23ANDME HOLDING CO. The following discussion and analysis provide information that management believes is relevant to an assessment and understanding of our consolidated results of operations and financial condition. You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our Current Report on From 8-K filed with theSEC onJune 21, 2021 , including the audited consolidated financial statements of23andMe, Inc. as ofMarch 31, 2021 and 2020 filed as Exhibit 99.1 thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations included therein, as well as the accompanying unaudited condensed consolidated financial statements and notes thereto included in this Form 10-Q. In addition to historical information, this discussion and analysis contains forward-looking statements. These forward-looking statements are subject to risks and uncertainties, including those discussed in the section titled "Risk Factors" of this Form 10-Q, that could cause actual results to differ materially from historical results or anticipated results. Unless the context otherwise requires, references in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" to the "Company," "we," "us," and "our" refer to23andMe Holding Co. , aDelaware corporation formerly known asVG Acquisition Corp. and its consolidated subsidiary. References toVG Acquisition Corp. or "VGAC" refer to the Company prior to the consummation of the Business Combination. Overview23andMe Holding Co. , formerly known asVG Acquisition Corp. , is a mission-driven company dedicated to empowering customers to live healthier lives. Our mission is to help people access, understand, and benefit from the human genome. We pioneered direct-to-customer genetic testing through our PGS products and services. Our PGS business provides customers with a full suite of genetic reports, including information on customers' genetic ancestral origins, personal genetic health risks, and chances of passing on certain rare carrier conditions to their children, as well as reports on how genetics can affect responses to medications. We believe that by providing customers with direct access to their genetic information, we can empower them to make better decisions by arming them with information about their risks of developing certain diseases or conditions and by highlighting opportunities for prevention and mitigation of disease. We provide customers with an engaging experience, including access to frequent updates to their genetic health and ancestry reports and new product features, the ability to connect with genetic relatives, and a subscription option for extended health insights. Customers have the option to participate in our research programs and over 80% of our customers have done so. We analyze consenting customers' genotypic data together with phenotypic data they provide to us concerning their physical characteristics, family origins, lifestyle, and other habits. We analyze this data using our proprietary machine learning and other analytic techniques in order to discover insights into whether and how particular genetic variants affect the likelihood of individuals developing specific diseases. These insights may highlight opportunities to develop a drug to treat or cure a specific disease. Our Therapeutics business focuses on the use of genetic insights to validate and develop novel therapies to improve patients' lives. We currently have research programs across several therapeutic areas, including oncology, respiratory, and cardiovascular diseases. InJuly 2018 , we signed an exclusive agreement with GSK to leverage genetic insights to validate, develop, and commercialize promising drugs. This multi-year collaboration is expected to identify and prioritize genetically validated drug targets, enable rapid progression of clinical programs, and bring useful new drugs to market. For example, our most advanced program, which has begun clinical trials, is in immuno-oncology and is being pursued in collaboration with GSK. In addition to our collaboration with GSK, we have several proprietary programs, one of which is being pursued in collaboration with Almirall, S.A. Our second most advanced program, P006, is an antibody that blocks the suppression of T-cells by tumors and reactivates their immune response. P006 is wholly owned by the Company, and we anticipate that this program will begin clinical trials by the end of fiscal year 2022. Following the expiration of the GSK Agreement, we will have the opportunity to collaborate with, or out-license other wholly owned programs to third parties or to develop them independently. 30 -------------------------------------------------------------------------------- We operate in two reporting segments: Consumer & Research Services and Therapeutics. The Consumer & Research Services segment consists of our PGS business, as well as research services that we perform under agreements with third parties, including the GSK Agreement, relating to the use of our genotypic and phenotypic data to identify promising drug targets. The Therapeutics segment consists of revenues from the out-licensing of intellectual property associated with identified drug targets and expenses related to therapeutic product candidates under clinical development. For the three and six months endedSeptember 30, 2021 , substantially all our revenues were derived from our Consumer & Research Services segment. The table below reflects our revenue for the three and six months endedSeptember 30, 2021 and 2020: Three Months Ended Six Months Ended September 30, September 30, 2021 2020 $ Change % Change 2021 2020 $ Change % Change (dollars in thousands) (dollars in thousands) Consumer & Research$ 55,204 $ 51,804 $ 3,400 7 %$ 114,443 $ 99,813 $ 14,630 15 %
Services Revenue Therapeutics - - - 0 % - 48 (48 ) (100 %) Revenue Total Revenue$ 55,204 $ 51,804 $ 3,400 7 %
$ 114,443 $ 99,861 $ 14,582 15 %
The table below reflects our two segments' Adjusted EBITDA (as defined below)
for the three and six months ended
Three Months Ended Six Months Ended
September 30, September 30,
2021 2020 $ Change % Change 2021 2020 $ Change % Change
(dollars in thousands) (dollars in thousands)
Consumer &
Research Services
Adjusted EBITDA* $ (760 ) $ 1,778 $ (2,538 ) (143 %) $ (1,265 ) $ (2,458 ) $ 1,193 (49 %)
Therapeutics
Adjusted EBITDA*$ (18,828 ) $ (14,440 ) $ (4,388 ) 30 %$ (37,131 ) $ (23,835 ) $ (13,296 ) 56 % * Adjusted EBITDA is the measure of segment profitability reported to our Chief Executive Officer ("CEO"), who is our chief operating decision-maker ("CODM"). We define Adjusted EBITDA as net income before net interest expense (income), net other expense (income), changes in fair value of warrant liabilities, depreciation and amortization of fixed assets, amortization of internal use software, non-cash stock-based compensation expense, acquisition-related costs, and expenses related to other charges, if applicable, for the period. See "-Adjusted EBITDA" below for a reconciliation of Adjusted EBITDA to net loss.
Recent Developments
Consummation of Business Combination
OnJune 16, 2021 (the "Closing Date"), we consummated our initial business combination (the "Merger" and the closing of the Merger, the "Closing") as contemplated by the Agreement and Plan of Merger, datedFebruary 4, 2021 , by and among VGAC,Chrome Merger Sub, Inc. , aDelaware corporation and wholly owned direct subsidiary of VGAC ("Merger Sub"), and23andMe, Inc. (as amended, the "Merger Agreement"). Upon the Closing Date, VGAC filed a notice of deregistration with the Cayman Islands Registrar of Companies, together with the necessary accompanying documents, and filed a charter and a certificate of corporate domestication with the Secretary of State of theState of Delaware , under which VGAC was domesticated and continued as aDelaware corporation, changing its name to "23andMe Holding Co. " (the "Domestication"). As a result of and upon the effective time of the Domestication, among other things, (1) each of the then issued and outstanding shares of Class A ordinary shares of VGAC (the "VGAC Class A ordinary shares") and Class B ordinary shares of VGAC, automatically converted, on a one-for-one basis, into shares of Class A common stock,$0.0001 par value per share, of the Company (the "Class A common stock"); (2) each then issued and outstanding warrant of VGAC (the "VGAC warrants") automatically converted into a 31 -------------------------------------------------------------------------------- warrant (a "Warrant") to acquire one share of Class A common stock; and (3) each of the then issued and outstanding units of VGAC that had not been previously separated into the underlying VGAC Class A ordinary shares and underlying VGAC warrants upon the request of the holder thereof, were canceled and entitled the holder thereof to one share of Class A common stock and one-third of one Warrant.
