What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-03-16 compared with 2022-03-14 · 291 added, 238 removed, 385 unchanged (58% of the section changed)

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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.

We are a patient-centered, health intelligence company with a mission to use artificial intelligence, or AI, and machine learning to enable personalized medicine for all.

By leveraging leading data scientists and technology, our platform powers remarkable and unique insights that transform the practice of medicine including how disease is diagnosed, treated, and prevented.

We were established out of Icahn School of Medicine at Mount Sinai or ISMMS, and commenced operations in June 2017 as a commercial entity that could effectively engage diverse patient populations and health care institutions at scale.

We have since established and deployed our comprehensive and integrated genomic and clinical

data platform and established a mature diagnostic testing business.

We now maintain a database that includes more than 12 million de-identified individual clinical records, many with genomic profiles.

We also manage a data asset over 47 petabytes in size, that has been expanding at more than 1 petabyte per month with an accelerating growth rate.

Currently, we derive the majority of our revenue from our diagnostic test solutions.

Our diagnostic business generates revenue and engages with healthcare professionals working with patients primarily through our Women’s Health and Oncology solutions.

Our Women’s Health solutions sequence and analyze an industry-leading number of genes and use interpretive information tools to translate raw sequencing and clinical data efficiently and accurately into digestible clinical reports that guide decision-making by patients and physicians.

Our Oncology diagnostic solutions feature both somatic tumor profiling and hereditary cancer screenings, along with a foundational whole exome and whole transcriptome sequencing approach.

Our Sema4 Signal Hereditary Cancer solution determines if a patient carries an inherited genetic change that increases the risk of cancer or informs on cancer treatment.

We believe our Signal Whole Exome and Transcriptome solution is one of the most comprehensive molecular profiling solutions from a commercial entity to receive New York State approval.

Beginning in May of 2020, we also expanded our diagnostic testing services to include testing for the presence of COVID-19, which we intend to discontinue by March 31, 2022.

We have also expanded beyond diagnostic testing to enter into service agreements with third parties to provide diagnostic testing, research, and related data aggregation reporting services.

We have established and continue to seek strategic relationships with pharmaceutical and biotech, or Biopharma, companies to enable innovation across the entire drug lifecycle, from next-generation drug discovery and development, to post-market efficacy surveillance, to informing on bioavailability, toxicity, tolerability, and other features critical to drug development.

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

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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

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.

Business Combination

On July 22, 2021, Legacy Sema4 completed the Business Combination with CMLS, received net cash proceeds of $510 million, and CMLS changed its name to Sema4 Holdings.

The Business Combination was accounted for as a reverse recapitalization with Legacy Sema4 as the accounting acquirer and CMLS as the acquired company for accounting purposes.

Legacy GeneDx

Legacy GeneDx was founded in 2000 by scientists from the National Institutes of Health and, prior to the Acquisition by the Company, was a wholly-owned subsidiary of OPKO Health, Inc.

Legacy GeneDx derived its revenue primarily from diagnostic testing services, including revenue related to exome sequencing and whole genome sequencing.

On April 29, 2022, Sema4 Holdings acquired Legacy GeneDx from OPKO for an upfront payment of $150 million in cash, and 80 million shares of Class A common stock, subject to adjustment, with up to an additional $150 million revenue-based milestones (payable in cash or up to 30.9 million shares of Class A common stock at our discretion).

Our results of operations include the results of operations of Legacy GeneDx from the date of acquisition.

For more information, see “—Acquisition of Legacy GeneDx” below.

New Strategic Direction for GeneDx and Legacy Sema4 Business Exits

On August 11, 2022, our board of directors approved a restructuring plan that contemplated exiting Legacy Sema4’s somatic tumor testing services and the closing of the laboratory in Branford, CT, which we completed as of December 31, 2022.

In connection with the plan, we also eliminated approximately 250 positions.

On November 14, 2022, we announced our plan to pursue a new strategic direction focused on our exome and whole genome sequencing business coupled with our Centrellis data platform.

As part of our strategic realignment, on November 11, 2022, our board of directors approved our exit from Legacy Sema4’s reproductive and women’s health testing business, which includes carrier screening, noninvasive prenatal, and other ancillary reproductive testing offerings.

We exited the operations of the reproductive and women’s health testing services during the first quarter of 2023.

As a result of this business exit, we eliminated approximately 500 positions, and ceased operations at the Stamford, CT laboratory.

The combined reductions in workforce eliminated approximately 32.5% of our workforce in 2022.

Our go-forward testing services will be consolidated and performed out of our Gaithersburg, MD laboratory which was primarily used for our pediatric and rare disease testing services.

Effective January 9, 2023, Sema4 Holdings Corp.

changed its name to GeneDx Holdings Corp.

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Factors Affecting Our Performance

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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 “ It em 1A.

See the section titled “Item 1A.

Risk Factors” for more information.

Number of resulted tests

We historically reported both accessioned and resulted tests as important factors impacting our performance.

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 more important and useful to our investors because it directly correlates with long-term patient relationships and the size of our genomic database.

Therefore, we do not plan to report the number of accessioned tests.

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

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As a result, in the past we have needed additional time and resources to comply with the requirements.

Third-party payors may decide to deny payment or seek to recoup payments for tests performed by us that they contend were improperly billed, not medically necessary or against their coverage determinations, or for which they believe they have otherwise overpaid.

As a result, we may be required to refund payments already received, and our revenues may be subject to retroactive adjustment as a result of these factors among others.

In particular, 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 the “Disputed Claims”).

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 payment of $15 million was made on December 30, 2022.

In consideration for the payments, the payor has agreed to provide releases of the Disputed Claims, which releases will become effective on or about April 1, 2023.

For more information regarding this matter, see Note 4, “Revenue Recognition” to our audited consolidated financial statements included within this Annual Report.

We expect to continue to focus our resources on increasing the adoption of, and expanding coverage and reimbursement for, our current and any future tests we may develop or acquire.

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We also rely upon third-party service providers for data storage and workflow management.

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Increasing adoption of our services by existing and new customers

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Investment in platform innovation to support commercial growth

We are seeking to leverage and deploy our Centrellis and Traversa 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 our Centrellis platform.

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.

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Thus, test volumes drive database diversity and enable potential identification of variants of unknown significance and population-specific insights.

The number of tests resulted is a key indicator that we use to assess the operational efficiency of our business.

The number of tests resulted and the mix of test results, with a focus on driving whole exome and whole genome sequencing, are key indicators that we use to assess the operational efficiency of our business.

Once the appropriate workflow is completed, the test is resulted and details are provided to ordered patients or healthcare professionals for reviews.

During the year ended December 31, 2021, we resulted 709,942 tests in our laboratories, 418,053 tests of which were for COVID-19, compared to the period ended December 31, 2020, in which we resulted approximately 540,407 tests in our laboratories, 332,764 of which were for COVID-19.

This 31% increase in resulted volume from 2020 to 2021 largely resulted from newly entered service agreements for COVID-19 testing as well as an increase in non-COVID-19 institutional testing.

During the year ended December 31, 2019, we resulted approximately 155,497 tests in our laboratories, none of which were for COVID-19.

The 248% increase in resulted volume from 2019 to 2020 largely resulted from newly entered service agreements for COVID-19 testing, offset by a slowdown in the base diagnostic business during the beginning of the COVID-19 pandemic given that many of our customers, including hospitals and clinics, had suspended non-emergency appointments and services.

As discussed above, we no longer report the number of accessioned tests as a key performance indicator because the number of resulted tests more directly correlates with long-term patient relationships and the size of our genomic database.

During the year ended December 31, 2022, we resulted 528,876 tests in our laboratories, 121,214 of which were processed by Legacy GeneDx compared to the period ended December 31, 2021, in which we resulted approximately 709,942 tests in Legacy Sema4 laboratories.

This decrease in resulted volume from 2021 to 2022 largely resulted from the Company’s decision to discontinue COVID-19, somatic oncology and reproductive health testing in 2022, which was partially offset by inclusion of volumes from GeneDx’s laboratory following the closing of the Acquisition of GeneDx as further discussed below.

Acquisition of Legacy GeneDx

In January 2022, we and our wholly-owned subsidiaries, Orion Merger Sub I, Inc.

