[SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS](index=4&type=section&id=SPECIAL%20NOTE%20REGARDING%20FORWARD-LOOKING%20STATEMENTS) This report's forward-looking statements involve risks and uncertainties that may cause actual results to differ materially - Forward-looking statements are primarily contained in the "Risk Factors" and "Management's Discussion and Analysis" sections[7](index=7&type=chunk) - These statements involve known and unknown risks and uncertainties, which may cause actual results to differ materially from expectations[11](index=11&type=chunk) - The company has no obligation to publicly update these forward-looking statements unless required by law[12](index=12&type=chunk) [PART I — FINANCIAL INFORMATION](index=7&type=section&id=PART%20I%20%E2%80%94%20FINANCIAL%20INFORMATION) This part presents unaudited financial statements and management's analysis of financial condition as of June 30, 2023 [Item 1. Financial Statements (unaudited)](index=7&type=section&id=Item%201.%20Financial%20Statements%20(unaudited)) This section provides unaudited condensed consolidated financial statements and accompanying notes explaining accounting policies [Condensed Consolidated Balance Sheets at June 30, 2023 and December 31, 2022](index=7&type=section&id=Condensed%20Consolidated%20Balance%20Sheets%20at%20June%2030%2C%202023%20and%20December%2031%2C%202022) The company's financial position shows a decrease in total assets and total stockholders' equity as of June 30, 2023 Condensed Consolidated Balance Sheet Highlights (in thousands of U.S. dollars) | Metric | June 30, 2023 | December 31, 2022 | Change | | :--- | :--- | :--- | :--- | | Total assets | $1,247,893 | $1,394,474 | $(146,581) | | Total liabilities | $651,746 | $688,730 | $(36,984) | | Total stockholders' equity | $596,147 | $705,744 | $(109,597) | | Cash, cash equivalents and restricted cash | $381,113 | $466,091 | $(84,978) | | Short-term investments | $354,828 | $432,301 | $(77,473) | | Accounts receivable, net | $260,065 | $244,385 | $15,680 | [Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three and Six Months Ended June 30, 2023 and 2022](index=8&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations%20and%20Comprehensive%20Loss%20for%20the%20Three%20and%20Six%20Months%20Ended%20June%2030%2C%202023%20and%202022) The company reported significant revenue growth but remained in a net loss position, although the loss has narrowed Condensed Consolidated Statements of Operations and Comprehensive Loss Highlights (in thousands of U.S. dollars, except per share data) | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :--- | :--- | :--- | :--- | :--- | | Total revenues | $261,404 | $198,200 | $503,160 | $392,333 | | Product revenues | $258,256 | $194,582 | $496,053 | $384,584 | | Licensing and other revenues | $3,148 | $3,618 | $7,107 | $7,749 | | Total costs and expenses | $373,830 | $341,285 | $753,887 | $672,548 | | Loss from operations | $(112,426) | $(143,085) | $(250,727) | $(280,215) | | Net loss | $(110,803) | $(145,151) | $(247,740) | $(283,746) | | Net loss per share, basic and diluted | $(0.97) | $(1.50) | $(2.20) | $(2.95) | [Condensed Consolidated Statements of Stockholders' Equity for the Three and Six Months Ended June 30, 2023 and 2022](index=9&type=section&id=Condensed%20Consolidated%20Statements%20of%20Stockholders'%20Equity%20for%20the%20Three%20and%20Six%20Months%20Ended%20June%2030%2C%202023%20and%202022) Changes in stockholders' equity reflect the impact of net loss and stock-based compensation, resulting in a decrease Summary of Changes in Stockholders' Equity (in thousands of U.S. dollars) | Metric | Balance at Dec 31, 2022 | H1 2023 Net Loss | H1 2023 Stock-Based Compensation | H1 2023 Unrealized Gain/Loss | Balance at June 30, 2023 | | :--- | :--- | :--- | :--- | :--- | :--- | | Common stock (shares) | 111,255 | — | — | — | 114,051 | | Additional paid-in capital | $2,664,730 | — | $85,165 | — | $2,795,714 | | Accumulated deficit | $(1,942,635) | $(247,740) | — | — | $(2,190,375) | | Accumulated other comprehensive loss | $(16,362) | — | — | $7,159 | $(9,203) | | **Total stockholders' equity** | **$705,744** | **$(247,740)** | **$85,165** | **$7,159** | **$596,147** | [Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2023 and 2022](index=11&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows%20for%20the%20Six%20Months%20Ended%20June%2030%2C%202023%20and%202022) Cash flows show reduced operating cash outflow but a significant drop in investing cash inflow, leading to a net decrease in cash Condensed Consolidated Cash Flow Highlights (in thousands of U.S. dollars) | Activity | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :--- | :--- | :--- | | Net cash used in operating activities | $(159,275) | $(248,126) | | Net cash provided by investing activities | $62,684 | $241,822 | | Net cash provided by financing activities | $11,613 | $13,074 | | Net change in cash, cash equivalents and restricted cash | $(84,978) | $6,770 | | Cash, cash equivalents and restricted cash, end of period | $381,113 | $91,384 | [Notes to Unaudited Interim Condensed Consolidated Financial Statements](index=12&type=section&id=Notes%20to%20Unaudited%20Interim%20Condensed%20Consolidated%20Financial%20Statements) These notes provide detailed explanations of accounting policies and specific financial items in the interim statements [1. Description of Business](index=12&type=section&id=1.%20Description%20of%20Business) Natera is a diagnostics company specializing in cell-free DNA testing for women's health, oncology, and organ health - Natera is a diagnostics company using proprietary cell-free DNA (cfDNA) technology for disease management[27](index=27&type=chunk) - Key products include Panorama (NIPT), Horizon (HCS), Signatera (MRD), and Prospera (organ transplant assessment)[28](index=28&type=chunk) - The company licenses its technology via the Constellation cloud platform, enabling lab clients to develop their own tests[28](index=28&type=chunk) [2. Summary of Significant Accounting Policies](index=12&type=section&id=2.%20Summary%20of%20Significant%20Accounting%20Policies) This note outlines key accounting policies and estimates used in preparing the interim financial statements [Basis of Presentation](index=12&type=section&id=Basis%20of%20Presentation) The unaudited financial statements are prepared in accordance with U.S. GAAP for interim financial information - The financial statements are prepared in accordance with U.S. GAAP for interim financial information and include normal recurring adjustments[30](index=30&type=chunk) [Liquidity Matters](index=14&type=section&id=Liquidity%20Matters) The company has a history of net losses and expects future losses, but believes current capital is sufficient for the next 12 months - The company has incurred losses since inception, with a **net loss of $247.7 million** and an **accumulated deficit of $2.2 billion** as of June 30, 2023[32](index=32&type=chunk) Liquidity Position (as of June 30, 2023, in millions of U.S. dollars) | Metric | Amount | | :--- | :--- | | Net loss (six months ended June 30, 2023) | $(247.7) | | Accumulated deficit (as of June 30, 2023) | $(2,200.0) | | Cash, cash equivalents and restricted cash | $381.1 | | Marketable securities | $354.8 | | Outstanding balance on revolving credit facility | $80.4 | | Outstanding principal on convertible senior notes | $287.5 | | Available balance on revolving credit facility | $20.0 | - The company expects existing cash and securities to be sufficient for at least 12 months from August 3, 2023, but will require additional financing for long-term growth[34](index=34&type=chunk)[38](index=38&type=chunk) [Principles of Consolidation](index=16&type=section&id=Principles%20of%20Consolidation) The consolidated financial statements include all accounts of the company and its subsidiaries, with intercompany transactions eliminated - The consolidated financial statements include the accounts of the company and its subsidiaries, with all intercompany balances and transactions eliminated[39](index=39&type=chunk) [Use of Estimates](index=16&type=section&id=Use%20of%20Estimates) Financial statement preparation requires management to make estimates affecting reported amounts of assets, liabilities, revenues, and expenses - Significant estimates include the allowance for doubtful accounts, average selling prices, deferred revenue, and stock-based compensation[40](index=40&type=chunk) [Revenue](index=16&type=section&id=Revenue) Revenue is recognized upon fulfillment of performance obligations, based on the estimated consideration expected from customers - Revenue is recognized when performance obligations are satisfied, reflecting the consideration the company expects to receive[41](index=41&type=chunk) - Total consideration is estimated using the expected value method, adjusted for historical collection rates and variable consideration[41](index=41&type=chunk)[42](index=42&type=chunk) [Allowance for doubtful accounts](index=16&type=section&id=Allowance%20for%20doubtful%20accounts) The allowance for doubtful accounts is based on an assessment of the collectability from clinic and laboratory partners - The allowance for doubtful accounts is based on an assessment of collectability, considering historical experience, aging, and economic conditions[43](index=43&type=chunk) [Inventory](index=18&type=section&id=Inventory) Inventory is valued at the lower of cost or net realizable value using the first-in, first-out method - Inventory is stated at the lower of cost or net realizable value, determined using the first-in, first-out method[44](index=44&type=chunk) - The company regularly assesses inventory for obsolescence and writes down specific unusable inventory, with charges recorded to cost of product revenues[44](index=44&type=chunk) [Investments and financial instruments](index=18&type=section&id=Investments%20and%20financial%20instruments) Investments are classified as Level 1 or Level 2 within the fair value hierarchy and are categorized as available-for-sale - The company's investments, primarily debt securities, are classified as Level 1 or Level 2 within the fair value hierarchy[45](index=45&type=chunk) - The entire investment portfolio is generally classified as available-for-sale financial assets and considered short-term investments[50](index=50&type=chunk) [Other accrued liabilities](index=18&type=section&id=Other%20accrued%20liabilities) Estimates are used to determine other accrued liabilities, including those for vendor contracts, clinical trials, and payroll - Estimates for other accrued liabilities involve vendor contracts, clinical trials, payroll, marketing, insurance, and tax-related liabilities[46](index=46&type=chunk) [Credit Losses](index=18&type=section&id=Credit%20Losses) The company provides for expected credit losses on trade receivables and available-for-sale debt securities per ASC Topic 326-20 - The company provides for expected credit losses on trade receivables and available-for-sale debt securities under ASC Topic 326-20[47](index=47&type=chunk) - The investment portfolio is deemed to consist of low-risk, investment-grade securities, requiring no credit loss allowance[48](index=48&type=chunk)[100](index=100&type=chunk) [Investments](index=18&type=section&id=Investments) The investment portfolio primarily consists of U.S. Treasury, agency, and municipal debt securities, all classified as available-for-sale - Investments primarily include U.S. Treasury, U.S. agency, and municipal debt securities, all classified as available-for-sale[49](index=49&type=chunk)[50](index=50&type=chunk) - As of June 30, 2023, **47 investments** were in an unrealized loss position totaling **$8.9 million**, deemed temporary due to rising market yields[98](index=98&type=chunk)[100](index=100&type=chunk)[102](index=102&type=chunk) Available-for-Sale Securities by Contractual Maturity (as of June 30, 2023, in thousands of U.S. dollars) | Maturity | Amortized Cost | Fair Value | | :--- | :--- | :--- | | Less than or equal to one year | $296,067 | $291,495 | | Greater than one year and less than five