23andMe (ME) - 2024 Q4 - Annual Report

PART I Item 1. Business The company operates in Consumer & Research Services and Therapeutics segments, leveraging its genetic database for personalized health services and drug discovery, while navigating intense competition and extensive government regulation - The company operates through two reporting segments: (1) Consumer and Research Services, and (2) Therapeutics[25] Revenue Contribution from Personal Genome Service (PGS) | Fiscal Year | PGS Revenue as % of Total Revenue | | :--- | :--- | | 2024 | 76% | | 2023 | 68% | | 2022 | 75% | - As of March 31, 2024, the company had two internal therapeutic programs in clinical trials: 23ME-00610 for cancer and 23ME-01473 for solid malignancies[41][42] - The company's exclusive drug discovery collaboration with GSK ended in July 2023. In October 2023, an amendment was signed providing GSK with non-exclusive data access[38][326] Operating Segments The company's operations are divided into Consumer and Research Services, encompassing PGS, telehealth, and research, and Therapeutics, focused on drug discovery in areas like oncology and immunology - The Consumer and Research Services segment comprises the Personal Genome Service® (PGS), telehealth business, and research services[26] - The Therapeutics segment focuses on using genetic insights to identify drug targets and develop novel therapies, with programs in oncology, immunological, and inflammatory diseases[40] Business Strategy and Market Opportunity The company's strategy aims to revolutionize healthcare through a personalized model, scale its research platform, and develop novel therapeutics, capitalizing on growing consumer interest in personal genetics and expanding subscription services - The company's business strategy includes revolutionizing healthcare with a customer-centric model, scaling its research database, and efficiently developing novel therapeutics[48] Customer and Membership Metrics | Metric | As of March 31, 2024 | As of March 31, 2023 | | :--- | :--- | :--- | | PGS Customers | ~15.1 million | ~14.1 million | | 23andMe+ Members | ~562,000 | ~640,000 | - In November 2023, the company launched 23andMe+ Total Health, a comprehensive membership including next-generation sequencing, blood testing, and access to genetics-based clinical care[53] Competition, Seasonality, and Supply The company faces intense competition and supply chain risks, with its PGS business experiencing significant seasonality driven by holiday demand - The company faces competition from other direct-to-consumer genetic testing companies, established telehealth providers, and traditional healthcare providers. The therapeutics business competes with large pharmaceutical and biotechnology companies[57][58][61] - The PGS business is seasonal, with a significant amount of revenue recognized in the fourth fiscal quarter, driven by holiday sales in the third quarter[67] - The company relies on a sole supplier for its saliva collection kits and on third-party contract manufacturers for its therapeutic candidates, including WuXi Biologics, which could be affected by potential U.S. sanctions[68][71] Intellectual Property As of March 31, 2024, the company's critical intellectual property portfolio includes 127 granted U.S. patents for Consumer (PGS) and 6 granted patents with 54 pending applications for Therapeutics, protected also by trade secrets - The PGS patent estate includes 127 granted U.S. patents (106 utility, 21 design) and 45 pending applications, with expiration dates ranging from approximately 2027 to 2044[72][73][74] - The Therapeutics patent estate includes 6 granted patents and 54 pending applications covering areas like immuno-oncology, with expected expiration dates from approximately 2039 to 2044[75] Government Regulation The company operates in a highly regulated environment, with its PGS reports and therapeutics programs subject to FDA oversight, its telehealth business governed by state laws, and all operations adhering to extensive global data protection regulations - The company's genetic health risk, carrier status, and pharmacogenetic reports are regulated by the FDA as medical devices. The company has obtained De Novo authorizations and 510(k) clearances for its reports[79][86] - The FDA has proposed a rule to phase out its general enforcement discretion for Laboratory-Developed Tests (LDTs) over four years, which would subject them to full FDA regulation as medical devices[82] - The telehealth business operates through affiliated professional medical corporations (PMCs) to comply with state laws prohibiting the corporate practice of medicine[34][100][101] - The company is subject to numerous data protection laws globally, including the CCPA in California and the GDPR in Europe, which regulate the handling of personal and genetic information[104][107] Human Capital Resources As of March 31, 2024, the company employed 582 U.S.-based individuals, emphasizing diversity, equity, and inclusion, and fostering talent development through comprehensive compensation and growth programs - As of March 31, 2024, the company had 582 employees, with 560 being full-time and 100% based in the U.S.