(“Merger Sub I”) and Orion Merger Sub II, LLC (“Merger Sub II”) entered into an Agreement and Plan of Merger and Reorganization (as amended, the “Acquisition Merger Agreement”), with GeneDx, Inc., a New Jersey corporation (“Legacy GeneDx”)

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and a wholly-owned subsidiary of OPKO, GeneDx Holding 2, Inc.

(“Holdco”), and OPKO to acquire 100% of Legacy GeneDx (the “Acquisition”).

Subject to the terms and conditions of the Acquisition Merger Agreement, we agreed to pay consideration to OPKO for the Acquisition of (i) $150 million in cash at the closing of the Acquisition, subject to certain adjustments as provided in the Acquisition Merger Agreement, (ii) 80 million shares of our Class A common stock to be issued at the closing of the Acquisition and (iii) up to $150 million payable following the closing of the Acquisition, if certain revenue-based milestones were achieved for each of the fiscal years ending December 31, 2022 and December 31, 2023.

These milestone payments, if and to the extent earned under the terms of the Acquisition Merger Agreement, will be satisfied through the payment and/or issuance of a combination of cash and/or shares of our Class A common stock (valued at a fixed $4.86 per share, subject to adjustment for stock splits and similar changes), with such mix to be determined in our sole discretion.

The Acquisition closed on April 29, 2022.

Our net loss for the year ended December 31, 2022 includes the results of operations of Legacy GeneDx from the date of acquisition.

Concurrently with the execution of the Acquisition Merger Agreement, we entered into subscription agreements with certain institutional investors, pursuant to, and on the terms and subject to the conditions of which, these investors collectively subscribed for 50 million shares of our Class A common stock for an aggregate purchase price equal to $200 million (the “Acquisition PIPE Investment”).

The Acquisition PIPE Investment was consummated substantially concurrently with the closing of the Acquisition.

Russia and Ukraine Conflict

During the first quarter of 2022, Russia commenced a military invasion of Ukraine, and the ensuing conflict has created disruption in the region and around the world.

We continue to utilize Ukraine-based contractors as of December 31, 2022.

To date, this has not had a material effect on our operations, and we have taken additional measures in securing and monitoring data and remote access.

We continue to closely monitor the ongoing conflict and related sanctions, which could impact our business, financial results and results of operations in the future.

COVID-19 Impact

The ongoing COVID-19 pandemic has had, and continues to have, an extensive impact on the global health and economic environments since the initial outbreak in March 2020.

Beginning in April 2020, our diagnostic test volumes decreased significantly as compared to the prior year as a result of the COVID-19 pandemic and the related limitations and priorities across the healthcare system.

In response, beginning in May 2020, we entered into several service agreements with state governments and healthcare institutions to provide testing for the presence of COVID-19 infection.

COVID-19 test volumes grew significantly from the introduction of the service offering through the remainder of 2020 and further increased in 2021.

To support the rapid expansion of COVID-19 test volumes, we increased our workforce through both temporary contractors and employees.

In addition, while most of our revenues from genetic testing rely upon reimbursements from third party payors, healthcare institutions, and individuals, the majority of our COVID-19 test revenues rely upon reimbursements from state governments and healthcare institutions.

In addition, COVID-19 testing yields lower revenues per tests and incurs lower costs to perform each test.

We have also experienced a slowdown in receivable collections since the onset of the pandemic, but do not expect those collection trends to continue.

As part of our response to the ongoing COVID-19 pandemic, we have implemented various strategies to mitigate operating risks, reduce costs and improve cash collections.

We have made significant advance purchases of test-related inventory in order to reduce the risk of potential business interruptions related to supply chain disruption.

We also contracted with third-party vendors to collect and test COVID-19 samples to reduce operating risks related to employee health.

Temporary COVID-19 austerity measures included cancellation of the 2020 annual merit compensation increase, temporary salary reductions from May through July 2020 and deferral of the 401(k) employer match from May through December 2020.

The employer match was reinstated in January 2021, and the deferred portion was funded on March 9, 2021.

To support our sales employees with commission-based compensation structure, we implemented temporary minimum commissions during the second quarter of 2020.

No such minimums were in place in any quarter after the second quarter nor are any such minimums expected to be implemented again in the near term.

No employee layoffs were implemented as part of these austerity measures.

As conditions improve, we are focused on overhauling our revenue cycle, and as part of transformational activities hired a Chief Revenue Officer and established a revenue cycle Center of Excellence.

As part of our efforts to improve our collection efficiency and overall financial health, we are also undergoing various process transformations within the Order-to-Cash and Procure-to-Pay cycles.

While test volumes have since improved, we continue to experience changes in the mix of tests due to the impact of the COVID-19 and its variants.

We anticipate that demand for COVID-19 tests will decrease as vaccines continue to be developed and deployed to the general population.

For this reason, we announced in December 2021 that we had decided to discontinue COVID-19 testing services by March 31, 2022 and began notifying our COVID-19 testing solutions customers of this decision.

We intend to dedicate all of our efforts and resources to our core mission to transform healthcare by using artificial intelligence to enable the delivery of precision medicine as the standard of care, and do not expect declines for our other revenue streams during 2022.

The full extent to which

the COVID-19 pandemic will directly or indirectly impact our business, results of operations and financial condition will depend on future developments that are highly uncertain and cannot be accurately predicted, including new information that may emerge concerning COVID-19 or its variants, the actions taken to contain it or treat it and the economic impact on local, regional, national and international markets and supply chains.

Therefore, the COVID-19 pandemic could continue to have a material impact on our results of operations, cash flows and financial condition for the foreseeable future.

In March 2020, the Coronavirus Aid, Relief and Economic Security Act, or the CARES Act, was signed into law which was a stimulus bill that, among other things, provided assistance to qualifying businesses and individuals and included funding for the healthcare system.

We received $5.4 million in 2020 as part of the stimulus, comprised of $2.6 million received under the Provider Relief Fund, or PRF, distribution and $2.8 million received under the Employee Retention Credit, or ERC, distribution.

During 2021, we received an additional $5.6 million under the PRF distribution.

PRF distributions to healthcare providers are not loans and will not be required to be repaid;

During the year ended December 31, 2022, we resulted 73,408 COVID-19 tests, compared to the year ended December 31, 2021, in which we resulted 418,053 COVID-19 tests.

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 PRF distribution have been met.

As a result, we recorded the PRF distributions in other income (expense), net in the statements of operations and comprehensive loss during the periods in which we received the distributions.

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 it has not received a Paycheck Protection Program loan under the Cares Act and (1) its operations have been fully or partially suspended because of COVID-19 or (2) its gross receipts in a calendar quarter in 2020 declined by more than 50% from the same period in 2019.

We have concluded it is probable that all terms and conditions associated with the funds received under the PRF distribution have been met.

As a result, we recorded the funds received under the PRF in other income in the statements of operations and comprehensive loss during the periods in which we received the funds.

Funds provided under the ERC are refundable tax credits for 50% of qualified wages paid to employees during the pandemic.

A company is eligible for the ERC (1) its operations have been fully or partially suspended because of COVID-19 or (2) its gross receipts in a calendar quarter in 2020 declined by more than 50% from the same period in 2019.

At the time of applying for the ERC, we concluded that it was reasonably possible the eligibility requirements would be met;

however, due to a change in circumstances, we are re-evaluating our position.

As such, we deferred the recognition of the ERC distribution and recorded the proceeds in other liabilities on the consolidated balance sheets as of December 31, 2021 and 2020.

At this time, we are not certain of the availability, extent or impact of any future relief provided under the CARES Act or other stimulus initiatives.

As such, we deferred

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the recognition of the funds received under the ERC and recorded the proceeds in other current liabilities on the audited consolidated balance sheets.

Recent Developments

In January 2022, we and our wholly-owned subsidiaries, Orion Merger Sub I, Inc., or Merger Sub I, and Orion Merger Sub II, LLC, or Merger Sub II, entered into an Agreement and Plan of Merger and Reorganization, or the Merger Agreement, with GeneDx, Inc., a New Jersey corporation, or GeneDx, and a wholly-owned subsidiary of OPKO Health, Inc., or OPKO, GeneDx Holding 2, Inc., or Holdco, and OPKO to acquire 100% of GeneDx (which we refer to as the “Acquisition”).