On the Closing Date, Merger Sub merged with and into
Immediately prior to the effective time of the Merger, each share of23andMe, Inc. preferred stock converted into one share of Class B common stock of23andMe, Inc. (the "23andMe, Inc. Class B common stock") (such converted shares, the "23andMe, Inc. Converted Preferred Shares"). As a result of and upon the Closing, (i) each share of Class A common stock of23andMe, Inc. ("23andMe, Inc. Class A common stock") was canceled and converted into the right to receive the applicable portion of the merger consideration comprised of shares of Class A common stock, as determined pursuant to the Share Conversion Ratio (as defined in the Merger Agreement), (ii) each share of23andMe, Inc. Class B common stock, including the23andMe, Inc. Converted Preferred Shares, was canceled and converted into the right to receive the applicable portion of the merger consideration comprised of Class B common stock, par value$0.0001 per share, of the Company (the "Class B common stock"), as determined pursuant to the Share Conversion Ratio, and (iii) each restricted stock unit and outstanding option to purchase23andMe, Inc. Class A common stock and23andMe, Inc. Class B common stock (whether vested or unvested) was assumed by the Company and converted into comparable restricted stock units and options that are exercisable for shares of Class A common stock, with a value determined in accordance with the Share Conversion Ratio. Prior to the Business Combination, VGAC's units, public shares, and public warrants were listed on theNew York Stock Exchange under the symbols "VGAC.U," "VGAC," and "VGAC WS," respectively. Following the consummation of the Business Combination, onJune 17, 2021 , the Company's Class A common stock and the Public Warrants began trading on The Nasdaq Global Select Market ("Nasdaq"), under the symbols "ME" and "MEUSW," respectively.23andMe, Inc. is considered the Company's accounting predecessor. The Merger was accounted for as a reverse recapitalization with23andMe, Inc. as the accounting acquirer and VGAC as the acquired company for accounting purposes. Accordingly, all historical financial information presented in the unaudited condensed consolidated financial statements represents the accounts of23andMe, Inc. and its wholly owned subsidiary.
Redemption of VGAC Class A Ordinary Shares
In connection with the consummation of the Business Combination, holders of 16,667,061 VGAC Class A ordinary shares elected to have their shares redeemed.
Consummation of
OnFebruary 4, 2021 , concurrently with the execution of the Merger Agreement, VGAC entered into subscription agreements with certain investors (the "PIPE Investors ") to which such investors collectively subscribed for an aggregate of 25,000,000 shares of Class A common stock at$10.00 per share for aggregate gross proceeds of$250.0 million (the "PIPE Investment ").The PIPE Investment was consummated substantially concurrently with the closing of the Merger.
COVID-19 Impact
We are continuing to closely monitor the impact of the COVID-19 pandemic in all
aspects of our business. We rely entirely on third-party vendors in our PGS
supply chain, including our PGS kit and array manufacturers, order fulfillment
vendor, and our DNA-processing lab vendor. These vendors have independent
responses to managing the effect of the COVID-19 pandemic, and we have not
experienced any disruptions in our ability to fulfill and process PGS orders to
date. In our Therapeutics segment, the advancement of our programs requires our
scientists to have physical access to our laboratory facilities on a continuing
basis, and we have implemented health and safety protocols and procedures to
keep our laboratory facilities operating during the COVID-19 pandemic. In
addition, despite the introduction and continued administration of COVID-19
vaccines, the pandemic remains highly volatile and continues to evolve. We
cannot accurately predict the duration or extent of the impact of the COVID-19
virus, including the Delta and other variants and other areas that may affect
our business operations. Despite our mitigation efforts, we may experience
delays or an inability to execute on our clinical and preclinical development
plans, reduced revenues or other adverse impacts to our business, which are
described in more detail in "Risk Factors" in Part II, Item 1A of this Form
10-Q. The duration of the COVID-19 pandemic and the impact of the
32
--------------------------------------------------------------------------------efforts being made to contain it or to flatten the spread of the disease cannot be predicted with any accuracy, and this uncertainty could have a material impact on our financial results for the foreseeable future.
We have taken other measures in response to the ongoing COVID-19 pandemic, including closing our offices and implementing a work-from-home policy for most of our workforce, and amplifying monitoring of our inventory levels and supply chain. We may take further actions that alter our business operations that we determine are in the best interests of our employees, customers, and stockholders or as may be required by federal, state, or local authorities. To help our customers and others during the ongoing pandemic, we created an onlineCOVID-19 Information Center , which contains data from theUS Centers for Disease Control and our own COVID-19 research study that evaluated genetic differences in both susceptibility and severity of the disease. The site includes data from both sources, offers people a place to learn more about the virus, and highlights conditions that carry added risks.
Key Factors Affecting Results of Operations
We believe that our performance and future success depend on several factors that present significant opportunities for us but also pose risks and challenges, including those discussed below and included (or incorporated by reference) in the section of this Form 10-Q titled "Risk Factors."
New Customer Acquisition
Our ability to attract new customers is a key factor for the future growth of our PGS business and our database. Our historical financial performance has largely been driven by, and in the future will continue to be affected by, the rate of sales of our PGS kits. Revenue from our PGS business, primarily composed of kit sales, represented approximately 81% and 78% of our total revenues for the three months endedSeptember 30, 2021 and 2020, respectively, and approximately 81% and 75% of our total revenues for the six months endedSeptember 30, 2021 and 2020, respectively. In addition, kit sales are a source of subscribers to our new subscription service. We expect kit sales and our new subscription service to grow as we increase awareness of our current and new offerings in existing markets, expand into new ones, and enhance our subscription service with new features. Purchasing patterns of our kits are largely influenced by product innovation, marketing spend, and varying levels of price discounting on our products. These promotional windows have typically aligned with gift-giving portions of the year, with an emphasis on the holiday period, other gift-giving and family-oriented holidays such asMother's Day andFather's Day , and Amazon Prime Day, which may change from year to year. Historically, we have experienced higher revenue in the fourth quarter of the fiscal year compared to other quarters. Over time, we expect the seasonality of our business to continue, with pronounced increases in revenue recognized in the fourth quarter. We generally incur higher sales and marketing expenses during holiday promotional periods, which have included, among others,Mother's Day ,Father's Day , and the November-December holidays.
Engagement of Research Participants
Our ability to conduct research and grow our database of genotypic and phenotypic information depends on our customers' willingness to consent to participate in our research. Approximately 80% of our customers have consented to participate in research. These customers permit us to use their de-identified data in our research and many of them regularly respond to our research surveys, providing us with phenotypic data in addition to the genetic data in their DNA samples. We analyze this genotypic and phenotypic data and conduct genome-wide association studies and phenome-wide association studies, which enable us to determine whether particular genetic variants affect the likelihood of individuals developing certain diseases. Our customers can withdraw their consent at any time. If a significant number of our customers were to withdraw their consent, or if the percentage of consenting customers were to decline significantly in the future, our ability to conduct research successfully could be diminished, which could adversely affect our business.
