Natera(NTRA) - 2023 Q2 - Quarterly Report

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS 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] - These statements involve known and unknown risks and uncertainties, which may cause actual results to differ materially from expectations[11] - The company has no obligation to publicly update these forward-looking statements unless required by law[12] PART I — FINANCIAL INFORMATION This part presents unaudited financial statements and management's analysis of financial condition as of June 30, 2023 Item 1. Financial Statements (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 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 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 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 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 These notes provide detailed explanations of accounting policies and specific financial items in the interim statements 1. Description of Business 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] - Key products include Panorama (NIPT), Horizon (HCS), Signatera (MRD), and Prospera (organ transplant assessment)[28] - The company licenses its technology via the Constellation cloud platform, enabling lab clients to develop their own tests[28] 2. Summary of Significant Accounting Policies This note outlines key accounting policies and estimates used in preparing the interim financial statements Basis of Presentation 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] Liquidity Matters 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] 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][38] Principles of Consolidation 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] Use of Estimates 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] 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] - Total consideration is estimated using the expected value method, adjusted for historical collection rates and variable consideration[41][42] Allowance for doubtful accounts 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] 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] - The company regularly assesses inventory for obsolescence and writes down specific unusable inventory, with charges recorded to cost of product revenues[44] Investments and financial instruments 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] - The entire investment portfolio is generally classified as available-for-sale financial assets and considered short-term investments[50] Other accrued liabilities 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] Credit Losses 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] - The investment portfolio is deemed to consist of low-risk, investment-grade securities, requiring no credit loss allowance[48][100] 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][50] - 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][100][102] 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 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] - The company's Executive Chairman, a co-founder, and the General Counsel have affiliations with MyOme as founders, directors, or shareholders[51][54] Fair Value 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] - The fair value hierarchy has three levels: Level 1 (quoted prices), Level 2 (observable inputs), and Level 3 (unobservable inputs)[93][94] Risk and Uncertainties 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] - No single customer accounted for more than 10% of total revenues or accounts receivable balances during the reported periods[54] Accumulated Other Comprehensive Income (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] Recent Accounting Pronouncements 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][58] 3. Revenue Recognition This note details revenue recognition for products and licensing, including contracts with various payers and strategic partners Product Revenues 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] - 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][69] - 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] - 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] Licensing and Other Revenues Licensing revenues stem from the Constellation platform and strategic agreements with BGI Genomics and Foundation Medicine 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][73] - Licensees pay a fixed fee per test, and revenue is recognized upon completion of the performance obligation for each test delivered[74] BGI Genomics 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] - 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] - 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] - 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] Foundation Medicine, Inc. 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] - 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] - 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] - 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] Disaggregation of Revenues 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 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 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 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] - 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] 5. Financial Instruments 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][100][102] 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 This note provides detailed information on key balance sheet components, including changes in allowances and fixed assets Allowance for doubtful accounts 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 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] Other Accrued Liabilities 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 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][111][113] 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] 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 This note discloses legal proceedings, intellectual property disputes, and other commitments and contingencies facing the company Legal Proceedings 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] - An independent committee concluded its internal investigation into allegations from a March 2022 short-seller report, finding them to be without merit[121] - The company assesses legal contingencies for potential losses but often cannot provide meaningful estimates due to complexity and evolving information[123] Intellectual Property Litigation Matters 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] - In a patent infringement suit against ArcherDX and Invitae, a jury found in Natera's favor, awarding total damages of $19.35 million[125][127] - The company is a defendant in a patent infringement lawsuit brought by Ravgen, with a trial scheduled for January 2024[128] - The company has also filed patent infringement lawsuits against Genosity, Inivata, and NeoGenomics[129][130][131][132] Other Litigation Matters 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] - A false advertising lawsuit between the company and Guardant is currently scheduled for trial in November 2023[134][136] - 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] - Two class action lawsuits concerning the marketing of Panorama have been consolidated, with an amended complaint filed in April 2023[138] - A securities class action lawsuit alleges false or misleading statements; the company has filed a motion to dismiss[139][140] Director and Of icer Indemnifications 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] - The company holds insurance policies that may limit its exposure, but