[186] - The company highlights its commitment to DE&I, noting that 53% of its U.S. workforce are women and its nine-member Board of Directors includes four individuals who identify as people of color and three who identify as female[187] Item 1A. Risk Factors The company faces significant risks including market decline, intense competition, supply chain reliance, a major cybersecurity incident, Nasdaq delisting risk, historical losses, capital needs, drug development challenges, concentrated voting power, and evolving regulatory oversight - The company has experienced a criminal cyber incident in October 2023, where a threat actor accessed user accounts and downloaded customer data, leading to multiple class-action lawsuits and regulatory inquiries[295][298][299] - The company is not in compliance with Nasdaq's minimum bid price requirement of $1.00 per share and faces a risk of delisting if compliance is not regained by November 4, 2024[426][427][428] - The market for personal genetics products has seen an overall decline, which corresponds with recent significant decreases in the company's revenues[206] - The company has a history of significant losses, with an accumulated deficit of $2.2 billion as of March 31, 2024, and expects to incur future losses, requiring additional capital which may not be available[305][415] - The dual-class stock structure concentrates approximately 49% of voting power with CEO and Co-Founder Anne Wojcicki, limiting other stockholders' influence[433] Item 1C. Cybersecurity The company's cybersecurity program, overseen by the board's audit committee, includes vulnerability assessments and an incident response plan, with enhanced security measures implemented following the October 2023 data breach - The company's cybersecurity program is managed by an interim CSO and includes vulnerability assessments, penetration testing, and a bug bounty program[437][438] - The Board of Directors' audit committee oversees the cybersecurity program, receiving regular updates on threats and vulnerabilities[443] - In response to the October 2023 cybersecurity incident, the company implemented enhanced security measures, including resetting all customer passwords and mandating two-factor verification for all new and existing customers[441] Item 2. Properties The company leases its corporate headquarters in South San Francisco, California, along with additional significant office spaces in Sunnyvale, California, and St Louis, Missouri, supporting administrative and therapeutics R&D functions - The company leases its corporate headquarters in South San Francisco, CA (65,340 sq ft), along with additional office spaces in Sunnyvale, CA (154,987 sq ft) and St. Louis, MO (23,731 sq ft)[445] PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's Class A common stock trades on Nasdaq under 'ME', while Class B is not publicly traded, and the company has never paid cash dividends nor anticipates doing so - Class A common stock is traded on the Nasdaq Capital Market under the symbol "ME"[448] - The company has never paid cash dividends and does not intend to in the foreseeable future[451] Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations In fiscal 2024, total revenue decreased 27% to $219.6 million, driven by lower PGS sales and the GSK agreement's conclusion, resulting in a $666.7 million net loss primarily due to a goodwill impairment, though current cash is deemed sufficient for the next 12 months Fiscal Year 2024 vs. 2023 Financial Highlights (in thousands) | Metric | FY 2024 | FY 2023 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Total Revenue | $219,638 | $299,489 | ($79,851) | (27%) | | Gross Profit | $99,377 | $134,496 | ($35,119) | (26%) | | Loss from Operations | ($681,468) | ($324,011) | ($357,457) | 110% | | Net Loss | ($666,704) | ($311,656) | ($355,048) | 114% | | Total Adjusted EBITDA | ($175,796) | ($161,301) | ($14,495) | 9% | - The company recorded a full goodwill impairment charge of $351.7 million in fiscal 2024, related to the Consumer and Research Services reporting unit[495][535] - The company undertook two reductions in force in June and August 2023, impacting approximately 9% and 11% of the workforce, respectively, to reduce operating costs[490][491] - As of March 31, 2024, the company had $216.5 million in cash and cash equivalents and believes this is sufficient to fund operations for at least the next 12 months[549] Results of Operations Fiscal 2024 saw a 27% revenue decline to $219.6 million, primarily from lower consumer and research services, while operating expenses surged 70% to $780.8 million due to a significant goodwill impairment and restructuring costs - Total revenue decreased by $79.9 million (27%) in FY2024, primarily due to lower PGS kit sales volume and a $35.0 million decrease in research services revenue after the original GSK Agreement terminated in July 2023[523] - Gross margin remained constant at 45% for both fiscal 2024 and 2023, as improvements in consumer services margin were offset by a decrease in the higher-margin research services business[527] - Research and development expenses decreased by 8% to $205.4 million in FY2024, mainly due to lower personnel-related costs following reductions in force[529] - Sales and marketing expenses decreased by 29% to $85.6 million in FY2024, driven by reduced advertising spend and lower intangible asset amortization[531] - General and administrative expenses increased by 12% to $129.8 million, primarily due to $32.8 million in stock-based compensation charges related to the departure of two former Lemonaid officers[532] Segment Adjusted EBITDA In fiscal 2024, Consumer and Research Services Adjusted EBITDA loss increased 104% to $36.8 million due to revenue decline, while Therapeutics