Drug Target Productivity of Our Genetics Database
Our genetics database underpins our research programs and enables us to identify drug targets with novel genetic evidence. As ofMarch 31, 2021 , we have identified over 40 drug targets. We expect the current productivity of our genetics database to continue based on the increasing amounts of data that we expect to result from increased kit sales and customer 33 -------------------------------------------------------------------------------- engagement. Any significant decline in such productivity would have a negative impact on our ability to identify drug targets and ultimately to develop and commercialize new drugs.
Development of Therapeutic Product Candidates
Our ability to successfully identify and develop therapeutic product candidates will determine the success of our Therapeutics business over time. Developing therapeutic product candidates with novel genetic evidence requires a significant investment of resources over a prolonged period of time, and a core part of our strategy is to continue making sustained investments in this area. We have over 40 programs in our pipeline in various stages of research and development that have been selected and are being pursued. We have one therapeutic product candidate, CD96, in clinical development and we expect our P006 candidate to enter clinical development by the end of our fiscal year 2022. Additional programs are in research or preclinical stages of development. We have incurred, and will continue to incur, significant research and development costs for preclinical studies and clinical trials. We expect that our research and development expenses will continue to constitute a significant portion of our expenses in future periods.
Collaborations
Substantially all of our research services revenues are generated from the GSK Agreement, which expires in fiscal 2023 unless extended by GSK into fiscal 2024. Additionally, all of our Therapeutics revenue for the three and six months endedSeptember 30, 2021 and 2020 were derived from our agreements withGSK and Almirall, S.A.
Our ability to enter into new collaboration agreements will affect our research services revenues. If we are unable to enter into additional collaboration agreements, our future research services revenue may decline.
Ability to Commercialize Our Therapeutics Products
Our ability to generate revenue from our therapeutic product candidates depends on our and our collaborators' ability to successfully complete clinical trials for our therapeutic product candidates and receive regulatory approval, particularly inthe United States ,Europe , and other major markets. We believe that our broad portfolio of therapeutic product candidates with novel genetic evidence and validated targets enhances the likelihood that our research and development efforts will yield successful therapeutic product candidates. Nonetheless, we cannot be certain if any of our therapeutic product candidates will receive regulatory approvals. Even if such approvals are granted, we will thereafter need to establish manufacturing and supply arrangements and engage in extensive marketing effort and expenses prior to generating any revenue from such products. The ultimate commercial success of our products will depend on their acceptance by patients, the medical community, and third-party payors, their ability to compete effectively with other therapies in the market, and the appropriate pricing and reimbursement of the products by third-party payors. The competitive environment is also an important factor with the commercial success of our therapeutic product candidates, and our ability to successfully commercialize a therapeutic product candidate will depend on whether there are competing therapeutic product candidates in development or already marketed by other companies.
Expansion into New Categories
We launched our 23andMe+ subscription service inOctober 2020 . We expect to expand into new categories and innovative healthcare models with the goal of driving future growth. Those opportunities include product enhancements, such as our proprietary polygenic risk scores, new product offerings aimed at extending our personalized and customer-centric philosophy to primary healthcare, and potential acquisitions of other consumer-oriented healthcare businesses. Such expansion would allow us to increase the number of engaged customers who purchase or subscribe for additional products and services. Success of our subscription service will depend upon our ability to acquire and retain subscribing customers over an extended period. Retention of customers will be based on the perceived value of the premium content and features they receive. If we are unable to provide sufficiently compelling new content and features, subscribers may not renew. 34 --------------------------------------------------------------------------------
Investments in Growth and Innovation
Our research platform is based on a continually growing database of genotypic and phenotypic information. Our database allows us to conduct analyses in a multi-directional fashion, by searching for genetic signatures of particular diseases or the likelihood of a particular genetic variant causing disease in a particular individual or group of individuals who share the same trait. Our platform enables us to rapidly and serially conduct studies across an almost unlimited number of conditions at unprecedented statistical power, yielding insights into the causes and potential treatments of a wide variety of diseases. We believe that our research platform enables us to rapidly identify genetically validated drug targets with improved odds of clinical success. With our state-of- the-art bioinformatics capabilities, we analyze the trillions of data points in our database, optimizing the use of our resources, to genetically validate drug targets, inform patient selection for clinical trials, and increase the probability of success of our programs. We plan to advance new drugs through the rapid selection of those with compelling clinical promise. We expect to continue investing in our business to capitalize on market opportunities and the long-term growth of our company. We intend to make significant investments in therapeutics research and development efforts and in marketing to acquire new customers and drive brand awareness, and also expect to incur software development costs as we work to enhance our existing products, expand the depth of our subscription service, and design new offerings. In addition, we expect to incur additional expenses as a result of operating as a public company. The expenses we incur may vary significantly by quarter depending, for example, on when significant hiring takes place, and as we focus on building out different aspects of our business.
Basis of Presentation
The consolidated financial statements and accompanying notes of the Company included elsewhere in this Form 10-Q include the accounts of23andMe Holding Co. and its consolidated subsidiary and were prepared in accordance with GAAP. As23andMe, Inc. is considered the Company's accounting predecessor, all historical financial information presented in the unaudited condensed consolidated financial statements represents the accounts of23andMe, Inc. and its wholly owned subsidiary. As discussed above, we operate in two reporting segments: Consumer & Research Services and Therapeutics. The Consumer & Research Services segment consists of our PGS business, as well as research services that we perform under agreements with third parties, including the GSK Agreement, relating to the use of our genotypic and phenotypic data to identify promising drug targets. The Therapeutics segment consists of revenues from the out-licensing of intellectual property associated with identified drug targets and expenses related to therapeutic product candidates under clinical development. Substantially all our revenues are derived from our Consumer & Research Services segment.