years | $67,630 | $63,333 | | **Total** | **$363,697** | **$354,828** | [Related Party](index=20&type=section&id=Related%20Party) The company discloses its investment in MyOme, Inc., noting affiliations with several of its executives and directors - In December 2021, the company invested approximately **$4.0 million** in MyOme, Inc. for preferred stock and warrants[51](index=51&type=chunk) - The company's Executive Chairman, a co-founder, and the General Counsel have affiliations with MyOme as founders, directors, or shareholders[51](index=51&type=chunk)[54](index=54&type=chunk) [Fair Value](index=20&type=section&id=Fair%20Value) Fair value is the price to sell an asset or transfer a liability in an orderly transaction between market participants - Fair value is defined as the price received to sell an asset or paid to transfer a liability in an orderly transaction[52](index=52&type=chunk) - The fair value hierarchy has three levels: Level 1 (quoted prices), Level 2 (observable inputs), and Level 3 (unobservable inputs)[93](index=93&type=chunk)[94](index=94&type=chunk) [Risk and Uncertainties](index=20&type=section&id=Risk%20and%20Uncertainties) Credit risk from financial instruments is managed by placing cash with high-credit-quality institutions and assessing payer financial health - Credit risk arises from cash, accounts receivable, and investments, and is limited by using high-credit-quality financial institutions[53](index=53&type=chunk) - No single customer accounted for more than **10%** of total revenues or accounts receivable balances during the reported periods[54](index=54&type=chunk) [Accumulated Other Comprehensive Income (Loss)](index=21&type=section&id=Accumulated%20Other%20Comprehensive%20Income%20(Loss)) Comprehensive loss includes net loss and unrealized gains or losses on available-for-sale securities Accumulated Other Comprehensive Income (Loss) (in thousands of U.S. dollars) | Metric | June 30, 2023 | June 30, 2022 | | :--- | :--- | :--- | | Beginning balance (three months) | $(11,798) | $(13,904) | | Net unrealized gain (loss) on available-for-sale securities | $2,595 | $(2,493) | | Ending balance (three months) | $(9,203) | $(16,397) | | Beginning balance (six months) | $(16,362) | $(2,287) | | Net unrealized gain (loss) on available-for-sale securities | $7,159 | $(14,110) | | Ending balance (six months) | $(9,203) | $(16,397) | - Changes in net unrealized losses on available-for-sale securities were due to increased market volatility, but no credit loss allowance was deemed necessary[56](index=56&type=chunk) [Recent Accounting Pronouncements](index=21&type=section&id=Recent%20Accounting%20Pronouncements) Recently issued accounting standards updates are not expected to have a material impact on the company's financial statements - The company does not expect recently issued but not yet effective accounting standards, such as ASU 2020-04, to materially impact its consolidated financial statements[57](index=57&type=chunk)[58](index=58&type=chunk) [3. Revenue Recognition](index=22&type=section&id=3.%20Revenue%20Recognition) This note details revenue recognition for products and licensing, including contracts with various payers and strategic partners [Product Revenues](index=22&type=section&id=Product%20Revenues) Product revenues are primarily from prenatal genetic testing contracts and are recognized upon delivery of test results - Product revenues are primarily derived from prenatal genetic testing contracts with insurance companies, lab partners, and patients[61](index=61&type=chunk) - Revenue is recognized upon delivery of test results, with an average collection period of 18 months, and is adjusted based on actual collection trends[66](index=66&type=chunk)[69](index=69&type=chunk) - For the six months ended June 30, 2023, the company recorded a **net revenue decrease of $5.8 million** related to tests from prior periods[69](index=69&type=chunk) - For the six months ended June 30, 2023, product revenues increased by **$6.5 million** due to a reduction in the refund reserve after determining refunds were not required[70](index=70&type=chunk) [Licensing and Other Revenues](index=24&type=section&id=Licensing%20and%20Other%20Revenues) Licensing revenues stem from the Constellation platform and strategic agreements with BGI Genomics and Foundation Medicine [Constellation](index=25&type=section&id=Constellation) The Constellation platform generates revenue by licensing proprietary intellectual property and cloud software to laboratories - Constellation generates revenue by licensing the company's proprietary intellectual property and cloud-based software[71](index=71&type=chunk)[73](index=73&type=chunk) - Licensees pay a fixed fee per test, and revenue is recognized upon completion of the performance obligation for each test delivered[74](index=74&type=chunk) [BGI Genomics](index=25&type=section&id=BGI%20Genomics) The company has a ten-year licensing agreement with BGI Genomics for NGS-based genetic tests with a total consideration of $50 million - The company has a ten-year licensing agreement with BGI Genomics (February 2019 to February 2029) to develop and commercialize NGS-based genetic tests[75](index=75&type=chunk) - The total consideration is **$50.0 million**, of which **$44.0 million** has been received in cash, including a **$20.0 million** upfront royalty payment[78](index=78&type=chunk) - Performance obligations for licensing and development services were fully satisfied in March 2023, with **$0.1 million** recognized in H1 2023 versus **$2.7 million** in H1 2022[79](index=79&type=chunk) - In H1 2023, the company recognized **$0.6 million** in revenue for oncology test interpretation services, with **$19.8 million** in deferred revenue as of June 30, 2023[81](index=81&type=chunk) [Foundation Medicine, Inc.](index=27&type=section&id=Foundation%20Medicine%2C%20Inc.) The company has a licensing and collaboration agreement with Foundation Medicine to develop personalized ctDNA monitoring tests - The company has a licensing and collaboration agreement with Foundation Medicine (initial term through August 2024) to develop and commercialize personalized ctDNA monitoring tests[83](index=83&type=chunk) - The total consideration is **$32.0 million**, of which **$24.3 million** has been received in cash, including a **$5.0 million** upfront royalty payment[86](index=86&type=chunk) - Performance obligations for licensing and development services were fully satisfied in March 2023, with **$0.2 million** recognized in H1 2023 versus **$1.1 million** in H1 2022[89](index=89&type=chunk) - In H1 2023, the company recognized **$0.4 million** in revenue for oncology test interpretation services, with **$4.0 million** in deferred revenue as of June 30, 2023[90](index=90&type=chunk) [Disaggregation of Revenues](index=29&type=section&id=Disaggregation%20of%20Revenues) This section disaggregates revenue by payer type and geography and details changes in accounts receivable and deferred revenue Revenue Disaggregation by Payer Type (in thousands of U.S. dollars) | Payer Type | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :--- | :--- | :--- | :--- | :--- | | Insurance companies | $226,521 | $167,822 | $436,899 | $332,564 | | Laboratories and other partners | $27,449 | $22,142 | $50,254 | $42,879 | | Patients | $7,434 | $8,236 | $16,007 | $16,890 | | **Total revenues** | **$261,404** | **$198,200** | **$503,160** | **$392,333** | Revenue Disaggregation by Geography (in thousands of U.S. dollars) | Geography | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :--- | :--- | :--- | :--- | :--- | | United States | $253,296 | $191,886 | $486,550 | $379,103 | | Americas (ex-U.S.) | $1,206 | $530 | $2,364 | $1,271 | | Europe, Middle East, India, Africa | $5,620 | $3,736 | $10,816 | $7,427 | | Asia Pacific and other | $1,282 | $2,048 | $3,430 | $4,532 | | **Total revenues** | **$261,404** | **$198,200** | **$503,160** | **$392,333** | Accounts Receivable and Deferred Revenue (in thousands of U.S. dollars) | Metric | Balance at June 30, 2023 | Balance at Dec 31, 2022 | | :--- | :--- | :--- | | Accounts receivable, net | $260,065 | $244,385 | | Deferred revenue (current) | $15,644 | $10,777 | | Deferred revenue (non-current) | $21,502 | $20,001 | | **Total deferred revenue** | **$37,146** | **$30,778** | Summary of Changes in Deferred Revenue (in thousands of U.S. dollars) | Metric | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :--- | :--- | :--- | | Beginning balance | $30,778 | $28,722 | | Additions to deferred revenue | $17,402 | $14,974 | | Revenue recognized from beginning balance | $(7,521) | $(5,757) | | Revenue recognized from current period performance | $(3,513) | $(1,209) | | **Ending balance** | **$37,146** | **$36,730** | [4. Fair Value Measurements](index=30&type=section&id=4.%20Fair%20Value%20Measurements) This note details the fair value measurement of financial assets and liabilities, categorized by the observability of inputs [Assets and Liabilities That Are Measured at Fair Value on a Recurring Basis](index=31&type=section&id=Assets%20and%20Liabilities%20That%20Are%20Measured%20at%20Fair%20Value%20on%20a%20Recurring%20Basis) Financial assets measured at fair value on a recurring basis primarily include money market funds and various debt securities Financial Assets Measured at Fair Value (in thousands of U.S. dollars) | Asset Type | Total at June 30, 2023 | Total at Dec 31, 2022 | | :--- | :--- | :--- | | Money market deposits | $216,337 | $283,358 | | Demand deposits | $128,562 | $125,596 | | U.S. Treasury securities | $296,490 | $346,057 | | Corporate bonds and notes | $8,901 | $23,529 | | Municipal securities | $49,437 | $62,715 | | **Total financial assets** | **$699,727** | **$841,255** | [Fair Value of Short-Term and Long-Term Debt](index=31&type=section&id=Fair%20Value%20of%20Short-Term%20and%20Long-Term%20Debt) The fair values of the revolving credit facility and convertible notes are estimated based on observable Level 2 inputs - As of June 30, 2023, the estimated fair value of the revolving credit facility was **$80.4 million**, based on observable Level 2 inputs (30-day average SOFR plus 1.21%)[96](index=96&type=chunk) - The estimated fair value of the convertible notes was **$433.2 million** as of June 30, 2023, compared to **$358.4 million** as of December 31, 2022, based on observable Level 2 inputs[97](index=97&type=chunk) [5. Financial Instruments](index=31&type=section&id=5.%20Financial%20Instruments) This note details the composition of cash equivalents and available-for-sale securities, noting temporary unrealized losses Cash Equivalents and Investments (Available-for-Sale Securities, in thousands of U.S. dollars) | Metric | Fair Value at June 30, 2023 | Fair Value at Dec 31, 2022 | | :--- | :--- | :--- | | Money market deposits | $216,337 | $283,358 | | Demand deposits | $128,562 | $125,596 | | U.S. Treasury securities | $296,490 | $346,057 | | Corporate bonds and notes | $8,901 | $23,529 | | Municipal securities | $49,437 | $62,715 | | **Total** | **$699,727** | **$841,255** | | Classified as: | | | | Cash equivalents | $344,899 | $408,954 | | Short-term investments | $354,828 | $432,301 | - As of June 30, 2023, **47 investments** were in an unrealized loss position totaling **$8.9 million**, deemed temporary due to a significant increase in average yields on similar securities[98](index=98&type=chunk)[100](index=100&type=chunk)[102](index=102&type=chunk) Available-for-Sale Securities by Contractual Maturity (as of June 30, 2023, in thousands of U.S. dollars) | Maturity | Amortized Cost | Fair Value | | :--- | :--- | :--- | | Less than or equal to one year | $296,067 | $291,495 | | Greater than one year and less than five years | $67,630 | $63,333 | | **Total** | **$363,697** | **$354,828** | [6. Balance Sheet Components](index=32&type=section&id=6.