Table of the Business Combination process. We do not intend to have any full time employees prior to the completion of our initial Business Combination.Item 1A.
Risk Factors.An investment in our securities involves a high degree of risk. Factors
You should carefully review and consider carefully all of the risks described below, together withfollowing risk factors and the other information contained in this Annual Report includingon Form 10-K as well as in our financial statements and related notes,other filings with the SEC before making a decisiondeciding whether to invest in our securities. IfWe cannot assure you that any of the following events occur,discussed below will not occur. These events could have a material and adverse impact on our business, financial condition, results of operations and operatingprospects. Unless otherwise indicated, references to our business being harmed in these risk factors will include harm to our business, reputation, financial condition, results may be materially adversely affected.of operations, net revenue and future prospects. In thatsuch event, the trading price of our securities could decline, and you could lose all or part of your investment. TheThis discussion does not address all of the risks that we face, and uncertainties described below are not the only ones we face. Additionalmay face additional risks and uncertainties that we are unaware of,not presently known to us, or that we currently believe are not material,deem immaterial, which may also become important factorsimpair our business or financial condition. The following discussion should be read in conjunction with the consolidated financial statements and notes thereto included herein.
Risk Factors Summary
Our business is subject to a number of risks and uncertainties, including those risks discussed at length below. These risks include, among others, the following:
•We need to scale our infrastructure in advance of demand for our products and services, and our failure to generate sufficient demand for our products and services would have a negative impact on our business and our ability to attain profitability.
•We face intense competition. If we do not continue to innovate and provide products and services that are useful to customers, including providers and patients, and partners, we may not remain competitive, which could harm our business and operating results.
•If third-party payors, including managed care organizations, private health insurers and government health plans, do not provide adequate reimbursement for our tests, or seek to amend or renegotiate their fee reimbursement schedules, or if we are unable to comply with their requirements for reimbursement, our commercial success could be negatively affected.
•We have limited experience with the development and commercialization of our databases and our health information and genomic platforms.
•We may need to raise additional capital to fund our existing operations, develop additional products and services, commercialize new products and services or expand our operations.
•If we fail to comply with federal and state laboratory licensing requirements or standards, we could lose the ability to perform our tests or experience disruptions to our business.
•We rely on highly skilled personnel in a broad array of disciplines and, if we are unable to hire, retain or motivate these individuals, or maintain our corporate culture, we may not be able to maintain the quality of our services or grow effectively.
•We rely on a limited number of suppliers or, in some cases, single suppliers, for some of our laboratory instruments and materials and may not be able to find replacements or immediately transition to alternative suppliers or service providers.
•We rely on a limited number of product and service providers for data infrastructure and analytics capabilities, and any disruption of, or interference with, our use of data and workflow services could adversely affect our business, financial condition, and operating results. For risk factors related to the proposed Sema4 Business Combination, see the “Risk Factors” sectionresults of the proxy statement that we will file with the SEC.Risks Relating to the Company and Our Search for, and Consummation of or Inability to Consummate, a Business Combination
Our stockholders may not be afforded an opportunity to vote on our proposed initial Business Combination, and even if we hold a vote, holders of our Founder Shares will participate in such vote, which means we may complete our initial Business Combination even though a majority of our Public Stockholders do not support such a combination.
We may choose not to hold a stockholder vote to approve our initial Business Combination if the Business Combination would not require stockholder approval under applicable law or stock exchange listing requirement. Except for as required by applicable law or stock exchange requirement, the decision as to whether we will seek stockholder approval of a proposed Business Combination or will allow stockholders to sell their shares to us in a tender offer will be made by us, solely in our discretion, and will be based on a variety of factors, such as the timing of the transaction and whether the terms of the transaction would otherwise require us to seek stockholder approval. Even if we seek stockholder approval, the holders of our Founder Shares will participate in the vote on such approval. Accordingly, we may complete our initial Business Combination even if a majority of our Public Stockholders do not approve of the Business Combination we complete.
Your only opportunity to affect the investment decision regarding a potential Business Combination may be limited to the exercise of your right to redeem your shares from us for cash.
You may not be provided with an opportunity to evaluate the specific merits or risks of our initial Business Combination. Since our board of directors may complete a Business Combination without seeking stockholder approval, Public Stockholders may not have the right or opportunity to vote on the Business Combination, unless we seek such stockholder vote. Accordingly, your only opportunity to affect the investment decision regarding our initial Business Combination may be limited to exercising your redemption rights within the period of time (which will be at least 20 business days) set forth in our tender offer documents mailed to our Public Stockholders in which we describe our initial Business Combination.
If we seek stockholder approval of our initial Business Combination, our initial stockholders and management team have agreed to vote in favor of such initial Business Combination, regardless of how our Public Stockholders vote.
Our initial stockholders own a substantial percentage of our outstanding common stock. Our initial stockholders and management team also may from time to time purchase Class A Common Stock prior to the completion of our initial Business Combination. Our second amended and restated certificate of incorporation provides that, if we seek stockholder approval of an initial Business Combination, such initial Business Combination will be approved if we receive the affirmative vote of a majority of the shares entitled to vote at such meeting, including the Founder Shares. Accordingly, if we seek stockholder approval of our initial Business Combination, the agreement by our initial stockholders and management team to vote in favor of our initial Business Combination will increase the likelihood that we will receive the requisite stockholder approval for such initial Business Combination.
The ability of our Public Stockholders to redeem their shares for cash may make our financial condition unattractive to potential Business Combination targets, which may make it difficult for us to consummate a Business Combination with a target.
We may seek to enter into a Business Combination transaction agreement with minimum cash requirement for (i) cash consideration to be paid to the target or its owners, (ii) cash for working capital or other general corporate purposes or (iii) the retention of cash to satisfy other conditions. If too many Public Stockholders exercise their redemption rights, we would not be able to meet such closing condition and, as a result, would not be able to proceed with the Business Combination. Furthermore, in no event will we redeem our Public Shares in an amount that would cause our net tangible assets to be less than $5,000,001. Consequently, if accepting all properly submitted redemption requests would cause our net tangible assets to be less than $5,000,001 or make us unable to satisfy a minimum cash condition as described above, we would not proceed with such redemption and the related Business Combination and may instead search for an alternate Business Combination. Prospective targets will be aware of these risks and, thus, may be reluctant to enter into a Business Combination transaction with us.
The ability of our Public Stockholders to exercise redemption rights with respect to a large number of our shares may not allow us to complete the most desirable Business Combination or optimize our capital structure.
At the time we enter into a Business Combination Agreement, we will not know how many stockholders may exercise their redemption rights, and therefore will need to structure the transaction based on our expectations as to the number of shares that will be submitted for redemption. If our initial Business Combination agreement requires us to use a portion of the cash in the Trust Account to pay the purchase price, or requires us to have a minimum amount of cash at closing, we will need to reserve a portion of the cash in the Trust Account to meet such requirements, or arrange for third party financing. In addition, if a larger number of shares is submitted for redemption than we initially expected, we may need to restructure the transaction to reserve a greater portion of the cash in the Trust Account or arrange for third party financing. Raising additional third party financing may involve dilutive equity issuances or the incurrence of indebtedness at higher than desirable levels. Furthermore, this dilution would increase to the extent that the anti-dilution provision of the Class B Common Stock results in the issues of shares of Class A Common Stock on a greater than one-to-one basis upon conversion of the shares of Class B Common Stock at the time of our initial Business Combination. In addition, the amount of the deferred underwriting commissions payable to the underwriters will not be adjusted for any shares that are redeemed in connection with an initial Business Combination. The per share amount we will distribute to stockholders who properly exercise their redemption rights will not be reduced by the deferred underwriting commission and after such redemptions, the amount held in trust will continue to reflect our obligation to pay the entire deferred underwriting commissions. The above considerations may limit our ability to complete the most desirable Business Combination available to us or optimize our capital structure.
The ability of our Public Stockholders to exercise redemption rights with respect to a large number of our shares could increase the probability that our initial Business Combination would be unsuccessful and that you would have to wait for liquidation in order to redeem your shares.
If our initial Business Combination agreement requires us to use a portion of the cash in the Trust Account to pay the purchase price, or requires us to have a minimum amount of cash at closing, the probability that our initial Business Combination would be unsuccessful is increased. If our initial Business Combination is unsuccessful, you would not receive your pro rata portion of the Trust Account until we liquidate the Trust Account. If you are in need of immediate liquidity, you could attempt to sell your shares in the open market; however, at such time our shares may trade at a discount to the pro rata amount per share in the Trust Account. In either situation, you may suffer a material loss on your investment or lose the benefit of funds expected in connection with your exercise of redemption rights until we liquidate or you are able to sell your shares in the open market.
The requirement that we complete our initial Business Combination within 24 months after the closing of the Initial Public Offering or during any Extension Period may give potential target businesses leverage over us in negotiating a Business Combination and may limit the time we have in which to conduct due diligence on potential Business Combination targets, in particular as we approach our dissolution deadline, which could undermine our ability to complete our initial Business Combination on terms that would produce value for our stockholders.
Any potential target business with which we enter into negotiations concerning a Business Combination will be aware that we must complete our initial Business Combination within 24 months after the closing of the Initial Public Offering or during any Extension Period. Consequently, such target business may obtain leverage over us in negotiating a Business Combination, knowing that if we do not complete our initial Business Combination with that particular target business, we may be unable to complete our initial Business Combination with any target business. This risk will increase as we get closer to the timeframe described above. In addition, we may have limited time to conduct due diligence and may enter into our initial Business Combination on terms that we would have rejected upon a more comprehensive investigation.
Our search for a Business Combination, and any target business with which we ultimately consummate a Business Combination, may be materially adversely affected by the coronavirus (COVID-19) outbreak and the status of debt and equity markets.
In December 2019, a novel strain of coronavirus was reported to have surfaced in Wuhan, China, which has and is continuing to spread throughout China and other parts of the world, including the United States. On January 30, 2020, the World Health Organization declared the outbreak of the coronavirus disease (COVID-19) a “Public Health Emergency of International Concern.” On January 31, 2020, U.S. Health and Human Services Secretary Alex M. Azar II declared a public health emergency for the United States to aid the U.S. healthcare community in responding to COVID-19, and on March 11, 2020 the World Health Organization characterized the outbreak as a “pandemic”. The COVID-19 outbreak has and a significant outbreak of other infectious diseases could result in a widespread health crisis that could adversely affect the economies and financial markets worldwide, and the business of any potential target business with which we consummate a Business Combination could be materially and adversely affected. Furthermore, we may be unable to complete a Business Combination if continued concerns relating to COVID-19 continues to restrict travel, limit the ability to have meetings with potential investors or the target company’s personnel, vendors and services providers are unavailable to negotiate and consummate a transaction in a timely manner. The extent to which COVID-19 impacts our search for a Business Combination will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of COVID-19 and the actions to contain COVID-19 or treat its impact, among others. If the disruptions posed by COVID-19 or other matters of global concern continue for an extensive period of time, our ability to consummate a Business Combination, or the operations, of a target business with which we ultimately consummate a Business Combination, may be materially adversely affected.
In addition, our ability to consummate a transaction may be dependent on the ability to raise equity and debt financing which may be impacted by COVID-19 and other events, including as a result of increased market volatility, decreased market liquidity in third-party financing being unavailable on terms acceptable to us or at all.
We may not be able to complete our initial Business Combination within 24 months after the closing of the Initial Public Offering or during any Extension Period, in which case we would cease all operations except for the purpose of winding up and we would redeem our Public Shares and liquidate.
We may not be able to find a suitable target business and complete our initial Business Combination within 24 months after the closing of the Initial Public Offeringreplacements or during any Extension Period. immediately transition to alternative products or service providers.
•Our ability to complete our initial Business Combination may be negatively impacted by general market conditions, volatility in the capital and debt markets and the other risks described herein. For example, the outbreak of COVID-19 continues to grow both in the U.S. and globally and, while the extent of the impact of the outbreak on us will depend on future developments, it could limit our ability to complete our initial Business Combination, including as a result of increased market volatility, decreased market liquidity and third-party financing being unavailable on terms acceptable to us or at all. Additionally, the outbreak of COVID-19 may negatively impact businesses we may seek to acquire. If we have not completed our initial Business Combination within such time period, we will: (i) cease all operations except for the purpose of winding up, (ii) as promptly as reasonably possible but not more than ten business days thereafter, redeem the Public Shares, at a per-share price, payable in cash, equal to the aggregate amount then on deposit in the Trust Account, including interest earned on the funds held in the Trust Account and not previously released to us to pay our taxes (less up to $100,000 of interest to pay dissolution expenses), divided by the number of then outstanding Public Shares, which redemption will completely extinguish Public Stockholders’ rights as stockholders (including the right to receive further liquidating distributions, if any), and (iii) as promptly as reasonably possible following such redemption, subject to the approval of our remaining stockholders and our board of directors, liquidate and dissolve, subject in each case, to our obligations under Delaware law to provide for claims of creditors and the requirements of other applicable law.If we seek stockholder approval of our initial Business Combination, our Sponsor, initial stockholders, directors, executive officers, advisors and their affiliates may elect to purchase shares or public warrants from Public Stockholders, which may influence a vote on a proposed Business Combination and reduce the public “float” of our Class A Common Stock or public warrants.
If we seek stockholder approval of our initial Business Combination and we do not conduct redemptions in connection with our initial Business Combination pursuant to the tender offer rules, our Sponsor, initial stockholders, directors, executive officers, advisors or their respective affiliates may purchase Public Shares or public warrants in privately negotiated transactions or in the open market either prior to or following the completion of our initial Business Combination, although they are under no obligation to do so. There is no limit on the number of shares our initial stockholders, directors, officers, advisors or their respective affiliates may purchase in such transactions, subject to compliance with applicable law and Nasdaq rules. However, other than as expressly stated herein, they have no current commitments, plans or intentions to engage in such purchases or transactions and have not formulated any terms or conditions for any such purchases or transactions. None of the funds in the Trust Account will be used to purchase Public Shares or public warrants in such transactions. Such purchases may include a contractual acknowledgment that such stockholder, although still the record holder of our shares, is no longer the beneficial owner thereof and therefore agrees not to exercise its redemption rights.
In the event that our Sponsor, initial stockholders, directors, executive officers, advisors or their respective affiliates purchase shares in privately negotiated transactions from Public Stockholders who have already elected to exercise their redemption rights, such selling stockholders would be required to revoke their prior elections to redeem their shares. The purpose of any such purchases of shares could be to vote such shares in favor of the Business Combination and thereby increase the likelihood of obtaining the requisite stockholder approval of the Business Combination or to satisfy a closing condition in an agreement with a target that requires us to have a minimum net worth or a certain amount of cash at the closing of our initial Business Combination, where it appears that such requirement would otherwise not be met. The purpose of any such purchases of public warrants could be to reduce the number of public warrants outstanding or to vote such warrants on any matters submitted to the warrant holders for approval in connection with our initial Business Combination. Any such purchases of our securities may result in the completion of our initial Business Combination that may not otherwise have been possible. We expect any such purchases will be reported pursuant to Section 13 and Section 16 of the Exchange Act to the extent such purchasersprojections are subject to such reporting requirements.
In addition, if such purchases are made, the public “float”significant risks, assumptions, estimates and uncertainties, including assumptions regarding adoption of our Class A Common Stock or public warrantsproducts and the number of beneficial holders of our securities may be reduced, possibly making it difficult to obtain or maintain the quotation, listing or trading of our securities on a national securities exchange.
If a stockholder fails to receive notice of our offer to redeem our Public Shares in connection with our initial Business Combination, or fails to comply with the procedures for tendering its shares, such shares may not be redeemed.
We will comply with the proxy rules or tender offer rules, as applicable, when conducting redemptions in connection with our initial Business Combination. Despite our compliance with these rules, if a stockholder fails to receive our proxy materials or tender offer documents, as applicable, such stockholder may not become aware of the opportunity to redeem its shares. In addition, proxy materials or tender offer documents, as applicable, that we will furnish to holders of our Public Shares in connection with our initial Business Combination will describe the various procedures that must be complied with in order to validly tender or submit Public Shares for redemption. For example, we intend to require our Public Stockholders seeking to exercise their redemption rights, whether they are record holders or hold their shares in “street name,” to, at the holder’s option, either deliver their stock certificates to our transfer agent, or to deliver their shares to our transfer agent electronically prior to the date set forth in the proxy materials or tender offer documents, as applicable. In the case of proxy materials, this date may be up to two business days prior to the date on which the vote on the proposal to approve the initial Business Combination is to be held. In addition, if we conduct redemptions in connection with a stockholder vote, we intend to require a public stockholder seeking redemption of its Public Shares to also submit a written request for redemption to our transfer agent two business days prior to the vote in which the name of the beneficial owner of such shares is included. In the event that a stockholder fails to comply with these or any other procedures disclosed in the proxy or tender offer materials, as applicable, its shares may not be redeemed.
You will not be entitled to protections normally afforded to investors of many other blank check companies.
Since the net proceeds of the Initial Public Offering and the sale of the Private Placement Warrants are intended to be used to complete an initial Business Combination with a target business that has not been selected, we may be deemed to be a “blank check” company under the United States securities laws. However, because we had net tangible assets in excess of $5,000,000 upon the completion of the Initial Public offering and the sale of the Private Placement Warrants and we filed a Current Report on Form 8-K, including an audited balance sheet demonstrating this fact, we are exempt from rules promulgated by the SEC to protect investors in blank check companies, such as Rule 419. Accordingly, investors will not be afforded the benefits or protections of those rules. Among other things, this means our units became immediately tradable and we will have a longer period of time to complete our initial Business Combination than do companies subject to Rule 419. Moreover, we were subject to Rule 419, that rule would prohibit the release of any interest earned on funds held in the Trust Account to us unless and until the funds in the Trust Account were released to us in connection with our completion of an initial Business Combination.
If we seek stockholder approval of our initial Business Combination and we do not conduct redemptions pursuant to the tender offer rules, and if you or a “group” of stockholders are deemed to hold in excess of 20% of our Class A Common Stock, you will lose the ability to redeem all such shares in excess of 20% of our Class A Common Stock.
If we seek stockholder approval of our initial Business Combination and we do not conduct redemptions in connection with our initial Business Combination pursuant to the tender offer rules, our second amended and restated certificate of incorporation provides that a public stockholder, together with any affiliate of such stockholder or any other person with whom such stockholder is acting in concert or as a “group” (as defined under Section 13 of the Exchange Act), will be restricted from seeking redemption rights with respect to the Excess Shares without our prior consent. However, we would not be restricting our stockholders’ ability to vote all of their shares (including Excess Shares) for or against our initial Business Combination. Your inability to redeem the Excess Shares will reduce your influence over our ability to complete our initial Business Combination and you could suffer a material loss on your investment in us if you sell Excess Shares in open market transactions. Additionally, you will not receive redemption distributions with respect to the Excess Shares if we complete our initial Business Combination. And as a result, you will continue to hold that number of shares exceeding 20% and, in order to dispose of such shares, would be required to sell your shares in open market transactions, potentially at a loss.
Because of our limited resources and the significant competition for Business Combination opportunities, it may be more difficult for us to complete our initial Business Combination. If we are unable to complete our initial Business Combination within the required time period, our Public Stockholders may receive only their pro rata portion of the funds in the Trust Account that are available for distribution to Public Stockholders, and our warrants will expire worthless.
We expect to encounter competition from other entities having a business objective similar to ours, including private investors (which may be individuals or investment partnerships), other blank check companies and other entities, domestic and international, competing for the types of businesses we intend to acquire. Many of these individuals and entities are well-established and have extensive experience in identifying and effecting, directly or indirectly, acquisitions of companies operating in or providing services to various industries. Many of these competitors possess similar or greater technical, human and other resources to ours or more local industry knowledge than we do and our financial resources will be relatively limited when contrasted with those of many of these competitors. While we believe there are numerous target businesses we could potentially acquire with the net proceeds of the Initial Public Offering and the sale of the Private Placement Warrants, our ability to compete with respect to the acquisition of certain target businesses that are sizable will be limited by our available financial resources. This inherent competitive limitation gives others an advantage in pursuing the acquisition of certain target businesses. Furthermore, we are obligated to offer holders of our Public Shares the right to redeem their shares for cash at the time of our initial Business Combination in conjunction with a stockholder vote or via a tender offer. Target companies will be aware that this may reduce the resources available to us for our initial Business Combination. Any of these obligations may place us at a competitive disadvantage in successfully negotiating a Business Combination. If we are unable to complete our initial Business Combination within the required time period, our Public Stockholders may receive only their pro rata portion of the funds in the Trust Account that are available for distribution to Public Stockholders, and our warrants will expire worthless.
Our Warrants are accounted for as liabilities and the changes in value of our warrants could have a material effect on our financial results.
On April 12, 2021, the Acting Director of the Division of Corporation Finance and Acting Chief Accountant of the SEC together issued a statement regarding the accounting and reporting considerations for warrants issued by special purpose acquisition companies entitled “Staff Statement on Accounting and Reporting Considerations for Warrants Issued by Special Purpose Acquisition Companies (“SPACs”)” (the “SEC Statement”). Specifically, the SEC Statement focused on certain settlement terms and provisions related to certain tender offers following a business combination, which terms are similar to those contained in the warrant agreement governing our Warrants.services. As a result, ofour projected revenues, market share, expenses and profitability may differ materially from our expectations in any given quarter or fiscal year.
•Uncertainty in the SEC Statement, we reevaluated the accounting treatmentdevelopment and commercialization of our 14,758,333 Public Warrants and 7,236,667 Private Placement Warrants, and determined to classify the Warrants as derivative liabilities measured at fair value, with changes in fair value each period reported in earnings.As a result, included on our balance sheet as of December 31, 2020 contained elsewhere in this Annual Report are derivative liabilities related to our Warrants. Accounting Standards Codification 815, Derivatives and Hedging (“ASC 815”), provides for the remeasurement of the fair value of such derivatives at each balance sheet date, with a resulting non-cash gainenhanced or loss related to the change in the fair value being recognized in earnings in the statement of operations in the period of change. As a result of the recurring fair value measurement, our financial statements and results of operations may fluctuate quarterly, based on factors, which are outside of our control. Due to the recurring fair value measurement, we expect that we will recognize non-cash gainsnew tests or losses on our Warrants each reporting period and that the amount of such gains or lossesservices could be material.
We have identified a material weakness in our internal control over financial reporting as of December 31, 2020. If we are unable to develop and maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results in a timely manner, which may adversely affect investor confidence in us and materially and adversely affect our business, financial condition and operating results.
Followingresults of operations.
•We currently use, and in the issuancefuture expect to increase our use of, the SEC Statement, on April 12, 2021, after consultation with our independent registered public accounting firm, our managementinformation and our audit committee concluded that, in light of the SEC Statement, it was appropriate to restate our previously issued audited financial statements as ofrights from customers, strategic partners, and collaborators for the period ended December 31, 2020 (the “Restatement”). See “—Our warrants are accounted for as liabilities and the changes in valueseveral aspects of our Warrantsoperations, and if we cannot maintain current and enter new relationships with these parties with adequate access and authorization to such information, our business will suffer.
•Our operating results could be subject to significant fluctuation, which could increase the volatility of our stock and warrant prices and cause losses to our stockholders.
•We have identified material weaknesses, some of which have a pervasive effect across the organization, and may identify additional material effect on our financial results.” As part of such process, we identified a material weaknessweaknesses or significant deficiencies, in our internal controls over financial reporting.A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented, or detected and corrected on a timely basis.
Effective internal controls are necessary for us Our failure to provide reliable financial reports and prevent fraud. We continue to evaluate steps to remediate the material weakness. These remediation measures may be time consuming and costly and there is no assurance thatremedy these initiatives will ultimately have the intended effects.
If we identify any new material weaknesses in the future, any such newly identified material weakness could limit our ability to prevent or detect a misstatement of our accounts or disclosures thatmatters could result in a material misstatement of our annualfinancial statements.
•We may be unable to realize the level of the anticipated benefits that we expect from exiting businesses and restructuring our operations, which may adversely impact our business and results of operations.
•Future changes in FDA enforcement discretion for LDTs could subject our operations to much more significant regulatory requirements.
•Compliance with the HIPAA security, privacy and breach notification regulations may increase our costs.
•We face uncertainty related to healthcare reform, pricing, coverage and reimbursement, which could reduce our revenue.
•Our inability to effectively protect our proprietary products, processes, and technologies, including the confidentiality of our trade secrets, could harm our competitive position.
•Security breaches, privacy issues, loss of data and other incidents could compromise sensitive, protected, or interimpersonal information related to our business, could prevent it from accessing critical information, and could expose it to regulatory liability, which could adversely affect our business.
Risks Related to Our Business, Industry and Operations
We need to scale our infrastructure in advance of demand for our tests, and our failure to generate sufficient demand for our tests would have a negative impact on our business and our ability to attain profitability.
Our success depends in large part on our ability to extend our market position, to provide customers with high-quality test reports quickly and at a lower price than our competitors, and to achieve sufficient test volume to realize economies of scale. In addition, we regularly evaluate and refine our testing process, often significantly updating our workflows, including with respect to exome sequencing and whole genome sequencing. In order to execute our business model, we intend to continue to invest heavily in order to significantly scale our infrastructure, including our testing capacity, particularly with respect to exome sequencing and whole genome sequencing to supplement our panel testing capabilities and information systems, expand our commercial operations, customer service, billing and systems processes and enhance our internal quality assurance program. We expect that much of this growth will be in advance of demand for our tests. Our current and future expense levels are to a large extent fixed and are largely based on investment plans and estimates of future revenue. Because the timing and amount of revenue from our tests is difficult to forecast, when revenue does not meet expectations, we may not be able to adjust our spending promptly or reduce spending to levels commensurate with our revenue. Even if we successfully scale our infrastructure and operations, there can be no assurance that tests will increase at levels consistent with the growth of our infrastructure. If we fail to generate demand commensurate with this growth or if we fail to scale our infrastructure sufficiently in advance of demand to successfully meet such demand, our business, prospects, financial statements.condition and results of operations could be adversely affected.
If we are not able to continue to generate substantial demand for our tests, our commercial success will be negatively affected.
Our business model assumes that we will be able to generate significant test volume, particularly with respect to exome sequencing and whole genome sequencing in addition to our panel testing offerings, and we may not succeed in continuing to drive adoption of our tests to achieve sufficient volumes. Inasmuch as detailed genetic data from exome and whole genome sequencing has only recently become available at relatively affordable prices, the continued pace and degree of clinical acceptance of the utility of such testing is uncertain. Specifically, it is uncertain how much genetic data will be accepted as necessary or useful, as well as how detailed that data should be, particularly since medical practitioners may have become accustomed to genetic testing that is specific to one or a few genes and may not embrace the utility of exome sequencing and whole genome sequencing. Given the substantial amount of additional information available from a broad-based testing panel such as ours, there may be distrust as to the reliability of such information when compared with more limited and focused genetic tests. To generate further demand for our tests, we will need to continue to make clinicians aware of the benefits of our tests, including the price, the breadth of our testing options, and the benefits of having additional genetic data available from which to make treatment decisions. A lack of or delay in clinical acceptance of our exome sequencing and whole genome sequencing testing, or our legacy broad-based panels testing, would negatively impact sales and market acceptance of our tests and limit our revenue growth and potential profitability. Genetic testing is expensive, and many potential customers may be sensitive to pricing. In such case,addition, potential customers may not adopt our tests if adequate reimbursement is not available, or if we are not able to maintain low prices relative to our competitors.
If we are not able to generate demand for our tests at sufficient volume, or if it takes significantly more time to generate this demand than we anticipate, our business, prospects, financial condition and results of operations could be materially harmed.
If our laboratories become inoperable due to disasters, health epidemics or for any other reasons, we will be unable to perform tests and our business will be harmed.
We perform all of our exome sequencing and whole genome sequencing tests at our production facilities in Gaithersburg, Maryland. Our laboratories and the equipment we use to perform our tests would be costly to replace and could require
substantial lead time to replace and qualify for use. Our laboratories may be harmed or rendered inoperable by natural or man-made disasters, including flooding, fire and power outages, or by health epidemics, which may render it difficult or impossible for us to perform our tests for some period of time. The inability to perform our tests or the backlog that could develop if our laboratories are inoperable for even a short period of time may result in the loss of customers or harm our reputation. Although we maintain insurance for damage to our property and the disruption of our business, this insurance may not be sufficient to cover all potential losses and may not continue to be available to us on acceptable terms, if at all.
Other companies or institutions may develop and market novel or improved technologies, which may make our technologies less competitive or obsolete.
We operate in a rapidly evolving and highly competitive industry. There are a number of private and public companies that offer products or services or have announced that they are developing products or services that compete, or may one day compete, with our products or services. Some of our current and potential competitors possess greater brand recognition, financial and other resources and development capabilities than we do. As the fields of exome and genome analysis and health information become more widely known to the public, we anticipate that competition will further increase. We expect to compete with a broad range of organizations in the U.S. and other countries that are engaged in the development, production and commercialization of genetic testing and screening products, including exome and whole genome sequencing products, health information services, and analytics, and data science services, and other diagnostic products. These competitors include:
•companies that offer clinical, research and data clinical services, molecular genetic testing and other clinical diagnostics, life science research and drug discovery services, data services and healthcare analytics, and consumer genetics products;
•academic and scientific institutions;
•governmental agencies; and
•public and private research organizations.
We may be unable to compete effectively against our competitors either because their products and services are superior or because they may have more expertise, experience, financial resources, or stronger business relationships. These competitors may have broader product lines and greater name recognition than we do. Furthermore, we must compete successfully in our existing markets, including exome and whole genome sequencing, but also in any new markets we expand into. Even if we successfully develop new marketable products or services, our current and future competitors may develop products and services that are more commercially attractive than ours, and they may bring those products and services to market earlier or more effectively than we are able to. If we are unable to compete successfully against current or future competitors, we may be unable to maintain compliance with securities law requirements regardingincrease market acceptance for and sales of our tests and services, which could prevent us from increasing or sustaining our revenues or achieving sustained profitability.
We face intense competition. If we do not continue to innovate and provide products and services that are useful to customers, including providers and patients, and partners, we may not remain competitive, which could harm our business and operating results.
Our business environment is rapidly evolving and intensely competitive. Our businesses face 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 in a timely filingmanner. As our businesses evolve, the competitive pressure to innovate will encompass a wider range of periodic reportsproducts and services. We must continue to invest significant resources in research and development, including through acquisitions and collaborations, joint ventures and partnerships, in order to enhance our current diagnostics and health information and data science technologies, and existing and new products and services based off these technologies.
We have many competitors in different industries. Our current and potential domestic and international competitors range from large and established companies to emerging start-ups in addition to applicable stock exchange listingacademic and scientific institutions, and public and private research organizations. Some competitors have longer operating histories than our Company in various sectors. They can use their experience and resources in ways that could affect our competitive position, including by making acquisitions, continuing to invest heavily in research and development and in talent, initiating intellectual property claims (whether or not meritorious), and continuing to compete aggressively for our customers and partners in the market for genetic testing and screening, health information and data science products and services. Our competitors may be able to innovate and provide products and services faster than we can or may foresee the need for products and services before we do.
Our operating results may also suffer if our products and services are not responsive to the needs of our customers and partners. As technologies continue to develop, our competitors may be able to offer products and services that are, or that are
seen to be, substantially similar to or better than our current products and services. This may force us to compete in different ways and expend significant resources in order to remain competitive. If our competitors are more successful than us in developing compelling products and services for or in attracting and retaining customers or partners in the market for genetic testing and screening, health information and data science products and services, our operating results could be harmed.
If third-party payors, including managed care organizations, private health insurers and government health plans, do not provide adequate reimbursement for our tests, or seek to amend or renegotiate their fee reimbursement schedules, or if we are unable to comply with their requirements investors may lose confidence infor reimbursement, our financial reportingcommercial success could be negatively affected.
Our ability to increase the number of billable tests and our stock pricerevenue therefrom will depend on our success in achieving reimbursement for our tests from third-party payors. Reimbursement by a payor may declinedepend on a number of factors, including a payor’s determination that a test is appropriate, medically necessary, cost-effective, correctly billed, and has received prior authorization. The commercial success of our current and future products, if approved, will depend on the extent to which our customers receive coverage and adequate reimbursement from third-party payors, including managed care organizations and government payors (e.g., Medicare and Medicaid).
Since each payor makes its own decision as to whether to establish a result. We cannot assure you thatpolicy or enter into a contract to cover our tests, as well as the measuresamount it will reimburse for a test, seeking these approvals is a time-consuming and costly process. In addition, the determination by a payor to cover and the amount it will reimburse for our tests will likely be made on an indication-by-indication basis and may consider our billing practices and reimbursements from other payors and from our patient billing programs. To date, we have takenobtained policy-level reimbursement approval or contractual reimbursement for some indications for our tests from most of the large commercial third-party payors in the U.S., and the Centers for Medicare & Medicaid Services (“CMS”). We believe that establishing adequate reimbursement from Medicare is an important factor in gaining adoption from healthcare providers. Our claims for reimbursement from third-party payors may be denied upon submission, and we must appeal the claims. The appeals process is time consuming and expensive and may not result in payment. In cases where there is not a contracted rate for reimbursement, there is typically a greater coinsurance or copayment requirement from the patient, which may result in further delay or decreased likelihood of collection.
A significant portion of the payments for our tests are paid or reimbursed under insurance programs with third-party payors. Billing and reimbursement for diagnostic tests is highly complex and closely scrutinized by payors. In particular, billing and reimbursement for multi-gene panel tests and other complex diagnostic tests continues to date,pose a particular risk of payor audit and potential overpayment obligations. Accurate billing requires sophisticated internal procedures and systems controls and ongoing oversight to ensure compliance with payor requirements.
To contain reimbursement and utilization rates, third-party payors often attempt to, or any measuresdo in fact, amend or renegotiate their fee reimbursement schedules. Loss of revenue caused by third-party payor cost containment efforts or an inability to negotiate satisfactory reimbursement rates could have a material adverse effect on our revenue and results of operations.
Furthermore, 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 on a regular basis, and we have needed additional time and resources to comply with them. We have also experienced, and may takecontinue to experience, delays in or denials of coverage if we do not adequately comply with these requirements. Our third-party payors have also requested, and in the future will be sufficientmay request, audits of the amounts paid to avoid potential future material weaknesses.us. We and following the Business Combination, the post-business combination company, may face litigation and other riskshave been required to repay certain amounts to payors as a result of such audits, including but not limited to the remaining $22 million of the $42 million settlement regarding certain overpayments to Legacy Sema4 allegedly received from a payor, and may be required to repay other payors for alleged overpayments due to lack of compliance with their reimbursement policies. For more information regarding this matter, see Note 4, “
Revenue Recognition” to our consolidated financial statements included within this Annual Report. In addition to potential repayment obligations, failure to comply with payor reimbursement policies could result in government enforcement actions and, potentially, exclusion from certain payor programs, which could have a material weaknessadverse effect on our business. We expect to continue to focus our resources on increasing adoption of, and expanding coverage and reimbursement for, our current tests 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 could be harmed and our future prospects and our business could suffer.
We have limited experience with the development and commercialization of our databases and our health information and genomic platforms.
We have limited experience with the development or commercialization of clinical or research products in connection with the databases we manage and to which we have access, including our Centrellis® platform. Our partners’ usage of an advanced machine learning engine for therapeutic decision-making are at an early stage of development and usage under current and proposed collaborations, and we are continuing to develop new processes that may support the development of new therapeutics applications such as the delivery of personalized clinically actionable insights into clinical reports, clinical trial matching, real-world evidence trials, and clinical decision support, via an advanced programmable interface layer. Although our partners have invested significant financial resources to develop and utilize new technologies to support preclinical studies and other early research and development activities, and provide general and administrative support for these operations, our future success is dependent on our current and future partners’ ability to successfully derive actionable insights from the database and our platform, and our partners’ ability, where applicable, to obtain regulatory approval for new therapeutic solutions based off existing models or to obtain regulatory approval and marketing for, and to successfully commercialize, new therapeutics.
We use artificial intelligence in our internal controlbusiness, and challenges with properly managing its use could result in reputational harm, competitive harm, and legal liability, and adversely affect our results of operations.
We currently incorporate artificial intelligence (“AI”) solutions into our Centrellis® platform to access, combine, curate and analyze health information, including longitudinal patient medical history data, and these applications may become important in our operations over
time. Our competitors or other third parties may incorporate AI into their products and offerings more quickly or more successfully than us, which could impair our ability to compete effectively and adversely affect our results of operations. Additionally, if the content, analyses, or recommendations that AI applications assist in producing are or are alleged to be inaccurate, deficient, or biased, our business, financial
reporting.Followingcondition and results of operations may be adversely affected. The use of AI applications has resulted in, and may in the issuancefuture result in, cybersecurity incidents that implicate the personal medical and genetic data of the SEC Statement, after consultationpatients analyzed within such applications. Any such cybersecurity incidents related to our use of AI applications to analyze personal data could adversely affect our reputation and results of operations. AI also presents emerging ethical issues and if our use of AI becomes controversial, we may experience brand or reputational harm, competitive harm, or legal liability. The rapid evolution of AI, including potential government regulation of AI and its various uses, will require significant resources to develop, test and maintain our Centrellis® platform, offerings, services, and features to help us implement AI ethically in order to minimize unintended, harmful impact.
We may need to raise additional capital to fund our existing operations, develop additional products and services, commercialize new products and services or expand our operations.
We have incurred net losses and negative cash flows from operations since its inception, with our independent registered public accounting firm, our management and our audit committee concluded that it was appropriate to restate our previously issued audited financial statementsan accumulated deficit of $1.3 billion as of December 31, 2020 and2023. We expect to continue to generate significant operating losses for the period from July 10, 2020 (inception) throughforeseeable future.
We may seek to sell common or preferred equity or convertible debt securities, enter into a credit facility or another form of third-party funding or seek other debt financing. For example, we have an effective shelf registration statement that we filed with the SEC in August of 2022, registering $300 million shares of our Class A common stock and other securities. As of December 31, 2020. See section entitled “—2023, approximately $150 million of securities remained available under this registration statement.
We may also consider raising additional capital in the future to expand our business, to pursue strategic investments, to take advantage of financing opportunities or for other reasons, including to:
•increase our sales and marketing efforts to drive market adoption of our current and future products and services;
•fund development efforts for our current and future products and services;
•expand our products and services into other disease indications and clinical applications;
•acquire, license or invest in technologies;
•acquire or invest in complementary businesses or assets; and
•finance capital expenditures and general and administrative expenses.
Our Warrantspresent and future funding requirements will depend on many factors, including:
•our ability to achieve revenue growth;
•our rate of progress in establishing payor coverage and reimbursement arrangements with commercial third-party payors and government payors;
•the cost of expanding our laboratory operations and offerings, including our sales and marketing efforts;
•our rate of progress in, and cost of the sales and marketing activities associated with, establishing adoption of our services for biopharma partners;
•our rate of progress in, and cost of research and development activities associated with, products and services in research and early development;
•the effect of competing technological, product and market developments;
•costs related to international expansion; and
•the potential cost of and delays in product development as a result of any regulatory oversight applicable to our products and services.
The various ways we could raise additional capital carry potential risks. If we raise funds by issuing equity securities, dilution to our stockholders could result. Any preferred equity securities issued also could provide for rights, preferences or privileges senior to those of holders of our Class A common stock. If we raise funds by issuing debt securities, those debt securities would have rights, preferences and privileges senior to those of holders of our Class A common stock. The terms of debt securities issued or borrowings pursuant to a credit agreement could impose significant restrictions on our operations. If we raise funds through collaborations and licensing arrangements, we might be required to relinquish significant rights to our technologies or products and services or grant licenses on terms that are accountednot favorable to us.
Our credit agreement contains operating and financial restrictions that may limit our business and financing activities.
Our credit agreement with Perceptive Credit Holdings IV, LP (“Perceptive”) contains operating and financial restrictions that may limit our business and financing activities. In particular, our credit agreement includes customary affirmative and negative covenants and events of default, including negative covenants that restrict, among other things, our ability to incur indebtedness and liens, dispose of property and make investments. In addition, the credit agreement requires us to maintain aggregate unrestricted cash of not less than $5.0 million and minimum levels of quarterly core revenue through the third quarter of 2028. The operating and financial restrictions in the credit agreement, as well as any other financing arrangements that we may enter into, may limit our ability to finance our operations, or engage in, expand, or otherwise pursue our business activities and strategies. Our ability to comply with these or other covenants may be affected by events beyond our control, and future breaches of these or other covenants could result in a default under the credit agreement or any other financing arrangement. If not waived, future defaults could cause all of the outstanding indebtedness under our credit agreement or other financing arrangement to become immediately due and payable and terminate all commitments to extend further credit, if any. Furthermore, if we were unable to repay our credit agreement or other indebtedness then due and payable, secured lenders could proceed against the assets, if any, securing such indebtedness. A default would also likely significantly diminish the market price of our securities.
If we do not have or are unable to generate sufficient cash to repay our debt obligations when they become due and payable, either upon maturity or in the event of a default, we may not be able to obtain additional debt or equity financing on favorable terms, if at all, which may negatively impact our ability to operate and continue our business as a going concern.
Ethical, legal and social concerns related to the use of genomic medicine and health information analysis could reduce demand for as liabilitiesour tests.
Genomic medicine and health information analysis has raised ethical, legal and social issues regarding privacy rights and the changes in valueappropriate uses of the resulting information. Domestic and international governmental and regulatory authorities could, for social or other purposes, such as data privacy, limit or regulate the use of health information or health information testing or prohibit testing for specific information derived from health information testing, including, for example, data on genetic predisposition to certain conditions, particularly for those that have no known cure. Similarly, these concerns may lead patients to refuse to use, or clinicians to be reluctant to order, genomic tests as part of health information assessment even if permissible, or lead patients to withhold or withdraw consent for our use of their data. These and other ethical, legal and social concerns may limit market acceptance of our warrantstests or services or reduce the potential markets for our tests, or services, either of which could have a materialan adverse effect on our business, research, financial results.” As partcondition or results of operations.
If we fail to comply with federal and state laboratory licensing requirements or standards, we could lose the ability to perform our tests or experience disruptions to our business.
We are subject to Clinical Laboratory Improvement Amendments of 1988 (“CLIA”), a federal law that regulates clinical laboratories that perform testing on specimens derived from humans for the purpose of providing information for the diagnosis, prevention or treatment of disease. CLIA regulations establish specific standards with respect to personnel qualifications, facility administration, proficiency testing, quality control, quality assurance and inspections. CLIA certification is also required in order for us to be eligible to bill state and federal healthcare programs, as well as many private third-party payors, for our tests. We have current CLIA, College of American Pathologists ("CAP"), and other certifications
to conduct our tests at our laboratory in Maryland. To renew these certifications, we are subject to survey and inspection on a regular basis and at the request of the Restatement,certifying bodies. Moreover, CLIA inspectors may make random inspections of our clinical reference laboratory.
We would also be required to maintain in-state licenses if we identifiedwere to conduct testing in other states. Several states require the licensure of out-of-state laboratories that accept specimens from certain states.
In addition to having a
material weaknesslaboratory license in
New York, our
internal controls over financial reporting.As a result of such material weakness, the Restatement, the change in accountingclinical reference laboratory is approved on test-specific bases for the Warrants, and other matters raised or thattests it runs as laboratory-developed tests (“LDTs”), by the New York State Department of Health (“NYDOH”). Other states may adopt similar licensure requirements in the future, be raised by the SEC, we face potential for litigation or other disputes which may include, among others, claims invoking the federal and state securities laws, contractual claimsrequire us to modify, delay or other claims arising from the Restatement and material weaknessesstop our operations in our internal control over financial reporting and the preparationsuch jurisdictions. We may also be subject to regulation in foreign jurisdictions as we seek to expand international utilization of our financial statements. Astests or such jurisdictions adopt new licensure requirements, which may require review of our tests in order to offer them or may have other limitations such as restrictions on the transport of samples necessary for us to perform our tests that may limit our ability to make our tests available outside of the dateU.S. Complying with licensure requirements in new jurisdictions may be expensive, time-consuming, and subject us to significant and unanticipated delays.
Failure to comply with applicable clinical laboratory licensure requirements or standards may result in a range of this Annual Report, we have no knowledgeenforcement actions, including license suspension, limitation, or revocation, directed plan of any such litigationaction, onsite monitoring, civil monetary penalties, criminal sanctions, and cancellation of the laboratory’s approval to receive Medicare and Medicaid payment for our services, as well as significant adverse publicity. Any sanction imposed under CLIA, its implementing regulations, or dispute. However, we can provide no assurance that such litigationstate or dispute will not arise in the future. Any such litigationforeign laws or dispute, whether successfulregulations governing clinical laboratory licensure, or not,our failure to renew our CLIA certifications, a state or foreign license, or accreditation, could have a material adverse effect on our business, financial condition and results of operations. Even if we were able to bring our laboratory back into compliance, we could incur significant expenses and potentially lose revenue in doing so.
The CAP maintains a clinical laboratory accreditation program. CAP asserts that its program is “designed to go well beyond regulatory compliance” and helps laboratories achieve the highest standards of excellence to positively impact patient care. While not required to operate a CLIA-certified laboratory, many private insurers require CAP accreditation as a condition to contracting with clinical laboratories to cover their tests. In addition, some countries outside the U.S. require CAP accreditation as a condition to permitting clinical laboratories to test samples taken from their citizens. We have a CAP accreditations for our laboratory. Failure to maintain CAP accreditation could have a material adverse effect on the sales of our tests and the results of our operations.
Due to the high degree of uncertainty regarding the implementation and impact of the CARES Act and other legislation related to COVID-19, there can be no assurance that we will be able to comply with the applicable terms and conditions of the CARES Act and retain such assistance.
On March 27, 2020, the CARES Act was signed into law, aimed at providing emergency assistance and health care for individuals, families, and businesses affected by the COVID-19 pandemic and generally supporting the U.S. economy. The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, and modifications to the net interest deduction limitations. The CARES Act and similar legislation intended to provide assistance related to the COVID-19 pandemic also authorized $175.0 billion in funding to be distributed by the U.S. Department of Health and Human Services (the “HHS”) to eligible health care providers. This funding, known as the Provider Relief Fund, is designated to fund eligible healthcare providers’ healthcare-related expenses or lost revenues attributable to COVID-19. On December 27, 2020, the Consolidated Appropriations Act, 2021 was signed into law, which adds $3.0 billion to the Provider Relief Fund. Payments from the Provider Relief Fund are subject to certain eligibility criteria, as well as reporting and auditing requirements, but do not need to be repaid to the U.S. government if recipients comply with the applicable terms and conditions.
In 2020, we received $5.4 million as part of the stimulus, comprised of $2.6 million received under the PRF and $2.8 million received under the ERC. In 2021, we received an additional $5.6 million under the PRF distribution. Funds provided under the PRF distributions 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. Funds provided under the ERC distributions are refundable tax credits for 50% of qualified wages paid to employees during the pandemic. A company is eligible for the ERC if (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 the eligibility requirements were met. However, due to a change in circumstances, we have re-evaluated our position and concluded that the funds received under the ERC
needed to be repaid. Therefore, in July 2023, we remitted $2.7 million of payment and reduced a liability initially recorded in other current liabilities on our balance sheets.
Due to the high degree of uncertainty regarding the implementation of the CARES Act, the Consolidated Appropriations Act, 2021, other stimulus legislation and our revenue revisions, there can be no assurance that the terms and conditions of the PRF or other relief programs will not change or be interpreted in ways that affect our ability to comply with such terms and conditions in the future, which could affect our ability to retain such assistance. We will continue to monitor our compliance with the terms and conditions of the PRF, including demonstrating that the distributions received have been used for healthcare-related expenses or lost revenue attributable to COVID-19. If we are unable to comply with current or future terms and conditions, our ability to retain some or all of the distributions received may be impacted, and we may be subject to actions including payment recoupment, audits and inquiries by governmental authorities, and criminal, civil or administrative penalties.
The COVID-19 pandemic affected and any similar public health emergency in the future may materially and adversely affect our business and financial results.
The COVID-19 pandemic, together with related precautionary measures in response to the pandemic, materially disrupted our business during certain periods in 2021. Although our test volumes improved to what would be considered normalized market conditions during 2022 and we maintained normalized volumes during 2023, the COVID-19 pandemic, or other similar public health emergencies in the future, may disrupt our business in the future and materially and adversely affect our business and financial results.
Risks Related to Our Business Model
We rely on highly skilled personnel in a broad array of disciplines and, if we are unable to hire, retain or motivate these individuals, or maintain our corporate culture, we may not be able to maintain the quality of our services or grow effectively.
Our performance, including our research and development programs and laboratory operations, largely depends on our continuing ability to identify, hire, develop, motivate and retain highly skilled personnel for all areas of our organization, including software developers, geneticists, biostatisticians, bioinformaticians, data scientists, certified laboratory directors and technicians and other scientific and technical personnel to process and interpret our tests and related data. In addition, we may need to continue to expand our sales force with qualified and experienced personnel. Competition in our industry for qualified employees is intense, and we may not be able to attract or retain qualified personnel in the future due to the competition for qualified personnel among life science and technology businesses as well as universities and public and private research institutions, particularly in the geographies in which we operate. Further, we may be unable to obtain the necessary visas for foreign personnel to work in the U.S. In addition, our compensation arrangements, such as our equity award programs, may not always be successful in attracting new employees and retaining and motivating our existing employees. If we are not able to attract and retain the necessary personnel to accomplish our business objectives, we may experience constraints that could adversely affect our ability to scale our business, support our research and development efforts and our clinical laboratories. We believe that our corporate culture fosters innovation, creativity and teamwork. However, as our organization grows, we may find it increasingly difficult to maintain the beneficial aspects of our corporate culture. This could negatively impact our ability to retain and attract employees and our future success.
The loss of any member or change in structure of our senior management team could adversely affect our business.
Our success depends in large part upon the skills, experience and performance of key members of our executive management team and others in key leadership positions. The efforts of these persons will be critical to us as we continue to develop our technologies and test processes and focus on scaling our business. If we were to lose one or more key executives, including our Chief Executive Officer, Katherine Stueland, we may experience difficulties in competing effectively, developing our tests and technologies and implementing our business strategy. Only certain of our executives have employment contracts, and the majority of our employees are at-will, which means that either we or any employee may terminate their employment at any time or in the notice period set forth in an executive’s contract. In addition, we do not have long-term retention agreements in place with our executive officers. Furthermore, we compete against other leading companies in the diagnostics, health information, and data sciences markets for top talent. If such competitors offer better compensation or opportunities, there is no guarantee that we would be able to retain our key executives.
We may not be able to manage our future growth effectively, which could make it difficult to execute our business strategy.
Our expected future growth could create a strain on our organizational, administrative and operational infrastructure, including data and laboratory operations, quality control, customer service, marketing and sales, and management. We may not be able to maintain the quality of or expected turnaround times for our products or services or satisfy customer demand as it grows. We may need to continue expanding our sales force to facilitate our growth, and we may have difficulties locating, recruiting, training and retaining sales personnel. Our ability to manage our growth effectively will require us to continue to improve our operational, financial and management controls, as well as our reporting systems and procedures. As we grow, any failure of our controls or interruption of our facilities or systems could have a negative impact on our business and financial operations.
International expansion of our business could expose us to business, regulatory, political, operational, financial and economic risks associated with doing business outside of the U.S. and Canada.
When cleared, authorized or approved, we and our collaborators may market, sell, and distribute our products and services outside of the U.S., and our business would be subject to risks associated with doing business outside of the U.S., including an increase in our expenses and diversion of our management’s attention from the development of future products and services. Accordingly, our business and financial results in the future could be adversely affected due to a variety of factors, including:
•multiple, conflicting and changing laws and regulations such as privacy, security and data use regulations, tax laws, export and import restrictions, economic sanctions and embargoes, employment laws, anticorruption laws, regulatory requirements, reimbursement or payor regimes and other governmental approvals, permits and licenses;
•failure by us, our collaborators or our distributors to obtain regulatory clearance, authorization or approval for the use of our products and services in various countries;
•additional potentially relevant third-party patent rights;
•complexities and difficulties in obtaining intellectual property protection and enforcing our intellectual property;
•difficulties in staffing and managing foreign operations, including repatriating foreign earned profits;
•complexities associated with managing multiple payor reimbursement regimes, government payors or patient self-pay systems;
•difficulties in negotiating favorable reimbursement negotiations with governmental authorities;
•logistics and regulations associated with shipping samples, including infrastructure conditions and transportation delays;
•limits in our ability to penetrate international markets if we are not able to conduct our clinical diagnostic services locally;
•financial risks, such as longer payment cycles, difficulty collecting accounts receivable, the impact of local and regional financial crises on demand and payment for our products and services and exposure to foreign currency exchange rate fluctuations;
•international regulations and license requirements that may restrict foreign investment in and operation of the internet, IT infrastructure, data centers and other sectors, and international transfers of data;
•natural disasters, political and economic instability, including wars, terrorism and political unrest, and outbreak of disease;
•boycotts, curtailment of trade and other business restrictions; and
•regulatory and compliance risks that relate to maintaining accurate information and control over sales and distributors’ activities that may fall within the purview of the Foreign Corrupt Practices Act of 1977 (the “FCPA”), its books and records provisions, or its anti-bribery provisions, Canada’s Corruption of Foreign Public Officials Act, or laws similar to the FCPA in other jurisdictions in which we may in the future operate, such as the United Kingdom’s Bribery Act of 2010 and anti-bribery requirements of member states in the European Union (the “EU”).
Any of these factors could significantly harm our future international expansion and operations and, consequently, our revenue and results of operations.
Unfavorable U.S. or global economic conditions could adversely affect our business, financial condition or results of operations.
Our results of operations could be adversely affected by general conditions in the global economy and financial markets. A severe or prolonged economic downturn or increase in inflation and interest rates could result in a variety of risks to our business, including weakened demand for our products and services, increased costs and expenses and a reduced ability to raise additional capital when needed on favorable terms, if at all. A weak declining or inflationary economy could also strain
our collaborators and suppliers, resulting in supply disruption, or cause delays in their payments to us. For example, we have experienced and may continue to experience interruptions in the supply of the diagnostic testing materials necessary for our testing products and material and shipping cost increases. We also have significant supply contracts that are short-term and, as we enter into the renewal cycles for these contracts, we may face material price increases upon renewal.
In particular, challenging macroeconomic conditions, including cost inflation, decreases in per capita income and levels of disposable income, increased and/or prolonged unemployment or a decline in consumer confidence, as well as limited or significantly reduced points of access of our tests, could have a material adverse effect on the demand for our tests. Under difficult economic conditions, consumers may seek to reduce discretionary spending by forgoing our tests. Decreased demand for our tests, could negatively affect our overall financial performance.
Any of the foregoing could harm our business and we cannot anticipate all of the ways in which the current economic climate and financial market conditions could adversely impact our business, financial condition, or results of operations.
We rely on a limited number of suppliers or, in some cases, single suppliers, for some of our laboratory instruments and materials and may not be able to find replacements or immediately transition to alternative suppliers or service providers.
We have sourced and will continue to source components of our diagnostic testing workflow, including sequencers and other laboratory equipment, reagents, lab supplies and other laboratory services and materials and related services, from third parties.
Our failure to maintain a continued supply of our sequencers and other laboratory equipment, reagents, lab supplies and other laboratory services and materials, along with the right to use certain hardware and software and related services, would adversely impact our business, financial condition, and results of operations. In particular, while we are seeking to validate our tests on additional sequencing platforms, we have not, to date, validated a viable alternative sequencing platform on which our testing could be run in a commercially viable manner. These efforts will require significant resources, expenditures and time and attention of management, and there is no guarantee that we will be successful in implementing any such sequencing platforms in a commercially sustainable way. We also cannot guarantee that we will appropriately prioritize or select alternative sequencing platforms on which to focus our efforts, in particular given our limited product and research and development resources and various business initiatives, which could result in increased costs and delayed timelines or otherwise adversely impact our business and results of operations.
Because we rely on third-party manufacturers, we do not control the manufacture of these components, including whether such components will meet our quality control requirements, nor the ability of our suppliers to comply with applicable legal and regulatory requirements. In many cases, our suppliers are not contractually required to supply these components to the quality or performance standards that we require. If the supply of components we receive does not meet our quality control or performance standards, we may not be able to use the components, or if we use them not knowing that they are of inadequate quality, which occasionally occurs with respect to certain reagents, our tests may not work properly or at all, or may provide erroneous results, and we may be subject to significant delays caused by interruption in production or manufacturing or to lost revenue from such interruption or from spoiled tests. In addition, any natural or other disaster, acts of war or terrorism, shipping embargoes, labor unrest, political instability, outbreak of disease or similar events at our third-party manufacturers’ facilities that cause a loss of manufacturing capacity would heighten the risks that we face.
In the event of any adverse developments with our sole suppliers, or if any of our sole suppliers modifies any of the components they supply to us, our ability to supply our products may be interrupted, and obtaining substitute components could be difficult or require us to re-design or re-validate our products. Our failure to maintain a continued supply of components, a supply that meets our quality control requirements, or changes to or termination of our agreements or inability to renew our agreements with these parties or enter into new agreements with other suppliers could result in the loss of access to important components of our tests and impact our test performance or affect our ability to perform our tests in a timely manner or at all, which could impair, delay or suspend our commercialization activities. In the event that we transition to a new supplier from any of our sole suppliers, doing so could be time-consuming and expensive, may result in interruptions in our ability to supply our products to the market, could affect the performance of our tests or could require that we re-validate our affected tests using replacement equipment and supplies, which could delay the performance of our tests, impact diagnostic solutions and heath information derived from such tests, and result in increased costs. Any of these occurrences could have a material adverse effect on our business, financial condition and results of operations.
We rely on a limited number of product and service providers for data infrastructure and analytics capabilities, and any disruption of, or interference with, our use of data and workflow services could adversely affect our business, financial condition, and results of operations, and we may not be able to find replacements or immediately transition to alternative products or service providers.
We currently rely upon third-party services for data storage and workflow management, including cloud storage solution providers, such as Microsoft Azure (“Azure”), Amazon Web Services (“AWS”), and Google Cloud Platform (“GCP”). We rely on each of these providers to complete several vital workflows in our health information and data science service delivery. To varying degrees some of those services are proprietary to how each platform performs in connection with our current usage of the services.
Nearly all of our data storage and analytics are conducted on, and the data and content we generate on our platforms are processed through, servers hosted by these providers, particularly Azure, AWS and GCP. We also rely on email service providers, bandwidth providers, internet service providers and mobile networks to deliver communications to patients, physicians and partners and to allow patients, physicians and our partners to access various offerings from our platforms. If our third-party vendors are unable or unwilling to provide the services necessary to support our business, or if our agreements with such vendors are terminated, our operations could be significantly disrupted. Some of our vendor agreements may be unilaterally terminated by the licensor for convenience, including with respect to Azure, AWS or GCP, and if such agreements are terminated, we may not be able to enter into similar relationships in the future on reasonable terms or at all.
Any damage to, or failure of, our systems or the systems of our third-party data centers or our other third-party providers could result in interruptions to the availability or functionality of database and platforms. As a result, we could lose health information data and miss opportunities to acquire and retain patients, physicians and partners including health systems and pharmaceutical and biotech companies, which could result in decreased revenue. If for any reason our arrangements with our data centers or third-party providers are terminated or interrupted, such termination or interruption could adversely affect our business, financial condition and results of operations. We exercise little control over these providers, which increases our vulnerability to problems with the services they provide. We could incur additional expense in arranging for new or redesigned facilities, technology, services and support. In addition, the failure of our third-party data centers or any other third-party providers to meet our capacity needs or any system failure as a result of reliance on third parties, including network, software or hardware failure, which causes a delay or interruption in our services and products, including our ability to handle existing or increased processing of data on our platforms, could have a material adverse effect on our business, revenues, operating results and financial condition.
Our current and future products and services may never achieve significant commercial market acceptance.
Our success depends on the market’s confidence that we can provide data-driven research and diagnostic products and services that improve clinical outcomes, lower healthcare costs and enable better product development by biopharma companies. Failure of our products and services, or those jointly developed with our collaborators, to perform as expected or to be updated to meet market demands could significantly impair our operating results and our reputation. We believe patients, health systems, clinicians, academic institutions and biopharma companies are likely to be particularly sensitive to defects, errors, inaccuracies and delays with our products and services. Furthermore, inadequate performance of these products or services may result in lower confidence in our services in general.
We and our collaborators may not succeed in achieving significant commercial market acceptance for our current or future products and services due to a number of factors, including:
•our ability to demonstrate the utility of our platforms and related products and services and their potential advantages over existing clinical AI technology, life sciences research, clinical diagnostic and drug discovery technologies to academic institutions, biopharma companies and the medical community;
•our ability, and that of our collaborators, to perform clinical trials or other research to gather adequate evidence and/or to secure and maintain FDA and other regulatory clearance authorization or approval for our products or products developed based off our platform;
•the agreement by third-party payors to reimburse our products or services, the scope and extent of which will affect patients’ willingness or ability to pay for our products or services and will likely heavily influence physicians’ decisions to recommend our products or services;
•the rate of adoption of our platforms and related products and services by academic institutions, clinicians, patients, key opinion leaders, advocacy groups and biopharma companies; and
•the impact of our investments in product and services, and technological innovation and commercial growth.
Additionally, our customers and collaborators may decide to decrease or discontinue their use of our products and services due to changes in their research and development plans, failures in their clinical trials, financial constraints, the regulatory environment, negative publicity about our products and services, competing products or the reimbursement landscape, all of which are circumstances outside of our control. We may not be successful in addressing these or other factors that might affect the market acceptance of our products, services and technologies. Failure to achieve widespread market acceptance of our platform and related products and services would materially harm our business, financial condition and results of operations.
We have estimated the global market opportunity for our current and future products and services, and these markets may be smaller than we estimate.
Our estimates of the global market opportunity for our current products and services and those under development are based on a number of internal and third-party estimates, including, the market opportunity for rare disease and pediatric developmental disorders, adult disorders and newborn screening. The estimates also depend on whether we or our collaborators are able to engage, diagnose or treat patients through or using our products and services, the number of potential clinical tests utilized per treatment course per patient, the ongoing engagement by patients, physicians and health systems on our platforms, and the assumed prices at which we can sell our current and future products and services for markets that have not been established. While we believe our assumptions and the data underlying our estimates are reasonable, these assumptions and estimates may not be correct and the conditions supporting our assumptions or estimates may change at any time, thereby reducing the predictive accuracy of these underlying factors. As a result, our estimates of the annual addressable market for our current or future products and services may prove to be incorrect. If the actual number of patients who would benefit from our products or services, the price at which we can sell future products and services or the annual addressable market for our products or services is smaller than we have estimated, it may impair our sales growth and have an adverse impact on our business.
Uncertainty in the development and commercialization of our enhanced or new tests or services could materially adversely affect our business, financial condition and results of operations.
Our success will depend in part on our ability to effectively introduce enhanced or new offerings, with a focus on expanding the clinical utility and application of exome and whole genome sequencing and developing solutions our health information platform can provide to partners. The development and launch of enhanced or new tests requires the completion of certain clinical development and commercialization activities that are complex, costly, time-intensive and uncertain, and requires us to accurately anticipate patients', clinicians', payors' and other counterparties' attitudes and needs as well as emerging technology and industry trends. This process is conducted in various stages, and each stage presents the risk that we will not achieve our goals.
We have relatively limited experience developing and commercializing products and services outside of the diagnostics business, and we may not be successful in our current or future efforts to do so. We also have limited experience forecasting our future financial performance from our new products and services, and our actual results may fall below our financial guidance or other projections, or the expectations of analysts or investors, which could cause the price of our Class A common stock and warrants to decline. We may experience research and development, regulatory, marketing and other difficulties that could delay or prevent our introduction of enhanced or new tests and result in increased costs and the diversion of management's attention and resources from other business matters, such as from our current product and service offerings, which currently represent the significant majority of our current revenues. For example, any tests that we may enhance or develop may not prove to be clinically effective in clinical trials or commercially, or may not meet our desired target product profile, be offered at acceptable cost and with the sensitivity, specificity and other test performance metrics necessary to address the relevant clinical need or commercial opportunity, our test performance in commercial experience may be inconsistent with our validation or other clinical data, we may not be successful in achieving market awareness and demand, whether through our own sales and marketing operations or through collaborative arrangements, healthcare providers may not order or use, or third-party payors may not reimburse for, any tests that we may enhance or develop, or we may otherwise have to abandon a test or service in which we have invested substantial resources.