Key Business Metrics
We monitor the following key metrics to help us evaluate our business, identify trends, formulate business plans, and make strategic decisions. We believe the following metrics are useful in evaluating our business: ? Customers. When we refer to our "Customers," this means individuals who have registered a kit on our website. We view Customers as an important metric to assess our financial performance because each Customer has registered a kit and has engaged with us by providing us with their DNA sample. These Customers may be interested in purchasing additional PGS products and services or in becoming subscribers to our new 23andMe+ subscription service, especially if they consent to participate in our research. We had approximately 11.9 million Customers as ofSeptember 30, 2021 and 11.3 million Customers as ofMarch 31, 2021 . 35 -------------------------------------------------------------------------------- ? Consenting Customers. "Consenting Customers" are Customers who have affirmatively opted in to participate in our research program. Consenting Customers are critical to our research programs and to the continuing growth of our database, which we use to identify drug targets and to generate new and interesting additional ancestry and health reports. Moreover, Consenting Customers respond to our research surveys, providing useful phenotypic data about their traits, habits, and lifestyles, which we analyze using de-identified data to determine whether a genetic variant makes an individual more or less likely to develop certain diseases. A Consenting Customer is likely to be more engaged with our brand, which may lead to the purchase of our 23andMe+ subscription service and to participation in further research studies, helping us to advance our research. Approximately 80% of our Customers are Consenting Customers. ? Subscribers. This metric represents the number of subscribers who have signed up for our 23andMe+ subscription service, which was launched inOctober 2020 . We believe that 23andMe+ will position us for future growth, as the annual membership model represents a previously untapped source of recurring revenue. We are continually investing in new reports and features to provide to subscribers as part of the 23andMe+ membership, which we believe will enhance customer lifetime value as customers can make new discoveries about themselves. We believe that this, in turn, will help to scale our customer acquisition costs and create expanding network effects. As of the fiscal year endedMarch 31, 2021 , our 23andMe+ membership base had approximately 125,000 subscribers. ? Adjusted EBITDA. Adjusted EBITDA is the measure of segment profitability reported to our CEO, the CODM. See "-Adjusted EBITDA" below for a reconciliation of Adjusted EBITDA to net loss. ? Validated Targets. We have seen a rapid acceleration in the discovery of genetically identified and biologically validated disease targets from the database and anticipate continued growth in the future. As of the fiscal year endedMarch 31, 2021 , we had genetically identified and biologically validated nineteen disease targets.
Components of Results of Operations
Revenue
We recognize revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers, when we transfer promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Our consolidated revenue is composed primarily of sales of PGS kits to customers, as well as revenues from target discovery activities as part of our research collaborations through our Consumer & Research Services segment. Additionally, revenue is generated through our collaboration agreements in our Therapeutics segment primarily as a result of the out-licensing of intellectual property to collaboration partners.
See Note 2 to our accompanying unaudited condensed consolidated financial statements for a more detailed discussion of our revenue recognition policy.
Cost of Revenue, Gross Profit, and Gross Margin
Cost of revenue for PGS primarily consists of cost of raw materials, lab
processing fees, personnel-related expenses, including salaries, benefits, and
stock-based compensation, shipping and handling, and allocated overhead. Cost of
revenue for research services primarily consists of personnel-related expenses,
including salaries, benefits, and stock-based compensation, and allocated
overhead. We expect cost of revenue to increase in the foreseeable future in
absolute dollars but gradually decrease as a percentage of revenue over the long
term.
Our gross profit represents total revenue less our total cost of revenue, and
our gross margin is our gross profit expressed as a percentage of our total
revenue. Our gross profit and gross margin have been and will continue to be
affected by a number of factors, including the volume of PGS kit sales
recognized, the prices we charge for our PGS products and research services, the
fees we incur for lab processing PGS kits, and revenues from our collaboration
agreements. We expect our Consumer & Research Services gross margin to increase
over the long term as subscription revenues become a higher percentage of
revenue mix, although our gross margin may fluctuate from period to period.
Substantially all our research services revenue is currently derived from the
GSK Agreement. If we are unable to add new research services agreements, our
research services revenue may decline substantially following the expiration of
the GSK Agreement.
36
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Operating Expenses
Our operating expenses primarily consist of research and development, sales and marketing, and general and administrative expenses. Personnel-related expenses, which include salaries, benefits, and stock-based compensation, is the most significant component of research and development and general and administrative expenses. Advertising and brand-related spend and personnel-related expenses represent the primary components of sales and marketing expenses. Operating expenses also include allocated overhead costs. Overhead costs that are not substantially dedicated for use by a specific functional group are allocated based on headcount. Allocated overhead costs include shared costs associated with facilities (including rent and utilities) and related personnel, information technology and related personnel, and depreciation of property and equipment.
Research and Development Expenses
Our research and development expenses support our efforts to add new services, to add new features to our existing services, and to ensure the reliability and scalability of our services. Research and development expenses primarily consist of personnel-related expenses, including salaries, benefits, and stock-based compensation associated with our research and development personnel, collaboration expenses, laboratory services and supplies costs, third-party data services, and allocated overhead. We plan to continue to invest in personnel to support our research and development efforts. We intend to make significant investments in therapeutics research and development efforts as we ramp up our clinical trials and the GSK collaboration. This multi-year collaboration with GSK is expected to validate drug targets with novel genetic evidence, enable rapid progression of clinical programs, and bring useful new drugs to market. We expect that research and development expenses will increase on an absolute dollar basis in the foreseeable future as we continue to invest in our products, pipeline, and infrastructure for long-term growth. In addition, our research and development expenses may fluctuate as a percentage of revenue from period to period due to the timing and amount of these expenses.
Sales and Marketing Expenses
Sales and marketing expenses consist primarily of advertising costs, personnel-related expenses, including salaries, benefits, and stock-based compensation associated with our sales and marketing personnel, and outside services. Outside services are primarily related to sales consultants that support sales of PGS kits.
Advertising costs consist primarily of direct expenses related to television and radio advertising, including production and branding, paid search, online display advertising, direct mail, and affiliate programs. Advertising production costs are expensed the first time the advertising takes place, and all other advertising costs are expensed as incurred. Deferred advertising costs primarily consist of vendor payments made in advance to secure media spots across varying media channels, as well as production costs incurred before the first time the advertising takes place. Deferred advertising costs are expensed on the first date the advertisements occur. In addition, advertising costs include platform fees due to brokers related to our third-party retailers. We expect our sales and marketing expenses to gradually decrease as a percentage of revenue over the long term, although our sales and marketing expenses may fluctuate as a percentage of revenue from period to period due to promotional strategies that drive the timing and amount of these expenses.
General and Administrative Expenses
General and administrative expenses primarily consist of personnel-related expenses, including salaries, benefits, and stock-based compensation associated with corporate management, including our CEO office, finance, legal, compliance, regulatory, and other administrative personnel. In addition, general and administrative expenses include professional fees for external legal, accounting, and other consulting services, as well as credit card processing fees related to PGS kit sales. We expect general and administrative expenses to increase for the foreseeable future as we increase headcount with the growth of our business. We also expect general and administrative expenses to increase in the near term as a result of operating as a public company, including expenses associated with compliance withSEC rules and regulations, and related increases in legal, audit, insurance, investor relations, professional services, and other administrative expenses. However, we anticipate general and administrative expenses to gradually decrease as a percentage of revenue over the long term, although it may fluctuate as a percentage of total revenue from period to period due to the timing and amount of these expenses. 37 --------------------------------------------------------------------------------
Other (Expense) Income
Other (expense) income includes interest income, change in fair value of warrants liabilities, and other (expense) income, net. Interest income consists of interest income earned on our cash deposits. Other (expense) income, net primarily consists of other non-operating income and expenditures.