coverage is not guaranteed[141] Third-Party Payer Reimbursement Audits 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] - The company disputes such requests or accrues an estimated provision when a loss is probable and estimable[142] Contractual Commitments 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 This note details the company's equity incentive plans, including stock option and RSU activity and valuation assumptions 2015 Equity Incentive Plan 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][145][146] - Stock options generally vest over four years from the grant date and have a maximum term of ten years[145] Employee Stock Purchase Plan 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] - During the first offering period of 2023 (November 1, 2022, to April 30, 2023), 218,649 shares were purchased[148] Stock Options and Restricted Stock Units 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 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] Restricted Stock Units 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 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] Valuation of Stock Option Grants to Employees and Non-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 This note details the company's debt, including a revolving credit facility and 2.25% convertible senior notes due 2027 Credit Line Agreement 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] - The interest rate is the 30-day average SOFR plus 1.21% (6.28% as of June 30, 2023)[160] - As of June 30, 2023, the outstanding principal and accrued interest totaled $80.4 million, with $20.0 million available for borrowing[160][161] - 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] Convertible Notes 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] - 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] - 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] 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 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] 12. Net Loss per Share 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][174] 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 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] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial condition and results of operations 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] - Key products include Panorama, Horizon, Signatera, and Prospera, distributed through direct sales and the Constellation platform[179][181] 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][187] - 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] Components of the Results of Operations 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] - Financial performance depends on reimbursement for Panorama in average-risk populations and for microdeletions, which have lower average reimbursement rates[194] - Increased in-network coverage is crucial for growth but may lower average reimbursement per test due to negotiated rates[195] - Cost of product revenues includes materials, personnel, equipment, shipping, and third-party processing fees[196] - Cost of licensing and other revenues is relatively low, resulting in higher gross margins for the Constellation platform[198][199] Critical Accounting Policies 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] Recent Accounting Pronouncements 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] Results of Operations 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 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] - Cost of product revenues increased by 31.3%, driven by higher third-party fees, inventory consumption, and equipment and labor costs[208] - R&D expenses decreased by 5.3%, primarily due to lower lab-related expenses, partially offset by increased stock-based compensation[210] - 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] Comparison of the six months ended June 30, 2023 and 2022 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] - Cost of product revenues increased by 37.4%, driven by higher third-party fees, inventory consumption, shipping, and equipment costs[220] - R&D expenses decreased by 1.5%, primarily due to lower lab-related expenses, partially offset by increased payroll and stock-based compensation[222] - 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] Liquidity and Capital Resources The company has a history of losses but believes its current cash and investments are sufficient for the next 12 months Credit Line Agreement 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] - The interest rate is variable, based on the 30-day average SOFR plus 1.21%[231] - As of June 30, 2023, the outstanding principal and accrued interest totaled $80.4 million[231] Convertible Notes 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][233] - The notes are senior unsecured obligations, pay 2.25% cash interest annually, and are convertible into cash, common stock, or a combination[233] - The company received net proceeds of $278.3 million from the offering, using $79.2 million to repay a term loan with OrbiMed[234] Cash Flows 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][237] - 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][239] - 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][241] Contractual Obligations and Other Commitments 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][243][244][245] Off-Balance Sheet Arrangements 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] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section discloses the company's exposure to market risks, including interest rate, foreign currency, and inflation risks Interest Rate Risk 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] - A 100 basis point increase in borrowing rates would increase annual interest expense by $0.8 million[247] - A 100 basis point increase in investment yields would increase annual interest income by approximately $3.6 million[247] Foreign Currency Exchange Rate Fluctuations 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] - To date, the company's foreign currency risk has been minimal, and no hedging has been undertaken[248] Inflation Risk 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] - If costs face significant inflationary pressure, the inability to offset them with higher revenues could adversely affect the business[249] Item 4. Controls and Procedures 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 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] Changes in Internal Control over Financial Reporting 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] Inherent Limitations on Effectiveness of Controls 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] PART II — OTHER INFORMATION This part contains other required disclosures, including legal proceedings, risk factors, and a list of exhibits Item 1. Legal Proceedings 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] Item 1A. Risk Factors 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] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 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] Item 3. Defaults Upon Senior Securities The company reports no defaults upon senior securities during the period - The company reported no defaults upon senior securities[261] Item 4. Mine Safety Disclosures This section states that mine safety disclosures are not applicable to the company - Mine safety disclosures are not applicable to the company[262] Item 5. Other Information 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] Item 6. Exhibits 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][267] 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]