%20Balance%20Sheet%20Components) This note provides detailed information on key balance sheet components, including changes in allowances and fixed assets [Allowance for doubtful accounts](index=32&type=section&id=Allowance%20for%20doubtful%20accounts) This section presents the activity in the allowance for doubtful accounts related to trade receivables Changes in Allowance for Doubtful Accounts (in thousands of U.S. dollars) | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :--- | :--- | :--- | :--- | :--- | | Beginning balance | $5,134 | $2,392 | $3,830 | $2,429 | | Provision for bad debts | $446 | $1,170 | $1,750 | $1,501 | | Write-offs | — | $(1) | — | $(369) | | **Total** | **$5,580** | **$3,561** | **$5,580** | **$3,561** | [Property and Equipment, net](index=33&type=section&id=Property%20and%20Equipment%2C%20net) This section details the composition of net property and equipment, which increased due to laboratory expansion Property and Equipment, net (in thousands of U.S. dollars) | Category | June 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Machinery and equipment | $78,705 | $66,262 | | Computer equipment | $1,701 | $1,308 | | Purchased and capitalized software | $6,739 | $5,464 | | Leasehold improvements | $29,806 | $29,747 | | Construction in progress | $31,091 | $25,370 | | Less: accumulated depreciation and amortization | $(45,121) | $(35,698) | | **Total property and equipment, net** | **$102,921** | **$92,453** | - The increase in net property and equipment during the six months ended June 30, 2023, was driven by expansion projects and new equipment purchases, partially offset by **$10.2 million** in depreciation expense[106](index=106&type=chunk) [Other Accrued Liabilities](index=34&type=section&id=Other%20Accrued%20Liabilities) This section details the composition of other accrued liabilities, which decreased from year-end 2022 Other Accrued Liabilities (in thousands of U.S. dollars) | Category | June 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Insurance carrier refund reserve | $15,480 | $18,948 | | Accrued third-party testing fees | $9,401 | $17,036 | | Vendor testing and lab materials | $13,493 | $13,281 | | Marketing and corporate affairs | $9,822 | $8,943 | | Legal, audit and consulting fees | $36,343 | $36,710 | | Clinical trials and studies | $11,371 | $23,301 | | Operating lease liabilities, current | $10,435 | $7,639 | | **Total other accrued liabilities** | **$125,513** | **$144,214** | Summary of Changes in Insurance Carrier Refund Reserve (in thousands of U.S. dollars) | Metric | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :--- | :--- | :--- | | Beginning balance | $18,948 | $17,210 | | Additional provisions | $5,148 | $8,576 | | Refunds to carriers | $(963) | $(793) | | Provisions released to revenue | $(7,653) | $(9,081) | | **Ending balance** | **$15,480** | **$15,912** | [7. Leases](index=34&type=section&id=7.%20Leases) This note describes the company's primary operating lease agreements for laboratory and office space - The company has significant operating lease agreements in Austin, San Carlos, and South San Francisco, with terms extending to 2033, 2027, and 2026, respectively[109](index=109&type=chunk)[111](index=111&type=chunk)[113](index=113&type=chunk) Operating Lease Liabilities (in thousands of U.S. dollars) | Metric | June 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Operating lease liabilities, current | $10,435 | $7,639 | | Operating lease liabilities, non-current | $71,093 | $76,577 | | **Total operating lease liabilities** | **$81,528** | **$84,216** | - As of June 30, 2023, the weighted-average remaining lease term was **7.40 years**, and the weighted-average discount rate was **6.67%**[117](index=117&type=chunk) Future Annual Minimum Lease Payments (as of June 30, 2023, in thousands of U.S. dollars) | Year | Operating Leases | | :--- | :--- | | 2023 (remaining 6 months) | $7,255 | | 2024 | $16,007 | | 2025 | $16,352 | | 2026 | $16,732 | | 2027 | $13,676 | | 2028 and thereafter | $33,999 | | **Total** | **$104,021** | | Less: imputed interest | $(22,493) | | **Operating lease liabilities** | **$81,528** | [8. Commitments and Contingencies](index=39&type=section&id=8.%20Commitments%20and%20Contingencies) This note discloses legal proceedings, intellectual property disputes, and other commitments and contingencies facing the company [Legal Proceedings](index=39&type=section&id=Legal%20Proceedings) The company is involved in various legal matters whose outcomes are uncertain and could result in significant expenses - The company is involved in various legal matters, including investigations, lawsuits, and regulatory actions related to intellectual property, billing, and marketing[120](index=120&type=chunk) - An independent committee concluded its internal investigation into allegations from a March 2022 short-seller report, finding them to be without merit[121](index=121&type=chunk) - The company assesses legal contingencies for potential losses but often cannot provide meaningful estimates due to complexity and evolving information[123](index=123&type=chunk) [Intellectual Property Litigation Matters](index=39&type=section&id=Intellectual%20Property%20Litigation%20Matters) The company is engaged in multiple patent lawsuits as both plaintiff and defendant, with mixed outcomes to date - The company is involved in two patent lawsuits with CareDx; one CareDx patent was invalidated, and another case is set for trial in January 2024[124](index=124&type=chunk) - In a patent infringement suit against ArcherDX and Invitae, a jury found in Natera's favor, awarding total damages of **$19.35 million**[125](index=125&type=chunk)[127](index=127&type=chunk) - The company is a defendant in a patent infringement lawsuit brought by Ravgen, with a trial scheduled for January 2024[128](index=128&type=chunk) - The company has also filed patent infringement lawsuits against Genosity, Inivata, and NeoGenomics[129](index=129&type=chunk)[130](index=130&type=chunk)[131](index=131&type=chunk)[132](index=132&type=chunk) [Other Litigation Matters](index=41&type=section&id=Other%20Litigation%20Matters) The company is involved in other non-IP litigation, including false advertising and class action lawsuits - In a false advertising lawsuit with CareDx, a jury awarded **$44.9 million** in damages, but the court vacated the damages award in July 2023[133](index=133&type=chunk) - A false advertising lawsuit between the company and Guardant is currently scheduled for trial in November 2023[134](index=134&type=chunk)[136](index=136&type=chunk) - A class action lawsuit regarding patient billing was dismissed in May 2023, but a similar suit was refiled in state court in July 2023[137](index=137&type=chunk) - Two class action lawsuits concerning the marketing of Panorama have been consolidated, with an amended complaint filed in April 2023[138](index=138&type=chunk) - A securities class action lawsuit alleges false or misleading statements; the company has filed a motion to dismiss[139](index=139&type=chunk)[140](index=140&type=chunk) [Director and Of icer Indemnifications](index=43&type=section&id=Director%20and%20Of%20icer%20Indemnifications) The company provides indemnification to its directors and officers and maintains insurance policies to limit potential risk - The company provides indemnification to its directors, officers, employees, and other agents under Delaware law and its bylaws[141](index=141&type=chunk) - The company holds insurance policies that may limit its exposure, but coverage is not guaranteed[141](index=141&type=chunk) [Third-Party Payer Reimbursement Audits](index=43&type=section&id=Third-Party%20Payer%20Reimbursement%20Audits) The company occasionally receives recoupment requests from third-party payers for alleged overpayments, which it disputes or accrues for - The company periodically receives recoupment requests from third-party payers for alleged overpayments[142](index=142&type=chunk) - The company disputes such requests or accrues an estimated provision when a loss is probable and estimable[142](index=142&type=chunk) [Contractual Commitments](index=44&type=section&id=Contractual%20Commitments) This section lists significant contractual commitments with remaining terms of at least one year as of June 30, 2023 Significant Contractual Commitments (as of June 30, 2023, in thousands of U.S. dollars) | Counterparty | Commitment Amount | Expiration Date | | :--- | :--- | :--- | | Laboratory instrument supplier | $14,171 | December 2024 | | Materials supplier | $32,180 | March 2028 | | Application service provider | $15,632 | March 2026 | | Other materials suppliers | $17,225 | Various | | **Total** | **$79,208** | | [9. Stock-Based Compensation](index=44&type=section&id=9.%20Stock-Based%20Compensation) This note details the company's equity incentive plans, including stock option and RSU activity and valuation assumptions [2015 Equity Incentive Plan](index=44&type=section&id=2015%20Equity%20Incentive%20Plan) The 2015 Equity Incentive Plan governs the issuance of stock options and RSUs, which typically vest over four years - The 2015 Equity Incentive Plan provides for the grant of stock options and restricted stock units (RSUs)[144](index=144&type=chunk)[145](index=145&type=chunk)[146](index=146&type=chunk) - Stock options generally vest over four years from the grant date and have a maximum term of ten years[145](index=145&type=chunk) [Employee Stock Purchase Plan](index=44&type=section&id=Employee%20Stock%20Purchase%20Plan) The ESPP allows employees to purchase common stock, with 3,964,612 shares available for issuance as of June 30, 2023 - As of June 30, 2023, the Employee Stock Purchase Plan (ESPP) had **3,964,612 shares** available for issuance[147](index=147&type=chunk) - During the first offering period of 2023 (November 1, 2022, to April 30, 2023), **218,649 shares** were purchased[148](index=148&type=chunk) [Stock Options and Restricted Stock Units](index=46&type=section&id=Stock%20Options%20and%20Restricted%20Stock%20Units) This section summarizes stock option and RSU activity for the six months ended June 30, 2023 Summary of Stock Option and RSU Activity (for the six months ended June 30, 2023, shares in thousands) | Metric | Number of Shares | Weighted-Average Exercise Price | Weighted-Average Remaining Contractual Term (Years) | Aggregate Intrinsic Value | | :--- | :--- | :--- | :--- | :--- | | Balance at Dec 31, 2022 | 5,300 | $21.11 | 4.84 | $131,385 | | Options granted | 344 | $44.53 | | | | Options exercised | (217) | $13.59 | | | | Balance at June 30, 2023 | 5,427 | $22.89 | 4.71 | $165,062 | | Exercisable at June 30, 2023 | 4,554 | $13.65 | 3.97 | $162,998 | [Performance-based Awards](index=46&type=section&id=Performance-based%20Awards) The company grants performance-based stock awards to senior management, recognizing related stock-based compensation expense - For the six months ended June 30, 2023, stock-based compensation expense for performance-based awards was **$17.5 million**, compared to **$27.5 million** for the same period in 2022[151](index=151&type=chunk) [Restricted Stock Units](index=46&type=section&id=Restricted%20Stock%20Units) This section summarizes the activity of unvested RSUs for the six months ended June 30, 2023 Summary of Unvested RSU Activity (for the six months ended June 30, 2023, shares in thousands) | Metric | Number of Shares | Weighted-Average Grant-Date Fair Value | | :--- | :--- | :--- | | Balance at Dec 31, 2022 | 6,836 | $57.12 | | Granted | 5,466 | $44.83 | | Vested | (2,024) | $56.75 | | Canceled/forfeited | (620) | $49.63 | | **Balance at June 30, 2023** | **9,658** | **$50.68** | [Stock-Based Compensation Expense](index=47&type=section&id=Stock-Based%20Compensation%20Expense) Stock-based compensation expense is measured at fair value on the grant date and recognized over the vesting period Stock-Based Compensation Expense (in thousands of U.S. dollars) | Category | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :--- | :--- | :--- | :--- | :--- | | Cost of revenues | $2,838 | $2,063 | $5,394 | $3,779 | | Research and development | $15,495 | $12,458 | $30,353 | $21,879 | | Selling, general and administrative | $26,137 | $26,452 | $49,418 | $50,402 | | **Total** | **$44,470** | **$40,973** | **$85,165** | **$76,060** | - As of June 30, 2023, approximately **$373.5 million** of unrecognized stock-based compensation expense is expected to be recognized over a weighted-average period of approximately **2.7 years**[157](index=157&type=chunk) [Valuation of Stock Option Grants to Employees and Non-employees](index=48&type=section&id=Valuation%20of%20Stock%20Option%20Grants%20to%20Employees%20and%20Non-employees) The company uses the Black-Scholes option-pricing model to estimate the fair value of stock option grants Black-Scholes Valuation Assumptions for Stock Options | Assumption | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :--- | :--- | :--- | :--- | :--- | | Expected term (years) | 5.97-6.03 | 5.20-5.12 | 5.97-6.03 | 5.20-5.12 | | Expected volatility | 68.35%-68.75% | 56.15%-56.38% | 68.35%-70.07% | 55.91%-62.30% | | Expected dividend yield | 0.00% | 0.00% | 0.00% | 0.00% | | Risk-free interest rate | 3.50%-4.06% | 2.72%-2.74% | 3.41%-4.06% | 1.62%-2.74% | [10. Debt](index=48&type=section&id=10.