Results of Operations
Comparisons for Three and Six Months ended
The following table sets forth our unaudited condensed consolidated statements of operations for the three and six months endedSeptember 30, 2021 and 2020, and the dollar and percentage change between the two periods: Three Months Ended Six Months Ended September 30, September 30, 2021 2020 $ Change % Change 2021 2020 $ Change % Change (dollars in thousands) (dollars in thousands) Revenue$ 55,204 $ 51,804 $ 3,400 7 %$ 114,443 $ 99,861 $ 14,582 15 % Cost of revenue(1)(2) 27,276 27,209 67 0 % 55,818 52,773 3,045 6 % Gross profit 27,928 24,595 3,333 14 % 58,625 47,088 11,537 25 % Operating expenses: Research and development(1)(2) 44,523 38,205 6,318 17 % 88,755 72,575 16,180 22 % Sales and marketing(1)(2) 13,588 8,329 5,259 63 % 29,007 18,984 10,023 53 % General and administrative(1)(2) 16,264 14,315 1,949 14 % 28,860 28,505 355 1 % Total operating expenses 74,375 60,849 13,526 22 % 146,622 120,064 26,558 22 % Loss from operations (46,447 ) (36,254 ) (10,193 ) 28 % (87,997 ) (72,976 ) (15,021 ) 21 % Other (expense) income: Interest income 92 69 23 33 % 136 143 (7 ) (5 %) Change in fair value of warrant liabilities 29,828 - 29,828 100 % 29,294 - 29,294 100 % Other (expense) income, net 3 (6 ) 9 (150 %) 17 872 (855 ) (98 %) Net loss and comprehensive loss$ (16,524 ) $ (36,191 ) $ 19,667 (54 %)$ (58,550 ) $ (71,961 ) $ 13,411 (19 %) (1)
Includes stock-based compensation expense as follows:
Three Months Ended Six Months Ended
September 30, September 30,
2021 2020 2021 2020
(in thousands) (in thousands)
Cost of revenue $ 945 $ 181 $ 1,743 $ 360
Research and development 5,450 4,486 11,057 8,685
Sales and marketing 860 1,039 1,763 1,868
General and administrative 3,172 5,095
5,501 9,589
Total stock-based compensation expense
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(2)
Includes stock-based compensation expense related to secondary sale transactions
as follows:
Three Months Ended September 30, Six Months Ended September 30,
2021 2020 2021 2020
(in thousands) (in thousands)Cost of revenue $ - $ 2 $ - $ 2 Research and development - 44 - 44 Sales and marketing - 9 - 9 General and administrative - 10 - 1,670 Total stock-based $ - $ 65 $ -$ 1,725 compensation expense
The following table sets forth our consolidated statements of operations data expressed as a percentage of revenue for the periods indicated:
Three Months Ended Six Months Ended
September 30, September 30,
2021 2020 2021 2020
(as a % of total revenue) (as a % of total revenue)Revenue 100 % 100 % 100 % 100 % Cost of revenue 49 % 53 % 49 % 53 % Gross margin 51 % 47 % 51 % 47 % Operating expenses: Research and development 81 % 74 % 78 % 73 % Sales and marketing 25 % 16 % 25 % 19 % General and administrative 29 % 27 % 25 % 28 % Total operating expenses 135 % 117 % 128 % 120 % Loss from operations (84 %) (70 %) (77 %) (73 %) Other (expense) income: Interest income 0 % 0 % 0 % 0 % Change in fair value of warrant liabilities 54 % 0 % 26 % 0 % Other (expense) income, net 0 % 0 % 0 % 1 % Net loss (30 %) (70 %) (51 %) (72 %) Revenue Total revenue increased by$3.4 million , or 7%, for the three months endedSeptember 30, 2021 compared to the three months endedSeptember 30, 2020 . The increase was due primarily to an increase in consumer services revenue of$3.9 million , driven mainly by higher PGS kit sales volume, which resulted from increased marketing spending and growth in consumer demand, as well as$1.5 million in subscription services revenue in the three months endedSeptember 30, 2021 . The Company launched the subscription offering inOctober 2020 , so no revenue was attributable to subscription services in the three months endedSeptember 30, 2020 . This increase in consumer services revenue was partially offset by a$0.5 million decrease in research services revenue due primarily to the completion of certain research projects. Total revenue increased by$14.6 million , or 15%, for the six months endedSeptember 30, 2021 compared to the six months endedSeptember 30, 2020 . The increase was due primarily to an increase in consumer services revenue of$17.1 million , driven mainly by higher PGS kit sales volume, which resulted from increased marketing spending and growth in consumer demand, as well as$2.7 million in subscription services revenue following our launch of the subscription offering inOctober 2020 . This increase in consumer services revenue was partially offset by a$2.5 million decrease in research services and therapeutics revenues due to the completion of certain research projects, as well as a reduction in the number of hours spent by our personnel on target discovery activities during the period under the GSK Agreement. 39 --------------------------------------------------------------------------------
Cost of Revenue, Gross Profit and Gross Margin
Total cost of revenue remained relatively consistent at$27.3 million for the three months endedSeptember 30, 2021 , compared to$27.2 million for the three months endedSeptember 30, 2020 . Total cost of revenue increased by$2.1 million due primarily to an increase in costs associated with drug target discovery activities under the GSK collaboration, which is offset by a decrease of$2.0 million in costs related to consumer services revenue due primarily to lower lab processing and overhead costs. Total cost of revenue increased by$3.0 million , or 6%, for the six months endedSeptember 30, 2021 compared to the six months endedSeptember 30, 2020 . The increase in cost of revenue was due primarily to a$1.7 million increase in costs associated with drug target discovery activities under the GSK collaboration and other research projects and a$1.3 million increase in costs related to consumer services revenue, driven mainly by a growth in the volume of PGS kit sales recognized during the six months endedSeptember 30, 2021 , partially offset by lower lab processing and overhead costs. Our gross profit increased by$3.3 million , or 14%, to$27.9 million for the three months endedSeptember 30, 2021 from$24.6 million for the three months endedSeptember 30, 2020 . The increase in gross profit was primarily due to the increase in consumer services revenue, as well as lower lab processing costs. Our gross profit increased by$11.5 million , or 25%, to$58.6 million for the six months endedSeptember 30, 2021 from$47.1 million for the six months endedSeptember 30, 2020 . The increase in gross profit was primarily due to the increase in consumer services revenue, as well as lower lab processing costs. Our gross margin improved year over year, from 47% for the three and six months endedSeptember 30, 2020 to 51% for the three and six months endedSeptember 30, 2021 , due to operating efficiencies and lower costs in lab processing and increased revenue from subscription services, which generates a higher gross margin than our PGS kit sales.