We cannot provide assurance that we can successfully complete the development of any new or enhanced product, or that we can establish or maintain the collaborative relationships that may be essential to our collaborators’ goals, including clinical development or commercialization efforts. For example, the publication of clinical data in peer-reviewed journals is a crucial step in commercializing and obtaining reimbursement for certain diagnostic solutions such as the ones offered by us, and our inability to control when, if ever, results are published may delay or limit our ability to derive sufficient revenues from any diagnostic solution that is the subject of or component in a study. Peer-reviewed publications regarding our products may be limited by many factors, including delays in the completion of, poor design of, or lack of compelling data from, clinical studies, as well as delays in the review, acceptance and publication process. If our diagnostic solutions or the technology
underlying our current and future diagnostic solutions do not receive sufficient favorable exposure in peer-reviewed publications, the rate of clinician adoption of our diagnostic solutions and positive reimbursement coverage determinations for our diagnostic solutions could be negatively affected.
These and other factors beyond our control could result in delays or other difficulties in the research and development, approval, production, launch, marketing or distribution of enhanced or new tests and could adversely affect our competitive position and results of operations.
We currently use, and in the future expect to increase our use of, information and rights from customers, strategic partners, and collaborators for several aspects of our operations, and if we cannot maintain current and enter new relationships with these parties with adequate access and authorization to such information, our business will suffer.
Accessing, combining, curating, and analyzing health information, including longitudinal patient medical history data and genetic data, are core features of the Centrellis® platform. The regulatory landscape around the storage, processing and deidentification of genetic data is evolving globally and greatly impacts the ability of us, our strategic partners and collaborators to process and use the data in connection with our products and services.
We have limited resources to conduct our health information services, data analysis, life sciences research, clinical diagnostics and drug discovery operations and have not yet fully established infrastructure for sales, marketing or distribution in connection with our products and services. Our future success depends in part on our ability to maintain and grow our existing relationships and to establish new relationships. Many factors may impact the success of such collaborations, including our ability to perform our obligations, our collaborators’ satisfaction with our products and services, our collaborators’ performance of their obligations to us, our collaborators’ internal priorities, resource allocation decisions and competitive opportunities, the ability to obtain regulatory approvals, disagreements with collaborators, the costs required of either party to the collaboration and related financing needs, and operating, legal and other risks in any relevant jurisdiction. Our ability to support such collaborations may also depend on factors outside of our control including the willingness of patients to engage with us and share their data, societal perspectives on privacy, and the willingness of health systems to establish collaborations, relationships and programs utilizing their data, all of which may impact the utility of these databases and the insights we will be able to generate from expanding datasets. In addition to reducing our revenue or delaying the development of our future products and services, the loss of one or more of these relationships may reduce our access to research, longitudinal patient health data, clinical trials or computing technologies that facilitate the collection and incorporation of new information into the databases we manage and to which we have access. All of the risks relating to product and service development, regulatory clearance, authorization or approval and commercialization described herein apply to us derivatively through the activities of our collaborators. We engage in conversations with companies regarding potential collaborations on an ongoing basis. These conversations may not result in a commercial agreement. Even if an agreement is reached, the resulting relationship may not be successful, and any products and services developed as part of the collaboration may not produce successful outcomes. Speculation in the industry about our existing or potential collaborations can be a catalyst for adverse speculation about us, or our products or services, which can adversely affect our reputation and our business.
If our products and services do not perform as expected, we may not realize the expected benefits of such products and services.
The success of our products depends on the market’s confidence that we can provide reliable products and services that enable high quality diagnostic testing and health information services with high sensitivity and specificity and short turnaround times. There is no guarantee that the accuracy and reproducibility we have demonstrated to date will continue as our product deliveries increase and our product and service portfolio expands.
Our products and services use a number of complex and sophisticated biochemical and bioinformatics processes, many of which are highly sensitive to external factors. An operational, technological or other failure in one of these complex processes or fluctuations in external variables may result in sensitivity or specificity rates that are lower than we anticipate or result in longer than expected turnaround times. In addition, labs are required to validate their processes before using our products for clinical purposes. These validations are outside of our control. If our products do not perform, or are perceived to not have performed, as expected or favorably in it to competitive products, our operating results, reputation, and business will suffer, and we may also be subject to legal claims arising from product limitations, errors, or inaccuracies.
If our sales and development or other collaborations and commercial relationships are not successful and we are not able to offset the resulting impact through our own efforts or through agreements with new partners, our commercialization activities may be impaired, and our financial results could be adversely affected.
Part of our business strategy is to develop relationships with health systems, biopharma companies, and other partners to utilize our products and to provide access to data. Developing and commercializing products with third parties reduces our control over such development and commercialization efforts and subjects us to the various risks inherent in a joint effort with a third party, such as delays, operational issues, technical difficulties and other contingencies outside of our influence or control. The financial condition of these third parties could weaken, or they could terminate their relationship with us and/or stop sharing data or other information; reduce their marketing efforts relating to our products; develop and commercialize, or otherwise utilize competing products in addition to or in lieu of our tests; merge with or be acquired by a competitor of us or a company that chooses to de-prioritize the efforts to utilize our products or provide us with adequate data; or otherwise breach their agreements with us. Further, we must expend resources to operationalize our existing collaborations with our health system partners, which requires substantial effort in areas such as integrations for testing workflow, electronic medical record, consents, marketing, and billing. To the extent we are not successful at operationalizing existing collaborations with health partners, we may not be able to further improve or pursue new agreements with additional partners. Furthermore, our partners may misappropriate our trade secrets or use our proprietary information in such a way as to expose us to litigation and potential liability, and our compliance risk may increase to the extent that we are responsible for our partners' activities. Disagreements or disputes with our health systems and other partners, including disagreements over customers, proprietary or other rights or our or their compliance with financial or other contractual obligations, might cause delays or impair the development or commercialization of our products, services, and technologies, lead to additional responsibilities for us with respect to new products, services and technologies, or result in litigation or arbitration, any of which would divert management attention and resources and be time-consuming and expensive. As is typical for companies in our industry, we are continually evaluating and pursuing various strategic or commercial relationships, some of which may involve the sale and issuance of our Class A common stock, which could result in additional dilution of the percentage ownership of our stockholders and could cause the price of our Class A common stock and warrants to decline.
If our relationships are not successful, our ability to develop and improve of products, services and technologies, and to successfully execute our commercial strategy regarding such products, services and technologies, could be compromised.
If we are unable to deploy and maintain effective sales, marketing and medical affairs capabilities, we will have difficulty achieving market awareness and selling our products and services.
To achieve commercial success for our tests and our future products and services, we must continue to develop and grow our sales, marketing and medical affairs organizations to effectively explain to healthcare providers the reliability, effectiveness and benefits of our current and future products and services as compared to alternatives. We may not be able to successfully manage our dispersed or inside sales forces or our sales force may not be effective. Because of the competition for their services, we may be unable to hire, partner with or retain additional qualified sales representatives or marketing or medical affairs personnel, either as our employees or independent contractors or through independent sales or other third-party organizations. Market competition for commercial, marketing and medical affairs talent is significant, and we may not be able to hire or retain such talent on commercially reasonable terms, if at all.
We may never become profitable.
We have incurred losses since our formation and we expect to continue to generate significant operating losses for the foreseeable future. We expect to continue investing significantly toward development and commercialization of our products and services and expect to continue efforts to reduce operating costs. If our revenue does not grow significantly, or if we are unable to achieve planned cost reductions, we will not be profitable. We cannot be certain that the revenue from the sale of any products or services based on our technologies will be sufficient to make us profitable.
Our operating results could be subject to significant fluctuation, which could increase the volatility of our stock and warrant prices and cause losses to our stockholders.
Our revenues and results of operations may fluctuate significantly, depending on a variety of factors, including the following:
•our success in marketing and selling, and changes in demand for, our tests, and the level of reimbursement and collection obtained for such tests;
•seasonal and environmental variations affecting healthcare provider recommendations for our tests and patient compliance with healthcare provider recommendations, including without limitation holidays, weather events, and
circumstances such as the outbreak of coronavirus or influenza that may limit patient access to medical practices for diagnostic tests and preventive services;
•our success in collecting payments from third-party payors, patients and collaborative partners, variation in the timing of these payments and recognition of these payments as revenues;
•the pricing of our tests, including potential changes in CMS or other reimbursement rates;
•circumstances affecting our ability to provide our tests, including weather events, supply shortages, or regulatory or other circumstances that adversely affect our ability to manufacture our tests or process tests in our clinical laboratories;
•circumstances affecting our ability to provide health information and data science services to biopharma partners, including software or hardware failures, insufficient capacity, regulatory changes or other circumstances that adversely affect the ability of us to deliver these services;
•fluctuations in the amount and timing of our selling and marketing costs and our ability to manage costs and expenses and effectively implement our business;
•our research and development activities; and
•our ability to collect, use, and commercialize data in a changing regulatory environment at a time when the public is growing increasingly concerned about privacy.
Our revenue growth rate could decline over time, and it may experience downward pressure on our operating margins in the future.
Our revenue growth rate could decline over time as a result of a number of factors, including increasing competition and the continued expansion of our business into a variety of new fields. Changes in geographic mix and product and service mix and an increasing competition for tests may also affect our revenue growth rate. We may also experience a decline in our revenue growth rate as our revenues increase to higher levels, if there is a decrease in the rate of adoption of our products, services, and technologies, among other factors.
In addition to a decline in our revenue growth rate, we may also experience downward pressure on our gross operating margins resulting from a variety of factors, such as the continued expansion of our business into new fields, including new products and services, as well as significant investments in new areas, all of which may have margins lower than those that we generate from testing. We may also experience downward pressure on our gross operating margins from increasing competition and increased costs for many aspects of our business. We may also pay increased fees to our partners as well as increased acquisition costs. We may also face an increase in infrastructure costs, supporting other businesses. Additionally, our expenditures to promote new products and services or to distribute certain products and services or increased investment in our innovation efforts may affect our operating margins.
Due to these factors and the evolving nature of our business, our historical revenue growth rate and historical gross operating margins may not be indicative of our future performance.
We have identified material weaknesses, some of which have a pervasive effect across the organization, and may identify additional material weaknesses or significant deficiencies, in our internal controls over financial reporting. Our failure to remedy these matters could result in a material misstatement of our financial statements.
In the course of preparing Legacy Sema4’s financial statements as of December 31, 2020, we previously identified material weaknesses in our internal control over financial reporting. Certain of these material weaknesses remain unremediated as of December 31, 2023. For a discussion of these material weaknesses, see “Item 9A. Controls and Procedures.”
Our management is actively engaged and committed to taking the steps necessary to remediate the control deficiencies that constituted the material weaknesses. However, we cannot guarantee that the steps we have taken or may subsequently take have been or will be sufficient to remediate the material weaknesses or ensure that our internal controls are effective. For a discussion of our remediation plan and actions, see “Item 9A. Controls and Procedures.”
Furthermore, as a public company, we are required to comply with certain rules and requirements related to our disclosure controls and procedures and our internal control over financial reporting. Any failure to develop or maintain effective controls as a public company, any deficiencies found in the technology system we use to support our controls, or any difficulties encountered in their implementation or improvement, could harm our operating results or cause us to fail to meet our reporting obligations and may result in a restatement of our financial statements for prior periods. For more information, see “Risks Related to Being a Public Company—Our internal controls over financial reporting may not be effective and our independent registered public accounting firm may not be able to certify as to their effectiveness, which could have a significant and adverse effect on our business and reputation.”
Our ability to use our net operating loss carry forwards and certain other tax attributes may be limited.
As of December 31, 2023, our total gross deferred tax assets were approximately $326 million. Future realization of the tax benefits of existing temporary differences and carryforwards ultimately depends on the existence of sufficient taxable income within the carryforward period. As of December 31, 2023 and December 31, 2022, the Company performed an evaluation to determine whether a valuation allowance was needed. Based on the Company’s analysis, which considered all available evidence, both positive and negative, the Company determined that it is more likely than not that a significant portion of its deferred tax assets will not be realized. Accordingly, the Company maintained a full valuation allowance as of December 31, 2023 and December 31, 2022.
Furthermore, under Section 382 of the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”), if a corporation undergoes an “ownership change,” the corporation’s ability to use its pre-change net operating loss carryforwards (“NOLs”) and other pre-change tax attributes (such as research tax credits) to offset its future taxable income may be limited. In general, an “ownership change” occurs if there is a cumulative change in its ownership by “5% shareholders” that exceeds 50 percentage points over a rolling three-year period. Our existing NOLs and tax credit carryovers may be subject to limitations arising from previous ownership changes, and if we undergo one or more ownership changes in connection with completed acquisitions, including the Business Combination or the Acquisition, or future transactions in our stock, our ability to utilize NOLs and tax credit carryovers could be further limited by Section 382 of the Internal Revenue Code. As a result, if we earn future taxable income, our ability to use our pre-change net operating loss and tax credit carryforwards to offset U.S. federal taxable income may be subject to limitations, which could potentially result in increased future tax liability to us. In addition, the Tax Cuts and Jobs Act limits the deduction for NOLs to 80% of current year taxable income and eliminates NOL carrybacks. Further, there may also be periods during which the use of NOLs is suspended or otherwise limited, which could accelerate or permanently increase state liability.
Risks Related to Our Key Relationships
We rely on commercial delivery services to transport samples to our facilities in a timely and cost-efficient manner and if these delivery services are disrupted, our business could be harmed.
Our core business depends on our ability to quickly and reliably deliver test results to our customers. We typically receive blood and saliva samples for analysis at our laboratory facilities within days of collection from the patient. Disruptions and errors in these delivery service and accessioning errors and breaches, whether due to error by the delivery service, labor disruptions, bad weather, natural disaster, terrorist acts or threats, outbreaks of disease or for other reasons, could adversely affect specimen integrity, our ability to process or store samples in a timely manner and to service our customers, and ultimately our reputation and our business. In addition, if we are unable to continue to obtain expedited delivery services on commercially reasonable terms, our operating results may be adversely affected.
Risks Related to Acquisitions and Other Strategic Transactions
We may be unable to realize the level of the anticipated benefits that we expect from exiting businesses and restructuring our operations, which may adversely impact our business and results of operations.
From time to time, we may decide to exit certain businesses or otherwise undertake restructuring, reorganization, or other strategic initiatives and business transformation plans to realign our resources with our growth strategies, operate more efficiently and control costs. The successful implementation of our restructuring activities may from time to time require us to effect business and asset dispositions, workforce reductions, management restructurings, decisions to limit investments in or otherwise exit businesses, facility consolidations and closures, and other actions, each of which may depend on a number of factors that may not be within our control. For example, as described in more detail elsewhere in this Annual Report, we enacted a plan to reduce our operating expenses during the fourth quarter of 2023, we exited our reproductive and women’s health testing business during the first quarter of 2023, and we exited our somatic tumor testing business during the fourth quarter of 2022.
Any such effort to realign or streamline our organization may result in the recording of restructuring or other charges, such as asset impairment charges, contract and lease termination costs, exit costs, termination benefits and other restructuring costs. Further, as a result of restructuring initiatives, we may experience a loss of continuity, loss of accumulated knowledge and proficiency, adverse effects on employee morale, loss of key employees and/or other retention issues during transitional periods. Reorganization and restructuring can impact a significant amount of management and other employees’ time and focus, which may divert attention from operating and growing our business. Further, upon completion of any restructuring initiatives, our business may not be more efficient or effective than prior to the implementation of the plan and we may be
unable to achieve anticipated operating enhancements or cost reductions, which would adversely affect our business, competitive position, operating results and financial condition.
We may seek to grow our business through additional acquisitions of complementary products or technologies and we may from time to time dispose of businesses or assets, and the failure to manage these acquisitions or dispositions, or the failure to integrate acquired businesses with our existing business, could have a material adverse effect on our business, financial condition and operating results.
From time to time, we may consider additional opportunities to acquire other products or technologies that may enhance our product platform or technology, expand the breadth of our markets or customer base, or advance our business strategies. In addition, we exited both our reproductive and women's health testing business and our somatic tumor testing business, which involves the divestiture of these businesses, and we may consider disposing other assets or businesses in the future.
Potential acquisitions involve numerous risks, including:
•problems assimilating the acquired products or technologies;
•issues maintaining uniform standards, procedures, controls and policies;
•unanticipated costs associated with acquisitions;
•diversion of management’s attention from our existing business;
•risks associated with entering new markets in which we have limited or no experience; and
•increased legal and accounting costs relating to the acquisitions or compliance with regulatory matters.
We do not know if we will be able to identify any other acquisitions we deem suitable, whether we will be able to successfully complete any acquisitions on favorable terms or at all, or whether we will be able to successfully integrate any acquired products or technologies. Our potential inability to integrate any acquired products or technologies effectively may adversely affect our business, operating results and financial condition.
Dispositions may similarly involve risks associated with the potential disruption of our ongoing business and distraction of our management team, and the anticipated benefits and cost savings of these transactions may not be realized fully, or at all, or take longer to realize than anticipated. In addition, dispositions may involve our continued financial involvement in a divested business, such as through continuing equity ownership, transition service agreements, guarantees, indemnities or other current or contingent financial obligations. Under these arrangements, performance by the acquired or divested business, or other conditions outside our control, could affect our future financial results.
Risks Related to Legal, Regulatory and Compliance
We may be subject to increased compliance risks as a result of our rapid growth, including our dependence on our sales, marketing and billing efforts.
We have had to expand our training and compliance efforts in line with our increasing reliance on personnel in our sales, marketing and billing functions, and our expansion of these functions in line with the overall growth in our business. We continue to monitor our personnel, but we have in the past experienced, and may in the future experience, situations in which employees fail to strictly adhere to our policies. In addition, sales and marketing activities in the healthcare space are subject to various rules and regulations. Moreover, our billing and marketing messaging can be complex and nuanced, and there may be errors or misunderstandings in our employees communication of such messaging. Furthermore, we utilize text messaging, email, phone calls and other similar methods to communicate with patients who are existing or potential users of our products for various business purposes. These activities subject us to laws and regulations relating to communications with consumers, such as the CAN-SPAM Act and the Telephone Consumer Protection Act, violations of which could subject us to claims by consumers, who may seek actual or statutory damages, which could be material in the aggregate. As we continue to scale up our sales and marketing efforts in line with the growth in our business, in particular our increased pace of product launches as well as further geographical expansion, we face an increased need to continuously monitor and improve our policies, processes and procedures to maintain compliance with a growing number and variety of laws and regulations, including with respect to consumer marketing. To the extent that there is any violation, whether actual, perceived or alleged, of our policies or applicable laws and regulations, we may incur additional training and compliance costs, may receive inquiries from third-party payors or other third parties, or be held liable or otherwise responsible for such acts of non-compliance. Any of the foregoing could adversely affect our cash flow and financial condition.
If we use hazardous materials in a manner that causes injury, we could be liable for resulting damages.
Our activities currently require the use of hazardous chemicals and biological material. We cannot eliminate the risk of accidental contamination or injury to employees or third parties from the use, storage, handling or disposal of these materials.
In the event of contamination or injury, we could be held liable for any resulting damages, and any liability could exceed our resources or any applicable insurance coverage we may have. Additionally, we are subject on an ongoing basis to federal, state and local laws and regulations governing the use, storage, handling and disposal of these materials and specified waste products. The cost of compliance with these laws and regulations may become significant, and our failure to comply may result in substantial fines or other consequences, and either could negatively affect our operating results.
Future changes in FDA enforcement discretion for LDTs could subject our operations to much more significant regulatory requirements.
We currently offer an LDT version of certain tests. The FDA has a policy of enforcement discretion with respect to LDTs, whereby the FDA does not actively enforce its medical device regulatory requirements for such tests. However, in October 2014, the FDA issued two draft guidance documents stating that the FDA intended to modify its policy of enforcement discretion with respect to LDTs in a risk-based manner consistent with the existing classification of medical devices. Although the FDA halted finalization of the guidance in November 2016 to allow for further public discussion on an appropriate oversight approach to LDTs and to give Congressional authorizing committees the opportunity to develop a legislative solution, it is unclear if Congress or the FDA will modify the current approach to the regulation of LDTs in a way that would subject our current or future services marketed as LDTs to the enforcement of FDA regulatory requirements. The FDA Commissioner and the Director of the Center for Devices and Radiological Health (“CDRH”) have expressed significant concerns regarding disparities between some LDTs and in vitro diagnostics that have been reviewed, cleared, authorized or approved by the FDA. If the FDA were to determine that certain tests offered by us as LDTs are not within the policy for LDTs for any reason, including new rules, policies or guidance, or due to changes in statute, our tests may become subject to extensive FDA requirements or our business may otherwise be adversely affected. If the FDA were to disagree with our LDT status or modify its approach to regulating LDTs, we could experience reduced revenue or increased costs, which could adversely affect our business, prospects, results of operations and financial conditioncondition. If required, the regulatory marketing authorization process required to bring our current or future LDTs into compliance may involve, among other things, successfully completing additional clinical validations and submitting to and obtaining clearance from the FDA for a premarket clearance (510(k)) submission or authorization for a de novo or approval of a premarket approval. Furthermore, pending legislative proposals, if passed, such as the VALID Act, could create new or different regulatory and compliance burdens on us and could have a negative effect on our ability to completekeep products on the market or develop new products, which could have a Business Combination.material effect on our business. In the event that the FDA requires marketing authorization of our LDTs in the future, the FDA may not ultimately grant any clearance, authorization or approval requested by us in a timely manner, or at all. In addition, if the FDA inspects our laboratory in relation to the marketing of any FDA-authorized test, any enforcement action the FDA takes might not be limited to the FDA-authorized test carried by us and could encompass our other testing services.
Recently, the FDA has also taken a more active role in certain diagnostic areas, including the oversight of pharmacogenetic (“PGx”) tests. In 2019, the FDA contacted several laboratories to demand changes to PGx test reports and marketing materials. In February 2020, the FDA issued a statement indicating that it continues to have concerns about the claims that certain clinical laboratories make with respect to their PGx tests, and published tables that list PGx associations for which the FDA has determined that the data support therapeutic management recommendations, a potential impact on safety or response, or a potential impact on pharmacokinetic properties only, respectively. To date, however, the FDA has not provided any general guidance on the types of claims or other characteristics that will cause a PGx test to fall outside FDA’s enforcement discretion. As such, the extent to which the FDA will allow any laboratory to offer PGx tests in their current form without meeting FDA regulatory requirements for medical devices is unclear at this time.
Our business is subject to various complex laws and regulations applicable to clinical diagnostics. We could be subject to significant fines and penalties if we or our partners fail to comply with these laws and regulations.
As a provider of clinical diagnostic products and services, we and our partners are subject to extensive and frequently changing federal, state, local and foreign laws and regulations governing various aspects of our business.
In particular, the clinical laboratory and healthcare industry is subject to significant governmental certification and licensing regulations, as well as federal, state and foreign laws regarding:
•test ordering and billing practices;
•marketing, sales and pricing practices;
•health information privacy and security, including HIPAA and comparable state laws;
•insurance;
•anti-markup legislation;
•fraud and abuse; and
•consumer protection.
We are also required to comply with FDA regulations, including with respect to our labeling and promotion activities. In addition, advertising and marketing of our clinical products are subject to regulation by the Federal Trade Commission (the “FTC”), and advertising of laboratory services is regulated by certain state laws. Violation of any FDA requirement could result in enforcement actions, such as seizures, injunctions, civil penalties and criminal prosecutions, and violation of any FTC or state law requirement could result in injunctions and other remedies, all of which could have a material adverse effect on our business. Most states also have similar regulatory and enforcement authority for devices. Additionally, most foreign countries have authorities comparable to the FDA and processes for obtaining marketing approvals. Obtaining and maintaining these approvals, and complying with all laws and regulations, may subject us to similar risks and delays as those we could experience under FDA, FTC and state regulation. We incur various costs in complying and overseeing compliance with these laws and regulations. The growth of our business and sales organization, the acquisition of additional businesses or products and services and our expansion outside of the U.S. may increase the potential of violating these laws, regulations or our internal policies and procedures.
Healthcare policy has been a subject of extensive discussion in the executive and legislative branches of the federal and many state governments, and healthcare laws and regulations are subject to change. Development of the existing commercialization strategy for our tests and planned development of products in our pipeline has been based on existing healthcare policies. We cannot predict what additional changes, if any, will be proposed or adopted or the effect that such proposals or adoption may have on our business, financial condition and results of operations.
If we or our partners, fail to comply with these laws and regulations, it could incur significant fines and penalties and our reputation and prospects could suffer. Additionally, any such partners could be forced to cease offering our products and services in certain jurisdictions, which could materially disrupt our business. An adverse outcome could include us being required to pay treble damages, incur civil and criminal penalties, paying attorneys’ fees, entering into a corporate integrity agreement, being excluded from participation in government healthcare programs, including Medicare and Medicaid, and other adverse actions that could materially and adversely affect our business, financial condition and results of operations.
Compliance with the HIPAA security, privacy and breach notification regulations may increase our costs.
The HIPAA privacy, security and breach notification regulations, which include requirements implemented under the HITECH Act, establish federal standards with respect to the uses and disclosures of protected health information (“PHI”), by health plans, healthcare providers and healthcare clearinghouses. The HIPAA regulations generally prohibit the use and disclosure of PHI without patient authorization, unless the use or disclosure is for payment, treatment or healthcare operations purposes. In setting standards to protect the confidentiality, integrity and security of PHI, the regulations establish a regulatory framework that addresses a variety of subjects, including:
•the circumstances under which uses and disclosures of PHI are permitted or required without a written authorization from the patient, including but not limited to treatment purposes, activities to obtain payments for our services, and our healthcare operations activities;
•a patient’s rights to access, amend and receive an accounting of certain disclosures of PHI;
•requirements to notify individuals if there is a breach of their PHI;
•the contents of notices of privacy practices related to the use and disclosure of PHI;
•administrative, technical and physical safeguards required of entities that use or receive PHI;
•criteria related to the deidentification and aggregation of PHI; and
•the use and protection of electronic PHI.
We are also required to comply with applicable state privacy, security and breach notification laws and regulations, which may be more stringent than federal HIPAA requirements. In addition, for healthcare data transfers from other countries relating to citizens and/or residents of those countries, we are also required to comply with the laws of those countries. Furthermore, on December 1, 2022, the U.S. Department of Health and Human Services, Office for Civil Rights (“OCR”) issued a Bulletin highlighting the obligations of HIPAA covered entities and business associates with respect to the use of online tracking technologies. To the extent that a covered entity or business associate permits a tracking technology vendor to collect PHI of its customers, the parties must enter into a business associate agreement. In addition, the PHI collected may only be used for treatment or health care operation purposes, in accordance with HIPAA. The PHI cannot be used for marketing purposes that are not connected with treatment or health care operations absent a HIPAA compliant authorization from each customer whose information is being shared.
Although HIPAA does not provide for private rights of action, HIPAA gives OCR and the Department of Justice the authority to assess significant fines and other penalties for wrongful use or disclosure of PHI, including potential civil and
criminal fines and penalties. OCR may require an entity to enter into a settlement agreement which may include ongoing oversight and auditing of a company’s HIPAA compliance program.
In addition, computer networks are always vulnerable to breach and unauthorized persons may in the future be able to exploit weaknesses in the security systems of our computer networks and gain access to PHI. Additionally, we share PHI with third-parties who are legally obligated to safeguard and maintain the confidentiality of PHI. Despite such protections, unauthorized persons may also be able to gain access to PHI stored in such third parties’ computer networks. Any wrongful use or disclosure of PHI by us or such third-parties, including disclosure due to data theft or unauthorized access to us or such third-parties’ computer networks, could subject us to fines or penalties that could adversely affect our business and results of operations. In addition, we distribute PHI to patients in physical form (e.g., test materials and/or test results), which introduces additional risk that human error will result in unauthorized disclosures of PHI. Although HIPAA does not expressly provide for a private right of action for damages, we could also be liable for damages under state privacy laws to private parties for the wrongful use or disclosure of confidential health information or other private personal information.
We have implemented practices intended to meet the requirements of the HIPAA privacy, security and breach notification regulations, as required by law, but cannot guarantee that such practices fully satisfy all applicable requirements under HIPAA. In addition, the Company has experienced a number of “security incidents” (as defined under HIPAA) that involved the unauthorized disclosure of PHI. A subset of these incidents was determined to be reportable breaches requiring disclosure to OCR, as well as to the affected patients. Moreover, we cannot confirm that we have identified all previous incidents that could constitute reportable breaches, or that the mitigation steps undertaken in response to known breaches are adequate to satisfy applicable regulatory requirements and prevent any future unauthorized disclosures.
As noted above, in addition to HIPAA, we are subject to myriad federal, state, and local requirements pertaining to the collection, retention, and disclosure of genetic material. While we endeavor to remain current with such requirements, we can provide no assurance that we are, or will remain, in compliance with all applicable requirements. Failure to comply with privacy and data security requirements could result in a variety of consequences, including significant fines and penalties as well as damage to our reputation, any of which could have a material adverse effect on our business.
Some of our activities may subject the Company to risks under federal and state laws prohibiting ‘kickbacks’ and false or fraudulent claims.
In addition to FDA marketing and promotion restrictions, several other types of state and federal healthcare fraud and abuse laws have been applied in recent years to restrict certain marketing practices in the healthcare product and service industry and to regulate billing practices and financial relationships with healthcare providers, hospitals and other healthcare providers. These laws include, among others, a federal law commonly known as the federal Anti-Kickback Statute, the federal False Claims Act, the federal physician self-referral law, known as the Stark Law, and corollary state laws. These laws constrain, among other things, the sales, marketing and other promotional activities of manufacturers of medical devices and providers of laboratory services by limiting the kinds of financial arrangements, including sales programs, free goods and services, consulting arrangements, speaker programs, compensated service arrangements (including specimen collection and processing), and other non-monetary compensation (e.g., meals, gifts and other business courtesies), that may be used with hospitals, healthcare providers, laboratories and other potential purchasers or prescribers of medical devices and laboratory services. The federal and state fraud and abuse laws prescribe civil and, in some cases, criminal penalties (including fines) for noncompliance that can be substantial. In addition, various states have enacted false claim laws analogous to the federal laws that apply where a claim is submitted to any third-party payor and not only a governmental payor program. Moreover, any claim for reimbursement that is predicated on a violation of the Anti-Kickback Statute may constitute a “false claim” under the False Claims Act (discussed in further detail below).
In 2018, Congress passed the Eliminating Kickbacks in Recovery Act (“EKRA”), as part of the Substance Use-Disorder Prevention that Promotes Opioid Recovery and Treatment for Patients and Communities Act. Similar to the Anti-Kickback Statute, EKRA imposes criminal penalties for knowing or willful payment or offer, or solicitation or receipt, of any remuneration, whether directly or indirectly, overtly or covertly, in cash or in kind, in exchange for the referral or inducement of laboratory testing (among other healthcare services) unless a specific exception applies. However, unlike the Anti-Kickback Statute, EKRA is not limited to services covered by federal or state healthcare programs but applies more broadly to services covered by “healthcare benefit programs,” including commercial insurers. As currently drafted, EKRA potentially expands the universe of arrangements that could be subject to government enforcement under federal fraud and abuse laws. In addition, while the Anti-Kickback Statute, includes certain exceptions that are widely relied upon in the healthcare industry, including safe harbors applicable to certain employees and personal service contracts, and not all of those same exceptions apply under EKRA. EKRA expressly does not protect employee compensation that varies by the number of
special purpose acquisition companies increases, there may be more competitionindividuals referred to
find an attractive target for an initial Business Combination. This could increase the costs associated with completing our initial Business Combination and may result in our inability to find a
suitable target for our initial Business Combination.In recent years,laboratory, the number of special purpose acquisition companiestests performed by a laboratory, or the amount billed to or received from a health benefit program from individuals referred to a laboratory. Because EKRA is a relatively new law, there is no agency
guidance and only two courts have addressed the application of EKRA and those courts reached opposite conclusions. One Court ruled that the commission-based compensation provisions of a laboratory employee’s contract did not violate EKRA while the other court expressly disagreed. Given the conflicting opinions, we cannot be assured that courts in our jurisdiction will reach the same conclusion or that the decision will not be overturned if there is an appeal. We cannot assure you that our relationships with healthcare providers, hospitals, customers, our own sales representatives, or any other party will not be subject to scrutiny or will survive regulatory challenge under EKRA or other anti-kickback laws.
The False Claims Act prohibits knowingly presenting (or causing the presentation of) a false claim for reimbursement by a federal health care program. Violation of the False Claims Act can result in substantial penalties, including treble damages. Moreover, the False Claims Act permits enforcement by qui tam relators (i.e., whistleblowers), such as competitors, customers, or current/former employees, who will receive a portion of any settlement. As discussed above, violations of the Anti-Kickback statute can serve as the basis for enforcement under the False Claims Act. In addition, inaccurate or otherwise improper claims for reimbursement could constitute a false claim, meaning that we or our partners must carefully and accurately code claims for reimbursement, proactively monitor the accuracy and appropriateness of claims and payments received, diligently investigate any credible information indicating that we or our partners may have been formed has increased substantially. Many companiesreceived an overpayment, and promptly return any overpayments. Medicare payments are subject to audit, including through the Comprehensive Error Rate Testing (“CERT”), program, and payments may be recouped by CMS if it is determined that they were improperly made. Currently, a small percentage of our revenues are generated by payments from Medicare.
While we continually strive to comply with these complex requirements, interpretations of the applicability of these laws to marketing and billing practices are constantly evolving and even an unsuccessful challenge could cause adverse publicity and be costly to respond to, and thus could harm our business and prospects. In addition, while we have enteredand will continue to enter into Business Combinationscertain financial arrangements with special purpose acquisition companies,referral sources, and therewe endeavor to ensure that such arrangements are still many special purpose acquisition companies seeking targetsdesigned to comply with applicable rules, laws and regulations, we can offer no assurance that such arrangements will not result in regulatory or enforcement scrutiny. Our failure to comply with applicable laws could result in various adverse consequences that could have a material adverse effect upon our business, including the exclusion of our products and services from government programs and the imposition of civil or criminal sanctions.
Our business could be harmed by the loss, suspension or other restriction on a license, certification or accreditation, or by the imposition of a fine or penalties, under CLIA, our implementing regulations or other state, federal and foreign laws and regulations affecting licensure or certification, or by future changes in these laws or regulations.
Federal law requires virtually all clinical laboratories to comply with CLIA, which generally involves becoming certified by the federal and state government for
their initial Business Combination,the testing that will be performed and complying with various operational, personnel, facilities administration, quality and proficiency testing requirements intended to ensure that testing services are accurate and reliable. CLIA certification is also a prerequisite to be eligible to bill state and federal healthcare programs, as well as many
additional special purpose acquisition companies currently in registration. Asprivate third-party payors, for clinical diagnostic testing services. For example, as a
result, at times, fewer attractive targetscondition of our CLIA certification, a laboratory may be
available,subject to survey and
itinspection every other year, additional random inspections and surprise inspections based on complaints received by state or federal regulators. The biennial survey and inspection is conducted by CMS, a CMS agent or, if the laboratory holds a CLIA certificate of accreditation, a CMS-approved accreditation organization, such as CAP. Sanctions for failure to comply with CLIA requirements, including proficiency testing violations, may
require more time, effortinclude suspension, revocation or limitation of a laboratory’s CLIA certificate, which is necessary to conduct business, as well as the imposition of significant civil, administrative or criminal sanctions against the lab, its owners and
resources to identify a suitable target for an initial Business Combination.other individuals. In addition, because therewe are subject to regulation under certain state laws and regulations governing laboratory licensure. Some states have enacted laboratory licensure and compliance laws that are more special purpose acquisition companies seeking to enter into an initial Business Combination with available targets, the competition for available targets with attractive fundamentals or business models may increase, which could cause target companies to demand improved financial terms. Attractive deals could also become scarcer for other reasons, such as economic or industry sector downturns, geopolitical tensions or increasesstringent than CLIA. Changes in the cost of additional capital needed to close Business Combinations or operate targets post-Business Combination. This could increase the cost of, delay or otherwise complicate or frustratestate licensure laws that affect our ability to findoffer and provide research and diagnostic products and services across state or foreign country lines could materially and adversely affect our business. In addition, state and foreign requirements for laboratory certification may be costly or difficult to meet and could affect our ability to receive specimens from certain states or foreign countries.
Any sanction imposed under CLIA, its implementing regulations or state or foreign laws or regulations governing licensure, or our failure to renew a suitable targetCLIA certificate, a state or foreign license or accreditation, could have a material adverse effect on our business.
We may never obtain approval in the EU or in any other foreign country for
and/any of our products or
completeservices and, even if we do, we or our
initial Business Combination.Ifpartners and collaborators may never be able to commercialize them in another jurisdiction, which would limit our ability to realize their full market potential.
In order to eventually market any of our current or future products and services in any particular foreign jurisdiction, we must establish compliance with numerous and varying regulatory requirements on a jurisdiction-by-jurisdiction basis regarding quality, safety, performance, privacy and efficacy. In addition, clinical trials or clinical investigations conducted in one
country may not be accepted by regulatory authorities in other countries, and regulatory clearance, authorization or approval in one country does not guarantee regulatory clearance, authorization or approval in any other country. Approval processes vary among countries and can involve additional product testing and validation and additional administrative review periods.
Seeking foreign regulatory clearance, authorization or approval could result in difficulties and costs for us and our collaborators and require additional preclinical studies, clinical trials or clinical investigations which could be costly and time-consuming. Regulatory requirements and ethical approval obligations can vary widely from country to country and could delay or prevent the net proceedsintroduction of our products and services in those countries. The foreign regulatory clearance, authorization or approval process involves all of the Initial Public Offering not being heldrisks and uncertainties associated with FDA clearance, authorization or approval. We currently have limited experience in obtaining regulatory clearance, authorization or approval in international markets. If we or our collaborators fail to comply with regulatory requirements in international markets or to obtain and maintain required regulatory clearances, authorizations or approvals in international markets, or if those approvals are delayed, our target market will be reduced and our ability to realize the full market potential of our products and services will be unrealized.
Complying with numerous statutes and regulations pertaining to our business is an expensive and time-consuming process, and any failure to comply could result in substantial penalties.
Our operations are subject to other extensive federal, state, local and foreign laws and regulations, all of which are subject to change. These laws and regulations currently include, among others:
•HIPAA, which establishes comprehensive federal standards with respect to the privacy and security of protected health information and requirements for the use of certain standardized electronic transactions;
•amendments to HIPAA under HITECH, which strengthen and expand HIPAA privacy and security compliance requirements, increase penalties for violators and expand vicarious liability, extend enforcement authority to state attorneys general, and impose requirements for breach notification;
•the General Data Protection Regulation (“GDPR”) and UK Data Protection Act 2018 (“UK GDPR”),, which imposes strict privacy and security requirements on controllers and processors of European and UK personal data, including enhanced protections for “special categories” of personal data, including sensitive information such as health and genetic information of data subjects;
•the CCPA , and similar consumer privacy laws in Colorado, Connecticut, Utah, and Virginia, which, among other things, regulate how subject businesses may collect, use, disclose and/or sell the personal information of consumers who reside in each state, affords rights to consumers that they may exercise against businesses that collect their information, and requires implementation of reasonable security measures to safeguard personal information of consumers;
•Laws governing genetic counseling services, relating to, among other things, the adequacy of health care, the practice of medicine and other health professions (including the provision of remote care and cross-coverage practice), equipment, personnel, operating policies and procedures and the prerequisites for ordering laboratory tests. Some states have enacted regulations specific to providing services to patients via telehealth. Such regulations include, among other things, informed consent requirements that some states require providers to obtain from their patients before providing telehealth services. Health professionals who provide professional services using telehealth modalities must, in most instances, hold a valid license to practice the applicable health profession in the Trust Accountstate in which the patient is located. In addition, certain states require a healthcare professional providing telehealth to be physically located in the same state as the patient. Any failure to comply with these laws and regulations could result in civil or criminal penalties against telehealth providers.
•Clinical and human subjects research regulations, including but not limited to the federal Policy for Protection of Human Subjects (45 C.F.R. Part 46), the FDCA and its applicable implementing regulations at 21 C.F.R. Parts 11, 50, 54, 56, 58 and 812, and all equivalent legal requirements in other jurisdictions.
•the federal Anti-Kickback Statute, which prohibits knowingly and willfully offering, paying, soliciting or receiving remuneration, directly or indirectly, overtly or covertly, in cash or in kind, to induce or in return for the referral of an individual, for the furnishing of or arrangement for the furnishing of any item or service for which payment may be made in whole or in part by a federal healthcare program, or the purchasing, leasing, ordering, arranging for, or recommend purchasing, leasing or ordering, any good, item or service for which payment may be made, in whole or in part, under a federal healthcare program;
•EKRA, which prohibits payments for referrals to recovery homes, clinical treatment facilities, and laboratories and reaches beyond federal health care programs, to include private insurance;
•the federal physician self-referral law, known as the Stark Law, which prohibits a physician from making a referral to an entity for certain designated health services covered by the Medicare program, including laboratory and pathology services, if the physician or an immediate family member has a financial relationship with the entity
unless an exception applies, and prohibits an entity from billing for designated health services furnished pursuant to a prohibited referral;
•the federal False Claims Act, which imposes liability on any person or entity that, among other things, knowingly presents, or causes to be presented, a false or fraudulent claim for payment to the federal government;
•the federal Civil Monetary Penalties Law, which prohibits, among other things, the offering or transfer of remuneration to a Medicare or state healthcare program beneficiary if the person knows or should know it is likely to influence the beneficiary’s selection of a particular provider, practitioner or supplier of services reimbursable by Medicare or a state healthcare program, unless an exception applies;
•the HIPAA fraud and abuse provisions, which create new federal criminal statutes that prohibit, among other things, defrauding health care benefit programs, willfully obstructing a criminal investigation of a healthcare offense and falsifying or concealing a material fact or making any materially false statements in connection with the payment for healthcare benefits, items or services;
•other federal and state fraud and abuse laws, such as anti-kickback laws, prohibitions on self-referral, fee-splitting restrictions, insurance fraud laws, anti-markup laws, prohibitions on the provision of tests at no or discounted cost to induce physician or patient adoption, and false claims acts, which may extend to services reimbursable by any third-party payor, including private insurers;
•the 21st Century Cures Act information blocking prohibition, which prohibits covered actors from engaging in certain practices that are insufficientlikely to allowinterfere with the access, exchange, or use of electronic health information;
•the Physician Payments Sunshine Act and similar state laws that require reporting of certain payments and other transfers of value made by applicable manufacturers, directly or indirectly, to or on behalf of covered recipients including physicians (defined to include doctors of medicine, osteopathy, dentists, optometrists, podiatrists and chiropractors), physician assistants, nurse practitioners, clinical nurse specialists, certified registered nurse anesthetists, anesthesiologist assistants, certified nurse midwives and teaching hospitals as well as ownership and investment interests held by physicians and their immediate family members;
•state laws that limit or prohibit the provision of certain payments and other transfers of value to certain covered healthcare providers;
•the prohibition on reassignment of Medicare claims, which, subject to certain exceptions, precludes the reassignment of Medicare claims to any other party;
•state laws that prohibit other specified practices, such as billing clinicians for testing that they order; waiving coinsurance, copayments, deductibles and other amounts owed by patients; billing a state Medicaid program at a price that is higher than what is charged to one or more other payors;
•similar foreign laws and regulations that may apply to us in the countries in which we operate or may operate in the future; and
•laws that relate to maintaining accurate information and control over activities that may fall within the purview of the U.S. Foreign Corrupt Practices Act, its books and records provisions, or anti-bribery provisions.
We have adopted policies and procedures designed to comply with these laws and regulations. While the Company continues to develop and improve its compliance program, we acknowledge that further development will be necessary to help mitigate enforcement risk. Our compliance may also be subject to governmental review and, in the event of a violation of certain legal requirements, any deficiencies in our policies, procedures, and controls may subject us to operate for at leastincreased sanctions that could materially affect our business.
In addition, the
24 months following the closinggrowth of
the offering, it could limit the amount available to fund our
search for a target business
or businesses and
complete our
initial Business Combination, and we will depend on loans from our Sponsor or management team to fund our search and to complete our initial Business Combination.Of the net proceeds of the Initial Public Offering, only $1,000,000 will be available to us initially outside the Trust Account to fund our working capital requirements. We believe that the funds available to usexpansion outside of the Trust AccountU.S. may increase the potential of violating these laws or our internal policies and procedures. The risk of us being found in violation of these or other laws and regulations is further increased by the fact that many have not been fully interpreted by the regulatory authorities or the courts, and their provisions are open to a variety of interpretations. Any action brought against us for violation of these or other laws or regulations, even if we successfully defend against it, could cause us to incur significant legal expenses and divert our management’s attention from the operation of our business. If our operations are found to be in violation of any of these laws and regulations, we may be subject to any applicable penalty associated with the violation, including significant administrative, civil and criminal penalties, damages, fines, imprisonment, exclusion from participation in Federal healthcare programs, refunding of payments received by us and curtailment or cessation of our operations, which may impact existing contracts with key payors, collaborators, health systems, and commercial partners. Any of the foregoing consequences could seriously harm our business and our financial results.
We face uncertainty related to healthcare reform, pricing, coverage and reimbursement, which could reduce our revenue.
Healthcare reform laws, including the Patient Protection and Affordable Care Act (“ACA,”) and the Protecting Access to Medicare Act of 2014 (“PAMA,”) are significantly affecting the U.S. healthcare and medical services industry. Existing legislation, and possible future legal and regulatory changes, including potential repeal or modification of the ACA,
elimination of penalties regarding the individual mandate for coverage, or approval of health plans that allow lower levels of coverage for preventive services, could materially change the structure and finances of the health insurance system and the methodology for reimbursing medical services, drugs and devices, including our current and future products and services. The ACA has also been the subject of various legal challenges, and if the plaintiffs in any case challenging the ACA are ultimately successful, insurance coverage for our tests could be materially and adversely affected. Any change in reimbursement policy could result in a change in patient cost-sharing, which could adversely affect a provider’s willingness to prescribe and patient’s willingness and ability to use our tests and any other product or service we may develop. Healthcare reforms, which may intend to reduce healthcare costs, may have the effect of discouraging third-party payors from covering certain kinds of medical products and services, particularly newly developed technologies, or other products or tests we may develop in the future. We cannot predict whether future healthcare reform initiatives will be implemented at the federal or state level or the effect any such future legislation or regulation will have on it. The taxes imposed by new legislation, cost reduction measures and the expansion in the government’s role in the U.S. healthcare industry may result in decreased profits to us, which may adversely affect our business, financial condition and results of operations.
PAMA presents significant uncertainty for future CMS reimbursement rates for our tests. Because Medicare currently covers a significant number of patients, any reduction in the CMS reimbursement rate for our tests would negatively affect our revenues and our business prospects. Under PAMA, unless delayed by an act of Congress, CMS reimbursement rates for clinical diagnostic laboratory tests are updated every three years, or annually for clinical laboratory tests that are considered “advanced diagnostic laboratory tests”. The CMS reimbursement rates for clinical diagnostic laboratory tests are updated based on the volume-weighted median of private payor rates for each clinical diagnostic laboratory test based on data submitted by certain applicable laboratories. Further, laboratories that fail to report or erroneously report required payment information may be subject to substantial civil money penalties. There can be no assurance under PAMA that adequate CMS reimbursement rates will continue to be assigned to our tests. Congress could modify or repeal PAMA in the future or CMS could modify regulations under PAMA, and any such action could have the effect of reducing the CMS reimbursement rate for our tests. Further, it is possible that Medicare or other federal payors that provide reimbursement for our tests may suspend, revoke or discontinue coverage at any time, may require co-payments from patients, or may reduce the reimbursement rates payable to us. Any such action could have a negative impact on our revenues.
Product and professional liability suits against us could result in expensive and time-consuming litigation, payment of substantial damages and increases in our insurance rates.
The sale and use of our solutions, products and services could lead to product or professional liability claims, including class action lawsuits. We may also be subject to liability for errors in the test results including health information it provides to healthcare providers or patients or for a misunderstanding of, or inappropriate reliance upon, the information it provides. Claims could also arise out of clinical studies we may conduct or any of our other activities. A product or professional liability claim could result in substantial damages, be costly and time consuming to defend, and cause material harm to our business, reputation or financial condition. We cannot assure you that our liability insurance would protect our assets from the financial impact of defending a product or professional liability claim. Any claim brought against us, with or without merit, could increase our liability insurance rates or prevent it from securing insurance coverage in the future.
Errors, defects, or mistakes in our products or services, and operations could harm our reputation, decrease market acceptance of our products or services.
We are creating new products and services, many of which are initially based on largely untested technologies. As all of our products and services progress, we or others may determine that it made product or service-level scientific or technological mistakes. The diagnostic and testing processes utilize a number of complex and sophisticated molecular, biochemical, informatics, and mechanical processes, many of which are highly sensitive to external factors. An operational or technological failure in one of these complex processes or fluctuations in external factors may result in less efficient processing or variation between testing runs. Refinements to our processes may initially result in unanticipated issues that reduce the efficiency or increase variability. In particular, sequencing, which is a key component of these processes, could be inefficient with higher-than-expected variability thereby increasing total sequencing costs and reducing the number of samples we can process in a given time period. Therefore, inefficient or variable processes can cause variability in our operating results and damage our reputation.
In addition, our laboratory operations could result in any number of errors or defects. Our quality assurance system may fail to prevent it from inadvertent problems with samples, sample quality, lab processes including sequencing, software, data upload or analysis, raw materials, reagent manufacturing, assay quality or design, or other components or processes. In addition, our assays may have quality or design errors, and we may have inadequate procedures or instrumentation to process samples, assemble our proprietary primer mixes and commercial materials, upload and analyze data, or otherwise conduct our laboratory operations. If we provide products or services with undiscovered errors to our customers, our clinical diagnostics
may falsely indicate a patient has a disease or genetic variant, fail to assess a patient’s risk of getting a disease or having a child with a disease, or fail to detect disease or variant in a patient who requires or could benefit from treatment or intervention. We believe our customers are likely to be particularly sensitive to product and service defects, errors and delays, including if our products and services fail to indicate the presence of residual disease with high accuracy from clinical specimens or if we fail to list or inaccurately indicate the presence or absence of disease in our test report or analysis. In drug discovery, such errors may interfere with our collaborators’ clinical studies or result in adverse safety or efficacy profiles for their products in development. This may harm our customers’ businesses and may cause it to incur significant costs, divert the attention of key personnel, encourage regulatory enforcement action against it, create a significant customer relations problem for us and cause our reputation to suffer. We may also be subject to warranty and liability claims for damages related to errors or defects in our products or services. Any of these developments could harm our business and operating results.
We are subject to increasingly complex taxation rules and practices, which may affect how we conduct our business and our results of operations.
As our business grows, we are required to comply with increasingly complex taxation rules and practices. We are subject to tax in multiple U.S. tax jurisdictions and may be subject to foreign tax jurisdictions in the future. The development of our tax strategies requires additional expertise and may impact how we conduct our business. Our future effective tax rates could be unfavorably affected by changes in, or interpretations of, tax rules and regulations in the jurisdictions in which we do business or by changes in the valuation of our deferred tax assets and liabilities. Furthermore, we provide for certain tax liabilities that involve significant judgment. We are and may be subject to the examination of our tax returns by federal, state and foreign tax authorities. If our tax strategies are ineffective or it is not in compliance with domestic and international tax laws, as applicable, our financial position, operating results and cash flows could be adversely affected.
Risks Related to Our Intellectual Property
Our inability to effectively protect our proprietary products, processes, and technologies, could harm our competitive position.
We currently rely upon trade secret protection and copyright, as well as non-disclosure agreements and confidentiality and intellectual property ownership provisions in agreements with our consultants collaborators, vendors and other third parties, confidentiality and proprietary rights agreements, including invention assignment provisions, with our employees, and, to a limited extent, patent protection, to protect our confidential and proprietary information. As our competitors have utilized and are expected to continue utilizing similar methods and have aggregated and are expected to continue to aggregate similar databases of genetic testing information, our success will depend upon our ability to develop proprietary methods and databases and to defend any advantages afforded by our methods and databases relative to our competitors. If we do not protect our intellectual property adequately, competitors may be able to use our methods and databases and thereby erode any competitive advantages we may have.
We will be able to protect our proprietary rights from unauthorized use by third parties only to the extent that our proprietary technologies are covered by valid and enforceable patents or are effectively maintained as trade secrets. In this regard, we have applied, and we intend to continue applying, for patents covering such aspects of our technologies as we deem appropriate. However, we expect that potential patent coverage we may obtain will not be sufficient to allowprevent substantial competition. In this regard, we believe it is probable that others will independently develop similar or alternative technologies or design around those technologies for which we may obtain patent protection. In addition, any patent applications we file may be rejected during examination and may not result in issued patents, or may be invalidated or narrowed in scope after they are issued. Questions as to inventorship or ownership may also arise. Any finding that our patents or applications are unenforceable could harm our ability to prevent others from practicing the related technology, and a finding that others have inventorship or ownership rights to our patents and applications could require us to operateobtain certain rights to practice related technologies, which may not be available on favorable terms, if at all. It would be expensive, if we initiate lawsuits to protect or enforce our patents or trade secrets, or defend against third-party IP claims, and if we lose, we may lose some of our intellectual property rights. Furthermore, these lawsuits may divert the attention of our management and technical personnel.
We expect to continue relying substantially upon trade secrets and proprietary know-how protection for at leastour confidential and proprietary information, and we have taken security measures to maintain such protection for this information. These measures, however, may not provide adequate protection for our trade secrets, know-how or other confidential information. Among other things, we seek to protect our trade secrets and confidential information by entering into confidentiality agreements with employees and consultants. There can be no assurance that any confidentiality agreements that we have with our employees and consultants will provide meaningful protection for our trade secrets and confidential information or will provide adequate remedies in the 24 months followingevent of unauthorized use or disclosure of such information. Accordingly, there also can be no assurance that our trade secrets will not become known. Enforcing a claim that a party illegally disclosed or
misappropriated a trade secret can be difficult, expensive and time-consuming, and the closingoutcome is unpredictable. In addition, trade secrets may be independently developed by others in a manner that could prevent legal recourse by us. If any of our confidential or proprietary information, such as our trade secrets, were to be disclosed or misappropriated, or if any such information was independently developed by a competitor, our competitive position could be harmed.
Any inability to effectively protect our proprietary technologies under certain jurisdictions and legal regimes could harm our competitive position.
Our success and ability to compete in certain jurisdictions and under certain legal regimes depend to a large extent on our ability to develop proprietary products and technologies and to maintain adequate protection of our intellectual property in the U.S. and other countries; this becomes increasingly important as we expand our operations and enter into strategic collaborations with partners to develop and commercialize products outside of the Initial Public Offering; however,U.S. The laws of some foreign countries do not protect proprietary rights to the same extent as the laws of the U.S., and we may encounter difficulties in establishing and enforcing its proprietary rights in some jurisdictions. In addition, the proprietary positions of companies developing and commercializing tools for molecular diagnostics, including our own, generally are uncertain and involve complex legal and factual questions. This uncertainty may materially affect our ability to defend or obtain patents or to address the issues arising under patents and patent applications owned or controlled by our collaborators and licensors.
Any of these factors could adversely affect our ability to obtain commercially relevant or competitively advantageous patent protection for our products.
If patent regulations or standards are modified, such changes could have a negative impact on our business.
From time to time, the U.S. Supreme Court, other federal courts, the U.S. Congress or the U.S. Patent & Trademark Office (“USPTO”) may change the standards of patentability and validity of patents within the screening and diagnostics space, and any such changes could have a negative impact on our business.
There have been several cases involving “gene patents” and diagnostic claims that have been considered by the U.S. Supreme Court. In March 2012, the Supreme Court in Mayo Collaborative Services v. Prometheus Laboratories, Inc, found a patented diagnostic method claim unpatentable because the relationship between a metabolite concentration and optimized dosage was a patent-ineligible “law of nature.” In June 2013, the Supreme Court ruled in ACLU v. Myriad Genetics, Inc, that an isolated genomic DNA sequence is not patent eligible, but complimentary DNA, or “cDNA,” is eligible. The Prometheus and Myriad decisions, as well as subsequent case law, affect the legal concept of subject matter eligibility by seemingly narrowing the scope of the statute defining patentable inventions.
In December 2014 and again in 2019, the USPTO published revised guidelines for patent examiners to apply when examining process claims for patent eligibility in view of several recent Supreme Court decisions, including Mayo, Association for Molecular Pathology v. Myriad Genetics, Inc., and Alice Corporation Pty. Ltd. v. CLS Bank International, and others. The guidance indicates that claims directed to a law of nature, a natural phenomenon, or an abstract idea that do not meet the eligibility requirements should be rejected as non-statutory, patent ineligible subject matter. While these guidelines may be subject to review and modification by the USPTO over time, we cannot assure you that our estimate is accurate. Of the funds available to us, we could use a portion of the funds available to us to pay fees to consultants to assist us with our search for a target business. We could also use a portion of the funds as a down paymentintellectual property strategy or to fund a “no-shop” provision (a provision in letters of intent or merger agreements designed to keep target businesses from “shopping” around for transactions with other companies or investors on terms more favorable to such target businesses) with respect to a particular proposed Business Combination, although we do not have any current intention to do so. If we entered into a letter of intent or merger agreement where we paid for the right to receive exclusivity from a target business and were subsequently required to forfeit such funds (whether as a result of our breach or otherwise), we might not have sufficient funds to continue searching for, or conduct due diligence with respect to, a target business.In the event that our offering expenses exceed our estimate of $1,000,000, we may fund such excess with funds not to be held in the Trust Account. In such case, the amount of funds we intend to be held outside the Trust Account would decrease by a corresponding amount. Conversely, in the event that the offering expenses are less than our estimate of $1,000,000, the amount of funds we intend to be held outside the Trust Account would increase by a corresponding amount. The amount held in the Trust Accountpatent portfolio will not be negatively impacted asby the decisions described above, rulings in other cases or changes in guidance or procedures issued by the USPTO.
Additional substantive changes to patent law, whether new or associated with the America Invents Act which substantially revised the U.S. patent system, may affect our ability to obtain, enforce or defend our patents. Accordingly, it is not clear what, if any, impact these substantive changes will ultimately have on the cost of prosecuting our patent applications, our ability to obtain patents based on our discoveries and our ability to enforce or defend our issued patents, all of which could have a result of such increase or decrease. material adverse effect on our business.
If we are not able to adequately protect our trade secrets and other proprietary information, including the databases we manage and to which we have access, the value of our technology and products could be significantly diminished.
We rely on trade secret and proprietary know-how protection for our confidential and proprietary information and have taken security measures to protect this information. These measures, however, may not provide adequate protection. For example, we have a policy of requiring our consultants, advisors and collaborators, including, for example, our strategic collaborators with whom we seek to develop and commercialize products, to enter into non-disclosure agreements and our employees to enter into confidentiality and proprietary rights and, in certain cases non-compete agreements. However, breaches of our physical or electronic security systems, or breaches caused by our employees who failing to abide by their confidentiality obligations during or upon termination of their employment with us, could compromise these protection efforts. Any action we take to enforce our rights may be time-consuming, expensive, and possibly unsuccessful. Even if successful, the resulting
remedy may not adequately compensate us for the harm caused by the breach. These risks are heightened in countries where laws or law enforcement practices may not protect proprietary rights as fully as in the U.S. or Europe. Any unauthorized use or disclosure of, or access to, our trade secrets, know-how or other proprietary information, whether accidentally or through willful misconduct, could have a material adverse effect on our programs and our strategy, and on our ability to compete effectively.
If our trademarks and trade names are not adequately protected, we may not be able to build name recognition in our markets of interest, and our business may be adversely affected.
Failure to maintain our trademark registrations, or to obtain new trademark registrations in the future, could limit our ability to protect our trademarks and impede our marketing efforts in the countries in which we operate. We may not be able to protect our rights to trademarks and trade names which we may need to build name recognition with potential partners or customers in our markets of interest. As a means to enforce our trademark rights and prevent infringement, we may be required to seek additional capital,file trademark claims against third parties or initiate trademark opposition proceedings. This can be expensive and time-consuming, and possibly unsuccessful. our registered or unregistered trademarks or trade names may be challenged, infringed, circumvented, declared generic or determined to infringe on other marks.
Our pending trademark applications in the U.S. and in other foreign jurisdictions where we may file may not be successful. Even if these applications result in registered trademarks, third parties may challenge these trademarks in the future. Over the long term, if we are unable to establish name recognition based on our trademarks and trade names, then we may not be able to compete effectively, and our business may be adversely affected.
Litigation or other proceedings resulting from either third-party claims of patent infringement, or asserting infringement by third parties of our technology, could be costly, time-consuming, and could limit our ability to commercialize our products or services.
Our success depends in part on our non-infringement of the patents or intellectual property rights of third parties, and our ability to successfully prevent third parties from infringing our intellectual property. We operate in a crowded technology area in which there has been substantial litigation and other proceedings regarding patent and other intellectual property rights in the genetic diagnostics industry. Third parties, including our competitors, have asserted and may in the future assert that we are infringing their intellectual property rights. We may also become subject to and/or initiate future intellectual property litigation as our product portfolio and the level of competition in our industry grow.
Because the USPTO maintains patent applications in secrecy until a patent application publishes or the patent is issued, we have no way of knowing if others may have filed patent applications covering technologies used by it or our partners. Additionally, there may be third-party patents, and other intellectual property rights relevant to our technologies that may block us from commercializing our technologies. From time-to-time, we have received correspondence from third parties alleging to hold intellectual property rights that could block our development or commercialization of products. While none of these inquiries to date have had any material effect on us, we may receive inquiries in the future that could have a material effect on our business. Even if third-party claims are without merit, defending a lawsuit may result in substantial expense to us and may divert the attention of management and key personnel. In addition, we cannot provide assurance that we would needprevail in any such suits to borrow funds fromthe extent necessary to conduct our Sponsor, management teambusiness according to our strategic plan or that the damages or other remedies, if any, awarded against us would not be substantial. Claims of intellectual property infringement may require that we, or our strategic partners, enter into unsustainably high royalty or license agreements with third parties that may only be available on unacceptable terms, if at all. In addition, we could experience delays in product introductions or sales growth while we attempt to operatedevelop non-infringing alternatives. These claims could also result in injunctions against the further development and commercial sale of services or products containing our technologies, which would have a material adverse effect on our business, financial condition and results of operations.
We cannot predict whether, or offer any assurance that, the patent infringement claims may initiate in the future will be successful. We are and may become subject to counterclaims by patent infringement defendants. Our patents may be
forced to liquidate. Neither our Sponsor, members of our management team nor any of their affiliates is under any obligation to advance funds to usdeclared invalid or unenforceable, or narrowed in
such circumstances. Any such advancesscope. Even if we prevail in an infringement action, we cannot assure you that it would be
repaid only from funds held outsideadequately compensated for the
Trust Account or from funds releasedharm to
us upon completion of our
initial Business Combination. Up to $1,500,000 of such loans may be convertible into warrants of the post-Business Combination entity at a price of $1.50 per warrant at the option of the lender. The warrants would be identical to the Private Placement Warrants. Prior to the completion of our initial Business Combination, we do not expect to seek loans from parties other than our Sponsor or an affiliate of our Sponsor as we do not believe third parties will be willing to loan such funds and provide a waiver against any and all rights to seek access to funds in our Trust Account.business. If we are unable to
completeenjoin third-party infringement, our
initial Business Combination within the required time period becauserevenues may be adversely impacted and we
do not have sufficient funds availablemay lose market share; and such third-party product may continue to
us, we will be forced to cease operations and liquidate the Trust Account. Consequently, our Public Stockholders may only receive an estimated $10.00 per public share, or possibly less, on our redemption of our Public Shares, and our warrants will expire worthless.Changesexist in the market, for directorsbut fail to meet our regulatory or safety standards, thereby causing irreparable harm to our reputation as a provider of quality products, which in turn could result in loss of market share and officers liability insurance could make it more difficult and more expensive for us to negotiate and complete an initial Business Combination.
In recent months, the market for directors and officers liability insurance for special purpose acquisition companies has changed in wayshave a material adverse to useffect on our business, financial condition and our management team. Fewer insurance companies are offering quotes for directors and officers liability coverage, the premiums charged for such policies have generally increased and the termsresults of such policies have generally become less favorable. These trends may continue into the future.
The increased cost and decreased availability of directors and officers liability insurance could make it more difficult and more expensive for us to negotiate and complete an initial Business Combination. In order to obtain directors and officers liability insurance or modify its coverage as a result of becoming a public company, the post-Business Combination entity might need to incur greater expense and/or accept less favorable terms. Furthermore, any failure to obtain adequate directors and officers liability insurance could have an adverse impact on the post-Business Combination’s ability to attract and retain qualified officers and directors.
operations.
In addition,
after completionour agreements with some of
any initial Business Combination, our
directors and officers could be subject to potential liability from claims arising from conduct alleged to have occurred prior to such initial Business Combination. As a result, in order to protect our directors and officers, the post-Business Combination entity may need to purchase additional insurance with respect to any such claims (“run-off insurance”). The need for run-off insurance would be an added expense for the post-Business Combination entity and could interfere with or frustrate our ability to consummate an initial Business Combination on terms favorable to our investors.If third parties bring claims against us, the proceeds held in the Trust Account could be reduced and the per-share redemption amount received by stockholders may be less than $10.00 per public share.