%20Debt) This note details the company's debt, including a revolving credit facility and 2.25% convertible senior notes due 2027 [Credit Line Agreement](index=48&type=section&id=Credit%20Line%20Agreement) The company has a $100 million revolving credit facility with UBS, secured by money market and marketable securities - The company has a **$100 million** revolving credit facility with UBS, secured by money market and marketable securities[160](index=160&type=chunk) - The interest rate is the 30-day average SOFR plus 1.21% (**6.28%** as of June 30, 2023)[160](index=160&type=chunk) - As of June 30, 2023, the outstanding principal and accrued interest totaled **$80.4 million**, with **$20.0 million** available for borrowing[160](index=160&type=chunk)[161](index=161&type=chunk) - Interest expense on the credit line was **$2.4 million** for the six months ended June 30, 2023, compared to **$0.3 million** for the same period in 2022[161](index=161&type=chunk) [Convertible Notes](index=48&type=section&id=Convertible%20Notes) The company issued $287.5 million of 2.25% convertible senior notes due May 2027 - The company issued **$287.5 million** aggregate principal amount of 2.25% convertible senior notes due May 2027[162](index=162&type=chunk) - The notes are senior unsecured obligations, pay 2.25% cash interest annually, and are convertible into cash, common stock, or a combination at the company's election[162](index=162&type=chunk) - The initial conversion rate is **25.7785 shares** per $1,000 principal, equivalent to a price of approximately **$38.79 per share**, convertible into **7,411,704 shares**[165](index=165&type=chunk) Convertible Notes Balance (in thousands of U.S. dollars) | Metric | June 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Principal outstanding | $287,500 | $287,500 | | Unamortized debt discount and issuance costs | $(5,205) | $(5,847) | | **Net carrying amount** | **$282,295** | **$281,653** | Convertible Notes Interest Expense (in thousands of U.S. dollars) | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :--- | :--- | :--- | :--- | :--- | | Cash interest expense | $1,617 | $1,617 | $3,234 | $3,234 | | Non-cash interest expense | $322 | $312 | $642 | $625 | | **Total interest expense** | **$1,939** | **$1,929** | **$3,876** | **$3,859** | [11. Income Taxes](index=52&type=section&id=11.%20Income%20Taxes) This note discloses the company's income tax expense (benefit) and notes a full valuation allowance against deferred tax assets Income Tax (Benefit) Expense (in thousands of U.S. dollars) | Period | Income Tax (Benefit) Expense | | :--- | :--- | | Three months ended June 30, 2023 | $282 | | Three months ended June 30, 2022 | $(193) | | Six months ended June 30, 2023 | $122 | | Six months ended June 30, 2022 | $(372) | - Due to a history of cumulative operating losses, the company maintains a **full valuation allowance** against all deferred tax assets[171](index=171&type=chunk) [12. Net Loss per Share](index=52&type=section&id=12.%20Net%20Loss%20per%20Share) This note explains that all potentially dilutive shares are excluded from the diluted net loss per share calculation - Due to the company's net loss position, potentially dilutive shares from stock options, RSUs, ESPP, and convertible notes are excluded from the diluted net loss per share calculation as they are anti-dilutive[173](index=173&type=chunk)[174](index=174&type=chunk) Total Potentially Dilutive Shares Excluded (in thousands) | Category | June 30, 2023 | June 30, 2022 | | :--- | :--- | :--- | | Options to purchase common stock | 5,427 | 5,435 | | Performance awards and restricted stock units | 9,658 | 7,601 | | Employee stock purchase plan | 72 | 112 | | Convertible notes | 7,411 | 7,411 | | Earn-out related to acquisition of Canadian entity | — | 931 | | **Total** | **22,568** | **21,490** | [13. Subsequent Events](index=53&type=section&id=13.%20Subsequent%20Events) The company reports no material subsequent events requiring disclosure as of the report's filing date - The company reported no subsequent events that would require disclosure[175](index=175&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=54&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section provides management's perspective on the company's financial condition and results of operations [Overview](index=54&type=section&id=Overview) Natera is a diagnostics company with products in women's health, oncology, and organ health, reporting continued growth and net losses - Natera is a diagnostics company leveraging proprietary molecular and bioinformatics technologies in women's health, oncology, and organ health[178](index=178&type=chunk) - Key products include Panorama, Horizon, Signatera, and Prospera, distributed through direct sales and the Constellation platform[179](index=179&type=chunk)[181](index=181&type=chunk) Test Volume Processed | Period | Total Tests Processed | Tests Accessioned in Lab | | :--- | :--- | :--- | | Six months ended June 30, 2023 | 1,243,400 | 1,206,700 | | Six months ended June 30, 2022 | 989,200 | 957,200 | | **Year-over-Year Growth** | **+25.7%** | **+26.1%** | - For the six months ended June 30, 2023, total revenues were **$503.2 million**, with **90%** from the U.S. direct sales force[186](index=186&type=chunk)[187](index=187&type=chunk) - For the six months ended June 30, 2023, the company incurred a **net loss of $247.7 million** and had an **accumulated deficit of $2.2 billion**[188](index=188&type=chunk) [Components of the Results of Operations](index=56&type=section&id=Components%20of%20the%20Results%20of%20Operations) This section analyzes the composition of revenues and costs, highlighting the impact of reimbursement rates on financial performance - Revenues are primarily derived from sales of Panorama, HCS, and Signatera tests through direct sales and lab partners[189](index=189&type=chunk) - Financial performance depends on reimbursement for Panorama in average-risk populations and for microdeletions, which have lower average reimbursement rates[194](index=194&type=chunk) - Increased in-network coverage is crucial for growth but may lower average reimbursement per test due to negotiated rates[195](index=195&type=chunk) - Cost of product revenues includes materials, personnel, equipment, shipping, and third-party processing fees[196](index=196&type=chunk) - Cost of licensing and other revenues is relatively low, resulting in higher gross margins for the Constellation platform[198](index=198&type=chunk)[199](index=199&type=chunk) [Critical Accounting Policies](index=60&type=section&id=Critical%20Accounting%20Policies) This section identifies key accounting policies requiring significant management judgment, including revenue recognition and fair value measurement - The company's critical accounting policies and estimates include revenue recognition, leases, fair value measurements, and stock-based compensation[200](index=200&type=chunk) [Recent Accounting Pronouncements](index=60&type=section&id=Recent%20Accounting%20Pronouncements) Recently issued accounting standards updates are not expected to have a material impact on the company's financial results - The company believes that recently issued but not yet effective accounting pronouncements will not have a material impact on its financial condition or results of operations[202](index=202&type=chunk) [Results of Operations](index=60&type=section&id=Results%20of%20Operations) This section compares financial performance for the second quarter and first half of 2023 and 2022 [Comparison of the three months ended June 30, 2023 and 2022](index=60&type=section&id=Comparison%20of%20the%20three%20months%20ended%20June%2030%2C%202023%20and%202022) In Q2 2023, total revenues grew 31.9% year-over-year, while net loss narrowed by 23.7% Financial Performance (for the three months ended June 30, in thousands of U.S. dollars, except percentages) | Metric | 2023 | 2022 | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Total revenues | $261,404 | $198,200 | $63,204 | 31.9% | | Product revenues | $258,256 | $194,582 | $63,674 | 32.7% | | Licensing and other revenues | $3,148 | $3,618 | $(470) | (13.0)% | | Total costs and expenses | $373,830 | $341,285 | $32,545 | 9.5% | | Loss from operations | $(112,426) | $(143,085) | $30,659 | (21.4)% | | Net loss | $(110,803) | $(145,151) | $34,348 | (23.7)% | - Total reported units increased from approximately **461,300** in Q2 2022 to **594,900** in Q2 2023, with oncology test volume growing from **44,200** to **83,500**[205](index=205&type=chunk) - Cost of product revenues increased by **31.3%**, driven by higher third-party fees, inventory consumption, and equipment and labor costs[208](index=208&type=chunk) - R&D expenses decreased by **5.3%**, primarily due to lower lab-related expenses, partially offset by increased stock-based compensation[210](index=210&type=chunk) - SG&A expenses increased by **2.0%**, mainly due to higher consulting, legal, and facility costs, partially offset by lower payroll and marketing expenses[211](index=211&type=chunk) [Comparison of the six months ended June 30, 2023 and 2022](index=63&type=section&id=Comparison%20of%20the%20six%20months%20ended%20June%2030%2C%202023%20and%202022) In H1 2023, total revenues grew 28.2% year-over-year, while net loss narrowed by 12.7% Financial Performance (for the six months ended June 30, in thousands of U.S. dollars, except percentages) | Metric | 2023 | 2022 | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Total revenues | $503,160 | $392,333 | $110,827 | 28.2% | | Product revenues | $496,053 | $384,584 | $111,469 | 29.0% | | Licensing and other revenues | $7,107 | $7,749 | $(642) | (8.3)% | | Total costs and expenses | $753,887 | $672,548 | $81,339 | 12.1% | | Loss from operations | $(250,727) | $(280,215) | $29,488 | (10.5)% | | Net loss | $(247,740) | $(283,746) | $36,006 | (12.7)% | - Total reported units increased from approximately **917,500** in H1 2022 to **1,178,300** in H1 2023, with oncology test volume growing from **79,200** to **154,500**[217](index=217&type=chunk) - Cost of product revenues increased by **37.4%**, driven by higher third-party fees, inventory consumption, shipping, and equipment costs[220](index=220&type=chunk) - R&D expenses decreased by **1.5%**, primarily due to lower lab-related expenses, partially offset by increased payroll and stock-based compensation[222](index=222&type=chunk) - SG&A expenses increased by **1.7%**, mainly due to higher consulting, legal, and facility costs, partially offset by lower marketing and payroll expenses[223](index=223&type=chunk) [Liquidity and Capital Resources](index=66&type=section&id=Liquidity%20and%20Capital%20Resources) The company has a history of losses but believes its current cash and investments are sufficient for the next 12 months [Credit Line Agreement](index=66&type=section&id=Credit%20Line%20Agreement) The company has a $100 million revolving credit facility with UBS, with $80.4 million outstanding as of June 30, 2023 - The company has a **$100 million** revolving credit facility with UBS, secured by money market and marketable securities[231](index=231&type=chunk) - The interest rate is variable, based on the 30-day average SOFR plus 