Research and Development Expenses
The following table sets forth our research and development expenses for the
three and six months ended
Three Months Ended Six Months Ended
September 30, September 30,
2021 2020 $ Change % Change 2021 2020 $ Change % Change
(dollars in thousands) (dollars in thousands)Personnel-related
expenses$ 20,217 $ 17,360 $ 2,857 16 %$ 40,003 $ 34,456 $ 5,547 16 % Lab-related research services 10,353 8,333 2,020 24 % 21,498 12,837 8,661 67 %
Depreciation,
equipment and supplies 2,457 2,872 (415 ) (14 %) 4,664 5,943 (1,279 ) (22 %) Facilities, other overhead allocation, and other 11,496 9,640 1,856 19 % 22,590 19,339 3,251 17 % Total research and development expenses$ 44,523 $ 38,205 $ 6,318 17 %$ 88,755 $ 72,575 $ 16,180 22 % Research and development expenses for the three months endedSeptember 30, 2021 was$44.5 million , compared to$38.2 million for three months endedSeptember 30, 2020 . This increase of$6.3 million , or 17%, is primarily attributable to the increase in personnel-related expenses of$2.9 million , due to growth in headcount and the timing and value of stock-based compensation for equity awards granted. Lab-related research services related to funding for our programs with GSK and to advancing our Therapeutics portfolio increased by$2.0 million . In addition, facilities, other overhead allocation, and other increased by$1.9 million due to higher allocated overhead costs mainly attributable to increased research and development headcount as well as increased personnel-related expenses for shared costs departments and a$0.5 million increase in consulting services during the three months endedSeptember 30, 2021 . These increases were partially offset by a$0.4 million decrease in depreciation, equipment and supplies due primarily to an operating lease amendment to extend the lease term of the Company's facility located inSouth San Francisco, CA. 40 -------------------------------------------------------------------------------- Research and development expenses for the six months endedSeptember 30, 2021 was$88.8 million , compared to$72.6 million for six months endedSeptember 30, 2020 . This increase of$16.2 million , or 22%, is primarily attributable to the increase in lab-related research services of$8.7 million related to funding for our programs with GSK and to advancing our Therapeutics portfolio. Personnel-related expenses increased by$5.5 million due to growth in headcount and the timing and value of stock-based compensation for equity awards granted. In addition, facilities, other overhead allocation, and other increased by$3.3 million due to higher allocated overhead costs mainly attributable to increased research and development headcount as well as increased personnel-related expenses for shared costs departments and a$0.8 million increase in consulting services during the six months endedSeptember 30, 2021 . These increases were partially offset by a$1.3 million decrease in depreciation, equipment and supplies due primarily to an operating lease amendment to extend the lease term of the Company's facility located inSouth San Francisco, CA. For the three months endedSeptember 30, 2021 and 2020, 52% and 53% of total research and development expenses are attributable to the Consumer and Research Services business, respectively, and 48% and 47% are attributable to our Therapeutics business, respectively. For the six months endedSeptember 30, 2021 and 2020, 52% and 58% of total research and development expenses are attributable to the Consumer and Research Services business, respectively, and 48% and 42% are attributable to our Therapeutics business, respectively. The increase attributable to the Therapeutics business is driven by our continued investment in drug discovery and advancement of ongoing programs.
Sales and Marketing Expenses
The following table sets forth our sales and marketing expenses for the three and six months endedSeptember 30, 2021 and 2020, and the dollar and percentage change between the two periods: Three Months Ended Six Months Ended September 30, September 30, 2021 2020 $ Change % Change 2021 2020 $ Change % Change (dollars in thousands) (dollars in thousands) Advertising & brand$ 7,134 $ 1,684 $ 5,450 324 %$ 16,187 $ 5,481 $ 10,706 195 % Personnel-related expenses 3,157 3,431 (274 ) (8 %) 6,314 7,132 (818 ) (11 %) Outside services, equipment and supplies 1,426 1,245 181 15 % 2,773 2,348 425 18 % Facilities and other overhead allocation 1,871 1,969 (98 ) (5
%) 3,733 4,023 (290 ) (7 %)
Total sales and
marketing expenses
63 % $ 29,007 $ 18,984 $ 10,023 53 %
Sales and marketing expenses for the three months ended September 30, 2021
amounted to $13.6 million , compared to $8.3 million for the three months ended
September 30, 2020 , representing an increase of $5.3 million , or 63%. This
increase was primarily driven by the $5.5 million increase in advertising and
brand-related spend in our marketing programs to grow our consumer business.
Sales and marketing expenses for the six months ended September 30, 2021
amounted to $29.0 million , compared to $19.0 million for the six months ended
September 30, 2020 , representing an increase of $10.0 million , or 53%. This
increase was primarily driven by the $10.7 million increase in advertising and
brand-related spend in our marketing programs to grow our consumer business.
41
--------------------------------------------------------------------------------General and Administrative Expenses
Total general and administrative expenses increased by$1.9 million , or 14%, from$14.3 million for the three months endedSeptember 30, 2020 to$16.3 million for the three months endedSeptember 30, 2021 . The increase in general and administrative expenses was due primarily to a$2.3 million increase in other operating expenses from$0.8 million for the three months endedSeptember 30, 2020 to$3.1 million for the three months endedSeptember 30, 2021 . This increase in other operating expenses was mainly due to an increase in director and officer insurance as a public company. There was also a$1.2 million increase in outside services mainly attributable to consulting and legal services and a$0.2 million increase in facilities expenses and other overhead allocation due to higher allocated overhead costs and increased headcount. The increases were partially offset by a$1.7 million decrease in personnel-related expenses from$8.5 million for the three months endedSeptember 30, 2020 to$6.8 million for the three months endedSeptember 30, 2021 . This decrease in personnel-related expenses was mainly due to a$2.0 million decrease in stock-based compensation expense arising from an option modification that occurred in the prior fiscal year, offset by a$0.3 million increase in other personnel-related expenses due to increased headcount. Total general and administrative expenses increased by$0.4 million , or 1%, from$28.5 million for the six months endedSeptember 30, 2020 to$28.9 million for the six months endedSeptember 30, 2021 . The increase in general and administrative expenses was due primarily to a$2.9 million increase in other operating expenses from$1.7 million for the six months endedSeptember 30, 2020 to$4.6 million for the six months endedSeptember 30, 2021 . This increase in other operating expenses was mainly due to an increase in director and officer insurance as a public company and credit card processing fees related to the increase in PGS kit sales. There was also a$2.2 million increase in outside services mainly attributable to increased consulting and audit services related to the Business Combination and a$0.6 million increase in facilities expenses and other overhead allocation due to higher allocated overhead costs and increased headcount. The increases were partially offset by a$5.3 million decrease in personnel-related expenses from$18.0 million for the six months endedSeptember 30, 2020 to$12.7 million for the six months endedSeptember 30, 2021 . This decrease in personnel-related expenses was mainly due to a$5.9 million decrease in stock-based compensation expense arising from an option modification that occurred in the prior fiscal year and secondary transactions that occurred during the six months endedSeptember 30, 2020 , offset by a$0.6 million increase in other personnel-related expenses due to increased headcount.
Interest income
Interest income was less than
Interest income was
Change in fair value of warrant liabilities
Change in fair value of warrant liabilities increased by$29.8 million , or 100%, from nil for the three months endedSeptember 30, 2020 to$29.8 million for the three months endedSeptember 30, 2021 . This increase was due to a reduction in the fair value of the Warrants that were assumed in connection with the Business Combination, which was primarily driven by movements in our stock price and volatility measurements. Change in fair value of warrant liabilities increased by$29.3 million , or 100%, from nil for the six months endedSeptember 30, 2020 to$29.3 million for the six months endedSeptember 30, 2021 . This increase was due to a reduction in the fair value of the Warrants that were assumed in connection with the Business Combination, which was primarily driven by movements in our stock price and volatility measurements.