Subject to the terms and conditions of the Merger Agreement, we will pay consideration to OPKO for the Acquisition of (i) $150 million in cash at the closing of the Acquisition, subject to certain adjustments as provided in the Merger Agreement, (ii) 80 million shares of our Class A common stock to be issued at the closing of the Acquisition and (iii) up to $150 million payable following the closing of the Acquisition, if certain revenue-based milestones are achieved for each of the fiscal years ending December 31, 2022 and December 31, 2023.

These milestone payments, if and to the extent earned under the terms of the Merger Agreement, will be satisfied through the payment and/or issuance of a combination of cash and shares of our Class A common stock (valued at $4.86 per share), with such mix to be determined in our sole discretion.

The completion of the Acquisition is subject to a number of closing conditions (which, as of the date of this report, have not been met), including certain regulatory and other third party approvals, the consummation of a pre-closing restructuring and certain approvals of our stockholders related to the Acquisition).

The Acquisition is expected to close in the first half of 2022.

If this pending Acquisition is consummated, consistent with our business model, we expect to leverage the combined health information database of Sema4 and GeneDx to partner with additional health systems and biopharma companies to transform patient care and therapeutic development and enable precision medicine for all.

Concurrently with the execution of the Merger Agreement, we entered into subscription agreements with certain institutional investors, pursuant to, and on the terms and subject to the conditions of which, these investors have collectively subscribed for 50 million shares of our Class A common stock for an aggregate purchase price equal to $200 million (which we refer to as the “Acquisition PIPE Investment”).

The Acquisition PIPE Investment will be consummated substantially concurrently with the closing of the Acquisition.

Effective January 9, 2023 Sema4 Holdings Corp.

changed its name to GeneDx Holdings Corp.

In January 2023, the Company raised approximately $150.0 million in gross proceeds from the sale of an aggregate 328,571,429 shares of its Class A common stock in an underwritten public offering and the sale of 100,000,000 shares of its Class A common stock shares directly to institutional investors affiliated with a member of our board of directors, in a concurrent registered direct offering.

Both transactions were executed at $0.35 per share.

77,663,376 shares in the direct offering were issued and the remaining 22,336,624 shares are subject to stockholder approval to satisfy Nasdaq requirements with respect to the issuance of such shares of Class A common stock.

The net offering proceeds received after deducting underwriters' discounts and commissions payable by the Company were approximately $137.6 million.

As part of the underwritten offering, the Company granted the underwriter a 30-day option to purchase up to an additional 49,285,714 shares of Class A common stock at the same price.

On January 27, 2023, the underwriter partially exercised the option to purchase an additional 185,000 shares of Class A common stock.

Additional net proceeds of $7.6 million are expected to be received during the second quarter of 2023 once the issuance of the remaining 22,336,624 shares receives stockholder approval and the Company issues such shares.

On March 14, 2023, we announced that 100% of our cash, cash equivalents, and restricted cash now resides at a designated systematically important financial institution.

Components of Results of Operations

We derive the majority of our revenue from diagnostic testing services, which primarily relate to Women’s Health, Oncology and COVID-19.

We also recognize revenue from collaboration service agreements with Biopharma companies and other third parties pursuant to which we provide diagnostic testing and related data aggregation reporting services.

As discussed above, in December 2021, we announced that we decided to discontinue COVID-19 testing services by March 31, 2022 and begun notifying its COVID-19 testing solutions customers of this decision.

During the periods discussed below, we derived the majority of our revenue from genetic and genomic diagnostic testing services.

We recognized revenue from collaboration service agreements with biopharma companies and other third parties pursuant to which we provide health information and patient identification support services.

The Legacy GeneDx business provided genetic and genomic diagnostic testing related to pediatrics, rare disease and hereditary cancer screening.

The Legacy Sema4 diagnostics business provided reproductive and women’s health testing and screening, as well as somatic tumor testing.

As discussed above, we discontinued Legacy Sema4’s COVID-19 testing services as of March 31, 2022 and no longer provide such testing services.

We also discontinued Legacy Sema4’s somatic tumor profiling business as of December 31, 2022 and we ceased the operations of Legacy Sema4’s reproductive and women’s health testing services during the first quarter of 2023.

We recognize revenue when control of the promised goods or services is transferred to the customer in an amount that reflects the consideration which we expect to be entitled to in exchange for those goods or services.

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We primarily generate revenue from performing diagnostic testing services for three groups of customers:

healthcare professionals working with patients with third-party insurance coverage or without third-party insurance coverage or those who elect to self-pay;

and institutional clients, such as hospitals, clinics, state governments and reference laboratories.

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, or self-pay patients.

Customers are billed upon delivery of test results.

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To date, the majority of our diagnostic test revenue has been earned from orders received for patients with third-party insurance coverage.

Our ability to increase our diagnostic test revenue will depend on our ability to increase our market penetration, obtain contracted reimbursement coverage from third-party payers, enter into contracts with institutions, and increase our reimbursement rate for tests performed.

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.

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Other Revenue

We generate revenue from providing diagnostic testing and related data aggregation reporting services under both short-term and long-term project-based collaboration service agreements with third parties.

The terms of these contracts generally include non-refundable upfront payments, which we record as contract liabilities, and variable payments based upon the achievement of certain milestones during the contract term.

With respect to existing collaboration service agreements, our revenue may fluctuate period to period due to the pattern in which we may deliver our services, our ability to achieve milestones, the timing of costs incurred, changes in estimates of total anticipated costs that we expect to incur during the contract period, and other events that may not be within our control.

We generate revenue from health information and patient identification support services under both short-term and long-term project-based collaboration and service agreements with third parties.

Certain of these contracts provide non-refundable payments, which we record as contract liabilities, and variable payments based upon the achievement of certain milestones during the contract term.

With respect to existing collaboration and service agreements, our revenue may fluctuate period to period due to the pattern in which we may deliver our services, our ability to achieve milestones, the timing of costs incurred, changes in estimates of total anticipated costs that we expect to incur during the contract period, and other events that may not be within our control.

Our ability to increase our revenue will depend on our ability to enter into contracts with third-party partners.

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The cost of services reflect the aggregate costs incurred in performing services.

These costs include expenses for reagents and laboratory supplies, personnel-related expenses (comprising salaries and benefits) and stock-based compensation for employees directly involved in revenue generating activities, shipping and handling fees, costs of third-party reference lab testing and phlebotomy services and allocated genetic counseling, facility and IT costs associated with delivery services.

These costs include expenses for reagents and laboratory supplies, personnel-related expenses (comprising salaries and benefits) and stock-based compensation for employees directly involved in revenue generating activities, shipping and handling fees, costs of third-party reference lab testing and phlebotomy services, 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.

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Selling and Marketing Expenses

Selling and marketing expenses primarily consist of personnel-related expenses (comprising salaries, and benefits) and stock-based compensation for employees performing commercial sales, account management, marketing, and allocation of genetic counseling services related to medical education.

Selling and marketing 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.

Selling and marketing costs are expensed as incurred.

We generally expect our selling and marketing expenses will continue to increase in absolute dollars as we expand our commercial sales and marketing and counseling teams and increase marketing activities.

However, we expect selling and marketing expenses to decrease as a percentage of revenue in the long term, subject to fluctuations from period to period due to the timing and magnitude of these expenses.

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expect selling and marketing expenses to decrease as a percentage of revenue in the long term, subject to fluctuations from period to period due to the timing and magnitude of these expenses.

General and Administrative Expenses

General and administrative expenses primarily consist of personnel-related expenses (comprising salaries and benefits) and stock-based compensation for employees in executive leadership, legal, finance and accounting, human resources, information technology, strategy and other administrative functions.

In addition, these expenses include office occupancy and information technology costs.

General and administrative costs are expensed as incurred.

We generally expect our general and administrative expenses to continue to increase in absolute dollars as we increase headcount and incur costs associated with operating as a public company, including expenses related to legal, accounting, and regulatory matters;

maintaining compliance with requirements of the Nasdaq and of the SEC;

director and officer insurance premiums and investor relations.

We expect these expenses to decrease as a percentage of revenue in the long term as revenue increases, although the percentage may fluctuate from period to period due to fluctuations in our compensation-related charges.

Related Party Expenses

Related party expenses primarily consist of amounts incurred in connection with transactions occurred with ISMMS for expenses under our transition services agreement, or TSA, with ISMMS which expired at the end of the

first quarter of 2021, and other service agreements.