Our placing of funds in the Trust Account may not protect those funds from third party claims against us. Although we will seek to have all vendors, service providers, prospective target businessescustomers, suppliers, and other entities (except for our independent registered public accounting firm) with whichwhom we do business execute agreements withrequire us waiving any right, title, interestto defend or claimindemnify these parties to the extent they become involved in patent infringement claims, including the types of any kind
claims described in or to any monies heldthis risk factor. We have agreed, and may in the Trust Account for the benefit of our Public Stockholders, suchfuture agree, to defend or indemnify third parties may not execute such agreements, or even if they execute such agreements they may not be prevented from bringing claims against the Trust Account, including, but not limitedwe determine it to fraudulent inducement, breach of fiduciary responsibility or other similar claims, as well as claims challenging the enforceability of the waiver, in each case in order to gain advantage with respect to a claim against our assets, including the funds held in the Trust Account. If any third party refuses to execute an agreement waiving such claims to the monies held in the Trust Account, our management will consider whether competitive alternatives are reasonably available to us and will only enter into an agreement with such third party if management believes that such third party’s engagement would be in the best interests of our business relationships. If we are required or agree to defend or indemnify third parties in connection with any infringement claims, we could incur significant costs and expenses that could adversely affect our business, financial condition and results of operations.
Our use of open-source software could subject our business to possible litigation or cause us to subject our platform to unwanted open-source license conditions that could negatively impact our sales.
A limited but meaningful portion of our platforms and products incorporate open-source software, and we will incorporate open-source software into other offerings or products in the companyfuture. Such open-source software is generally licensed by its authors or other third parties under open-source licenses. There is little legal precedent governing the circumstances. interpretation of certain terms of these licenses, and therefore the potential impact of these terms on our business is unknown and may result in unanticipated obligations regarding our products and technologies. If an author or other third party that distributes such open-source software were to allege that we had not complied with the conditions of one or more of these licenses, we could be required to incur significant legal expenses defending against such allegations. In addition, if we combine our proprietary software with open-source software in a certain manner, under some open-source licenses, we could be required to release the source code of our proprietary software, which could substantially help our competitors develop products that are similar to or better than our products.
We rely on strategic collaborative and licensing arrangements with third parties to develop intellectual property. We may not be able to successfully establish and maintain such intellectual property.
The underwritersdevelopment and commercialization of our products and services rely, directly or indirectly, upon strategic collaborations and licensing agreements with third parties. Such arrangements provide us with intellectual property and other business rights crucial to our product development and commercialization. We have incorporated licensed technology into our tests. Our dependence on licensing, collaboration and other similar agreements with third parties may subject it to a number of risks. There can be no assurance that any current contractual arrangements between us and third parties or between our strategic partners and other third parties will be continued on materially similar terms and will not be breached or terminated early. Any failure to obtain or retain the rights to necessary technologies on acceptable commercial terms could require us to re-configure our products and services, which could negatively impact their commercial sale or increase the associated costs, either of which could materially harm our business and adversely affect our future revenues and ability to achieve sustained profitability.
We expect to continue and expand our reliance on collaborative and licensing arrangements. Establishing new strategic collaborations and licensing arrangements is difficult and time-consuming. Discussions with potential collaborators or licensors may not lead to the establishment of collaborations on favorable terms, if at all. To the extent we agree to work exclusively with one collaborator in a given area, our opportunities to collaborate with other entities could be limited. Potential collaborators or licensors may reject collaborations with it based upon their assessment of our financial, regulatory or intellectual property position or other factors. Even if we successfully establish new collaborations, these relationships may never result in the successful commercialization of any product or service. In addition, the success of the Initial Public Offeringprojects that require collaboration with third parties will be dependent on the continued success of such collaborators. There is no guarantee that our collaborators will continue to be successful and, as a result, we may expend considerable time and resources developing products or services that will not ultimately be commercialized.
Risks Related to Cybersecurity, Privacy and Information Technology
Interruption, interference with, or failure of our information technology and communications systems could hurt our ability to effectively provide our products and services, which could harm our reputation, financial condition, and operating results.
The availability of our products and services and fulfillment of our customer contracts depend on the continuing operation of our information technology and communications systems. Our systems are vulnerable to damage, interference, or interruption from terrorist attacks, natural disasters, the effects of climate change (such as sea level rise, drought, flooding, wildfires, and increased storm severity), power loss, telecommunications failures, computer viruses, ransomware attacks, computer denial of service attacks, phishing schemes, or other attempts to harm or access our systems. Some of our data centers are located in areas with a high risk of major earthquakes or other natural disasters. Our data centers are also subject to break-ins, sabotage, and intentional acts of vandalism, and, in some cases, to potential disruptions resulting from problems experienced by facility operators. Some of our systems are not fully redundant, and disaster recovery planning cannot account for all eventualities.
The occurrence of a natural disaster, closure of a facility, or other unanticipated problems at our data centers could result in lengthy interruptions in our service. In addition, our products and services are highly technical and complex and may contain errors or vulnerabilities, which could result in interruptions in or failure of our services or systems.
Security breaches, privacy issues, loss of data and other incidents could continue to compromise sensitive, protected, or personal information related to our business, could prevent it from accessing critical information, and could expose it to regulatory liability, which could adversely affect our business.
In the ordinary course of our business, our collection and storing of PHI also includes more sensitive data, such as genetic information, as well as
personally identifiable information, genetic information, credit card information, financial information, intellectual property and proprietary business information owned or controlled by us or our
registered independent public accounting firm will not execute agreementscustomers, payors and other parties. We manage and maintain our applications and data utilizing a combination of on-site systems, managed data center systems and cloud-based systems. We also communicate PHI and other sensitive patient data through our various customer tools and platforms, and in physical form. In addition to storing and transmitting sensitive data that is subject to multiple legal protections, these applications and data encompass a wide variety of business-critical information including research and development information, commercial information, and business and financial information. We continue to face a number of risks relative to protecting this critical information, including loss of access risk, inappropriate disclosure, inappropriate modification, and the risk of our being unable to adequately monitor and modify our controls over our critical information. Any technical problems that may arise in connection with
us waiving such claimsthe data that we access and our systems, including those that are hosted by third-party providers, could result in interruptions to
the monies heldour business and operations or exposure to security vulnerabilities. These types of problems may be caused by a variety of factors, including infrastructure changes, intentional or accidental human actions or omissions, software errors, malware, viruses, security attacks, fraud, spikes in
the Trust Account.customer usage and denial of service issues. From time to time, large third-party web hosting providers have experienced outages or other problems that have resulted in their systems being offline and inaccessible. Such outages could materially impact our business and operations. Examples of possible instances whereAlthough we may engage a third party that refuses to execute a waiver include the engagement of a third party consultant whose particular expertise or skills are believed by managementtake what we believe to be significantly superiorreasonable and appropriate measures, including a formal, dedicated enterprise security program, to thoseprotect sensitive information from various compromises (including unauthorized access, disclosure, or modification or lack of availability), our information technology and infrastructure may be vulnerable to attacks by hackers or viruses or breached due to employee error, malfeasance, lost or stolen technology, or other consultants that would agree to executedisruptions. Any such breach or interruption could compromise our networks and the information stored therein could be accessed by unauthorized parties, altered, publicly disclosed, lost or stolen.
Further, some of our customer tools and platforms are currently accessible through a waiver or in cases where management is unable to find a service provider willing to execute a waiver. In addition,portal and there is no guarantee that we can protect our portal from a security breach. Unauthorized access, loss or dissemination could also disrupt our operations (including our ability to conduct our analyses, provide test results, bill payors or patients, process claims and appeals, provide customer assistance, conduct research and development activities, collect, process and prepare company financial information, provide information about our tests and other patient and physician education and outreach efforts through our website, and manage the administrative aspects of our business) and damage our reputation, any of which could adversely affect our business. In addition to data security risks, we also face privacy risks. For example, as noted above, pursuant to guidance recently issued by OCR, HIPAA covered entities and business associates who permit tracking technology vendors to collect PHI from their patients must enter into a HIPAA compliant business associate agreement with that vendor or obtain advance consent. We have utilized, and may continue to utilize, tracking technologies on one or more of our websites, and may not be able to do so in a manner that is consistent with what HIPAA requires. Should we actually violate, or be perceived to have violated, any privacy promises our business makes to patients or consumers, we could be subject to a complaint from an affected individual or interested privacy regulator, such entities will agreeas OCR, the FTC, a state Attorney General, an EU Member State Data Protection Authority, or a data protection authority in another international jurisdiction. This risk is heightened given the sensitivity of the data we collect.
Any security compromise that causes an apparent privacy violation could also result in legal claims or proceedings; liability under federal, state, foreign, or multinational laws that regulate the privacy, security, or breach of personal information, such as but not limited to waive any claims theythe HIPAA, HITECH, state data security and data breach notification laws, the EU’s GDPR, the UK Data Protection Act of 2018; and related regulatory penalties. Penalties for failure to comply with a requirement of HIPAA or HITECH vary significantly, and, depending on the knowledge and culpability of the HIPAA-regulated entity, may haveinclude civil monetary penalties of up to $1.5 million per calendar year for each provision of HIPAA that is violated. A person who knowingly obtains or discloses individually identifiable health information in violation of HIPAA may face a criminal penalty of up to $50,000 and up to one-year imprisonment. The criminal penalties increase if the wrongful conduct involves false pretenses or the intent to sell, transfer or use identifiable health information for commercial advantage, personal gain or
malicious harm. Penalties for unfair or deceptive acts or practices under the FTC Act or state UDAP, statutes may also vary significantly.
There has been unprecedented activity in the future asdevelopment of data protection regulation around the world. As a result, the interpretation and application of consumer, health-related and data protection laws in the U.S., Europe and elsewhere are often uncertain, contradictory and in flux. The GDPR applies to any entity established in the EU as well as extraterritorially to any entity outside the EU that offers goods or arisingservices to, or monitors the behavior of, individuals who are located in the EU. The GDPR imposes strict requirements on controllers and processors of personal data, including enhanced protections for “special categories” of personal data, which includes sensitive information such as health and genetic information of data subjects. The GDPR also grants individuals various rights in relation to their personal data, including the rights of access, rectification, objection to certain processing and deletion. The GDPR provides an individual with an express right to seek legal remedies if the individual believes his or her rights have been violated. Failure to comply with the requirements of the GDPR or the related national data protection laws of the member states of the EU, which may deviate from or be more restrictive than the GDPR, may result in significant administrative fines issued by EU regulators. Maximum penalties for violations of the GDPR are capped at 20 million euros or 4% of an organization’s annual global revenue, whichever is greater.
Additionally, the implementation of GDPR has led other jurisdictions to either amend or propose legislation to amend their existing data privacy and cybersecurity laws to resemble the requirements of GDPR. For example, on June 28, 2018, California adopted the CCPA. The CCPA regulates how certain for-profit businesses that meet one or more CCPA applicability thresholds collect, use, and disclose the personal information of consumers who reside in California. Among other things, the CCPA confers to California consumers the right to receive notice of the categories of personal information that will be collected by a business, how the business will use and share the personal information, and the third parties who will receive the personal information; the CCPA also confers rights to access, delete, or transfer personal information; and the right to receive equal service and pricing from a business after exercising a consumer right granted by the CCPA. In addition, the CCPA allows California consumers the right to opt out of the “sale” of their personal information, which the CCPA defines broadly as any negotiations, contracts or agreements with us and will not seek recourse against the Trust Account for any reason. Upon redemptiondisclosure of our Public Shares, if we are unablepersonal information to complete our initial business combination within the required time period, or upon the exercise of a redemption right in connection with our initial Business Combination, we will be required to provide for payment of claims of creditors that were not waived that may be brought against us within the 10 years following redemption. Accordingly, the per-share redemption amount received by Public Stockholders could be less than the $10.00 per public share initially held in the Trust Account, due to claims of such creditors. Pursuant to the letter agreement dated as of September 1, 2020, our Sponsor has agreed that it will be liable to us if and to the extent any claims by a third party in exchange for services renderedmonetary or products soldother valuable consideration. The CCPA also requires a business to implement reasonable security procedures to safeguard personal information against unauthorized access, use, or disclosure. California amended the law in September 2018 to exempt all PHI collected by certain parties subject to HIPAA, and further amended the law in September 2020 to clarify that de-identified data as defined under HIPAA will also be exempt from the CCPA. The California Attorney General’s final regulations implementing the CCPA took effect on August 14, 2020. The CCPA provides for civil penalties for violations, as well as a private right of action for data breaches resulting from a business’s failure to implement and maintain reasonable data security procedures that is expected to increase data breach litigation. In addition, California voters recently approved the California Privacy Rights Act of 2020 (“CPRA,”) that went into effect on January 1, 2023. The CPRA among other things, amends the CCPA to give California residents the ability to limit the use of their sensitive information provides for penalties for CPRA violations concerning California residents under the age of 16, and establishes a new California Privacy Protection Agency to implement and enforce the law. Other jurisdictions in the U.S. are beginning to propose and enact laws similar to the CCPA. Some observers have noted that the CCPA could mark the beginning of a trend toward more stringent privacy legislation, which could increase our potential liability and adversely affect our business, results of operations, and financial condition.
It is possible the GDPR, CCPA and other emerging U.S. and international data protection laws may be interpreted and applied in manner that is inconsistent with our practices. If so, this could result in government-imposed fines or orders requiring that we change our practices, which could adversely affect our business. In addition, these privacy laws and regulations may differ from country to country and state to state, and our obligations under these laws and regulations vary based on the nature of our activities in the particular jurisdiction, such as whether we collect samples from individuals in the local jurisdiction, perform testing in the local jurisdiction, or process personal information regarding employees or other individuals in the local jurisdiction. In the U.S., the SEC has adopted rules for mandatory disclosure of cybersecurity incidents suffered by public companies, as well as cybersecurity governance and risk management. Complying with these various laws and regulations could cause us to incur substantial costs or require it to change our business practices and compliance procedures in a prospective target businessmanner adverse to our business. Any failure or perceived failure by us to comply with these laws may also subject us to enforcement action or litigation, any of which could harm our business. We can provide no assurance that it is or will remain in compliance with diverse privacy and data security requirements in all of the jurisdictions in which we will enter intodo business. Failure to comply with privacy and data security requirements could result in a written lettervariety of intent, confidentialityconsequences, or damage to our reputation, any of which could have a material adverse effect on our business.
Data privacy and security concerns relating to our technology and our practices could damage our reputation, subject it to significant legal and financial exposure, and deter current and potential users or customers from using our products and
services. Software bugs or defects, security breaches, and attacks on our systems could result in the improper disclosure and use of user data and interference with our users and customers’ ability to use our products and services, harming our business operations and reputation.
Concerns about our practices with regard to the collection, use, disclosure, or security of personal information or other similar agreement data-privacy-related matters, even if unfounded, could harm our reputation, financial condition, and operating results. Our policies and practices may change over time as expectations regarding privacy and data change.
Our products and services involve the storage and transmission of protected health information and other personal information, proprietary information, and bugs, theft, misuse, defects, vulnerabilities in our products and services, and security breaches expose us to a risk of loss of this information, improper use and disclosure of such information, litigation, and other potential liability. Systems and control failures, security breaches, failure to comply with our privacy policies, and/or inadvertent disclosure of user data could result in government and legal exposure, seriously harm our reputation and brand and, therefore, our business, combination agreement, reduce the amount of funds in the Trust Accountand impair our ability to below the lesser of (i) $10.00 per public shareattract and (ii) the actual amount per public share held in the Trust Account as of the date of the liquidation of the Trust Account, if less than $10.00 per public shareretain users or customers. We expect to continue to expend significant resources to maintain security protections that shield against bugs, theft, misuse, or security vulnerabilities or breaches.
We experience cyber-attacks and other attempts to gain unauthorized access to our systems on a regular basis. We may experience future security issues, whether due to reductionsemployee error or malfeasance or system errors or vulnerabilities in the value of the trust assets, less taxes payable, provided that such liability will not applyour or other parties’ systems, which could result in significant legal and financial exposure. Government inquiries and enforcement actions, litigation, and adverse press coverage could harm our business. We may be unable to any claims by a third partyanticipate or prospective target business who executed a waiver of anydetect attacks or vulnerabilities or implement adequate preventative measures. Attacks and all rights to the monies held in the Trust Account (whether or not such waiver is enforceable) nor will it apply to any claims undersecurity issues could also compromise trade secrets and other sensitive information, harming our indemnity of the underwriters of the Initial Public Offering against certain liabilities, including liabilities under the Securities Act of 1933, as amended (the “Securities Act”). However,business.
While we have dedicated significant resources to privacy and security incident response capabilities, including dedicated worldwide incident response teams, our response process may not asked our Sponsorbe adequate, may fail to reserve for such indemnification obligations, nor have we independently verified whether our Sponsor has sufficient fundsaccurately assess the severity of an incident, may not respond quickly enough, or may fail to satisfy its indemnity obligations and we believe that our Sponsor’s only assets are securities of our company. Therefore, we cannot assure you that our Sponsor would be able to satisfy those obligations.sufficiently remediate an incident. As a result, ifwe may suffer significant legal, reputational, or financial exposure, which could harm our business, financial condition, and operating results.
We depend on our scientific computing and information technology and management systems and any such claims were successfully made againstfailure of these systems could harm our business.
We depend on scientific computing and information technology and management systems, including third-party cloud computing infrastructure, operating systems and AI platforms, for significant elements of our operations, including our laboratory information management system, clinical database, analytical platform, laboratory workflow tools, customer and collaborator reporting and related functions. We also depend on our proprietary workflow software to support new product and service launches and regulatory compliance.
We use complex software processes and bioinformatic pipelines to manage samples and evaluate sequencing result data. These are subject to initial design or ongoing modifications which may result in unanticipated issues that could cause variability in patient results, leading to service disruptions or errors, resulting in liability.
We have installed, and expect to expand, a number of enterprise software systems that affect a broad range of business processes and functional areas, including systems laboratory operations, handling human resources, financial controls and reporting, contract management, regulatory compliance and other infrastructure operations, and patient consent and information management. In addition to these business systems, we have installed, and intend to extend, the Trust Account,capabilities of both our preventative and detective security controls by augmenting the funds available formonitoring and alerting functions, the network design and the automatic countermeasure operations of our initial Business Combinationtechnical systems. These information technology and redemptionstelecommunications systems support a variety of functions, including laboratory operations, test validation, sample tracking, quality control, customer service support, billing and reimbursement, research and development activities, scientific and medical curation and general administrative activities. In addition, our third-party billing and collections provider depends upon technology and telecommunications systems provided by outside vendors.
Information technology and telecommunications systems are vulnerable to damage from a variety of sources, including telecommunications or network failures, malicious internal or external human acts and natural disasters. Moreover, despite network security and back-up measures, some of our servers are potentially vulnerable to physical or electronic break-ins, computer viruses and similar disruptive problems. Despite the precautionary measures we have taken to prevent unanticipated problems that could affect our information technology and telecommunications systems, failures or significant downtime of these systems or those used by our collaborators or subcontractors could prevent it from conducting our comprehensive
screening analysis, clinical diagnostics and drug discovery, preparing and providing reports to researchers, clinicians and our collaborators, billing payors, handling physician inquiries, conducting research and development activities and managing the administrative aspects of our business. Any disruption or loss of information technology or telecommunications systems on which critical aspects of our operations depend could have an adverse effect on our business and our reputation, and we may be unable to regain or repair our reputation in the future.
Our ability to transfer data stored outside of the U.S. could be reducedlimited by international regulations or other action by foreign governments, which could adversely affect our business.
Some of the data we process in the ordinary course of our business may be stored outside of the U.S. In order to lessprocess such data, we may need to transfer them to countries other than $10.00 per public share. Inthose where they are stored. Should a foreign government adopt a regulation restricting the international transfer of such event,data, we may not be able to completeprocess them, which could adversely impact our initial Business Combination,business.
Risks Related to Being a Public Company
We will incur increased costs and youdemands on management as a result of compliance with laws and regulations applicable to public companies, which could harm our operating results.
As a public company, we incur significant legal, accounting and other expenses, including costs associated with public company reporting requirements. In addition, the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”) as well as rules implemented by the SEC and the Nasdaq Stock Market (“Nasdaq”) impose a number of requirements on public companies, including with respect to corporate governance practices. The SEC and other regulators have continued to adopt new rules and regulations and make additional changes to existing regulations that require the company’s compliance. In addition, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), enacted in 2010, includes significant corporate governance and executive-compensation-related provisions. Our management and other personnel will need to devote a substantial amount of time to these compliance and disclosure obligations. If these requirements divert the attention of our management and personnel from other aspects of our business concerns, they could have a material adverse effect on our business, financial condition and results of operations. Moreover, these rules and regulations applicable to public companies substantially could increase our legal, accounting and financial compliance costs, require that we hire additional personnel and make some activities more time consuming and costly.
A market for our securities may not continue, which would receive such lesser amount per shareadversely affect the liquidity and price of our securities.
The price of our securities may fluctuate significantly due to general market and economic conditions. An active trading market for our securities may not be sustained. In addition, the price of our securities can vary due to general economic conditions and forecasts, our general business condition and the release of our financial reports. You may be unable to sell your securities when desired or at an acceptable price unless an active trading market can be sustained.
If we do not meet the expectations of investors, stockholders or financial analysts, the market price of our securities may decline.
If we do not meet the expectations of investors or securities analysts, the market price of our securities may decline. In addition, fluctuations in
connection with any redemptionthe price of our securities could contribute to the loss of all or part of your
Public Shares. Noneinvestment. If an active market for our securities does not continue, the trading price of our
officers or directors will indemnify us for claims by third parties including, without limitation, claims by vendors and prospective target businesses.Our directors may decide not to enforce the indemnification obligations of our Sponsor, resulting in a reduction in the amount of funds in the Trust Account available for distribution to our Public Stockholders.
In the event that the proceeds in the Trust Account are reduced below the lesser of (i) $10.00 per share and (ii) the actual amount per public share held in the Trust Account as of the date of the liquidation of the Trust Account if less than $10.00 per public share due to reductions in the value of the trust assets, in each case less taxes payable, and our Sponsor asserts that it is unable to satisfy its obligations or that it has no indemnification obligations related to a particular claim, our independent directors would determine whether to take legal action against our Sponsor to enforce its indemnification obligations. While we currently expect that our independent directors would take legal action on our behalf against our Sponsor to enforce its indemnification obligations to us, it is possible that our independent directors in exercising their business judgmentsecurities could be volatile and subject to their fiduciary duties may choose notwide fluctuations in response to do so in any particular instance. If our independent directors choose not to enforce these indemnification obligations, the amount of funds in the Trust Account available for distribution to our Public Stockholders may be reduced below $10.00 per public share.
If, after we distribute the proceeds in the Trust Account to our Public Stockholders, we file a bankruptcy petition or an involuntary bankruptcy petition is filed against us that is not dismissed, a bankruptcy court may seek to recover such proceeds, and the members of our board of directors may be viewed as having breached their fiduciary duties to our creditors, thereby exposing the members of our board of directors and us to claims of punitive damages.
If, after we distribute the proceeds in the Trust Account to our Public Stockholders, we file a bankruptcy petition or an involuntary bankruptcy petition is filed against us that is not dismissed, any distributions received by stockholders could be viewed under applicable debtor/creditor and/or bankruptcy laws as either a “preferential transfer” or a “fraudulent conveyance.” As a result, a bankruptcy court could seek to recovervarious factors, some or all amounts received by our stockholders. In addition, our board of directors may be viewed as having breached its fiduciary duty to our creditors and/or having acted in bad faith, by paying Public Stockholders from the Trust Account prior to addressing the claims of creditors, thereby exposing itself and us to claims of punitive damages.
If, before distributing the proceeds in the Trust Account to our Public Stockholders, we file a bankruptcy petition or an involuntary bankruptcy petition is filed against us that is not dismissed, the claims of creditors in such proceeding may have priority over the claims of our stockholders and the per-share amount that would otherwise be received by our stockholders in connection with our liquidation may be reduced.
If, before distributing the proceeds in the Trust Account to our Public Stockholders, we file a bankruptcy petition or an involuntary bankruptcy petition is filed against us that is not dismissed, the proceeds held in the Trust Account could be subject to applicable bankruptcy law, and may be included in our bankruptcy estate and subject to the claims of third parties with priority over the claims of our stockholders. To the extent any bankruptcy claims deplete the Trust Account, the per-share amount that would otherwise be received by our stockholders in connection with our liquidation may be reduced.
If we are deemed to be an investment company under the Investment Company Act, we may be required to institute burdensome compliance requirements and our activities may be restricted, which may make it difficult for us to complete our initial Business Combination.
If we are deemed to be an investment company under the Investment Company Act, our activities may be restricted, including:
| ● | restrictions on the nature of our investments; and |
| | |
| ● | restrictions on the issuance of securities, |
each of which may make it difficult for us to completeare beyond our initial Business Combination. In addition, we may have imposed upon us burdensome requirements, including:
| ● | registration as an investment company with the SEC; |
| | |
| ● | adoption of a specific form of corporate structure; and |
| | |
| ● | reporting, record keeping, voting, proxy and disclosure requirements and other rules and regulations that we are not currently subject to. |
In order not to be regulated as an investment company under the Investment Company Act, unless we can qualify for an exclusion, we must ensure that we are engaged primarily in a business other than investing, reinvesting or trading of securities and that our activities do not include investing, reinvesting, owning, holding or trading “investment securities” constituting more than 40% of our assets (exclusive of U.S. government securities and cash items) on an unconsolidated basis. Our business will be to identify and complete a Business Combination and thereafter to operate the post-transaction business or assets for the long term. We do not plan to buy businesses or assets with a view to resale or profit from their resale. We do not plan to buy unrelated businesses or assets or to be a passive investor.
We do not believe that our anticipated principal activities will subject us to the Investment Company Act. To this end, the proceeds held in the Trust Account may only be invested in United States “government securities” within the meaning of Section 2(a)(16)control. Any of the Investment Company Act havingfactors listed below could have a maturity of 185 days or less or in money market funds meeting certain conditions under Rule 2a-7 promulgated under the Investment Company Act which invest only in direct U.S. government treasury obligations. Pursuant to the trust agreement, the trustee is not permitted to invest in other securities or assets. By restricting the investment of the proceeds to these instruments, and by having a business plan targeted at acquiring and growing businesses for the long term (rather thanmaterial adverse effect on buying and selling businesses in the manner of a merchant bank or private equity fund), we intend to avoid being deemed an “investment company” within the meaning of the Investment Company Act. Anyour investment in our securities isand our securities may trade at prices significantly below the price you paid for them. In such circumstances, the trading price of our securities may not intended for persons who are seekingrecover and may experience a returnfurther decline.
Factors affecting the trading price of our securities may include:
•actual or anticipated fluctuations in our quarterly financial results or the quarterly financial results of companies perceived to be similar to us;
•changes in the market’s expectations about our operating results;
•the public’s reaction to our press releases, our other public announcements and our filings with the SEC;
•speculation in the press or investment community;
•announcements of technological innovation, new products, acquisitions, strategic alliances, significant agreements by us or competitors;
•success of competitors;
•our operating results falling below our financial guidance or other projections or failing to meet the expectation of securities analysts or investors in a particular period;
•changes in financial estimates and recommendations by securities analysts concerning us or the market in general;
•operating and stock price performance of other companies that investors deem comparable to us;
•our ability to market new and enhanced products on investmentsa timely basis;
•changes in governmentlaws and regulations affecting our business;
•commencement of, or involvement in, litigation involving us;
•changes in our capital structure, such as future issuances of securities or investment securities. The Trust Account is intended as a holding place for funds pending the earliest to occurincurrence of either: (i) additional debt;
•the completionvolume of shares of our initial Business Combination; (ii)Class A common stock available for public sale;
•any major change in our Board or management;
•sales of substantial amounts of Class A common stock by our directors, officers or significant stockholders or the redemptionperception that such sales could occur;
•the expiration of the market stand-off or contractual lock-up agreements;
•the realization of any Public Shares properly tendered in connection with a stockholder vote to amend our second amended and restated certificate of incorporation to modify the substance or timing of our obligation to redeem 100% of our Public Shares if we do not complete our initial Business Combination within 24 months from the closing of the Initial Public Offeringrisk factors described herein;
•additions or during any Extension Perioddepartures of key personnel;
•failure to comply with the requirements of the Nasdaq;
•failure to comply with the Sarbanes-Oxley Act or other laws or regulations;
•actual, potential or perceived control, accounting or reporting problems;
•changes in accounting principles, policies and guidelines; and
•general economic and political conditions such as recessions, rising inflation and interest rates, uncertainty with respect to any other material provisions relatingthe U.S. federal budget, global conflicts such as the war in Ukraine and the war in Israel, fuel prices, international currency fluctuations and acts of war or terrorism.
Broad market and industry factors may materially harm the market price of our securities irrespective of our operating performance. The stock market in general and Nasdaq have experienced price and volume fluctuations that have often been unrelated or disproportionate to stockholders’ rights or pre-initial Business Combination activity; and (iii) absent an initial Business Combination within 24 months from the closingoperating performance of the Initial Public Offering or during any Extension Period,particular companies affected. The trading prices and valuations of these stocks, and of our returnsecurities, may not be predictable. A loss of the funds heldinvestor confidence in the Trust Accountmarket for the stocks of other companies which investors perceive to be similar to us could depress our Public Stockholders as partstock price regardless of our redemptionbusiness, prospects, financial conditions or results of operations. A decline in the Public Shares. If we do not invest the proceeds as discussed above, we may be deemed to be subject to the Investment Company Act. If we were deemed to be subject to the Investment Company Act, compliance with these additional regulatory burdens would require additional expenses for which we have not allotted funds and may hindermarket price of our securities also could adversely affect our ability to completeissue additional securities and our ability to obtain additional financing in the future.
In the past, securities class action litigation has often been initiated against companies following periods of volatility in their stock price. In particular, on September 7, 2022, a Business Combination. If we are unable to complete our initial Business Combination withinshareholder class action lawsuit was filed in the required time period, our Public Stockholders may only receive their pro rata portionU.S. District Court for the District of Connecticut against the Company and certain of the fundsCompany’s current and former officers. Further, on February 7, 2023, a stockholder commenced a lawsuit in the Trust AccountDelaware Court of Chancery against, among other parties, certain of the Company’s current and former directors. In addition, on November 28, 2023, a stockholder filed a lawsuit in the U.S. District Court for the District of Delaware against, among other parties, certain of the Company’s current and former officers and directors. For more information, see Note 11, “Purchase Commitments and Contingencies” in the consolidated financial statements included in this Annual Report. This type of litigation could result in substantial costs and divert our management’s attention and resources, and could also require us to make substantial payments to satisfy judgments or to settle litigation.
If securities or industry analysts cease publishing research or reports about us, our business, or our market, or if they change their recommendations regarding our Class A common stock adversely, then the price and trading volume of our Class A common stock could decline.
The trading market for our Class A common stock is influenced by the research and reports that
are available for distributionindustry or securities analysts publish about us, our business, our market, or our competitors. If any of the analysts who cover us change their recommendation regarding our stock adversely, or provide more favorable relative recommendations about our competitors, the price of our Class A common stock would likely decline. If any analyst who covers us were to
Public Stockholders, andcease coverage of us or fail to regularly publish reports on us, we could lose visibility in the financial markets, which could cause our
warrants will expire worthless.stock price or trading volume to decline.
Changes in laws,
regulations or
regulations,rules, or a failure to comply with any laws,
and regulations
or rules, may adversely affect our business,
including our ability to negotiate and complete our initial Business Combination,investments and results of operations.
We are subject to laws, regulations and regulationsrules enacted by national, regional and local governments.governments and Nasdaq. In particular, we will beare required to comply with certain SEC, Nasdaq and other legal or regulatory requirements. Compliance with, and monitoring of, applicable laws, regulations and regulationsrules may be difficult, time consuming and costly. Those laws, and regulations or rules and their interpretation and application may also change from time to time and those changes could have a material
adverse effect on our business, investments and results of operations. In addition, a failure to comply with applicable laws,
regulations or
regulations,rules, as interpreted and applied, could have a material adverse effect on our business
including our ability to negotiate and complete our initial Business Combination, and results of operations.
Our stockholders may be held liable for claims by third parties against us to the extent of distributions received by them upon redemption of their shares.
Under the DGCL, stockholders may be held liable for claims by third parties against a corporation to the extent of distributions received by them in a dissolution. The pro rata portion of our Trust Account distributed to our Public Stockholders upon the redemption of our Public Shares in the event we do not complete our initial Business Combination within 24 months from the closing of the Initial Public Offering or during any Extension Period may be considered a liquidating distribution under Delaware law. If a corporation complies with certain procedures set forth in Section 280 of the DGCL intended to ensure that it makes reasonable provision for all claims against it, including a 60-day notice period during which any third-party claims can be brought against the corporation, a 90-day period during which the corporation may reject any claims brought, and an additional 150-day waiting period before any liquidating distributions are made to stockholders, any liability of stockholders with respect to a liquidating distribution is limited to the lesser of such stockholder’s pro rata share of the claim or the amount distributed to the stockholder, and any liability of the stockholder would be barred after the third anniversary of the dissolution. However, it is our intention to redeem our Public Shares as soon as reasonably possible following the 24th month from the closing of the Initial Public Offering in the event we do not complete our initial Business Combination and, therefore, we do not intend to comply with the foregoing procedures.
Because we will not be complying with Section 280, Section 281(b) of the DGCL requires us to adopt a plan, based on facts known to us at such time that will provide for our payment of all existing and pending claims or claims that may be potentially brought against us within the 10 years following our dissolution. However, because we are a blank check company, rather than an operating company, and our operations will be limited to searching for prospective target businesses to acquire, the only likely claims to arise would be from our vendors (such as lawyers, investment bankers, etc.) or prospective target businesses. If our plan of distribution complies with Section 281(b) of the DGCL, any liability of stockholders with respect to a liquidating distribution is limited to the lesser of such stockholder’s pro rata share of the claim or the amount distributed to the stockholder, and any liability of the stockholder would likely be barred after the third anniversary of the dissolution. We cannot assure you that we will properly assess all claims that may be potentially brought against us. As such, our stockholders could potentially be liable for any claims to the extent of distributions received by them (but no more) and any liability of our stockholders may extend beyond the third anniversary of such date. Furthermore, if the pro rata portion of our Trust Account distributed to our Public Stockholders upon the redemption of our Public Shares in the event we do not complete our initial Business Combination within 24 months from the closing of the Initial Public Offering or during any Extension Period is not considered a liquidating distribution under Delaware law and such redemption distribution is deemed to be unlawful (potentially due to the imposition of legal proceedings that a party may bring or due to other circumstances that are currently unknown), then pursuant to Section 174 of the DGCL, the statute of limitations for claims of creditors could then be six years after the unlawful redemption distribution, instead of three years, as in the case of a liquidating distribution.
We may not hold an annual meeting of stockholders until after the consummation of our initial Business Combination, which could delay the opportunity for our stockholders to elect directors.
In accordance with Nasdaq’s corporate governance requirements, we are not required to hold an annual meeting until no later than one year after our first fiscal year end following our listing on Nasdaq. Under Section 211(b) of the DGCL, we are, however, required to hold an annual meeting of stockholders for the purposes of electing directors in accordance with our bylaws unless such election is made by written consent in lieu of such a meeting. We may not hold an annual meeting of stockholders to elect new directors prior to the consummation of our initial Business Combination, and thus we may not be in compliance with Section 211(b) of the DGCL, which requires an annual meeting. Therefore, if our stockholders want us to hold an annual meeting prior to the consummation of our initial Business Combination, they may attempt to force us to hold one by submitting an application to the Delaware Court of Chancery in accordance with Section 211(c) of the DGCL.
Because we are neither limited to evaluating a target business in a particular industry, sector or geographic region nor have we selected any specific target businesses with which to pursue our initial Business Combination, you will be unable to ascertain the merits or risks of any particular target business’s operations.
Our efforts to identify a prospective initial Business Combination target will not be limited to a particular industry, sector or geographic region. While we may pursue an initial Business Combination opportunity in any industry, sector or geographic region, we expect to focus our efforts on the life sciences sector and intend to capitalize on the ability of our management team to identify, acquire and operate a business or businesses that can benefit from our management team’s established global relationships and operating experience. Our management team has extensive experience in identifying and executing strategic investments globally and has done so successfully in a number of sectors. Our second amended and restated certificate of incorporation prohibits us from effectuating a Business Combination with another blank check company or similar company with nominal operations.
To the extent we complete our initial Business Combination, we may be affected by numerous risks inherent in the business operations with which we combine. For example, if we combine with a financially unstable business or an entity lacking an established record of sales or earnings, we may be affected by the risks inherent in the business and operations of a financially unstable or a development stage entity. Although our officers and directors will endeavor to evaluate the risks inherent in a particular target business, we cannot assure you that we will properly ascertain or assess all of the significant risk factors or that we will have adequate time to complete due diligence. Furthermore, some of these risks may be outside of our control and leave us with no ability to control or reduce the chances that those risks will adversely impact a target business. We also cannot assure you that an investmentAnti-takeover provisions contained in our units will ultimately prove to be more favorable to investors than a direct investment, if such opportunity were available, in a Business Combination target. Accordingly, any stockholders or warrant holders who choose to remain stockholders or warrant holders following the Business Combination could suffer a reduction in the value of their securities. Such stockholders or warrant holders are unlikely to have a remedy for such reduction in value unless they are able to successfully claim that the reduction was due to the breach by our officers or directors of a duty of care or other fiduciary duty owed to them, or if they are able to successfully bring a private claim under securities laws that the proxy materials or tender offer documents,Charter and Bylaws, as applicable, relating to the Business Combination contained an actionable material misstatement or material omission.
Past performance by our management team and their respective affiliates may not be indicative of future performance of an investment in us.
Information regarding performance by, or businesses associated with, our management team or businesses associated with them is presented for informational purposes only. Past performance by our management team and their respective affiliates is not a guarantee either (i) of success with respect to any Business Combination we may consummate or (ii) that we will be able to locate a suitable candidate for our initial Business Combination. You should not rely on the historical record of the performance of our management team’s or businesses associated with themwell as indicative of our future performance of an investment in us or the returns we will, or is likely to, generate going forward.
In evaluating a prospective target business for our initial Business Combination, our management will consider the availability of funds from the sale of the Forward Purchase Shares, which may be used as part of the consideration to the sellers in the initial Business Combination. If all or some of the Forward Purchase Shares are not purchased under the forward purchase agreement, we may decide not to consummate our initial Business Combination, or if we decide to, we may lack sufficient funds to consummate our initial Business Combination.
In connection with the consummation of the Initial Public Offering, we entered into separate forward purchase agreements with affiliates of our Sponsor, Casdin Capital and Corvex Management, in their capacities as investment advisors on behalf of their Clients, pursuant to which, subject to the conditions described below, they will cause certain Clients to purchase from us up to an aggregate amount of 15,000,000 shares of Class A Common Stock, or the Forward Purchase Shares, for $10.00 per Forward Purchase Share, or an aggregate amount of up to $150,000,000, in a private placement that will close concurrently with the closing of our initial Business Combination. The proceeds from the sale of these Forward Purchase Shares, together with the amounts available to us from the Trust Account (after giving effect to any redemptions of Public Shares) and any other equity or debt financing obtained by us in connection with the Business Combination, will be used to satisfy the cash requirements of the Business Combination, including funding the purchase price and paying expenses and retaining specified amounts to be used by the post-Business Combination company for working capital or other purposes. The amount of Forward Purchase Shares sold pursuant to the forward purchase agreements will be determined in our discretion based on our need for additional capital to consummate the initial Business Combination.
Each of Casdin Capital’s and Corvex Management’s obligation to cause Clients to purchase Forward Purchase Shares will, among other things, be conditioned on our completing an initial Business Combination with a company engaged in a business that is within the investment objectives of the Clients purchasing Forward Purchase Shares and on the Business Combination (including the target assets or business, and the terms of the Business Combination) being reasonably acceptable to such Clients as determined by Casdin Capital or Corvex Management, as relevant, as investment advisors on behalf of such Clients. In determining whether a target is reasonably acceptable to Clients, we expect that Casdin Capital or Corvex Management, as relevant, would consider many of the same criteria as we will consider, but will also consider whether the investment is an appropriate investment for such Clients, including whether the investment complies with any guidelines, restrictions or conflicts of interest provisions applicable to such Clients. Accordingly, if either Casdin Capital or Corvex Management, as relevant, determines, as an investment advisor on behalf of such Clients that the initial Business Combination falls outside the investment objects of such Clients or is not reasonably acceptable to such Clients, it would not be obligated to purchase any Forward Purchase Shares. In addition, the obligation to purchase Forward Purchase Shares will be subject to fulfillment of customary closing conditions, including that our initial Business Combination must be consummated substantially concurrently with the purchase of Forward Purchase Shares. If the sale of Forward Purchase Shares does not close for any reason, including by reason of the failure to fund the purchase price, for example, we may lack sufficient funds to consummate our initial Business Combination.
We may seek Business Combination opportunities in industries, sectors or geographic regions that may be outside of our management’s areas of expertise.
Although we expect to focus our search for a target business in the life sciences sector, we will consider a Business Combination in industries, sectors or geographic regions outside of our management’s areas of expertise if a Business Combination candidate is presented to us and we determine that such candidate offers an attractive Business Combination opportunity for our company. Although our management will endeavor to evaluate the risks inherent in any particular Business Combination candidate, we cannot assure you that we will adequately ascertain or assess all of the significant risk factors. We also cannot assure you that an investment in our units will not ultimately prove to be less favorable to investors than a direct investment, if an opportunity were available, in a Business Combination candidate. In the event we elect to pursue a Business Combination outside of the areas of our management’s expertise, our management’s expertise may not be directly applicable to its evaluation or operation. As a result, our management may not be able to ascertain or assess adequately all of the relevant risk factors. Accordingly, any stockholders or warrant holders who choose to remain stockholders or warrant holders, respectively, following our initial Business Combination could suffer a reduction in the value of their shares. Such stockholders or warrant holders are unlikely to have a remedy for such reduction in value.
Although we have identified general criteria and guidelines that we believe are important in evaluating prospective target businesses, we may enter into our initial Business Combination with a target that does not meet such criteria and guidelines, and as a result, the target business with which we enter into our initial Business Combination may not have attributes entirely consistent with our general criteria and guidelines.
Although we have identified general criteria and guidelines for evaluating prospective target businesses, it is possible that a target business with which we enter into our initial Business Combination will not have all of these positive attributes. If we complete our initial Business Combination with a target that does not meet some or all of these guidelines, such combination may not be as successful as a combination with a business that does meet all of our general criteria and guidelines. In addition, if we announce a prospective Business Combination with a target that does not meet our general criteria and guidelines, a greater number of stockholders may exercise their redemption rights, which may make it difficult for us to meet any closing condition with a target business that requires us to have a minimum net worth or a certain amount of cash. In addition, if stockholder approval of the transaction is required by law or stock exchange listing rules, or we decide to obtain stockholder approval for business or other legal reasons, it may be more difficult for us to attain stockholder approval of our initial Business Combination if the target business does not meet our general criteria and guidelines. If we are unable to complete our initial Business Combination, our Public Stockholders may only receive their pro rata portion of the funds in the Trust Account that are available for distribution to Public Stockholders, and our warrants will expire worthless.
We are not required to obtain an opinion from an independent investment banking firm or from a valuation or appraisal firm, and consequently, you may have no assurance from an independent source that the price we are paying for the business is fair to our stockholders from a financial point of view.
Unless we complete our initial Business Combination with an affiliated entity or our board of directors cannot independently determine the fair market value of the target business or businesses (including with the assistance of financial advisors), we are not required to obtain an opinion from an independent investment banking firm which is a member of FINRA or from a valuation or appraisal firm that the price we are paying is fair to our stockholders from a financial point of view. If no opinion is obtained, our stockholders will be relying on the judgment of our board of directors, who will determine fair market value based on standards generally accepted by the financial community. Such standards used will be disclosed in our proxy materials or tender offer documents, as applicable, related to our initial Business Combination.
Resources could be wasted in researching Business Combinations that are not completed, which could materially adversely affect subsequent attempts to locate and acquire or merge with another business. If we are unable to complete our initial Business Combination within the required time period, our Public Stockholders may only receive their pro rata portion of the funds in the Trust Account that are available for distribution to Public Stockholders, and our warrants will expire worthless.
We anticipate that the investigation of each specific target business and the negotiation, drafting and execution of relevant agreements, disclosure documents and other instruments will require substantial management time and attention and substantial costs for accountants, attorneys and others. If we decide not to complete a specific initial Business Combination, the costs incurred up to that point for the proposed transaction likely would not be recoverable. Furthermore, if we reach an agreement relating to a specific target business, we may fail to complete our initial Business Combination for any number of reasons including those beyond our control. Any such event will result in a loss to us of the related costs incurred which could materially adversely affect subsequent attempts to locate and acquire or merge with another business. If we are unable to complete our initial Business Combination within the required time period, our Public Stockholders may only receive their pro rata portion of the funds in the Trust Account that are available for distribution to Public Stockholders, and our warrants will expire worthless.
We may only be able to complete one Business Combination with the proceeds of the Initial Public Offering, the sale of the Private Placement Warrants and the sale of Forward Purchase Shares, which will cause us to be solely dependent on a single business which may have a limited number of products or services. This lack of diversification may negatively impact our operations and profitability.
The net proceeds held in the Trust Account from the Initial Public Offering and the Private Placement of warrants provided us with $442,750,000 that we may use to complete our initial Business Combination (not taking into account the $15,496,250 of deferred underwriting commissions being held in the Trust Account). The proceeds from the sale of Forward Purchase Shares will be up to $150,000,000.
We may effectuate our initial Business Combination with a single target business or multiple target businesses simultaneously or within a short period of time. However, we may not be able to effectuate our initial Business Combination with more than one target business because of various factors, including the existence of complex accounting issues and the requirement that we prepare and file pro forma financial statements with the SEC that present operating results and the financial condition of several target businesses as if they had been operated on a combined basis. By completing our initial Business Combination with only a single entity, our lack of diversification may subject us to numerous economic, competitive and regulatory developments. Further, we would not be able to diversify our operations or benefit from the possible spreading of risks or offsetting of losses, unlike other entities which may have the resources to complete several Business Combinations in different industries or different areas of a single industry. Accordingly, the prospects for our success may be:
| ● | solely dependent upon the performance of a single business, property or asset, or |
| | |
| ● | dependent upon the development or market acceptance of a single or limited number of products, processes or services. |
This lack of diversification may subject us to numerous economic, competitive and regulatory risks, any or all of which may have a substantial adverse impact upon the particular industry in which we may operate subsequent to our initial Business Combination.
We may attempt to simultaneously complete Business Combinations with multiple prospective targets, which may hinder our ability to complete our initial Business Combination and give rise to increased costs and risks that could negatively impact our operations and profitability.
If we determine to simultaneously acquire several businesses that are owned by different sellers, we will need for each of such sellers to agree that our purchase of its business is contingent on the simultaneous closings of the other Business Combinations, which may make it more difficult for us, and delay our ability, to complete our initial Business Combination. With multiple Business Combinations, we could also face additional risks, including additional burdens and costs with respect to possible multiple negotiations and due diligence investigations (if there are multiple sellers) and the additional risks associated with the subsequent assimilation of the operations and services or products of the acquired companies in a single operating business. If we are unable to adequately address these risks, it could negatively impact our profitability and results of operations.
We may attempt to complete our initial Business Combination with a private company about which little information is available, which may result in a Business Combination with a company that is not as profitable as we suspected, if at all.
In pursuing our Business Combination strategy, we may seek to effectuate our initial Business Combination with a privately held company. Very little public information generally exists about private companies, and we could be required to make our decision on whether to pursue a potential initial Business Combination on the basis of limited information, which may result in a Business Combination with a company that is not as profitable as we suspected, if at all.
We do not have a specified maximum redemption threshold. The absence of such a redemption threshold may make it possible for us to complete our initial Business Combination with which a substantial majority of our stockholders or warrant holders do not agree.
Our second amended and restated certificate of incorporation does not provide a specified maximum redemption threshold, except that in no event will we redeem our Public Shares in an amount that would cause our net tangible assets to be less than $5,000,001. In addition, our proposed initial Business Combination may impose a minimum cash requirement for: (i) cash consideration to be paid to the target or its owners, (ii) cash for working capital or other general corporate purposes or (iii) the retention of cash to satisfy other conditions. As a result, we may be able to complete our initial Business Combination even though a substantial majority of our Public Stockholders do not agree with the transaction and have redeemed their shares or, if we seek stockholder approval of our initial Business Combination and do not conduct redemptions in connection with our initial Business Combination pursuant to the tender offer rules, have entered into privately negotiated agreements to sell their shares to our Sponsor, officers, directors, advisors or any of their respective affiliates. In the event the aggregate cash consideration we would be required to pay for all shares of Class A Common Stock that are validly submitted for redemption plus any amount required to satisfy cash conditions pursuant to the terms of the proposed Business Combination exceed the aggregate amount of cash available to us, we will not complete the Business Combination or redeem any shares in connection with such initial Business Combination, all shares of Class A Common Stock submitted for redemption will be returned to the holders thereof, and we instead may search for an alternate Business Combination.
In order to effectuate an initial Business Combination, special purpose acquisition companies have, in the recent past, amended various provisions of their charters and other governing instruments, including their warrant agreements. We cannot assure you that we will not seek to amend our second amended and restated certificate of incorporation or governing instruments in a manner that will make it easier for us to complete our initial Business Combination that our stockholders may not support.
In order to effectuate a Business Combination, special purpose acquisition companies have, in the recent past, amended various provisions of their charters and governing instruments, including their warrant agreements. For example, special purpose acquisition companies have amended the definition of Business Combination, increased redemption thresholds and extended the time to consummate an initial Business Combination and, with respect to their warrants, amended their warrant agreements to require the warrants to be exchanged for cash and/or other securities. Amending our second amended and restated certificate of incorporation will require the approval of holders of 65% of our common stock, and amending our warrant agreement will require a vote of holders of at least 50% of the public warrants and, solely with respect to any amendment to the terms of the Private Placement Warrants or any provision of the warrant agreement with respect to the Private Placement Warrants, 50% of the number of the then outstanding Private Placement Warrants. In addition, our second amended and restated certificate of incorporation requires us to provide our Public Stockholders with the opportunity to redeem their Public Shares for cash if we propose an amendment to our a second amended and restated certificate of incorporation to modify the substance or timing of our obligation to redeem 100% of our Public Shares if we do not complete an initial Business Combination within 24 months of the closing of the Initial Public Offering or with respect to any other material provisions relating to stockholders’ rights or pre-initial Business Combination activity. To the extent any of such amendments would be deemed to fundamentally change the nature of our securities, we would register, or seek an exemption from registration for, the affected securities. We cannot assure you that we will not seek to amend our charter or governing instruments or extend the time to consummate an initial Business Combination in order to effectuate our initial Business Combination.
The provisions of our second amended and restated certificate of incorporation that relate to our pre-Business Combination activity (and corresponding provisions of the agreement governing the release of funds from our Trust Account) may be amended with the approval of holders of 65% of our common stock, which is a lower amendment threshold than that of some other special purpose acquisition companies. It may be easier for us, therefore, to amend our second amended and restated certificate of incorporation to facilitate the completion of an initial Business Combination that some of our stockholders may not support.
Our second amended and restated certificate of incorporation provides that any of its provisions related to pre-Business Combination activity (including the requirement to deposit proceeds of the Initial Public Offering and the private placement of warrants into the Trust Account and not release such amounts except in specified circumstances, and to provide redemption rights to Public Stockholders as described herein) may be amended if approved by holders of 65% of our common stock entitled to vote thereon and corresponding provisions of the trust agreement governing the release of funds from our Trust Account may be amended if approved by holders of 65% of our common stock entitled to vote thereon. In all other instances, our second amended and restated certificate of incorporation may be amended by holders of a majority of our outstanding common stock entitled to vote thereon, subject to applicable provisions of the DGCL or applicable stock exchange rules. Our initial stockholders, who will collectively beneficially own approximately 20% of our common stock, may participate in any vote to amend our second amended and restated certificate of incorporation and/or trust agreement and will have the discretion to vote in any manner they choose. As a result, we may be able to amend the provisions of our second amended and restated certificate of incorporation which govern our pre-Business Combination behavior more easily than some other special purpose acquisition companies, and this may increase our ability to complete a Business Combination with which you do not agree. Our stockholders may pursue remedies against us for any breach of our second amended and restated certificate of incorporation.
Our Sponsor, executive officers, directors and director nominees have agreed, pursuant to written agreements with us, that they will not propose any amendment to our second amended and restated certificate of incorporation to modify the substance or timing of our obligation to redeem 100% of our Public Shares if we do not complete our initial Business Combination within 24 months from the closing of the Initial Public Offering or during any Extension Period or with respect to any other material provisions relating to stockholders’ rights or pre-initial Business Combination activity, unless we provide our Public Stockholders with the opportunity to redeem their Class A Common Stock upon approval of any such amendment at a per-share price, payable in cash, equal to the aggregate amount then on deposit in the Trust Account, including interest earned on the funds held in the Trust Account and not previously released to us to pay our taxes, divided by the number of then outstanding Public Shares. Our stockholders are not parties to, or third-party beneficiaries of, these agreements and, as a result, will not have the ability to pursue remedies against our Sponsor, executive officers, directors or director nominees for any breach of these agreements. As a result, in the event of a breach, our stockholders would need to pursue a stockholder derivative action, subject to applicable law.
Certain agreements related to the Initial Public Offering may be amended without stockholder approval.
Each of the agreements related to the Initial Public Offering to which we are a party, other than the warrant agreement and the investment management trust agreement, may be amended without stockholder approval. Such agreements are: the underwriting agreement; the letter agreement among us and our initial stockholders, Sponsor, officers and directors; the registration rights agreement among us and our initial stockholders; and the Private Placement Warrants purchase agreement between us and our Sponsor. These agreements contain various provisions that our Public Stockholders might deem to be material. For example, our letter agreement and the underwriting agreement contain certain lock-up provisions with respect to the Founder Shares, Private Placement Warrants and other securities held by our initial stockholders, Sponsor, officers and directors. Amendments to such agreements would require the consent of the applicable parties thereto and would need to be approved by our board of directors, which may do so for a variety of reasons, including to facilitate our initial Business Combination. While we do not expect our board of directors to approve any amendment to any of these agreements prior to our initial Business Combination, it may be possible that our board of directors, in exercising its business judgment and subject to its fiduciary duties, chooses to approve one or more amendments to any such agreement. Any amendment entered into in connection with the consummation of our initial Business Combination will be disclosed in our proxy materials or tender offer documents, as applicable, related to such initial Business Combination, and any other material amendment to any of our material agreements will be disclosed in a filing with the SEC. Any such amendments would not require approval from our stockholders, may result in the completion of our initial Business Combination that may not otherwise have been possible, and may have an adverse effect on the value of an investment in our securities. For example, amendments to the lock-up provision discussed above may result in our initial stockholders selling their securities earlier than they would otherwise be permitted, which may have an adverse effect on the price of our securities.
We may be unable to obtain additional financing to complete our initial Business Combination or to fund the operations and growth of a target business, which could compel us to restructure or abandon a particular Business Combination.
We have not selected any specific Business Combination target but may target businesses with enterprise values that are greater than we could acquire with the net proceeds of the Initial Public Offering, the sale of the Private Placement Warrants and the sale of the Forward Purchase Shares. As a result, if the cash portion of the purchase price exceeds the amount available from the Trust Account and the sale of Forward Purchase Shares, net of amounts needed to satisfy any redemption by Public Stockholders, or if the Forward Purchase Shares are not purchased under the forward purchase agreement, we may be required to seek additional financing to complete such proposed initial Business Combination. We cannot assure you that such financing will be available on acceptable terms, if at all. To the extent that additional financing proves to be unavailable when needed to complete our initial Business Combination, we would be compelled to either restructure the transaction or abandon that particular Business Combination and seek an alternative target business candidate. Further, we may be required to obtain additional financing in connection with the closing of our initial Business Combination for general corporate purposes, including for maintenance or expansion of operations of the post-transaction businesses, the payment of principal or interest due on indebtedness incurred in completing our initial Business Combination, or to fund the purchase of other companies. If we are unable to complete our initial Business Combination within the required time period, our Public Stockholders may only receive their pro rata portion of the funds in the Trust Account that are available for distribution to Public Stockholders, and our warrants will expire worthless. In addition, even if we do not need additional financing to complete our initial Business Combination, we may require such financing to fund the operations or growth of the target business. The failure to secure additional financing could have a material adverse effect on the continued development or growth of the target business. None of our officers, directors or stockholders is required to provide any financing to us in connection with or after our initial Business Combination.
Our initial stockholders control a substantial interest in us and thus may exert a substantial influence on actions requiring a stockholder vote, potentially in a manner that you do not support.
Our initial stockholders own approximately 20% of our issued and outstanding common stock. Accordingly, they may exert a substantial influence on actions requiring a stockholder vote, potentially in a manner that you do not support, including amendments to our second amended and restated certificate of incorporation. If our initial stockholders purchase any units or any additional Class A Common Stock in the aftermarket or in privately negotiated transactions, this would increase their control. Neither our initial stockholders nor, to our knowledge, any of our officers or directors, have any current intention to purchase additional securities. Factors that would be considered in making such additional purchases would include consideration of the current trading price of our Class A Common Stock. In addition, our board of directors, whose members were elected by our Sponsor, is and will be divided into three classes, each of which will generally serve for a terms for three years with only one class of directors being elected in each year. We may not hold an annual meeting of stockholders to elect new directors prior to the completion of our initial Business Combination, in which case all of the current directors will continue in office until at least the completion of the Business Combination. If there is an annual meeting, as a consequence of our “staggered” board of directors, only a minority of the board of directors will be considered for election and our initial stockholders, because of their ownership position, will have considerable influence regarding the outcome. Accordingly, our initial stockholders will continue to exert control at least until the completion of our initial Business Combination. Any Forward Purchase Shares will not be issued until completion of our initial Business Combination, and, accordingly, will not be included in any stockholder vote until such time.
Because we must furnish our stockholders with target business financial statements, we may lose the ability to complete an otherwise advantageous initial Business Combination with some prospective target businesses.
The federal proxy rules require that the proxy statement with respect to the vote on an initial Business Combination include historical and pro forma financial statement disclosure. We will include the same financial statement disclosure in connection with our tender offer documents, whether or not they are required under the tender offer rules. These financial statements may be required to be prepared in accordance with, or be reconciled to, accounting principles generally accepted in the United States of America (“GAAP”), or international financial reporting standards as issued by the International Accounting Standards Board (“IFRS”), depending on the circumstances and the historical financial statements may be required to be audited in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”). These financial statement requirements may limit the pool of potential target businesses we may acquire because some targets may be unable to provide such financial statements in time for us to disclose such statements in accordance with federal proxy rules and complete our initial Business Combination within the prescribed time frame.
Compliance obligations under the Sarbanes-Oxley Act may make it more difficult for us to effectuate our initial Business Combination, require substantial financial and management resources, and increase the time and costs of completing an initial Business Combination.
Section 404 of the Sarbanes-Oxley Act requires that we evaluate and report on our system of internal controls beginning with our Annual Report on Form 10-K for the year ending December 31, 2021. Only in the event we are deemed to be a large accelerated filer or an accelerated filer, and no longer qualify as an emerging growth company, will we be required to comply with the independent registered public accounting firm attestation requirement on our internal control over financial reporting. Further, for as long as we remain an emerging growth company, we will not be required to comply with the independent registered public accounting firm attestation requirement on our internal control over financial reporting. The fact that we are a blank check company makes compliance with the requirements of the Sarbanes-Oxley Act particularly burdensome on us as compared to other public companies because a target business with which we seek to complete our initial Business Combination may not be in compliance with the provisions of the Sarbanes-Oxley Act regarding adequacy of its internal controls.
The development of the internal control of any such entity to achieve compliance with the Sarbanes-Oxley Act may increase the time and costs necessary to complete any such Business Combination.
If we effect our initial Business Combination with a company located outside of the United States, we would be subject to a variety of additional risks that may adversely affect us.
If we pursue a target company with operations or opportunities outside of the United States for our initial Business Combination, we may face additional burdens in connection with investigating, agreeing to and completing such initial Business Combination, and if we effect such initial Business Combination, we would be subject to a variety of additional risks that may negatively impact our operations.
If we pursue a target a company with operations or opportunities outside of the United States for our initial Business Combination, we would be subject to risks associated with cross-border Business Combinations, including in connection with investigating, agreeing to and completing our initial Business Combination, conducting due diligence in a foreign jurisdiction, having such transaction approved by any local governments, regulators or agencies and changes in the purchase price based on fluctuations in foreign exchange rates.
If we effect our initial Business Combination with such a company, we would be subject to any special considerations or risks associated with companies operating in an international setting, including any of the following:
| ● | costs and difficulties inherent in managing cross-border business operations; |
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| ● | rules and regulations regarding currency redemption; |
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| ● | complex corporate withholding taxes on individuals; |
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| ● | laws governing the manner in which future Business Combinations may be effected; |
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| ● | exchange listing and/or delisting requirements; |
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| ● | tariffs and trade barriers; |
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| ● | regulations related to customs and import/export matters; |
| ● | local or regional economic policies and market conditions; |
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| ● | unexpected changes in regulatory requirements; |
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| ● | challenges in managing and staffing international operations; |
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| ● | longer payment cycles; |
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| ● | tax issues, such as tax law changes and variations in tax laws as compared to the United States; |
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| ● | currency fluctuations and exchange controls; |
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| ● | rates of inflation; |
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| ● | challenges in collecting accounts receivable; |
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| ● | cultural and language differences; |
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| ● | employment regulations; |
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| ● | underdeveloped or unpredictable legal or regulatory systems; |
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| ● | corruption; |
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| ● | protection of intellectual property; |
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| ● | social unrest, crime, strikes, riots and civil disturbances; |
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| ● | regime changes and political upheaval; |
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| ● | terrorist attacks and wars; and |
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| ● | deterioration of political relations with the United States. |
We may not be able to adequately address these additional risks. If we were unable to do so, we may be unable to complete such initial Business Combination, or, if we complete such initial Business Combination, our operations might suffer, either of which may adversely impact our business, financial condition and results of operations.
Our initial Business Combination and our structure thereafter may not be tax-efficient to our stockholders and warrant holders. As a result of our Business Combination, our tax obligations may be more complex, burdensome and uncertain.
Although we will attempt to structure our initial Business Combination in a tax-efficient manner, tax structuring considerations are complex, the relevant facts and law are uncertain and may change, and we may prioritize commercial and other considerations over tax considerations. For example, in connection with our initial Business Combination and subject to any requisite stockholder approval, we may structure our Business Combination in a manner that requires stockholders and/or warrant holders to recognize gain or income for tax purposes, effect a Business Combination with a target company in another jurisdiction, or reincorporate in a different jurisdiction (including, but not limited to, the jurisdiction in which the target company or business is located). We do not intend to make any cash distributions to stockholders or warrant holders to pay taxes in connection with our Business Combination or thereafter. Accordingly, a stockholder or a warrant holder may need to satisfy any liability resulting from our initial Business Combination with cash from its own funds or by selling all or a portion of the shares received. In addition, stockholders and warrant holders may also be subject to additional income, withholding or other taxes with respect to their ownership of us after our initial Business Combination.
In addition, we may effect a Business Combination with a target company that has business operations outside of the United States, and possibly, business operations in multiple jurisdictions. If we effect such a Business Combination, we could be subject to significant income, withholding and other tax obligations in a number of jurisdictions with respect to income, operations and subsidiaries related to those jurisdictions. Due to the complexity of tax obligations and filings in other jurisdictions, we may have a heightened risk related to audits or examinations by U.S. federal, state, local and non-U.S. taxing authorities. This additional complexity and risk could have an adverse effect on our after-tax profitability and financial condition.
Risks Relating to Our Management Team
We are dependent upon our executive officers and directors and their loss could adversely affect our ability to operate.
Our operations are dependent upon a relatively small group of individuals and, in particular, our executive officers and directors. We believe that our success depends on the continued service of our officers and directors, at least until we have completed our initial business combination. In addition, our executive officers and directors are not required to commit any specified amount of time to our affairs and, accordingly, will have conflicts of interest in allocating their time among various business activities, including identifying potential business combinations and monitoring the related due diligence. In particular, certain of our officers and directors serve as an officer or director of CM Life Sciences II Inc. (Nasdaq: CMII) and CM Life Sciences III Inc., which are both blank check companies sponsored by an affiliate of Casdin Capital and Corvex Management. We do not have an employment agreement with, or key-man insurance on the life of, any of our directors or executive officers. The unexpected loss of the services of one or more of our directors or executive officers could have a detrimental effect on us.