Other (Expense) Income, Net
Other (expense) income, net was less than
Other (expense) income, net decreased by$0.9 million , or 98%, from$0.9 million for the six months endedSeptember 30, 2020 to less than$0.1 million for the six months endedSeptember 30, 2021 . This decrease was due to a lease reassessment that occurred inJune 2020 , which resulted in a one-time$0.9 million gain during the six months endedSeptember 30, 2020 . 42 --------------------------------------------------------------------------------
Adjusted EBITDA
We evaluate the performance of each segment based on Adjusted EBITDA, which is a non-GAAP financial measure that we define as net income before net interest expense (income), net other expense (income), changes in fair value of warrant liabilities, depreciation and amortization of fixed assets, amortization of internal use software, non-cash stock-based compensation expense, acquisition-related costs, and expenses related to restructuring and other charges, if applicable for the period. Adjusted EBITDA is a key measure used by our management and our Board of Directors to understand and evaluate our operating performance and trends, to prepare and approve our annual budget, and to develop short- and long-term operating plans. In particular, we believe that the exclusion of the items eliminated in calculating Adjusted EBITDA provides useful measures for period-to-period comparisons of our business. Accordingly, we believe that Adjusted EBITDA provides useful information in understanding and evaluating our operating results in the same manner as our management and our Board of Directors. Adjusted EBITDA should not be considered in isolation of, or as an alternative to, measures prepared in accordance with GAAP. Other companies, including companies in our industry, may calculate similarly-titled non-GAAP financial measures differently or may use other measures to evaluate their performance, all of which could reduce the usefulness of Adjusted EBITDA as a tool for comparison. There are a number of limitations related to the use of these non-GAAP financial measures rather than net loss, which is the most directly comparable financial measure calculated in accordance with GAAP. Some of the limitations of Adjusted EBITDA include (i) Adjusted EBITDA does not properly reflect capital commitments to be paid in the future, and (ii) although depreciation and amortization are non-cash charges, the underlying assets may need to be replaced and Adjusted EBITDA does not reflect these capital expenditures. In evaluating Adjusted EBITDA, you should be aware that in the future we will incur expenses similar to the adjustments in this presentation. Our presentation of Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by these expenses or any unusual or non-recurring items. When evaluating our performance, you should consider Adjusted EBITDA alongside other financial performance measures, including our net loss and other GAAP results. The following tables reconcile net loss to Adjusted EBITDA for the three and six months endedSeptember 30, 2021 and 2020 on a company-wide basis and for each of our segments: Three Months Ended Six Months Ended September 30, September 30, 2021 2020 2021 2020 (in thousands) (in thousands) Segment Revenue Consumer & Research Services$ 55,204 $ 51,804 $ 114,443 $ 99,813 Therapeutics - - - 48 Total revenue$ 55,204 $ 51,804 $ 114,443 $ 99,861 Segment Adjusted EBITDA Consumer & Research Services Adjusted EBITDA$ (760 ) $ 1,778 $ (1,265 ) $ (2,458 ) Therapeutics Adjusted EBITDA (18,828 ) (14,440 ) (37,131 ) (23,835 ) Unallocated Corporate (1) (10,095 ) (7,558 ) (18,563 ) (13,757 ) Total Adjusted EBITDA$ (29,683 ) $ (20,220 ) $ (56,959 ) $ (40,050 ) Reconciliation of net loss to Adjusted EBITDA Net loss$ (16,524 ) $ (36,191 ) $ (58,550 ) $ (71,961 ) Adjustments: Interest (income), net (92 ) (69 ) (136 ) (143 ) Other (income) expense, net (3 ) 6 (17 ) (872 ) Change in fair value of warrant liabilities (29,828 ) - (29,294 ) - Depreciation and amortization 4,871 5,168 9,508 10,699 Stock-based compensation expense 10,427 10,866 20,064 22,227 Acquisition-related costs (2) 1,466 - 1,466 - Total Adjusted EBITDA$ (29,683 ) $ (20,220 ) $ (56,959 ) $ (40,050 ) 43
--------------------------------------------------------------------------------
(1)
Certain expenses such as Finance, Legal, Regulatory and Supplier Quality, and CEO Office are not reported as part of the reporting segments as reviewed by the CODM. These amounts are included in Unallocated Corporate. (2) For the three and six months endedSeptember 30, 2021 , acquisition-related costs primarily consisted of advisory, legal and consulting fees.
Liquidity and Capital Resources
We have financed our operations primarily through sales of equity securities and revenue from sales of PGS and research services. We received gross proceeds of$309.7 million from the Business Combination and$250.0 million from thePIPE Investment . Our primary requirements for liquidity and capital are to fund operating needs and finance working capital, capital expenditures, and general corporate purposes. As ofSeptember 30, 2021 , our principal source of liquidity was our cash balance of$701.1 million , which is held for working capital purposes. We have generated significant operating losses as reflected in our accumulated deficit and negative cash flows from operations. We had an accumulated deficit of$1,035.8 million as ofSeptember 30, 2021 . As of the date of this Form 10-Q, we believe our existing cash resources are sufficient to continue operating activities for the next 12 months. We expect to continue to incur operating losses and generate negative cash flows from operations for the foreseeable future due to the investments we intend to continue to make in research and development, and additional general and administrative costs we expect to incur in connection with operating as a public company. Cash from operations could also be affected from our customers and other risks detailed in the section titled "Risk Factors." We expect to continue to maintain financing flexibility in the current market conditions. As a result, we may require additional capital resources to execute strategic initiatives to grow our business. Our future capital requirements will depend on many factors including our revenue growth rate, the timing and extent of spending to support further sales and marketing, and research and development efforts. We may be required to seek additional equity or debt financing. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all. If we raise additional funds by issuing equity or equity-linked securities, our stockholders may experience dilution. Future debt financing, if available, may involve covenants restricting our operations or our ability to incur additional debt. If we are unable to raise additional capital when desired, our business, results of operations, and financial condition would be materially and adversely affected.