Additional information can be found in our consolidated financial statements in Note 7, “Related Party Transactions” included within this Annual Report.

We generally expect related party expenses to decrease as we establish our own internal and external resources to fulfill the administrative and other services we have historically procured from ISMMS.

Related party expenses consist of amounts due to ISMMS for expenses under our Transition Services Agreement with ISMMS (the “ISMMS TSA”) which expired at the end of the first quarter of 2021, and other service agreements.

In addition, Legacy GeneDx and OPKO entered into a Transition Services Agreement dated as of April 29, 2022 (the “OPKO TSA”), pursuant to which OPKO agreed to provide, at cost, certain services in support of the Acquisition of the Legacy GeneDx business through December 31, 2022, subject to certain limited exceptions, in order to facilitate the transactions contemplated by the Acquisition Merger Agreement.

Additional information can be found in the audited financial statements in Note 7, “Related Party Transactions” included within this Annual Report.

Interest Income

Interest income primarily consists of interest earned on money market funds.

Interest income consists of interest earned on money market funds.

Interest Expense

Interest expense consists of interest costs related to our capital leases and our long-term debt arrangements, including unused line fee and the amortization of deferred transaction costs related to the loan and security agreement entered into with Silicon Valley Bank to provide a $125 million revolving credit facility described elsewhere in this report.

Interest expense consists of interest costs incurred related to our finance leases and our long-term debt arrangements, including unused line fee and the amortization of deferred transaction costs related to the loan and security agreement originally entered into with Silicon Valley Bank that provides a $125 million revolving credit facility described elsewhere in this report.

No amounts have been drawn under the revolving credit facility as of December 31, 2022.

Other Income, Net

Other income, net primarily consists of funding received under the CARES Act.

We recognized $2.6 million of the $5.4 million of funding received under the CARES Act as other income, net on the statements of operations and comprehensive loss during the year ended December 31, 2020.

We recognized $5.6 million of additional funding received under the CARES Act during the year ended December 31, 2021 and the amount is included in other income, net for the year ended December 31, 2021.

In addition, the loss incurred due to early payment penalties recognized upon extinguishment of debt of $0.3 million is included in other income, net.

Results of Operations

A discussion regarding our financial condition and results of consolidated operations for the year ended December 31, 2022 compared to the year ended December 31, 2021 and for the year ended December 31, 2021 compared to the year ended December 31, 2020 is presented below.

Certain expenses were previously misclassified as cost of services and they are now reported as selling and marketing.

The adjustment is reflected in the amounts reported below for years ended December 31, 2021, 2020 and 2019.

Refer to Note 2, “Summary of Significant Accounting Policies” to our consolidated financial statements for further information.

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Comparison of the Years Ended December 31, 2022 and 2021

1 unchanged sentence

Year Ended December 31,

2021 2020 (Restated)

(in thousands)

6 unchanged sentences

261,444 228,797

Gross (loss) profit

(26,750) (16,602)

6 unchanged sentences

Related party expenses

Impairment Loss 210,145 —

Loss from operations

7 unchanged sentences

Total other income (expense), net

69,620 200,759

Loss before income taxes

3 unchanged sentences

$ (548,980) $ (245,390)

Redeemable convertible preferred stock dividends

Net loss attributable to common stockholders

$ (245,390) $ (241,340)

Year Ended December 31, 2021 to 2022

6 unchanged sentences

Diagnostic test revenue increased by $22.2 million, or 11%, to $227.3 million for the year ended December 31, 2022, from $205.1 million for the year ended December 31, 2021.

The increase was primarily attributable to a 135% increase in oncology test volumes, a 38% increase in women’s health test volumes and an overall increase in volumes of 31%, partially offset by the change in the mix of tests performed and reduced reimbursement rates.

COVID-19 testing was introduced in May of 2020, which had a lower impact on total test volume during the year

ended December 31, 2020, compared to the year ended December 31, 2021 (with COVID-19 test volumes growing 26% year over year) .

Other revenue increased by $3.1 million, or 79%, to $7.1 million for the year ended December 31, 2021, from $4.0 million for the year ended December 31, 2020.

The increase was primarily attributable to growth in collaboration service activities due to the execution of third-party contracts which generated $3.7 million more in revenues in 2021 compared to 2020.

This was partially offset by reduced revenues recognized related to an existing third-party contract by $0.8 million.

Cost of Services (2020 amount restated)

The increase was primarily attributable to the inclusion of $114.9 million of Legacy GeneDx diagnostics revenue from the date of Acquisition, partially offset by a decrease of $92.6 million from Legacy Sema4’s diagnostics business.

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For the year ended December 31, 2022, Legacy Sema4 diagnostic testing revenue decreased by $92.6 million to $112.5 million compared to $205.1 million for the year ended December 31, 2021.

This decrease in diagnostic testing revenue was primarily due to a combination of the cessation of COVID-19 operations in the first quarter of 2022 resulting in a year over year decline in revenue recognized of $18.9 million, increases in third-party payor denials on both somatic oncology and women’s health testing resulting in $44.1 million of lower reimbursement, and significant reversals in the amount of cumulative revenue recognized of $54.0 million in connection with establishment of liabilities and reserves for actual and potential recoupment of payments previously made by third-party payors.

These decreases in revenue recognized were partially offset by increased volume of 13.4 % within the Legacy Sema4 women’s health and oncology testing lines that resulted in increased revenue of $24.4 million compared to the year ended December 31, 2021.

Other revenue increased by $ 0.3 million, or 4%, to $7.4 million for the year ended December 31, 2022, from $7.1 million for the year ended D ecember 31, 2021.

The increase was primarily attributable to the inclusion of $1.5 million of Legacy GeneDx collaboration services activities from the date of the Acquisition, partially offset by a decrease of $1.2 million from Legacy Sema4’s biopharma business.

Cost of Services

Year Ended December 31, 2021 to 2022

3 unchanged sentences

Cost of services increased by $32.6 million, or 14%, to $261.4 million for the year ended December 31, 2022, from $228.8 million for the year ended December 31, 2021.

The increase was primarily driven by the following cost components:

a $9.7 million increase in stock-based compensation expense primarily driven by the increase in fair value of the liability-classified awards until July 22, 2021, the closing date of our business combination, or the Closing Date and an increase in the number of stock-based compensation awards granted;

a $7.9 million increase in personnel-related expenses driven by an increase in average headcount;

a $8.2 million increase in consulting and outside service costs driven by temporary hires contracted to perform COVID-19 testing activities;

a $5.0 million increase in logistical expenses and other lab services as a result of an increase in operations;

a $9.6 million increase in reagents and laboratory supplies expense due primarily to the 32% increase in volumes;

a $2.4 million increase in software expenses due to increased cloud storage and expanded computing capacity requirements from New York City to Stamford, Connecticut for testing data;

a $2.1 million increase in the inventory obsolescence reserve for expiring COVID-19 and certain carrier screening testing kits;

a $2.2 million increase in occupancy expenses;

a $5.1 million increase in depreciation expenses in connection with our laboratory move at the end of 2020, with production activities commencing at the Stamford facility in the first quarter of 2021 and a $1.3 million increase in equipment maintenance and general office expenses.

The increase was primarily driven by the inclusion of $67.5 million of Legacy GeneDx cost of services from the time of the Acquisition, partially offset by a $34.4 million decrease in Legacy Sema4 cost of services, primarily driven by a decrease in stock-based compensation along with lower activity due to the exit of the Company’s somatic tumor and COVID-19 testing businesses.

Research and Development

3 unchanged sentences

Research and development $ 86,203 $ 105,162 $ (18,959) (18) %

Research and development expenses increased by $32.5 million, or 45%, to $105.2 million for the year ended December 31, 2021, from $72.7 million for the year ended December 31, 2020.

The increase was primarily attributable to the following cost components:

a $20.5 million increase in stock-based compensation expense driven by the increase in fair value of the liability-classified awards until the Closing Date and an increase in the number of stock-based compensation awards granted;

a $0.9 million increase in software expenses due to increased cloud storage;

a $0.3 million increase in personnel-related expenses driven by an increase in average headcount a $4.8 million increase in depreciation expenses;

a $3.6 million increase in expenses for reagents, laboratory supplies and laboratory software for research and development;

and a $2.2 million increase in consulting fees.