Our ability to successfully effect our initial Business Combination and to be successful thereafter will be dependent upon the efforts of our key personnel, some of whom may join us following our initial Business Combination. The loss of key personnel could negatively impact the operations and profitability of our post-combination business.
Our ability to successfully effect our initial Business Combination is dependent upon the efforts of our key personnel. The role of our key personnel in the target business, however, cannot presently be ascertained. Although some of our key personnel may remain with the target business in senior management or advisory positions following our initial business combination, it is likely that some or all of the management of the target business will remain in place. While we intend to closely scrutinize any individuals we engage after our initial Business Combination, we cannot assure you that our assessment of these individuals will prove to be correct. These individuals may be unfamiliar with the requirements of operating a company regulated by the SEC, which could cause us to have to expend time and resources helping them become familiar with such requirements.
Our key personnel may negotiate employment or consulting agreements with a target business in connection with a particular Business Combination, and a particular Business Combination may be conditioned on the retention or resignation of such key personnel. These agreements may provide for them to receive compensation following our initial business combination and as a result, may cause them to have conflicts of interest in determining whether a particular Business Combination is the most advantageous.
Our key personnel may be able to remain with our company after the completion of our initial Business Combination only if they are able to negotiate employment or consulting agreements in connection with the Business Combination. Such negotiations would take place simultaneously with the negotiation of the Business Combination and could provide for such individuals to receive compensation in the form of cash payments and/or our securities for services they would render to us after the completion of the Business Combination. Such negotiations also could make such key personnel’s retention or resignation a condition to any such agreement. The personal and financial interests of such individuals may influence their motivation in identifying and selecting a target business, subject to their fiduciary duties under Delaware law.
Our executive officers and directors will allocate their time to other businesses thereby causing conflicts of interest in their determination as to how much time to devote to our affairs. This conflict of interest could have a negative impact on our ability to complete our initial Business Combination.
Our executive officers and directors are not required to, and will not, commit their full time to our affairs, which may result in a conflict of interest in allocating their time between our operations and our search for a Business Combination and their other businesses. We do not intend to have any full-time employees prior to the completion of our initial Business Combination. Each of our executive officers is engaged in several other business endeavors for which he may be entitled to substantial compensation, and our executive officers are not obligated to contribute any specific number of hours per week to our affairs. Our independent directors also serve as officers and board members for other entities. In particular, certain of our officers and directors serve as an officer or director of CM Life Sciences II Inc. (Nasdaq: CMII) and CM Life Sciences III Inc., which are both blank check companies sponsored by an affiliate of Casdin Capital and Corvex Management. If our executive officers’ and directors’ other business affairs require them to devote substantial amounts of time to such affairs in excess of their current commitment levels, it could limit their ability to devote time to our affairs which may have a negative impact on our ability to complete our initial business combination. For a complete discussion of our executive officers’ and directors’ other business affairs, please see “Item 10. Directors, Executive Officers and Corporate Governance.”
Our officers and directors presently have, and any of them in the future may have additional, fiduciary or contractual obligations to other entities and, accordingly, may have conflicts of interest in determining to which entity a particular business opportunity should be presented.
Following the completion of the Initial Public Offering and until we consummate our initial Business Combination, we intend to engage in the business of identifying and combining with one or more businesses. Each of our officers and directors presently has, and any of them in the future may have, additional fiduciary or contractual obligations to other entities pursuant to which such officer or director is or will be required to present a Business Combination opportunity to such entity (including, without limitation, CM Life Sciences II Inc. and CM Life Sciences III Inc.). Accordingly, they may have conflicts of interest in determining to which entity a particular business opportunity should be presented. These conflicts may not be resolved in our favor and a potential target business may be presented to another entity prior to its presentation to us. Our second amended and restated certificate of incorporation will provide that we renounce our interest in any corporate opportunity offered to any director or officer unless such opportunity is expressly offered to such person solely in his or her capacity as a director or officer of the company and such opportunity is one we are legally and contractually permitted to undertake and would otherwise be reasonable for us to pursue, and to the extent the director or officer is permitted to refer that opportunity to us without violating another legal obligation. In addition, our sponsor and our officers and directors may sponsor or form other special purpose acquisition companies similar to ours or may pursue other business or investment ventures during the period in which we are seeking an initial business combination. Any such companies, businesses or ventures (including, without limitation, CM Life Sciences II Inc. and CM Life Sciences III Inc.) may present additional conflicts of interest in pursuing an initial Business Combination. However, we do not believe that any such potential conflicts would materially affect our ability to complete our initial business combination.
For a complete discussion of our executive officers’ and directors’ business affiliations and the potential conflicts of interest that you should be aware of, please see “Item 10. Directors, Executive Officers and Corporate Governance — Conflicts of Interest.”
Our executive officers, directors, security holders and their respective affiliates may have competitive pecuniary interests that conflict with our interests.
We have not adopted a policy that expressly prohibits our directors, executive officers, security holders or affiliates from having a direct or indirect pecuniary or financial interest in any investment to be acquired or disposed of by us or in any transaction to which we are a party or have an interest. In fact, we may enter into a Business Combination with a target business that is affiliated with our Sponsor, our directors or executive officers. Nor do we have a policy that expressly prohibits any such persons from engaging for their own account in business activities of the types conducted by us. Accordingly, such persons or entities may have a conflict between their interests and ours.
The personal and financial interests of our directors and officers may influence their motivation in timely identifying and selecting a target business and completing a Business Combination. Consequently, our directors’ and officers’ discretion in identifying and selecting a suitable target business may result in a conflict of interest when determining whether the terms, conditions and timing of a particular Business Combination are appropriate and in our stockholders’ best interest. If this were the case, it would be a breach of their fiduciary duties to us as a matter of Delaware law, and we or our stockholders might have a claim against such individuals for infringing on our stockholders’ rights. However, we might not ultimately be successful in any claim we may make against them for such reason.
We may engage in a Business Combination with one or more target businesses that have relationships with entities that may be affiliated with our sponsor, executive officers, directors or existing holders which may raise potential conflicts of interest.
In light of the involvement of our Sponsor, executive officers and directors with other entities, we may decide to acquire one or more businesses affiliated with our sponsor, executive officers, directors or existing holders. Our directors and officers also serve as officers and board members for other entities, including, without limitation, those described under “Item 10. Directors, Executive Officers and Corporate Governance — Conflicts of Interest.” Such entities may compete with us for Business Combination opportunities. We would pursue such a transaction if we determined that such affiliated entity met our criteria for a business combination and such transaction was approved by a majority of our independent and disinterested directors. Despite our agreement to obtain an opinion from an independent investment banking firm which is a member of FINRA or a valuation or appraisal firm regarding the fairness to our company from a financial point of view of a Business Combination with one or more domestic or international businesses affiliated with our Sponsor, executive officers, directors or existing holders, potential conflicts of interest still may exist and, as a result, the terms of the Business Combination may not be as advantageous to our public stockholders as they would be absent any conflicts of interest.
Since our Sponsor, executive officers and directors will lose their entire investment in us if our initial Business Combination is not completed (other than with respect to public shares they may acquire during or after the Initial Public Offering), a conflict of interest may arise in determining whether a particular Business Combination target is appropriate for our initial Business Combination.
On July 16, 2020, our Sponsor paid $25,000, or approximately $0.002 per share, to cover certain of our offering costs in consideration of 10,062,500 Founder Shares. In August 2020, our Sponsor transferred 25,000 Founder Shares to each of Mr. Islam, Dr. Leproust and Mr. Turner. On September 1, 2020, we effected a 1:1.1 stock split of our Class B Common Stock, resulting in our Sponsor holding an aggregate of 10,993,750 Founder Shares and there being an aggregate of 11,068,750 Founder Shares outstanding. The Founder Shares will be worthless if we do not complete an initial Business Combination. In addition, our Sponsor and certain of our independent director nominees have purchases an aggregate of 7,236,667 warrants, each exercisable for one share of Class A Common Stock at $11.50 per share, for an aggregate purchase price of $10,855,000, or $1.50 per warrant, that will also be worthless if we do not complete our initial Business Combination. The personal and financial interests of our executive officers and directors may influence their motivation in identifying and selecting a target Business Combination, completing an initial Business Combination and influencing the operation of the business following the initial Business Combination. This risk may become more acute as the 24-month anniversary of the closing of the Initial Public Offering nears, which is the deadline for our completion of an initial Business Combination.
Provisions in our second amended and restated certificate of incorporation and Delaware law may have the effect of discouraging lawsuits against our directors and officers.
Our second amended and restated certificate of incorporation requires, unless we consent in writing to the selection of an alternative forum, that (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim of breach of a fiduciary duty owed by any director, officer or other employee to us or our stockholders, (iii) any action asserting a claim against us, our directors, officers or employees arising pursuant to any provision of the DGCL or our second amended and restated certificate of incorporation or bylaws, or (iv) any action asserting a claim against us, our directors, officers or employees governed by the internal affairs doctrine may be brought only in the Court of Chancery in the State of Delaware, except any claim (A) as to which the Court of Chancery of the State of Delaware determines that there is an indispensable party not subject to the jurisdiction of the Court of Chancery (and the indispensable party does not consent to the personal jurisdiction of the Court of Chancery within ten days following such determination), (B) which is vested in the exclusive jurisdiction of a court or forum other than the Court of Chancery or (C) for which the Court of Chancery does not have subject matter jurisdiction, as to which the Court of Chancery and the federal district court for the District of Delaware shall have concurrent jurisdiction. If an action is brought outside of Delaware, the stockholder bringing the suit will be deemed to have consented to service of process on such stockholder’s counsel. Although we believe this provision benefits us by providing increased consistency in the application of Delaware law in the types of lawsuits to which it applies, a court may determine that this provision is unenforceable, and to the extent it is enforceable, the provision may have the effect of discouraging lawsuits against our directors and officers, although our stockholders will not be deemed to have waived our compliance with federal securities laws and the rules and regulations thereunder.
Notwithstanding the foregoing, our second amended and restated certificate of incorporation will provide that the exclusive forum provision will not apply to suits brought to enforce a duty or liability created by the Exchange Act or any other claim for which the federal courts have exclusive jurisdiction. Section 27 of the Exchange Act creates exclusive federal jurisdiction over all suits brought to enforce any duty or liability created by the Exchange Act or the rules and regulations thereunder.
Additionally, unless we consent in writing to the selection of an alternative forum, the federal courts shall be the exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act against us or any of our directors, officers, other employees or agents. Section 22 of the Securities Act, however, created concurrent jurisdiction for federal and state courts over all suits brought to enforce any duty or liability created by the Securities Act or the rules and regulations thereunder. Accordingly, there is uncertainty as to whether a court would enforce such provisions, and the enforceability of similar choice of forum provisions in other companies’ charter documents has been challenged in legal proceedings. While the Delaware courts have determined that such exclusive forum provisions are facially valid, a stockholder may nevertheless seek to bring a claim in a venue other than those designated in the exclusive forum provisions, and there can be no assurance that such provisions will be enforced by a court in those other jurisdictions. Any person or entity purchasing or otherwise acquiring any interest in our securities shall be deemed to have notice of and consented to these provisions; however, we note that investors cannot waive compliance with the federal securities laws and the rules and regulations thereunder.
Although we believe this provision benefits us by providing increased consistency in the application of Delaware law in the types of lawsuits to which it applies, the provision may limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us and may have the effect of discouraging lawsuits against our directors and officers.
Provisions in our second amended and restated certificate of incorporation and Delaware law may inhibitcould impair a takeover attempt.
Our Third Amended and Restated Certificate of
us, which could limit the price investors might be willing to pay for our shares of Class A Common Stock and could entrench management.Our secondIncorporation, as amended and restated certificate of incorporation(our “Charter”), contains provisions that may discourage unsolicited takeover proposals that stockholders may consider to be in their best interests. TheseWe are also subject to anti-takeover provisions includeunder Delaware law, which could delay or prevent a staggered boardchange of directors and the ability of the board of directors to designate the terms of and issue new series of preferred stock, whichcontrol. Together, these provisions may make more difficult the removal of management and may discourage transactions that otherwise could involve payment of a premium over prevailing market prices for our securities.
We are also subject These provisions will include:
•no cumulative voting in the election of directors, which limits the ability of minority stockholders to anti-takeover provisions under Delaware law,elect director candidates;
•a classified board of directors with three-year staggered terms, which could delay the ability of stockholders to change the membership of a majority of the Board;
•the requirement that directors may only be removed from the Board for cause;
•the right of our Board to elect a director to fill a vacancy created by the expansion of our Board or preventthe resignation, death or removal of a changedirector in certain circumstances, which prevents stockholders from being able to fill vacancies on our Board;
•a prohibition on stockholder action by written consent, which forces stockholder action to be taken at an annual or special meeting of control. Together these provisionsour stockholders;
•a prohibition on stockholders calling a special meeting and the requirement that a meeting of stockholders may makeonly be called by a majority of the board, our chairman of the board or our chief executive officer and may not be called by any other person, which may delay the ability of our stockholders to force consideration of a proposal or to take action, including the removal of management more difficultdirectors;
•the requirement that changes or amendments to certain provisions of our Charter must be approved by holders of at least two-thirds of our Class A common stock; and
•advance notice procedures that stockholders must comply with in order to nominate candidates to our Board or to propose matters to be acted upon at a meeting of stockholders, which may discourage transactions thator deter a potential acquirer from conducting a solicitation of proxies to elect the acquirer’s own slate of directors or otherwise could involve payment of a premium over prevailing market prices for our securities.We may not have sufficient fundsattempting to satisfy indemnification claims of our officers and directors.
We have agreed to indemnify our officers and directors to the fullest extent permitted by law. However, our officers and directors have agreed to waive any right, title, interest or claim of any kind in or to any monies in the trust account and to not seek recourse against the trust account for any reason whatsoever. Accordingly, any indemnification provided will be able to be satisfied by us only if (i) we have sufficient funds outside of the trust account or (ii) we consummate an initial Business Combination. Our obligation to indemnify our officers and directors may discourage stockholders from bringing a lawsuit against our officers or directors for breach of their fiduciary duty. These provisions also may have the effect of reducing the likelihood of derivative litigation against our officers and directors, even though such an action, if successful, might otherwise benefit us and our stockholders. Furthermore, a stockholder’s investment may be adversely affected to the extent we pay the costs of settlement and damage awards against our officers and directors pursuant to these indemnification provisions.
Risks Relating to the Post-Business Combination Company
Subsequent to our completion of our initial Business Combination, we may be required to take write-downs or write-offs, restructuring and impairment or other charges that could have a significant negative effect on our financial condition, results of operations and the price of our securities, which could cause you to lose some or all of your investment.
Even if we conduct extensive due diligence on a target business with which we combine, we cannot assure you that this diligence will identify all material issues that may be present with a particular target business, that it would be possible to uncover all material issues through a customary amount of due diligence, or that factors outside of the target business and outside of our control will not later arise. As a result of these factors, we may be forced to later write-down or write-off assets, restructure our operations, or incur impairment or other charges that could result in our reporting losses. Even if our due diligence successfully identifies certain risks, unexpected risks may arise and previously known risks may materialize in a manner not consistent with our preliminary risk analysis. Even though these charges may be non-cash items and not have an immediate impact on our liquidity, the fact that we report charges of this nature could contribute to negative market perceptions about us or our securities. In addition, charges of this nature may cause us to violate net worth or other covenants to which we may be subject as a result of assuming pre-existing debt held by a target business or by virtue of our obtaining debt financing to partially finance the initial Business Combination or thereafter. Accordingly, any stockholders or warrant holders who choose to remain stockholders or warrant holders following the business combination could suffer a reduction in the value of their securities. Such stockholders or warrant holders are unlikely to have a remedy for such reduction in value unless they are able to successfully claim that the reduction was due to the breach by our officers or directors of a duty of care or other fiduciary duty owed to them, or if they are able to successfully bring a private claim under securities laws that the proxy materials or tender offer documents, as applicable, relating to the business combination contained an actionable material misstatement or material omission.
We may have a limited ability to assess the management of a prospective target business and, as a result, may effect our initial Business Combination with a target business whose management may not have the skills, qualifications or abilities to manage a public company.
When evaluating the desirability of effecting our initial Business Combination with a prospective target business, our ability to assess the target business’s management may be limited due to a lack of time, resources or information. Our assessment of the capabilities of the target business’s management, therefore, may prove to be incorrect and such management may lack the skills, qualifications or abilities we suspected. Should the target business’s management not possess the skills, qualifications or abilities necessary to manage a public company, the operations and profitability of the post-combination business may be negatively impacted. Accordingly, any stockholders or warrant holders who choose to remain stockholders or warrant holders following the business combination could suffer a reduction in the value of their securities. Such stockholders or warrant holders are unlikely to have a remedy for such reduction in value unless they are able to successfully claim that the reduction was due to the breach by our officers or directors of a duty of care or other fiduciary duty owed to them, or if they are able to successfully bring a private claim under securities laws that the proxy solicitation or tender offer materials, as applicable, relating to the business combination contained an actionable material misstatement or material omission.
The officers and directors of an acquisition candidate may resign upon completion of our initial Business Combination. The loss of a Business Combination target’s key personnel could negatively impact the operations and profitability of our post-combination business.
The role of an acquisition candidate’s key personnel upon the completion of our initial business combination cannot be ascertained at this time. Although we contemplate that certain members of an acquisition candidate’s management team will remain associated with the acquisition candidate following our initial Business Combination, it is possible that members of the management of an acquisition candidate will not wish to remain in place.
Our management may not maintainobtain control of a target business after our initial Business Combination. We cannot provide assurance that, upon loss of control of a target business, new management will possess the skills, qualifications or abilities necessary to profitably operate such business.
We may structure our initial Business Combination so that the post-transaction company in which our public stockholders own shares will own less than 100% of the equity interests or assets of a target business, but we will only complete such Business Combination if the post-transaction company owns or acquires 50% or more of the outstanding voting securities of the target or otherwise acquires a controlling interest in the target sufficient for us not to be required to register as an investment company under the Investment Company Act. We will not consider any transaction that does not meet such criteria. Even if the post-transaction company owns 50% or more of the voting securities of the target, our stockholders prior to the Business Combination may collectively own a minority interest in the post business combination company, depending on valuations ascribed to the target and us in the business combination. For example, we could pursue a transaction in which we issue a substantial number of new shares of Class A Common Stock in exchange for all of the outstanding capital stock of a target. In this case, we would acquire a 100% interest in the target. However, as a result of the issuance of a substantial number of new shares of Class A Common Stock, our stockholders immediately prior to such transaction could own less than a majority of our outstanding Class A Common Stock subsequent to such transaction. In addition, other minority stockholders may subsequently combine their holdings resulting in a single person or group obtaining a larger share of the company’s shares than we initially acquired. Accordingly, this may make it more likely that our management will not maintain control of the target business.
General Risk Factors
We are a blank check company with no operating history and no revenues, and you have no basis on which to evaluate our ability to achieve our business objective.
We are a blank check company incorporated under the laws of the State of Delaware with no operating results. Because we lack an operating history, you have no basis upon which to evaluate our ability to achieve our business objective of completing our initial Business Combination. We have entered into the Merger Agreement, but we may be unable to complete the proposed Sema4 Business Combination. If we fail to complete our initial Business Combination, we will never generate any operating revenues.
We are an emerging growth company and a smaller reporting company within the meaning of the Securitiesus.
The JOBS Act
and if we take advantage of certain exemptions from disclosure requirements available to emerging growth companies or smaller reporting companies, this could make our securities less attractive to investors and may make it more difficult to compare our performance with other public companies.We are anpermits “emerging growth company” within the meaning of the Securities Act, as modified by the JOBS Act, and we maycompanies” like us to take advantage of certain exemptions from various reporting requirements applicable to other public companies that are not emerging growth companies.
We currently qualify as an “emerging growth company” as defined in Section 2(a)(19) of the Securities Act, as modified by the Jumpstart Our Business Startups Act (“JOBS”). As such, we take advantage of certain exemptions from various reporting requirements applicable to other public companies that are not emerging growth companies including, but not limitedfor as long as we continue to not being required to comply withbe an emerging growth company, including: (i) the exemption from the auditor internal controls attestation requirements ofwith respect to internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act,Act; (ii) the exemptions from say-on-pay, say-on-frequency and say-on-golden parachute voting requirements; and (iii) reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved.reports. As a result, our stockholders may not have access to certain information they may deem important. We could bewill remain an emerging growth company for upuntil the earliest of (i) the last day of the fiscal year: (a) following September 1, 2025, the fifth anniversary of the initial public offering of CMLS; (b) in which we have total annual gross revenue of at least $1.235 billion; or (c) in which we are deemed to five years, although circumstances could cause us to lose that status earlier, including ifbe a large accelerated filer, which means the market value of our Class A Common Stockcommon stock that is held by non-affiliates exceeds $700$700.0 million as of anythe prior June 30 before30th, and (ii) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period.
In addition, Section 107 of the JOBS Act also provides that
time, in which case we would no longer be an emerging growth company
ascan take advantage of the
following December 31. We cannot predict whether investors will find our securities less attractive because we will rely on these exemptions. If some investors find our securities less attractive as a result of our reliance on these exemptions, the trading prices of our securities may be lower than they otherwise would be, there may be a less active trading market for our securities and the trading prices of our securities may be more volatile.Further, Section 102(b)(1) of the JOBS Act exempts emerging growth companiesexemption from being required to complycomplying with new or revised financialaccounting standards provided in Section 7(a)(2)(B) of the Securities Act as long as we are an emerging growth company. An emerging growth company can therefore delay the adoption of certain accounting standards until those standards would otherwise apply to private companies (that is, those that have not had a Securities Act registration statement declared effective or do not have a class of securities registered under the Exchange Act) are required to comply with the new or revised financial accounting standards.companies. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies, but any such an election to opt out is irrevocable. We have elected not to opt outavail ourselves of such extended transition period, which means that when a standard is issued or revised and it has different application dates for public or private companies, we, as an emerging growth company, can adopt the new or revised standard at the time private companies adopt the new or revised standard. This may make comparison of our financial statements with another public company whichthat is neither an emerging growth company nor an emerging growth company whichthat has opted out of using the extended transition period difficult or impossible because of the potential differences in accounting standards used.
Additionally, we are a “smaller reporting company” as defined in Item 10(f)(1) of Regulation S-K. Smaller reporting companies may take advantage of certain reduced disclosure obligations, including, among other things, providing only two years of auditedconsolidated financial statements. We will remain a smaller reporting company until the last day of the fiscal year in which (1)(i) the market value of our Class A common stock held by non-affiliates equals or exceeds $250 million as of the prior June 30,th, and (2) or (ii) our annual revenues equal or exceedexceeded $100 million during such completed fiscal year orand the market value of our Class A common stock held by non-affiliates equals or exceeds $700 million as of the prior June 30th. To the extent30.
We cannot predict if investors will find our Class A common stock less attractive because we take advantage of such reduced disclosure obligations, itrely on these exemptions. If some investors find our Class A common stock less attractive as a result, there may also make comparison ofbe a less active trading market for our Class A common stock and our stock price may be more volatile.
Our internal controls over financial
statements with other public companies difficult or impossible.Cyber incidents or attacks directed at us could result in information theft, data corruption, operational disruption and/or financial loss.
We depend on digital technologies, including information systems, infrastructure and cloud applications and services, including those of third parties with which we may deal. Sophisticated and deliberate attacks on, or security breaches in, our systems or infrastructure, or the systems or infrastructure of third parties or the cloud, could lead to corruption or misappropriation of our assets, proprietary information and sensitive or confidential data. As an early stage company without significant investments in data security protection, wereporting may not be sufficiently protected against such occurrences. We may not have sufficient resources to adequately protect against, or to investigate and remediate any vulnerability to, cyber incidents. It is possible that any of these occurrences, or a combination of them,effective which could have a significant and adverse consequenceseffect on our business and leadreputation.
As a public company, we are required to comply with the SEC’s rules implementing Sections 302 and 404 of Sarbanes-Oxley Act, which require management to certify financial loss.and other information in our quarterly and annual reports and provide an annual management report on the effectiveness of internal control over financial reporting. To comply with the requirements of being a public company, we are required to provide management’s assessment on internal controls, and we may need to undertake various actions, such as implementing additional internal controls and procedures and hiring additional accounting or internal audit staff. Further, as an emerging growth company, our independent registered public accounting firm is not required to formally attest to the effectiveness of our internal controls over financial reporting pursuant to Section 404 until the date we are no longer an emerging growth company. At such time, our independent registered public accounting firm may issue a report that is adverse in the event that it is not satisfied with the level at which the controls of the company are documented, designed or operating.
Testing and maintaining these controls can divert our management’s attention from other matters that are important to the operation of our business. If we identify material weaknesses in the internal control over financial reporting of the company or are unable to comply with the requirements of Section 404 or assert that our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an opinion as to the effectiveness of our internal controls over financial reporting when we no longer qualify as an emerging growth company, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our Class A common stock could be negatively affected, and we could become subject to investigations by the SEC or other regulatory authorities, which could require additional financial and management resources.
Our Charter and our Bylaws designate the Court of Chancery of the State of Delaware and federal court within the State of Delaware as the exclusive forum for certain types of actions and proceedings that our stockholders may initiate, which could limit a stockholder’s ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees.
Our Charter and our Amended and Restated Bylaws (as amended, our “Bylaws”) designate the Court of Chancery of the State of Delaware and federal court within the State of Delaware as the exclusive forum for certain types of actions and proceedings that our stockholders may initiate, which could limit a stockholder’s ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees.
Our Charter and our Bylaws provide that, subject to limited exceptions, the Court of Chancery of the State of Delaware and federal court within the State of Delaware will be exclusive forums for any:
•derivative action or proceeding brought on our behalf;
•action asserting a claim of breach of a fiduciary duty owed by, or other wrongdoing by, any of our directors, officers, stockholders, employees or agents to us or our stockholders;
•action asserting a claim against the us or any of our directors, officers, stockholders, employees or agents arising pursuant to any provision of the General Corporation Law, our Charter or our Bylaws or as to which the General Corporation Law confers jurisdiction on the Court of Chancery of the State of Delaware:
•action to interpret, apply, enforce or determine the validity of our Charter or our Bylaws; or
•other action asserting a claim against us or any of our directors, officers, stockholders, employees or agents that is governed by the internal affairs doctrine.
These provisions do not apply to actions brought to enforce a duty or liability created under the Exchange Act or any other claim for which federal courts have jurisdiction. Furthermore, in accordance with our Bylaws, unless we consent in writing to the selection of an alternative forum, the federal district courts of the U.S. will be, to the fullest extent permitted by law, the
exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act. Any person or entity purchasing or otherwise acquiring or holding any interest in any of our securities shall be deemed to have notice of and consented these provisions in our Charter and our Bylaws.
These provisions may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or any of our directors, officers, or other employees, which may discourage lawsuits with respect to such claims. Alternatively, if a court were to find the provisions contained in our Charter and our Bylaws to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could harm our business, results of operations and financial condition.
The stockholders will not be deemed to have waived our compliance with the federal securities laws and the regulations promulgated thereunder.
Any person or entity purchasing or otherwise acquiring or holding any interest in any of our securities shall be deemed to have notice of and consented to our exclusive forum provisions. These provisions may limit a stockholders’ ability to bring a claim, and may result in increased costs for a stockholder to bring a claim in a judicial forum of their choosing for disputes with us or our directors, officers, or other employees, which may discourage lawsuits against us and our directors, officers, and other employees.
Risks Related to Our Common Stock and Warrants
The ownership of our outstanding Class A common stock is concentrated, with certain of our stockholders owning significant percentages of our outstanding shares.
Icahn School of Medicine at Mount Sinai (“ISMMS”), OPKO Health, Inc. (“OPKO”), entities affiliated with Casdin Partners Master Fund, L.P. (“Casdin Partners”), and Corvex Management, L.P. (“Corvex Management”) are some of our significant stockholders, which owned approximately 11%, 11%, 12% and 10%, respectively, of our outstanding shares of our Class A common stock as of December 31, 2023. In addition, Mr. Richard C. Pfenniger, Jr., one of our directors also serves as a director of OPKO, Mr. Eli D. Casdin, one of our directors, is affiliated with Casdin Partners and CMLS Holdings, LLC (“CMLS Holdings”), which owned approximately 1% of our outstanding shares of our Class A common stock as of December 31, 2023, and Mr. Keith Meister, one of our directors, is affiliated with Corvex Management and CMLS Holdings.
These stockholders may choose to dispose of some or all of the shares of our Class A common stock held by them. Any disposal of shares of Class A common stock by any of these stockholders, or the perception that these sales could occur, could cause the market price of our stock or warrants to decline.
We may amend the terms of the public warrants in a manner that may be adverse to holders with the approval by the holders of at least 50% of the then-outstanding public warrants. As a result, the exercise price of a holder’s public warrants could be increased, the exercise period could be shortened and the number of shares of our Class A common stock purchasable upon exercise of a public warrant could be decreased, all without the approval of that warrant holder.
Our public warrants were issued in registered form under a warrant agreement between Continental Stock Transfer & Trust Company, as warrant agent, and us. The warrant agreement provides that the terms of the public warrants may be amended without the consent of any holder to cure any ambiguity or correct any defective provision, but requires the approval by the holders of at least 50% of the then-outstanding public warrants to make any change that adversely affects the interests of the registered holders. Accordingly, we may amend the terms of the public warrants in a manner adverse to a holder if holders of at least 50% of the then-outstanding public warrants approve of such amendment. Although our ability to amend the terms of the public warrants with the consent of at least 50% of the then-outstanding public warrants is unlimited, examples of such amendments could be amendments to, among other things, increase the exercise price of the public warrants, convert the warrants into cash or stock, shorten the exercise period or decrease the number of shares of common stock purchasable upon exercise of a public warrant.
We may redeem unexpired public warrants prior to their exercise at a time that is disadvantageous to warrant holders, thereby making their public warrants worthless.
We have the ability to redeem outstanding public warrants at any time after they become exercisable and prior to their expiration, at a price of $0.33 per public warrant; provided that the last reported sales price of our Class A common stock equals or exceeds $594.00 per share (as adjusted for stock splits, stock dividends, reorganizations, recapitalizations and the like) for any 20 trading days within a 30 trading-day period ending on the third trading day prior to the date on which we give notice of such redemption to the warrant holders. If and when the public warrants become redeemable by us, we may exercise our redemption right even if we are unable to register or qualify the underlying securities for sale under all applicable state
securities laws. We will use our best efforts to register or qualify such shares of common stock under the blue sky laws of the state of residence in those states in which the warrants were offered by us. Redemption of the outstanding public warrants could force the warrant holders: (i) to exercise their public warrants and pay the exercise price therefor at a time when it may be disadvantageous for them to do so; (ii) to sell their public warrants at the then-current market price when they might otherwise wish to hold their public warrants; or (iii) to accept the nominal redemption price which, at the time the outstanding public warrants are called for redemption, is likely to be substantially less than the market value of their public warrants. None of the private placement warrants will be redeemable by us so long as they are held by CMLS Holdings LLC, or its permitted transferees. Additionally, none of the private warrants issued to Perceptive are redeemable by us so long as the warrants are held by Perceptive, or its permitted transferees.
Our warrants are exercisable for our Class A common stock, which will increase the number of shares eligible for future resale in the public market and result in dilution to our stockholders.
As of December 31, 2023, our public warrants were exercisable for 452,272 shares of Class A common stock at $379.50 per share, our private warrants were exercisable for 214,243 shares of Class A common stock at $379.50 per share, and our private warrants issued to Perceptive were exercisable for 800,000 shares of Class A common stock at $3.18 per share. The additional shares of our Class A common stock issuable upon exercise of our warrants will result in dilution to the then existing holders of our Class A common stock and increase the number of shares eligible for resale in the public market. Sales of substantial numbers of such shares in the public market could adversely affect the market price of our Class A common stock.
Our warrants are accounted for as liabilities and the changes in value of our warrants could have a material effect on our financial results.
Included on our consolidated balance sheet as of December 31, 2023, are liabilities related to our public and private warrants which are each remeasured at fair value at each balance sheet date, with a resulting non-cash gain or loss related to the change in the fair value being recognized in earnings in the statement of operations. As a result of the recurring fair value measurement, our financial statements and results of operations may fluctuate quarterly, based on factors, which are outside of our control. Due to the recurring fair value measurement, we expect that we will recognize non-cash gains or losses on our warrants each reporting period in our results of operations and that the amount of such gains or losses could be material. For example, during 2023, we recognized $0.2 million in non-cash gains on the fair value of our warrants due to the change in fair market value. If the price of our Class A common stock decreases, we expect we would recognize non-cash gains on our warrants in future reporting periods.
Future resales of our Class A common stock could cause the market price of our Class A common stock to drop significantly, even if our business is doing well.
Sales of a substantial number of shares of our Class A common stock in the public market could occur at any time. These sales, or the perception in the market that the holders of a large number of shares intend to sell shares, could reduce the market price of our Class A common stock.
We had 25,978,863 shares of Class A common stock outstanding as of December 31, 2023. We have filed a registration statement which registers the offer and sale from time to time by certain selling stockholders of up to 10,803,779 shares of our Class A common stock, although the 2,873,738 shares of our Class A common stock registered on behalf of OPKO pursuant to this registration statement will be subject to certain transfer restrictions pursuant to the shareholder agreements that were entered into in connection with the Acquisition. To the extent shares of our Class A common stock are sold into the market pursuant to an effective registration statement, under Rule 144 under the Securities Act or otherwise, particularly in substantial quantities and following the end of the transfer restrictions provided for in the shareholder agreements in the case of OPKO and the other stockholders party to such shareholder agreements, the market price of our Class A common stock could decline.
There is no guarantee that the public warrants will ever be in the money, and they may expire worthless and the terms of our public warrants may be amended.
The exercise price for the public warrants is $379.50 per share of Class A common stock. There is no guarantee that the public warrants will ever be in the money prior to their expiration, and as such, the public warrants may expire worthless.
We cannot guarantee that we will be able to satisfy the continued listing standards of Nasdaq going forward and if we fail to satisfy the continued listing requirements of Nasdaq, including the minimum closing bid price requirement, Nasdaq may take steps to delist our Class A common stock.
Our Class A common stock and public warrants are listed on the Nasdaq under the symbols “WGS” and “WGSWW,” respectively. However, we cannot ensure that we will be able to satisfy the continued listing standards of Nasdaq, including the minimum closing bid price requirement, going forward. If we cannot satisfy the continued listing standards going forward, The Nasdaq Stock Market may commence delisting procedures against us, which could result in our Class A common stock or public warrants being removed from listing on Nasdaq. If either of our Class A common stock or public warrants were to be delisted, the liquidity of our Class A common stock or warrants could be adversely affected and the market price of our Class A common stock or warrants could decrease. Delisting could also adversely affect our securityholders’ ability to trade or obtain quotations on our securities because of lower trading volumes and transaction delays. These factors could contribute to lower prices and larger spreads in the bid and ask price for our securities. Investors may also not be able to resell their Class A common stock or warrants at or above the price they paid for such securities or at all.
Item 1B.
Unresolved Staff Comments.Comments
None.
Item 1C. Cybersecurity
Our board of directors recognizes the critical importance of maintaining the trust and confidence of our customers, healthcare providers, clients, business partners, and employees. Our board of directors actively oversees our risk management program, and cybersecurity represents an important component of our overall approach to enterprise risk management (“ERM”). In general, we seek to address cybersecurity risks through a cross-functional approach focused on preserving the confidentiality, security, and availability of the information that we collect and store by identifying, preventing and mitigating cybersecurity threats and effectively responding to cybersecurity incidents when they occur.
Risk Management and Strategy
As one of the critical elements of our overall ERM approach, our cybersecurity program is focused on the following key areas:
Governance: As discussed in more detail under the heading “Governance,” the audit committee of our board of directors supports the board of directors oversight of cybersecurity risk management, which regularly interacts with our ERM function, our Head of Information Security (“HIS”) and other members of management.
Cross-Functional Approach: We have implemented a cross-functional approach to identifying, preventing, and mitigating cybersecurity threats and incidents, while also implementing controls and procedures that provide for the prompt escalation of certain cybersecurity incidents so that decisions regarding the public disclosure and reporting of such incidents can be made by management in a timely manner.
Technical Safeguards: We deploy commercially reasonable technical safeguards that are designed to protect our information systems from cybersecurity threats, including firewalls, intrusion prevention and detection systems, anti-malware functionality and access controls, which are evaluated and improved through vulnerability assessments and cybersecurity threat intelligence.
Third-Party Risk Management: We maintain a risk-based approach to identifying and overseeing cybersecurity risks presented by third parties, including vendors, service providers and other external users of our systems, as well as the systems of third parties that could adversely impact our business in the event of a cybersecurity incident affecting those third-party systems.
Education and Awareness: We provide regular, mandatory training for personnel regarding cybersecurity threats as a means to equip our personnel with effective tools to address cybersecurity threats, and to communicate our evolving information security policies, standards, processes and practices.
We engage in the routine, periodic assessment and testing of our policies, standards, processes and practices that are designed to address cybersecurity threats and incidents. These efforts include a wide range of activities, including audits, assessments and other exercises focused on evaluating the effectiveness of our cybersecurity measures and planning. We regularly engage third parties to perform assessments on our cybersecurity measures, including information security maturity assessments,
audits and independent reviews of our information security control environment and operating effectiveness. The results of such assessments, audits and reviews are reported to our audit committee, and we adjust our cybersecurity policies, standards, processes, and practices as necessary based on the information provided by these assessments, audits and reviews.
Governance
Our board of directors, in coordination with our audit committee, oversees our ERM process, including the management of risks arising from cybersecurity threats. Our audit committee receives regular presentations and reports on cybersecurity risks. Our board of directors and audit committee receives and reviews prompt and timely information regarding any incident that may be considered material to investor or otherwise could materially affect core company operations.
Our HIS works collaboratively across the company to implement a program designed to protect our information systems from cybersecurity threats and to promptly respond to any cybersecurity incidents in accordance with our incident response and recovery plans. Through ongoing communications with these teams, our HIS monitors the prevention, detection, mitigation and remediation of cybersecurity threats and incidents in real time, and such threats and incidents are reported to our audit committee when appropriate.
Our HIS has served in various roles in information technology and information security for over 14 years and holds an undergraduate degree in Management Information System and a graduate degree in Human Resource Management and has attained the professional certification of Certified Chief Information Security Officer.
Risks from cybersecurity threats, including as a result of any previous cybersecurity incidents, have not materially affected, and the Company believes that such risks are not reasonably likely to materially affect the Company, including its business strategy, results of operations or financial condition.
Although we are subject to ongoing and evolving cybersecurity threats, we are not aware of any material risks from cybersecurity threats in 2023 that have materially affected or are reasonably likely to materially affect us, including our business strategy, results of operations or financial condition. For more information on our cybersecurity risks, see “Risk Factors—Risks Related to Cybersecurity, Privacy and Information Technology".
Item 2.
Properties.We do not own any real estate or other physical properties material to Properties
Properties for our operation. We currently maintaincore operations include our executive offices at 667 Madison Avenue, 2nd Floor,corporate office and headquarters located in Stamford, Connecticut, our primary operating laboratory located in Gaithersburg, Maryland, and a satellite meeting space located in New York New York 10065. City; each are leased spaces with an aggregate of approximately 115,000 square feet. The lease agreements for these properties expire in 2034, 2031, and 2025, respectively.
As previously disclosed, our laboratories in Branford, Connecticut and Stamford, Connecticut have ceased operations as part of our announced exits in 2022 from reproductive health and somatic tumor testing. These facilities as well as a portion of our headquarters located in Stamford, Connecticut are actively being marketed for sublet; however, the outstanding lease obligations remain obligations. The lease agreements for these properties expire in 2030 and 2036, respectively.
We considerbelieve that our current office spacefacilities are suitable and adequate forto meet our current operations.needs.
Item 3.
Legal Proceedings.We are not currently subject to any materialProceedings
Information regarding legal proceedings nor, to our knowledge, is any material legal proceeding threatened against us or any of our officers or directorscan be found in their corporate capacity.the consolidated financial statements in Note 11, “
Purchase Commitments and Contingencies” included in this Annual Report.
Item
4.Mine Safety Disclosures.None.
Part II
Item 5. Market for
Registrant’sRegistrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities.Securities
Market Information
Our Units began
Since January 10, 2023, our Class A common stock and public warrants have been trading on
the Nasdaq
on September 2, 2020. Each Unit consists of one share of Class A Common Stock and one-third of one redeemable warrant to purchase one share of Class A Common Stock. On October 23, 2020, we announced that holders of the Units may elect to separately trade the Class A Common Stock and redeemable warrants included in the Units commencing on October 26, 2020. The Units not separated continue to trade on Nasdaq under the symbol “CMLFU.” Any underlying Class A Common Stock and redeemable warrants that were separated trade on NasdaqGlobal Select Market under the symbols
“CMLF”“WGS” and
“CMLFW,“WGSWW,” respectively.
From July 23, 2021 to January 9, 2023, our Class A common stock and public warrants traded on the Nasdaq Global Select Market under the symbols “SMFR” and “SMFRW”, respectively. Prior to the Business Combination, CMLS’s Class A common stock, CMLS’s public warrants, and CMLS’s public units were listed on the Nasdaq Capital Market under the symbols “CMLF”, “CMFLW”, and “CMLFU” respectively.
As of
March 22, 2021,February 20, 2024, there
was approximately 1 holder ofwere 45 record
holders of our
Units, approximately 1 holder ofClass A common stock and 5 record
holders of our
separately traded Class A Common Stock, and approximately 4 holders of record of our redeemable warrants. The number of record holders was determinedpublic warrants, based upon information received from
the records of our transfer
agent andagent. However, this number does not
includereflect beneficial owners whose
securities areshares were held
in the names of
various securityrecord by nominees or broker dealers. We believe a substantially greater number of beneficial owners hold shares of our Class A common stock or public warrants through brokers,
dealers, and registered clearing agencies.Dividends
banks, or other nominees.
Dividend Policy
We have
notnever paid any cash dividends on our
common stockcapital stock. We anticipate that we will retain earnings, if any, to
datesupport operations and
to finance the growth and development of our business. In addition, the terms of our credit agreement with Perceptive Credit Holdings IV, LP restrict us from paying cash dividends. Therefore, we do not
intendexpect to pay cash dividends
prior to the completion of our initial Business Combination. The payment of cash dividends in the future will be dependent upon our revenues and earnings, if any, capital requirements and general financial condition subsequent to completion of our initial Business Combination. The payment of any cash dividends subsequent to our initial Business Combination will be within the discretion of our board of directors at such time. In addition, our board of directors is not currently contemplating and does not anticipate declaring any dividends infor the foreseeable future.
Further, if we incur any indebtedness in connection with our initial Business Combination, our ability to declare dividends may be limited by restrictive covenants we may agree to in connection therewith.Securities Authorized for Issuance Under Equity Compensation Plans
None.
Performance Graph
The performance graph has been omitted as permitted under rules applicable to smaller reporting companies.
Recent Sales
Sale of Unregistered Securities; UseSecurities
None.
Purchases of
Proceeds from Registered OfferingsUnregistered Sales
On July 16, 2020, our Sponsor paid an aggregate of $25,000, or approximately $0.002 per share, to cover certain expenses on behalf of the Company in exchange for issuance of 10,062,500 Founder Shares. In August 2020, our Sponsor transferred 25,000 Founder Shares to each of the following directors: Mr. Islam, Dr. Leproust and Mr. Turner. On September 1, 2020, we effected a 1:1.1 stock split of our Class B Common Stock, resulting in our Sponsor holding an aggregate of 10,993,750 Founder Shares and there being an aggregate of 11,068,750 Founder Shares outstanding. The Sponsor agreed to forfeit up to an aggregate of 1,443,750 Founder Shares, on a pro rata basis, to the extent that the option to purchase additional units is not exercised in fullEquity Securities by the underwriters, so that the Founder Shares would represent 20% of the Company’s issuedIssuer and outstanding shares after the Initial Public Offering. The underwriters fully exercised their over-allotment option on September 2, 2020; thus, those Founder Shares were no longer subject to forfeiture.
Our Sponsor and certain of our independent directors purchased an aggregate of 7,236,667 Private Placement Warrants, each exercisable to purchase one share of Class A Common Stock at $11.50 per share, at a price of $1.50 per warrant, generating gross proceeds of $10,855,000, in a private placement that closed substantially concurrently with the closing of the Initial Public Offering. This issuance was made pursuant to the exemption from registration contained in Section 4(a)(2) of the Securities Act.
No underwriting discounts or commissions were paid with respect to such sales.
Use of Proceeds
On September 4, 2020, the Company consummated its Initial Public Offering of 44,275,000 Units, including the issuance of 5,775,000 Over-Allotment Units, at $10.00 per Unit, generating gross proceeds of $442.75 million. Jefferies LLC acted as the underwriter for the Initial Public Offering. The securities sold in the Initial Public Offering were registered under the Securities Act on registration statements on Form S-1 (Nos. 333-246251 and 333-248541). The registration statements became effective on September 1, 2020.
Substantially concurrently with the closing of the Initial Public Offering, the Company consummated the Private Placement of 7,236,667 Private Placement Warrants, at a price of $1.50 per Private Placement Warrant to the Sponsor, generating gross proceeds of approximately $10.86 million.
In connection with the Initial Public Offering, we incurred offering costs of approximately $25.3 million (including deferred underwriting commissions of approximately $15.5 million). After deducting the underwriting discounts and commissions (excluding the deferred portion, which amount will be payable upon consummation of the initial Business Combination, if consummated) and the Initial Public Offering expenses, $442.75 million of the net proceeds from our Initial Public Offering and certain of the proceeds from the private placement of the Private Placement Warrants (or $10.00 per Unit sold in the Initial Public Offering) was placed in the Trust Account. The net proceeds of the Initial Public Offering and certain proceeds from the sale of the Private Placement Warrants are held in the Trust Account and invested as described elsewhere in this Annual Report on Form 10-K.
There has been no material change in the planned use of the proceeds from the Initial Public Offering and Private Placement as is described in the Company’s final prospectus related to the Initial Public Offering. For a description of the use of the proceeds generated from the Initial Public Offering, see “Item 1. Business.”
Item 6.
Selected Financial Data.Selected financial data has been omitted as permitted under rules applicable to smaller reporting companies.
ReservedNot applicable.
Item 7.
Management’sManagement's Discussion and Analysis of Financial Condition and Results of
Operations.References toOperations
You should read the “Company,” “our,” “us” or “we” refer to CM Life Sciences, Inc. The following discussion and analysis of the Company’sour financial condition and results of operations together with our consolidated financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements and involves numerous risks and uncertainties. Actual results may differ materially from the results described in or implied by the forward-looking statements. You should carefully read the section entitled “Risk Factors” to gain an understanding of the important factors that could cause actual results to differ materially from these forward-looking statements.
Overview
We are a leading genomics company—one that sits at the intersection of diagnostics and data science, pairing decades of genomic expertise with an ability to interpret clinical data at scale. We are focused on delivering personalized and actionable health insights to inform diagnosis, direct treatment and improve drug discovery. We believe we are well-positioned to accelerate the use of genomics and leverage large-scale clinical data to enable precision medicine as the standard of care. Our initial focus is in pediatric and rare diseases, two areas in which we believe we have competitive advantage and can deliver on our vision today.
Corporate History Overview
Mount Sinai Genomics, Inc. d/b/a as Sema4 (“Legacy Sema4”) was established out of the Mount Sinai Health System and commenced operations as a commercial entity on June 1, 2017. Legacy Sema4 derived the majority of its revenue from diagnostic testing services, which primarily related to reproductive and women’s health and somatic tumor testing. In addition, between May 2020 through March 31, 2022, Legacy Sema4 provided COVID-19 diagnostic testing services.
GeneDx, LLC (formerly, GeneDx, Inc.) (“Legacy GeneDx”), which derives its revenue primarily from diagnostic testing services, including revenue related to exome sequencing and whole genome sequencing, was acquired by us on April 29, 2022 (the “Acquisition”). The diagnostic testing services businesses of Legacy Sema4 were discontinued as of the end of the first quarter of 2023, and our continuing operations now include the combination of the Legacy GeneDx diagnostic testing services business with the data and information business of Legacy Sema4.
Additional information on Legacy GeneDx and Legacy Sema4 can be found in the consolidated financial statements in Note 1, “Organization and Description of Business” included within this Annual Report.
Factors Affecting Our Performance
We believe several important factors have impacted, and will continue to impact, our performance and results of operations. While each of these areas presents significant opportunities for us, they also pose significant risks and challenges that we must address. See the section titled “Item 1A. Risk Factors” 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. The commercial success of our current and future products, if approved, will depend on the extent to which our customers receive coverage and adequate reimbursement from third-party payors. Since each payor makes its own decision as to whether to establish a policy or enter into a contract to provide coverage for our tests, as well as the amount it will reimburse us for a test, seeking these approvals is a time-consuming and costly process.
In cases where we or our partners have established reimbursement rates with third-party payors, we face additional challenges in complying with their procedural requirements for reimbursement. These requirements often vary from payor to payor and are reassessed by third-party payors regularly. As a result, in the past we have needed additional time and resources to comply with the requirements.
Third-party payors may decide to deny payment or seek to recoup payments for tests performed by us that they contend were improperly billed, not medically necessary or against their coverage determinations, or for which they believe they have otherwise overpaid. As a result, we may be required to refund payments already received, and our revenues may be subject to retroactive adjustment as a result of these factors among others.
We expect to continue to focus our resources on increasing the adoption of, and expanding coverage and reimbursement for, our current and any future tests we may develop or acquire. If we fail to expand and maintain broad adoption of, and coverage and reimbursement for, our tests, our ability to generate revenue and our future business prospects may be adversely affected.
Ability to lower the costs associated with performing our tests
Reducing the costs associated with performing our diagnostic tests is both our focus and a strategic objective. We source, and will continue to source, components of our diagnostic testing workflows from third parties. We also rely upon third-party service providers for data storage and workflow management.
Increasing adoption of our services by existing and new customers
Our performance depends on our ability to retain and broaden the adoption of our services with existing customers as well as our ability to attract new customers. Our success in retaining and gaining new customers is dependent on the market’s confidence in our services and the willingness of customers to continue to seek more comprehensive and integrated genomic and clinical data insights.
Investment in platform innovation to support commercial growth
We are seeking to leverage and deploy our platforms to develop a pipeline of future disease-specific research and diagnostic and therapeutic products and services. We have limited experience in the development or commercialization of clinical or research products in connection with our database and platform.
We operate in a rapidly evolving and highly competitive industry. Our business faces changing technologies, shifting provider and patient needs, and frequent introductions of rival products and services. To compete successfully, we must accurately anticipate technology developments and deliver innovative, relevant, and useful products, services, and technologies on time. As our business evolves, the competitive pressure to innovate will encompass a wider range of products and services. We must continue to invest significant resources in research and development, including investments through acquisitions and partnerships. These investments are critical to the enhancement of our current diagnostics and health information and data science technologies from which existing and new service offerings are derived.
We expect to incur significant expenses to advance these development efforts, but they may not be successful. New potential services may fail at any stage of development and, if we determine that any of our current or future services are unlikely to succeed, we may abandon them without any return on our investment. If we are unsuccessful in developing additional services, our growth potential may be impaired.
COVID-19 Impact
During 2023, our test volumes improved to what would, at this time, be considered normalized market conditions.
In March 2020, the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), was signed into law. The CARES Act was a stimulus bill that, among other things, provided assistance to qualifying businesses and individuals and included funding for the healthcare system. We received $5.4 million in 2020 as part of the stimulus, comprised of $2.6 million received under the Provider Relief Fund (the “PRF”), and $2.8 million received under the Employee Retention Credit (the “ERC”). In 2021, we received an additional $5.6 million under the PRF.
Funds provided under the PRF to healthcare providers are not loans and will not be required to be repaid; however, as a condition to receiving these payments, providers must agree to certain terms and conditions and submit sufficient documentation demonstrating that the funds are being used for healthcare-related expenses or lost revenue attributable to the COVID-19 pandemic. We have concluded it is probable that all terms and conditions associated with the funds received under the PRF distribution have been met. As a result, we recorded the funds received under the PRF in other expense (income), net in the statements of operations and comprehensive loss during the periods in which we received the funds.
Funds provided under the ERC are refundable tax credits for 50% of qualified wages paid to employees during the pandemic. A company is eligible for the ERC (1) its operations have been fully or partially suspended because of COVID-19 or (2) its gross receipts in a calendar quarter in 2020 declined by more than 50% from the same period in 2019. At the time of applying
for the ERC, we concluded that it was reasonably possible the eligibility requirements would be met; however, due to a change in circumstances, we re-evaluated our position and concluded that the funds received under the ERC needed to be repaid. In 2022, we deferred the recognition of the funds received under the ERC and repaid them in July 2023.
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 auditedfollowing discussion of our results of operations and financial condition together with our consolidated financial statements and the related notes related thereto which areand other financial information included in “Item 8. Financial Statements and Supplementary Data” of this Annual Report on Form 10-K. Certain information contained in the discussion and analysis set forth below includes forward-looking statements. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those set forth under “Cautionary Note Regarding Forward-Looking Statements and Risk Factor Summary,” “Item 1A. Risk Factors” and elsewhere in this Annual Reportreport.
The principal focus of our commercial operations is to offer our diagnostic tests through both our direct sales force and laboratory distribution partners. Test volume correlates with genomic database size and long-term patient relationships. Thus, test volumes drive database diversity and enable potential identification of variants of unknown significance and population-specific insights. The number of tests resulted and the mix of test results, with a focus on
Form 10-K, as well as those that will be set forth in our preliminary prospectus/proxy statement to be included in a Registration Statement on Form S-4driving whole exome and whole genome sequencing, are key indicators that we
will file withuse to assess the
SEC relating to the proposed Sema4 Business Combination.This Management’s Discussion and Analysis of Financial Condition and Results of Operations has been amended and restated to give effect to the restatement and revisionoperational efficiency of our financial statements as more fully described inbusiness. Once the Explanatory Noteappropriate workflow is completed, the test is resulted and in “Note 2—Restatement of Previously Issued Financial Statements”details are provided to our accompanying financial statements. For further detail regardingordered patients or healthcare professionals for reviews.
During the
restatement adjustments, see Explanatory Note and Item 9A: Controls and Procedures, both contained herein.Overview
We are a blank check company incorporated on July 10, 2020 as a Delaware corporation and formed for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar Business Combination with one or more target businesses. We intend to effectuate our Business Combination using cash from the proceeds of our Initial Public Offering, the sale of the Private Placement Warrants that occurred simultaneously with the completion of our Initial Public Offering and the sale of the Forward Purchase Shares, shares issued to the owners of the target, debt issued to bank or other lenders or the owners of the target or others, or a combination of the foregoing.
We expect to continue to incur significant costs in the pursuit of our acquisition plans. We cannot assure you that our plans to complete a Business Combination will be successful.
Results of Operations
We have neither engaged in any operations nor generated any revenues to date. Our only activities throughyear ended December 31, 20202023, we resulted 222,934 tests, all of which were organizational activities, the consummation of the Initial Public Offering, described below, and seeking to identify a target company for our initial Business Combination. We do not expect to generate any operating revenues until after the completion of our initial Business Combination. We generate non-operating income in the form of interest income on marketable securities held in the Trust Account. We will incur expenses as a result of being a public company (for legal, financial reporting, accounting and auditing compliance), as well as for due diligence expenses in connection with completing our initial Business Combination.
As a result of the restatement described in Note 2 of the notes to the financial statements included herein, we classify the Warrants issued in connection with our Initial Public Offering as liabilities at their fair value and adjust the warrant instrument to fair value at each reporting period. This liability is subject to re-measurement at each balance sheet date until exercised, and any change in fair value is recognized in our statement of operations.
For the period from July 10, 2020 (inception) through December 31, 2020, we had a net loss of $39,907,599, which consists of operating costs of $206,195, a change in the fair value of the warrant liability of $38,510,584, transaction costs of $1,204,771 offset by interest income on marketable securities held in the Trust Account of $13,951.
Liquidity and Capital Resources
On September 4, 2020, we consummated the Initial Public Offering of 44,275,000 Units, which included the full exerciseprocessed by the underwriters of the over-allotment optionLegacy GeneDx laboratory compared to purchase an additional 5,775,000 Units, at $10.00 per Unit, generating gross proceeds of $442,750,000. Simultaneously with the closing of the Initial Public Offering, we consummated the sale of 7,236,667 Private Placement Warrants to our Sponsor at a price of $1.50 per warrant, generating gross proceeds of $10,855,000.
Following the Initial Public Offering, the exercise of the over-allotment option and the sale of the Private Placement Warrants, a total of $442,750,000 was placed in the Trust Account. We incurred $24,895,463 in transaction costs, including $8,855,000 of underwriting fees, $15,496,250 of deferred underwriting fees and $544,213 of other offering costs.
For the period from July 10, 2020 (inception) through December 31, 2020, cash used in operating activities was $386,106. Net loss of $39,907,599 was affected by interest earned on marketable securities held in the Trust Account of $13,951, a non-cash charge for the change in the fair value of warrant liabilities of $38,510,584, transaction costs of $1,204,771 and changes in operating assets and liabilities, which used $179,911 of cash from operating activities.
As of December 31, 2020, we had cash and marketable securities held in the Trust Account of $442,763,951. We intend to use substantially all of the funds held in the Trust Account, including any amounts representing interest earned on the Trust Account (less taxes payable and deferred underwriting commissions) to complete our initial Business Combination. To the extent that our capital stock or debt is used, in whole or in part, as consideration to complete our initial Business Combination, the remaining proceeds held in the Trust Account will be used as working capital to finance the operations of the target business or businesses, make other acquisitions and pursue our growth strategies. During the period ended December 31, 2020,2022, in which we did not withdraw any interest incomeresulted 528,876 tests in our Legacy GeneDx and Legacy Sema4 laboratories. This volume decrease from the Trust Account.
As of December 31, 2020, we had $1,094,681 of cash held outside of the Trust Account. We intend2022 to use the funds held outside the Trust Account2023 was primarily to identify and evaluate target businesses, perform business due diligence on prospective target businesses, travel to and from the offices, plants or similar locations of prospective target businesses or their representatives or owners, review corporate documents and material agreements of prospective target businesses, and structure, negotiate and complete a Business Combination.
In order to fund working capital deficiencies or finance transaction costs in connection with our initial Business Combination, our Sponsor or an affiliate of our Sponsor or certain of our officers and directors may, but are not obligated to, loan us funds as may be required. If we complete a Business Combination, we would repay such loaned amounts. In the event that a Business Combination does not close, we may use a portion of the working capital held outside the Trust Account to repay such loaned amounts but no proceeds from our Trust Account would be used for such repayment. Up to $1,500,000 of such loans may be convertible into warrants identical to the Private Placement Warrants, at a price of $1.50 per warrant at the option of the lender.
We do not believe we will need to raise additional funds in order to meet the expenditures required for operating our business. However, if our estimate of the costs of identifying a target business, undertaking in-depth due diligence and negotiating a Business Combination are less than the actual amount necessary to do so, we may have insufficient funds available to operate our business priorattributed to our Business Combination. Moreover, we may needdecision to obtain additional financing either to completeterminate our initial Business Combination or because we become obligated to redeem a significant number of our Public Shares upon consummation of our initial Business Combination,Legacy Sema4 reproductive health and somatic oncology testing activities in which case we may issue additional securities or incur debt in connection with such Business Combination. Subject to compliance with applicable securities laws, we would only complete such financing simultaneously with the completion of our initial Business Combination. If we are unable to complete our initial Business Combination because we do not have sufficient funds available to us, we will be forced to cease operations2022, and liquidate the Trust Account. In addition, following our initial Business Combination, if cash on hand is insufficient, we may need to obtain additional financing in order to meet our obligations.
Sema4 Business Combination Announcement
On February 10, 2021, the Company announced that it executed an Agreement and Plan of Merger (the “Merger Agreement”) with Mount Sinai Genomics, Inc., a Delaware corporation, d/b/a Sema4 (“Sema4”) and the other parties thereto (the transactions contemplatedwas partially offset by the Merger Agreement, including the Merger (as defined below), the “Sema4 Business Combination”). Specifically, the Company entered into the Merger Agreement with Sema4 and S-IV Sub, Inc., a Delaware corporation and a direct, wholly-owned subsidiaryaddition of the Company (“Merger Sub”). Pursuant to the terms of the Merger Agreement, CMLS will acquire Sema4 through the merger of Merger Sub with and into Sema4, with Sema4 surviving as a wholly-owned subsidiary of CMLS (the “Merger”)
The Sema4 Business Combination is expected to close in the second quarter of 2021, following the receipt of the required approval by CMLS’s stockholders and the satisfaction of certain other customary closing conditions.
At the effective time of the Merger (the “Effective Time”), each share of Sema4 class B common stock, par value $0.00001 per share (“Sema4 Class B Common Stock”) issued and outstanding as of immediately prior to the Effective Time will be converted into 1/100th of a share of Sema4 class A common stock, par value $0.00001 per share (“Sema4 Class A Common Stock”, together with Sema4 Class B Common Stock, “Sema4 Common Stock”) in accordance with Sema4’s organizational documents.
Immediately thereafter, each share of Sema4 Common Stock and Sema4’s series A-1 preferred stock, series A-2 preferred stock, series B preferred stock and series C preferred stock (collectively, “Sema4 Capital Stock”) issued and outstanding immediately prior to the Effective Time (other than Excluded Shares and Dissenting Shares (each as defined in the Merger Agreement)) will be converted into the right to receive a portion of the total closing merger consideration, with each Sema4 stockholder being entitled to receive the following:
| (a) | if such stockholder has made a cash election as set forth and in accordance with the terms of the Merger Agreement, a portion of the specified aggregate amount of cash consideration payable under the terms of the Merger Agreement (such aggregate amount not to exceed $343,000,000) and pursuant to the terms of such stockholder’s cash election; and |
| | |
| (b) | a number of shares of common stock, par value $0.0001 per share, of CMLS (the “Common Stock”) equal to the quotient of: (i) (A) the product of (x) such stockholder’s total shares of Sema4 Capital Stock multiplied by (y) the per share amount calculated in accordance with the Merger Agreement minus (B) the amount of cash payable to such stockholder pursuant to its cash election, if any, divided by (ii) $10. |
In addition, at the Effective Time, each outstanding option to purchase Sema4 Capital Stock, each outstanding and unsettled restricted stock unit in respect of shares of Sema4 Capital Stock and each outstanding stock appreciation right will be rolled over into options to purchase Common Stock, restricted stock units in respect of Common Stock and stock appreciation rights in respect of Common Stock, all as further set forth in and in accordance with the terms of the Merger Agreement.
In addition to the payment of cash, issuance of Common Stock and rollover of other Sema4 equity awards described above as of the Effective Time, in the event that the closing sale price of Common Stock exceeds certain price thresholds for 20 out of any 30 consecutive trading days during the period of time commencing upon the expiration of the lock-up period applicable to the Sponsor under the Letter Agreement, dated as of August 27, 2021, by and among the Company, Sponsor and each of the executive officers and directors of the Company and ending on the second anniversary of the closing of the Merger, an additional number of shares equal to an amount up to an aggregate of 11% of the shares of Common Stock that would have been issuable upon closing of the Merger to the stockholders of the Company if no cash elections were made and the closing cash payment amount under the Merger Agreement was $0.00 (the “Earn-Out Shares”) shall become issuable, in accordance with the terms of the Merger Agreement following the achievement of those certain price thresholds, to the stockholders of Sema4 as of immediately priorvolumes from Legacy GeneDx’s laboratory subsequent to the closing of the Merger;Acquisition.
Key Components of Results of Operations
Revenue
Diagnostic Test Revenue
The majority of our revenue is derived from genetic and genomic diagnostic testing services for three groups of customers: healthcare professionals working with patients with third-party insurance coverage or without third-party insurance coverage, institutional clients such as hospitals, clinics, state governments and reference laboratories, and self-pay patients. The amount of revenue recognized for diagnostic testing services depends on a number of factors, such as contracted rates with our customers and third-party insurance providers, insurance reimbursement policies, payor mix, historical collection experience, price concessions and other business and economic conditions and trends. To date, the majority of our diagnostic test revenue has been earned from orders received for patients with third-party insurance coverage. The discontinued Legacy Sema4 diagnostics business previously provided reproductive and women’s health testing and screening, as well as somatic tumor testing. Our ability to increase our diagnostic test revenue will depend on our ability to increase our market penetration, obtain contracted reimbursement coverage from third-party payors, enter into contracts with institutions, and increase our reimbursement rate for tests performed.