Adjusted EBITDA loss widened slightly to $91.0 million, and unallocated corporate costs decreased Adjusted EBITDA by Segment (in thousands) | Segment | FY 2024 | FY 2023 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Consumer and Research Services | ($36,769) | ($17,997) | ($18,772) | 104% | | Therapeutics | ($91,025) | ($88,503) | ($2,522) | 3% | | Unallocated Corporate | ($48,002) | ($54,801) | $6,799 | (12%) | | Total Adjusted EBITDA | ($175,796) | ($161,301) | ($14,495) | 9% | Liquidity and Capital Resources As of March 31, 2024, the company held $216.5 million in cash, deemed sufficient for 12 months despite a $2.2 billion accumulated deficit, while facing a Nasdaq delisting risk and having an unused $150.0 million ATM equity program Cash Flow Summary (in thousands) | Cash Flow Activity | FY 2024 | FY 2023 | | :--- | :--- | :--- | | Net cash used in operating activities | ($164,319) | ($165,390) | | Net cash used in investing activities | ($9,626) | ($11,305) | | Net cash provided by financing activities | $3,584 | $9,777 | - The company has an at-the-market (ATM) sales agreement to sell up to $150.0 million of its Class A common stock, but no sales have been made under this program as of the filing date[550] Critical Accounting Policies and Estimates The company's critical accounting policies involve significant judgment in revenue recognition, business combinations, and goodwill impairment, notably the $351.7 million goodwill write-off in fiscal 2024 and the estimation of PGS kit breakage revenue - A key estimate in revenue recognition is the breakage for unreturned PGS kits. The company recognized breakage revenue of $22.1 million in fiscal 2024 and $27.7 million in fiscal 2023[567][568] - Following a sustained decline in market capitalization and lower-than-expected financial performance, the company performed goodwill impairment tests and recorded total impairment charges of $351.7 million in fiscal 2024, fully writing off its goodwill balance[578][579] Item 7A. Quantitative and Qualitative Disclosures About Market Risk The company's primary market risks are interest rate risk on its $216.5 million cash and cash equivalents and foreign currency risk, neither of which is currently considered material, and no hedging strategies are employed - The company's primary market risks are interest rate risk on its cash and cash equivalents and foreign currency risk. A hypothetical 10% change in either would not have had a material impact on historical financial statements[583][584][585] Item 8. Financial Statements and Supplementary Data This section presents the audited consolidated financial statements for fiscal year 2024, with KPMG LLP's report highlighting critical audit matters related to PGS revenue recognition and goodwill impairment, and detailed notes covering acquisitions, collaborations, and legal contingencies - The independent auditor's report from KPMG LLP identified two critical audit matters for the fiscal year 2024 audit: (1) Sufficiency of audit evidence over revenue recognition for the Personal Genome Service (PGS) and (2) the Goodwill Impairment Assessment of the Consumer and Research Services Reporting Unit[599][600][603] Notes to Consolidated Financial Statements The notes detail the $351.7 million goodwill impairment from the Lemonaid acquisition, the amended GSK collaboration, the financial impact of the October 2023 cybersecurity incident, the dual-class stock structure, and $1.1 billion in federal net operating loss carryforwards - The company recognized a full goodwill impairment charge of $351.7 million during fiscal 2024 related to the Lemonaid Health acquisition[783][784] - Following the October 2023 cybersecurity incident, multiple class-action lawsuits have been filed. The company believes a loss is reasonably possible but cannot estimate an upper range of potential loss, which may be material[797][798] - As of March 31, 2024, the company had approximately $1.1 billion of federal net operating loss carryforwards available to reduce future taxable income[850] - In October 2023, the company amended its agreement with GSK, providing a non-exclusive data license for a $20.0 million fee, which was received in FY2024[750] Item 9A. Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of March 31, 2024, a conclusion concurred with by independent auditor KPMG LLP - Management concluded that as of March 31, 2024, the company's disclosure controls and procedures were effective at a reasonable assurance level[869] - Management assessed internal control over financial reporting and concluded that it was effective as of March 31, 2024. This assessment was audited by KPMG LLP, which concurred[872][873] PART III Items 10-14 Information for Items 10 through 14, covering governance, compensation, and related matters, is incorporated by reference from the company's definitive proxy statement for the 2024 annual meeting of stockholders - Information for Part III (Items 10-14) is incorporated by reference from the Registrant's definitive proxy statement for the 2024 annual meeting of stockholders[877] PART IV Item 15. Exhibits, Financial Statement Schedules This section provides an index of all exhibits filed with the Form 10-K, including corporate governance documents, material agreements, and executive certifications - This section provides an index of all exhibits filed with the Form 10-K, including corporate governance documents, material agreements, and executive certifications[883][884]