Selling and Marketing (2020 amount restated)

Research and development expenses decreased by $19.0 million, or 18%, to $86.2 million for the year ended December 31, 2022, from $105.2 million for the year ended December 31, 2021.

The decrease was primarily driven by a decrease of $45.4 million in stock-based compensation expense year-over-year which was primarily due to the reversal of stock-based compensation expense by $11.3 million based on forfeiture of unvested equity awards upon termination of our executives.

This decrease was offset by the inclusion of $13.1 million of Legacy GeneDx’s research and development costs from the time of the Acquisition.

Selling and Marketing

Year Ended December 31, 2021 to 2022

2 unchanged sentences

Selling and marketing $ 134,913 $ 112,738 $ 22,175 20 %

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Selling and marketing expenses increased by $22.2 million, or 20%, to $134.9 million for the year ended December 31, 2022, from $112.7 million for the year ended December 31, 2021.

The increase was primarily attributable to the following cost components:

an $17.3 million increase in stock-based compensation expense driven by the increase in fair value of the liability-classified awards until the Closing Date and an increase in the number of stock-based compensation awards granted;

a $19.6 million increase in personnel-related expenses driven by increased headcount;

a $4.1 million increase in consulting service expenses mainly to support revenue cycle transformation initiatives;

a $3.2 million increase in information technology-related expenses;

a $1.8 million increase in other administrative and office expenses;

a $2.0 million increase in travel and business expenses due to the lifting of COVID-19 travel restrictions and a $1.5 million increase in counseling services.

The increase was primarily attributable to the inclusion of Legacy GeneDx’s selling and marketing expenses of $34.2 million from the time of the Acquisition and intangible asset amortization of $3.3 million, partially offset by a $15.3 million decrease in Legacy Sema4 selling and marketing expenses.

The decrease in Legacy Sema4 selling and marketing expenses was primarily driven by a decrease in stock based compensation of $22.3 million, which was offset by an increase in restructuring expenses of $7.9 million due to restructuring activities in 2022.

General and Administrative

3 unchanged sentences

General and administrative $ 203,329 $ 205,988 $ (2,659) (1) %

General and administrative expenses increased by $105.3 million, or 104%, to $206.0 million for the year ended December 31, 2021, from $100.7 million for the year ended December 31, 2020.

The increase was primarily attributable to the following cost components:

an $51.7 million increase in stock-based compensation expense driven by the increase in fair value of the liability-classified awards until the Closing Date and an increase in the number of stock-based compensation awards granted;

a $21.1 million increase in professional services incurred mainly in connection with the business combination transaction;

a $20.0 million increase in personnel-related expenses driven by an increase in average headcount including executive headcount;

a $5.0 million increase in software expenses due to increased cloud storage requirements;

a $7.0 million increase in insurance expenses driven by the commencement of director’s insurance policy;

and a $0.8 million increase in capital taxes as a result of the business combination transaction.

These increases were partially offset by a $0.4 million decrease in occupancy and depreciation expenses in connection with our laboratory move from New York City to Stamford, Connecticut.

General and administrative expenses decreased by $2.7 million, or 1%, to $203.3 million for the year ended December 31, 2022, from $206.0 million for the year ended Dec ember 31, 2021.

The decrease was primarily attributable to a $34.7 million decrease in Legacy Sema4 general and administrative expenses, which was partially offset by the inclusion of GeneDx general and administrative expenses of $25.9 million from the time at Acquisition and $6.1 million in intangible asset amortization.

The decrease in Legacy Sema4 expenses was primarily driven by a decrease in stock-based compensation of $90.1 million which is primarily due to forfeiture of unvested equity awards upon termination of our executives .

The decrease was partially offset by restructuring expenses of $7.3 million due to restructuring activities in 2022 associated to the Legacy Sema4.

There was also an increase of $25.2 million in outside consulting expenses, $3.9 million increase in insurance expenses, and an $10.0 million increase in software related expenses.

Related Party Expenses

3 unchanged sentences

Related party expenses $ 6,312 $ 5,659 $ 653 12 %

Related party expenses decreased by $3.7 million, or 40%, to $5.7 million for the year ended December 31, 2021, from $9.4 million for the year ended December 31, 2020.

The decrease was primarily attributable to the following cost components:

a $3.2 million decrease in rent and facility expenses driven by a reduction of office and lab space leased from ISMMS pursuant to the TSA which ended in the first quarter of 2021;

and a $0.5 million decrease in fees associated with information technology support pursuant to the TSA with ISMMS.

Related party expenses increased by $0.7 million, or 12%, to $6.3 million for the year ended December 31, 2022, from $5.7 million for the year ended December 31, 2021.

The increase was primarily attributable to fees related to supporting certain services pursuant to the TSA with OPKO as a result of the Acquisition of Legacy GeneDx and an increase in information technology related services provided by ISMMS.

Interest Income

3 unchanged sentences

Interest income $ 2,541 $ 79 $ 2,462 3116 %

Interest income decreased by $0.4 million, or 84%, to $0.1 million for the year ended December 31, 2021, from $0.5 million for the year ended December 31, 2020.

The decrease was due to declines in interest rates on money market fund accounts.

Interest income for the year ended December 31, 2022 was due to increases in the average cash balances held in our interest-bearing and money market deposit accounts and increases in interest rates.

Interest Expense

4 unchanged sentences

Interest expense increased by $0.4 million, or 13%, to $3.2 million for the year ended December 31, 2022, from $2.8 million for the year ended December 31, 2021.

The increase was driven by new capital lease obligations for our Stamford laboratory facility which commenced operations in 2021 as well as the unused line fee and the amortization of deferred transaction costs related to the loan and security agreement entered into with Silicon Valley Bank at the end of 2021.

The increase was driven by the unused line fee and amortization of deferred transaction costs related to the loan and security agreement originally entered into with Silicon Valley Bank at the end of 2021.

Other Income, Net

3 unchanged sentences

Other income, net $ 57 $ 5,114 $ (5,057) (99) %

Other income, net increased by $2.5 million or 95% to $5.1 million for the year ended December 31, 2021, from $2.6 million for the year ended December 31, 2020.

The increase in other income, net was primarily attributable to the $5.6 million in funding that we received and recognized as other income under the CARES Act in the first quarter of 2021, partially offset by $0.3 million in penalties related to an early repayment of debt.

This is compared to $2.6 million in funding received in 2020.

Other income, net increased by $5.1 million or 99% to less than $0.1 million for the year ended December 31, 2022, from $5.1 million for the year ended December 31, 2021.

The decrease in other income, net was primarily attributable to the $5.6 million in funding that we received and recognized as other income under the CARES Act in the first quarter of 2021, partially offset by $0.3 million in penalties related to an early repayment of debt.

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Comparison of the Years Ended December 31, 2021 and 2020

1 unchanged sentence

Year Ended December 31,

2020 (Restated) 2019 (Restated)

(in thousands)

6 unchanged sentences

228,797 175,296

Gross (loss) profit

(16,602) 4,026

Research and development

8 unchanged sentences

Other income (expense):

Change in fair market value of warrant and earn-out contingent liabilities 198,401 —

Interest income

2 unchanged sentences

Other income, net

Total other income, net

Total other income (expense), net

Loss before income taxes

(245,390) (241,340)

Income tax provision

Net loss and comprehensive loss

(245,390) (241,340)

Redeemable convertible preferred stock dividends

Net loss attributable to common stockholders

$ (241,340) $ (32,743)

Year Ended December 31, 2020 to 2021

2021 2020 $ %

(dollars in thousands)

Diagnostic test revenue $ 205,100 $ 175,351 $ 29,749 17 %

1 unchanged sentence

Total revenue $ 212,195 $ 179,322 $ 32,873 18 %

Total revenue decreased by $16.9 million, or 9%, to $179.3 million for the year ended December 31, 2020, from $196.2 million for the year ended December 31, 2019.

Diagnostic test revenue decreased by $16.3 million, or 9%, to $175.4 million for the year ended December 31, 2020, from $191.7 million for the year ended December 31, 2019.

The decrease was primarily attributable to a change in the mix of tests performed coupled with reduced reimbursement rates.

The Company experienced an increase in volumes of 248%, primarily driven by the introduction of COVID-19 testing in May 2020.

Despite these increased volumes, diagnostic test revenue decreased due to lower pricing on COVID-19 testing relative to other diagnostic tests and an overall decrease in average pricing on Women’s Health and Oncology testing.