Cash Flows
The following table summarizes our cash flows for the periods presented:
Six Months Ended September 30,
2021 2020
(in thousands)
Net cash (used in) operating activities $ (107,025 ) $ (62,419 )
Net cash (used in) investing activities $ (9,116 ) $ (5,003 )
Net cash provided by financing activities $ 534,702 $ 36,587 Cash Flows from Operating Activities
Net cash used in operating activities of$107.0 million for the six months endedSeptember 30, 2021 was primarily related to a net loss of$58.6 million and changes in fair value of warrant liabilities of$29.3 million , partially offset by non-cash charges for stock-based compensation of$20.1 million , depreciation and amortization of$8.4 million and amortization of internal-use software of$1.1 million . The net changes in operating assets and liabilities of$48.8 million were primarily related to an increase in accounts receivable of$24.2 million primarily attributable to an accounts receivable balance related to GSK, an increase in inventories of$11.5 million due to increased purchases aligned with higher forecasted sales, an increase in prepaid expenses and other current assets of$5.4 million primarily due to increase in prepaid insurance, a decrease in operating lease liabilities of$3.7 million primarily due to lease payments, a decrease in deferred revenue of$3.6 million primarily due to less kit sales than revenue recognized during the period, partially offset by increased deferred revenue balance related to GSK, a decrease in accrued expenses and other current liabilities of$2.3 million primarily due to timing of vendor invoice receipts, a decrease in accounts payable of$1.0 million due to timing of vendor payments and an 44 --------------------------------------------------------------------------------
increase in other assets of
Net cash used in operating activities of$62.4 million for the six months endedSeptember 30, 2020 was primarily related to a net loss of$72.0 million , gain from lease termination of$0.9 million , partially offset by non-cash charges for stock-based compensation of$22.2 million , depreciation and amortization of$9.6 million and amortization and impairment of internal-use software of$1.1 million . The net changes in operating assets and liabilities of$22.5 million were primarily related to an increase in accounts receivable of$20.2 million primarily attributable to an accounts receivable balance related to GSK, partially offset by decrease in retailers' accounts receivable balance as we terminated certain retail contracts, a decrease in deferred revenue of$7.9 million primarily as a result of less kit sales than revenue recognized during the period, partially offset by increased deferred revenue balance related to GSK, a decrease in operating lease liabilities of$4.9 million primarily due to lease payments, a decrease in accounts payable of$4.2 million due to the timing of payments, a decrease in accrued expenses and other current liabilities of$1.1 million primarily due to timing of vendor invoice receipts as well as payment settlements and adjustments for the closeout of thePhoenix lab, which were partially offset by a decrease in operating lease right-of-use assets of$6.7 million primarily due to right-of-use assets amortization and adjustment to the carrying amount of the right-of-use assets as a result of tenant improvement allowance received for the office inSunnyvale, California , a decrease in prepaid expenses and other current assets of$5.2 million primarily due to decrease in deferred advertising and other receivables, a decrease in deferred cost of revenue of$1.8 million primarily due to lower kit sales and a decrease in inventories of$1.7 million due to decreased purchase aligned with lower forecasted sales.
Cash Flows from Investing Activities
Cash flows from investing activities primarily relate to purchase of property and equipment, prepayments for intangible assets, as well as capitalization of internal-use software costs. Net cash used in investing activities was$9.1 million for the six months endedSeptember 30, 2021 , which consisted of prepayments for intangible assets of$5.5 million related to a patent rights purchase completed inOctober 2021 , purchases of property and equipment of$1.8 million and capitalization of internal-use software costs of$1.8 million . Net cash used in investing activities was$5.0 million for the six months endedSeptember 30, 2020 , which consisted of purchases of property and equipment of$3.6 million and capitalization of internal-use software costs of$2.0 million , partially offset by proceeds from sales of property and equipment of$0.6 million .
Cash Flows from Financing Activities
Net cash provided by financing activities was$534.7 million for the six months endedSeptember 30, 2021 , which consisted of$309.7 million in proceeds from the Business Combination,$250.0 million of proceeds from thePIPE Investment , and$5.6 million in proceeds from the exercise of stock options, which were partially offset by$30.6 million in payments of deferred offering costs. Net cash provided by financing activities of$36.6 million for the six months endedSeptember 30, 2020 related entirely to proceeds from the exercise of stock options.
Contractual Obligations and Commitments
Our lease portfolio includes leased offices, dedicated lab facility and storage space, and dedicated data center facility space, with remaining contractual periods from 2.3 years to 9.8 years. Refer to Note 7 of our unaudited condensed consolidated financial statements included elsewhere in this Form 10-Q for a summary of our future minimum lease obligations. In the normal course of business, we enter into non-cancelable purchase commitments with various parties for purchases. Refer to Note 8 of our unaudited condensed consolidated financial statements included elsewhere in this Form 10-Q for a summary of our commitments as ofSeptember 30, 2021 . 45 --------------------------------------------------------------------------------
Critical Accounting Policies and Estimates
Our condensed consolidated financial statements and the related notes thereto included elsewhere in this Form 10-Q are prepared in accordance with GAAP. The preparation of condensed consolidated financial statements also requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses, and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ significantly from the estimates made by management. To the extent that there are differences between our estimates and actual results, our future financial statement presentation, financial condition, results of operations, and cash flows will be affected. There have been no material changes to our critical accounting policies and estimates as compared to those described in the section titled "Management's Discussion and Analysis of Financial Condition and Results of Operations" set forth in our Current Report on Form 8-K datedJune 16, 2021 , which was filed with theSEC onJune 21, 2021 .
Emerging Growth Company Status
We are an emerging growth company ("EGC"), as defined in the Jumpstart Our
Business Startups Act of 2012 (the "JOBS Act"). The JOBS Act permits companies
with EGC status to take advantage of an extended transition period to comply
with new or revised accounting standards, delaying the adoption of these
accounting standards until they would apply to private companies. We have
elected to use this extended transition period to enable us to comply with new
or revised accounting standards that have different effective dates for public
and private companies until the earlier of the date we (i) are no longer an EGC
or (ii) affirmatively and irrevocably opt out of the extended transition period
provided in the JOBS Act. As a result, our financial statements may not be
comparable to companies that comply with the new or revised accounting standards
as of public company effective dates.
In addition, we intend to rely on the other exemptions and reduced reporting
requirements provided by the JOBS Act. Subject to certain conditions set forth
in the JOBS Act, if, as an EGC, we intend to rely on such exemptions, we are not
required to, among other things: (i) provide an auditor's attestation report on
our system of internal controls over financial reporting pursuant to Section
404(b) of the Sarbanes-Oxley Act; (ii) provide all of the compensation
disclosure that may be required of non-emerging growth public companies under
the Dodd-Frank Wall Street Reform and Consumer Protection Act; (iii) comply with
any requirement that may be adopted by the Public Company Accounting Oversight
Board ; and (iv) disclose certain executive compensation-related items such as
the correlation between executive compensation and performance and comparisons
of the CEO's compensation to median employee compensation.
We will remain an EGC under the JOBS Act until the earliest of (i) the last day
of the fiscal year (a) following October 2, 2025 , the fifth anniversary of the
closing of VGAC's initial public offering, (b) the year in which we have total
annual gross revenue of at least $1.07 billion , or (c) the year in which we are
deemed to be a large accelerated filer, which means the market value of the
common equity of the Company that is held by non-affiliates exceeds $700 million
as of the last business day of its most recently completed second fiscal
quarter; and (ii) the date on which we have issued more than $1.00 billion in
non-convertible debt securities during the prior three-year period.
Recent Accounting Pronouncements
See Note 2, "Summary of Significant Accounting Policies" -Recently Issued Accounting Pronouncements and -Recently Adopted Accounting Pronouncements, included in Part I, Item 1 of this Form 10-Q for more information.
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