1.21%[231](index=231&type=chunk) - As of June 30, 2023, the outstanding principal and accrued interest totaled **$80.4 million**[231](index=231&type=chunk) [Convertible Notes](index=66&type=section&id=Convertible%20Notes) The company issued $287.5 million of 2.25% convertible senior notes due 2027 to fund operations and repay debt - The company issued **$287.5 million** aggregate principal amount of 2.25% convertible senior notes due May 2027[232](index=232&type=chunk)[233](index=233&type=chunk) - The notes are senior unsecured obligations, pay 2.25% cash interest annually, and are convertible into cash, common stock, or a combination[233](index=233&type=chunk) - The company received net proceeds of **$278.3 million** from the offering, using **$79.2 million** to repay a term loan with OrbiMed[234](index=234&type=chunk) [Cash Flows](index=68&type=section&id=Cash%20Flows) In H1 2023, operating cash outflow decreased while investing cash inflow dropped, resulting in a net decrease in cash Condensed Consolidated Cash Flows (in thousands of U.S. dollars) | Activity | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :--- | :--- | :--- | | Net cash used in operating activities | $(159,275) | $(248,126) | | Net cash provided by investing activities | $62,684 | $241,822 | | Net cash provided by financing activities | $11,613 | $13,074 | | Net change in cash, cash equivalents and restricted cash | $(84,978) | $6,770 | - Net cash used in operating activities decreased by **$88.9 million**, primarily due to a smaller net loss and changes in operating assets and liabilities[236](index=236&type=chunk)[237](index=237&type=chunk) - Net cash provided by investing activities decreased by **$179.1 million**, mainly due to lower proceeds from the sale/maturity of investments and purchases of property and equipment[238](index=238&type=chunk)[239](index=239&type=chunk) - Net cash provided by financing activities decreased by **$1.5 million**, primarily due to lower proceeds from stock option exercises and ESPP share issuances[240](index=240&type=chunk)[241](index=241&type=chunk) [Contractual Obligations and Other Commitments](index=69&type=section&id=Contractual%20Obligations%20and%20Other%20Commitments) The company has contractual obligations, including leases and supply agreements, that will impact future liquidity - Contractual obligations include lease commitments, the revolving credit facility, convertible notes, and commercial supply agreements[242](index=242&type=chunk)[243](index=243&type=chunk)[244](index=244&type=chunk)[245](index=245&type=chunk) [Off-Balance Sheet Arrangements](index=70&type=section&id=Off-Balance%20Sheet%20Arrangements) The company did not have any off-balance sheet arrangements during the reporting periods - The company had no off-balance sheet arrangements during the periods presented[246](index=246&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=70&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) This section discloses the company's exposure to market risks, including interest rate, foreign currency, and inflation risks [Interest Rate Risk](index=70&type=section&id=Interest%20Rate%20Risk) The company is exposed to interest rate risk from its variable-rate credit facility and investment portfolio - The revolving credit facility has a variable interest rate (30-day average SOFR plus 1.21%), while the convertible notes have a fixed rate of 2.25%[247](index=247&type=chunk) - A **100 basis point** increase in borrowing rates would increase annual interest expense by **$0.8 million**[247](index=247&type=chunk) - A **100 basis point** increase in investment yields would increase annual interest income by approximately **$3.6 million**[247](index=247&type=chunk) [Foreign Currency Exchange Rate Fluctuations](index=70&type=section&id=Foreign%20Currency%20Exchange%20Rate%20Fluctuations) International expansion exposes the company to potential impacts from foreign currency exchange rate fluctuations - As international operations expand, results and cash flows may be affected by foreign currency fluctuations[248](index=248&type=chunk) - To date, the company's foreign currency risk has been minimal, and no hedging has been undertaken[248](index=248&type=chunk) [Inflation Risk](index=70&type=section&id=Inflation%20Risk) Inflation has not had a material impact on the business to date, but significant cost pressures could pose a future risk - As of the filing date, inflation has not materially impacted the company's business, financial condition, or results of operations[249](index=249&type=chunk) - If costs face significant inflationary pressure, the inability to offset them with higher revenues could adversely affect the business[249](index=249&type=chunk) [Item 4. Controls and Procedures](index=70&type=section&id=Item%204.%20Controls%20and%20Procedures) This section discusses the effectiveness of the company's disclosure controls and any changes to internal financial reporting controls [Evaluation of Disclosure Controls and Procedures](index=70&type=section&id=Evaluation%20of%20Disclosure%20Controls%20and%20Procedures) Management concluded that the company's disclosure controls and procedures were effective as of June 30, 2023 - Management concluded that as of June 30, 2023, the company's disclosure controls and procedures were effective at a reasonable assurance level[253](index=253&type=chunk) [Changes in Internal Control over Financial Reporting](index=72&type=section&id=Changes%20in%20Internal%20Control%20over%20Financial%20Reporting) No material changes were made to the company's internal control over financial reporting during the period - There were no material changes in the company's internal control over financial reporting during the period ended June 30, 2023[254](index=254&type=chunk) [Inherent Limitations on Effectiveness of Controls](index=72&type=section&id=Inherent%20Limitations%20on%20Effectiveness%20of%20Controls) The company acknowledges that any control system provides reasonable, not absolute, assurance due to inherent limitations - Control systems provide only reasonable assurance and are subject to inherent limitations, such as errors in judgment, simple mistakes, or management override[255](index=255&type=chunk) [PART II — OTHER INFORMATION](index=72&type=section&id=PART%20II%20%E2%80%94%20OTHER%20INFORMATION) This part contains other required disclosures, including legal proceedings, risk factors, and a list of exhibits [Item 1. Legal Proceedings](index=72&type=section&id=Item%201.%20Legal%20Proceedings) Information regarding legal proceedings is incorporated by reference to Note 8 of the financial statements - Information on current legal proceedings is incorporated by reference to Note 8, "Commitments and Contingencies—Legal Proceedings," of the unaudited condensed consolidated financial statements[258](index=258&type=chunk) [Item 1A. Risk Factors](index=73&type=section&id=Item%201A.%20Risk%20Factors) This section advises investors to consider the risk factors discussed in the company's Annual Report on Form 10-K - Investing in the company's common stock involves a high degree of risk, and investors should carefully consider the factors discussed in the "Risk Factors" section of the Form 10-K for the year ended December 31, 2022[259](index=259&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=73&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) The company reports no unregistered sales of equity securities or use of proceeds during the period - The company reported no unregistered sales of equity securities or use of proceeds[260](index=260&type=chunk) [Item 3. Defaults Upon Senior Securities](index=73&type=section&id=Item%203.%20Defaults%20Upon%20Senior%20Securities) The company reports no defaults upon senior securities during the period - The company reported no defaults upon senior securities[261](index=261&type=chunk) [Item 4. Mine Safety Disclosures](index=73&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This section states that mine safety disclosures are not applicable to the company - Mine safety disclosures are not applicable to the company[262](index=262&type=chunk) [Item 5. Other Information](index=73&type=section&id=Item%205.%20Other%20Information) This section discloses the adoption of a Rule 10b5-1 trading plan by a member of the Board of Directors - Board member Herm Rosenman adopted a Rule 10b5-1 trading plan on May 19, 2023, to exercise **93,901 stock options** and sell the underlying shares between August 18, 2023, and February 23, 2024[263](index=263&type=chunk) [Item 6. Exhibits](index=74&type=section&id=Item%206.%20Exhibits) This section provides an index of exhibits filed with the Form 10-Q, including employment agreements and certifications - This report includes an index of exhibits, such as employment agreements, director compensation plans, and CEO/CFO certifications (31.1, 31.2, 32.1, 32.2)[265](index=265&type=chunk)[267](index=267&type=chunk) [Signatures](index=77&type=section&id=Signatures) This section contains the signatures of the CEO and CFO, certifying the report's compliance with securities laws - This report was signed on August 3, 2023, by Steve Chapman, Chief Executive Officer, and Michael Brophy, Chief Financial Officer[272](index=272&type=chunk)

Financial Data and Key Metrics Changes - The company processed approximately 626,000 tests in Q1 2023, representing a 28% increase year-on-year and a 12% sequential increase from Q4 2022 [99] - Revenue for the quarter reached $242 million, a significant increase compared to both Q4 and the previous year [100] - The company raised its annual revenue guidance to a range of $995 million to $1.015 billion for the year, reflecting strong performance [101] - Cash burn in Q1 2023 was reduced to about $86 million, down from over $160 million in Q1 2022, indicating improved financial efficiency [37] Business Line Data and Key Metrics Changes - The Signatera and Altera tests saw over 100% growth year-on-year, with 71,000 tests performed in the quarter [100] - Clinical oncology volumes increased approximately 17% sequentially since Q4 2022, demonstrating strong momentum [57] - Average selling prices (ASPs) for Signatera improved, moving from the mid-700s in Q4 to the low 800s in Q1 2023 [76] Market Data and Key Metrics Changes - The company secured Medicare coverage for Prospera in heart transplantation, which was not included in previous guidance, indicating a positive development in market access [82] - The company noted a modest disruption in kidney testing due to updated Medicare policies, but overall business performance remained strong [9][70] - The NIPT market penetration is estimated to be around 50%, with significant growth potential as the company continues to take market share [106] Company Strategy and Development Direction - The company is focused on expanding its presence in the oncology market, particularly through the Signatera test, which is expected to drive future growth [74] - The strategy includes maintaining a balance between short-term gross margins and long-term growth potential, particularly in the context of new clinical data and reimbursement opportunities [74] - The company is optimistic about the future of its organ health business, particularly with the upcoming readouts from key studies [93] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in achieving cash flow breakeven by 2024 based on current performance and outlook for the rest of the year [20] - The company is cautiously optimistic about the impact of new clinical guidelines and reimbursement changes, which could enhance growth prospects [76] - Management highlighted the importance of strong peer-reviewed data in expanding commercial coverage for Signatera, which is expected to drive future revenue growth [47] Other Important Information - The company has over 40 peer-reviewed publications supporting the performance of its Panorama NIPT, which is a key differentiator in the market [102] - The company is actively pursuing new MolDX submissions based on the strength of its clinical data, which could further enhance reimbursement opportunities [47] - The company is committed to prudent investment in its early cancer detection assay program, with updates expected as significant milestones are reached [17] Q&A Session Summary Question: Can you provide insights on the ASP trends for women's health and Signatera? - Management indicated that Signatera ASPs are ahead of schedule, with improvements noted in Q1 2023 [43] - ASPs for women's health outside California showed sequential growth, although there was a penalty on blended ASPs due to strategic decisions [44] Question: What progress is being made regarding commercial coverage for Signatera? - Management noted that strong peer-reviewed data is essential for expanding commercial coverage, with several states adopting positive solutions for Signatera [47][48] Question: Have you seen an uptick in testing volume from the recent CMS coverage for Signatera in breast cancer? - Management reported an increase in breast cancer testing volume due to strong clinical utility data and recent coverage decisions [50] Question: Can you elaborate on the kidney headwinds from the MolDx coverage change? - Management acknowledged a 15% to 20% pullback in kidney claims but noted that this was offset by new revenue from heart reimbursement [70] Question: What are the expectations for the neoadjuvant opportunity and coverage? - Management is optimistic about the potential for reimbursement in the neoadjuvant setting, with plans to submit for coverage soon [66]

[Part I — Financial Information](index=7&type=section&id=Part%20I%20%E2%80%94%20Financial%20Information) [Financial Statements (unaudited)](index=7&type=section&id=Item%201.%20Financial%20Statements%20%28unaudited%29) This section provides Natera, Inc.'s unaudited condensed consolidated financial statements and related notes for the first quarter of 2023 and 2022 [Condensed Consolidated Balance Sheets](index=7&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | March 31, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Cash, cash equivalents and restricted cash | $403,154 | $466,091 | | Total current assets | $1,129,468 | $1,211,817 | | Total assets | $1,318,880 | $1,394,474 | | Total current liabilities | $290,969 | $310,499 | | Total liabilities | $668,307 | $688,730 | | Total stockholders' equity | $650,573 | $705,744 | [Condensed Consolidated Statements of Operations and Comprehensive Loss](index=8&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations%20and%20Comprehensive%20Loss) Statement of Operations Highlights (in thousands, except per share data) | Metric | Q1 2023 | Q1 2022 | | :--- | :--- | :--- | | Total revenues | $241,756 | $194,133 | | Cost of product revenues | $147,754 | $102,670 | | Loss from operations | ($138,301) | ($137,130) | | Net loss | ($136,937) | ($138,595) | | Net loss per share (Basic and diluted) | ($1.23) | ($1.45) | [Condensed Consolidated Statements of Stockholders' Equity](index=9&type=section&id=Condensed%20Consolidated%20Statements%20of%20Stockholders%27%20Equity) - Total stockholders' equity decreased from **$705.7 million** at December 31, 2022, to **$650.6 million** at March 31, 2023. The decrease was primarily driven by a net loss of **$136.9 million**, partially offset by stock-based compensation of **$40.7 million** and proceeds from stock issuances[22](index=22&type=chunk) [Condensed Consolidated Statements of Cash Flows](index=10&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) Cash Flow Highlights (in thousands) | Cash Flow Activity | Three Months Ended Mar 31, 2023 | Three Months Ended Mar 31, 2022 | | :--- | :--- | :--- | | Net cash used in operating activities | ($80,890) | ($137,277) | | Net cash provided by investing activities | $15,652 | $207,033 | | Net cash provided by financing activities | $2,301 | $4,156 | | Net change in cash | ($62,937) | $73,912 | [Notes to Unaudited Interim Condensed Consolidated Financial Statements](index=11&type=section&id=Notes%20to%20Unaudited%20Interim%20Condensed%20Consolidated%20Financial%20Statements) - The company operates as a **single segment** focused on developing and commercializing **molecular testing services** in women's health, oncology, and organ health. Key products include **Panorama**, **Horizon**, **Signatera**, and **Prospera**[26](index=26&type=chunk)[27](index=27&type=chunk) - The company has a history of **net losses**, with a net loss of **$136.9 million** for Q1 2023 and an accumulated deficit of **$2.1 billion**. However, management believes existing cash and marketable securities are **sufficient to meet cash requirements for at least 12 months** from May 9, 2023[31](index=31&type=chunk)[37](index=37&type=chunk) Revenue Disaggregation by Payer (in thousands) | Payer Type | Q1 2023 | Q1 2022 | | :--- | :--- | :--- | | Insurance carriers | $210,378 | $164,742 | | Laboratory and other partners | $22,805 | $20,737 | | Patients | $8,573 | $8,654 | | **Total revenues** | **$241,756** | **$194,133** | - In a false advertising lawsuit with CareDx, a jury returned a verdict against Natera with damages of **$44.9 million** in March 2022. Natera has filed a motion to set aside the verdict and does not consider a loss related to this matter to be probable and estimable at this time[127](index=127&type=chunk) - As of March 31, 2023, the company had **$80.4 million** outstanding on its revolving Credit Line and **$287.5 million** in principal amount of 2.25% Convertible Senior Notes due 2027[156](index=156&type=chunk)[158](index=158&type=chunk)[164](index=164&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=48&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses the company's financial condition and operational results for Q1 2023, highlighting revenue growth driven by increased test volumes and its liquidity position - The company processed approximately **626,200 tests** in Q1 2023, a significant increase from **489,300 tests** in Q1 2022. This volume growth, particularly in **Panorama** and **HCS tests**, is the primary driver of revenue increases[179](index=179&type=chunk) Results of Operations Comparison (in thousands) | Line Item | Q1 2023 | Q1 2022 | Change % | | :--- | :--- | :--- | :--- | | Total revenues | $241,756 | $194,133 | 24.5% | | Cost of product revenues | $147,754 | $102,670 | 43.9% | | Research and development | $82,306 | $80,414 | 2.4% | | Selling, general and administrative | $149,627 | $147,634 | 1.3% | | Loss from operations | ($138,301) | ($137,130) | 0.9% | - Cost of product revenues increased by **$45.1 million** (**43.9%**) YoY, primarily due to a **$16.9 million** increase in third-party fees, an **$11.1 million** increase in inventory consumption from higher test volumes, and a **$12.7 million** increase in labor and overhead costs[203](index=203&type=chunk) - The company believes its existing cash and marketable securities of approximately **$812.1 million** (as of March 31, 2023) are **sufficient to meet its anticipated cash requirements for at least 12 months** from May 9, 2023[209](index=209&type=chunk)[212](index=212&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=63&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company's primary market risk exposure is to interest rate changes, which affect its variable-rate Credit Line and its investment portfolio. Foreign currency and inflation risks are also monitored but are considered to have had a minimal impact to date - The company is exposed to interest rate risk on its variable-rate debt and investment portfolio. A hypothetical **100 basis point (1%)** increase in borrowing rates would increase annual interest expense by **$0.8 million**, while a **100 basis point** increase in investment yields would increase annual interest income by approximately **$4.1 million**[231](index=231&type=chunk) - Foreign currency risk is currently minimal as operations are primarily conducted in the United States. Inflation is not believed to have had a material effect on the business as of the report filing date[232](index=232&type=chunk)[233](index=233&type=chunk) [Controls and Procedures](index=63&type=section&id=Item%204.%20Controls%20and%20Procedures) Management, with the participation of the CEO and CFO, evaluated the company's disclosure controls and procedures and concluded they were effective at a reasonable assurance level as of March 31, 2023. The report also confirms that there were no material changes in the company's internal control over financial reporting during the quarter - As of March 31, 2023, the Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were **effective at the reasonable assurance level**[237](index=237&type=chunk) - There were **no changes in internal control over financial reporting** during the quarter ended March 31, 2023, that have materially affected, or are reasonably likely to materially affect, internal controls[238](index=238&type=chunk) [Part II — Other Information](index=65&type=section&id=Part%20II%20%E2%80%94%20Other%20Information) [Legal Proceedings](index=65&type=section&id=Item%201.%20Legal%20Proceedings) This section refers to Note 8 in the Notes to Unaudited Interim Condensed Consolidated Financial Statements for detailed information regarding the company's current legal proceedings - For detailed information on legal proceedings, the report refers to "Note 8—Commitments and Contingencies—Legal Proceedings" in the financial statements[242](index=242&type=chunk) [Risk Factors](index=66&type=section&id=Item%201A.%20Risk%20Factors) The company states there have been no material changes from the risk factors previously disclosed in its Annual Report on Form 10-K for the year ended December 31, 2022. Investors are directed to that filing for a comprehensive discussion of risks - The report refers to the risk factors discussed in Part I, Item 1A of the company's Annual Report on Form 10-K for the year ended December 31, 2022, indicating **no material changes**[243](index=243&type=chunk) [Unregistered Sales of Equity Securities and Use of Proceeds](index=66&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) The company reported no unregistered sales of equity securities during the quarter ended March 31, 2023 - There were **no recent sales of unregistered securities** during the period[244](index=244&type=chunk) [Defaults Upon Senior Securities](index=66&type=section&id=Item%203.%20Defaults%20Upon%20Senior%20Securities) The company reported no defaults upon its senior securities during the period - There were **no defaults upon senior securities**[245](index=245&type=chunk) [Mine Safety Disclosures](index=66&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This item is not applicable to the company's business - This section is **not applicable**[246](index=246&type=chunk) [Other Information](index=66&type=section&id=Item%205.%20Other%20Information) The company did not report any other information under this item for the period - There is **no information to report** for this item[247](index=247&type=chunk) [Exhibits](index=66&type=section&id=Item%206.%20Exhibits) This section provides an index of the exhibits filed with the Form 10-Q, including an Amended Compensation Program for Non-Employee Directors, certifications by the CEO and CFO as required by the Sarbanes-Oxley Act, and XBRL data files - The report includes an index of exhibits, notably **CEO and CFO certifications** (Exhibits 31.1, 31.2, 32.1, 32.2) and **Inline XBRL documents**[249](index=249&type=chunk)[250](index=250&type=chunk) [Signatures](index=70&type=section&id=Signatures) - The report was duly signed on May 9, 2023, by **Steve Chapman**, Chief Executive Officer, and **Michael Brophy**, Chief Financial Officer[257](index=257&type=chunk)

× × Ⅹ Ｘ Ｘ Ｘ Ｘ Ｘ × × × Ⅹ Ｘ Ｘ Ｘ Ｘ Ｘ × × × × × × × x × × × × × × × × × × × × × × × × × × × × 8 natera® × × x × × × Ｘ Ｘ × × × × Ｘ Ｘ × × Ｘ Ｘ × × × × × × × × Fourth Quarter 2022 Earnings Call February 28, 2023 2 × X X X X × × × × × Safe harbor statement These forward-looking statements are subject to known and unknown risks and uncertainties that may cause actual results to differ materially, including: we face numerous uncertainties and challenges in achieving our financial projections and goals; we may be unabl ...

Natera, Inc. (NASDAQ:NTRA) Q4 2022 Results Conference Call February 28, 2022 4:30 PM ET Company Participants Steven Chapman - Chief Executive Officer Michael Brophy - Chief Financial Officer Solomon Moshkevich - GM, Oncology John Fesko - Chief Business Officer Conference Call Participants Andrew Cooper - Raymond James Catherine Schulte - Baird Mark Massaro - BTIG Max Masucci - Cowen & Company Puneet Souda - SVB Securities Julia Qin - JP Morgan Tejas Savant - Morgan Stanley Operator Welcome to Natera's 2022 ...

PART I [Business](index=6&type=section&id=Item%201.%20Business) Natera is a diagnostics company specializing in cell-free DNA technology, primarily focusing on women's health, oncology, and organ health, generating revenue from its core diagnostic tests Financial and Operational Highlights (2020-2022) | Metric | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | **Total Revenues** | $820.2 million | $625.5 million | $391.0 million | | **Product Revenues** | $797.3 million | $580.1 million | $377.9 million | | **Net Losses** | ($547.8 million) | ($471.7 million) | ($229.7 million) | | **Tests Processed** | ~2.1 million | ~1.6 million | ~1.0 million | - Natera's core cfDNA technology combines novel molecular assays with statistical algorithms to identify genetic variations with **high accuracy** from small samples, applicable across women's health, oncology, and organ health[25](index=25&type=chunk)[29](index=29&type=chunk) - The company operates **CLIA-certified laboratories** in Austin, Texas, and San Carlos, California[28](index=28&type=chunk) [Overview](index=6&type=section&id=Item%201.%20Business-Overview) Natera is a diagnostics company leveraging cfDNA technology across women's health, oncology, and organ health, with 2022 revenues of $820.2 million and approximately 2.1 million tests processed [Our Solution](index=6&type=section&id=Item%201.%20Business-Our%20Solution) Natera's solution uses proprietary mmPCR and computational algorithms to detect genomic variations with high sensitivity and specificity across various diagnostic applications, distributed globally via Constellation - The company's technology combines mmPCR to measure thousands of SNPs with advanced algorithms to analyze the data, achieving **high signal-to-noise ratio** for detecting DNA fragments at very low frequencies[32](index=32&type=chunk) - Natera's technology has demonstrated **high performance** across its three main business areas: women's health (Panorama), oncology (Signatera), and organ health (Prospera)[33](index=33&type=chunk) [Women's Health](index=7&type=section&id=Item%201.%20Business-Women's%20Health) Natera's Women's Health division offers family planning, prenatal screening, and hereditary cancer risk tests, with Panorama NIPT and Horizon carrier screening as flagship products generating most revenue - The Panorama NIPT screens for fetal chromosomal abnormalities like Down syndrome as early as nine weeks into pregnancy, using a unique SNP-based method that provides **high accuracy**[36](index=36&type=chunk)[38](index=38&type=chunk) - The SMART study demonstrated Panorama's high performance for 22q11.2 deletion syndrome, with **83% sensitivity** and a **53% positive predictive value (PPV)** using an updated AI algorithm[42](index=42&type=chunk) - The Horizon carrier screening test screens for **over 200 inherited conditions**, including Cystic Fibrosis and Spinal Muscular Atrophy, and can be performed from the same blood sample as Panorama[45](index=45&type=chunk)[46](index=46&type=chunk) [Oncology](index=10&type=section&id=Item%201.%20Business-Oncology) Natera's oncology division focuses on molecular residual disease (MRD) detection and recurrence monitoring in solid tumors, with Signatera as its personalized ctDNA test, targeting a U.S. market over $15 billion - Signatera is a personalized ctDNA test for MRD assessment that is custom-designed for each patient by tracking 16 tumor-specific clonal mutations, allowing for **high accuracy** at very low variant allele frequencies[54](index=54&type=chunk) - Clinical studies across multiple tumor types have shown that a positive Signatera test result predicted relapse with an overall positive predictive value (PPV) of **over 98%** without further treatment[58](index=58&type=chunk) - The total addressable market in the U.S. for recurrence and treatment monitoring for solid tumor cancers is estimated to be **over $15 billion**[53](index=53&type=chunk) [Organ Health](index=11&type=section&id=Item%201.%20Business-Organ%20Health) Natera's organ health division offers tests like Prospera for organ transplant rejection assessment, targeting an estimated U.S. market of approximately $3.0 billion, and Renasight for chronic kidney disease - The Prospera test assesses organ transplant rejection by measuring dd-cfDNA in the recipient's blood, offering a **non-invasive alternative** to biopsies for kidney, heart, and lung transplants[61](index=61&type=chunk)[62](index=62&type=chunk) Prospera Clinical Validation Performance | Organ | Metric | Performance | Source Chunk | | :--- | :--- | :--- | :--- | | Kidney | Sensitivity | 89% | 63 | | Kidney | Specificity | 73% | 63 | | Heart | AUC | 0.86 | 63 | | Lung | AUC (Rejection vs. Stable) | 0.91 | 63 | [Constellation](index=12&type=section&id=Item%201.%20Business-Constellation) Constellation is Natera's cloud-based platform enabling global partners to perform molecular workflows locally and access Natera's bioinformatics algorithms for analysis, expanding technology access - The Constellation platform enables **international and U.S. laboratories** to license Natera's technology, run molecular assays locally, and access Natera's bioinformatics algorithms through the cloud[67](index=67&type=chunk) [Commercial Capabilities](index=13&type=section&id=Item%201.%20Business-Commercial%20Capabilities) Natera's commercial strategy combines a direct U.S. sales force with a global partner network, focusing on physician education and test bundling to maximize sales and market penetration - In FY2022, approximately **75%** of customers ordering the basic Panorama panel also ordered screening for 22q11.2 deletion syndrome, and about **33%** also ordered Horizon carrier screening[72](index=72&type=chunk) [Competition](index=14&type=section&id=Item%201.%20Business-Competition) Natera operates in highly competitive molecular diagnostics markets, facing rivals like LabCorp, Illumina, Roche, Guardant Health, and CareDx across its women's health, oncology, and organ health segments - Key competitors in NIPT include **LabCorp, Illumina, Myriad, and Quest**[81](index=81&type=chunk) - Key competitors in MRD assessment include **Roche, Guardant Health, and Adaptive Biotechnologies**[82](index=82&type=chunk) - Key competitors in organ health include **CareDx and Eurofins Viracor**[83](index=83&type=chunk) [Intellectual Property](index=15&type=section&id=Item%201.%20Business-Intellectual%20Property) Natera protects its intellectual property through over 150 issued patents and 220 pending applications as of December 31, 2022, and is actively involved in IP litigation - As of December 31, 2022, Natera held **over 150 issued U.S. and foreign patents** and had **over 220 pending patent applications**[86](index=86&type=chunk) [Reimbursement](index=15&type=section&id=Item%201.%20Business-Reimbursement) Natera receives reimbursement from commercial and government payers, with NIPT widely covered, but microdeletions testing reimbursement remains low, covering over 231 million lives in the U.S. as of December 31, 2022 - As of December 31, 2022, Natera and its laboratory partners had in-network contracts with health plans covering **over 231 million lives** in the United States[95](index=95&type=chunk) - Reimbursement for NIPT in average-risk pregnancies has **improved**, with most commercial insurers and an increasing number of state Medicaid programs providing positive coverage[94](index=94&type=chunk) - The company has experienced **low average reimbursement rates** for microdeletions testing and for its broader Horizon panel due to the implementation of specific CPT codes[92](index=92&type=chunk) [Government Regulations](index=17&type=section&id=Item%201.%20Business-Government%20Regulations) Natera's business is subject to extensive federal, state, and international regulations, including FDA oversight of LDTs, CLIA certification, HIPAA, GDPR, and healthcare fraud and abuse laws - Natera's tests are currently offered as Laboratory Developed Tests (LDTs), which have historically been subject to FDA enforcement discretion, but the regulatory landscape remains **uncertain**[107](index=107&type=chunk)[108](index=108&type=chunk) - The company's laboratories in Austin, TX, and San Carlos, CA, are **CLIA certified** and **accredited by the College of American Pathologists (CAP)**. They also hold licenses in states with stringent requirements, such as California and New York[114](index=114&type=chunk)[115](index=115&type=chunk)[117](index=117&type=chunk)[119](index=119&type=chunk) - The company is subject to healthcare fraud and abuse laws, including the federal Anti-Kickback Statute, the Stark Law, and the False Claims Act, which carry **significant civil and criminal penalties** for violations[134](index=134&type=chunk)[145](index=145&type=chunk)[148](index=148&type=chunk) [Human Capital Management](index=26&type=section&id=Item%201.%20Business-Human%20Capital%20Management) As of December 31, 2022, Natera had a global workforce of 3,018 employees, a 10.7% increase, emphasizing diversity with 62.7% women and over 40% minorities in the U.S. workforce - As of December 31, 2022, the global workforce comprised **3,018 employees**, representing a **10.7% increase** during 2022[157](index=157&type=chunk) - In 2022, women made up approximately **62.7%** of the global workforce, and minorities comprised **over 40%** of the U.S. workforce[158](index=158&type=chunk) [Risk Factors](index=29&type=section&id=Item%201A.%20Risk%20Factors) The company faces significant risks including revenue concentration, reimbursement uncertainty, a history of net losses, intense competition, potential FDA regulation, supply chain dependence, and intellectual property litigation - A **majority of the company's revenues** are derived from sales of its Panorama NIPT and Horizon carrier screening tests, and the business would be harmed if it cannot grow revenues for these products[199](index=199&type=chunk) - The company has incurred net losses since inception, with a net loss of **$547.8 million** in 2022 and an accumulated deficit of **$1.9 billion** as of December 31, 2022[205](index=205&type=chunk) - The company faces **intense competition** from established and emerging companies in women's health, oncology, and organ health, some of which have greater financial and technological resources[218](index=218&type=chunk)[219](index=219&type=chunk) - Natera relies on Illumina as the **sole supplier** for its sequencing platform and related reagents for key tests like Panorama, Horizon, and Signatera, creating significant supply chain risk[232](index=232&type=chunk)[233](index=233&type=chunk) [Unresolved Staff Comments](index=66&type=section&id=Item%201B.