Other revenue decreased by $0.5 million, or 12%, to $4.0 million for the year ended December 31, 2020, from $4.5 million for the year ended December 31, 2019.

The decrease was primarily attributable to the completion of one significant third-party contract in 2019 and the completion of one significant contract with ISMMS in early 2020.

This decrease was partially offset by growth in collaboration service activities due to the execution of two new third-party contracts in 2020.

Other revenues are expected to continue to be driven predominately by services performed pursuant to contracts with third parties.

Cost of Services (2020 and 2019 amounts restated)

Total revenue increased by $32.9 million, or 18%, to $212.2 million for the year ended December 31, 2021, from $179.3 million for the year ended December 31, 2020.

Diagnostic test revenue increased by $29.7 million, or 17%, to $205.1 million for the year ended December 31, 2021, from $175.4 million for the year ended December 31, 2020.

COVID-19 testing was introduced in May of 2020, which had a lower impact on total test volume during the year ended December 31, 2020, compared to the year ended December 31, 2021 (with COVID-19 test volumes growing 26% year over year) .

Other revenue increased by $3.1 million, or 79%, to $7.1 million for the year ended December 31, 2021, from $4.0 million for the year ended December 31, 2020.

The increase was primarily attributable to growth in

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collaboration service activities due to the execution of third-party contracts which generated $3.7 million more in revenues in 2021 compared to 2020.

This was partially offset by reduced revenues recognized related to an existing third-party contract by $0.8 million.

Cost of Services

Year Ended December 31, 2020 to 2021

2021 2020 $ %

(dollars in thousands)

Cost of services $ 228,797 $ 175,296 $ 53,501 31 %

Cost of services increased by $53.5 million, or 31%, to $228.8 million for the year ended December 31, 2021, from $175.3 million for the year ended December 31, 2020.

The increase was primarily attributable to the following cost components:

a $17.5 million increase in reagents and laboratory supplies expense due primarily to the 248% increase in resulted volumes coupled with the lower per test cost of performing COVID-19 tests relative to our other tests;

a $12.2 million increase in stock-based compensation expenses primarily driven by the increase in fair value of the liability-classified awards;

an $11.1 million increase in personnel-related expenses driven by an increase in average headcount, partially offset by COVID-19 austerity measures;

a $6.4 million increase in third party reference laboratory expenses due to an increase in tests performed by such third parties;

a $4.6 million increase in expenses for other services such as genetic counseling, shipping and phlebotomy services;

a $4.4 million increase in depreciation and amortization expenses driven by laboratory sequencing equipment acquired in 2020 and an increase in capitalized software as compared to the prior year;

a $3.6 million increase in outside labor costs driven by temporary hires contracted in 2020 to perform COVID-19 testing activities as well as an increase in consultants supporting collaboration services;

a $0.2 million increase in software expenses due to increased cloud storage and expanded computing capacity requirements for testing data;

a $1.3 million increase in equipment-related expenses, including maintenance expenses on existing equipment and purchases of minor equipment in 2020;

and a $0.5 million increase in occupancy costs.

The increase was primarily driven by the following cost components:

a $9.7 million increase in stock-based compensation expense primarily driven by the increase in fair value of the liability-classified awards until the Closing Date and an increase in the number of stock-based compensation awards granted;

a $7.9 million increase in personnel-related expenses driven by an increase in average headcount;

a $8.2 million increase in consulting and outside service costs driven by temporary hires contracted to perform COVID-19 testing activities;

a $5.0 million increase in logistical expenses and other lab services as a result of an increase in operations;

a $9.6 million increase in reagents and laboratory supplies expense due primarily to the 32% increase in volumes;

a $2.4 million increase in software expenses due to increased cloud storage and expanded computing capacity requirements from New York City to Stamford, Connecticut for testing data;

a $2.1 million increase in the inventory obsolescence reserve for expiring COVID-19 and certain carrier screening testing kits;

a $2.2 million increase in occupancy expenses;

Research and Development

Year Ended December 31, 2020 to 2021

2021 2020 $ %

(dollars in thousands)

Research and development $ 105,162 $ 72,700 $ 32,462 45 %

Research and development expense increased by $37.8 million, or 108%, to $72.7 million for the year ended December 31, 2020, from $34.9 million for the year ended December 31, 2019.

Research and development expenses increased by $32.5 million, or 45%, to $105.2 million for the year ended December 31, 2021, from $72.7 million for the year ended December 31, 2020.

The increase was primarily attributable to the following cost components:

a $25.4 million increase in stock-based compensation expenses primarily due to an increase in fair value of the liability-classified awards and an increase in the number of stock-based compensation awards granted;

a $9.3 million increase in personnel-related expenses driven by increased average headcount and retention bonuses offered to employees impacted by the relocation of our New York laboratory in December of 2020, partially offset by COVID-19 austerity measures;

a $1.7 million increase in expenses for reagents, laboratory supplies and laboratory software for research and development use;

and a $1.1 million increase in consulting and outside services, primarily due to an increase in the number of, and required investment in, research and development studies.

Selling and Marketing (2020 and 2019 amounts restated)

a $0.9 million increase in software expenses due to increased cloud storage;

a $0.3 million increase in personnel-related expenses driven by an increase in average headcount a $4.8 million increase in depreciation expenses;

a $3.6 million increase in expenses for reagents, laboratory supplies and laboratory software for research and development;

and a $2.2 million increase in consulting fees.

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Selling and Marketing

Year Ended December 31, 2020 to 2021

2021 2020 $ %

(dollars in thousands)

Selling and marketing $ 112,738 $ 63,183 $ 49,555 78 %

Selling and marketing expense increased by $23.8 million, or 61%, to $63.2 million for the year ended December 31, 2020, from $39.4 million for the year ended December 31, 2019.

Selling and marketing expenses increased by $49.6 million, or 78%, to $112.7 million for the year ended December 31, 2021, from $63.2 million for the year ended December 31, 2020.

The increase was primarily attributable to the following cost components:

a $11.4 million increase in personnel-related expenses driven by an increase in average headcount, partially offset by COVID-19 austerity measures;

a $11.1 million increase in stock-based compensation expenses primarily due to an increase in the fair value of the liability-classified awards and an increase in the number of outstanding awards due to increase in the number of stock-based compensation awards granted;

a $1.5 million increase in commissions due to an increase in sales employee headcount and the implementation of temporary minimum commissions offered to sales employees in response to the COVID-19 pandemic;

a $1.0 million increase in other lab service;

and a $0.6 million increase in software expenses due to increased cloud storage requirements.

These increases were partially offset by a $1.8 million decrease in travel and business expenses due to reduced business travel during the COVID-19 pandemic.

a $19.6 million increase in personnel-related expenses driven by increased headcount;

a $4.1 million increase in consulting service expenses mainly to support revenue cycle transformation initiatives;

a $3.2 million increase in information technology-related expenses;

a $1.8 million increase in other administrative and office expenses;

a $2.0 million increase in travel and business expenses due to the lifting of COVID-19 travel restrictions and a $1.5 million increase in counseling services.

General and Administrative

Year Ended December 31, 2020 to 2021

2021 2020 $ %

(dollars in thousands)

General and administrative $ 205,988 $ 100,742 $ 105,246 104 %

General and administrative expense increased by $71.3 million, or 242%, to $100.7 million for the year ended December 31, 2020, from $29.5 million for the year ended December 31, 2019.

General and administrative expenses increased by $105.3 million, or 104%, to $206.0 million for the year ended December 31, 2021, from $100.7 million for the year ended December 31, 2020.

The increase was primarily attributable to the following cost components:

a $66.0 million increase in stock-based compensation expenses due to an increase in the fair value of the liability-classified awards and an increase in the number of outstanding awards due to increase in the number of stock-based compensation awards granted;

a $1.4 million increase in occupancy expenses due to the execution of additional third party leases;

and a $1.3 million increase in personnel-related expenses due to an increase in general and administrative headcount, partially offset by COVID-19 austerity measures.

a $51.7 million increase in stock-based compensation expense driven by the increase in fair value of the liability-classified awards until the Closing Date and an increase in the number of stock-based compensation awards granted;

a $21.1 million increase in professional services incurred mainly in connection with the Business Combination;

a $20.0 million increase in personnel-related expenses driven by an increase in average headcount including executive headcount;

a $5.0 million increase in software expenses due to increased cloud storage requirements;

a $7.0 million increase in insurance expenses driven by the commencement of director’s insurance policy;

and a $0.8 million increase in capital taxes as a result of the Business Combination.