Other Revenue
We also generate revenue from collaboration service agreements with biopharma companies and other third parties, pursuant to which we provide health information and patient identification support services. Certain of these contracts provide non-refundable payments, which we record as contract liabilities, and variable payments based upon the achievement of certain milestones during the contract term.
With respect to existing collaboration and service agreements, our revenue may fluctuate period to period due to the pattern in which we may deliver our services, our ability to achieve milestones, the timing of costs incurred, changes in estimates of total anticipated costs that we expect to incur during the boardcontract 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 directorsServices
The cost of services reflect the aggregate costs incurred in performing services, which include expenses for reagents and laboratory supplies, personnel-related expenses (comprising salaries and benefits) and stock-based compensation for employees directly involved in revenue generating activities, shipping and handling fees, costs of third-party reference lab testing and phlebotomy services, if any, and allocated genetic counseling, facility and IT costs associated with delivery
services. Allocated costs include depreciation of laboratory equipment, facility occupancy, and information technology costs. The cost of services are recorded as the services are performed.
We expect the cost of services to generally increase in line with the anticipated growth in diagnostic testing volume and services we provide under our collaboration service agreements. However, we expect the cost per test to decrease over the long term due to the efficiencies we may gain from improved utilization of our laboratory capacity, automation, and other value engineering initiatives. These expected reductions may be offset by new tests which often have a higher cost per test during the introductory phases before we can gain efficiencies. The cost per test may fluctuate from period to period.
Research and Development Expenses
Research and development expenses represent costs incurred to develop our technology and future test offerings. These costs are principally associated with our efforts to develop the software we use to analyze data and process customer orders. These costs primarily consist of personnel-related expenses (comprising salaries and benefits), stock-based compensation for employees performing research and development, innovation and product development activities, costs of reagents and laboratory supplies, costs of consultants and third-party services, equipment and related depreciation expenses, non-capitalizable software development costs, research funding to our research partners as part of research and development agreements and allocated facility and information technology costs associated with genomics medical research. Research and development costs are generally expensed as incurred and certain non-refundable advanced payments provided to our research partners are expensed as the related activities are performed.
We generally expect our research and development expenses to continue to increase as we innovate and expand the application of our platforms. However, we expect research and development expenses to decrease as a percentage of revenue in the long term, although the percentage may fluctuate from period to period due to the timing and extent of our development and commercialization efforts and fluctuations in our compensation-related charges.
Selling and Marketing Expenses
Selling and marketing expenses primarily consist of personnel-related expenses (comprising salaries and benefits) and stock-based compensation for employees performing commercial sales, account management, marketing, and allocation of genetic counseling services for us. Allocated genetic counseling service cost for Legacy Sema4 (oris recorded as general and administrative expenses, as the activities are not expected to support selling and marketing expenses of Legacy Sema4. Selling and marketing costs are expensed as incurred.
We generally expect our selling and marketing expenses will continue to increase in absolute dollars as we expand our commercial sales and marketing and counseling teams and increase marketing activities. However, we expect selling and marketing expenses to decrease as a duly authorized committee thereof)percentage of revenue in the long term, subject to fluctuations from period to period due to the timing and magnitude of these expenses.
General and Administrative Expenses
General and administrative expenses primarily consist of personnel-related expenses (comprising salaries, billing and benefits) and stock-based compensation for employees in executive leadership, legal, finance and accounting, human resources, information technology, and other administrative functions. In addition, these expenses include office occupancy and information technology costs. General and administrative costs are expensed as incurred.
We generally expect our general and administrative expenses to continue to increase in absolute dollars as we increase headcount and incur costs associated with operating as a public company, including expenses related to legal, accounting, and regulatory matters, maintaining compliance with requirements of Nasdaq and of the SEC, director and officer insurance premiums. We expect these expenses to decrease as a percentage of revenue in the long term as revenue increases, although the percentage may fluctuate from period to period due to fluctuations in our compensation-related charges.
Comparison of the Years Ended December 31, 2023 and 2022
The following table sets forth our results of operations for the periods presented (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2023 | | 2022 | | $ Change | | % Change |
| Revenue | | | | | | | |
| Diagnostic test revenue | $ | 195,654 | | | $ | 227,334 | | | $ | (31,680) | | | (14) | % |
| Other revenue | 6,912 | | | 7,360 | | | (448) | | | (6) | % |
| Total revenue | 202,566 | | | 234,694 | | | (32,128) | | | (14) | % |
| Cost of services | 112,560 | | | 261,444 | | | (148,884) | | | (57) | % |
| Gross profit (loss) | 90,006 | | | (26,750) | | | 116,756 | | | (436) | % |
| Research and development | 58,266 | | | 86,203 | | | (27,937) | | | (32) | % |
| Selling and marketing | 60,956 | | | 122,075 | | | (61,119) | | | (50) | % |
| General and administrative | 133,755 | | | 216,167 | | | (82,412) | | | (38) | % |
| Impairment loss | 10,402 | | | 210,145 | | | (199,743) | | | (95) | % |
| Other operating expenses, net | 7,223 | | | 6,312 | | | 911 | | | 14 | % |
| Loss from operations | (180,596) | | | (667,652) | | | 487,056 | | | (73) | % |
| | | | | | | |
| Non-operating income (expenses), net | | | | | | | |
| Change in fair market value of warrant and earn-out contingent liabilities | 1,170 | | | 70,229 | | | (69,059) | | | (98) | % |
| Interest income (expense), net | 1,114 | | | (666) | | | 1,780 | | | (267) | % |
| Other income, net | 1,619 | | | 57 | | | 1,562 | | | 2740 | % |
| Total non-operating income, net | 3,903 | | | 69,620 | | | (65,717) | | | (94) | % |
| Loss before income taxes | (176,693) | | | (598,032) | | | 421,339 | | | (70) | % |
| Income tax benefit | 926 | | | 49,052 | | | (48,126) | | | (98) | % |
| Net loss | $ | (175,767) | | | $ | (548,980) | | | $ | 373,213 | | | (68) | % |
Revenue
Total revenue decreased by $32.1 million, or 14%, to $203 million for the year ended December 31, 2023, from $234.7 million for the year ended December 31, 2022.
Diagnostic test revenue decreased by $31.7 million, or 14%, to $195.7 million for the year ended December 31, 2023, from $227.3 million for the year ended December 31, 2022. The decrease was attributable to lower revenues from the now discontinued Legacy Sema4 business, partially offset by an increase in diagnostic test revenue from Legacy GeneDx driven by an increase in whole exome and genome sequencing test volumes. In addition, the prior toperiod only reflected Legacy GeneDx’s revenue following the closing of the Merger, allocate a portion of such Earn-Out SharesAcquisition.
Other revenue decreased by $0.4 million, or 6%, to be issued to service providers of Sema4 in$6.9 million for the form of restricted stock units of the Company.Off-Balance Sheet Financing Arrangements
We have no obligations, assets or liabilities, which would be considered off-balance sheet arrangements as ofyear ended December 31, 2020. We do not participate in transactions that create relationships with unconsolidated entities or financial partnerships, often referred to as variable interest entities, which would have been established2023, from $7.4 million for the purpose of facilitating off-balance sheet arrangements. We have not entered into any off-balance sheet financing arrangements, established any special purpose entities, guaranteed any debt or commitments of other entities, or purchased any non-financial assets.
Contractual Obligations
We do not have any long-term debt, capital lease obligations, operating lease obligations or long-term liabilities, other than as described below.
The underwriters are entitledyear ended December 31, 2022 due to a deferred fee of $0.35 per Unit, or $15,496,250 in the aggregate. The deferred fee will become payable to the underwriterlower revenues from the amounts held innow discontinued
Legacy Sema4 business. Gross Profit (Loss)
Gross profit increased by $116.8 million for the
Trust Account solely inyear ended December 31, 2023, driven by a combination of lower cost of services from the
event that the Company completes a Business Combination, subjectnow discontinued Legacy Sema4 business and improved margins from Legacy GeneDx. The gross profit performance from Legacy GeneDx reflected favorable volume mix shift to
the terms of the underwriting agreement.higher margin whole exome and genome tests, and lower average cost per test associated with these tests. In addition, we entered into separate forward purchase agreements with affiliates of the Sponsor, Casdin and Corvex, in their capacities as investment advisors on behalf of one or more investment funds, clients or accounts managed by the Clients, pursuant to which, subject to the conditions described below, they will cause the Clients to purchase from us up to an aggregate amount of 15,000,000 Forward Purchase Shares, for $10.00 per Forward Purchase Share, or an aggregate amount of up to $150,000,000, in a private placement that will close concurrently withprior year only reflected Legacy GeneDx’s results following the closing of the Acquisition in April 2022.
Research and Development
Research and development expenses decreased by $27.9 million, or 32%, to $58.3 million for the year ended December 31, 2023, from $86.2 million for the year ended December 31, 2022. The decrease was primarily attributable to lower current year costs from the now discontinued Legacy Sema4 business, which included a Business Combination.$4.3 million decrease in stock compensation
expense resulting from forfeitures of unvested equity awards by terminated employees. In addition, the prior year only reflected Legacy GeneDx’s research and development costs following the closing of the Acquisition in April 2022.
Selling and Marketing
Selling and marketing expenses decreased by $61.1 million, or 50%, to $61.0 million for the year ended December 31, 2023, from $122.1 million for the year ended December 31, 2022. The amountdecrease was primarily attributable to lower current year costs from the now discontinued Legacy Sema4 business, including a $6.7 million decrease in stock compensation expense resulting from forfeitures of Forward Purchase Shares sold pursuantunvested equity awards by terminated employees. In addition, the prior year only reflected Legacy GeneDx’s selling and marketing costs following the closing of the Acquisition in April 2022. This decrease was partially offset by higher Legacy GeneDx costs, in line with the increase in post-Acquisition revenue.
General and Administrative
General and administrative expenses decreased by $82.4 million, or 38%, to $133.8 million for the forward purchase agreements will be determined at our discretion based on our needsyear ended December 31, 2023, from $216.2 million for additional capitalthe year ended December 31, 2022. The decrease was primarily attributable to consummatelower current year cost from the now discontinued Legacy Sema4 business and a Business Combination. Under each forward purchase agreement, we are required to approach Casdin and Corvex if it proposes to raise additional capital$25.0 million reduction of stock compensation expense in the current period resulting from forfeitures of unvested equity awards by issuing any equity, or securities convertible into, exchangeable or exercisable for equity securitiesemployees terminated in connection with a Business Combination. The respective obligations of Casdinfiscal 2023 headcount reduction actions. In addition, the prior year only reflected Legacy GeneDx’s general and Corvex to purchase Forward Purchase Shares will, among other things, be conditioned on us completing a Business Combination with a company engaged in a business that is withinadministrative costs following the investment objectivesclosing of the Clients purchasing Forward Purchase SharesAcquisition in April 2022. The decrease was partially offset by $4.0 million of accelerated depreciation recorded in the current year to write-down the remaining assets at the two closed Legacy Sema4 labs.
Impairment Loss
The non-cash charge of $10.4 million for the year ended December 31, 2023 reflected the impairment of certain capital and right-of-use asset leases. See Note 6, “Property and Equipment, net” to our consolidated financial statements for further information.
The non-cash charge of $210.1 million for the year ended December 31, 2022 reflected the impairment of goodwill and other charges associated with the now discontinued Legacy Sema4 business.
Other Operating Expenses, Net
Other operating expenses, net were $7.2 million for the year ended December 31, 2023 and included related party expenses of $6.0 million and non-cash charges of $3.6 million to reserve for obsolete Legacy Sema4 inventory, partially offset by a current year gain of $1.7 million recognized on the Business Combination (includingsale of certain assets sold as a result of an auction. Other operating expenses, net were $6.3 million for the target assets or business,year ended December 31, 2022 primarily reflected related party expenses.
Non-Operating Income, Net
Non-operating income, net, decreased by $65.7 million, due to the significant decline in fair value of our warrant and earn-out contingent liabilities taken in the prior year and $1.0 million of contract termination costs in the current year associated with the now discontinued Legacy Sema4 business. This decrease was partially offset by interest income in the current year due to higher interest rates associated with money market funds we invested in with proceeds from our public offering of Class A common stock in the first quarter of 2023 and the termsprincipal loan forgiveness of the Business Combination) being reasonably acceptable to such Clients as determined by Casdin or Corvex, as relevant, as investment advisors on behalf of such Clients. Each of Casdin and Corvex will have the right to transfer a portion of its purchase obligation$2.8 million under the forward purchase agreementamendment to third parties, or upon mutual agreementthe Connecticut Department of Economic and Community Development (“DECD”) loan. See Note 9, “Long-Term Debt” to each other, subject to compliance with applicable securities laws. To the extent that we obtain alternative financing to fund the initial Business Combination and the Clients participate in such financing, the aggregate commitment under the forward purchase agreement will be reduced by the amount of such alternative financing.Critical Accounting Policies
The preparation ofour consolidated financial statements and related disclosuresfor further information.
Reconciliation of Non-GAAP Financial Measures
In addition to our results determined in conformityaccordance with accounting principles generally accepted in the United States of America (“U.S. GAAP” or “GAAP”), we believe the following non-GAAP measures are useful in evaluating our operating performance. We use the following non-GAAP financial information to evaluate our ongoing operations and for internal planning and forecasting purposes. We believe that non-GAAP financial information, when taken collectively, may be helpful to investors because it provides consistency and comparability with past financial performance. However, non-GAAP financial information is presented for supplemental informational purposes only and should not be considered in isolation or as a substitute for financial information presented in accordance with GAAP. In addition, other companies, including companies in our industry, may calculate similarly-titled non-GAAP measures differently or may use other measures to evaluate their performance, all of which could reduce the usefulness of our non-GAAP financial measures as tools for comparison. A reconciliation is provided below for each non-GAAP financial measure to the most directly comparable financial measure stated in accordance with GAAP. Investors are encouraged to review the related GAAP financial measures
and the reconciliation of these non-GAAP financial measures to their most directly comparable GAAP financial measures, and not to rely on any single financial measure to evaluate our business.
Non-GAAP financial measures have limitations as analytical tools and you should not consider them in isolation, or as substitutes for analysis of our results as reported under GAAP. We may in the future incur expenses similar to the adjustments in the presentation of non-GAAP financial measures. Other limitations include that non-GAAP financial measures do not reflect:
•all expenditures or future requirements for capital expenditures or contractual commitments;
•changes in our working capital needs;
•the costs of replacing the assets being depreciated, which will often have to be replaced in the future;
•the non-cash component of employee compensation expense; and
•the impact of earnings or charges resulting from matters we consider not to be reflective, on a recurring basis, of our ongoing operations.
Adjusted Gross Profit and Adjusted Gross Margin
Adjusted Gross Profit is a non-GAAP financial measure that we define as revenue less cost of services, excluding depreciation and amortization expense, stock-based compensation expense and restructuring costs. We define Adjusted Gross Margin as our Adjusted Gross Profit divided by our revenue. We believe these non-GAAP financial measures are useful in evaluating our operating performance compared to that of other companies in our industry, as these metrics generally eliminate the effects of certain items that may vary from company to company for reasons unrelated to overall operating performance.
The following is a reconciliation of revenue to our Adjusted Gross Profit and Adjusted Gross Margin for the years ended December 31, 2023 and 2022 (in thousands):
| | | | | | | | | | | | | |
| Year Ended December 31, |
| 2023 | | 2022 | | |
| Revenue | $ | 202,566 | | | $ | 234,694 | | | |
| Cost of services | 112,560 | | | 261,444 | | | |
| Gross Profit (Loss) | 90,006 | | | (26,750) | | | |
| Gross Margin | 44 | % | | (11) | % | | |
| Add: | | | | | |
| Depreciation and amortization expense | $ | 4,350 | | | $ | 31,328 | | | |
| Stock-based compensation expense | (1,217) | | | 5,080 | | | |
Restructuring expense (1) | 139 | | | 1,926 | | | |
Adjusted Gross Profit | $ | 93,278 | | | $ | 11,584 | | | |
| Adjusted Gross Margin | 46 | % | | 5 | % | | |
__________________(1)Represents costs incurred for restructuring activities, which include severance to impacted employees and costs incurred in connection with these activities.
Adjusted Net Loss
Adjusted net loss is a non-GAAP financial measure that we define as net loss adjusted for depreciation and amortization, stock-based compensation expenses, transaction costs, other (income) expense, net, impairment loss, restructuring and business exit related charges, acquisition costs and change in fair market value of warrant and earn-out contingent liabilities. We believe Adjusted net loss is useful in evaluating our operating performance compared to that of other companies in our industry, as this metric generally eliminates the effects of certain factors that may vary from company to company for reasons unrelated to overall operating performance.
The following is a reconciliation of our net loss to Adjusted net loss for the years ended December 31, 2023 and 2022 (in thousands):
| | | | | | | | | | | | | |
| Year Ended December 31, |
| 2023 | | 2022 | | |
| Net loss | $ | (175,767) | | | $ | (548,980) | | | |
| | | | | |
| | | | | |
| Depreciation and amortization | 33,734 | | | 59,309 | | | |
| Stock-based compensation expense | (326) | | | 41,975 | | | |
Impairment loss (1) | 10,402 | | | 210,145 | | | |
Transaction, acquisition and business integration costs (2) | — | | | 13,436 | | | |
Restructuring costs (3) | 6,532 | | | 25,810 | | | |
Change in fair market value of financial liabilities (4) | (1,170) | | | (70,229) | | | |
Gain on sale of assets (5) | (1,677) | | | — | | | |
| Provision for excess and obsolete inventory associated with Legacy Sema4 | 3,634 | | | — | | | |
| Other income, net | (1,619) | | | (57) | | | |
| Adjusted net loss | $ | (126,257) | | | $ | (268,591) | | | |
__________________(1)For fiscal year 2023, represents the impairment of certain capital and right-of-use asset leases. For fiscal year 2022, represents impairment charge incurred in connection with the business exit activities and discontinuance of testing for Legacy Sema4.
(2)For fiscal year 2022, represents costs incurred in connection with the Legacy GeneDx Acquisition, which include due diligence and legal costs.
(3)Represents costs incurred for restructuring activities, which include severance for impacted employees and costs incurred in connection with these activities.
(4)Represents the change in fair market value of the liabilities associated with our public warrants, private placement warrants, Perceptive warrants and the earn-out shares that were issuable under the terms of the merger agreement for our business combination.
(5)Represents a current year gain recognized on the sale of certain assets sold as a result of an auction.
Liquidity and Capital Resources
On April 29, 2022, upon the closing of the Acquisition, we received gross proceeds of $200 million from the issuance of 1.5 million shares of our Class A common stock pursuant to a related private placement (the “Acquisition PIPE Investment”). The gross proceeds were partially used to pay for the cash consideration of the Acquisition and transaction costs incurred in connection with the Acquisition.
On January 31, 2023, we announced the closing of an underwritten public offering of 9,962,316 shares of our Class A common stock and a concurrent registered direct offering of 2,353,436 shares of our Class A common stock. On April 17, 2023, we issued the remaining 676,868 shares of our Class A common stock in the registered direct offering. The total gross proceeds were approximately $150 million.
On October 27, 2023, we entered into a five-year senior secured credit facility with Perceptive Credit Holdings IV, LP that provides for a senior secured delayed draw term loan facility in an aggregate principal amount of up to $75.0 million (the “Perceptive Term Loan Facility”), and received an initial tranche of $50 million under the facility. In addition, the facility includes an additional tranche of $25.0 million, which will be accessible by us so long as we satisfy certain customary conditions precedent, including a specified revenue milestone. See Note 9, “Long-Term Debt” to our consolidated financial statements for further information.
Management believes that our cash and cash equivalents and available-for-sale marketable securities provide us with sufficient liquidity for at least twelve months from the filing date of this Annual Report.
Accordingly, our consolidated financial statements included in this Annual Report have been prepared on a basis that assumes we will continue as a going concern and which contemplates the realization of assets and satisfaction of liabilities and commitments in the ordinary course of business. Nevertheless, we may also seek additional funding in the future through the sale of common or preferred equity or convertible debt securities, drawing on the additional $25.0 tranche of the term loan under the Perceptive Term Loan Facility, the entry into other credit facilities or another form of third-party funding or by seeking other debt financing. We have an effective shelf registration statement that we filed with the SEC in August of 2022, registering $300 million shares of our Class A common stock and other securities. Following the underwritten and registered direct offerings described above, approximately $150 million of securities remained available under this registration statement.
Material Cash Requirements for Known Contractual Obligations and Commitments
The following is a description of commitments for known and reasonably likely cash requirements as of December 31, 2023 and December 31, 2022. We anticipate fulfilling such commitments with our existing cash and cash equivalents and available-for-sale marketable securities, which amounted to $130.1 million and $123.9 million as of December 31, 2023 and December 31, 2022, respectively, or through additional capital raised to finance our operations.
Our future minimum payments under non-cancellable operating lease and finance lease agreements were $66.8 million and $34.3 million, respectively as of December 31, 2023. The timing of these future payments, by year, can be found in our consolidated financial statements in Note 10, “Leases”, included within this Annual Report.
As discussed above, the Legacy Sema4 business recently entered into a settlement agreement with one of its third-party payors in order to settle the claims related to coverage and billing matters allegedly resulting in the overpayments by the payor to the Legacy Sema4 business including those related to multi-gene tests, such as carrier screening services. Under the settlement agreement, the total settlement amount is $42 million, to be paid by us to the payor in a series of installments over the next four years with the final installment payment scheduled to be on or before June 30, 2026. The first installment payment of $15 million was made on December 31, 2022 and the second installment of $5 million was made on December 27, 2023. In consideration for the payments, the payor has agreed to provide releases of the Disputed Claims, which releases will become effective 91 days after the first installment payment was received by the payor. For more information regarding this matter, see Note 4, “Revenue Recognition” included within this Annual Report.
Our future contractual purchase commitments were $3.8 million as of December 31, 2023. The timing of these future payments, by year, can be found in our consolidated financial statements in Note 11, “Purchase Commitments and Contingencies”, included within this Annual Report.
Cash Flows
| | | | | | | | | | | | | |
| Year Ended December 31, |
| (in thousands) | 2023 | | 2022 | | |
| Net cash used in operating activities | $ | (180,147) | | | $ | (319,155) | | | |
| Net cash used in investing activities | (43,726) | | | (141,326) | | | |
| Net cash provided by financing activities | 186,238 | | | 197,315 | | | |
Operating Activities
Net cash used in operating activities during the year ended December 31, 2023 was $180.1 million which was primarily attributable to a net loss of $175.8 million and unfavorable working capital associated with the wind down of the Legacy Sema4 accounts payable, primarily during the second half of 2023, which was partially offset by the release of a third party payor reserve.
Net cash used in operating activities during the year ended December 31, 2022 was $319.2 million, which was primarily attributable to a net loss of $549.0 million, a change in fair value of the warrant and earn-out liabilities of $70.2 million and a deferred income tax benefit of $49.1 million. This was partially offset by non-cash depreciation and amortization of $59.3 million, non-cash stock-based compensation expense of $42.0 million, impairment loss of $210.1 million, a provision for excess and obsolete inventory of $1.1 million and non-cash lease expense of $2.2 million. The net change in our operating assets and liabilities primarily reflected a $2.4 million decrease in inventories, a $34.5 million increase in accounts payable and accrued expenses driven by the payor settlement accrual which was partially offset by timing of vendor payments, a $19.5 million decrease in other current liabilities mainly driven by the payment of 2021 bonuses, offset by the accrual of the 2022 expected payment, a $5.5 million decrease in accounts receivable primarily from self-pay payors and a $11.1 million increase in prepaid expenses and other current assets mainly driven by the amortization of insurance policy premiums.
Investing Activities
Net cash used in investing activities during the year ended December 31, 2023 was $43.7 million which primarily included net purchases of marketable securities of $47.7 million, $12.1 million in consideration held in escrow paid for the Legacy GeneDx Acquisition and $5.3 million in purchases of property and equipment, which was offset partially by $17.8 million in proceeds from maturities of marketable securities and $4.0 million in proceeds from the sale of assets.
Net cash used in investing activities during the year ended December 31, 2022 was $141.3 million, which was primarily attributable to the $127 million net of cash spent for the Acquisition of Legacy GeneDx, $7.2 million in purchases of property and equipment and $7.2 million related to spend on development of internal-use software assets.
Financing Activities
Net cash provided by financing activities during the year ended December 31, 2023 was $186.2 million which was primarily driven by the $143.0 million net proceeds from the underwritten public offering and concurrent registered direct offering, net of issuance costs, and $48.5 million from the Perceptive Term Loan Facility, which was offset partially by the DECD loan payment of $2.0 million and $3.6 million of finance lease payments.
Net cash provided by financing activities during the year ended December 31, 2022 was $197.3 million, which was primarily driven by the $197.7 million net proceeds from the Acquisition PIPE Investment. Additionally, $2.9 million relates to cash received from exercise of employee stock options, which was offset by $3.3 million of finance lease principal payments.
Critical Accounting Policies and Estimates
Our management's discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these consolidated financial statements requires managementus to make judgments, estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and incomeas well as the reported revenue generated and expenses incurred during the periods reported.reporting periods. Our estimates are based on our historical experience and various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about items that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
See Note 2, “Summary of Significant Accounting Policies” to our consolidated financial statements for a complete description of each of these critical accounting policies and estimates. Each of these critical accounting policies could potentially generate materially different results if we were to change underlying assumptions, estimates and/or judgments. Although actual results may differ from those estimates. estimates, we believe the estimates are reasonable and appropriate.
Revenue Recognition
We
have identifiedrecognize revenue when, or as, performance obligations under the
following critical accounting policies:Warrant Liability
terms of a contract are satisfied, which occurs when control of the promised products or services are transferred to a customer. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring products or services to a customer. Our contracts require significant judgments in determining the transaction price and satisfying performance obligations.
Diagnostic test revenue
We estimate a transaction price in arrangements with third-party insurance payors based on historical collection experience, contractual provisions and insurance reimbursement policies, payor mix, and other relevant information for applicable payor portfolios. The portfolio approach is used as a practical expedient to account for categories of diagnostic test contracts as collective groups rather than on an individual contract basis. Management believes that revenue recognized by utilizing the Warrants issuedportfolio approach approximates the revenue that would have been recognized if an individual contract approach was used. For orders received for self-pay patients, we determine a transaction price associated with services rendered in connectionconsideration of implicit price concessions that are granted to such orders. The estimates for implicit price concessions require significant judgment and are based upon management’s assessment of expected net collections, business and economic conditions, historical trends, trends in federal, state and private employer health care coverage and other collection indicators. For institutional clients, the customer is the institution. We determine a transaction price associated with our Initial Public Offeringservices rendered in accordance with the guidance containedcontractual rates established with each customer.
We monitor these estimates at each reporting period based on actual cash collections in order to assess whether a revision to the estimate is required. Both the initial estimate and any subsequent revision to the estimate contain uncertainty and require the use of judgment in the estimation of the transaction price and application of the constraint for variable consideration. If actual results in the future vary from our estimates, we will adjust these estimates, which could affect revenue and earnings in the period such variances become known.
Other revenue
We also recognize revenue from collaboration service agreements with biopharma companies and other third parties pursuant to which we health information and patient identification support services. Certain of these contracts provide non-refundable upfront payments, which we record as contract liabilities, and variable payments based upon the achievement of certain milestones during the contract term. Milestone payments are a form of variable consideration that 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.
For certain service or collaboration contracts that require us to transfer control of the service over time, we recognize revenue over time using an input measure based on costs incurred on the basis that this measure best reflects the pattern of transfer of control of the services to the customer. The measure of progress is developed using our best estimate of the performance period and the anticipated costs to be incurred to perform such services, including any subcontracted service costs.
Intangible Assets
Amortizable intangible assets include trade names and trademarks, developed technology and customer relationships acquired as part of business combinations. All intangible assets subject to amortization are reviewed for impairment in accordance with ASC 815-40-15-7D under360, Property, Plant and Equipment. The recoverability test is performed on a company-wide single asset group level.
Warrant Liabilities
Our warrant liabilities are recorded on the consolidated balance sheets at fair value on their respective issuance dates, with subsequent changes in respective fair values recognized on the consolidated statements of operations and comprehensive loss at each reporting date.
Our outstanding warrants include publicly-traded warrants (the “Public Warrants”) which were originally issued in the IPO, warrants sold in a private placement to CMLS Holdings LLC (the “Private Warrants”) and warrants issued to Perceptive Credit Holdings IV, LP in connection with the entry into the Perceptive Term Loan Facility (the “Perceptive Warrants”). The Public Warrants do not meetare traded in active markets and the criteria for equity treatmentfair value is determined on the basis of quoted market prices. Management has 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 estimated fair value of the Perceptive Warrants is determined based on a Modified Black-Scholes valuation model. The Black-Scholes option-pricing model requires the use of assumptions regarding a number of variables that are complex, subjective and must be recorded as liabilities. Accordingly, we classifygenerally require significant judgment to determine. Changes in the Warrants as liabilities at theirassumptions can materially affect the fair value and adjustultimately how much income or expense is recognized. Key assumptions include expected volatility, expected term, and risk-free interest rate. The expected volatility for us is based on the Warrantshistorical volatility of historical share prices of a peer group of public companies, our historical share prices, and the implied volatility of the call options. When selecting these comparable companies, we considered the enterprise value, risk profiles, position within the industry, and whether there was sufficient historical share price information to meet the expected exercise period of the Perceptive Warrants. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of re-measurement.
Stock-Based Compensation
Stock-based compensation for all employee and non-employee stock-based awards, including restricted stock units, is measured at fair value
at each reportingon the date of grant and recognized over the service period.
This liability is subject to re-measurement at each balance sheet date until exercised, and any change in fair value is recognized in our statement of operations. The fair value of
restricted stock units are calculated based on the
Warrants issued in the IPO has been estimated using a Monte Carlo simulation methodology asfair value of
our common stock on the date of
grant, while the
IPO and such Warrants’ quoted market price asfair value of
December 31, 2020. The Private Placement Warrants were valuedstock options are calculated using a
Modified Black Scholes Option Pricing Model.Class A Common Stock SubjectBlack-Scholes option-pricing model. The Black-Scholes option-pricing model requires the use of assumptions regarding a number of variables that are complex, subjective and generally require significant judgment to Possible Redemption
determine. Changes in the assumptions can materially affect the fair value and ultimately how much stock-based compensation expense is recognized. Key assumptions include expected volatility, expected term, risk-free interest rate and dividend yield. The volatility is estimated based on analysis of historical share prices of a peer group of public companies, the historical share prices of the Company, and the implied volatility of the Company’s call options. When selecting these comparable companies, we considered the enterprise value, risk profiles, position within the industry, and whether there was sufficient historical share price information to meet the expected life of the stock-based awards. The expected term of the Company’s options has been determined utilizing the “simplified” method as the awards granted are qualified as “plain-vanilla” options. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for bonds with maturities consistent with the expected holding periods corresponding with the expected term of the option. We estimate
zero dividend yield as we have not historically paid dividends on common stock and do not anticipate paying dividends in the foreseeable future.
Income Taxes
We account for our Class A common stock subject to possible redemptionincome taxes in accordance with ASC Topic 740, “Income Taxes,” under which deferred income taxes are provided for temporary differences between the guidancefinancial reporting and tax basis of our assets and liabilities. We reduce deferred tax assets, if necessary, by a valuation allowance if it is more likely than not that we will not realize some or all of our deferred tax assets. In making such a determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations.
We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by taxing authorities, based on the technical merits of the position.
Recent Accounting Pronouncements
Information on recent accounting pronouncements can be found in Note 2, “Summary of Significant Accounting Standards Codification (“ASC”) Topic 480 “Distinguishing Liabilities from Equity.Policies” Class A Common stock subject to mandatory redemption is classified as a liability instrument and is measured at fair value. Conditionally redeemable common stock (including common stock that features redemption rights that.
JOBS Act Accounting Election
We are
eitheran “emerging growth company” within the
controlmeaning of the
holder or subject to redemption upon the occurrence of uncertain events not solely within our control) is classified as temporary equity. At all other times, common stock is classified as stockholders’ equity. Our common stock features certain redemption rights that are considered to be outside of our control and subject to occurrence of uncertain future events. Accordingly, Class A common stock subject to possible redemption is presented as temporary equity, outside of the stockholders’ equity section of our balance sheet.Net Income (Loss) Per Common Share
We apply the two-class method in calculating earnings per share. Net income per common share, basic and diluted for Class A redeemable common stock is calculated by dividing the interest income earned on the Trust Account, net of applicable franchise and income taxes, by the weighted average number of Class A redeemable common stock outstanding for the period. Net loss per common share, basic and diluted for Class B non-redeemable common stock is calculated by dividing the net income, less income attributable to Class A redeemable common stock, by the weighted average number of Class B non-redeemable common stock outstanding for the period presented.
Recent Accounting Standards
Management does not believe that any recently issued, but not yet effective, accounting standards, if currently adopted, would have a material effect on our financial statements.
JOBS Act
The Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”) contains provisions that, among other things, relax certain reporting requirements for qualifying public companies. We will qualify as an “emerging growth company” and under the. The JOBS Act will be allowed to comply with new or revised accounting pronouncements based on the effective date for private (not publicly traded) companies. We are electingallows an emerging growth company to delay the adoption of new or revised accounting standards that have different effective dates for public and private companies until those standards apply to private companies. We have elected to use this extended transition period and, as a result, we may not comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. As a result, our financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates.
Additionally, we are in the process of evaluating the benefits of relying We also intend to rely on the other reduced reporting requirementsexemptions provided by the JOBS Act. Subject to certain conditions set forth in the JOBS Act, if, as an “emerging growth company,” we choose to rely on such exemptions we mayincluding not bebeing required to among other things, (i) provide an independent registered public accounting firm’scomply with the auditor attestation report on our systemrequirements of internal controls over financial reporting pursuant to Section 404, (ii) provide all404(b) of the compensation disclosure that maySarbanes-Oxley Act.
We will remain an emerging growth company until the earliest of (1) September 1, 2025, (2) the last day of the fiscal year in which we have total annual gross revenue of at least $1.235 billion, (3) the last day of the fiscal year in which we are deemed to be required of non-emerging growth public companiesa “large accelerated filer” as defined in Rule 12b-2 under the Dodd-Frank Wall Street Reform and Consumer ProtectionExchange Act, (iii) comply with any requirement that may be adoptedwhich would occur if the market value of our Class A common stock held by the PCAOB regarding mandatory audit firm rotation or a supplement to the independent registered public accounting firm’s report providing additional information about the audit and the financial statements (auditor discussion and analysis), and (iv) disclose certain executive compensation related items suchnon-affiliates exceeded $700.0 million as the correlation between executive compensation and performance and comparisons of the CEO’s compensation to median employee compensation. These exemptions will apply for a period of five years following the completionlast business day of the Initial Public Offeringsecond fiscal quarter of such year or until(4) the date on which we are no longer an “emerging growth company,” whichever earlier.have issued more than $1.0 billion in non-convertible debt securities during the prior three-year period.
Item 7A.
Quantitative and Qualitative DisclosureDisclosures About Market Risk.AsRisk
We are exposed to market risks in the ordinary course of December 31, 2020, we were not subjectour business. These risks primarily relate to any market or interest rate risk. The net proceeds received into the Trust Account, have been invested in U.S. government treasury bills, notes or bonds with a maturityrates. Our cash, cash equivalents, available-for-sale marketable securities and restricted cash consists of 185 days or less or in certainbank deposits and money market funds, that invest solelywhich totaled $131.1 million and $138.3 million at December 31, 2023 and 2022, respectively. Such interest-bearing instruments carry a degree of risk. However, because our investments are primarily high-quality credit instruments with short-term durations with high-quality institutions, we have not been exposed to, nor do we anticipate being exposed to, material risks due to changes in US treasuries. Due tointerest rates. A 100 basis point change in interest rates would not have a material effect on the short-term naturefair market value of these investments, we believe there will be no associated material exposure toour cash, cash equivalents and restricted cash.
Our Perceptive Term Loan Facility includes variable interest rate risk.terms for the outstanding principal amount of $50 million at October 27, 2023. Therefore, changes in interest rates can impact future interest payments we are obligated to pay.
See Note 9, “Long-Term Debt” to our consolidated financial statements for further information.
Item 8.
Financial Statements and Supplementary DataThis information appears following Item 15 of this Report and is included herein by reference.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
None.
Item 9A.Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Disclosure controls are procedures that are designed with the objective of ensuring that information required to be disclosed in our reports filed under the Exchange Act, is recorded, processed, summarized, and reported within the time period specified in the SEC’s rules and forms. Disclosure controls are also designed with the objective of ensuring that such information is accumulated and communicated to our management, including the chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure. In connection with this Amendment, our management re-evaluated, with the participation of our current chief executive officer and chief financial officer (our “Certifying Officers”), the effectiveness of our disclosure controls and procedures as of December 31, 2020, pursuant to Rule 13a-15(b) under the Exchange Act. Based upon that evaluation, our Certifying Officers concluded that, solely due to the Company’s restatement of its financial statements to reclassify the Company’s Public Warrants and Private Placement Warrants as described in the Explanatory Note to this Amendment, our disclosure controls and procedures were not effective as December 31, 2020.
We do not expect that our disclosure controls and procedures will prevent all errors and all instances of fraud. Disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Further, the design of disclosure controls and procedures must reflect the fact that there are resource constraints, and the benefits must be considered relative to their costs. Because of the inherent limitations in all disclosure controls and procedures, no evaluation of disclosure controls and procedures can provide absolute assurance that we have detected all our control deficiencies and instances of fraud, if any. The design of disclosure controls and procedures also is based partly on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
Restatement of Previously Issued Financial Statements
On May 3, 2021, we revised our prior position on accounting for warrants and concluded that our previously issued financial statements as of December 31, 2020 and for the period from July 10, 2020 (inception) through December 31, 2020; as of September 4, 2020; and as of and for the period ended September 30, 2020 should not be relied on because of a misapplication in the guidance on warrant accounting. However, the non-cash adjustments to the financial statements do not impact the amounts previously reported for our cash, cash and marketable securities held in the trust account, total assets, revenue ,or cash flows.
Management’s Report on Internal Controls Over Financial Reporting
This Annual Report on Form 10-K does not include a report of management’s assessment regarding internal control over financial reporting or an attestation report of our independent registered public accounting firm due to a transition period established by rules of the SEC for newly public companies.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.) In light of the restatement of our financial statements included in this Amendment, we plan to enhance our processes to identify and appropriately apply applicable accounting requirements to better evaluate and understand the nuances of the complex accounting standards that apply to our financial statements. Our plans at this time include providing enhanced access to accounting literature, research materials and documents and increased communication among our personnel and third-party professionals with whom we consult regarding complex accounting applications. The elements of our remediation plan can only be accomplished over time, and we can offer no assurance that these initiatives will ultimately have the intended effects.
Item 9B.Other Information.
None.
PART III.
Item 10. Directors, Executive Officer and Corporate Governance.
Our current directors and executive officer are as follows:
| Name | | Age | Title |
Eli D. Casdin | | 47 | | Chief Executive Officer and Director |
Keith A. Meister | | 47 | | Chairman |
Brian Emes | | 38 | | Chief Financial Officer and Secretary |
Shaun Rodriguez | | 43 | | Chief Strategy Officer |
Sean George | | 47 | | Director |
Munib Islam | | 47 | | Director |
Emily Leproust | | 48 | | Director |
Nat Turner | | 35 | | Director |
Eli Casdin has been our Chief Executive Officer since July 2020. He founded Casdin Capital, LLC, an investment firm focused on the life sciences and healthcare industry, in November 2011 and currently serves as its Chief Investment Officer. Since December 2020 and January 2021, Mr. Casdin has also served as Chief Executive Officer and a director of CM Life Sciences II Inc. (Nasdaq: CMII) and CM Life Sciences III Inc., respectively, both blank check companies. Mr. Casdin previously served on the board of directors of Exact Sciences Corp. (Nasdaq: EXAS). Mr. Casdin holds a B.S. degree from Columbia University School of General Studies and an MBA from Columbia Business School. His qualifications to serve on our board of directors include his extensive leadership experience as an executive officer of an investment firm, his extensive public and private company directorship experience in the life sciences and healthcare sectors, and his expertise in finance, capital markets, and the biotechnology industry.
Keith Meister has been Chairman of our board of directors since July 2020. He founded Corvex Management LP, a New York based investment manager, in December 2010 and since its inception has served as its Managing Partner and Chief Investment Officer. From 2003 to 2010, Mr. Meister served as Chief Executive Officer and then Principal Executive Officer and Vice Chairman of the Board of Icahn Enterprises L.P. (Nasdaq: IEP), the primary investment vehicle for Carl Icahn. Mr. Meister currently serves as Chairman of CM Life Sciences II Inc. (Nasdaq: CMII) and CM Life Sciences III Inc., since December 2020 and January 2021, respectively. Mr. Meister also serves on the Board of Directors of MGM Resorts International (NYSE: MGM), a global hospitality and entertainment company, and its affiliate Roar Digital. Mr. Meister has previously served on the Board of Directors of numerous other public companies in his career, including Yum! Brands Inc. (NYSE: YUM), The Williams Companies, Inc. (NYSE: WMB), ADT, Inc. (NYSE: ADT), Ralcorp Holdings, Inc. and Motorola, Inc. (now Motorola Solutions, Inc., NYSE: MSI/Motorola Mobility, Inc.). He is Chairman of the board of the Harlem Children’s Zone and also serves on the board of trustees of the American Museum of Natural History. Mr. Meister holds a B.A. degree in government from Harvard College where he graduated cum laude. His qualifications to serve on our board of directors include his extensive leadership experience as managing partner and executive officer of an investment firm and a diversified holding company, his extensive public company directorship experience in a variety of industries, and his expertise in finance, capital markets, strategic development, and risk management.
Brian Emes has been our Chief Financial Officer and Secretary since July 2020. Mr. Emes is also the Chief Financial Officer of Corvex Management LP, a New York based investment manager, which he joined in January 2013. Since December 2020 and January 2021, Mr. Emes has also served as Chief Financial Officer of CM Life Sciences II Inc. (Nasdaq: CMII) and CM Life Sciences III Inc., respectively. Mr. Emes holds a B.S. degree in finance and marketing from Elon University’s Martha & Spencer Love School of Business, and is a licensed certified public accountant.
Shaun Rodriguez has been our Chief Strategy Officer since July 2020. Mr. Rodriguez joined Casdin Capital, LLC, an investment firm focused on the life sciences and healthcare industry, in July 2015 as a Senior Research Analyst and currently serves as its Director of Life Science Research. His coverage universe at Casdin Capital, LLC focuses on life science tools, diagnostics, health technology and services, and industrial applications of biotechnology. Since December 2020 and January 2021, Mr. Rodriguez has also served as Chief Financial Officer of CM Life Sciences II Inc. (Nasdaq: CMII) and CM Life Sciences III Inc., respectively. From February 2011 to July 2015, Mr. Rodriguez served as Director and Senior Research Analyst in the healthcare equity research group of Cowen Inc. (Nasdaq: COWN), an investment bank and financial services company. Mr. Rodriguez holds a Ph.D. in biological sciences from Harvard University.
Sean George has served as a director since completion of the Initial Public Offering in September 2020. Dr. George has been Co-Founder, President and Chief Executive Officer of Invitae Corporation (NYSE: NVTA) since January 2017 and a director since 2010. He also served as Invitae’s President and Chief Operating Officer from August 2012 to January 2017 and as Chief Executive from January 2010 to August 2012. Prior to Invitae, he served as COO at Navigenics, Inc. an early pioneer in personalized genetics from 2007 to November 2009. Before joining Navigenics, Dr. George served in a variety of product, operating and commercial roles at Affymetrix, Inc., Invitrogen Corporation and Molecular Probes, Inc. Dr. George holds a B.S. in Molecular Genetics from UCLA, an M.S. in Molecular Biology from UC Santa Barbara, and a Ph.D. in Molecular Genetics from UC Santa Cruz. His qualifications to serve on our board of directors include his extensive experience in the life sciences sector and his leadership experience guiding an early stage company from startup to market leader.
Munib Islam has served as a director since completion of the Initial Public Offering in September 2020. Mr. Islam served as Co-Chief Investment Officer and a Partner at Third Point LLC, an investment management firm, from July 2019 through 2020. Prior to becoming co-Chief Investment Officer, he served as Head of Equities at Third Point from 2011 to July 2019, where he spearheaded research on Third Point’s strategic block investments globally. From 2008 to 2011, Mr. Islam worked at Highbridge Capital, an investment management firm, where he was a Managing Director and Portfolio Manager of Highbridge’s European Value Equities fund. Mr. Islam previously served on the Board and Executive Selection and Audit Committees of Baxter International, Inc. (NYSE: BAX) from 2015 to 2019, and he currently sits on the Boards of the Stanford Business School Trust and the Brearley School in New York City. Mr. Islam holds a B.A. in Economics from Dartmouth College, where he graduated magna cum laude, and an MBA from the Graduate School of Business at Stanford University. His qualifications to serve on our board of directors include his significant experience in governance, evaluation of investment opportunities, capital allocation, investment management and financial research.
Emily Leproust, has served as a director since completion of the Initial Public Offering in September 2020. Dr. Leproust has been President and Chief Executive Officer of Twist Bioscience Corp. (Nasdaq: TWST) since co-founding Twist in 2013. Since October 2018, she has also served as Chair of the board of directors for Twist. Prior to Twist, Dr. Leproust served in various positions at Agilent Technologies, Inc. (NYSE: A), most recently as its Director, Applications and Chemistry R&D from February 2009 to April 2013. Dr. Leproust holds a M.Sc. in Industrial Chemistry from the Lyon School of Industrial Chemistry and a Ph.D. in Organic Chemistry from the University of Houston. Her qualifications to serve on our board of directors include her extensive professional and educational experience in the life sciences industry.
Nat Turner has served as a director since completion of the Initial Public Offering in September 2020. Mr. Turner has been the Co-Founder and Chief Executive Officer of Flatiron Health, Inc., a healthcare technology company focusing on accelerating oncology research and improving patient care acquired by Roche Holding AG, since June 2012. Previously, Mr. Turner co-founded and served as Chief Executive Officer of Invite Media, Inc., an advertising technology company, from March 2007 until it was acquired by Google Inc. (Nasdaq: GOOGL) in June 2010, after which he remained at Google until June 2012. Mr. Turner received a B.S., cum laude, in Economics with concentrations in entrepreneurship and marketing from The Wharton School of the University of Pennsylvania. His qualifications to serve on our board of directors include his significant experience in the life sciences industry, both as an executive and as an angel investor.
Number, Terms of Office and Election of Officers and Director
Our board of directors consists of six members divided into three classes with only one class of directors being elected in each year, and with each class (except for those directors appointed prior to our first annual meeting of stockholders) serving a three-year term. In accordance with Nasdaq corporate governance requirements, we are not required to hold an annual meeting until one year after our first fiscal year end following our listing on Nasdaq. The term of office of the first class of directors, consisting of Dr. George and Dr. Leproust, will expire at our first annual meeting of stockholders. The term of office of the second class of directors, consisting of Mr. Islam and Mr. Turner, will expire at the second annual meeting of stockholders. The term of office of the third class of directors, consisting of Mr. Casdin and Mr. Meister, will expire at the third annual meeting of stockholders.
Our officers are appointed by the board of directors and serve at the discretion of the board of directors, rather than for specific terms of office. Our board of directors is authorized to appoint officers as it deems appropriate pursuant to our second amended and restated certificate of incorporation.
Committees of the Board of Directors
Our board of directors has three standing committees: an audit committee, a compensation committee and a nominating and corporate governance committee. Each of our audit committee, compensation committee and nominating and corporate governance committee are composed solely of independent directors. Each committee operates under a charter that was approved by our board of directors and has the composition and responsibilities described below. We have filed a copy of each committee charter as an exhibit to this Annual Report.
Audit Committee
The members of our audit committee are Dr. George, Mr. Islam and Dr. Leproust. Mr. Islam serves as chairman of the audit committee.
Each member of the audit committee is financially literate and our board of directors has determined that Mr. Islam qualifies as an “audit committee financial expert” as defined in applicable SEC rules and has accounting or related financial management expertise.
We have adopted an audit committee charter, which details the principal functions of the audit committee, including:
| ● | assisting board oversight of (1) the integrity of our financial statements, (2) our compliance with legal and regulatory requirements, (3) our independent registered public accounting firm’s qualifications and independence, and (4) the performance of our internal audit function and independent registered public accounting firm; the appointment, compensation, retention, replacement, and oversight of the work of the independent registered public accounting firm and any other independent registered public accounting firm engaged by us; |
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| ● | pre-approving all audit and non-audit services to be provided by the independent registered public accounting firm or any other registered public accounting firm engaged by us, and establishing pre-approval policies and procedures; reviewing and discussing with the independent registered public accounting firm all relationships the independent registered public accounting firm have with us in order to evaluate their continued independence; |
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| ● | setting clear policies for audit partner rotation in compliance with applicable laws and regulations; obtaining and reviewing a report, at least annually, from the independent registered public accounting firm describing (1) the independent registered public accounting firm’s internal quality-control procedures and (2) any material issues raised by the most recent internal quality-control review, or peer review, of the audit firm, or by any inquiry or investigation by governmental or professional authorities, within the preceding five years respecting one or more independent audits carried out by the firm and any steps taken to deal with such issues; |
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| ● | meeting to review and discuss our annual audited financial statements and quarterly financial statements with management and the independent registered public accounting firm, including reviewing our specific disclosures under “Management’s Discussion and Analysis of Financial Condition and Results of Operations”; reviewing and approving any related party transaction required to be disclosed pursuant to Item 404 of Regulation S-K promulgated by the SEC prior to us entering into such transaction; and |
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| ● | reviewing with management, the independent, and our legal advisors, as appropriate, any legal, regulatory or compliance matters, including any correspondence with regulators or government agencies and any employee complaints or published reports that raise material issues regarding our financial statements or accounting policies and any significant changes in accounting standards or rules promulgated by the Financial Accounting Standards Board, the SEC or other regulatory authorities. |
Compensation Committee
The members of our compensation committee are Mr. Islam, Dr. Leproust and Mr. Turner. Dr. Leproust serves as chair of the compensation committee.
We have adopted a compensation committee charter, which details the principal functions of the compensation committee, including:
| ● | reviewing and approving on an annual basis the corporate goals and objectives relevant to our Chief Executive Officer’s compensation (if any) evaluating our Chief Executive Officer’s performance in light of such goals and objectives and determining and approving the remuneration (if any) of our Chief Executive Officer based on such evaluation; |
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| ● | reviewing and making recommendations to our board of directors with respect to the compensation, and any incentive compensation and equity based plans that are subject to board approval of all of our other officers; |
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| ● | reviewing our executive compensation policies and plans; |
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| ● | implementing and administering our incentive compensation equity-based remuneration plans; |
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| ● | assisting management in complying with our proxy statement and annual report disclosure requirements; |
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| ● | approving all special perquisites, special cash payments and other special compensation and benefit arrangements for our officers and employees; |
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| ● | producing a report on executive compensation to be included in our annual proxy statement; and |
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| ● | reviewing, evaluating and recommending changes, if appropriate, to the remuneration for directors. |
Notwithstanding the foregoing, as indicated above, no compensation of any kind, including finders, consulting or other similar fees, will be paid to any of our existing stockholders, officers, directors or any of their respective affiliates, prior to, or for any services they render in order to effectuate the consummation of an initial Business Combination. Accordingly, it is likely that prior to the consummation of an initial Business Combination, the compensation committee will only be responsible for the review and recommendation of any compensation arrangements to be entered into in connection with such initial Business Combination.
The charter also provides that the compensation committee may, in its sole discretion, retain or obtain the advice of a compensation consultant, independent legal counsel or other adviser and will be directly responsible for the appointment, compensation and oversight of the work of any such adviser. However, before engaging or receiving advice from a compensation consultant, external legal counsel or any other adviser, the compensation committee will consider the independence of each such adviser, including the factors required by Nasdaq and the SEC.
Nominating and Corporate Governance Committee
The members of our nominating and corporate governance committee are Dr. George, Mr. Islam and Mr. Meister. Dr. George serves as chair of the nominating and corporate governance committee.
We have adopted a nominating and corporate governance committee charter, which details the principal functions of the nominating and corporate governance committee, including:
| ● | screening and reviewing individuals qualified to serve as directors, consistent with criteria approved by the board, and recommending to the board of directors candidates for nomination for election at the annual meeting of stockholders or to fill vacancies on the board of directors; |
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| ● | developing and recommending to the board of directors and overseeing implementation of our corporate governance guidelines; |
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| ● | coordinating and overseeing the annual self-evaluation of the board of directors, its committees, individual directors and management in the governance of the company; and |
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| ● | reviewing on a regular basis our overall corporate governance and recommending improvements as and when necessary. |
The charter also provides that the nominating and corporate governance committee may, in its sole discretion, retain or obtain the advice of, and terminate, any search firm to be used to identify director candidates, and is directly responsible for approving the search firm’s fees and other retention terms.
We have not formally established any specific, minimum qualifications that must be met or skills that are necessary for directors to possess. In general, in identifying and evaluating nominees for director, the board of directors considers educational background, diversity of professional experience, knowledge of our business, integrity, professional reputation, independence, wisdom, and the ability to represent the best interests of our stockholders. Prior to our initial Business Combination, holders of our Public Shares will not have the right to recommend director candidates for nomination to our board of directors.
Code of Ethics
We have adopted a code of ethics and business conduct (our “Code of Ethics”) applicable to our directors, officers and employees. We have filed a copy of our Code of Ethics as an exhibit to this Annual Report. You are able to review these documents by accessing our public filings at the SEC’s web site at www.sec.gov. In addition, a copy of the Code of Ethics will be provided without charge upon request from us. We intend to disclose any amendments to or waivers of certain provisions of our Code of Ethics in a Current Report on Form 8-K.
Conflicts of Interest
In general, officers and directors of a corporation incorporated under the laws of the State of Delaware are required to present business opportunities to a corporation if:
| ● | the corporation could financially undertake the opportunity; |
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| ● | the opportunity is within the corporation’s line of business; and |
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| ● | it would not be fair to our company and its stockholders for the opportunity not to be brought to the attention of the corporation. |
Each of our officers and directors presently has, and any of them in the future may have additional, fiduciary or contractual obligations to another entity pursuant to which such officer or director is or will be required to present a Business Combination opportunity to such entity. Accordingly, if any of our officers or directors becomes aware of a Business Combination opportunity which is suitable for an entity to which he or she has then-current fiduciary or contractual obligations, he or she will honor his or her fiduciary or contractual obligations to present such Business Combination opportunity to such entity. Our second amended and restated certificate of incorporation provides that we renounce our interest in any corporate opportunity offered to any director or officer unless such opportunity is expressly offered to such person solely in his or her capacity as a director or officer of the company and such opportunity is one we are legally and contractually permitted to undertake and would otherwise be reasonable for us to pursue, and to the extent the director or officer is permitted to refer that opportunity to us without violating another legal obligation. We do not believe, however, that the fiduciary duties or contractual obligations of our officers or directors will materially affect our ability to complete our initial Business Combination.
Below is a table summarizing the entities to which our executive officers and directors currently have fiduciary duties or contractual obligations to another entity (excluding non-profit and educational organizations with no connection to the life sciences sector):
Individual | | Entity | | Entity’s Business | | Affiliation |
Eli Casdin | | AbSci | | Biotechnology | | Director |
| | C2i Genomics | | Biotechnology | | Director |
| | Casdin Capital, LLC(1) | | Investment manager | | Chief Investment Officer |
| | Cedilla Therapeutics, Inc. | | Biotechnology | | Director |
| | CM Life Sciences II Inc. | | Blank check company | | Chief Executive Officer and Director |
| | CM Life Sciences III Inc. | | Blank check company | | Chief Executive Officer and Director |
| | DNA Script | | Biotechnology | | Director |
| | EQRx, Inc. | | Biotechnology | | Director |
| | GeneMatters, LLC | | Biotechnology | | Director |
| | Genomatica, Inc. | | Biotechnology | | Director |
| | New York Genome Center | | Biotechnology | | Director |
| | Prominex Inc. | | Biotechnology | | Director |
| | Sexton Biotechnologies | | Biotechnology | | Director |
| | Somalogic Inc | | Biotechnology | | Director |
| | Tenaya Therapeutics, Inc. | | Biotechnology | | Director |
| | Verana Health | | Biotechnology | | Director |
| | Vineti | | Biotechnology | | Director |
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Keith Meister | | Corvex Management LP(1) | | Investment manager | | Managing Partner and Chief Investment Officer |
| | CM Life Sciences II Inc. | | Blank check company | | Chairman |
| | CM Life Sciences III Inc. | | Blank check company | | Chairman |
| | MGM Resorts International | | Hospitality and entertainment | | Director |
| | Roar Digital, LLC | | Sports betting and online gaming | | Director |
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Brian Emes | | Corvex Management LP(1) | | Investment manager | | Chief Financial Officer |
| | CM Life Sciences II Inc. | | Blank check company | | Chief Financial Officer and Secretary |
| | CM Life Sciences III Inc. | | Blank check company | | Chief Financial Officer and Secretary |
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Shaun Rodriguez | | C2i Genomics | | Biotechnology | | Director |
| | Casdin Capital, LLC(1) | | Investment manager | | Director of Life Science Research |
| | CM Life Sciences II Inc. | | Blank check company | | Chief Strategy Officer |
| | CM Life Sciences III Inc. | | Blank check company | | Chief Strategy Officer |
| | GeneMatters, LLC | | Biotechnology | | Director |
| | Invetx | | Biotechnology | | Director |
| | Ivexsol | | Biotechnology | | Director |
| | Prominex Inc. | | Biotechnology | | Director |
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Sean George | | Invitae Corporation | | Biotechnology | | President, Chief Executive Officer and Director |
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Emily Leproust | | Twist Bioscience Corp. | | Biotechnology | | President, Chief Executive Officer and Chair of the Board |
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Nat Turner | | Flatiron Health, Inc. | | Biotechnology | | Chief Executive Officer and Director |
| | Clover Health, Inc. | | Biotechnology | | Director |
| | Zenreach, Inc. | | Biotechnology | | Director |
(1) | Including with respect to one or more investment funds, clients or accounts for which such entity acts as investment advisor. |
Potential investors should also be aware of the following other potential conflicts of interest:
| ● | Our executive officers and directors are not required to, and will not, commit their full time to our affairs, which may result in a conflict of interest in allocating their time between our operations and our search for a Business Combination and their other businesses. We do not intend to have any full-time employees prior to the completion of our initial Business Combination. Each of our executive officers is engaged in several other business endeavors for which he may be entitled to substantial compensation, and our executive officers are not obligated to contribute any specific number of hours per week to our affairs. |
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| ● | Our initial stockholders purchased Founder Shares prior to the Initial Public Offering and will purchase Private Placement Warrants in a transaction that will close simultaneously with the closing of the Initial Public Offering. Our initial stockholders have entered into agreements with us, pursuant to which they have agreed to waive their redemption rights with respect to their Founder Shares and any Public Shares they hold in connection with the completion of our initial Business Combination. The other members of our management team have entered into agreements similar to the one entered into by our initial stockholders with respect to any Public Shares acquired by them in or after the Initial Public Offering. Additionally, our initial stockholders have agreed to waive their rights to liquidating distributions from the Trust Account with respect to their Founder Shares if we fail to complete our initial Business Combination within the prescribed time frame or during any Extension Period. If we do not complete our initial Business Combination within the prescribed time frame, the Private Placement Warrants will expire worthless. Furthermore, our initial stockholders have agreed not to transfer, assign or sell any of their Founder Shares until the earlier to occur of: (i) one year after the completion of our initial Business Combination and (ii) the date following the completion of our initial Business Combination on which we complete a liquidation, merger, capital stock exchange or other similar transaction that results in all of our stockholders having the right to exchange their common stock for cash, securities or other property. Notwithstanding the foregoing, if the closing price of our Class A Common Stock equals or exceeds $12.00 per share (as adjusted for stock splits, stock capitalizations, reorganizations, recapitalizations and the like) for any 20 trading days within any 30-trading day period commencing at least 150 days after our initial Business Combination, the Founder Shares will be released from the lockup. Subject to certain limited exceptions, the Private Placement Warrants will not be transferable until 30 days following the completion of our initial Business Combination. Because each of our executive officers and director nominees will own common stock or warrants directly or indirectly, they may have a conflict of interest in determining whether a particular target business is an appropriate business with which to effectuate our initial Business Combination. |
| | |
| ● | Our officers and directors may have a conflict of interest with respect to evaluating a particular Business Combination if the retention or resignation of any such officers and directors was included by a target business as a condition to any agreement with respect to our initial Business Combination. |
We are not prohibited from pursuing an initial Business Combination with a Business Combination target that is affiliated with our Sponsor, officers or directors or completing the Business Combination through a joint venture or other form of shared ownership with our Sponsor, officers or directors. In the event we seek to complete our initial Business Combination with an Business Combination target that is affiliated with our Sponsor, executive officers or directors, we, or a committee of independent directors, would obtain an opinion from an independent investment banking which is a member of FINRA or a valuation or appraisal firm, that such initial Business Combination is fair to our company from a financial point of view. We are not required to obtain such an opinion in any other context. Furthermore, in no event will our Sponsor or any of our existing officers or directors, or any of their respective affiliates, be paid by the company any finder’s fee, consulting fee or other compensation prior to, or for any services they render in order to effectuate, the completion of our initial Business Combination.
We cannot assure you that any of the above mentioned conflicts will be resolved in our favor.
In the event that we submit our initial Business Combination to our Public Stockholders for a vote, our initial stockholders have agreed to vote their Founder Shares, and they and the other members of our management team have agreed to vote any Founder Shares they hold and any shares purchased during or after the offering in favor of our initial Business Combination.
Item 11. Executive Compensation.
In August 2020, our Sponsor transferred 25,000 Founder Shares to each of Mr. Islam, Dr. Leproust and Mr. Turner. None of our executive officers or directors have received any cash compensation for services rendered to us. Our Sponsor, executive officers and directors, or any of their respective affiliates will be reimbursed for any out-of-pocket expenses incurred in connection with activities on our behalf such as identifying potential target businesses and performing due diligence on suitable Business Combinations. Our audit committee will review on a quarterly basis all payments that were made to our Sponsor, executive officers or directors, or our or their affiliates. Any such payments prior to an initial Business Combination will be made from funds held outside the Trust Account. Other than quarterly audit committee review of such reimbursements, we do not expect to have any additional controls in place governing our reimbursement payments to our directors and executive officers for their out-of-pocket expenses incurred in connection with our activities on our behalf in connection with identifying and consummating an initial Business Combination. Other than these reimbursements, no compensation of any kind, including finder’s and consulting fees, will be paid by the company to our Sponsor, executive officers and directors, or any of their respective affiliates, prior to completion of our initial Business Combination.
After the completion of our initial Business Combination, directors or members of our management team who remain with us may be paid consulting or management fees from the combined company. All of these fees will be fully disclosed to stockholders, to the extent then known, in the proxy solicitation materials or tender offer materials furnished to our stockholders in connection with a proposed Business Combination. We have not established any limit on the amount of such fees that may be paid by the combined company to our directors or members of management. It is unlikely the amount of such compensation will be known at the time of the proposed Business Combination, because the directors of the post-combination business will be responsible for determining executive officer and director compensation. Any compensation to be paid to our executive officers will be determined, or recommended to the board of directors for determination, either by a compensation committee constituted solely by independent directors or by a majority of the independent directors on our board of directors.