%20Unresolved%20Staff%20Comments) None [Properties](index=66&type=section&id=Item%202.%20Properties) Natera leases its primary laboratory and office facilities, including approximately 136,000 square feet in San Carlos, CA, and 191,722 square feet in Austin, TX, with leases extending to 2027 and 2033 respectively Key Leased Facilities | Location | Size (sq. ft.) | Lease Expiration | | :--- | :--- | :--- | | San Carlos, CA | ~136,000 | October 2027 | | Austin, TX | ~191,722 | March 2033 | | South San Francisco, CA | 11,395 | November 2026 | [Legal Proceedings](index=67&type=section&id=Item%203.%20Legal%20Proceedings) The company is involved in various legal proceedings, including intellectual property, billing, marketing, and employment matters, with details referenced from the Consolidated Financial Statements - The company is involved in legal proceedings from time to time, the results of which are **uncertain** and could have an **adverse impact** due to defense costs and potential settlements[395](index=395&type=chunk) [Mine Safety Disclosures](index=67&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) Not applicable PART II [Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=68&type=section&id=Item%205.%20Market%20for%20Registrant's%20Common%20Equity,%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities) Natera's common stock (NTRA) trades on Nasdaq, with no cash dividends paid or anticipated, as the company intends to retain earnings for business growth - The company's common stock is listed on the **Nasdaq Global Select Market** under the symbol **"NTRA"**[400](index=400&type=chunk) - **No cash dividends** have ever been paid, and the company intends to retain all future earnings for business operations and expansion[402](index=402&type=chunk) [Selected Financial Data](index=70&type=section&id=Item%206.%20Selected%20Financial%20Data) Information required by this item is omitted as per SEC amendments to Regulation S-K effective February 10, 2021 [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=71&type=section&id=Item%207.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Natera's 2022 revenues grew 31.1% to $820.2 million, driven by product revenue, though net loss widened to $547.8 million due to increased costs, with management affirming sufficient liquidity for at least 12 months Results of Operations (2021 vs. 2022) | Metric (in millions) | 2022 | 2021 | % Change | | :--- | :--- | :--- | :--- | | **Total Revenues** | $820.2 | $625.5 | 31.1% | | Product Revenues | $797.3 | $580.1 | 37.4% | | Licensing & Other Revenues | $22.9 | $45.4 | (49.5)% | | **Total Cost & Expenses** | $1,361.3 | $1,093.7 | 24.5% | | Cost of Product Revenues | $453.6 | $315.2 | 43.9% | | R&D | $316.4 | $264.2 | 19.8% | | SG&A | $588.6 | $511.0 | 15.2% | | **Net Loss** | ($547.8) | ($471.7) | 16.1% | - The increase in product revenues was driven by higher test volumes, which grew from approximately **1.57 million tests** processed in 2021 to **2.07 million** in 2022[419](index=419&type=chunk)[461](index=461&type=chunk) - The decrease in licensing revenue was primarily due to the recognition of **$28.6 million** in deferred revenue from a settlement with Qiagen in 2021 that did not recur in 2022[462](index=462&type=chunk) - As of December 31, 2022, the company had **$466.1 million** in cash and cash equivalents and **$432.3 million** in marketable securities. Management believes this is sufficient to meet cash requirements for **at least 12 months** from March 1, 2023[470](index=470&type=chunk)[473](index=473&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=82&type=section&id=Item%207A.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) Natera is primarily exposed to interest rate risk, where a 100 basis point increase could raise annual interest expense by $0.8 million and increase investment income by $4.3 million - The company's primary market risk is **interest rate volatility** affecting its variable-rate Credit Line and its investment portfolio[494](index=494&type=chunk) [Financial Statements and Supplementary Data](index=83&type=section&id=Item%208.%20Financial%20Statements%20and%20Supplementary%20Data) This section contains Natera's audited consolidated financial statements for the fiscal years ended December 31, 2022, 2021, and 2020, including balance sheets, statements of operations, stockholders' equity, and cash flows, along with detailed notes and an unqualified auditor's opinion from Ernst & Young LLP Consolidated Balance Sheet Summary (As of Dec 31, 2022) | Account (in thousands) | Amount | | :--- | :--- | | **Total Assets** | **$1,394,474** | | Cash, Cash Equivalents & Short-term Investments | $898,306 | | Accounts Receivable, net | $244,385 | | **Total Liabilities** | **$688,730** | | Debt Financing (Short & Long-term) | $362,003 | | **Total Stockholders' Equity** | **$705,744** | Consolidated Statement of Operations Summary (Year Ended Dec 31, 2022) | Account (in thousands) | Amount | | :--- | :--- | | **Total Revenues** | **$820,222** | | Total Cost and Expenses | $1,361,262 | | Loss from Operations | ($541,040) | | **Net Loss** | **($547,799)** | | Net Loss Per Share (Basic & Diluted) | ($5.57) | [Changes in and Disagreements with Accountants on Accounting and Financial Disclosure](index=125&type=section&id=Item%209.%20Changes%20in%20and%20Disagreements%20with%20Accountants%20on%20Accounting%20and%20Financial%20Disclosure) None [Controls and Procedures](index=125&type=section&id=Item%209A.%20Controls%20and%20Procedures) Management concluded that the company's disclosure controls and internal control over financial reporting were effective as of December 31, 2022, a conclusion affirmed by Ernst & Young LLP, following ERP system modifications - Management concluded that the company's disclosure controls and procedures were **effective** as of December 31, 2022[738](index=738&type=chunk) - Management concluded that the company maintained **effective** internal control over financial reporting as of December 31, 2022, a conclusion audited and affirmed by Ernst & Young LLP[740](index=740&type=chunk)[741](index=741&type=chunk) [Other Information](index=128&type=section&id=Item%209B.%20Other%20Information) Chief Operating Officer Robert Schueren transitioned to a part-time role effective February 24, 2023, and is no longer considered a Section 16 officer of the company - Effective February 24, 2023, Chief Operating Officer Robert Schueren transitioned to a **part-time role** and is **no longer a Section 16 officer**[755](index=755&type=chunk)[756](index=756&type=chunk) [Disclosure Regarding Foreign Jurisdictions That Prevent Inspections](index=128&type=section&id=Item%209C.%20Disclosure%20Regarding%20Foreign%20Jurisdictions%20That%20Prevent%20Inspections) None PART III [Directors, Executive Officers and Corporate Governance](index=128&type=section&id=Item%2010.%20Directors,%20Executive%20Officers%20and%20Corporate%20Governance) The information required by this item is incorporated by reference from the company's definitive proxy statement for its 2023 annual meeting of stockholders [Executive Compensation](index=128&type=section&id=Item%2011.%20Executive%20Compensation) The information required by this item is incorporated by reference from the company's definitive proxy statement for its 2023 annual meeting of stockholders [Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters](index=128&type=section&id=Item%2012.%20Security%20Ownership%20of%20Certain%20Beneficial%20Owners%20and%20Management%20and%20Related%20Stockholder%20Matters) The information required by this item is incorporated by reference from the company's definitive proxy statement for its 2023 annual meeting of stockholders [Certain Relationships and Related Transactions, and Director Independence](index=128&type=section&id=Item%2013.%20Certain%20Relationships%20and%20Related%20Transactions,%20and%20Director%20Independence) The information required by this item is incorporated by reference from the company's definitive proxy statement for its 2023 annual meeting of stockholders [Principal Accounting Fees and Services](index=128&type=section&id=Item%2014.%20Principal%20Accounting%20Fees%20and%20Services) The information required by this item is incorporated by reference from the company's definitive proxy statement for its 2023 annual meeting of stockholders PART IV [Exhibits and Financial Statement Schedules](index=129&type=section&id=Item%2015.%20Exhibits%20and%20Financial%20Statement%20Schedules) This section lists the financial statements and exhibits filed as part of the Annual Report on Form 10-K, including corporate governance documents, material contracts, and Sarbanes-Oxley Act certifications [Form 10-K Summary](index=133&type=section&id=Item%2016.%20Form%2010-K%20Summary) None

Natera, Inc. (NASDAQ:NTRA) Q3 2022 Earnings Conference Call November 8, 2022 4:30 PM ET Company Participants Michael Brophy - Chief Financial Officer Steve Chapman - Chief Executive Officer Solomon Moshkevich - General Manager, Oncology Conference Call Participants Puneet Souda - SVB Securities Tejas Savant - Morgan Stanley Max Masucci - Cowen Julia Qin - JPMorgan Catherine Schulte - Baird Operator Welcome to Natera's 2022 Third Quarter Financial Results Conference Call. At this time, all participants are i ...

× × × × × × × × x 8 natera × × × Ⅹ Ｘ Ｘ Ｘ Ｘ Ｘ × × × × × × Ｘ Ｘ × × × Ⅹ Ｘ Ｘ Ｘ Ｘ Ｘ × × × × Ｘ Ｘ x × x × × × Ｘ Ｘ × × × × × × × x × × × × × × × × × × × × × × × × × Natera, Inc. Investor presentation × × × × × × × × × Third Quarter 2022 Earnings Call November 8, 2022 × × × × × X X × × × × × Safe harbor statement × × × × X X × × This presentation contains forward-looking statements under the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical facts cont ...

Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) ⌧ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2022 OR (650) 249-9090 (Registrant's Telephone Number, Including Area Code) Securities registered pursuant to Section 12(b) of the Act: ◻ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commi ...

Natera, Inc. (NASDAQ:NTRA) Q2 2022 Results Conference Call August 4, 2022 4:30 PM ET Company Participants Michael Brophy - Chief Financial Officer Steve Chapman - Chief Executive Officer Solomon Moshkevich - General Manager, Oncology Conference Call Participants Tejas Savant - Morgan Stanley Dave Delahunt - Goldman Sachs Catherine Schulte - Baird Max Masucci - Cowen Puneet Souda - Leerink Julia Qin - JPMorgan Vidyun Bais - BTIG Connor Stevenson - Craig-Hallum Mason Carrico - Stephens Operator Welcome to Nat ...