These increases were partially offset by a $0.4 million decrease in occupancy and depreciation expenses in connection with our laboratory move from New York City to Stamford, Connecticut.

Related Party Expenses

Year Ended December 31, 2020 to 2021

2021 2020 $ %

(dollars in thousands)

Related party expenses $ 5,659 $ 9,395 $ (3,736) (40) %

Related party expenses decreased by $3.7 million, or 40%, to $5.7 million for the year ended December 31, 2021, from $9.4 million for the year ended December 31, 2020.

The decrease was primarily attributable to a $1.7 million decrease in service fees associated with a reduction of leased ISMMS employees, a $1.0 million decrease in fees associated with information technology support pursuant to the TSA with ISMMS and decreases in other various services provided by ISMMS pursuant to the TSA and service agreements.

These decreases were partially offset by a $2.0 million increase in rent and facility expenses driven by additional office and lab space leased from

ISMMS pursuant to the transition services agreement and a $0.5 million increase in consultant costs driven by an increase in research and development efforts performed by ISMMS under consulting agreements.

The decrease was primarily attributable to the following cost components:

a $3.2 million decrease in rent and facility expenses driven by a reduction of office and lab space leased from ISMMS pursuant to the TSA which ended in the first quarter of 2021;

and a $0.5 million decrease in fees associated with information technology support pursuant to the TSA with ISMMS.

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Interest Income

Year Ended December 31, 2020 to 2021

2021 2020 $ %

(dollars in thousands)

Interest income $ 79 $ 506 $ (427) (84) %

Interest income decreased by $0.4 million, or 84%, to $0.1 million for the year ended December 31, 2021, from $0.5 million for the year ended December 31, 2020.

The decrease was due to declines in interest rates on money market deposit accounts and reductions in the average cash balances held throughout the year in these interest-bearing accounts.

The decrease was due to declines in interest rates on money market fund accounts.

Interest Expense

Year Ended December 31, 2020 to 2021

2021 2020 $ %

(dollars in thousands)

Interest expense $ 2,835 $ 2,474 $ 361 15 %

Interest expense increased by $0.4 million, or 15%, to $2.8 million for the year ended December 31, 2021, from $2.5 million for the year ended December 31, 2020.

The increase was driven by an increase in capital lease obligations, an increase in our interest-bearing loan balance with the Connecticut Department of Economic and Community Development, or the DECD, and a new interest-bearing bank loan executed in 2020.

The increase was driven by new capital lease obligations for our Stamford laboratory facility which commenced operations in 2021 as well as the unused line fee and the amortization of deferred transaction costs related to the loan and security agreement originally entered into with Silicon Valley Bank at the end of 2021.

Other Income, Net

Year Ended December 31, 2020 to 2021

2021 2020 $ %

(dollars in thousands)

Other income, net $ 5,114 $ 2,622 $ 2,492 95 %

Other income, net increased by $2.5 million or 95% to $5.1 million for the year ended December 31, 2021, from $2.6 million for the year ended December 31, 2020.

The increase in other income, net was primarily attributable to $2.6 million in funding that we received under the CARES Act.

This is compared to $2.6 million in funding received in 2020.

Reconciliation of Non-GAAP Financial Measures

In addition to our results determined in accordance with 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, as a component in determining employee bonus compensation, and for internal planning and forecasting purposes.

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.

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.

A reconciliation is provided below for each non-GAAP financial measure to the most directly comparable financial

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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.

4 unchanged sentences

• changes in our working capital needs;

• provision for income taxes, which may be a necessary element of our costs and ability to operate;

• the costs of replacing the assets being depreciated, which will often have to be replaced in the future;

2 unchanged sentences

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 stock-based compensation expense, labor costs due to our move, and COVID-19 costs.

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.

2 unchanged sentences

Year Ended December 31,

(Restated) 2019

2022 2021 2020

Revenue $ 234,694 $ 212,195 $ 179,322

3 unchanged sentences

(11) % (8) % 2 %

Depreciation and amortization expense $ 31,328 $ 14,094 $ 9,055

Stock-based compensation expense 5,080 22,567 12,942

Restructuring expense (1) 1,926 — —

Labor costs due to laboratory move (2)

4 unchanged sentences

__________________

(1) Represents costs incurred for restructuring activities, which include severance packages offered to impacted employees and third party consulting costs incurred during 2022.

(2) Represents labor costs in respect of laboratory employees' time spent to support our laboratory move from New York City to Stamford, Connecticut in 2020.

2 unchanged sentences

However, as the laboratory move and effort spent by our employees are one-time activities, we adjusted our Gross Profit to reflect management’s view of our normal operations.

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(3) Represents labor costs in respect laboratory employees’ downtime.

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Adjusted EBITDA

Adjusted EBITDA is a non-GAAP financial measure that we define as net loss adjusted for interest expense (income), net, depreciation and amortization, stock-based compensation expenses, transaction costs, other (income) expense, net, COVID-19 costs and change in fair market value of warrant and earn-out contingent liabilities and.

Adjusted EBITDA is a non-GAAP financial measure that we define as net loss adjusted for interest expense (income), net, depreciation and amortization, stock-based compensation expenses, transaction costs, other (income) expense, net, COVID-19 costs, 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 EBITDA 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.

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666 2,756 1,968

Income tax benefit (49,052) — —

Depreciation and amortization 59,309 21,807 11,734

Stock-based compensation expense 41,975 219,421 120,231

Transaction costs (2)

Impairment loss (2)

Restructuring and other business exit transaction costs (3)

Transaction, acquisition and business acquisition costs (4)

13,436 5,496 —

Other (income) expense, net (5)

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__________________

(1) Represents the total of interest expense related to our capital leases and interest-bearing loans and interest income on money market funds.

(2) Represents professional service costs incurred in connection with pursuing the business combination transaction that did not meet the requirement for capitalization.

(3) For fiscal year 2020 and 2021, primarily consists of funding received under the CARES Act Provider Relief Fund.

(1) Represents the total of interest expense related to our finance leases and interest-bearing loans and interest income on money market funds.

(2) Represents impairment charge incurred in connection with the business exit activities and discontinuance of testing for Legacy Sema4.

(3) Represents costs incurred for restructuring and business exit activities, which include severance packages offered to impacted employees and third party consulting costs incurred during 2022.

Certain professional service costs incurred in connection with the business exit are also included..

(4) For fiscal year 2021, represents professional service costs incurred in connection with pursuing the business combination transaction that did not meet the requirement for capitalization.

For fiscal year 2022, this represents professional service costs incurred in connection with the Legacy GeneDx Acquisition transaction, which include due diligence, legal and business integration costs.

(5) For the fiscal years ended December 31, 2020 and 2021, primarily consists of funding received under the CARES Act Provider Relief Fund.

(6) Represents labor costs in respect laboratory employees’ downtime.

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Accordingly, we have adjusted our Gross Profit to reflect the management-assessed impact from the decrease in productivity of existing laboratory employees due to the COVID-19 pandemic in the second quarter of 2020.

(5) For the year ended December 31, 2021, represents the change in fair market value of the liabilities associated with our public warrants, private placement warrants and the earn-out shares issuable under the terms of the merger agreement for our business combination.

(7) For the years ended December 31, 2022 and 2021, represents the change in fair market value of the liabilities associated with our public warrants, private placement warrants and the earn-out shares issuable under the terms of the merger agreement for our business combination.

Liquidity and Capital Resources

On July 22, 2021, we completed the business combination with CMLS, consummated the Prior PIPE Investment and received net cash proceeds of $510 million.

Management determined that the cash proceeds received from the business combination provides us with sufficient liquidity to meet our obligations for at least twelve months from the date of this Annual Report.

Furthermore, on November 15, 2021, we entered into a loan and security agreement, or the SVB Agreement, with Silicon Valley Bank, or SVB, whereby SVB agreed to provide a $125 million revolving credit facility with a maturity date of November 15, 2024.

On July 22, 2021, we completed the Business Combination with CMLS, consummated the related private placement financing the “Business Combination PIPE Investment”), and received net cash proceeds of $510 million.