We do not intend to take any action to ensure that members of our management team maintain their positions with us after the consummation of our initial Business Combination, although it is possible that some or all of our executive officers and directors may negotiate employment or consulting arrangements to remain with us after our initial Business Combination. The existence or terms of any such employment or consulting arrangements to retain their positions with us may influence our management’s motivation in identifying or selecting a target business but we do not believe that the ability of our management to remain with us after the consummation of our initial Business Combination will be a determining factor in our decision to proceed with any potential Business Combination. We are not party to any agreements with our executive officers and directors that provide for benefits upon termination of employment.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The following table sets forth information available to us at March 29, 2021 with respect to our common stock held by:
| ● | each person known by us to be the beneficial owner of more than 5% of our outstanding shares of common stock; |
| | |
| ● | each of our executive officers and directors; and |
| | |
| ● | all our executive officers and directors as a group. |
The following table is based on 44,275,000 shares of Class A Common Stock and 11,068,750 shares of Class B Common Stock outstanding as of March 29, 2021. Unless otherwise indicated, we believe that all persons named in the table have sole voting and investment power with respect to all shares of common stock beneficially owned by them. The following table does not reflect record or beneficial ownership of the Private Placement Warrants as these are not exercisable within 60 days of March 29, 2021.
| Name and Address of Beneficial Owner (1) | | Number of Shares Beneficially
Owned (2) | | | Percentage of Outstanding Common
Stock | |
| CMLS Holdings, LLC (our Sponsor) (3) | | | 10,993,750 | | | | 19.9 | % |
| Eli Casdin (3) | | | 10,993,750 | | | | 19.9 | % |
| Keith Meister (3) | | | 10,993,750 | | | | 19.9 | % |
| Brian Emes | | | — | | | | — | |
| Shaun Rodriguez | | | — | | | | — | |
| Sean George | | | — | | | | — | |
| Munib Islam | | | 25,000 | | | | * | |
| Emily Leproust | | | 25,000 | | | | * | |
| Nat Turner | | | 25,000 | | | | * | |
| Sachem Head Capital Management LP (4) | | | 3,465,000 | | | | 7.8 | % |
| Magnetar Financial LLC (5) | | | 2,898,231 | | | | 6.5 | % |
| BlueCrest Capital Management Limited (6) | | | 2,500,000 | | | | 5.6 | % |
| Millennium Management LLC (7) | | | 2,467,288 | | | | 5.6 | % |
| All directors, officers and director nominees as a group (8 individuals) | | | 11,068,750 | | | | 20.0 | % |
* | Less than one percent. |
| |
(1) | Unless otherwise noted, the business address of each of the following entities or individuals is c/o Corvex Management LP, 667 Madison Avenue, New York, New York 10065. |
(2) | Interests shown consist of shares of Class A Common Stock and shares of Class B Common Stock. The Class B Common Stock will automatically convert into Class A Common Stock concurrently with or immediately following the consummation of our initial Business Combination on a one-for-one basis, subject to adjustment, as described in the section entitled “Description of Securities” in our prospectus filed with the SEC pursuant to Rule 424(b)(4) (File No. 333-246251). Excludes Class A Common Stock issuable pursuant to the forward purchase agreements, as such shares will only be issued concurrently with the closing of our initial Business Combination. |
(3) | The Board of Managers of CMLS Holdings LLC is comprised of Mr. Casdin and Mr. Meister who share voting and investment discretion with respect to the common stock held of record by CMLS Holdings LLC. C-LSH LLC and M-LSH LLC are the members of CMLS Holdings LLC, and Mr. Casdin and Mr. Meister are the managing members of C-LSH LLC and M-LSH LLC, respectively. As such, each of the foregoing may be deemed to have or share beneficial ownership of the Class B Common Stock held directly by CMLS Holdings LLC. Each of C-LSH LLC, M-LSH LLC and Messrs. Casdin and Meister disclaims beneficial ownership of these shares except to the extent of its or his respective pecuniary interest therein. |
(4) | According to a Schedule 13G filed with the SEC on September 11, 2020, each of Sachem Head Capital Management LP, Uncas GP LLC, Sachem Head GP LLC and Scott D. Ferguson has shared voting and dispositive power with regard to 3,465,000 shares of Class A Common Stock of the Company. The business address for each is 250 West 55th Street, 34th Floor, New York, New York 10019. |
(5) | According to a Schedule 13G filed with the SEC on February 12, 2021, each of Magnetar Financial LLC, Magnetar Capital Partners LP, Supernova Management LLC and Alec N. Litowitz shares voting and dispositive power with regard to 2,898,231 shares of Class A Common Stock of the Company. The business address for each is 1603 Orrington Avenue, 13th Floor, Evanston, IL 60201. |
(6) | According to a Schedule 13G filed with the SEC on September 11, 2020, each of BlueCrest Management Limited and Michael Platt share voting and dispositive power with regard to 2,500,000 shares of Class A Common Stock of the Company. The business address for each is Ground Floor, Harbour Reach, La Rue de Carteret, St. Helier, Jersey, Channel Islands, JE2 4HR. |
(7) | According to Amendment No. 1 to Schedule 13G filed with the SEC on January 19, 2021, each of Millennium Management LLC, Millennium Group Management LLC and Israel A. Englander share voting and dispositive power with regard to 2,632,318 shares of Class A Common Stock of the Company. The business address for each is 666 Fifth Avenue, New York, New York 10103. |
Our initial stockholders beneficially own approximately 20% of the issued and outstanding common stock. Because of this ownership block, our initial stockholders may be able to effectively influence the outcome of all other matters requiring approval by our stockholders, including amendments to our second amended and restated certificate of incorporation and approval of significant corporate transactions including our initial Business Combination.
We have no compensation plans under which equity securities are authorized for issuance.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Founder Shares
On July 16, 2020, our Sponsor paid $25,000, or approximately $0.002 per share, to cover certain expenses on our behalf in consideration of 10,062,500 Founder Shares. In August 2020, our Sponsor transferred 25,000 Founder Shares to each of Mr. Islam, Dr. Leproust and Mr. Turner. On September 1, 2020, we effected a 1:1.1 stock split of our Class B Common Stock, resulting in our Sponsor holding an aggregate of 10,993,750 Founder Shares and there being an aggregate of 11,068,750 Founder Shares outstanding. The Sponsor agreed to forfeit up to an aggregate of 1,443,750 Founder Shares to the extent that the option to purchase additional units was not exercised in full by the underwriters, so that the Founder Shares would represent 20% of the Company’s issued and outstanding shares after the Initial Public Offering. The underwriters fully exercised their over-allotment option on September 2, 2020; thus, those Founder Shares were no longer subject to forfeiture.
Our initial stockholders have agreed not to transfer, assign or sell any of their Founder Shares until the earlier to occur of: (A) one year after the completion of our initial Business Combination and (B) subsequent to our initial Business Combination, (x) if the closing price of our Class A Common Stock equals or exceeds $12.00 per share (as adjusted for stock splits, stock capitalizations, reorganizations, recapitalizations and the like) for any 20 trading days within any 30-trading day period commencing at least 150 days after our initial Business Combination, or (y) the date on which we complete a liquidation, merger, capital stock exchange, or other similar transaction that results in all of our Public Stockholders having the right to exchange their common stock for cash, securities or other property (except to certain permitted transferees). Any permitted transferees will be subject to the same restrictions and other agreements of our Sponsor, directors and our management team with respect to any Founder Shares, Private Placement Warrants and shares of Class A Common Stock issued upon conversion or exercise thereof.
Private Placement Warrants
Substantially concurrently with the closing of the Initial Public Offering, the Company consummated the Private Placement of 7,236,667 Private Placement Warrants, at a price of $1.50 per Private Placement Warrant with the Sponsor, generating gross proceeds of $10,855,000. Our Sponsor purchased 6,903,335 Private Placement Warrants and each of Mr. Islam and Dr. Leproust purchased 166,666 Private Placement Warrants.
Each Private Placement Warrant is exercisable for one share of Class A Common Stock at a price of $11.50 per share. A portion of the proceeds from the sale of the Private Placement Warrants was added to the proceeds from the Initial Public Offering held in the Trust Account. If the Company does not complete a Business Combination within the Combination Period, the Private Placement Warrants will expire worthless. The Private Placement Warrants will be non-redeemable for cash and exercisable on a cashless basis, except under limited circumstances, so long as they are held by the Sponsor or its permitted transferees.
The Sponsor and the Company’s officers and directors agreed, subject to limited exceptions, not to transfer, assign or sell any of their Private Placement Warrants (including the Class A Common Stock issuance upon the exercise of the warrants) until 30 days after the completion of the initial Business Combination. The Private Placement Warrants will be non-redeemable (except as described in Exhibit 4.5 to this Annual Report under the heading “Redemption of warrants when the price per share of Class A Common Stock equals or exceeds $10.00”) and exercisable on a cashless basis so long as they are held by their initial purchasers or their permitted transferees. If the Private Placement Warrants are held by holders other than their initial purchasers or their permitted transferees, the Private Placement Warrants will be redeemable by us and exercisable by the holders on the same basis as the warrants included in the units being sold in the Initial Public Offering.
If we do not complete an Initial Business Combination within 24 months from the closing of the Initial Public Offering or during any Extension Period, the proceeds of the sale of the Private Placement Warrants will be used to fund the redemption of our Public Shares, subject to the requirements of applicable law, and the Private Placement Warrants will expire worthless.
Registration Rights
The holders of the Founder Shares, Private Placement Warrants, any warrants that may be issued upon conversion of Working Capital Loans (and any Class A Common Stock issuable upon the exercise of the Private Placement Warrants or warrants issued upon conversion of the Working Capital Loans and upon conversion of the Founder Shares) and any Forward Purchase Shares that may be issued in a private placement concurrently with the initial Business Combination are entitled to registration rights pursuant to a registration rights agreement. The holders of these securities are entitled to make up to three demands, excluding short form demands, that the Company registers such securities. In addition, the holders have certain “piggy-back” registration rights with respect to registration statements filed subsequent to the completion of the initial Business Combination. The Company will bear the expenses incurred in connection with the filing of any such registration statements.
Related Party Notes
On July 16, 2020, the Sponsor agreed to loan the Company up to $300,000 to be used for the payment of costs related to the Initial Public Offering pursuant to a promissory note (the “Pre-IPO Note”). The Pre-IPO Note was non-interest bearing, unsecured and due upon the closing of the Initial Public Offering. The Company borrowed approximately $165,081 under the Pre-IPO Note. The Company repaid the Note in full as of September 4, 2020.
In addition, in order to finance transaction costs in connection with an initial Business Combination, our Sponsor or an affiliate of our Sponsor or certain of our officers and directors may, but are not obligated to, loan us funds as may be required on a non-interest basis. If we complete an initial Business Combination, we would repay such loaned amounts. In the event that the initial Business Combination does not close, we may use a portion of the working capital held outside the Trust Account to repay such loaned amounts but no proceeds from our Trust Account would be used for such repayment. Up to $1,500,000 of such loans may be convertible into warrants of the post Business Combination entity at a price of $1.50 per warrant at the option of the lender. The warrants would be identical to the Private Placement Warrants. Except as set forth above, the terms of such loans, if any, have not been determined and no written agreements exist with respect to such loans. To date, the Company had no borrowings under the Working Capital Loans. Prior to the completion of our initial Business Combination, we do not expect to seek loans from parties other than our Sponsor or an affiliate of our Sponsor as we do not believe third parties will be willing to loan such funds and provide a waiver against any and all rights to seek access to funds in our Trust Account.
Forward Purchase Agreements
We have entered into separate forward purchase agreements with affiliates of our Sponsor, Casdin Capital and Corvex Management, in their capacities as investment advisors on behalf of their Clients, pursuant to which, subject to the conditions described below, they will cause certain Clients to purchase from us up to an aggregate amount of 15,000,000 Forward Purchase Shares, for $10.00 per Forward Purchase Share, or an aggregate amount of up to $150,000,000, in a private placement that will close concurrently with the closing of our initial Business Combination. The amount of Forward Purchase Shares sold pursuant to the forward purchase agreements will be determined in our discretion based on our need for additional capital to consummate the initial Business Combination. Under each forward purchase agreement, we are required to approach Casdin Capital and Corvex Management if we propose to raise additional capital by issuing any equity, or securities convertible into, exchangeable or exercisable for equity securities in connection with the initial Business Combination. The respective obligations of Casdin Capital and Corvex Management to cause Clients to purchase Forward Purchase Shares will, among other things, be conditioned on our completing an initial Business Combination with a company engaged in a business that is within the investment objectives of the Clients purchasing Forward Purchase Shares and on the Business Combination (including the target assets or business, and the terms of the Business Combination) being reasonably acceptable to such Clients as determined by Casdin Capital or Corvex Management, as relevant, as investment advisors on behalf of such Clients. In determining whether a target is reasonably acceptable to Clients, we expect that Casdin Capital or Corvex Management, as relevant, would consider many of the same criteria as we will consider, but will also consider whether the investment is an appropriate investment for such Clients, including whether the investment complies with any guidelines, restrictions or conflicts of interest provisions applicable to such Clients. Each of Casdin Capital and Corvex Management will have the right to transfer a portion of the purchase obligation under the forward purchase agreement to third parties, or upon mutual agreement, to each other, subject to compliance with applicable securities laws. To the extent that we obtain alternative financing to fund the initial Business Combination and the Clients participate in such financing, the aggregate commitment under the forward purchase agreement will be reduced by the amount of such alternative financing.
The Forward Purchase Shares will be identical to the shares of Class A Common Stock included in the units being sold in the Initial Public Offering, except that they will not be transferable, assignable or salable until 30 days after the completion of our initial Business Combination, except under limited circumstances to certain permitted transferees, and will be subject to registration rights.
Sponsor Support Agreement
On February 10, 2021, the Company entered into a Sponsor Support Agreement with the Sponsor and Sema4, whereby Sponsor has agreed to, among other things, (a) vote at any meeting of the stockholders of the Company all of their shares of capital stock of the Company held of record or thereafter acquired in favor of the Stockholder Approvals (as defined in the Merger Agreement), (b) be bound by certain other covenants and agreements related to the Business Combination and (c) be bound by certain transfer restrictions with respect to such securities, prior to the closing of the Business Combination, in each case, on the terms and subject to the conditions set forth in the Sponsor Support Agreement.
Forfeiture Agreement
On February 10, 2021, we entered into a Forfeiture Agreement with Sema4 and the Sponsor, whereby the Sponsor has agreed, subject to certain limitations and in accordance with the terms of the Forfeiture Agreement, to forfeit up to 33% of its (i) warrants for Class A Common Stock and (ii) shares of our Class B Common Stock, such actual amount tied to the actual exercise of redemption rights of our stockholders in connection with the Business Combination, as more fully described in the Forfeiture Agreement.
Director Independence
Nasdaq listing standards require that a majority of our board of directors be independent within one year of the Initial Public Offering. Our board of directors has determined that Dr. George, Mr. Islam, Dr. Leproust, and Mr. Turner are “independent directors” as defined in Nasdaq listing standards and applicable SEC rules and Mr. Meister is an “independent director” as defined in Nasdaq listing standards. Our independent directors will have regularly scheduled meetings at which only independent directors are present.
Item 14. Principal Accountant Fees and Services.
The firm of WithumSmith+Brown, PC, or Withum, acts as our independent registered public accounting firm. The following is a summary of fees paid to Withum for services rendered.
Audit Fees. For the period from July 10, 2020 (inception) through December 31, 2020, fees for our independent registered public accounting firm were $80,855 for the services Withum performed in connection with our Initial Public Offering, review of interim financial statements and the audit of our December 31, 2020 financial statements included in this Annual Report on Form 10-K.
Audit-Related Fees. For the period from July 10, 2020 (inception) through December 31, 2020, our independent registered public accounting firm did not render any audit related services.
Tax Fees. For the period from July 10, 2020 (inception) through December 31, 2020, our independent registered public accounting firm did not render services to us for tax compliance, tax advice and tax planning.
All Other Fees. For the period from July 10, 2020 (inception) through December 31, 2020, there were no fees billed for products and services provided by our independent registered public accounting firm other than those set forth above.
Pre-Approval Policy
Our audit committee was formed upon the consummation of our Initial Public Offering. As a result, the audit committee did not pre-approve all of the foregoing services, although any services rendered prior to the formation of our audit committee were approved by our board of directors. Since the formation of our audit committee, and on a going-forward basis, the audit committee has and will pre-approve all auditing services and permitted non-audit services to be performed for us by our auditors, including the fees and terms thereof (subject to the de minimis exceptions for non-audit services described in the Exchange Act which are approved by the audit committee prior to the completion of the audit).
PART IV.
Item 15. Exhibit and Financial Statement Schedules.
| (a) | The following documents are filed as part of this Annual Report on Form 10-K: |
| | |
| (2) | Financial Statement Schedules: |
None
The exhibits listed in the accompanying index to exhibits are filed or incorporated by reference as part of this Annual Report on Form 10-K.
70
Exhibit Index
No. | | Description of Exhibit |
2.1 | | Agreement and Plan of Merger, dated as of February 9, 2021, by and among, CM Life Sciences, Inc., S-IV Sub, Inc., and Mount Sinai Genomics, Inc. d/b/a Sema4 (incorporated by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on February 11, 2021). |
| |
3.1 | | Second Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on September 4, 2020). |
| |
3.2 | | Bylaws (incorporated by reference to Exhibit 3.3 to the Registrant’s Registration Statement on Form S-1 (File No. 333-246251) filed with the SEC on August 24, 2020). |
| |
4.1 | | Warrant Agreement, dated September 1, 2020, by and between the Company and Continental Stock Transfer & Trust Company, as warrant agent (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on September 4, 2020). |
| |
4.2 | | Specimen Unit Certificate (incorporated by reference to Exhibit 4.1 to the Registrant’s Registration Statement on Form S-1 (File No. 333-246251) filed with the SEC on August 24, 2020). |
| |
4.3 | | Specimen Class A Common Stock Certificate (incorporated by reference to Exhibit 4.2 to the Registrant’s Registration Statement on Form S-1 (File No. 333-246251) filed with the SEC on August 24, 2020). |
| |
4.4* | | Specimen Warrant Certificate (incorporated by reference to Exhibit 4.3 to the Registrant’s Registration Statement on Form S-1 (File No. 333-246251) filed with the SEC on August 24, 2020). |
| |
4.5* | | Description of the Company’s securities. |
| |
10.1 | | Promissory Note issued to CMLS Holdings LLC (incorporated by reference to Exhibit 10.6 to the Registrant’s Registration Statement on Form S-1 (File No. 333-246251) filed with the SEC on August 24, 2020). |
| |
10.2* | | Securities Subscription Agreement by and between the Registrant and CMLS Holdings LLC (incorporated by reference to Exhibit 10.7 to the Registrant’s Registration Statement on Form S-1 (File No. 333-246251) filed with the SEC on August 24, 2020). |
| |
10.3 | | Letter Agreement, dated September 1, 2020, by and among the Company, its officers and directors and CMLS Holdings, LLC (incorporated by reference to Exhibit 10.5 to the Registrant’s Current Report on Form 8-K filed with the SEC on September 4, 2020). |
| |
10.4 | | Investment Management Trust Agreement, dated September 1, 2020, by and between the Company and Continental Stock Transfer & Trust Company, as trustee (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed with the SEC on September 4, 2020). |
| |
10.5 | | Registration Rights Agreement, dated September 1, 2020, by and among the Company, CMLS Holdings, LLC and the other parties thereto (incorporated by reference to Exhibit 10.4 to the Registrant’s Current Report on Form 8-K filed with the SEC on September 4, 2020). |
| |
10.6 | | Forward Purchase Agreement, dated September 1, 2020, by and between the Company and Casdin Capital, LLC (incorporated by reference to Exhibit 10.6 to the Registrant’s Current Report on Form 8-K filed with the SEC on September 4, 2020). |
| |
10.7 | | Forward Purchase Agreement, dated September 1, 2020, by and between the Company and Corvex Management LP (incorporated by reference to Exhibit 10.6 to the Registrant’s Current Report on Form 8-K filed with the SEC on September 4, 2020). |
10.8* | | Indemnity Agreement, dated September 1, 2020, by and between the Company and Eli Casdin. |
| |
10.9* | | Indemnity Agreement, dated September 1, 2020, by and between the Company and Keith Meister. |
| |
10.10* | | Indemnity Agreement, dated September 1, 2020, by and between the Company and Brian Emes. |
| |
10.11* | | Indemnity Agreement, dated September 1, 2020, by and between the Company and Shaun Rodriguez. |
| |
10.12* | | Indemnity Agreement, dated September 1, 2020, by and between the Company and Sean George. |
| |
10.13* | | Indemnity Agreement, dated September 1, 2020, by and between the Company and Munib Islam. |
| |
10.14* | | Indemnity Agreement, dated September 1, 2020, by and between the Company and Emily Leproust. |
| |
10.15* | | Indemnity Agreement, dated September 1, 2020, by and between the Company and Nat Turner. |
| |
10.16 | | Form of Subscription Agreement (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on February 11, 2021). |
| |
10.17 | | Sponsor Support Agreement, dated as of February 9, 2021, by and between CMLS Holdings, LLC, and Mount Sinai Genomics, Inc. d/b/a Sema4 (incorporated by reference to Exhibit 10.4 to the Registrant’s Current Report on Form 8-K filed with the SEC on February 11, 2021). |
| |
10.18 | | Forfeiture Agreement, dated as of February 9, 2021, by and among, CM Life Sciences, Inc., CMLS Holdings, LLC, and Mount Sinai Genomics, Inc. d/b/a Sema4 (incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed with the SEC on February 11, 2021). |
| |
14 | | Code of Ethics (incorporated by reference to Exhibit 14 to the Registrant’s Registration Statement on Form S-1 (File No. 333-246251) filed with the SEC on August 24, 2020). |
| |
31.1** | | Certification of Principal Executive Officer Pursuant to Securities Exchange Act Rules 13a-14(a) and 15(d)-14(a), as adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| |
31.2** | | Certification of Principal Financial Officer Pursuant to Securities Exchange Act Rules 13a-14(a) and 15(d)-14(a), as adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| |
32.1+ | | Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| |
32.2+ | | Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
* | Previously filed. |
** | Filed herewith. |
+ | Furnished herewith. |
Item 16. Form 10-K Summary.
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| CM LIFE SCIENCES, INC. |
| |
Date: May 4, 2021 | /s/ Brian Emes |
| By: | Brian Emes |
| | Chief Financial Officer and Secretary |
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Annual Report on Form 10-K has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated.
Name | | Title | | Date |
| | | | |
* | | Chief Executive Officer and Director | | May 4, 2021 |
Eli Casdin | | (Principal Executive Officer) | | |
| | | | |
/s/ Brian Emes | | Chief Financial Officer and Secretary | | May 4, 2021 |
Brian Emes | | (Principal Financial and Accounting Officer) | | |
| | | | |
* | | Chairman of the Board | | May 4, 2021 |
Keith Meister | | | | |
| | | | |
* | | Director | | May 4, 2021 |
Sean George | | | | |
| | | | |
* | | Director | | May 4, 2021 |
Munib Islam | | | | |
| | | | |
* | | Director | | May 4, 2021 |
Emily Leproust | | | | |
| | | | |
* By: | /s/ Brian Emes | |
| Attorney-in-fact | |
CM LIFE SCIENCES, INC.
INDEX TO FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of
CM Life Sciences, Inc.
GeneDx Holdings Corp.
Opinion on the Financial Statements
We have audited the accompanying
consolidated balance
sheetsheets of
CM Life Sciences, Inc.GeneDx Holdings Corp. (the
“Company”),Company) as of December 31,
2020,2023 and 2022, the related
consolidated statements of operations
changes inand comprehensive loss, stockholders’ equity and cash flows for
each of the two years in the period
from July 10, 2020 (inception) throughended December 31,
2020,2023, and the related notes (collectively referred to as the
“financial“consolidated financial statements”). In our opinion, the
consolidated financial statements present fairly, in all material respects, the financial position of the Company
as ofat December 31,
2020,2023 and 2022, and the results of its operations and its cash flows for
each of the two years in the period
from July 10, 2020 (inception) throughended December 31,
2020,2023, in conformity with
accounting principlesU.S. generally accepted
in the United States of America.Restatement of Financial Statements
As discussed in Note 2 to the financial statements, the Securities and Exchange Commission issued a public statement entitled Staff Statement on Accounting and Reporting Considerations for Warrants Issued by Special Purpose Acquisition Companies (“SPACs”) (the “Public Statement”) on April 12, 2021, which discusses the accounting for certain warrants as liabilities. The Company previously accounted for its warrants as equity instruments. Management evaluated its warrants against the Public Statement, and determined that the warrants should be accounted for as liabilities. Accordingly, the 2020 financial statements have been restated to correct the accounting and related disclosure for the warrants.
principles.
These financial statements are the responsibility of the
Company’sCompany's management. Our responsibility is to express an opinion on the
Company'sCompany’s financial statements based on our
audit.audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States)
(“PCAOB”)(PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our
auditaudits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our
auditaudits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the
Company'sCompany’s internal control over financial reporting. Accordingly, we express no such opinion.
Our
auditaudits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our
auditaudits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our
audit providesaudits provide a reasonable basis for our opinion.
/s/
WithumSmith+Brown, PCERNST & YOUNG LLP
We have served as the
Company'sCompany’s auditor since
2020.2018.
New York, New York
May 4, 2021
CM LIFE SCIENCES, INC.
Table of ContentsBALANCE SHEET
DECEMBER 31, 2020 (As Restated)| ASSETS | | | |
| Current assets | | | |
| Cash | | $ | 1,094,681 | |
| Prepaid expenses | | | 277,031 | |
| Total Current Assets | | | 1,371,712 | |
| | | | | |
| Cash and marketable securities held in trust account | | | 442,763,951 | |
| Total Assets | | $ | 444,135,663 | |
| | | | | |
| LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | |
| Current liabilities | | | | |
| Accounts payable and accrued expenses | | $ | 97,120 | |
| Total Current Liabilities | | | 97,120 | |
| | | | | |
| Warrant liability | | | 70,322,418 | |
| Deferred underwriting fee payable | | | 15,496,250 | |
| Total Liabilities | | | 85,915,788 | |
| | | | | |
| Commitments and contingencies | | | | |
| | | | | |
| Class A common stock subject to possible redemption, 35,321,987 shares at $10.00 per share | | | 353,219,870 | |
| | | | | |
| Stockholders’ Equity | | | | |
| Preferred stock, $0.0001 par value; 1,000,000 shares authorized; none issued or outstanding | | | — | |
| Class A common stock, $0.0001 par value; 380,000,000 shares authorized; 8,953,013 shares issued and outstanding (excluding 35,321,987 shares subject to possible redemption) | | | 895 | |
| Class B common stock, $0.0001 par value; 20,000,000 shares authorized; 11,068,750 shares issued and outstanding | | | 1,107 | |
| Additional paid-in capital | | | 44,905,602 | |
| Accumulated deficit | | | (39,907,599 | ) |
| Total Stockholders’ Equity | | | 5,000,005 | |
| Total Liabilities and Stockholders’ Equity | | $ | 444,135,663 | |
GeneDx Holdings Corp.
Consolidated Balance Sheets
(in thousands, except share and per share amounts)
| | | | | | | | | | | |
| December 31, |
| 2023 | | 2022 |
| Assets | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 99,681 | | | $ | 123,933 | |
| Marketable securities | 30,467 | | | — | |
| Accounts receivable | 32,371 | | | 42,634 | |
| Due from related parties | 445 | | | 708 | |
| Inventory, net | 8,777 | | | 13,665 | |
| Prepaid expenses and other current assets | 10,598 | | | 31,682 | |
| Total current assets | 182,339 | | | 212,622 | |
| Operating lease right-of-use assets | 26,900 | | | 32,758 | |
| Property and equipment, net | 32,479 | | | 51,527 | |
| Intangible assets, net | 172,625 | | | 186,650 | |
| Other assets | 4,413 | | | 7,385 | |
| Total assets | $ | 418,756 | | | $ | 490,942 | |
| Liabilities and Stockholders’ Equity | | | |
| Current liabilities: | | | |
| Accounts payable and accrued expenses | $ | 37,456 | | | $ | 84,878 | |
| Due to related parties | 1,379 | | | 3,593 | |
| Short-term lease liabilities | 3,647 | | | 6,121 | |
| Other current liabilities | 16,336 | | | 49,705 | |
| Total current liabilities | 58,818 | | | 144,297 | |
| Long-term debt, net of current portion | 52,688 | | | 6,250 | |
| Long-term lease liabilities | 62,938 | | | 60,013 | |
| Other liabilities | 14,735 | | | 24,018 | |
| Deferred taxes | 1,560 | | | 2,659 | |
| Total liabilities | 190,739 | | | 237,237 | |
| | | |
| Commitments and contingencies (Note 11) | | | |
| | | |
| Stockholders’ Equity: | | | |
| Preferred Stock, $0.0001 par value: 1,000,000 shares authorized at December 31, 2023 and December 31, 2022; 0 shares issued and outstanding at December 31, 2023 and December 31, 2022, respectively | — | | | — | |
| Class A common stock, $0.0001 par value: 1,000,000,000 shares authorized, 25,978,863 shares issued and outstanding at December 31, 2023 and $0.0001 par value: 1,000,000,000 shares authorized, 11,773,065 shares issued and outstanding at December 31, 2022 | 2 | | | 1 | |
| Additional paid-in capital | 1,527,778 | | | 1,378,125 | |
| Accumulated deficit | (1,300,188) | | | (1,124,421) | |
| Accumulated other comprehensive income | 425 | | | — | |
| Total stockholders’ equity | 228,017 | | | 253,705 | |
| Total liabilities and stockholders’ equity | $ | 418,756 | | | $ | 490,942 | |
The accompanying notes are an integral part of
thethese consolidated financial
statements.
Table of ContentsSTATEMENT OF OPERATIONS
FOR THE PERIOD FROM JULY 10, 2020 (INCEPTION) THROUGH DECEMBER 31, 2020 (As Restated)| | | | | |
| General and administrative expenses | | $ | 206,195 | |
| Loss from operations | | | (206,195 | ) |
| | | | | |
| Other income (expense): | | | | |
| Interest earned on investments held in Trust Account | | | 13,951 | |
| Change in fair value of warrant liability | | | (38,510,584 | ) |
| Transaction Costs | | | (1,204,771 | ) |
| Loss before provision for income taxes | | | (39,907,599 | ) |
| Provision for income taxes | | | — | |
| Net loss | | $ | (39,907,599 | ) |
| | | | | |
| Weighted average shares outstanding of Class A redeemable common stock | | | 44,275,000 | |
| Basic and diluted income per share, Class A redeemable common stock | | $ | 0.00 | |
| | | | | |
| Weighted average shares outstanding of Class B non-redeemable common stock | | | 10,633,062 | |
| Basic and diluted net loss per share, Class B non-redeemable common stock | | $ | (3.75 | ) |
GeneDx Holdings Corp.
Consolidated Statements of Operations and Comprehensive Loss
(in thousands, except per share and share amounts)
| | | | | | | | | | | | | |
| Year Ended December 31, |
| 2023 | | 2022 | | |
| Revenue | | | | | |
| Diagnostic test revenue | $ | 195,654 | | | $ | 227,334 | | | |
| Other revenue | 6,912 | | | 7,360 | | | |
| Total revenue | 202,566 | | | 234,694 | | | |
| Cost of services | 112,560 | | | 261,444 | | | |
| Gross profit (loss) | 90,006 | | | (26,750) | | | |
| Research and development | 58,266 | | | 86,203 | | | |
| Selling and marketing | 60,956 | | | 122,075 | | | |
| General and administrative | 133,755 | | | 216,167 | | | |
| Impairment loss | 10,402 | | | 210,145 | | | |
| Other operating expenses, net | 7,223 | | | 6,312 | | | |
| Loss from operations | (180,596) | | | (667,652) | | | |
| | | | | |
| Non-operating income (expenses), net | | | | | |
| Change in fair market value of warrant and earn-out contingent liabilities | 1,170 | | | 70,229 | | | |
| Interest income (expense), net | 1,114 | | | (666) | | | |
| Other income, net | 1,619 | | | 57 | | | |
| Total non-operating income, net | 3,903 | | | 69,620 | | | |
| Loss before income taxes | (176,693) | | | (598,032) | | | |
| Income tax benefit | 926 | | | 49,052 | | | |
| Net loss | $ | (175,767) | | | $ | (548,980) | | | |
| | | | | |
| Other comprehensive income, net of tax | | | | | |
| Unrealized gain related to available for sale securities | 425 | | | — | | | |
| Comprehensive loss | $ | (175,342) | | | $ | (548,980) | | | |
| | | | | |
| Weighted average shares outstanding of Class A common stock | 24,311,989 | | | 10,236,960 | | | |
| Basic and diluted net loss per share, Class A common stock | $ | (7.23) | | | $ | (53.63) | | | |
The accompanying notes are an integral part of
thethese consolidated financial statements.
Table of ContentsSTATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE PERIOD FROM JULY 10, 2020 (INCEPTION) THROUGH DECEMBER 31, 2020 (As Restated)| | | Class A
Common Stock | | | Class B
Common Stock | | | Additional
Paid-in
Capital | | | Accumulated
Deficit | | | Total
Stockholders’
Equity | |
| | | Shares | | | Amount | | | Shares | | | Amount | | | | | | | |
| Balance – July 10, 2020 (Inception) | | | — | | | $ | — | | | | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Issuance of Class B common stock to initial stockholders | | | — | | | | — | | | | 11,068,750 | | | | 1,107 | | | | 23,893 | | | | — | | | | 25,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Sale of 44,275,000 Units, net of underwriting discounts | | | 44,275,000 | | | | 4,427 | | | | — | | | | — | | | | 398,098,047 | | | | — | | | | 398,102,474 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common stock subject to possible redemption | | | (35,321,987 | ) | | | (3,532 | ) | | | — | | | | — | | | | (353,216,338 | ) | | | — | | | | (353,219,870 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net loss | | | — | | | | — | | | | — | | | | — | | | | — | | | | (39,907,599 | ) | | | (39,907,599 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance – December 31, 2020 | | | 8,953,013 | | | $ | 895 | | | | 11,068,750 | | | $ | 1,107 | | | $ | 44,905,602 | | | $ | (39,907,599 | ) | | $ | 5,000,005 | |
GeneDx Holdings Corp.
Consolidated Statements of Stockholders’ Equity
(in thousands, except share amounts) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Class A Common Stock | | | | | | | | | | |
| | Shares | | Par Value | | | | | | Additional paid-in capital | | Accumulated deficit | | Accumulated other comprehensive income | | Total stockholders’ equity |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| Balance at December 31, 2021 | | 7,352,958 | | | $ | 1 | | | | | | | $ | 963,543 | | | $ | (575,441) | | | — | | | $ | 388,103 | |
| Net loss | | — | | | — | | | | | | | — | | | (548,980) | | | — | | | (548,980) | |
| Common stock issued pursuant to stock option exercises | | 333,988 | | | — | | | | | | | 2,948 | | | — | | | — | | | 2,948 | |
| Stock based compensation expense | | — | | | — | | | | | | | 41,975 | | | — | | | — | | | 41,975 | |
| Shares issued for PIPE, net of issuance costs | | 1,515,152 | | | — | | | | | | | 197,659 | | | — | | | — | | | 197,659 | |
Shares issued for acquisition (1) | | 2,424,243 | | | — | | | | | | | 172,000 | | | — | | | — | | | 172,000 | |
| Vested restricted stock units converted to common stock | | 146,724 | | | — | | | | | | | — | | | — | | | — | | | — | |
| Balance at December 31, 2022 | | 11,773,065 | | | $ | 1 | | | | | | | $ | 1,378,125 | | | $ | (1,124,421) | | | $ | — | | | $ | 253,705 | |
| Net loss | | | | — | | | | | | | — | | | (175,767) | | | — | | | (175,767) | |
| Common stock issued pursuant to stock option exercises | | 50,444 | | | — | | | | | | | 285 | | — | | | — | | | 285 | |
| Stock-based compensation expense | | — | | | — | | | | | | | (326) | | | — | | | — | | | (326) | |
| Other comprehensive income, net of tax | | — | | | — | | | | | | | — | | | — | | | 425 | | | 425 | |
| Vested restricted stock units converted to common stock | | 431,671 | | | — | | | | | | | — | | | — | | | — | | | — | |
| Issuance of Class A common shares in registered direct offering, net of issuance costs | | 676,868 | | | — | | | | | | | 7,564 | | | — | | | — | | | 7,564 | |
| Issuance of Class A common shares for the first Milestone Payment | | 701,460 | | | — | | | | | | | 6,692 | | | — | | | — | | | 6,692 | |
| Fractional shares adjustment | | 29,603 | | | — | | | | | | | — | | | — | | | — | | | — | |
| Issuance of Class A common shares in underwritten public offering, net of issuance costs | | 12,315,752 | | | 1 | | | | | | | 135,438 | | | — | | | — | | | 135,439 | |
| Balance at December 31, 2023 | | 25,978,863 | | | $ | 2 | | | | | | | $ | 1,527,778 | | | $ | (1,300,188) | | | $ | 425 | | | $ | 228,017 | |
(1) Of the 2.4 million shares issued for acquisition, 251,965 shares were held by an escrow agent for a one year escrow period. During this period, the seller retained all rights with respect to the escrow shares, including voting rights and rights to receive dividends and other distributions on such escrow shares.
The accompanying notes are an integral part of
thethese consolidated financial statements.
Table of ContentsSTATEMENT OF CASH FLOWS
FOR THE PERIOD JULY 10, 2020 (INCEPTION) THROUGH DECEMBER 31, 2020 (As Restated)| Cash Flows from Operating Activities: | | | |
| Net loss | | $ | (39,907,599 | ) |
| Adjustments to reconcile net loss to net cash used in operating activities: | | | | |
| Interest earned on investments held in Trust Account | | | (13,951 | ) |
| Change in fair value of warrant liability | | | 38,510,584 | |
| Transaction costs | | | 1,204,771 | |
| Changes in operating assets and liabilities: | | | | |
| Prepaid expenses | | | (277,031 | ) |
| Accrued expenses | | | 97,120 | |
| Net cash used in operating activities | | | (386,106 | ) |
| | | | | |
| Cash Flows from Investing Activities: | | | | |
| Investment of cash into Trust Account | | | (442,750,000 | ) |
| Net cash used in investing activities | | | (442,750,000 | ) |
| | | | | |
| Cash Flows from Financing Activities: | | | | |
| Proceeds from sale of Units, net of underwriting discounts paid | | | 433,895,000 | |
| Proceeds from sale of Private Placement Warrants | | | 10,855,000 | |
| Proceeds from promissory note – related party | | | 112,837 | |
| Repayment of promissory note – related party | | | (165,081 | ) |
| Payment of offering costs | | | (466,969 | ) |
| Net cash provided by financing activities | | | 444,230,787 | |
| | | | | |
| Net Change in Cash | | | 1,094,681 | |
| Cash – Beginning of period | | | — | |
| Cash – End of period | | $ | 1,094,681 | |
| | | | | |
| Non-Cash financing activities: | | | | |
| Initial classification of common stock subject to possible redemption | | $ | 380,268,982 | |
| Change in value of common stock subject to possible redemption | | $ | (27,049,112 | ) |
| Initial classification of warrant liabilities | | $ | 31,811,834 | |
| Deferred underwriting fee payable | | $ | 15,496,250 | |
| Offering costs paid directly by Sponsor in consideration for the issuance of Class B common stock | | $ | 25,000 | |
| Payment of offering costs through promissory note — related party | | $ | 52,244 | |
GeneDx Holdings Corp.
Consolidated Statements of Cash Flows
(in thousands) | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2023 | | 2022 | | |
| Operating activities | | | | | |
| Net loss | $ | (175,767) | | | $ | (548,980) | | | |
| Adjustments to reconcile net loss to net cash used in operating activities: | | | | | |
| Depreciation and amortization expense | 33,734 | | | 59,309 | | | |
| Stock-based compensation expense | (326) | | | 41,975 | | | |
| Change in fair value of warrants and contingent liabilities | (1,170) | | | (70,229) | | | |
| Deferred tax benefit | (926) | | | (49,124) | | | |
| Provision for excess and obsolete inventory | 3,913 | | | 1,125 | | | |
| Third-party payor reserve release | (9,745) | | | — | | | |
| | | | | |
| Gain on sale of assets | (1,677) | | | — | | | |
| Gain on debt forgiveness | (2,750) | | | — | | | |
| Impairment loss | 10,402 | | | 210,145 | | | |
| Other | 2,406 | | | 2,743 | | | |
| Change in operating assets and liabilities, net of effects from purchase of business: | | | | | |
| Accounts receivable | 10,263 | | | 5,527 | | | |
| Inventory | 975 | | | 2,350 | | | |
| Accounts payable and accrued expenses | (46,953) | | | 34,459 | | | |
| Other assets and liabilities | (2,526) | | | (8,455) | | | |
| Net cash used in operating activities | (180,147) | | | (319,155) | | | |
| Investing activities | | | | | |
| Consideration on escrow paid for GeneDx acquisition | (12,144) | | | (127,004) | | | |
| Purchases of property and equipment | (5,250) | | | (7,156) | | | |
| Proceeds from sale of assets | 4,034 | | | — | | | |
| Purchases of marketable securities | (47,670) | | | — | | | |
| Proceeds from maturities of marketable securities | 17,765 | | | — | | | |
| Development of internal-use software assets | (461) | | | (7,166) | | | |
| Net cash used in investing activities | (43,726) | | | (141,326) | | | |
| Financing activities | | | | | |
| | | | | |
| Proceeds from PIPE issuance, net of issuance costs | — | | | 197,659 | | | |
| Proceeds from offerings, net of issuance costs | 143,002 | | | — | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Proceeds from long-term debt, net of issuance costs | 48,549 | | | — | | | |
| Exercise of stock options | 285 | | | 2,948 | | | |
| | | | | |
| Long-term debt principal payments | (2,000) | | | — | | | |
| Finance lease payoff and principal payments | (3,598) | | | (3,292) | | | |
| Net cash provided by financing activities | 186,238 | | | 197,315 | | | |
| Net decrease in cash, cash equivalents and restricted cash | (37,635) | | | (263,166) | | | |
| Cash, cash equivalents and restricted cash, at beginning of year | 138,303 | | | 401,469 | | | |
| Cash, cash equivalents and restricted cash, at end of year | $ | 100,668 | | | $ | 138,303 | | | |
| | | | | |
| Supplemental disclosures of cash flow information | | | | | |
| Cash paid for interest | $ | 3,041 | | | $ | 1,932 | | | |
| Cash paid for taxes | $ | 1,465 | | | $ | 1,241 | | | |
| Lease liability from obtaining right-of-use asset | $ | 637 | | | $ | — | | | |
| Stock consideration paid for first Milestone Payment | $ | 6,692 | | | $ | — | | | |
| Stock consideration paid for purchase of business | $ | — | | | $ | 172,000 | | | |
| Purchases of property and equipment in accounts payable and accrued expenses | $ | 134 | | | $ | — | | | |
| Software development costs in accounts payable and accrued expenses | $ | — | | | $ | 461 | | | |
The accompanying notes are an integral part of
thethese consolidated financial statements.
GeneDx Holdings Corp.
Notes to Consolidated Financial Statements
1. Organization and Description of Business
GeneDx Holdings Corp., through its subsidiaries GeneDx, LLC and Sema4 OpCo, Inc., provides genomics-related diagnostic and information services and pursues genomics medical research. GeneDx utilizes an integrated portfolio of laboratory processes, software tools and informatics capabilities to process DNA-containing samples, analyzes information about patient-specific genetic variation and generates test reports for clinicians and their patients. GeneDx provides a variety of genetic diagnostic tests, screening solutions, and information with a focus on pediatrics, rare diseases for children and adults, and hereditary cancer screening. GeneDx Holdings’ operating subsidiaries primarily serve healthcare professionals who work with their patients and bills third-party payors across the United States.
On January 9, 2023, Sema4 Holdings Corp. changed its name to GeneDx Holdings Corp. The Company’s Class A common stock and public warrants are listed on the Nasdaq under the symbols “WGS” and “WGSWW,” respectively.
On January 31,
2020NOTE 1. DESCRIPTION OF ORGANIZATION AND BUSINESS OPERATIONS
2023, the Company raised approximately $150.0 million in gross proceeds and announced the closing of an underwritten public offering of 9,962,316 shares of our Class A common stock and a concurrent registered direct offering of 2,353,436 shares of our Class A common stock. The net offering proceeds received after deducting underwriters' discounts and commissions payable by the Company were approximately $135.4 million. On April 17, 2023, following the Company’s receipt of stockholder approval for the issuance, the Company issued the remaining 676,868 shares of the Company’s Class A common stock to Corvex Select Equity Master Fund LP, Corvex Master Fund LP and Corvex Dynamic Equity Select Master Fund LP in its previously announced registered direct offering for gross proceeds of approximately $7.6 million.
Unless otherwise stated herein or unless the context otherwise requires, references in these notes to:
•“GeneDx Holdings” refer to GeneDx Holdings Corp., a Delaware corporation (f/k/a Sema4 Holdings Corp. (“Sema4 Holdings”));
•“Legacy GeneDx” refer to GeneDx, LLC, a Delaware limited liability company (formerly, GeneDx, Inc., a New Jersey corporation), which we acquired on April 29, 2022 (the “Acquisition”);
•“Legacy Sema4” refer to Mount Sinai Genomics, Inc. d/b/a as Sema4, a Delaware corporation, which consummated the business combination with CM Life Sciences, Inc. (the “Company”(“CMLS”) was incorporated in Delaware on July 10, 2020. The Company was formed for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination with one or more businesses22, 2021 (the “Business Combination”). The Company is not limited; and
•“we,” “us” and “our,” the “Company” and “GeneDx” refer, as the context requires, to:
◦Legacy Sema4 prior to a particular industry or sector for purposes of consummating a Business Combination. The Company is an early stage and emerging growth company and, as such, the Company is subject to all of the risks associated with early stage and emerging growth companies.As of December 31, 2020, the Company had not commenced any operations. All activity for the period from July 10, 2020 (inception) through December 31, 2020 relates to the Company’s formation, the initial public offering (“Initial Public Offering”), which is described below, and, subsequent to the Initial Public Offering, identifying a target company for a Business Combination. The Company will not generate any operating revenues until after the completion of its initial Business Combination, at the earliest. The Company will generate non-operating income in the form of interest income from the proceeds derived from the Initial Public Offering.
The registration statement for the Company’s Initial Public Offering was declared effective on September 1, 2020. On September 4, 2020 the Company consummated the Initial Public Offering of 44,275,000 units (the “Units” and, with respect to the Class A common stock included in the Units sold, the “Public Shares”), which includes the full exercise by the underwriter of its over-allotment option in the amount of 5,775,000 Units, at $10.00 per Unit, generating gross proceeds of $442,750,000 which is described in Note 4.
Simultaneously with the closing of the Initial Public Offering, the Company consummated the sale of 7,236,667 warrants (the “Private Placement Warrants”) at a price of $1.50 per Private Placement Warrant in a private placement to CMLS Holdings LLC (the “Sponsor”) and certain of the Company’s independent directors, generating gross proceeds of $10,855,000, which is described in Note 5.
Transaction costs charged to equity amounted to $24,895,463, consisting of $8,855,000 in cash underwriting fees, $15,496,250 of deferred underwriting fees and $544,213 of other offering costs. Of the total transaction costs of the Initial Public Offering, $1,204,771 is included in transactions costs in the statement of operations and $23,690,693 is included in shareholders’ equity. In addition, as of December 31, 2020, cash of $1,094,681 was held outside of the Trust Account (as defined below) and is available for the payment of offering costs and for working capital purposes.
Following the closing of the Initial Public Offering on September 4, 2020, an amount of $442,750,000 ($10.00 per Unit) from the net proceeds of the sale of the Units in the Initial Public Offering and the sale of the Private Placement Warrants was placed in a trust account (the “Trust Account”) located in the United States and will be invested only in U.S. government securities, within the meaning set forth in Section 2(a)(16) of the Investment Company Act of 1940, as amended (the “Investment Company Act”), with a maturity of 185 days or less or in any open-ended investment company that holds itself out as a money market fund selected by the Company meeting certain conditions of Rule 2a-7 of the Investment Company Act, as determined by the Company, until the earlier of: (i) the completion of a Business Combination, and (ii)GeneDx Holdings and its consolidated subsidiaries following the distributionconsummation of the funds held in the Trust Account, as described below.
The Company’s management has broad discretion with respectBusiness Combination; and
◦Legacy GeneDx prior to the specific applicationAcquisition, and GeneDx Holdings and its consolidated subsidiaries following the consummation of the net proceedsAcquisition.
•“Company,” or “GeneDx” refer to (i) Legacy Sema4 prior to the consummation of the Initial Public OfferingBusiness Combination; and (ii) GeneDx Holdings and its subsidiaries following the saleconsummation of Private Placement Warrants, although substantially all of the net proceeds are intended to be applied generally toward consummating a Business Combination. There is no assurance that the Company will be able to complete a Business Combination successfully. The Company must complete one or more initial Business Combinations with one or more operating businesses or assets with a fair market value equal to at least 80% of the net assets held in the Trust Account (excluding the deferred underwriting commissions and taxes payable on the interest earned on the Trust Account). The Company will only complete a Business Combination if the post-transaction company owns or acquires 50% or more of the outstanding voting securities of the target or otherwise acquires a controlling interest in the target business sufficient for it not to be required to register as an investment company under the Investment Company Act.CM LIFE SCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2020
The Company will provide the holders of the outstanding Public Shares (the “Public Stockholders”) with the opportunity to redeem all or a portion of their Public Shares upon the completion of a Business Combination either (i) in connection with a stockholder meeting called to approve the Business Combination or (ii) by means of a tender offer. The decision as to whether(including, following the Company will seek stockholder approval of a Business Combination or conduct a tender offer will be made by the Company. The Public Stockholders will be entitled to redeem their Public Shares for a pro rata portionconsummation of the amount then in the Trust Account (initially $10.00 per Public Share, plus any pro rata interest then in the Trust Account, netAcquisition, Legacy GeneDx).
2. Summary of
taxes payable). There will be no redemption rights upon the completion of a Business Combination with respect to the Company’s warrants.The Company will only proceed with a Business Combination if the Company has net tangible assets of at least $5,000,001 following any related redemptions and, if the Company seeks stockholder approval, a majority of the shares voted are voted in favor of the Business Combination. If a stockholder vote is not required by applicable law or stock exchange listing requirements and the Company does not decide to hold a stockholder vote for business or other reasons, the Company will, pursuant to its Second Amended and Restated Certificate of Incorporation (the “Certificate of Incorporation”), conduct the redemptions pursuant to the tender offer rules of the U.S. Securities and Exchange Commission (“SEC”) and file tender offer documents with the SEC prior to completing a Business Combination. If, however, stockholder approval of the transaction is required by applicable law or stock exchange listing requirements, or the Company decides to obtain stockholder approval for business or other reasons, the Company will offer to redeem shares in conjunction with a proxy solicitation pursuant to the proxy rules and not pursuant to the tender offer rules. If the Company seeks stockholder approval in connection with a Business Combination, the Company’s Sponsor and any other holders of the Company’s common stock prior to the Initial Public Offering (the “initial stockholders”) have agreed to vote their Founder Shares (as defined in Note 6) and any Public Shares purchased during or after the Initial Public Offering in favor of approving a Business Combination. Additionally, each Public Stockholder may elect to redeem their Public Shares without voting, and if they do vote, irrespective of whether they vote for or against the proposed transaction.
Notwithstanding the foregoing, if the Company seeks stockholder approval of a Business Combination and it does not conduct redemptions pursuant to the tender offer rules, the Certificate of Incorporation provides that a Public Stockholder, together with any affiliate of such stockholder or any other person with whom such stockholder is acting in concert or as a “group” (as defined under Section 13 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), will be restricted from redeeming its shares with respect to more than an aggregate of 20% of the Public Shares, without the prior consent of the Company.
The Sponsor has agreed (a) to waive its redemption rights with respect to the Founder Shares and Public Shares held by it in connection with the completion of a Business Combination and (b) not to propose an amendment to the Certificate of Incorporation (i) to modify the substance or timing of the Company’s obligation to redeem 100% of its Public Shares if the Company does not complete a Business Combination within the Combination Period (as defined below) or (ii) with respect to any other material provision relating to stockholders’ rights or pre-business combination activity, unless the Company provides the Public Stockholders with the opportunity to redeem their Public Shares in conjunction with any such amendment.
If the Company has not completed a Business Combination by September 4, 2022 (the “Combination Period”), the Company will (i) cease all operations except for the purpose of winding up, (ii) as promptly as reasonably possible but not more than ten business days thereafter, redeem the Public Shares, at a per-share price, payable in cash, equal to the aggregate amount then on deposit in the Trust Account, including interest earned on the funds held in the Trust Account and not previously released to pay taxes (less up to $100,000 of interest to pay dissolution expenses), divided by the number of then outstanding Public Shares, which redemption will completely extinguish Public Stockholders’ rights as stockholders (including the right to receive further liquidating distributions, if any), and (iii) as promptly as reasonably possible following such redemption, subject to the approval of the Company’s remaining stockholders and the Company’s board of directors, dissolve and liquidate, subject in each case to the Company’s obligations under Delaware law to provide for claims of creditors and the requirements of other applicable law. There will be no redemption rights or liquidating distributions with respect to the Company’s warrants, which will expire worthless if the Company fails to complete a Business Combination within the Combination Period.
Significant Accounting Policies CM LIFE SCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2020
The Sponsor has agreed to waive its liquidation rights with respect to the Founder Shares if the Company fails to complete a Business Combination within the Combination Period. However, if the Sponsor acquires Public Shares in or after the Initial Public Offering, such Public Shares will be entitled to liquidating distributions from the Trust Account if the Company fails to complete a Business Combination within the Combination Period. The underwriter has agreed to waive its rights to its deferred underwriting commission (see Note 7) held in the Trust Account in the event the Company does not complete a Business Combination within the Combination Period and, in such event, such amounts will be included with the other funds held in the Trust Account that will be available to fund the redemption of the Public Shares. In the event of such distribution, it is possible that the per share value of the assets remaining available for distribution will be less than the Initial Public Offering price per Unit ($10.00).
In order to protect the amounts held in the Trust Account, the Sponsor has agreed to be liable to the Company if and to the extent any claims by a third party for services rendered or products sold to the Company, or a prospective target business with which the Company has discussed entering into a transaction agreement, reduce the amount of funds in the Trust Account to below the lesser of (i) $10.00 per Public Share and (ii) the actual amount per Public Share held in the Trust Account as of the date of the liquidation of the Trust Account, if less than $10.00 per public Share due to reductions in the value of the trust assets, less taxes payable, provided that such liability will not apply to any claims by a third party or prospective target business who executed a waiver of any and all rights to monies held in the Trust Account nor will it apply to any claims under the Company’s indemnity of the underwriter of the Initial Public Offering against certain liabilities, including liabilities under the Securities Act of 1933, as amended (the “Securities Act”). Moreover, in the event that an executed waiver is deemed to be unenforceable against a third party, the Sponsor will not be responsible to the extent of any liability for such third-party claims. The Company will seek to reduce the possibility that the Sponsor will have to indemnify the Trust Account due to claims of creditors by endeavoring to have all vendors, service providers (except for the Company’s independent registered public accounting firm), prospective target businesses and other entities with which the Company does business, execute agreements with the Company waiving any right, title, interest or claim of any kind in or to monies held in the Trust Account.
NOTE 2. RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS
The Company previously accounted for its outstanding Public Warrants (as defined in Note 4) and Private Placement Warrants issued in connection with its Initial Public Offering as components of equity instead of as derivative liabilities. The warrant agreement governing the warrants includes a provision that provides for potential changes to the settlement amounts dependent upon the characteristics of the holder of the warrant. In addition, the warrant agreement includes a provision that in the event of a tender or exchange offer made to and accepted by holders of more than 50% of the outstanding shares of a single class of common shares, all holders of the warrants would be entitled to receive cash for their warrants (the “tender offer provision”).
In connection with the audit of the Company’s financial statements for the period ended December 31, 2020, the Company’s management further evaluated the warrants under Accounting Standards Codification (“ASC”) Subtopic 815-40, Contracts in Entity’s Own Equity. ASC Section 815-40-15 addresses equity versus liability treatment and classification of equity-linked financial instruments, including warrants, and states that a warrant may be classified as a component of equity only if, among other things, the warrant is indexed to the issuer’s common stock. Under ASC Section 815-40-15, a warrant is not indexed to the issuer’s common stock if the terms of the warrant require an adjustment to the exercise price upon a specified event and that event is not an input to the fair value of the warrant. Based on management’s evaluation, the Company’s audit committee, in consultation with management and after discussion with the Company’s independent registered public accounting firm, concluded that the Company’s Private Placement Warrants are not indexed to the Company’s common shares in the manner contemplated by ASC Section 815-40-15 because the holder of the instrument is not an input into the pricing of a fixed-for-fixed option on equity shares. In addition, based on management’s evaluation, the Company’s audit committee, in consultation with management and after discussion with the Company’s independent registered public accounting firm, concluded the tender offer provision included in the warrant agreement fails the “classified in shareholders’ equity” criteria as contemplated by ASC Section 815-40-25.
As a result of the above, the Company should have classified the warrants as derivative liabilities in its previously issued financial statements. Under this accounting treatment, the Company is required to measure the fair value of the warrants at the end of each reporting period and recognize changes in the fair value from the prior period in the Company’s operating results for the current period. In addition, at the IPO, the Company re-allocated a portion of the IPO transaction costs related to the warrant liabilities, which resulted in additional operating costs that were expensed through the statement of operations.
CM LIFE SCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2020
The Company’s accounting for the warrants as components of equity instead of as derivative liabilities did not have any effect on the Company’s previously reported operating expenses, cash flows or cash.
| | | As | | | | | | | |
| | | Previously | | | | | | As | |
| | | Reported | | | Adjustments | | | Restated | |
| | | | | | | | | | |
| Balance sheet as of September 4, 2020 (audited) | | | | | | | | | |
| Warrant Liabilities | | $ | — | | | $ | 43,462,868 | | | $ | 43,462,868 | |
| Class A Common Stock Subject to Possible Redemption | | | 423,731,850 | | | | (43,462,868 | ) | | | 380,268,982 | |
| Class A Common Stock | | | 190 | | | | 434 | | | | 624 | |
| Additional Paid-in Capital | | | 5,001,390 | | | | 12,855,371 | | | | 17,856,761 | |
| Accumulated Deficit | | | (2,681 | ) | | | (12,855,805 | ) | | | (12,858,486 | ) |
| Total Stockholders’ Equity | | | 5,000,006 | | | | — | | | | 5,000,006 | |
| | | | | | | | | | | | | |
| Balance sheet as of September 30, 2020 (unaudited) | | | | | | | | | | | | |
| Warrant Liabilities | | $ | — | | | $ | 48,148,484 | | | $ | 48,148.484 | |
| Class A Common Stock Subject to Possible Redemption | | | 423,677,610 | | | | (48,148,484 | ) | | | 375,529,126 | |
| Class A Common Stock | | | 191 | | | | 481 | | | | 672 | |
| Additional Paid-in Capital | | | 5,055,629 | | | | 17,540,941 | | | | 22,596,570 | |
| Accumulated Deficit | | | (56,923 | ) | | | (17,541,422 | ) | | | (17,598,345 | ) |
| Total Stockholders’ Equity | | | 5,000,004 | | | | — | | | | 5,000,004 | |
| | | | | | | | | | | | | |
| Balance sheet as of December 31, 2020 (audited) | | | | | | | | | | | | |
| Warrant Liabilities | | $ | — | | | $ | 70,322,418 | | | $ | 70,322,418 | |
| Class A Common Stock Subject to Possible Redemption | | | 423,542,290 | | | | (70,322,420 | ) | | | 353,219,870 | |
| Class A Common Stock | | | 192 | | | | 703 | | | | 895 | |
| Additional Paid-in Capital | | | 5,190,948 | | | | 39,714,654 | | | | 44,905,602 | |
| Accumulated Deficit | | | (192,244 | ) | | | (39,715,355 | ) | | | (39,907,599 | ) |
| Total Stockholders’ Equity | | | 5,000,003 | | | | 2 | | | | 5,000,005 | |
| | | | | | | | | | | | | |
| Period from July 10, 2020 (inception) to September 30, 2020 (unaudited) | | | | | | | | | | | | |
| Change in value of warrant liability | | $ | — | | | $ | 16,336,651 | | | $ | 16,336,651 | |
| Transaction costs | | | — | | | | 1,204,771 | | | | 1,204,771 | |
| Net loss | | | (56,923 | ) | | | (17,541,422 | ) | | | (17,598,345 | ) |
| Weighted average shares outstanding of Class A redeemable common stock | | | 44,275,000 | | | | — | | | | 44,275,000 | |
| Basic and diluted earnings per share, Class A redeemable common stock | | | 0.00 | | | | 0.00 | | | | 0.00 | |
| Weighted average shares outstanding of Class B non-redeemable common stock | | | 11,068,750 | | | | — | | | | 11,068,750 | |
| Basic and diluted net loss per share, Class B non-redeemable common stock | | | (0.01 | ) | | | (1.58 | ) | | | (1.59 | ) |
| | | | | | | | | | | | | |
| Period from July 10, 2020 (inception) to December 31, 2020 (audited) | | | | | | | | | | | | |
| Change in value of warrant liability | | $ | — | | | $ | 38,510,584 | | | $ | 38,510,584 | |
| Transaction costs | | | — | | | | 1,204,771 | | | | 1,204,771 | |
| Net loss | | | (192,244 | ) | | | (39,715,354 | ) | | | (39,907,599 | ) |
| Weighted average shares outstanding of Class A redeemable common stock | | | 44,275,000 | | | | — | | | | 44,275,000 | |
| Basic and diluted earnings per share, Class A redeemable common stock | | | 0.00 | | | | 0.00 | | | | 0.00 | |
| Weighted average shares outstanding of Class B non-redeemable common stock | | | 10,633,062 | | | | — | | | | 10,633,062 | |
| Basic and diluted net loss per share, Class B non-redeemable common stock | | | (0.02 | ) | | | (3.73 | ) | | | (3.75 | ) |
| | | | | | | | | | | | | |
| Cash Flow Statement for the Period from July 10, 2020 (inception) to September 30, 2020 (unaudited) | | | | | | | | | | | | |
| Net loss | | $ | (56,923 | ) | | $ | (17,541,422 | ) | | $ | (17,598,345 | ) |
| Allocation of initial public offering costs to warrant liability | | | — | | | | 1,204,771 | | | | 1,204,771 | |
| Change in fair value of warrant liability | | | — | | | | 16,336,651 | | | | 16,336,651 | |
| Initial classification of warrant liability | | | — | | | | 31,811,834 | | | | 31,811,834 | |
| Initial classification of common stock subject to possible redemption | | | 423,731,850 | | | | (43,462,868 | ) | | | 380,268,982 | |
| Change in value of common stock subject to possible redemption | | | (54,240 | ) | | | (4,685,617 | ) | | | (4,739,857 | ) |
| | | | | | | | | | | | | |
| Cash Flow Statement for the Period from July 10, 2020 (inception) to December 31, 2020 (audited) | | | | | | | | | | | | |
| Net loss | | $ | (192,244 | ) | | $ | (39,715,355 | ) | | $ | (39,907,599 | ) |
| Change in fair value of warrant liability | | | — | | | | 38,510,584 | | | | 38,510,584 | |
| Allocation of initial public offering costs to warrant liability | | | | | | | 1,204,771 | | | | 1,204,771 | |
| Initial classification of warrant liability | | | — | | | | 31,811,834 | | | | 31,811,834 | |
| Initial classification of common stock subject to possible redemption | | | 423,731,850 | | | | (43,462,868 | ) | | | 380,268,982 | |
| Change in value of common stock subject to possible redemption | | | (1,539,252 | ) | | | (25,509,860 | ) | | | (27,049,112 | ) |
CM LIFE SCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2020
NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordanceconformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). These financial statements consolidate the operations and pursuantaccounts of the Company and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated. Unless otherwise noted, all tabular dollars are in thousands, except per share amounts. Certain reclassifications have been made to the rulesprior year consolidated financial statements in order to conform to the current year’s presentation.
On May 4, 2023, at the commencement of trading, the Company effected a 1-for-33 reverse stock split (the “Reverse Stock Split”). Accordingly, all share and regulationsper share amounts for the periods presented in the accompanying consolidated financial statements and notes thereto have been adjusted retroactively, where applicable, to reflect the reverse stock split. No fractional shares were issued in connection with the reverse stock split.
The Company is an “emerging growth
company,”company” as defined in
Section 2(a) of the Securities Act, as modified by the Jumpstart Our Business Startups Act of
2012 (the “JOBS Act”)2012. In addition, the Company is a “smaller reporting company”,
as defined in Item 10(f)(1) of the U.S. Securities and
it may take advantage of certainExchange Commission’s Regulation S-K. As such, the Company is eligible for exemptions from various reporting requirements
that are applicable to other public companies that are not emerging growth companies, including
but not limited to, not being required to comply withreduced reporting, including the
independent registered public accounting firm attestation requirementsreporting of
Section 404two fiscal years of
the Sarbanes-Oxley Act, of 2002, reduced disclosure obligations regarding executive compensation in its periodic reports and proxyaudited financial statements, and
exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved.Further, Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being requiredextended transition periods to comply with new or revised financial accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared effective or do not have a class of securities registered under the Exchange Act) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such election to opt out is irrevocable.for public business entities. The Company has elected to avail itself of this exemption and, therefore, will not be subject to opt out of such extended transition period which means that when a standard is issued or revised and it has different application dates for public or private companies, the Company, as an emerging growth company, can adopt thesame new or revised standard at the time privateaccounting standards as other public companies adopt the new or revised standard. This may make comparison of the Company’s financial statements with another public company which is neither anthat are not emerging growth company nor an emerging growth company which has opted out of using the extended transition period difficult or impossible because of the potential differences in accounting standards used.
companies.
The preparation of
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
disclosure of contingent assets and liabilitiesthe related disclosures at the date of the
consolidated financial statements
andas well as the reported amounts of revenues and expenses during the
reporting period.Makingperiods presented. The Company bases these estimates requires managementon current facts, historical and anticipated results, trends and various other assumptions that it believes are reasonable in the circumstances, including assumptions as to exercise significant judgment. It is at least reasonably possiblefuture 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 valuation of stock-based awards, the valuation of warrant liabilities, income taxes and intangible assets. 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 estimateCompany to concentrations of credit risk consist primarily of cash and cash equivalents, marketable securities and accounts receivable. The majority of the effectCompany’s cash, cash equivalents and restricted cash are uninsured with account balances in excess of the Federal Deposit Insurance Company limits.
The Company’s cash and cash equivalents are deposited with high-quality financial institutions. Management believes these financial institutions are financially sound and, accordingly, that minimal credit risk exists. The Company is exposed to credit risk in the event of a condition, situationdefault by the financial institutions holding its cash in excess of government insured limits and in the event of default by corporations and governments in which it holds investments in cash equivalents and short-term debt securities, to the extent recorded on the consolidated balance sheet. 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 concentration of credit risk. Significant patients and payors are those that represent more than 10% of the Company’s total annual revenues or setaccounts receivable balance at each respective balance sheet date. The significant concentrations of circumstancesaccounts receivable as of December 31, 2023 and 2022 were primarily from large managed care insurance companies, institutional billed accounts, and data arrangements. There was no individual patient or client that existedaccounted for 10% or more of revenue or accounts receivable for any of the years 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 |
| Year Ended December 31, | | As of December 31, |
| 2023 | | 2022 | | | | 2023 | | 2022 |
| | | | | | | | | |
Payor A (1) | 18% | | 30% | | | | * | | 14% |
| | | | | | | | | |
| Payor B | 28% | | 15% | | | | 10% | | 14% |
__________________*less than 10%
(1)This payor group includes multiple individual plans and the Company calculates and presents the aggregated value from all plans, which is consistent with the Company’s portfolio approach used in accounting for diagnostic test revenue.
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 11% and 4% of purchases for the years ended December 31, 2023 and 2022, respectively. Another supplier accounted for approximately 11% and 12% of purchases for the years ended
December 31, 2023 and 2022, respectively. This risk is managed by maintaining a target quantity of surplus stock. Alternative suppliers are available for some or all of these reagents and supplies.
Revenue Recognition
The Company recognizes revenue when control of the promised goods or services is transferred to the customer in an amount that reflects the consideration which the Company expects to be entitled to in exchange for those goods or services. If any changes in customer credit issues are identified which were not assessed at the date of service, provisions for credit losses are recognized and recorded.
Diagnostic test 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 not applicable. 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.
Diagnostic test revenues consist primarily of services reimbursed by third-party insurance payors. Third-party insurance payors include managed care health plans and commercial insurance companies, including plans offered through the health insurance exchanges, and employers. In arrangements with third-party insurance payors, the transaction price is stated within the contract, however, the Company accepts payments from third-party payors that are less than the contractually stated price and is therefore variable consideration and the transaction price is estimated.
When determining the transaction price, the Company uses a portfolio approach as a practical expedient to account for categories of diagnostic test contracts as collective groups rather than on an individual contract basis. The portfolio consists of major payor classes based on third-party payors. Based on historical collection trends and other analyses, the Company believes that revenue recognized by utilizing the portfolio approach approximates the revenue that would have been recognized if an individual contract approach was used.
Estimates of allowances for third-party insurance payors that impact the estimated transaction price are based upon the pricing and payment terms specified in the related contractual agreements. Contractual pricing and payment terms in third-party insurance agreements are generally based upon predetermined rates per diagnosis, per diem rates or discounted fee-for-service rates. In addition, for third-party payors in general, the estimated transaction price is impacted by factors such as historical collection experience, contractual provisions and insurance reimbursement policies, payor mix, and other relevant information for applicable payor portfolios.
For institutional clients, the customer is the institution. The Company determines the transaction price associated with services rendered in accordance with the contractual rates established with each customer.
Payment terms and conditions vary by contract and customer, however standard payment terms are generally less than 60 days from the invoice date. In instances where the timing of the Company’s revenue recognition differs from the timing of its invoicing, the Company does not assess whether a contract has a significant financing component if the expectation at contract inception is such that the period between payment by the customer and the transfer of the promised services to the customer will be one year or less.
Other revenue
The Company enters into both short-term and long-term project-based collaboration and service agreements with customers. Certain of these contracts include a license to directly access the Company’s intellectual property or participation by the Company on joint steering committees with the customer, which was considered to be immaterial in the context of the contract. The Company concludes that the goods and services transferred to our customers pursuant to these agreements generally comprise a single performance obligation on the basis that such goods and services are not distinct within the context of the contract. This is because the goods and services are highly interdependent and interrelated such that the Company would not be able to fulfill its underlying promise to our customers by transferring each good or service independently.
Certain of these contracts include non-refundable upfront payments and variable payments based upon the achievement of certain milestones or fixed monthly payments during the contract term. Non-refundable upfront payments received prior to the Company performing performance obligation are recorded as a contract liability upon receipt. 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. For longer-term contracts,
the Company does not account for a significant financing component since a substantial amount of the consideration promised by the customer is variable and the amount or timing of that consideration varies on the basis of a future event that is not substantially within the control of either party.
The Company satisfies its performance obligation generally over time if the customer simultaneously receives and consumes the benefits provided by the Company’s services as the Company performs those services. The Company recognizes revenue over time using an input measure based on costs incurred on the basis that this measure best reflects the pattern of transfer of control of the services to the customer. In some contracts, the Company subcontracts certain services to other parties for which the Company is ultimately responsible. Costs incurred for such subcontracted services are included in the Company’s measure of progress for satisfying its performance obligation and are recorded in cost of services in the consolidated statements of operations and comprehensive loss. Changes in the total estimated costs to be incurred in measuring the Company’s progress toward satisfying its performance obligation may result in adjustments to cumulative revenue recognized at the time the change in estimate occurs.
See Note 4, “Revenue Recognition” for more information.
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 and debt securities. Carrying values of cash equivalents approximate fair value due to the short-term nature of these instruments. The current and long-term portions of restricted cash are included within prepaid expenses and other current assets and other assets.
Marketable Securities
Marketable securities are classified as current assets as these investments are intended to be available to the Company for use in funding current operations. Unrealized gains and losses on available for sale securities are deemed temporary and are classified in accumulated other comprehensive income (loss) within stockholders’ equity. Changes in the fair value of available for sale securities impact earnings only when such securities are sold, or an allowance for expected credit losses or impairment is recognized. We regularly evaluate our portfolio of marketable securities for expected credit losses and impairment for any decline in fair value determined to be other-than-temporary. In making this judgement, we evaluate, among other things, the extent to which the fair value of a security is less than its amortized cost; the financial statements, which management considered in formulatingcondition of the issuer, including the credit quality, and any changes thereto; and our intent to sell, or whether we will more likely than not be required to sell, the security before recovery of its estimate,amortized cost basis. Our assessment of whether a marketable security has a credit loss or is impaired could change in the near termfuture due to onenew developments or changes in assumptions related to any particular security.
See Note 5, “Fair Value Measurements” for more information.
Accounts Receivable
Accounts receivable consists of amounts due from customers and third-party payors for services performed and reflect the consideration to which the Company expects to be entitled in exchange for providing those services. Accounts receivable is estimated and recorded in the period the related revenue is recorded. During the years ended December 31, 2023 and 2022, the Company did not record provisions for credit losses. The Company did not write off any accounts receivable balances for the years ended December 31, 2023 and 2022.
Inventory, net
Inventory, net, which primarily consists of finished goods such as testing supplies and reagents, is capitalized when purchased and expensed when used in performing services. Inventory is stated at the lower of cost or net realizable value. Cost is determined using actual costs on a first-in, first-out basis. The Company periodically performs obsolescence assessments and writes off any inventory that is no longer usable. Any write-down of inventory to net realizable value creates a new cost basis.
During the fourth quarter of 2022, the Company identified indicators of impairment for certain inventory testing supplies and reagents in connection with the planned exit of the Legacy Sema4 business and recorded a $22.5 million impairment charge in the Company’s consolidated statements of operations and comprehensive loss for the year ended December 31, 2022.
Property and Equipment, net
Property and equipment, net are stated at cost less accumulated depreciation and amortization. Equipment includes assets under finance lease. Improvements are capitalized, while maintenance and repairs are expensed as incurred. When assets are retired or otherwise disposed of, the cost and accumulated depreciation and amortization are removed from the consolidated balance sheets and any resulting gain or loss is reflected in the consolidated statements of operations and comprehensive loss in the period realized.
Finance leases and leasehold improvements are amortized straight-line over the shorter of the term of the lease or the estimated useful life. All other property and equipment assets are depreciated using the straight-line method over the estimated useful life of the asset, which ranges from three to five years.
The Company reviews the recoverability of its long-lived assets when events or changes in circumstances occur that indicate that the carrying value of the asset or asset group may not be recoverable. An impairment loss is recognized when the total estimated future
events. Accordingly,undiscounted cash flows expected to result from the
actual results could differ significantly from those estimates.Class A common stock subjectuse of the asset and its eventual disposition are less than its carrying amount. Impairment, if any, is assessed using discounted cash flows or other appropriate measures of fair value.
See Note 6, “Property and Equipment, net”.
Capitalized Software
The Company capitalizes certain costs incurred related to
possible redemptionthe development of our 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 we estimate the useful life of the asset and begin amortization.
Capitalized software costs are amortized using the straight-line method over an estimated useful life of three years. Capitalized software is reviewed for impairment whenever events or changes in circumstances may indicate that the carrying amount of an asset may not be recoverable.
See Note 6, “Property and Equipment, net” for more information.
Business Combinations
The Company accounts for its Class A common stockacquisitions 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 as 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.
See Note 3, “Business Combinations” for more information.
Intangible Assets, Net
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 2022 are amortized on a straight-line basis. All intangible assets subject to possible redemptionamortization are reviewed for impairment in accordance with ASC 360, Property, Plant and Equipment. There were no impairment losses recorded on intangible assets for any periods presented.
See Note 7, “Goodwill and Intangible Assets” for more information.
Cloud Computing
The Company capitalizes certain costs incurred during the guidance in Accounting Standards Codification (“ASC”) Topic 480 “Distinguishing Liabilities from Equity.” Class A Common stock subject to mandatory redemptionapplication development stage and all costs incurred during the preliminary project and post-implementation stages are expensed as incurred. Amortization begins when the cloud computing arrangement is classified as a liability instrumentready for its intended use and is measuredcalculated on a straight-line basis over the fixed noncancellable periods plus renewal periods the Company deems it reasonably certain to exercise. During the year ended December 31, 2022, $0.3 million of implementation costs were capitalized and recorded in prepaid expenses and other current assets. There were no capitalized amounts for the year ended December 31, 2023.
Fair Value Measurements
Financial assets and liabilities are recorded at fair value. Conditionally redeemable common stock (including common stockFair value is defined as the price that features redemption rightswould 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 determines the fair value of its financial instruments based on assumptions that is either withinmarket participants would use in pricing an asset or liability in the controlprincipal or most advantageous market. The following hierarchy lists three levels of fair value based on the holderextent 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 subjectliabilities.
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.
Level 3: Unobservable inputs that are significant to redemption upon the occurrencemeasurement of uncertain events not solely within the Company’s control) is classified as temporary equity. At all other times, common stock is classified as stockholders’ equity. fair value but are supported by little to no market data.
The Company’s
common stock features certain redemption rights that are considered to be outside of the Company’s controlfinancial assets and
subject to occurrence of uncertain future events. Accordingly, at December 31, 2020, Class A common stock subject to possible redemption is presented as temporary equity, outside of the stockholders’ equity section of the Company’s balance sheet.CM LIFE SCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2020
Offering Costs
Offering costsliabilities consist of underwriting, legal, accountingcash and cash equivalents, marketable securities, accounts receivable, other current assets, accounts payable, and accrued expenses, other current liabilities, and long-term debt. The Company’s carry value of cash and cash equivalents, accounts receivable, other current assets, accounts payable, accrued expenses and other expenses incurred through the Initial Public Offering that are directly relatedcurrent liabilities approximate their fair value due to the Initialrelatively short-term nature of these accounts.
See Note 5, “Fair Value Measurements” for more information.
Warrant Liability
The Company’s outstanding warrants include the Public
Offering. Offering costs amounting to $23,690,693 were charged to stockholders’ equity uponWarrants, the
completion ofPrivate Warrants and the
Initial Public Offering. At the IPO date, $1,204,771 of offering costs were expensed through the statement of operations.Warrant Liability
Perceptive Warrants.
The Company accounts for warrants as either equity-classified or liability-classified instruments based on an assessment of the warrant’s specificwarrant terms and applicable authoritative guidance in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”)accordance with ASC 480, Distinguishing Liabilities from Equity (“ASC 480”) and ASC 815, Derivatives815-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, including whether the warrants are indexed to the Company’s own common shares and whether the warrant holders could potentially require “net cash settlement” in a circumstance outside of the Company’s control, among other conditions for equity classification.815. This assessment which requires the use of professional judgment, is conducted at the time of warrant issuance. The warrant liabilities are recorded on the consolidated balance sheets at fair value on their respective issuance dates, with subsequent changes in respective fair values recognized on the consolidated statements of operations and comprehensive loss at each reporting date.
The Public Warrants are classified within Level 1 of the fair value hierarchy as
they are traded in active markets and the fair value is determined on the basis of quoted market prices. Management has determined the fair value of each
subsequent quarterly period end date whilePrivate Warrant is the
warrantssame as that of a Public Warrant because the terms are
outstanding.For issued or modified warrants that meet allsubstantially the same. The Private Warrants are classified within Level 2 of the criteriafair 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 Perceptive Warrants are classified within Level 3 of the fair value hierarchy. The estimated fair value of the Perceptive Warrants is determined based on a Modified Black-Scholes valuation model. Key assumptions include expected volatility, expected term, and risk-free interest rate.
See Note 5, “Fair Value Measurements” for equity classification,more information.
Contingent Consideration (Legacy GeneDx)
The Acquisition involved potential payment of future consideration payable to OPKO Health, Inc. (“OPKO”) in cash and/or shares of Company’s Class A common stock with such mix to be determined in the warrantsCompany’s sole discretion, based upon achievement of 2022 and 2023 revenue milestones, pursuant to the Acquisition Merger Agreement (the “Milestone Payments”). The Company records contingent consideration at fair value at the date of acquisition based on the consideration
expected to be transferred, estimated using a Monte Carlo simulation valuation model. Changes in assumptions may result in adjustments to the fair value measurements.
Contingent consideration is remeasured each reporting period using Level 3 inputs, and the change in fair value, including accretion for the passage of time, is recognized as income or expense on the Company’s consolidated statements of operations. Cash contingent consideration payments up to the acquisition date fair value of the contingent consideration liability are requiredclassified as financing activities in the consolidated statements of cash flows, and amounts paid in excess of the original acquisition date fair value are classified as operating activities in the consolidated statements of cash flows.
See Note 5, “Fair Value Measurements” for more information.
Earn-out Contingent Liability
In connection with the Business Combination, all Legacy Sema4 stockholders and option holders at that time became entitled to bea pro rata share of earn-out shares and earn-out RSUs.
The Company accounted for the earn-out shares as a liability in accordance with ASC 480. The Company subsequently measured the fair value of the liability at each reporting period and changes in fair value were recorded as a component of additional paid-in capital atnon-operating income (expenses), net, on the timeconsolidated statements of issuance. For issuedoperations and comprehensive loss. In July 2023, the Company’s obligations to issue earn-out shares pursuant to that certain Agreement and Plan of Merger, dated February 9, 2021, and shares pursuant to the earn-out RSUs expired as a result of the vesting conditions not being achieved.
The Company accounted for the earn-out RSUs in accordance with ASC 718- Compensation — Stock Compensation (“ASC 718”) and stock-based compensation expense was recognized over the longer of the expected achievement period for the market-based requirement or modified warrantsthe service requirement. In the event that do not meet allany earn-out RSUs were forfeited as a result of a failure to achieve the criteria for equity classification,service requirement, the warrants are requiredunderlying shares were reallocated on an annual basis to be recorded at their initial fair value onthe Legacy Sema4 stockholders and to the Legacy Sema4 option holders who remained employed as of the date of issuance, and each balance sheetsuch reallocation. Any re-allocations to Legacy Sema4 option holders were accounted for as new grants.
See Note 5, “Fair Value Measurements” for more information.
Stock-Based Compensation
The Company measures stock-based compensation at the grant date thereafter. Changes inbased on the estimated fair value of the warrantsaward and recognizes stock-based compensation expense over the requisite service period for each separate vesting portion of the award on a straight-line basis.
The Company uses the Black-Scholes option-pricing model to estimate the fair value of its stock option awards. Determining the fair value of stock option awards requires judgment, including estimating expected stock price volatility and expected option term. The Company estimates a volatility factor for the Company’s options based on analysis of historical share prices of a peer group of public companies, the historical share prices of the Company, and the implied volatility of the Company’s call options. The Company estimates 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 does not rely on the historical holding periods of the Company’s options due to the limited availability of exercise data. The Company uses 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. Expected dividend yield is based on the fact that the Company has never paid dividends.
Restricted stock awards are valued based on the fair value of the stock on the grant date. The Company issues new shares upon share option exercise and vesting of a restricted share unit. Forfeitures of stock-based compensation are recognized as
a non-cash gain or loss on the statements of operations.they occur.
See Note 12, “Stock-Based Compensation” for more information.
The Company
followsaccounts for income taxes using the asset and liability method
of accounting for income taxes under ASC 740, “Income Taxes.” Deferredand deferred tax assets and liabilities are recognized for the
estimated future tax consequences attributable to differences between the financial statement carrying
amountsvalues of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in
effect for the
yearsyear in which those temporary differences are expected to be recovered or settled.
The effect onA valuation allowance is established when it is more likely than not that some or all of the deferred tax assets
and liabilities ofwill not be realized. Based on the Company’s historical operating losses, the Company has recorded a
change in tax rates is recognized in income in the period that included the enactment date. Valuation allowances are established, when necessary,valuation allowance to reduce deferred tax assets to the amount
expected to be realized.ASC 740 prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must bethat is more likely than not to be realized.
The Company recognizes tax benefits from uncertain tax positions only if it is more likely than not, based on technical merits, that the position will be sustained upon examination by the appropriate taxing authorities. The amount of tax benefit recognized for an uncertain tax position is the largest that is more than 50 percent likelihood to be realized upon ultimate settlement. The Company recognizes accruedrecords interest and penalties related to unrecognized tax benefits asuncertainties, where appropriate, in income tax expense. There
See Note 13, “Income Taxes” for more information.
Leases
The Company’s leases primarily consisted of office and lab space, and equipment for use in its operations. Its leases generally have lease terms of 2024 to 2036 years, some with the option to extend. The Company includes extension options that are reasonably certain to be exercised as part of the lease terms. As of December 31, 2023, none of the Company’s lease terms included the extension option as the Company has determined that it is unlikely to exercise to extension option.
Under ASU 2016-02, Leases (ASC 842), the Company determines if an arrangement is or contains a lease at inception. A lease qualifies as a finance lease if any of the following criteria are met at the inception of the lease: (i) there is a transfer of ownership of the leased asset to the Company by the end of the lease term, (ii) the Company holds an option to purchase the leased asset that the Company is reasonably certain to exercise, (iii) the lease term is for a major part of the remaining economic life of the leased asset, (iv) the present value of the sum of lease payments equals or exceeds substantially all of the fair value of the leased asset, or (v) the nature of the leased asset is specialized to the point that it is expected to provide the lessor no alternative use at the end of the lease term. All other leases are classified as operating leases.
Right-of-use assets (ROU assets) represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating and finance lease ROU assets and liabilities are recognized at the lease commencement date based on the present value of remaining future minimum lease payments over the lease term. The Company does not recognize a ROU asset or lease liability for leases with a term of 12 months or less and does not include variable costs, which are based on actual usage, in the measurement of ROU assets and lease liabilities. The ROU assets include any lease payments made prior to the commencement date and initial direct costs incurred and excludes lease incentives received. ROU assets are subsequently assessed for impairment in accordance with the Company’s accounting policy for long-lived assets.
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. The lease liabilities are classified as current or non-current based on the expected timing of payments.
The Company recognizes lease expense for operating leases on a straight-line basis over the lease term, which may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise such options. Variable costs are expensed when the event determining the amount of variable consideration to be paid occurs. Interest expense for finance leases is recognized based on the accretion of the lease liability. The Company has operating and finance lease arrangements with lease and non-lease components. The Company accounts for lease and non-lease components as a single lease component for all leases.
See Note 10, “Leases” for more information.
Recently Issued Accounting Pronouncements Not Yet Adopted
Changes to U.S. GAAP are established by the Financial Accounting Standards Board (the “FASB”) in the form of accounting standards updates (“ASUs”) to the FASB’s Accounting Standards Codification. The Company considers the applicability and impact of all ASUs. ASUs not included in the disclosures in this report were assessed and determined to be either not applicable or are not expected to have a material impact on the consolidated financial statements.
In November 2023, the FASB issued ASU 2023-07, Improvements to Reportable Segment Disclosures (“ASU 2023-07”). The standard requires enhanced segment reporting disclosures, including significant segment expenses and other segment items. Additionally, the standard requires public entities to provide in interim periods all disclosures about a reportable segment’s profit or loss and assets that are currently required annually. ASU 2023-07 will be effective for annual periods beginning after December 15, 2023, and for interim periods beginning after December 15, 2024, with early adoption permitted. The guidance will be applied retrospectively to all periods presented in financial statements unless it is impractical
to do so. The Company is currently evaluating the impact of the new guidance on its consolidated financial statements and related disclosures.
In December 2023, the FASB issued ASU 2023-09, Income Taxes – Improvements to Income Tax Disclosures (“ASU 2023-09”). The standard requires additional disclosures around disaggregated information about a reporting entity’s effective tax rate reconciliation as well as information on income taxes paid. ASU 2023-09 will be effective for annual periods beginning after December 15, 2024, with early adoption permitted. The guidance will be applied on a prospective basis with the option to apply the standard retrospectively. The Company is currently evaluating the impact of the new guidance on its consolidated financial statements and related disclosures.
Recently Adopted Accounting Pronouncements
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. The Company adopted ASU 2016-13 effective January 1, 2023 and the adoption did not have material impact in the consolidated statements of operations and comprehensive loss.
3. Business Combination
Legacy GeneDx Acquisition
On April 29, 2022, the Company completed the Acquisition. 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 2.4 million shares of the Company’s Class A common stock ($172 million based on the closing date share price of $70.95 per share). A portion of this cash and stock consideration was held in escrow for a one year escrow period ending in May 2023. On May 15, 2023, the Company completed the net working capital settlement with OPKO and released the remaining escrowed amount recorded in restricted cash. In addition, a portion of the $150 million was payable following the closing of the Acquisition due to the achievement of the first revenue-based milestone for the fiscal year ended December 31, 2022 and the remaining Milestone Payment of up to $37.5 million would be payable if certain revenue-based milestones are achieved for the fiscal year ending December 31, 2023. During the year ended December 31, 2023, the first Milestone Payment became due and payable in full and resulted in the issuance of 701,460 shares of the Company’s Class A common stock on April 14, 2023. The remaining Milestone Payment, 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 $160.38 per share, subject to adjustment for stock splits and similar changes), with such mix to be determined in the Company’s sole discretion. The second milestone payment was determined to be zero. Concurrently with the closing of the Acquisition, the Company also issued and sold in a private placement 1,515,152 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 presents the net purchase price and the fair values of the assets and liabilities of Legacy GeneDx on a preliminary basis:
| | | | | | | | |
| 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 amounts above represent the fair value estimates at the time of the Acquisition.
4. Revenue Recognition
Disaggregated revenue
The following table summarizes the Company’s disaggregated revenue by payor category:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year ended December 31, |
| 2023 | | 2022 | | |
| GeneDx | | Legacy Sema4 | | Consolidated | | GeneDx | | Legacy Sema4 | | Consolidated | | |
| Diagnostic test revenue: | | | | | | | | | | | | | |
| Patients with third-party insurance | $ | 126,265 | | | $ | 8,226 | | | $ | 134,491 | | | $ | 72,890 | | | $ | 100,734 | | | $ | 173,624 | | | |
| Institutional customers | 59,497 | | | — | | | 59,497 | | | 40,754 | | | 5,370 | | | 46,124 | | | |
| Self-pay patients | 1,702 | | | (36) | | | 1,666 | | | 1,230 | | | 6,356 | | | 7,586 | | | |
| Total diagnostic test revenue | 187,464 | | | 8,190 | | | 195,654 | | | 114,874 | | | 112,460 | | | 227,334 | | | |
| Other revenue | 6,912 | | | — | | | 6,912 | | | 7,360 | | | — | | | 7,360 | | | |
| Total | $ | 194,376 | | | $ | 8,190 | | | $ | 202,566 | | | $ | 122,234 | | | $ | 112,460 | | | $ | 234,694 | | | |
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 year ended December 31, 2023, the total change in estimate resulted in a net $8.8 million which included the partial release of a third party payor reserve established in prior periods for Legacy Sema4.
During the year ended December 31, 2022, the Company recorded $54.0 million to decrease revenue resulting from 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.
Certain payor matters
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 instituted a third-party review of billing claims and compliance practices, and initiated improvements including implementing a package of new billing compliance policies and procedures and strengthening the Company’s billing compliance team.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 unrecognized tax benefitslonger subject to such audits, reviews, and no amountsinvestigations.
Throughout 2022, the Company was engaged in discussions with one of its third-party payors (the “Payor”) regarding certain overpayments to Legacy Sema4. On December 30, 2022, the Company entered into a settlement agreement with the Payor in order to settle the claims related to coverage and billing matters allegedly resulting in the overpayments by the Payor to the Company (the “Disputed Claims”). Under the settlement agreement, $42 million is to be paid by the Company to the Payor in a series of installments over four years with the final installment payment scheduled to be on or before June 30, 2026. The first installment payment of $15 million was made on December 31, 2022 and the second installment of $5 million was made on December 27, 2023. In consideration for these payments, the Payor agreed to provide releases of the Disputed Claims, which releases became effective on March 31, 2023.
As a result of this matter, and in connection with a review of certain billing policies and procedures undertaken by management, the Company considered the need to establish reserves for potential recoupments of payments previously made by third-party payors. As of December 31, 2023 and December 31, 2022, $27.0 million and $39.0 million were recorded in accounts payable and accrued for interestexpenses and penaltiesother liabilities, respectively. See Note 16, “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
Due to the long-term nature of collaboration service agreements, the Company’s obligations pursuant to such agreements represent partially unsatisfied performance obligations as of December 31, 2020.2023. The revenues under existing service agreements with original expected durations of more than one year are estimated to be approximately $3.3 million. The Company is currently not awareexpects to recognize the majority of any issues under reviewthis revenue over the next 2 years.
Costs to fulfill contracts
Costs associated with fulfilling the Company’s performance obligations pursuant to its collaboration service agreements include costs for services that
could resultare subcontracted to ISMMS. Amounts are generally prepaid and then expensed in
significant payments, accruals or material deviation from its position. The Company is subject to income tax examinations by major taxing authorities since inception.Net Income (Loss) per Common Share
Net income (loss) per common share is computed by dividing net income byline with the weighted average numberpattern of common shares outstanding for the period. The Company has not considered the effectrevenue recognition. Prepayment of warrants sold in the Initial Public Offering and private placement to purchase 21,995,000 shares of Class A common stock in the calculation of diluted income per share, since the exercise of the warrants are contingent upon the occurrence of future events and the inclusion of such warrants would be anti-dilutive.
CM LIFE SCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2020
The Company’s statement of operations includes a presentation of income (loss) per share for common shares subject to possible redemption in a manner similaramounts prior to the two-class method of income (loss) per share. Net income per common share, basic and diluted, for Class A redeemable common stock is calculated by dividing the interest income earnedcosts being incurred are recognized on the Trust Account less income and franchise taxes, by the weighted average number of Class A redeemable common stock outstanding since original issuance. Net loss per share, basic and diluted, for Class B non-redeemable common stock is calculated by dividing the net loss, adjusted for income attributable to Class A redeemable common stock, net of applicable franchise and income taxes, by the weighted average number of Class B non-redeemable common stock outstanding for the period. Class B non-redeemable common stock includes the Founder Sharesbalance sheets as these shares do not have any redemption features and do not participate in the income earned on the Trust Account.
The following table reflects the calculation of basic and diluted net income (loss) per common share (in dollars, except per share amounts):
| | | For the Period
From
July 10, 2020
(inception)
Through
December 31, | |
| | | 2020 | |
| Redeemable Class A Common Stock | | | |
| Numerator: Earnings allocable to Redeemable Class A Common Stock | | | |
| Interest Income | | $ | 13,951 | |
| Income and Franchise Tax | | | (13,951 | ) |
| Net Earnings | | $ | — | |
| Denominator: Weighted Average Redeemable Class A Common Stock | | | | |
| Redeemable Class A Common Stock, Basic and Diluted | | | 44,275,000 | |
| Earnings/Basic and Diluted Redeemable Class A Common Stock | | $ | 0.00 | |
| | | | | |
| Non-Redeemable Class A and B Common Stock | | | | |
| Numerator: Net Income (Loss) minus Redeemable Net Earnings | | | | |
| Net Income (Loss) | | $ | (39,907,599 | ) |
| Redeemable Net Earnings | | | — | |
| Non-Redeemable Net Loss | | $ | (39,907,599 | ) |
| Denominator: Weighted Average Non-Redeemable Class A and B Common Stock | | | | |
| Non-Redeemable Class A and B Common Stock, Basic and Diluted | | | 10,633,062 | |
| Loss/Basic and Diluted Non-Redeemable Class A and B Common Stock | | $ | (3.75 | ) |
Note: current or non-current asset based upon forecasted performance.
As of December 31,
2020, basic2023 and
diluted shares are the same as there are no non-redeemable securities that are dilutive to the Company’s stockholders.Concentration of Credit Risk
Financial instruments that potentially subjectDecember 31, 2022, the Company had outstanding deferred costs to concentrationsfulfill contracts of credit risk consistzero and $0.3 million, respectively. At each period, all outstanding deferred costs were recorded as other current assets.
The cost recognized was $2.1 million and $1.5 million for the years ended December 31, 2023 and 2022, respectively and are recorded in
a financial institution, which, at times, may exceedcost of services on the
Federal Depository Insurance Coverageconsolidated statements of
$250,000. The Company has not experienced losses on this accountoperations and
management believes the Company is not exposed to significant risks on such account.CM LIFE SCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2020
5. Fair Value of Measurements
Financial InstrumentsThe fair value of the Company’s assets and liabilities which qualify as financial instruments under ASC Topic 820, “Fair Value Measurement,” approximatesare recorded at fair value on the carrying amounts represented in the accompanyingconsolidated balance sheet, primarily due to their short-term nature.
Fair Value Measurements
sheets on a recurring basis. Fair value is defined as the price that would be received for sale ofto sell an asset or paid forto transfer of a liability in an orderly transaction between market participants at the measurement date. GAAP establishes a three-tierFor further information regarding the Company’s fair value hierarchy, which prioritizes the inputs used in measuring fair value. measurements, see Note 2, “
Summary of Significant Accounting Policies” included within this Annual Report. The
hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). These tiers include: | ● | Level 1, defined as observable inputs such as quoted prices (unadjusted) for identical instruments in active markets; |
| | |
| ● | Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable such as quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active; and |
| | |
| ● | Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions, such as valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable. |
In some circumstances, the inputs used to measure fair value might be categorized within different levels offollowing tables set forth the fair value hierarchy. In those instances,of financial instruments that were measured at fair value on a recurring basis:
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2023 |
| Total | | Level 1 | | Level 2 | | Level 3 |
| Financial Assets: | | | | | | | |
| Money market funds | $ | 92,702 | | | $ | 92,702 | | | $ | — | | | $ | — | |
| U.S. treasury bonds | 6,128 | | | — | | | 6,128 | | | — | |
| Corporate and municipal bonds | 24,098 | | | — | | | 24,098 | | | — | |
| Total financial assets | $ | 122,928 | | | $ | 92,702 | | | $ | 30,226 | | | $ | — | |
| | | | | | | |
| Financial Liabilities: | | | | | | | |
| Public warrant liability | $ | 149 | | | $ | 149 | | | $ | — | | | $ | — | |
| Private warrant liability | 71 | | | — | | | 71 | | | — | |
| Perceptive warrant liability | 2,515 | | | — | | | — | | | 2,515 | |
| | | | | | | |
| | | | | | | |
| Total financial liabilities | $ | 2,735 | | | $ | 149 | | | $ | 71 | | | $ | 2,515 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 |
| Total | | Level 1 | | Level 2 | | Level 3 |
| Financial Assets: | | | | | | | |
| Money market funds | $ | 16,901 | | | $ | 16,901 | | | $ | — | | | $ | — | |
| Total financial assets | $ | 16,901 | | | $ | 16,901 | | | $ | — | | | $ | — | |
| | | | | | | |
| Financial Liabilities: | | | | | | | |
| Public warrant liability | $ | 280 | | | $ | 280 | | | $ | — | | | $ | — | |
| Private warrant liability | 138 | | | — | | | 138 | | | — | |
| | | | | | | |
| Contingent consideration | 7,619 | | | — | | | — | | | 7,619 | |
| Total financial liabilities | $ | 8,037 | | | $ | 280 | | | $ | 138 | | | $ | 7,619 | |
There were no transfers between Level 1, Level 2 and Level 3 during the years ended December 31, 2023 or December 31, 2022.
The Company’s marketable securities presented in the consolidated balance sheet at December 31, 2023 have maturity dates ranging from 2024 through 2026 and are classified as current assets as these investments are intended to be readily available to fund current operations. The differences between the fair value
measurement is categorized in its entirety in the fair value hierarchy based on the lowest level input that is significant to the fair value measurement.Derivative Financial Instruments
The Company evaluates its financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives in accordance with ASC Topic 815, “Derivatives and Hedging”. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value on the grant date and is then re-valued at each reporting date, with changes in the fair value reported in the statements of operations. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the endamortized cost basis of each reporting period. Derivative liabilitiessecurity are classifiedthe unrealized gains or losses recorded in accumulated other comprehensive income. As of December 31, 2023, the balance sheet as current or non-current based on whether or not net-cash settlement or conversionamortized cost for maturities less than one year and greater than one year were $17.2 million and $12.6 million, respectively.
Public and Private Warrants
As of the
instrument could be required within 12 monthsconsummation of the
balance sheet date.Recently Issued Accounting Standards
Management does not believe that any recently issued, but not yet effective, accounting standards, if currently adopted, would have a material effect on the Company’s financial statements.
NOTE 4. INITIAL PUBLIC OFFERING
PursuantMerger in July 2021, there were 666,516 warrants to the Initial Public Offering, the Company sold 44,275,000 Units, which includes the full exercise by the underwriter of its over-allotment option in the amount of 5,775,000 Units, at a purchase price of $10.00 per Unit. Each Unit consists of one shareshares of Class A common stock outstanding, including 447,223 public warrants and one-third219,293 private placement warrants. As of one redeemableDecember 31, 2023, there were 666,515 warrants to purchase shares of Class A common stock outstanding, including 452,272 public warrants and 214,243 private placement warrants outstanding. Each warrant (“Public Warrant”). Each whole Public Warrantexpires 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 aan exercise price of $11.50$379.50 per share, subject to adjustment, (see Note 8).
at any time commencing on September 4, 2021. 88
CM LIFE SCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2020
NOTE 5. PRIVATE PLACEMENT
Simultaneously with
The Company may redeem the closingoutstanding public warrants if the price per share of the Initial Public Offering, the SponsorClass A common stock equals or exceeds $594.00 as described below:
•in whole and certain of the Company’s independent directors purchased an aggregate of 7,236,667 Private Placement Warrants, not in part;
•at a price of $1.50$0.33 per Private Placement Warrant, for an aggregate purchase pricepublic warrant;
•upon not less than 30 days’ prior written notice of $10,855,000. The Sponsor purchased 6,903,335 Private Placement Warrants, and each of Mr. Islam and Dr. Leproust (and/or one or more entities controlled by them) purchased 166,666 Private Placement Warrants. Each Private Placement Warrant is exercisable to purchase one share of Class A common stock at a price of $11.50 per share, subject to adjustment (see Note 8). Proceeds from the sale of the Private Placement Warrants were added to the net proceeds from the Initial Public Offering held in the Trust Account. If the Company does not complete a Business Combination within the Combination Period, the proceeds from the sale of the Private Placement Warrants held in the Trust Account will be used to fund the redemption of the Public Shares (subject to the requirements of applicable law) and the Private Placement Warrants will expire worthless.NOTE 6. RELATED PARTY TRANSACTIONS
Founder Shares
In July 2020, the Sponsor paid $25,000 to cover certain offering costs of the Company in consideration for 10,062,500 shares of the Company’s Class B common stock (the “Founder Shares”). In August 2020, the Sponsor transferred 25,000 Founder Shares to each of Munib Islam, Emily Leproustwarrant holder; and Nat Turner, certain of the Company’s independent directors, at their original per-share purchase price, for an aggregate of 75,000 Founder Shares transferred. On September 1, 2020, the Company effected a 1:1.1 stock split of its Class B common stock, resulting in the Sponsor holding an aggregate of 10,993,750 Founder Shares
•if, and there being an aggregate of 11,068,750 Founder Shares outstanding. All share and per-share amounts have been retroactively restated to reflect the stock split, The Founder Shares included an aggregate of up to 1,443,750 shares subject to forfeiture by the Sponsor to the extent that the underwriter’s over-allotment was not exercised in full or in part, so that the number of Founder Shares would equal, on an as-converted basis, approximately 20% of the Company’s issued and outstanding shares of common stock after the Initial Public Offering. As a result of the underwriter’s election to fully exercise its over-allotment option, 1,443,750 Founder Shares are no longer subject to forfeiture.The Sponsor has agreed, subject to limited exceptions, not to transfer, assign or sell any of the Founder Shares until the earlier to occur of: (A) one year after the completion of a Business Combination and (B) subsequent to a Business Combination, (x)only if, the last reported saleclosing price of the Class A common stock equals or exceeds $12.00$594.00 per share (as adjusted for stock splits, stock capitalizations, reorganizations, recapitalizations and the like)adjusted) for any 20 trading days within anya 30-trading day period commencing at least 150ending three trading days after a Business Combination, or (y)before sending the date on whichnotice of redemption to warrant holders.
The Company may redeem the
Company completes a liquidation, merger, capital stock exchange or other similar transaction that results in alloutstanding public warrants if the price per share of the
Public Stockholders having the right to exchange their shares of common stock
for cash, securitiesequals or
other property.Promissory Note – Related Party
On July 16, 2020, the Sponsor issued an unsecured promissory note to the Company (the “Promissory Note”), pursuant to which the Company could borrow up to an aggregate principal amountexceeds $330.00 as described below:
•in whole and not in part;
•at $3.30 per warrant upon a minimum of $300,000. The Promissory Note was non-interest bearing and payable on the earlier30 days’ prior written notice of (i) December 31, 2020 or (ii) the consummation of the Initial Public Offering. The outstanding balance under the Promissory Note of $165,081 was repaid at the closing of the Initial Public Offering on September 4, 2020.Related Party Loans
In order to finance transaction costs in connection with a Business Combination, the Sponsor or an affiliate of the Sponsor, or certain of the Company’s officers and directors may, but are not obligated to, loan the Company funds as may be required (“Working Capital Loans”). Such Working Capital Loans would be evidenced by promissory notes. The notes may be repaid upon completion of a Business Combination, without interest, or, at the lender’s discretion, up to $1,500,000 of the notes may be converted upon completion of a Business Combination into warrants at a price of $1.50 per warrant. Such warrants would be identical to the Private Placement Warrants. In the eventredemption provided that a Business Combination does not close, the Company may use a portion of proceeds held outside the Trust Account to repay the Working Capital Loans but no proceeds held in the Trust Account would be used to repay the Working Capital Loans. As of December 31, 2020, there were no amounts outstanding under the Working Capital Loans.
CM LIFE SCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2020
NOTE 7. COMMITMENTS AND CONTINGENCIES
Risks and Uncertainties
Management continues to evaluate the impact of the COVID-19 pandemic on the industry and has concluded that while it is reasonably possible that the virus could have a negative effect on the Company’s financial position, results of its operations and/or search for a target company, the specific impact is not readily determinable as of the date of these financial statements. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Registration Rights
Pursuant to a registration rights agreement entered into on September 1, 2020, the holders of the Founder Shares, Private Placement Warrants and securities that may be issued upon conversion of Working Capital Loans and forward purchase shares are entitled to registration rights. The holders of these securities will be entitledable to make upexercise their warrants on a cashless basis prior to three demands, excluding short form demands,redemption and receive that the Company register such securities. In addition, the holders have certain “piggy-back” registration rights with respect to registration statements filed subsequent to the completionnumber of a Business Combination. The Company will bear the expenses incurred in connection with the filing of any such registration statements.
Underwriting Agreement
The underwriter is entitled to a deferred fee of $0.35 per Unit, or $15,496,250 in the aggregate. The deferred fee will become payable to the underwriter from the amounts held in the Trust Account solely in the event that the Company completes a Business Combination, subject to the terms of the underwriting agreement.
Forward Purchase Agreement
The Company entered into separate forward purchase agreements with affiliates of the Sponsor, Casdin Capital, LLC (“Casdin”) and Corvex Management LP (“Corvex”), in their capacities as investment advisors on behalf of one or more investment funds, clients or accounts managed by each of Casdin and Corvex, respectively (collectively, their “Clients”), pursuant to which, subject to the conditions described below, they will cause the Clients to purchase from the Company up to an aggregate amount of 15,000,000 shares of Class A common stock, or the forward purchase shares, for $10.00 per forward purchase share, or an aggregate amount of up to $150,000,000, in a private placement that will close concurrently with the closing of a Business Combination. The amount of forward purchase shares sold pursuant to the forward purchase agreements will be determined in the Company’s discretion based on the Company’s need for additional capital to consummate a Business Combination. Under each forward purchase agreement,redemption date and the Company is required to approach Casdin and Corvex if it proposes to raise additional capital by issuing any equity, or securities convertible into, exchangeable or exercisable for equity securities in connection with a Business Combination. The respective obligations of Casdin and Corvex to purchase forward purchase shares will, among other things, be conditioned on the Company completing a Business Combination with a company engaged in a business that is within the investment objectivesfair market value of the Clients purchasing forward purchase shares and on the Business Combination (including the target assets or business, and the terms of the Business Combination) being reasonably acceptable to such Clients as determined by Casdin or Corvex, as relevant, as investment advisors on behalf of such Clients. Each of Casdin and Corvex will have the right to transfer a portion of its purchase obligation under the forward purchase agreement to third parties, subject to compliance with applicable securities laws. To the extent that the Company obtains alternative financing to fund the initial Business Combination and the Clients participate in such financing, the aggregate commitment under the forward purchase agreement will be reduced by the amount of such alternative financing.
CM LIFE SCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2020
NOTE 8. STOCKHOLDERS’ EQUITY
Preferred Stock — The Company is authorized to issue 1,000,000 shares of preferred stock with a par value of $0.0001 per share with such designations, voting and other rights and preferences as may be determined from time to time by the Company’s board of directors. At December 31, 2020, there were no shares of preferred stock issued or outstanding.
Class A Common Stock — The Company is authorized to issue 380,000,000 shares of Class A common stock with a par value of $0.0001 per share. Holders of Class A common stock are entitled to one vote for each share. At December 31, 2020, there were 8,953,013 shares of Class A common stock issued and outstanding, excluding 35,321,987 shares of Class A common stock subject to possible redemption.
Class B Common Stock — The Company is authorized to issue 20,000,000 shares of Class B common stock with a par value of $0.0001 per share. Holders of Class B common stock are entitled to one vote for each share. At December 31, 2020, there were 11,068,750 shares of Class B common stock issued and outstanding.
The shares of Class B common stock will automatically convert into Class A common stock concurrently with or immediately following the consummation of the Business Combination, on a one-for-one basis, subject to adjustment. In the case that additional shares of Class A common stock, or equity-linked securities, are issued or deemed issued in connection with a Business Combination, the number of shares of Class A common stock issuable upon conversion of all Founder Shares will equal, in the aggregate, on an as-converted basis, 20% of the total number of shares of Class A common stock outstanding after such conversion (after giving effect to any redemptions of shares of Class A common stock by public stockholders), including the total number of shares of Class A common stock issued, or deemed issued or issuable upon conversion or exercise of any equity-linked securities or rights issued or deemed issued, by the Company in connection with or in relation to the consummation of a Business Combination (including the forward purchase shares), excluding any shares of Class A common stock or equity-linked securities or rights exercisable for or convertible into shares of Class A common stock issued, or to be issued, to any seller in a Business Combination and any Private Placement Warrants issued to the Sponsor, officers or directors upon conversion of Working Capital Loans, provided that such conversion of Founder Shares will never occur on a less than one-for-one basis.
NOTE 9. WARRANT LIABILITY
Warrants — Public Warrants may only be exercised for a whole number of shares. No fractional warrants will be issued upon separation of the Units•if, and only whole warrants will trade. The Public Warrants will become exercisable on the later of (a) 30 days after the completion of a Business Combination and (b) 12 months fromif, the closing of the Initial Public Offering. The Public Warrants will expire five years after the completion of a Business Combination or earlier upon redemption or liquidation.
The Company will not be obligated to deliver any shares of Class A common stock pursuant to the exercise of a warrant and will have no obligation to settle such warrant exercise unless a registration statement under the Securities Act with respect to the Class A common stock underlying the warrants is then effective and a prospectus relating thereto is current, subject to the Company satisfying its obligations with respect to registration. No warrant will be exercisable and the Company will not be obligated to issue shares of Class A common stock upon exercise of a warrant unless the share of Class A common stock issuable upon such warrant exercise has been registered, qualified or deemed to be exempt under the securities laws of the state of residence of the registered holder of the warrants.
The Company has agreed that as soon as practicable, but in no event later than 15 business days, after the closing of a Business Combination, it will use its best efforts to file with the SEC a registration statement for the registration, under the Securities Act,price of the Class A common stock issuable upon exerciseequals or exceeds $330.00 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 the Public Warrants. The Company will use its best effortsredemption to cause the same to become effective and to maintain the effectiveness of such registration statement, and a current prospectus relating thereto, until the expiration of the Public Warrants in accordance with the provisions of the warrant agreement. If a registration statement covering the shares of Class A common stock issuable upon exercise of the warrants is not effective by the sixtieth (60th) business day after the closing of a Business Combination, warrant holders may, until such time as there is an effective registration statementholders; and during any period when the Company will have failed to maintain an effective registration statement, exercise warrants on a “cashless basis” in accordance with Section 3(a)(9) of the Securities Act or another exemption. Notwithstanding the above,
•if the Class A common stock are, at the time of any exercise of a Public Warrant, not listed on a national securities exchange such that they satisfy the definition of a “covered security” under Section 18(b)(1) of the Securities Act, the Company may, at its option, require holders of Public Warrants who exercise their Public Warrants to do so on a “cashless basis” in accordance with Section 3(a)(9) of the Securities Act and, in the event the Company so elects, the Company will not be required to file or maintain in effect a registration statement, and in the event the Company does not so elect, it will use its best efforts to register or qualify the shares under applicable blue sky laws to the extent an exemption is not available.CM LIFE SCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2020
Redemption of Warrants When the Price per Share of Class A Common Stock Equals or Exceeds $18.00 — Once the warrants become exercisable, the Company may redeem the outstanding Public Warrants:
| ● | in whole and not in part; |
| | |
| ● | at a price of $0.01 per warrant; |
| | |
| ● | upon not less than 30 days’ prior written notice of redemption, or the 30-day redemption period, to each warrant holder; and |
| | |
| ● | if, and only if, the reported last sale price of the Company’s Class A common stock equals or exceeds $18.00 per share (as adjusted for stock splits, stock dividends, reorganizations, recapitalizations and the like) for any 20 trading days within a 30-trading day period ending on the third trading day prior to the date on which the Company sends the notice of redemption to the warrant holders. |
If and when the warrants become redeemable by the Company, the Company may exercise its redemption right even if it is unable to register or qualify the underlying securities for sale under all applicable state securities laws.
Redemption of Warrants When the Price per Share of Class A Common Stock Equals or Exceeds $10.00 — Once the warrants become exercisable, the Company may redeem the outstanding warrants:
| ● | in whole and not in part; |
| | |
| ● | at a price of $0.10 per warrant provided that holders will be able to exercise their warrants prior to redemption and receive that number of shares of Class A common stock determined based on the redemption date and the “fair market value” of the Company’s Class A common stock; |
| | |
| ● | upon a minimum of 30 days’ prior written notice of redemption; |
| | |
| ● | if, and only if, the last reported sale price of the Company’s Class A common stock equals or exceeds $10.00 per share (as adjusted for stock splits, stock dividends, reorganizations, recapitalizations and the like) on the trading day prior to the date on which the Company sends the notice of redemption to the warrant holders; |
| | |
| ● | if, and only if, there is an effective registration statement covering the issuance of the shares of Class A common stock issuable upon exercise of the warrants and a current prospectus relating thereto is available throughout the 30-day period after the written notice of redemption is given. |
In addition, if (x) the Company issues additional shares of Class A common stock or equity-linked securities for capital raising purposes in connection with the closing of a Business Combination at an issue price or effective issue price of less than $9.20 per share of Class A common stock (with such issue price or effective issue price to be determined in good faith by the Company’s board of directors, and, in the case of any such issuance to the Sponsor or its affiliates, without taking into account any Founder Shares held by the Sponsor or its affiliates, as applicable, prior to such issuance) (the “Newly Issued Price”), (y) the aggregate gross proceeds from such issuances represent more than 60% of the total equity proceeds, and interest thereon, available for the funding of a Business Combination on the date of the completion of a Business Combination (net of redemptions), and (z) the volume weighted average trading price of the Company’s Class A common stock during thefor any 20 trading days within a 30-trading day period startingending three trading days before the Company sends notice of redemption to the warrant holders is less than $594.00 per share (as adjusted), the private placement warrants must also be concurrently called for redemption on the trading day aftersame terms as the day on which the Company completes a Business Combination (such price, the “Market Value”) is below $9.20 per share, the exercise price of theoutstanding public warrants, will be adjusted (to the nearest cent)as described above.
The private placement warrants were issued to
be equal to 115% of the higher of the Market ValueCMLS Holdings, LLC, Mr. Munib Islam, Dr. Emily Leproust and
the Newly Issued Price, the $18.00 per share redemption trigger price will be adjusted (to the nearest cent) to be equal to 180% of the higher of the Market ValueMr. Nat Turner, and
the Newly Issued Price, and the $10.00 per share redemption trigger price will be adjusted (to the nearest cent) to be equal to the higher of the Market Value and the Newly Issued Price.The Private Placement Warrants are identical to the Public Warrantspublic warrants underlying the Unitsunits sold in the Initial Public Offering,initial public offering, except that (1) the Private Placement Warrantsprivate placement warrants and the Class A common stock issuable upon the exercise of the Private Placement Warrants willprivate placement warrants would not be transferable, assignable or saleablesalable until 30 days after the completion of a Business Combination, subject to certain limited exceptions, (2) the Private Placement Warrants will beprivate placement warrants are exercisable on a cashless basis, (3) the Private Placement Warrants will beprivate placement warrants are non-redeemable (except as described above, in “Redemptionupon a redemption of Warrants Whenwarrants when the Priceprice per Shareshare of Class A Common Stock Equalscommon stock equals or Exceeds $10.00”)exceeds $330.00) so long as they are held by the initial purchasers or their permitted transferees, and (4) the holders of the Private Placement Warrantsprivate placement warrants and the Class A common stock issuable upon the exercise of the Private Placement Warrants willprivate placement warrants have certain registration rights. If the Private Placement Warrantsprivate placement warrants are held by someone other than the initial purchasers or their permitted transferees, the Private Placement Warrantsprivate placement warrants will be redeemable by the Company and exercisable by such holders on the same basis as the Public Warrants.
public warrants. For the years ended December 31, 2023 and December 31, 2022 , a gain of $0.2 million and $21.1 million was recorded within the change in the change in fair market value of warrant and earn-out contingent liabilities in the consolidated statements of operations and comprehensive loss, respectively.
Perceptive Warrant
On October 27, 2023, the Company entered into a Credit Agreement and Guaranty (the “Credit Agreement”) with Perceptive Credit Holdings IV, LP, as lender and administrative agent (“Perceptive”), which provides for a senior secured delayed draw term loan facility in an aggregate principal amount of up to $75 million (the “Perceptive Term Loan Facility”). As consideration for the Credit Agreement, the Company issued to Perceptive a warrant to purchase up to 1,200,000 shares (the “Perceptive Warrants”) of its Class A common stock. For further information regarding the Credit Agreement and Perceptive Warrants, see Note 9, “Long Term Debt” included within this Annual Report.
The Perceptive Warrants are classified within Level 3 of the fair value hierarchy.The key assumptions utilized in determining the Perceptive Warrants valuation as of December 31, 2023 were as follows:
| F-18 | | | | | | | |
| | December 31, 2023 |
| Stock price | | $2.75 |
| Exercise price | | $3.18 |
| Expected volatility | | 110.0% |
| Expected term (in years) | | 9.8 |
| Risk-free interest rate | | 3.88% |
| Dividend yield | | — |
CM LIFE SCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBERThe fair value determined and recorded as of December 31, 2020
NOTE 10. INCOME TAX
2023 was $2.5 million. For the year ended December 31, 2023, a nominal gain was recorded within the change in fair market value of warrant and earn-out contingent liabilities in the consolidated statements of operations and comprehensive loss based on re-measurement performed as of the period end date.
Earn-out Contingent Liability
In connection with the Business Combination, all Legacy Sema4 stockholders and option holders at that time became entitled to a pro rata share of 576,412 earn-out shares and earn-out RSUs. As for the earn-out RSUs for the Legacy Sema4 option holders, a total of 81,819 RSUs were granted on December 9, 2021. The vesting of such arrangement was conditioned on the satisfaction of both a service requirement and on the satisfaction of a market-based requirement. The market-based requirement would have been achieved if the Company’s stock price was greater than or equal to $429 (Triggering Event I), $495 (Triggering Event II) and $594 (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.
In July 2023, the Company’s obligations to issue earn-out shares pursuant to that certain Agreement and Plan of Merger (as amended, the “Business Combination Merger Agreement”), dated February 9, 2021, and shares pursuant to the earn-out RSUs expired as a result of the vesting conditions not being achieved. The fair value determined and recorded as of December 31, 2023 and December 31, 2022 was zero. During the year ended December 31, 2022, a gain of $10.2 million was recorded within the change in fair market value of warrant and earn-out contingent liabilities in the consolidated statements of operations and comprehensive loss based on re-measurement performed as of the period end date.
The Company also recorded $0.8 million reduction in stock-based compensation expense in relation to the forfeiture of the earn-out RSUs by the Legacy Sema4 option holders for the year December 31, 2023.
Contingent Consideration (Legacy GeneDx)
In connection with the Acquisition, up to $150 million of contingent payments was to 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”).
Subject to the terms and conditions of the Acquisition Merger Agreement, the first Milestone Payment was paid out in full in April 2023 through the issuance of 701,460 shares of the Company’s Class A common stock (valued at $160.38 per share) for $112.5 million as the revenue of the Legacy GeneDx group for the fiscal year 2022 exceeded $163 million. The second Milestone Payment of $37.5 million was valued at zero as the revenue target for the Legacy GeneDx group was not met during fiscal year 2023. The second Milestone Payment would have become due and payable if the revenue of the Legacy GeneDx group for the fiscal year 2023 equaled or exceeded $219 million (each of clauses (a) and (b), a “Milestone Event”); provided that 80% of the second Milestone Payment would have become payable in respect of the second milestone period if the Legacy GeneDx group achieved 90% of the Milestone Event revenue target for such period, which amount would have scaled on a linear basis up to 100% of the second Milestone Payment at 100% of the revenue target.
During the year ended December 31, 2023, a gain of $0.9 million was recorded in the change in fair market value of warrant and earn-out contingent liabilities in the consolidated statements of operations and comprehensive loss.
Connecticut Department of Economic and Community Development Funding Commitment
The Company’s loan from the Connecticut Department of Economic and Community Development (“DECD”) is classified within Level 2 of the fair value hierarchy. The loan was recorded at its carrying value of $6.3 million at December 31, 2022
and December 31, 2023, with $0.5 million of recorded in other current liabilities on the consolidated balance sheets at December 31, 2023. The fair value was $5.0 million, which is estimated based on discounted cash flows using the yields of similar debt instruments of other companies with similar credit profiles.
6. Property and Equipment
Property and equipment consisted of the following:
| | | | | | | | | | | |
| As of December 31, |
| 2023 | | 2022 |
| Laboratory equipment | $ | 15,538 | | | $ | 41,255 | |
| Equipment under finance leases | 2,604 | | | 21,384 | |
| Leasehold improvements | 14,614 | | | 35,561 | |
| Capitalized software | 32,171 | | | 32,171 | |
| Building under finance lease | 4,529 | | | 6,276 | |
| Computer equipment | 5,819 | | | 9,177 | |
| Furniture, fixtures and other equipment | 550 | | | 3,777 | |
| Construction in-progress | 3,106 | | | 3,386 | |
| Total property and equipment | 78,931 | | | 152,987 | |
| Less: accumulated depreciation and amortization | (46,452) | | | (101,460) | |
| Property and equipment, net | $ | 32,479 | | | $ | 51,527 | |
For the years ended December 31, 2023 and 2022, depreciation and amortization expense was $19.7 million and $50.0 million, respectively, which included software amortization expense of $6.6 million and $15.4 million for the years ended December 31, 2023 and 2022, respectively. For intangible amortization, see Note 7, “Goodwill and Intangible Assets”.
For the year ended December 31, 2023, the Company recorded the following:
•$4.0 million charge to accelerate the amortization for certain capitalized software projects associated with Legacy Sema4 that were not expected to be utilized;
•$9.9 million non-cash impairment charges (of which $5.6 million was allocated to the right-of-use asset associated with the sublease), driven by indicators of impairment related to the ISMMS sublease agreements during the first and third quarters of 2023; and
•$1.7 million net gain on sale of assets primarily associated with the closure of Legacy Sema4 facilities.
For the year ended December 31, 2022, the Company recorded the following:
•$24.0 million charge to accelerate depreciation and amortization due to the change in the Company’s useful lives on certain fixed assets that are related to the business exit activity; and
•$8.7 million charge associated with the identification of indicators of impairment that the carrying value of the certain capitalized software may not be recoverable. As a result, certain costs previously capitalized were written down within cost of services, research and development and general and administrative expenses.
Depreciation and amortization expense is included within the statements of operations and comprehensive loss as follows:
| | | | | | | | | | | | | |
| Year Ended December 31, |
| 2023 | | 2022 | | |
| Cost of services | $ | 4,350 | | | $ | 31,328 | | | |
| Research and development | 6,710 | | | 14,960 | | | |
| Selling and marketing | 2 | | | 4 | | | |
| General and administrative | 8,647 | | | 3,667 | | | |
| Total depreciation and amortization expense | $ | 19,709 | | | $ | 49,959 | | | |
7. Goodwill and Intangible Assets
As discussed in Note 3, “Business Combinations”, upon the acquisition of GeneDx in April 2022, the Company recorded initial goodwill of $185.9 million through its preliminary purchase allocation. The purchase price allocation for acquired businesses may be modified for up to one year from the date of acquisition if additional facts or circumstances lead to changes in our preliminary purchase accounting estimates. During 2022, the Company recorded measurement period adjustments to reduce goodwill by $11.4 million. The measurement period closed on April 29, 2023.
During the fourth quarter of 2022, the Company identified indicators that it was more likely than not that the fair value of the GeneDx reporting unit was less than its carrying value. The factors contributing to the indicators included, but were not limited to, significant decline in the Company’s stock price coupled with lower than anticipated business financial performance of the Legacy Sema4 business. Based on the quantitative analysis performed as of December 31, 2022, the Company concluded that the reporting unit’s carrying value was greater than the fair value. Accordingly, an impairment charge totaling $174.5 million was recognized.
The following table reflects the carrying values and remaining useful lives of the acquired intangible assets identified based on the Company’s preliminary purchase accounting assessments for the GeneDx acquisition:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2023 | | December 31, 2022 | | Weighted-Average
Amortization
Period
(in years) |
| Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Value | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Value | |
| Tradenames and trademarks | $ | 50,000 | | | $ | (5,208) | | | $ | 44,792 | | | $ | 50,000 | | | $ | (2,083) | | | $ | 47,917 | | | 14.3 |
| Developed Technology | 48,000 | | | (10,000) | | | 38,000 | | | 48,000 | | | (4,000) | | | 44,000 | | | 6.3 |
| Customer Relationships | 98,000 | | | (8,167) | | | 89,833 | | | 98,000 | | | (3,267) | | | 94,733 | | | 18.3 |
| $ | 196,000 | | | $ | (23,375) | | | $ | 172,625 | | | $ | 196,000 | | | $ | (9,350) | | | $ | 186,650 | | | |
The following table summarizes the Company’s estimated future amortization expense of intangible assets with finite lives as of December 31, 2023:
| | | | | | | | |
| | |
| 2024 | | $ | 14,025 | |
| 2025 | | 14,025 | |
| 2026 | | 14,025 | |
| 2027 | | 14,025 | |
| 2028 | | 14,025 | |
| Thereafter | | 102,500 | |
| Total estimated future amortization expense | | $ | 172,625 | |
Amortization expense for tradenames and trademarks and developed technology of $9.1 million was recorded in general and administrative expenses for the year ended December 31, 2023 within the consolidated statements of operations and comprehensive loss. Amortization expense for customer relationships of $4.9 million was recorded in selling and marketing expenses for the year ended December 31, 2023 within the consolidated statements of operations and comprehensive loss.
8. Related Party Transactions
Related party revenues
Total related party revenues are included within diagnostic test revenue and other revenue in the consolidated statements of operations and comprehensive loss as follows:
| | | | | | | | | | | | | |
| Year Ended December 31, |
| 2023 | | 2022 | | |
| Diagnostic test revenue | $ | 3,199 | | | $ | 2,209 | | | |
| Other revenue | — | | | 353 | | | |
| Total related party revenues | $ | 3,199 | | | $ | 2,562 | | | |
Related party revenues primarily include diagnostic testing revenues generated by GeneDx from BioReference Laboratories, Inc. (“BRLI”), which is a subsidiary of OPKO. The prices charged represent market rates. Revenue recorded from this contract was $2.7 million and $1.7 million for the years ended December 31, 2023 and December 31, 2022, respectively.
Related party expenses
Total related party costs are included within cost of services and related party expenses in the consolidated statements of operations and comprehensive loss as follows:
| | | | | | | | | | | | | |
| Year Ended December 31, |
| 2023 | | 2022 | | |
| Costs of services | $ | 4,338 | | | $ | 4,169 | | | |
| General and administrative | 435 | | | — | | | |
| Other operating expenses, net | 5,266 | | | 6,312 | | | |
| Total related party costs | $ | 10,039 | | | $ | 10,481 | | | |
On June 1, 2017, the Company signed a contribution and funding agreement and other agreements with ISMMS, whereby ISMMS contributed certain assets and liabilities related to the Company’s operations, provided certain services to the Company, and also committed to funding the Company up to $55.0 million in future capital contributions in exchange for equity in the Company, of which $55.0 million was drawn as of December 31, 2019. Following the transaction, the Company commenced operations and began providing the services and performing research.
Expenses recognized pursuant to other service arrangements with ISMMS totaled $6.8 million and $7.4 million for the years ended December 31, 2023 and 2022, respectively. These amounts are included in either cost of services or related party expenses on the 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 $1.0 million and $2.4 million as of December 31, 2023 and December 31, 2022, respectively. These amounts are included within due to related parties on the Company’s consolidated balance sheets.
Additionally, the Company incurred $3.4 million and $1.7 million in purchases of diagnostic testing kits and materials and $1.8 million and $1.4 million was recorded in cost of services for the year ended December 31, 2023 and 2022, respectively, 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 $0.4 million as of December 31, 2023 and 2022.
Legacy 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, 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. Services in connection with the OPKO TSA were fully completed in October 2023. The Company recognized $1.6 million and $1.3 million in costs for the year ended December 31, 2023 and 2022, respectively. As of December 31, 2023 and 2022, a nominal amount and $0.4 million was unpaid and included in due to related parties in consolidated balance sheets, respectively.
During the year ended December 31, 2023, the Company recorded a reduction of $1.3 million of receivables from OPKO related to the Acquisition closing working capital adjustment that was previously recorded as prepaid expenses and other current assets in consolidated balance sheets at December 31, 2022.
9. Long-Term Debt
As of December 31, 2023, long-term debt matures as follows:
| | | | | |
| 2024 | $ | 497 | |
| 2025 | 1,211 | |
| 2026 | 1,235 | |
| 2027 | 1,260 | |
| 2028 | 51,285 | |
| Thereafter | 762 | |
| Total debt | 56,250 | |
| Less: current portion of long-term debt | (497) | |
| Less: long-term debt issuance costs | (3,065) | |
| Total long-term debt, net of current portion and debt issuance costs | $ | 52,688 | |
Entry into Perceptive Term Loan Facility
On October 27, 2023 (the “Closing Date”), the Company entered into a Credit Agreement and Guaranty (the “Credit Agreement”) with Perceptive Credit Holdings IV, LP, as lender and administrative agent (“Perceptive”), which provides for a senior secured delayed draw term loan facility in an aggregate principal amount of up to $75 million (the “Perceptive Term Loan Facility”). An initial tranche of $50 million (the “Tranche A Loan”) was funded under the Perceptive Term Loan Facility on the Closing Date. In addition to the Tranche A Loan, the Perceptive Term Loan Facility includes an additional tranche of $25 million (the “Tranche B Loan,” and together with the Tranche A Loan, the “Term Loans”), which will be accessible by the Company so long as the Company satisfies certain customary conditions precedent, including a specified revenue milestone (the funding date of the Tranche B Loan, the “Tranche B Borrowing Date”). The Perceptive Term Loan Facility has a maturity date of October 27, 2028 (the “Maturity Date”) and provides for an interest-only period during the term of the loan with principal due at the maturity date. Our net proceeds from the Tranche A Loan were approximately $49 million, after deducting estimated debt issuance costs and expenses.
Interest Rate
The Perceptive Term Loan Facility will accrue interest at an annual rate equal to the sum of (a) Term SOFR (as defined in the Credit Agreement) and (b) an applicable margin of 7.5% (the “Applicable Margin”). Accrued interest on the Term Loans is payable monthly in arrears. Upon an Event of Default (as defined in the Credit Agreement), the Applicable Margin will automatically increase by an additional 4% per annum.
Amortization and Prepayment
Prior to the Maturity Date, there will be no scheduled principal payments under the Perceptive Term Loan Facility. On the Maturity Date, the Company is required to pay Perceptive the aggregate outstanding principal amount of the Term Loans and all accrued and unpaid interest thereon. The Term Loans may be prepaid at any time, subject to a prepayment premium equal to 0% to 10% of the aggregate outstanding principal amount being prepaid, depending on the date of prepayment.
Security Instruments and Warrant
In connection with the Credit Agreement, the Company also entered into a Security Agreement (the “Security Agreement”), dated as of the Closing Date, with Perceptive, pursuant to which all of its obligations under the Credit Agreement are secured by a first lien perfected security interest on substantially all of its existing and after-acquired assets, subject to customary exceptions.
In addition, on the Closing Date, as consideration for the Credit Agreement, the Company issued to Perceptive a warrant to purchase up to 1,200,000 shares of its Class A common stock. 800,000 Warrant Shares (the “Initial Warrant Shares”) vested and became exercisable on the Closing Date and 400,000 Warrant Shares (the “Additional Warrant Shares”) will vest and become exercisable on the Tranche B Borrowing Date. The per share exercise price for the Initial Warrant Shares is $3.1752 (the “Initial Warrant Exercise Price”), which is equal to the10-day volume weighted average price (the “10-day VWAP”) of the Company’s Class A common stock at the end of the business day immediately prior to the Closing Date, and the per share exercise price for the Additional Warrant Shares will be equal to the lower of (a) the Initial Warrant Exercise Price or (b) the 10-day VWAP ending on the end of the business day immediately preceding the Tranche B Borrowing Date. The Perceptive Warrant will be exercisable, in whole or in part, until the 10th anniversary of the applicable vesting date. For further
information regarding the accounting treatment and subsequent fair value re-measurement of the Perceptive Warrant, see Note 5, “Fair Value Measurement” included within this Annual Report.
Termination of 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”) which provided for a revolving credit facility (the “Revolver”) up to an aggregate principal amount of $125 million, including a sublimit of $20 million for Letters of Credit (as such terms are defined in the SVB Agreement).
In connection with the entry into the Credit Agreement, the SVB Agreement was terminated, effective as of the Closing Date, and SVB’s security interest in the Company’s assets and property was released. No amounts had been drawn under the SVB Agreement at the Closing Date. The Company recorded $0.6 million of expenses related to the termination of the SVB Agreement during the fourth quarter of 2023.
Connecticut Department of Economic and Community Development Funding Commitment
In June 2017, ISMMS assigned a loan funding commitment from the DECD to the Company (the “DECD Loan Agreement”) to support the Genetic Sequencing Laboratory Project in Branford, Connecticut, with funding based on the achievement of certain project development phases. The DECD Loan Agreement provided 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 was 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 was due in July 2028. However, under the terms of the DECD Loan Agreement, the DECD granted a partial principal loan forgiveness of up to $12.3 million in the aggregate. Such forgiveness was contingent upon the Company achieving certain job creation and retention milestones and $4.5 million had been forgiven at December 31, 2022. This commitment was collateralized by a security interest in certain machinery and equipment the Company acquired from ISMMS, as defined in a separate security agreement.
In January 2023, the Company amended the DECD Loan Agreement, which resulted in the Company agreeing to pay $2.0 million in principal, obtaining $2.8 million in debt forgiveness for achieving its Phase 2 job milestone, and agreeing to two new forgiveness milestone targets for its Phase 3 job milestone (eligible for $2.0 million in forgiveness) and a final phase job milestone (eligible for $1.0 million in forgiveness) (the “2022 Amended DECD Loan Agreement”). Upon execution of this amendment, the Company paid the $2.0 million in principal and received $2.8 million in debt forgiveness, both of which were classified as current liabilities at December 31, 2022 and the Company recognized the debt forgiveness as other (expense) income, net in the consolidated statements of operations and comprehensive loss for the year ended December 31, 2023. The terms of the 2022 Amended DECD Loan Agreement require the Company to make interest-only payments through July 2024 and principal and interest payments commencing in August 2024 through July 2029 at the same fixed annual interest rate of 2.0%. The other terms of the 2022 Amended DECD Loan Agreement remained the same.
The outstanding loan balance from the 2022 Amended DECD Loan Agreement was $6.3 million at December 31, 2023.
10. Leases
The tables below present financial information associated with the Company’s leases as of, and for the year ended, December 31, 2023 and 2022:
| | | | | | | | | | | | | | | | | |
| | | December 31, |
| Classification | | 2023 | | 2022 |
| Assets | | | | | |
| Operating lease assets | Operating lease right-of-use assets | | $ | 26,900 | | | $ | 32,758 | |
| Finance lease assets | Property and Equipment, net | | 3,440 | | | 8,604 | |
| Total lease assets | | | $ | 30,340 | | | $ | 41,362 | |
| | | | | |
| Liabilities | | | | | |
| Current | | | | | |
| Operating | Short-term lease liabilities | | $ | 2,331 | | | $ | 2,409 | |
| Finance | Short-term lease liabilities | | 1,316 | | | 3,712 | |
| | | | | |
| Non-current | | | | | |
| Operating | Long-term lease liabilities | | $ | 44,428 | | | $ | 44,468 | |
| Finance | Long-term lease liabilities | | 18,510 | | | 15,545 | |
| Total lease liabilities | | | $ | 66,585 | | | $ | 66,134 | |
| | | | | | | | | | | | | | |
| | Year ended December 31, |
| Lease cost | | 2023 | | 2022 |
| Operating lease cost | | | | |
| Operating lease cost | | $ | 5,806 | | | $ | 6,044 | |
| Short-term lease cost | | 745 | | | 1,131 | |
| Variable lease cost | | 659 | | | 1,111 | |
| Total operating lease cost | | $ | 7,210 | | | $ | 8,286 | |
| | | | |
| Finance lease cost | | | | |
| Depreciation and amortization of leased assets | | $ | 1,970 | | | $ | 5,518 | |
| Interest on lease liabilities | | 1,041 | | | 2,152 | |
| Total finance lease cost | | $ | 3,011 | | | $ | 7,670 | |
| Total lease cost | | $ | 10,221 | | | $ | 15,956 | |
Future minimum lease payments under non-cancellable leases as of December 31, 2023 are as follows:
| | | | | | | | | | | | | | | | | | | | |
| Maturity of lease liabilities | | Operating lease | | Finance lease | | Total |
| 2024 | | $ | 4,388 | | | $ | 2,605 | | | $ | 6,993 | |
| 2025 | | 6,205 | | | 2,491 | | | 8,696 | |
| 2026 | | 6,296 | | | 2,003 | | | 8,299 | |
| 2027 | | 6,266 | | | 2,045 | | | 8,311 | |
| 2028 | | 6,450 | | | 2,107 | | | 8,557 | |
| Thereafter | | 37,157 | | | 23,048 | | | 60,205 | |
| Total | | 66,762 | | | 34,299 | | | $ | 101,061 | |
| Less: imputed interest | | (20,003) | | | (14,473) | | | (34,476) | |
| Present value of lease liabilities | | $ | 46,759 | | | $ | 19,826 | | | $ | 66,585 | |
Other information related to leases as of and for the year ended December 31, 2023 and 2022 and are as follows:
| | | | | | | | | | | | | | |
| | December 31, |
| | 2023 | | 2022 |
| Weighted-average remaining lease term (years) | | | | |
| Operating leases | | 10.0 | | 12.2 |
| Finance leases | | 11.8 | | 19.0 |
| | | | |
| Weighted-average discount rate | | | | |
| Operating leases | | 6.4% | | 6.9% |
| Finance leases | | 8.1% | | 11.2% |
| | | | |
| Cash paid for amounts included in the measurement of lease liabilities | | | | |
| Operating cash flows from operating leases | | $ | 5,482 | | | $ | 4,183 | |
| Operating cash flows from finance leases | | 1,874 | | | 2,225 | |
| Financing cash flows from finance lease | | 3,598 | | | 3,292 | |
11. Purchase Commitments and Contingencies
Purchase Commitments
The following sets forth purchase commitments as of December 31, 2023 with a remaining term of at least one year:
| | | | | | | | | | | | | | | | | | | | | | |
| | 2024 | | 2025 | | | | Total Commitments |
| Software provider | | $ | 2,445 | | | $ | 1,199 | | | | | $ | 3,644 | |
| Equipment provider | | 193 | | | — | | | | | 193 | |
| | $ | 2,638 | | | $ | 1,199 | | | | | $ | 3,837 | |
The Company enters into contracts with suppliers to purchase materials needed for diagnostic testing. These contracts generally do not require multi-year purchase commitments.
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 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 consolidated financial condition or results of operations.
Except as described below, the Company was not a party to any material legal proceedings as of December 31, 2023, nor is it a party to any material legal proceedings as of the date of issuance of these consolidated financial statements.
On September 7, 2022, a shareholder class action lawsuit was filed in the United States District Court for the District of Connecticut against the Company and certain of the Company’s current and former officers. The complaint purports to bring suit on behalf of stockholders who purchased the Company’s publicly traded securities between March 14, 2022 and August 15, 2022. Following the appointment of a lead plaintiff, an amended complaint was filed on January 30, 2023. As amended, the complaint purports to allege that defendants made false and misleading statements about the Company’s business, operations and prospects in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended (“Exchange Act”), and seeks unspecified compensatory damages, fees and costs. The Company believes the allegations and claims made in the complaint are without merit.
On February 7, 2023, a stockholder commenced a lawsuit in the Delaware Court of Chancery. The suit is brought as a class action on behalf of stockholders of CMLS who did not redeem their shares in connection with the Business Combination. The suit names as defendants all directors of CMLS at the time of the transaction, including directors who continue to serve on the Company’s Board of Directors, as well as CMLS Holdings LLC. The Company is not named as a defendant. The complaint alleges that the July 2, 2021 proxy statement mailed to CMLS stockholders in connection with the transaction contained false and misleading statements, and purports to assert a claim of breach of fiduciary duty against all individual defendants, and a
similar claim against CMLS Holdings LLC and certain individuals for breach of fiduciary duty as control persons. The suit seeks to recover unspecified damages on behalf of the alleged class, among other relief. The Company believes the allegations and claims made in the complaint are without merit. The Company is subject to certain claims for advancement and indemnification by the individual defendants in this proceeding.
On November 28, 2023, a stockholder filed a derivative suit, allegedly on behalf of the Company, based largely on the same allegations in the securities class action referenced above. The suit was filed in federal court in the District of Delaware, styled Ghazaleh v. Schadt, et al, 23-cv-01357 (D. Del.), and purports to assert claims against certain of the Company’s former and current officers and directors under Section 10(b) of the Exchange Act, and for breach of fiduciary duty, aiding and abetting breach of fiduciary duty, unjust enrichment and corporate waste. The Company is named only as a nominal defendant. The complaint seeks damages on the Company’s behalf, and seeks corporate governance and other relief. The response to the complaint is not yet due.
Defined Contribution Plan
Substantially all of the Company’s employees in the U.S. are eligible to participate in the defined contribution plan the Company sponsors. The defined contribution plan allows employees to contribute a portion of their compensation in accordance with specified guidelines. The Company, at its discretion, makes matching contributions. The Company contributed $6.5 million and $9.8 million for the years ended December 31, 2023 and 2022, respectively.
12. Stock-Based Compensation
Stock Incentive Plans
On July 22, 2021, in connection with the Business Combination, the Company’s 2021 Equity Incentive Plan (the “2021 Plan”) became effective and 991,970 authorized shares of Class A common stock were reserved for issuance thereunder. This 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 this 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.
On April 13, 2023, the stockholders of the Company approved an amendment and restatement to the 2021 Plan to increase the aggregate number of shares of the Company’s Class A common stock authorized for issuance under the 2021 Plan by 787,879 shares and implement certain other clarifying changes. 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 5% of the total number of shares of all classes of common stock issued and outstanding immediately preceding December 31.
On July 21, 2023, the Company adopted the 2023 Equity Inducement Plan (the “Equity Inducement Plan”) and, subject to the adjustment provisions of the Equity Inducement Plan, reserved 500,000 shares of the Company’s Class A common stock for issuance pursuant to equity awards to be granted under the Equity Inducement Plan. In accordance with Rule 5635(c)(4) of the Nasdaq Listing Rules, the only persons eligible to receive grants of equity awards under the Equity Inducement Plan are individuals who were not previously an employee or director of the Company, or following a bona fide period of non-employment, as an inducement material to such persons entering into employment with the Company.
As of December 31, 2023, there was an aggregate of 1,310,423 shares available for grants of stock options or other awards under the 2021 Plan and Equity Inducement Plan. In January 2024, the number of Class A common stock reserved for future issuance under the 2021 Plan automatically increased by 1,298,943 shares.
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 ESPP 2021 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 years ended December 31, 2023 and December 31, 2022. A total of 336,816 shares of Class A common stock have been reserved for future issuance under the 2021 ESPP. In January 2024, the number of Class A common stock reserved for future issuance under the 2021 ESPP automatically increased by 259,788 shares.
Stock Option Activity
All stock options granted under the 2021 Plan are accounted for as time-based equity awards. The following summarizes the stock option activity:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Stock Options Outstanding | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Life (years) | | Aggregate Intrinsic Value |
| Balance at December 31, 2022 | | 798,873 | | $ | 49.83 | | | 6.08 | | $ | 775,842 | |
| Options granted | | 44,080 | | $ | 7.89 | | | | | |
| Options exercised | | (50,444) | | $ | 5.05 | | | | | |
| Options forfeited and canceled | | (294,533) | | $ | 48.62 | | | | | |
| Balance at December 31, 2023 | | 497,976 | | $ | 42.80 | | | 5.55 | | $ | — | |
| Options exercisable at December 31, 2023 | | 303,433 | | $ | 37.27 | | | 4.52 | | $ | — | |
Non-vested options outstanding at the end of the year were 194,543 with weighted average grant-date fair value of $28.24.
The weighted-average grant-date fair value of options granted and total fair value of the options with tranches vested was $25.07 and $1.5 million for the year ended December 31, 2023, respectively. The weighted-average grant-date fair value of options forfeited and canceled was $22.71 for the year ended December 31, 2023. The aggregate intrinsic value of exercised options was $0.3 million and $18.1 million in the years ended December 31, 2023 and 2022, respectively, and is calculated based on the difference between the exercise price and the fair value of the Company’s common stock as of the exercise date.
The fair value of the stock option awards for the periods ended December 31, 2023 and 2022 were estimated using the Black-Scholes option pricing model with the following assumptions:
| | | | | | | | | | | | | |
| 2023 | | 2022 | | |
| Expected volatility | 105.00% | | 65.20% - 90.00% | | |
| Weighted-average expected volatility | 105.0% | | 75.0% | | |
| Expected term (in years) | 5.5 | | 5.48 - 6.18 | | |
| Risk-free interest rate | 4.03% | | 1.65% - 3.38% | | |
| Dividend yield | — | | — | | |
| Fair value of Class A common stock | $6.35 | | $32.67 - $113.85 | | |
Restricted Stock Units (RSU)
The Company issued time-based RSUs to employees under the 2021 Plan. The RSUs automatically convert to 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 common stock on the grant date. The RSUs granted generally vest over a four year vesting period from the grant date, however, the Company also granted certain RSUs with vesting term beginning 12 months from the grant date and vesting immediately on 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, 2022 | 855,061 | | | $ | 77.88 | |
| Restricted Stock Units granted | 1,836,177 | | | $ | 8.93 | |
| Restricted Stock Units vested | (431,671) | | | $ | 42.38 | |
| Restricted Stock Units forfeited | (751,690) | | | $ | 49.61 | |
| Balance at December 31, 2023 | 1,507,877 | | | $ | 15.48 | |
The total fair value of RSUs vested for the year ended December 31, 2023 was $6.6 million.
In 2022 the Company issued 18,794 RSUs subject to both service and performance based vesting conditions to the Executive Chairman of the Company, and in 2023 the Company issued an additional 20,666 RSUs. Vesting of the RSUs was based on the achievement of performance goals established for calendar year 2023. As of December 31, 2023, the established performance measures were not achieved for these RSUs and no expense was recorded for the year.
Stock-Based Compensation Expense
Stock-based compensation expense is included within the consolidated statements of operations and comprehensive loss as follows:
| | | | | | | | | | | | | |
| Year Ended December 31, |
| 2023 | | 2022 | | |
| Cost of services | $ | (1,217) | | | $ | 5,080 | | | |
| Research and development | (2,585) | | | 1,755 | | | |
| Selling and marketing | (1,266) | | | 5,390 | | | |
| General and administrative | 4,742 | | | 29,750 | | | |
| Total stock-based compensation expense | $ | (326) | | | $ | 41,975 | | | |
The Company recorded a reversal of stock-based compensation of $24.7 million and $38.2 million during the years ended December 31, 2023 and 2022, respectively, due to forfeiture activities upon employee terminations. As of December 31, 2023, unrecognized stock-based compensation cost related to the unvested portion of the Company’s stock options was $2.7 million, which is expected to be recognized on a graded-vesting basis over a weighted-average period of 1.4 years. As of December 31, 2023, unrecognized stock-based compensation cost related to the Company’s RSUs was $10.6 million, which is expected to be recognized on a graded-vesting basis over a weighted-average period of 1.7 years.
13. Income Taxes
The components of income before incomes taxes consisted of the following:
| | | | | | | | | | | | | |
| Year Ended December 31, |
| 2023 | | 2022 | | |
| Foreign | $ | 623 | | | $ | 104 | | | |
| Domestic | (177,316) | | | (598,136) | | | |
| Loss before income tax provision (benefit) | (176,693) | | | (598,032) | | | |
| | | | | | | | | | | | | |
| Year Ended December 31, |
| 2023 | | 2022 | | |
| Current | | | | | |
| Federal | $ | — | | | $ | — | | | |
| State and Local | — | | | — | | | |
| Foreign | 164 | | | 72 | | | |
| Total Current | $ | 164 | | | $ | 72 | | | |
| | | | | |
| Deferred | | | | | |
| Federal | $ | 942 | | | $ | (40,828) | | | |
| State and Local | (2,032) | | | (8,296) | | | |
| Foreign | — | | | — | | | |
| Total Deferred | (1,090) | | | (49,124) | | | |
| Total income tax provision (benefit) | $ | (926) | | | $ | (49,052) | | | |
For the years ended December 31, 2023 and 2022, the Company recorded a total income tax benefit of $0.9 million and $49.1 million, respectively. Accordingly, the effective tax rate for the Company for the years ended December 31, 2023 and 2022 was 0.5% and 8.2%, respectively. A reconciliation of the anticipated income tax expense/(benefit) computed by applying the
statutory federal income tax rate of 21% to loss before income taxes to the amount reported in the statement of operations and comprehensive loss is as follows:
| | | | | | | | | | | | | |
| Year Ended December 31, |
| 2023 | | 2022 | | |
| U.S. federal taxes at statutory rate | 21.0% | | 21.0% | | |
| State taxes (net of federal benefit) | 1.1 | | 1.4 | | |
| Research and development tax credits | (0.8) | | 0.3 | | |
| Non-deductible stock-based compensation | (2.4) | | (1.0) | | |
| 162(m) Limitation | (0.1) | | — | | |
| Permanent Items | (0.1) | | 0.5 | | |
| Unrealized fair market value gain on warrants | 0.1 | | 1.7 | | |
| Goodwill Impairment | (0.1) | | (6.1) | | |
| Change in valuation allowance | (18.4) | | (9.6) | | |
| Other | 0.2 | | — | | |
| Effective tax rate | 0.5% | | 8.2% | | |
The tax effects of temporary differences and carryforwards that give rise to significant portions of the net deferred tax assets
areand liabilities were as follows:
| | | December 31, | |
| | | 2020 | |
| Deferred tax asset | | | |
| Net operating loss carryforward | | $ | 16,902 | |
| Organizational costs/Startup expenses | | | 23,469 | |
| Total deferred tax asset | | | 40,371 | |
| Valuation allowance | | | (40,371 | ) |
| Deferred tax asset, net of allowance | | $ | — | |
The income tax provision consists
| | | | | | | | | | | |
| As of December 31, |
| 2023 | | 2022 |
| Deferred tax assets: | | | |
| Net operating loss carryforwards | $ | 257,960 | | | $ | 199,426 | |
| Stock-based compensation | 7,690 | | | 13,379 | |
| Accrued compensation | 1,269 | | | 2,233 | |
| Accrued expenses | 3,470 | | | — | |
| Research and development credits | 6,374 | | | 8,600 | |
| Leases | 14,054 | | | 12,971 | |
| Property and equipment | — | | | 4,039 | |
| Obsolete inventory reserve | 136 | | | 5,889 | |
| Third party liability | 7,514 | | | 10,142 | |
| Section 174 amortization | 25,993 | | | 23,193 | |
| Capitalized software | 1,211 | | | — | |
| Other | 814 | | | 1,091 | |
| Total deferred tax assets | 326,485 | | | 280,963 | |
| Valuation allowance | (271,567) | | | (226,644) | |
| Deferred tax assets, net of valuation allowance | 54,918 | | | 54,319 | |
| | | |
| Deferred tax liabilities: | | | |
| Property and equipment | (1,279) | | | — | |
| ROU asset | (7,353) | | | (8,589) | |
| Capitalized software | — | | | (141) | |
| Intangible amortization | (47,846) | | | (48,248) | |
| Total deferred tax liabilities | (56,478) | | | (56,978) | |
| Net deferred tax liability after valuation allowance | $ | (1,560) | | | $ | (2,659) | |
Table of the following: | | December 31, | |
| | 2020 | |
Federal | | | |
Current | | $ | — | |
Deferred | | | (40,371 | ) |
| | | | |
State | | | | |
Current | | $ | — | |
Deferred | | | — | |
Change in valuation allowance | | | 40,371 | |
Income tax provision | | $ | — | |
Contents
As of December 31,
2020,2023, the Company had
a U.S. federalthe following tax net operating loss
carryover of approximately $80,000carryforwards available to reduce future federal and state taxable income, and tax credit carryforwards available to offset future
taxable income.In assessingfederal and Connecticut income taxes:
| | | | | | | | | | | |
| Amount | | Expiration period |
| Tax net operating loss carryforwards: | | | |
| Federal (pre-2018 net operating losses) | $ | 33,056 | | | 2036-2037 |
| Federal (post-2017 net operating losses) | $ | 853,531 | | | No expiration |
| State and Local | $ | 1,278,549 | | | 2028-2042 |
| State and Local | $ | 97,727 | | | No expiration |
| Tax credit carryforwards: | | | |
| Federal research and development | $ | 5,460 | | | 2038-2040 |
| Connecticut research and experimental | $ | 777 | | | 2035-2036 |
| Connecticut research and development | $ | 381 | | | No expiration |
The Company had the following deferred tax valuation allowance balances:
| | | | | | | | | | | | | | | | | | | | | | |
| Year | | Balance at the Beginning of Period | | Additions | | | | Balance at the End of Period |
| 2023 | | $ | 226,644 | | | 44,923 | | | | | $ | 271,567 | |
| 2022 | | $ | 155,668 | | | 70,976 | | | | $ | 226,644 | |
| | | | | | | | |
Future realization of the deferred tax assets, management considersbenefits of existing temporary differences and carryforwards ultimately depends on the existence of sufficient taxable income within the carryforward period. As of December 31, 2023 and 2022 the Company performed an evaluation to determine whether a valuation allowance was needed. Based on the Company’s analysis, which considered all available evidence, both positive and negative, the Company determined that it is more likely than not that somea significant portion of all of theits deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent uponAccordingly, the generation of future taxable income during the periods in which temporary differences representing net future deductible amounts become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. After consideration of all of the information available, management believes that significant uncertainty exists with respect to future realization of the deferred tax assets and has therefore establishedCompany maintained a full valuation allowance. For the period from July 10, 2020 (inception) throughallowance as of December 31, 2020,2023 and 2022. The valuation allowance increased by $44.9 million in 2023 and $71.0 million in 2022, primarily due to the increase in net operating loss carryforwards.
Under Internal Revenue Code Section 382, if a corporation undergoes an “ownership change,
” the corporation’s ability to use its pre-change NOL carryforwards and other pre-change tax attributes to offset its post-change income may be limited. Generally, an ownership change occurs when certain shareholders increase their aggregated ownership by more than 50 percentage points over their lowest ownership percentage in a testing period (typically three years). Future changes in stock ownership, which may be outside of the Company’s control, may trigger an ownership change. In addition, future equity offerings or acquisitions that have an equity component of the purchase price could result in an ownership change. If an ownership change has occurred or does occur in the
valuation allowance was $40,371.future, utilization of the NOL carryforwards or other tax attributes may be limited.
A reconciliation of the federalbeginning and ending amounts of unrecognized tax benefits for the years ended December 31, 2023 and 2022 is as follows:
| | | | | | | | | | | | | |
| As of December 31, |
| 2023 | | 2022 | | |
| Unrecognized tax benefits – January 1 | $ | 718 | | | $ | 537 | | | |
| Gross increases – tax positions in current period | — | | | 181 | | | |
| Unrecognized tax benefits – December 31 | $ | 718 | | | $ | 718 | | | |
To the extent penalties and interest would be assessed on any underpayment of income tax,
rate to the Company’s
effectivepolicy is that such amounts would be accrued and classified as a component of income tax
rate atexpense in the financial statements. The Company had a nominal amount of accrued interest or penalties related to uncertain tax positions as of December 31,
2020 is as follows: | | December 31, | |
| | 2020 | |
Statutory federal income tax rate | | | 21.0 | % |
State taxes, net of federal tax benefit | | | 0.0 | % |
Change in fair value of warrant liability | | | -20.0 | % |
Transaction costs | | | -1.0 | % |
Change in valuation allowance | | | -0.0 | % |
Income tax provision | | | -0.0 | % |
2023 and 2022.
The Company files income tax returns
in the U.S.for U.S federal jurisdiction,
in various state
and local jurisdictions, and
various foreign countries. In the normal course of business, the Company is subject to examination by
the various taxing authorities.CM LIFE SCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2020
NOTE 11. FAIR VALUE MEASUREMENTS
The fair valuefederal, state and foreign jurisdictions, where applicable. There are currently no pending federal, state or foreign income tax examinations. As a result of the Company’s financial assets
net operating loss carryforwards, the Company’s federal and liabilities reflects management’s estimatestate statutes of amounts thatlimitations remain open from 2016 and forward until the net operating loss carryforwards are utilized or expire prior to utilization.
14. Net Loss per Share
Basic net loss per share is computed by dividing the net loss attributable to common stockholders by the weighted-average number of shares of common stock outstanding for the period. The following table sets forth the computation of basic and diluted net loss per share attributable to common stockholders:
| | | | | | | | | | | | | |
| Year Ended December 31, |
| 2023 | | 2022 | | |
| Numerator: | | | | | |
| Net loss attributable to common stockholders | $ | (175,767) | | | $ | (548,980) | | | |
| Denominator: | | | | | |
| Basic and diluted weighted-average common shares outstanding | 24,311,989 | | | 10,236,960 | | | |
| Basic and diluted loss per share | $ | (7.23) | | | $ | (53.63) | | | |
On May 4, 2023, the Company effected a reverse stock split of its Class A common stock at a ratio of 1-for-33. As a result of the Reverse Stock Split, the Company has retroactively adjusted the weighted-average number of shares of common stock outstanding prior to the Reverse Stock Split by a ratio of 1-for-33 to determine the number of shares of common stock into which they converted.
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 received in connection withbeen anti-dilutive:
| | | | | | | | | | | | | |
| Year Ended December 31, |
| 2023 | | 2022 | | |
| Outstanding options and RSUs to purchase Class A common stock | 2,005,853 | | | 1,653,934 | | | |
| Outstanding warrants | 1,466,515 | | | 666,515 | | | |
| Outstanding earn-out shares | — | | | 552,392 | | | |
| Outstanding earn-out RSUs | — | | | 24,019 | | | |
| Total | 3,472,368 | | | 2,896,860 | | | |
15. Restructuring Costs
The table below provides certain information concerning restructuring activity during the saleyear ended December 31, 2023 and December 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | |
| Reserve Balance at December 31, 2022 | | Charged to Costs and Expenses | | Payments and Other | | Reserve Balance at December 31, 2023 |
| Severance | $ | 4,770 | | | $ | 6,514 | | | $ | (9,431) | | | $ | 1,853 | |
| Others | 253 | | | 18 | | | (271) | | | — | |
| Total | $ | 5,023 | | | $ | 6,532 | | | $ | (9,702) | | | $ | 1,853 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Reserve Balance at December 31, 2021 | | Charged to Costs and Expenses | | Payments and Other | | Reserve Balance at December 31, 2022 |
| Severance | $ | — | | | $ | 19,239 | | | $ | (14,469) | | | $ | 4,770 | |
| Others | — | | | 6,571 | | | (6,318) | | | 253 | |
| Total | $ | — | | | $ | 25,810 | | | $ | (20,787) | | | $ | 5,023 | |
On October 30, 2023, the Company announced a continued strategic realignment of its organization to key priorities which includes the elimination of approximately 50 positions impacted on August 23, 2023, and approximately 35 positions impacted on October 30, 2023. Together these actions reduced the size of the assets or paid in connection withCompany’s workforce by 10% from the transfertotal number that existed at the time of the liabilitiesAugust reduction in force. In total, the Company announced cost saving initiatives,
including but not limited to these reductions in force, that are expected to result in an
orderly transaction between market participants at the measurement date. In connection with measuring the fair valueexcess of
its assets and liabilities, the$40 million in annual cost reduction. The Company
seeks to maximize the use of observable inputs (market data obtained from independent sources) and to minimize the use of unobservable inputs (internal assumptions about how market participants would price assets and liabilities). The following fair value hierarchy is used to classify assets and liabilities based on the observable inputs and unobservable inputs usedexpects that all remaining cash severance payments will be complete in
order to value the assets and liabilities: | Level 1: | Quoted prices in active markets for identical assets or liabilities. An active market for an asset or liability is a market in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis. |
| | |
| Level 2: | Observable inputs other than Level 1 inputs. Examples of Level 2 inputs include quoted prices in active markets for similar assets or liabilities and quoted prices for identical assets or liabilities in markets that are not active. |
| | |
| Level 3: | Unobservable inputs based on our assessment of the assumptions that market participants would use in pricing the asset or liability. |
At December 31, 2020, assets held in the Trust Account were comprised of $442,763,951 in money market funds which are invested primarily in U.S. Treasury Securities. less than one year.
During the year ended December 31, 2020,2022, the Company’s Compensation Committee of the Board of Directors approved by written consents, dated February 17, 2022, May 2, 2022 and August 11, 2022, a restructuring plan which was fully executed by management and restructuring charges were incurred and recorded in connection therewith, including an exit of the Company’s somatic tumor testing business. These costs include severance packages offered to the employees impacted by the plan, third party consulting costs, and costs related to closing the Company’s laboratory in Branford, CT. The plan resulted in the Company dideliminating approximately 250 positions.
During the fourth quarter of 2022, the Company announced its strategic realignment resulting in the exit of its reproductive and women’s health testing business, which included carrier screening, noninvasive prenatal, and other ancillary reproductive testing offerings. The Company ceased accepting samples for these tests on December 14, 2022 and notified its customers impacted by the decision immediately. As a result, the Company eliminated approximately 500 positions, and ceased operations at its Stamford, CT laboratory. When combined with the Company’s prior reductions in workforce during 2022, the exit resulted in the elimination of approximately 32.5% of the Company’s workforce which existed at the time of the announcement.
The Company may incur additional expenses not
withdraw any interest income fromcurrently contemplated due to events associated with the
Trust Account.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.
16. Supplemental Financial Information
The following table presents information aboutprovides a reconciliation of cash, cash equivalents and restricted cash reported on the Company’sconsolidated balance sheets to the total of the same amounts shown on the consolidated statements of cash flows:
| | | | | | | | | | | | | |
| As of December 31, |
| 2023 | | 2022 | | |
| Cash and cash equivalents | $ | 99,681 | | | $ | 123,933 | | | |
| Restricted cash (included in prepaid expenses and other current assets) | — | | | 13,470 | | | |
| Restricted cash (included in other assets) | 987 | | | 900 | | | |
| Total | $ | 100,668 | | | $ | 138,303 | | | |
Restricted cash included within prepaid expenses and other current assets
and liabilities that are measured at fair value on a recurring basis atas of December 31,
2020 and indicates the fair value hierarchy of the valuation inputs the Company utilized to determine such fair value:| Description | | Level | | December 31,
2020 | |
| Assets: | | | | | |
| Investments held in Trust Account – U.S. Treasury Securities Money Market Fund | | 1 | | $ | 442,763,951 | |
| | | | | | | |
| Liabilities: | | | | | | |
| Warrant Liability – Public Warrants | | 1 | | $ | 40,290,250 | |
| Warrant Liability – Private Placement Warrants | | 3 | | $ | 30,032,168 | |
The Warrants were accounted for2022 includes $12.1 million held in escrow as liabilities in accordance with ASC 815-40 and are presented within warrant liabilities on our balance sheet. The warrant liabilities are measured at fair value at inception and on a recurring basis, with changes in fair value presented within change in fair value of warrant liabilities in the statement of operations.
The Private Warrants were initially valued using a Modified Black Scholes Option Pricing Model, which is considered to be a Level 3 fair value measurement. The Modified Black Scholes model’s primary unobservable input utilized in determining the fair value of the Private Warrants is the expected volatility of the common stock. The expected volatility as of the IPO date was derived from observable public warrant pricing on comparable ‘blank-check’ companies without an identified target. The expected volatility as of subsequent valuation dates will be implied from the Company’s own public warrant pricing. A Monte Carlo simulation methodology was used in estimating the fair value of the public warrants for periods where no observable traded price was available, using the same expected volatility as was used in measuring the fair value of the Private Warrants. For periods subsequent to the detachment of the warrants from the Units, the close price of the public warrant price will be used as the fair value as of each relevant date.
The following table presents the changes in the fair value of warrant liabilities:
| | | Private Placement | | | Public | | | Total Warrant Liabilities | |
| Fair value as of July 10, 2020 (inception) | | $ | — | | | $ | — | | | $ | — | |
| Initial measurement on September 4, 2020 | | | 10,855,001 | | | | 20,956,833 | | | | 31,811,834 | |
| Change in valuation inputs or other assumptions | | | 19,177,167 | | | | 19,333,417 | | | | 38,510,584 | |
| Fair value as of December 31, 2020 | | $ | 30,032,168 | | | $ | 40,290,250 | | | $ | 70,322,418 | |
There were no transfers in or out of Level 3 from other levels in the fair value hierarchy.
CM LIFE SCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2020
NOTE 12. SUBSEQUENT EVENTS
The Company evaluated subsequent events and transactions that occurred after the balance sheet date up to the date that the financial statements were issued. Based upon this review, other than as described below and in Note 2, the Company did not identify any subsequent events that would have required adjustment or disclosure in the financial statements
On February 10, 2021, the Company announced that it executed an Agreement and Plan of Merger (the “Merger Agreement”) with Mount Sinai Genomics, Inc., a Delaware corporation, d/b/a Sema4 (“Sema4”) and the other parties thereto (the transactions contemplated by the Merger Agreement, including the Merger (as defined below), the “Business Combination”). Specifically, the Company entered into the Merger Agreement with Sema4 and S-IV Sub, Inc., a Delaware corporation incorporated on February 1, 2021 and a direct, wholly-owned subsidiary of the Company (“Merger Sub”). Pursuant to the terms of the Merger Agreement, the Company will acquire Sema4 through the merger of Merger Sub with and into Sema4, with Sema4 surviving as a wholly-owned subsidiary of the Company (the “Merger”)
The Business Combination is expected to close in the second quarter of 2021, following the receipt of the required approval by the Company’s stockholders and the satisfaction of certain other customary closing conditions.
At the effective time of the Merger (the “Effective Time”), each share of Sema4 class B common stock, par value $0.00001 per share (“Sema4 Class B Common Stock”) issued and outstanding as of immediately prior to the Effective Time will be converted into 1/100th of a share of Sema4 class A common stock, par value $0.00001 per share (“Sema4 Class A Common Stock”, together with Sema4 Class B Common Stock, “Sema4 Common Stock”) in accordance with Sema4’s organizational documents.
Immediately thereafter, each share of Sema4 Common Stock and Sema4’s series A-1 preferred stock, series A-2 preferred stock, series B preferred stock and series C preferred stock (collectively, “Sema4 Capital Stock”) issued and outstanding immediately prior to the Effective Time (other than Excluded Shares and Dissenting Shares (each as defined in the Merger Agreement)) will be converted into the right to receive a portion of the total closing merger consideration, with each Sema4 stockholder being entitled to receive the following:
| (c) | if such stockholder has made a cash election as set forth and in accordance with the terms of the Merger Agreement, a portion of the specified aggregate amount of cash consideration payable under the terms of the Merger Agreement (such aggregate amount not to exceed $343,000,000) and pursuant to the terms of such stockholder’s cash election; and |
| | |
| (d) | a number of shares of common stock, par value $0.0001 per share, of the Company (the “Common Stock”) equal to the quotient of: (i) (A) the product of (x) such stockholder’s total shares of Sema4 Capital Stock multiplied by (y) the per share amount calculated in accordance with the Merger Agreement minus (B) the amount of cash payable to such stockholder pursuant to its cash election, if any, divided by (ii) $10. |
In addition, at the Effective Time, each outstanding option to purchase Sema4 Capital Stock, each outstanding and unsettled restricted stock unit in respect of shares of Sema4 Capital Stock and each outstanding stock appreciation right will be rolled over into options to purchase Common Stock, restricted stock units in respect of Common Stock and stock appreciation rights in respect of Common Stock, all as further set forth in and in accordance with the terms of the Merger Agreement.
In addition to the payment of cash issuance of Common Stock and rollover of other Sema4 equity awards described above as of the Effective Time, in the event that the closing sale price of Common Stock exceeds certain price thresholds for 20 out of any 30 consecutive trading days during the period of time commencing upon the expiration of the lock-up period applicable to the Sponsor under the Letter Agreement, dated as of August 27, 2021, by and among the Company, Sponsor and each of the executive officers and directors of the Company and ending on the second anniversary of the closing of the Merger, an additional number of shares equal to an amount up to an aggregate of 11% of the shares of Common Stock that would have been issuable upon closing of the Merger to the stockholders of the Company if no cash elections were made and the closing cash payment amount under the Merger Agreement was $0.00 (the “Earn-Out Shares”) shall become issuable, in accordance with the terms of the Merger Agreement following the achievement of those certain price thresholds, to the stockholders of Sema4 as of immediately priorrelated to the closing of the Merger; Acquisition which was released upon expiration of the one year escrow period in May 2023. Restricted cash included in other assets as of December 31, 2023 and 2022 primarily 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 10, “Leases” for further information.
Accounts payable and accrued expenses consisted of the following:
| | | | | | | | | | | |
| As of December 31, |
| 2023 | | 2022 |
| Accounts payable | $ | 10,238 | | | $ | 46,017 | |
| Accrued purchases | 12,154 | | | 20,314 |
| Reserves for refunds to insurance carriers | 15,039 | | | 17,001 | |
| Other | 25 | | | 1,546 | |
| Total | $ | 37,456 | | | $ | 84,878 | |
Other current liabilities consisted of the following:
| | | | | | | | | | | |
| As of December 31, |
| 2023 | | 2022 |
| Accrued bonus | $ | 3,784 | | | $ | 8,429 | |
| Accrued payroll | 1,745 | | | 3,905 | |
| Accrued benefits | 6,409 | | | 1,529 | |
| Accrued commissions | 527 | | | 1,656 | |
| Accrued severance | 1,853 | | | 4,770 | |
| Current portion of long-term debt | 497 | | | 4,750 | |
| Indemnification liabilities | — | | | 13,470 | |
| Current portion of the contingent consideration liabilities | — | | | 6,019 | |
| Current portion of debt issuance costs | (802) | | | — | |
| Other | 2,323 | | | 5,177 | |
| Total | $ | 16,336 | | | $ | 49,705 | |
Other liabilities consisted of the following:
| | | | | | | | | | | |
| As of December 31, |
| 2023 | | 2022 |
| Warrant liability | $ | 2,735 | | | $ | 418 | |
| Earn-out contingent liability | — | | | 1,600 | |
| Third party payor reserve | 12,000 | | | 22,000 | |
| Total | $ | 14,735 | | | $ | 24,018 | |
17. Segment Reporting
The Company’s business is aligned with how the chief operating decision maker (“CODM”) reviews performance and makes decisions in managing the Company. At December 31, 2023, the Company has identified two reportable segments: (i) GeneDx inclusive of Legacy GeneDx and Legacy Sema4 data revenues and associated costs and (ii) Legacy Sema4 diagnostics. The GeneDx segment primarily provides pediatric and rare disease diagnostics with a focus on whole exome and genome sequencing and, to a lesser extent, data and information services. The Legacy Sema4 diagnostics segment provided reproductive and women’s health and somatic oncology diagnostic testing and screening products and has been completely shut down. Segment information is consistent with how management reviews the business, makes investing and resource allocation decisions and assesses operating performance. The CODM evaluates segment performance based on revenue and adjusted gross margin.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, |
| | 2023 | | 2022 |
| | GeneDx | | Legacy Sema4 | | Total | | GeneDx | | Legacy Sema4 | | Total |
| Revenue | | $ | 194,376 | | | $ | 8,190 | | | $ | 202,566 | | | $ | 122,234 | | | $ | 112,460 | | | $ | 234,694 | |
| Adjusted cost of services | | 106,983 | | | 2,305 | | | 109,288 | | | 74,213 | | | 148,897 | | | 223,110 | |
Adjusted gross profit (loss) (1) | | 87,393 | | | 5,885 | | | 93,278 | | | 48,021 | | | (36,437) | | | 11,584 | |
| | | | | | | | | | | | |
| Reconciliations: | | | | | | | | | | | | |
| Depreciation and amortization | | 4,238 | | | 112 | | | 4,350 | | | 2,440 | | | 28,888 | | | 31,328 | |
| Stock-based compensation | | 754 | | | (1,971) | | | (1,217) | | | 680 | | | 4,400 | | | 5,080 | |
| Restructuring charges | | 108 | | | 31 | | | 139 | | | 129 | | | 1,797 | | | 1,926 | |
| Gross profit (loss) | | $ | 82,293 | | | $ | 7,713 | | | $ | 90,006 | | | $ | 44,772 | | | $ | (71,522) | | | $ | (26,750) | |
(1)Adjusted Cost of Services and Adjusted Gross Profit exclude depreciation and amortization expense, stock-based compensation expense and restructuring costs.
Management manages assets on a total company basis, not by reporting segment. The CODM does not regularly review any asset information by reporting segment and, accordingly, the Company does not report asset information by reporting segment.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
As required by Rules 13a-15 and 15d-15 under the Exchange Act, our Chief Executive Officer and Chief Financial Officer carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2023. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of December 31, 2023 because of the material weaknesses in internal control over financial reporting discussed below.
Notwithstanding the material weaknesses in internal control over financial reporting described below, our management has concluded that our consolidated financial statements included in this Annual Report on Form 10-K are fairly stated in all material respects in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).
Management’s Annual Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting and for the assessment of the effectiveness of internal control over financial reporting as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act. Internal control over financial reporting is a process designed under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.
Under the supervision and with the participation of our Chief Executive Officer and our Chief Financial Officer and oversight of the Board of Directors, our management conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2023, based on the criteria set forth in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 COSO framework). Based on this evaluation, due to the material weaknesses described below, management concluded that the boardCompany’s internal control over financial reporting were not effective.
Material Weaknesses
A material weakness is a deficiency, or a combination of directorsdeficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of Sema4 (or a duly authorized committee thereof) may, priorcompany’s annual or interim financial statements will not be prevented or detected on a timely basis.
In connection with the preparation of the Annual Report on Form 10-K as of December 31, 2022, we previously reported three material weaknesses in our internal controls over financial reporting, as follows:
•We did not have sufficient, qualified finance and accounting staff with the appropriate U.S. GAAP technical accounting expertise to effectively maintain processes and controls that allow for the timely production of accurate financial information with internal financial reporting timelines, commensurate with our size and the nature and complexity of our operations.
•We did not maintain formal processes and controls to achieve complete, accurate and timely financial accounting, reporting and disclosures, including controls over the preparation and review of account reconciliations, journal entries, classification of certain costs, non-recurring complex transactions and the accounting in accordance with U.S. GAAP.
•Our accounting and operating systems lacked controls over access, and program change management that are needed to ensure access to financial data is adequately restricted to appropriate personnel, including consideration of the appropriate segregation of duties. As a result, it is possible that the Company’s business process controls that depend on the accuracy and completeness of data or financial reports generated by the Company's information technology
system could be adversely affected due to the closinglack of operating effectiveness of the Merger, allocate a portioninformation technology general controls (“ITGCs”).
Of the three previously reported material weaknesses noted above, the first two items have been remediated as of
such Earn-Out SharesDecember 31, 2023 and due to
be issued to service providers of Sema4 in the form of restricted stock unitssignificant enhancement during 2023, only portions of the
Company.On February 10, 2021,third remains unremediated as of December 31, 2023. Specifically, our accounting and operating systems lacked controls over user access and program change management that are needed to ensure access to financial data is adequately restricted to appropriate personnel, including consideration of the appropriate segregation of duties.
Remediation Plan
Our management is actively engaged and committed to taking the steps necessary to remediate the material weakness over user access and program change management in order to establish a strong internal control environment. During 2023, we designed and implemented the following measures as part of the remediation efforts over the lack of operating effectiveness of the information technology general controls (“ITGCs”):
•We expanded the available resources with experience designing and implementing ITGCs, through hired information technology (“IT”) employees and use of outside consultants.
•We implemented role redesign for certain systems, including rationalization user roles and permissions and establishing appropriate segregation of duties, where applicable.
•We implemented process improvements and standardized certain practices across relevant systems, including access provisioning, deprovisioning and user access review (UAR) processes.
•We conducted training for personnel responsible for internal control performers to deepen their comprehension of risk assessment concepts and to refine their execution of controls pertaining to financial reporting.
•We strengthened and documented our accounting policies and procedures around ITGCs and communicated the policies to relevant personnel.
•We have implemented action plans to address remaining issues that still exist within user access and change management, and continue to enforce consistent execution of key internal control procedures.
While significant progress has been made to strengthen the design and operating effectiveness of our ITGCs, management has concluded that as of December 31, 2023, there was not a sufficient period of time available to sufficiently test nor conclude that enhanced internal controls were fully implemented and operating effectively. We will continue to monitor the effectiveness of our remediation measures in connection with our future assessments of the effectiveness of internal control over financial reporting and disclosure controls and procedures, and we will make any changes to the design of our plan and take such other actions that we deem appropriate given the circumstances.
We will continue to monitor the effectiveness of ITGC remediation actions in connection with future assessments of the effectiveness of internal control over financial reporting and disclosure controls and procedures. Assessment results will be used to validate the efficacy of our ITGC remediation efforts and identify any additional actions necessary to ensure ongoing design and operating effectiveness.
Remediation of Previously-Reported Material Weaknesses
As of December 31, 2023, management believes the following two previously reported material weaknesses have been remediated:
•We did not have sufficient, qualified finance and accounting staff with the appropriate U.S. GAAP technical accounting expertise to effectively maintain processes and controls that allow for the timely production of accurate financial information in accordance with internal financial reporting timelines, commensurate with our size and the nature and complexity of our operations.
•We did not maintain formal processes and controls to achieve complete, accurate and timely financial accounting, reporting and disclosures, including controls over the preparation and review of account reconciliations, journal entries, classification of certain costs, non-recurring complex transactions and the accounting in accordance with U.S. GAAP.
To remediate these material weaknesses, the Company entered into a Sponsor Support Agreementdocumented and implemented the following actions:
•We hired key personnel, obtained qualified accountants and retained additional resources with the Sponsorappropriate technical accounting skills to achieve complete, accurate, and Sema4, whereby Sponsor has agreedtimely financial accounting and reporting. In addition, we formalized roles and review responsibilities to among other things, (a) vote at any meetingalign the team’s skills and experience, including consideration related to the segregation of duties, to the risk and complexity of our transactions.
•We completed a gap analysis of the stockholdersprocesses supporting our internal control over financial reporting to identify areas where new controls are needed and where existing controls required improvement. Based on that analysis, we formalized detailed remediation plans at the risk and control level to improve our internal control framework.
•We strengthened and documented our internal accounting policies and procedures and communicated them to all relevant personnel.
•We standardized business practices and implemented various improvements within financial functional areas, including account reconciliation reviews and automation of certain close processes.
Management believes it has effectively designed and tested the operating effectiveness related to the previously-reported material weaknesses noted above. Accordingly, management has concluded that these material weaknesses have been remediated because each component of the Company allmaterial weakness has been operating effectively for a sufficient period of their sharestime.
Changes in Internal Control Over Financial Reporting
Our management has evaluated, with the participation of capital stock of the Company held of record or thereafter acquiredour Chief Executive Officer and Chief Financial Officer, changes in favor of the Stockholder Approvalsour internal controls over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Merger Agreement), (b) be bound by certain other covenants and agreements related toExchange Act) during the Business Combination and (c) be bound by certain transfer restrictionsfourth quarter of 2023. Except as described above with respect to such securities, priorthe remediation of certain previously-reported material weaknesses, there were no changes in the Company’s internal control over financial reporting that occurred during the quarter ended December 31, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. We continue to take steps to remediate the closingmaterial weakness in our information technology general controls over financial reporting, as discussed above.
Inherent Limitation on the Effectiveness of Internal Control
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures, or our internal controls, will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the Business Combination, in each case, oncontrol system are met. Further, the termsdesign of a control system must reflect the fact that there are resource constraints, and subjectthe benefits of controls must be considered relative to the conditions set forth in the Sponsor Support Agreement. On February 10, 2021, concurrently with the executiontheir costs. Because of the Merger Agreement,inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our Company have been detected.
Item 9B. Other Information
Other Information
Following the Company entered into subscription agreements (collectively, the “Subscription Agreements”) with certain investors (collectively, the “PIPE Investors” which include certain existing equityholdersexpiration of Sema4), pursuant to, andhis employment agreement on the terms and subject to the conditions of which, the PIPE Investors have collectively subscribed for 35,000,000 shares of our common stock for an aggregate purchase price equal to $350,000,000 (the “PIPE Investment”). The PIPE Investment will be consummated immediately prior to the closing of the Sema4 Business Combination. The Subscription Agreements provide for certain customary registration rights for the PIPE Investors. The Subscription Agreements will terminate with no further force and effect upon the earliest to occur of: (a) such date and time as the Merger Agreement is terminatedDecember 31, 2023 in accordance with its terms; (b)terms, on February 23, 2024, Jason Ryan resigned from his officer position as the mutual written agreementExecutive Chairman of the partiesCompany, effective February 23, 2024. Mr. Ryan continues to such Subscription Agreement;serve as a member of and (c) November 9, 2021.as the Chairman of the Board of Directors.
Rule 10b5-1 Plan Adoptions and Modifications
None.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
None.
Part III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Except as set forth below, the information required by this Item is incorporated by reference from our definitive proxy statement for our 2024 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of our fiscal year ended December 31, 2023.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference from our definitive proxy statement for our 2024 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of our fiscal year ended December 31, 2023.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this Item is incorporated by reference from our definitive proxy statement for our 2024 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of our fiscal year ended December 31, 2023.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this Item is incorporated by reference from our definitive proxy statement for our 2024 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of our fiscal year ended December 31, 2023.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this Item is incorporated by reference from our definitive proxy statement for our 2024 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of our fiscal year ended December 31, 2023.
Part IV
Item 15. Exhibits, Financial Statement Schedules
a) The following documents are filed as a part of this Annual Report.
1. Consolidated financial statements: The consolidated financial statements are set forth under “Item 8. Financial Statements and Supplementary Data” of this Annual Report on Form 10-K.
2. Financial statement schedules: All schedules have been omitted because they are not required, not applicable, or the required information is included in the consolidated financial statements or notes thereto.
3. Exhibits: The exhibits listed in the accompanying Exhibit Index are filed or incorporated by reference as part of this Annual Report on Form 10-K.
Incorporated by Reference
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| No. | | Description of Exhibit | | Form | | Exhibit | | Filing Date | | Filed Herewith |
| 1.1 | | | | 8-K | | 1.1 | | 01/30/2023 | | |
| | | | | | | | | | |
| 2.1+ | | | | DEF14M | | Annex A | | 07/02/2021 | | |
| | | | | | | | | | |
| 2.2 | | Agreement and Plan of Merger and Reorganization, dated as of January 14, 2022, by and among, Orion Merger Sub I, Inc., Orion Merger Sub II, LLC, GeneDx, Inc., GeneDx Holding 2, Inc. and OPKO Health, Inc. | | 8-K | | 2.1 | | 01/18/2022 | | |
| | | | | | | | | | |
| 2.3+ | | Amendment to Agreement and Plan of Merger and Reorganization, dated as of April 29, 2022, by and among, Sema4 Holdings Corp., Orion Merger Sub I, Inc., Orion Merger Sub II, LLC, GeneDx, Inc., GeneDx Holding 2, Inc. and OPKO Health, Inc. | | 8-K | | 99.2 | | 05/02/2022 | | |
| | | | | | | | | | |
| 3.1 | | | | 8-K | | 3.1 | | 07/28/2021 | | |
| | | | | | | | | | |
| 3.2 | | | | 8-K | | 3.1 | | 01/09/2023 | | |
| | | | | | | | | | |
| 3.3 | | | | 8-K | | 3.1 | | 04/17/2023 | | |
| | | | | | | | | | |
| 3.4 | | | | 8-K | | 3.1 | | 04/28/2023 | | |
| | | | | | | | | | |
| 3.5 | | | | 8-K | | 3.2 | | 01/09/2023 | | |
| | | | | | | | | | |
| 4.1 | | | | S-1/A | | 4.2 | | 08/24/2020 | | |
| | | | | | | | | | |
| 4.2 | | | | S-1/A | | 4.3 | | 08/24/2020 | | |
| | | | | | | | | | |
| 4.3 | | | | 8-K | | 10.1 | | 09/04/2020 | | |
| | | | | | | | | | |
| 4.4 | | | | 8-K | | 4.1 | | 10/30/2023 | | |
| | | | | | | | | | |
| 4.5 | | | | | | | | | | X |
| | | | | | | | | | |
| 10.1 | | | | 8-K | | 10.2 | | 07/28/2021 | | |
| | | | | | | | | | |
| 10.2 | | | | 8-K | | 10.4 | | 07/28/2021 | | |
| | | | | | | | | | |
| 10.3* | | | | 8-K | | 10.1 | | 04/17/2023 | | |
| | | | | | | | | | |
| 10.4* | | | | 8-K | | 10.6 | | 07/28/2021 | | |
| | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 10.5* | | | | 8-K | | 10.7 | | 07/28/2021 | | |
| | | | | | | | | | |
| 10.6* | | | | 8-K | | 10.8 | | 07/28/2021 | | |
| | | | | | | | | | |
| 10.7* | | | | 8-K | | 10.9 | | 07/28/2021 | | |
| | | | | | | | | | |
| 10.8* | | | | 8-K | | 10.1 | | 07/24/2023 | | |
| | | | | | | | | | |
| 10.9* | | | | 8-K | | 10.2 | | 07/24/2023 | | |
| | | | | | | | | | |
| 10.10* | | | | 8-K | | 10.3 | | 07/24/2023 | | |
| | | | | | | | | | |
| 10.11 | | | | 8-K | | 10.17 | | 07/28/2021 | | |
| | | | | | | | | | |
| 10.12 | | | | 8-K | | 10.18 | | 07/28/2021 | | |
| | | | | | | | | | |
| 10.13 | | | | 8-K | | 10.19 | | 07/28/2021 | | |
| | | | | | | | | | |
| 10.14 | | | | 8-K | | 10.20 | | 07/28/2021 | | |
| | | | | | | | | | |
| 10.15 | | | | 8-K | | 10.21 | | 07/28/2021 | | |
| | | | | | | | | | |
| 10.16# | | | | 8-K | | 10.22 | | 07/28/2021 | | |
| | | | | | | | | | |
| 10.17# | | | | 8-K | | 10.23 | | 07/28/2021 | | |
| | | | | | | | | | |
| 10.18# | | | | 8-K | | 10.24 | | 07/28/2021 | | |
| | | | | | | | | | |
| 10.19# | | | | 8-K | | 10.25 | | 07/28/2021 | | |
| | | | | | | | | | |
| 10.20# | | | | 8-K | | 10.26 | | 07/28/2021 | | |
| | | | | | | | | | |
| 10.21# | | | | 8-K | | 10.27 | | 07/28/2021 | | |
| | | | | | | | | | |
| 10.22* | | | | S-8 | | 99.6 | | 09/27/2021 | | |
| | | | | | | | | | |
| 10.23 | | | | 10-Q | | 10.26 | | 11/15/2021 | | |
| | | | | | | | | | |
| 10.24 | | | | 8-K | | 10.1 | | 02/11/2021 | | |
| | | | | | | | | | |
| 10.25 | | | | 8-K | | 10.1 | | 01/18/2022 | | |
| | | | | | | | | | |
| 10.26 | | | | 8-K | | 10.2 | | 01/18/2022 | | |
| | | | | | | | | | |
| 10.27 | | | | 8-K | | 10.3 | | 01/18/2022 | | |
| | | | | | | | | | |
| 10.28 | | | | 8-K | | 10.4 | | 01/18/2022 | | |
| | | | | | | | | | |
| 10.29* | | | | 10-K | | 10.31 | | 03/14/2022 | | |
| | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 10.30* | | | | 8-K | | 10.1 | | 04/14/2023 | | |
| | | | | | | | | | |
| 10.31+ | | | | 8-K | | 10.1 | | 05/02/2022 | | |
| | | | | | | | | | |
| 10.32* | | | | 8-K | | 10.2 | | 05/02/2022 | | |
| | | | | | | | | | |
| 10.33* | | | | 10-K | | 10.32 | | 03/16/2023 | | |
| | | | | | | | | | |
| 10.34* | | | | 8-K | | 10.1 | | 08/26/2022 | | |
| | | | | | | | | | |
| 10.35# | | | | 10-K | | 10.34 | | 03/16/2023 | | |
| | | | | | | | | | |
| 10.36 | | | | 10-K | | 10.35 | | 03/16/2023 | | |
| | | | | | | | | | |
| 10.37 | | | | 8-K | | 10.1 | | 10/30/2023 | | |
| | | | | | | | | | |
| 10.38 | | | | 8-K | | 10.2 | | 10/30/2023 | | |
| | | | | | | | | | |
| 10.39 | | | | 8-K | | 10.1 | | 01/30/2023 | | |
| | | | | | | | | | |
| 10.40+ | | | | 10-Q | | 10.3 | | 05/09/2023 | | |
| | | | | | | | | | |
| 21.1 | | | | | | | | | | X |
| | | | | | | | | | |
| 23.1 | | | | | | | | | | X |
| | | | | | | | | | |
| 24.1 | | Power of Attorney (included on signature page to this Annual Report on Form 10-K). | | | | | | | | X |
| | | | | | | | | | |
| 31.1 | | | | | | | | | | X |
| | | | | | | | | | |
| 31.2 | | | | | | | | | | X |
| | | | | | | | | | |
| 32.1** | | | | | | | | | | X |
| | | | | | | | | | |
| 32.2** | | | | | | | | | | X |
| | | | | | | | | | |
| 97.1 | | Policy Relating to Recovery of Erroneously Awarded Compensation. | | | | | | | | X |
| | | | | | | | | | |
| 101.INS | | Inline XBRL Instance Document | | | | | | | | X |
| | | | | | | | | | |
| 101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document | | | | | | | | X |
| | | | | | | | | | |
| 101.SCH | | Inline XBRL Taxonomy Extension Schema Document | | | | | | | | X |
| | | | | | | | | | |
| 101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document | | | | | | | | X |
| | | | | | | | | | |
| 101.LAB | | Inline XBRL Taxonomy Extension Labels Linkbase Document | | | | | | | | X |
| | | | | | | | | | |
| 101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document | | | | | | | | X |
| | | | | | | | | | |
| 104 | | Cover Page Interactive Data File (formatted as inline XBRL with applicable taxonomy extension information contained in Exhibits 101.) | | | | | | | | X |
| | | | | | | | | | |
| F-21 | | | | | |
| * | Management Contract or Compensatory Plan |
| ** | Furnished. |
| | | | | | |
| + | Certain of the exhibits and schedules to this Exhibit have been omitted in accordance with Regulation S-K Item 601(a)(5). The Company agrees to furnish a copy of all omitted exhibits and schedules to the SEC upon its request. |
| # | The Company has omitted portions of the exhibit as permitted under Regulation S-K Item 601(b)(10). |
Item 16. Form 10-K Summary
We may voluntarily include a summary of information required by Form 10-K under this Item 16. We have elected not to include such summary information.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | | | | | | | |
| GENEDX HOLDINGS CORP. |
| | |
| Date: February 23, 2024 | By: | /s/ Katherine Stueland |
| Name: | Katherine Stueland |
| Title: | Chief Executive Officer and Director
(Principal Executive Officer) |
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Katherine Stueland, Kevin Feeley and Devin Schaffer, and each or any one of them, his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the United States Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his substitutes or substitute, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| | | | | | | | | | | | | | |
| Signature | | Title | | Date |
| | | | |
| /s/ Katherine Stueland | | Chief Executive Officer and Director | | February 23, 2024 |
| Katherine Stueland | | (Principal Executive Officer)
| |
| | | | |
| /s/ Kevin Feeley | | Chief Financial Officer | | February 23, 2024 |
| Kevin Feeley | | (Principal Financial Officer)
| |
| | | | |
| /s/ Jason Ryan | | Chairman of the Board | | February 23, 2024 |
Jason Ryan
| | |
| | | | |
| /s/ Eli D. Casdin | | Director | | February 23, 2024 |
| Eli D. Casdin | | |
| | | | |
| /s/ Emily Leproust | | Director | | February 23, 2024 |
Emily Leproust
| | |
| | | | |
| /s/ Keith Meister | | Director | | February 23, 2024 |
| Keith Meister | | |
| | | | |
| /s/ Joshua Ruch | | Director | | February 23, 2024 |
| Joshua Ruch | | |
| | | | |
| /s/ Richard Pfenninger, Jr. | | Director | | February 23, 2024 |
| Richard Pfenninger, Jr. | | |