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On November 15, 2021, we entered into a loan and security agreement (the “SVB Agreement”,) with Silicon Valley Bank (“SVB”,) whereby SVB agreed to provide a $125 million revolving credit facility with a maturity date of November 15, 2024.

No amounts were drawn as of December 31, 2022.

Advances under the SVB

Agreement will bear interest at a floating rate per annum equal to the greater of (1) 4.00% and (2) the prime rate plus an applicable margin

Advances under the SVB Agreement will bear interest at a floating rate per annum equal to the greater of (1) 4.00% and (2) the prime rate plus an applicable margin.

On March 10, 2023, SVB was closed by the California Department of Financial Protection and Innovation, which appointed the Federal Deposit Insurance Corporation (“FDIC”) as receiver.

On March 14, 2023, Silicon Valley Bridge Bank, N.A., a new bank that is regulated by the Office of the Comptroller of the Currency, announced that it had assumed all loan positions, including as lender, issuing bank, administrative agent and any other function that was formerly performed by SVB, and that all commitments to advance under existing credit agreements would be honored in accordance with and pursuant to the terms thereof.

On April 29, 2022, upon the closing of the Acquisition, we received gross proceeds of $200 million from the issuance of 50 million shares of our Class A common stock pursuant to 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 and a concurrent registered direct offering of shares of our Class A common stock.

The total gross proceeds are expected to be approximately $150 million, including proceeds from the issuance of the additional shares in the direct offering.

See “-Recent Developments’ above.

Management believes that our cash and cash equivalents provide us with sufficient liquidity for at least twelve months from the filing date of this Annual Report.

Accordingly, the 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, the entry into other credit facilities or another form of third-party funding or by seeking other debt financing.

In particular, if the Acquisition is consummated, we expect to issue 50 million shares of our Class A common stock for an aggregate purchase price equal to $200 million pursuant to the Acquisition PIPE Investment .

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.

Following the Offerings in January 2023, approximately $150 million of securities remained available under this registration statement.

The Company does not know what impact the ongoing situation at SVB will ultimately have on the SVB Agreement.

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Material Cash Requirements for Known Contractual Obligations and Commitments

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We anticipate fulfilling such commitments with our existing cash and cash equivalents, which amounted to $123.9 million and $400.6 million as of December 31, 2022 and December 31, 2021, respectively, or through additional capital raised to finance our operations.

Our future minimum payments under non-cancellable operating lease and capital lease agreements were $68.3 and $65.6 million, respectively as of December 31, 2021.

The timing of these future payments, by year, can be found in our consolidated financial statements in Note 9, “Commitments and Contingencies,” included within this Annual Report.

Our future minimum payments under non-cancellable operating lease and finance lease agreements were $80.1 million and $60.8 million, respectively as of December 31, 2022.

The timing of these future payments, by year, can be found in our consolidated financial statements in Note 9, “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.

The first installment payment of $15 million was made on December 30, 2022.

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” to our audited consolidated financial statements included within this Annual Report.

Our future contractual purchase commitments were $8.8 million as of December 31, 2022.

The timing of these future payments, by year, can be found in our consolidated financial statements in Note 10, “Commitments and Contingencies,” included within this Annual Report.

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2022 2021 2020

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Operating Activities

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 an 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.

Net cash used in operating activities during the year ended December 31, 2021 was $190.4 million, which was primarily attributable to a net loss of $245.4 million and a change in fair value of the warrant and earn-out contingent liabilities of $198.4 million, partially offset by non-cash depreciation and amortization of $21.8 million, non-cash stock-based compensation expense of $219.4 million, and a reserve against obsolete inventory of $2.1 million.

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payroll taxes as part of the CARES Act.

Net cash used in operating activities during the year ended December 31, 2019 was $18.7 million, which was primarily attributable to a net loss of $29.7 million and a net change in our operating assets and liabilities of $0.7 million, partially offset by non-cash depreciation and amortization of $6.4 million and non-cash stock-based compensation expense of $5.5 million.

The net change in our operating assets and liabilities primarily reflected an increase in accounts receivable of $4.6 million driven by increase in testing volumes and billings, an $8.0 million increase in inventories driven by anticipated future growth due to a year-over-year increase in testing volumes for the year ended December 31, 2019 as compared to the year ended December 31, 2018, a $4.4 million increase in other assets due to security deposits on certain office and laboratory locations, an increase in accounts payable and accrued expenses of $12.8 million due to increased operating expenditures in line with the growth of the business and a $4.5 million increase in other current liabilities driven by higher personnel-related accruals due to increased headcount at 2019 year-end as compared to 2018 year-end.

Investing Activities

Net cash used in investing activities during the year ended December 31, 2021 was $20.8 million, which was attributable to $9.4 million in purchases of property and equipment and $11.4 million of costs related to development of internal-use software 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

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purchases of property and equipment and $7.2 million related to spend on development of internal-use software assets.

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Financing Activities

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 proceeds from the Acquisition PIPE Investment, net of issuance costs of $2.3 million.

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.

Net cash provided by financing activities during the year ended December 31, 2021 was $493.7 million, which was attributable to the consummation of our Business Combination including:

$350.0 million from the Prior PIPE Investment proceeds;

$350.0 million from the Business Combination PIPE Investment proceeds;

$442.7 million from an equity infusion from the Business Combination, net of redemptions;

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These increases were partially offset by $4.0 million in principal payments on our capital lease obligations and $0.2 million in principal payments on our long-term debt obligations.

Net cash provided by financing activities during the year ended December 31, 2019 was $148.0 million, which was attributable to $118.8 million in net cash proceeds from the issuance of our Series B redeemable convertible preferred stock and $30.9 million in capital contributions from ISMMS, partially offset by $1.7 million in principal payments on our capital lease obligations.

Critical Accounting Policies and Estimates

We have prepared our consolidated financial statements in accordance with GAAP.

Our preparation of these consolidated financial statements requires us to make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities and related disclosures at the date of the financial statements, as well as revenue and expense recorded during the reporting periods.

We evaluate our estimates and judgments on an ongoing basis.

We base our estimates on historical experience and or other relevant assumptions that we believe to be reasonable under the circumstances.

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.

The preparation of these consolidated financial statements requires us to make 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, as well as the reported revenue generated and expenses incurred during the reporting periods.

Our estimates are based on our historical experience and various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about items that are not readily apparent from other sources.

Actual results may differ from these estimates under different assumptions or conditions.

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Our contracts require significant judgments in determining the transaction price and satisfying performance obligations.

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Diagnostic test revenue

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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.

A 1% decrease or increase in our collection rate from third-party insurance payors, which we believe could be a reasonably likely change, would result in an unfavorable or favorable adjustment to diagnostic test revenue of approximately $16.2 million.

A 1% decrease or increase in our collection rate from third-party insurance payers within GeneDx, which we believe could be a reasonably likely change, would result in an unfavorable or favorable adjustment to diagnostic test revenue of approximately $9.9 million.

Other revenue

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To the extent that we change our estimates related to internal-use software, the amount of internal-use software development costs we capitalize and amortize could change in future periods.

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In accordance with ASC 350, Intangibles - Goodwill and Other we do not amortize goodwill but rather test them for impairment.

ASC 350 requires us to perform an impairment review of our goodwill balance at least annually, which we do in the fourth quarter of each year for our single consolidated reporting unit, and whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable.

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 360, Property, Plant and Equipment.

The recoverability test was performed on a company-wide single asset group level.

Contingent consideration based on milestone achievement

We estimate the fair value of the total earn-out shares based on a Monte Carlo simulation valuation model and assuming the Company will pay the earn-out in shares.

Key assumptions include revenue projections, revenue volatility, the Company’s expectation to settle the liability in shares and the share price per share.

Earn-out Contingent Liability

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Key assumptions include expected volatility, expected term, risk-free interest rate and dividend yield.

The volatility is estimated based on the average volatility for comparable publicly traded companies over a period equal to the expected term of stock option grants.

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.

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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.

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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.

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Recent Accounting Pronouncements

Information on recent accounting pronouncements can be found in Sema4’s audited consolidated financial statements in Note 2, “Summary of Significant Accounting Policies”.

Information on recent accounting pronouncements can be found in GeneDx’s audited consolidated financial statements in Note 2, “Summary of Significant Accounting Policies”.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis