Natera, Inc. - Quarter Report: 2024 June (Form 10-Q)

Natera, Inc.

FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2024

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Part I — Financial Information
	Item 1. Financial Statements (unaudited)	5
	Condensed Consolidated Balance Sheets at June 30, 2024 and December 31, 2023	5
	Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three and Six Months Ended June 30, 2024 and 2023	6
	Condensed Consolidated Statements of Stockholders’ Equity for the Three and Six Months Ended June 30, 2024 and 2023	7
	Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2024 and 2023	9
	Notes to Unaudited Interim Condensed Consolidated Financial Statements	10
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	37
	Item 3. Quantitative and Qualitative Disclosures About Market Risk	48
	Item 4. Controls and Procedures	49

Part II — Other Information
	Item 1. Legal Proceedings	49
	Item 1A. Risk Factors	51
	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	51
	Item 3. Defaults Upon Senior Securities	51
	Item 4. Mine Safety Disclosures	51
	Item 5. Other Information	51
	Item 6. Exhibits	52
	Signatures	54

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements. The forward-looking statements are contained principally in the sections titled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” but are also contained elsewhere in this report. Forward-looking statements include information concerning our future results of operations and financial position, strategy and plans, and our expectations for future operations. Forward-looking statements include all statements that are not historical facts and, in some cases, can be identified by terms such as "believe," "may," "will," "estimate," "continue," "anticipate," "design," "intend," "expect," "could," "plan," "potential," "predict," "seek," "should," "would" or the negative version of these words and similar expressions.

These forward-looking statements include, but are not limited to, statements concerning the following:

●

our expectations regarding revenue, expenses and other operating results;

●

our expectation that, for the foreseeable future, a significant portion of our revenues will be derived from sales of Panorama, Horizon, and Signatera;

●

our ability to increase demand and reimbursement for our tests;

●

our expectation that Panorama will be adopted for the screening of microdeletions and that third-party payer reimbursement will be available for this testing, including our expectations that the results from our single nucleotide polymorphism-based Microdeletion and Aneuploidy RegisTry, or SMART, Study may support broader use of and reimbursement for the use of Panorama for microdeletions;

●

our expectations of the reliability, accuracy, and performance of our tests, as well as expectations of the benefits of our tests to patients, providers, and payers;

●

our ability to successfully develop additional revenue opportunities, expand our product offerings to include new tests, and expand adoption of our current and future technologies through Constellation, our cloud-based distribution model;

●

our efforts to successfully develop and commercialize, or enhance, our products;

●

our ability to comply with federal, state, and foreign regulatory requirements, programs and policies, including a recently enacted rule from the FDA that would classify our tests as medical devices, and to successfully operate our business in response to changes in such requirements, programs and policies;

●

our ability to respond to, defend, or otherwise favorably resolve litigation or other proceedings, including investigations, subpoenas, demands, disputes, requests for information, and other regulatory or administrative actions or proceedings;

●

the effect of improvements in our cost of goods sold;

●

our estimates of the total addressable markets for our current and potential product offerings;

●

our ability and expectations regarding obtaining, maintaining and expanding third-party payer coverage of, and reimbursement for, our tests;

●

the effect of changes in the way we account for our revenue;

●

the scope of protection we establish and maintain for, and developments or disputes concerning, our intellectual property or other proprietary rights, including associated litigation costs we may incur and our assumptions regarding any potential liabilities associated with our existing litigation matters;

●

our ability to successfully compete in the markets we serve;

●

our reliance on collaborators such as medical institutions, contract laboratories, laboratory partners, and other third parties;

●

our ability to operate our laboratory facilities and meet expected demand, and to successfully scale our operations;

●

our reliance on a limited number of suppliers, including sole source suppliers, which may impact our ability to maintain a continued supply of laboratory instruments and materials and to run our tests;

●

our expectations of the rate of adoption of our current or future tests by laboratories, clinics, clinicians, payers, and patients;

●

our ability to complete clinical studies and publish compelling clinical data in peer-reviewed medical publications regarding our current and future tests, and the effect of such data or publications on professional society or practice guidelines or coverage and reimbursement determinations from third-party payers, including our SMART and CIRCULATE-Japan studies and our ongoing and planned trials in oncology and organ health;

●

our reliance on our partners to market and offer our tests in the United States and in international markets;

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●

our expectations regarding acquisitions, dispositions and other strategic transactions;

●

our expectations regarding the conversion of our outstanding 2.25% convertible senior notes due 2027, or the Convertible Notes, in the aggregate principal amount of $287.5 million prior to the scheduled redemption date of October 11, 2024;

●

our ability to control our operating expenses and fund our working capital requirements;

●

the factors that may impact our financial results, including our revenue recognition assumptions and estimates; and

●

anticipated trends and challenges in our business and the markets in which we operate.

Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements, including those discussed in Part II, Item 1A, “Risk Factors” in this report and Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2023 filed with the Securities and Exchange Commission on February 29, 2024. Given these uncertainties, you should not place undue reliance on these forward-looking statements. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame, or at all. You should read this report completely and with the understanding that our actual future results may be materially different from what we expect.

Also, forward-looking statements represent our beliefs and assumptions only as of the date of this report. Any forward-looking statement made by us in this report speaks only as of the date on which it is made. Except as required by law, we disclaim any obligation to update these forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.

As used in this Quarterly Report on Form 10-Q, the terms “Natera,” “Registrant,” “Company,” “we,” “us,” and “our” mean Natera, Inc. and its subsidiaries unless the context indicates otherwise.

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PART I – FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

Natera, Inc.

Condensed Consolidated Balance Sheets

(Unaudited)

(in thousands except par value)


	June 30,		December 31,
	2024		2023
Assets
Current assets:
Cash, cash equivalents and restricted cash	$		$
Short-term investments
Accounts receivable, net of allowance of $ and $ at June 30, 2024 and December 31, 2023, respectively
Inventory
Prepaid expenses and other current assets, net
Total current assets
Property and equipment, net
Operating lease right-of-use assets
Other assets
Total assets	$		$
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$		$
Accrued compensation
Other accrued liabilities
Deferred revenue, current portion
Short-term debt financing
Total current liabilities
Long-term debt financing
Deferred revenue, long-term portion and other liabilities
Operating lease liabilities, long-term portion
Total liabilities

Commitments and contingencies (Note 8)

Stockholders’ equity:
Common stock, $ par value: shares authorized at both June 30, 2024 and December 31, 2023; and shares issued and outstanding at June 30, 2024 and December 31, 2023, respectively
Additional paid-in capital
Accumulated deficit		()		()
Accumulated other comprehensive loss		()		()
Total stockholders’ equity
Total liabilities and stockholders’ equity	$		$

See accompanying notes to the unaudited interim condensed consolidated financial statements.

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Natera, Inc.

Condensed Consolidated Statements of Operations and Comprehensive Loss

(Unaudited)

(in thousands, except per share data)

Three months ended

Six months ended

June 30,

2024

2023

2024

2023

Revenues

Product revenues

Licensing and other revenues

Total revenues

Cost and expenses

Cost of product revenues

Cost of licensing and other revenues

Research and development

Selling, general and administrative

Total cost and expenses

Loss from operations

()

Interest expense

()

Interest and other income, net

Loss before income taxes

()

Income tax (expense) benefit

()

Net loss

()

Unrealized gain on available-for-sale securities, net of tax

Comprehensive loss

()

Net loss per share (Note 12):

Basic and diluted

()

Weighted-average number of shares used in computing basic and diluted net loss per share:

Basic and diluted

See accompanying notes to the unaudited interim condensed consolidated financial statements.

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Natera, Inc.

Condensed Consolidated Statements of Stockholders’ Equity

(Unaudited)

(in thousands)

Three months ended June 30, 2023

Common Stock

Additional
Paid-in

Accumulated Other Comprehensive

Accumulated

Total
Stockholders'

Shares

Amount

Capital

Loss

Deficit

Equity

Balance as of March 31, 2023

()

Issuance of common stock upon exercise of stock options

—

Issuance of common stock under the employee stock purchase plan

—

Vesting of restricted stock units

—

Stock-based compensation

—

Unrealized gain on available-for sale securities

—

Net loss

—

()

Balance as of June 30, 2023

()

Six months ended June 30, 2023

Common Stock

Additional
Paid-in

Accumulated Other Comprehensive

Accumulated

Total
Stockholders'

Shares

Amount

Capital

Loss

Deficit

Equity

Balance as of December 31, 2022

()

Issuance of common stock upon exercise of stock options

—

Issuance of common stock under the employee stock purchase plan

—

Issuance of stock for bonuses

—

Issuance of common stock for IPR&D milestone

—

Vesting of restricted stock units

—

Stock-based compensation

—

Unrealized gain on available-for sale securities

—

Net loss

—

()

Balance as of June 30, 2023

()

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Three months ended June 30, 2024

Common Stock

Additional
Paid-in

Accumulated Other Comprehensive

Accumulated

Total
Stockholders'

Shares

Amount

Capital

Loss

Deficit

Equity

Balance as of March 31, 2024

()

Issuance of common stock upon exercise of stock options

—

Issuance of common stock under the employee stock purchase plan

—

Vesting of restricted stock units

—

Stock-based compensation

—

Unrealized gain on available-for sale securities

—

Net loss

—

()

Balance as of June 30, 2024

()

Six months ended June 30, 2024

Common Stock

Additional
Paid-in

Accumulated Other Comprehensive

Accumulated

Total
Stockholders'

Shares

Amount

Capital

Loss

Deficit

Equity

Balance as of December 31, 2023

()

Issuance of common stock upon exercise of stock options

—

Issuance of common stock under the employee stock purchase plan

—

Issuance of stock for bonuses

—

Vesting of restricted stock units

—

Stock-based compensation

—

Unrealized gain on available-for sale securities

—

Net loss

—

()

Balance as of June 30, 2024

()

See accompanying notes to the unaudited interim condensed consolidated financial statements.

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Natera, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)


	Six Months Ended
	June 30,
	2024		2023

	(in thousands)
Operating activities
Net loss	$	()	$	()
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization
Expensed in-process research and development		—
Premium amortization and discount accretion on investment securities		()
Stock-based compensation
Non-cash lease expense
Amortization of debt discount and issuance cost
Foreign exchange adjustment
Non-cash interest expense		()
Changes in operating assets and liabilities:
Accounts receivable		()		()
Inventory		()		()
Prepaid expenses and other assets
Accounts payable				()
Accrued compensation
Operating lease liabilities		()		()
Other accrued liabilities		()		()
Deferred revenue
Cash provided by (used in) operating activities				()

Investing activities
Purchases of investments		()		—
Proceeds from maturity of investments
Purchases of property and equipment, net		()		()
Cash paid for acquisition of intangible assets		()		—
Cash provided by investing activities

Financing activities
Proceeds from exercise of stock options
Proceeds from the issuance of common stock under the employee stock purchase plan
Cash provided by financing activities

Net change in cash, cash equivalents and restricted cash				()
Cash, cash equivalents and restricted cash, beginning of period
Cash, cash equivalents and restricted cash, end of period	$		$

Supplemental disclosure of cash flow information:
Cash paid for interest	$		$

Non-cash investing and financing activities:
Purchases of property and equipment in accounts payable and accruals	$		$
Acquisition of warrants	$		$	—
Amounts accrued for acquisition of intangible assets	$		$	—
Issuance of common stock for IPR&D acquisition	$	—	$
Issuance of common stock for bonuses	$		$
Stock-based compensation included in capitalized software development costs	$		$

See accompanying notes to the unaudited interim condensed consolidated financial statements.

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Natera, Inc.

Notes to Unaudited Interim Condensed Consolidated Financial Statements

segment, the development and commercialization of molecular testing services, applying its proprietary technology in the fields of women’s health, oncology and organ health.

The Company’s key product offerings include its Panorama Non-Invasive Prenatal Test (“Panorama”) that screens for chromosomal abnormalities of a fetus as well as in twin pregnancies, typically with a blood draw from the mother; Horizon Carrier Screening (“Horizon”) to determine carrier status for a large number of severe genetic diseases that could be passed on to the carrier’s children; its Signatera molecular residual disease test (“Signatera”) to detect circulating tumor DNA in patients previously diagnosed with cancer to assess molecular residual disease, monitor for recurrence, and evaluate treatment response; and its Prospera test, to assess organ transplant rejection in patients who have undergone kidney, heart, or lung transplantation. All testing is available principally in the United States. The Company also offers its Panorama test to customers outside of the United States, primarily in Europe. The Company also offers Constellation, a cloud-based software platform that enables laboratory customers to gain access through the cloud to the Company’s algorithms and bioinformatics in order to validate and launch their own tests based on the Company’s technology.

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million for the six months ended June 30, 2024 and an accumulated deficit of $ billion as of June 30, 2024. As of June 30, 2024, the Company had $ million in cash, cash equivalents, and restricted cash, $ million in marketable securities, an $ million outstanding balance on its Credit Line (as defined in Note 10, Debt) including accrued interest and $ million of outstanding principal on its % Convertible Senior Notes (the “Convertible Notes”). The Company is required to maintain a minimum of at least $ million in its UBS accounts as collateral for its Credit Line. As of June 30, 2024, the Company had $ million remaining and available on its Credit Line.

While the Company has introduced multiple products that are generating revenues, these revenues have not been sufficient to fund all operations and business plans. Accordingly, the Company has funded the portion of operating costs that exceeds revenues through a combination of equity issuances, debt issuances, and other financings.

The Company continues to invest in the development and commercialization of its existing and future products and, consequently, it will need to generate additional revenues to achieve future profitability and may need to raise additional equity or debt financing. If the Company raises additional funds by issuing equity securities, its stockholders will experience dilution. Additional debt financing, if available, may involve covenants restricting its operations or its ability to incur additional debt. Any additional debt financing or additional equity that the Company raises may contain terms that are not favorable to it or its stockholders and requires significant debt service payments, which diverts resources from other activities. Additional financing may not be available when necessary, or in amounts or on terms acceptable to the Company. If the Company is unable to obtain additional financing, it may be required to delay the development and commercialization of its products and significantly scale back its business and operations.

On July 19, 2024, the Company announced its decision to redeem all of its outstanding % Convertible Senior Notes due 2027. The redemption is scheduled for October 11, 2024 (the “Redemption Date”). The redemption price for the Convertible Notes is equal to % of the principal amount of the Convertible Notes to be redeemed plus accrued and unpaid interest to, but excluding, the Redemption Date. The Company elected physical settlement with shares of its common stock as the settlement method to apply to all conversions of the Convertible Notes. Based on the conversion terms of the Convertible Notes and the market price of its common stock, the Company expects that substantially all outstanding Convertible Notes will be converted into shares of the Company’s common stock prior to the Redemption Date. As a result, the Company does not expect that its decision to redeem the Convertible Notes will have a material effect on its liquidity.

In September 2023, the Company completed an underwritten equity offering and sold shares of its common stock at a price of $ per share to the public. Before estimated offering expenses of $ million, the Company received proceeds of approximately $ million net of the underwriting discount.

On September 10, 2021, the Company entered into an agreement with a third party for an asset acquisition where the acquired asset was in-process research and development primarily in exchange for an equity consideration payment. In addition, pursuant to the agreement, certain employees of the third party became employees of the Company. The third party was a biotechnology company focused on oncology. The total upfront acquisition consideration amounts to $ million composed of the issuance of shares of the Company's common stock with a fair value of $ million, approximately $ million of cash consideration, assumed net liabilities of $ million, as well as $ million of acquisition related legal and accounting costs directly attributable to the acquisition of the asset. The Company accounted for the transaction as an asset acquisition as substantially all of the estimated fair value of the gross assets acquired was concentrated in a single identified in-process research and development asset (“IPR&D”) thus satisfying the requirements of the screen test in Accounting Standards Update (“ASU”) 2017-01 Business Combinations (Topic 805): Clarifying the Definition of Business. The estimated fair value of the acquired workforce was not significant. The Company concluded the acquired IPR&D has no alternative-future use and accordingly expensed approximately $ million, on the day the transaction closed as research and development expense, which is reflected in its consolidated statement of operations.

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million was estimated to be paid via issuance of an estimated additional shares of the Company’s common stock, consistent with the registration statement filed with the SEC on September 10, 2021, upon achievement of defined milestones relating to product development, commercial launch and continued employment of certain selling shareholders, each of which was revalued at each reporting date and amount of compensation expense was adjusted accordingly and reported in research and development expenses. In November 2022, the terms of the payment for any remaining consideration were modified, resulting in $ million of consideration paid in December 2022 and $ million of consideration paid in March 2023, with such consideration primarily consisting of the Company’s common stock.

Based on the Company’s current business plan, the Company believes that its existing cash and marketable securities will be sufficient to meet its anticipated cash requirements for at least 12 months after August 8, 2024.

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million consisted of $ million in upfront payment costs and approximately $ million of other transaction costs which were capitalized as intangible assets over an estimated useful life of . An additional payment of up to $ million may be made should the Company achieve certain customer volume retention targets and based on certain legal outcomes.

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)

()

Net unrealized gain on available-for-sale securities, net of tax and foreign currency translation adjustment

Ending balance

()

The change in net unrealized loss on available-for-sale securities is due to increased market volatility. The Company has assessed the unrealized loss position for available-for-sale securities and determined that an allowance for credit loss was not necessary.

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million. The Company does not hold a seat on MyOme’s board of directors. The Company’s investment in MyOme is recorded at cost and impairment was identified as of June 30, 2024. The following are the Company’s related persons and the basis of each such related person’s relationship with MyOme:

●

Matthew Rabinowitz, the Company’s executive chairman and co-founder, is the chairman of the board and founder of MyOme, and a beneficial holder of approximately % of the outstanding shares of MyOme on a fully dilutive basis;

●

Jonathan Sheena, the Company’s co-founder and a member of the Company’s board of directors, is a stockholder and a member of the board of directors of MyOme;

●

Daniel Rabinowitz, the Company’s Secretary and Chief Legal Officer, is a stockholder of MyOme; and

●

Roelof Botha, the Lead Independent Director of the Company’s board of directors, is a managing member of Sequoia Capital. Certain funds affiliated with Sequoia Capital also participated in MyOme’s series B financing.

None of the related party investments in MyOme by our executives and directors noted above were at the behest of the Company nor funded by the Company.

In February 2024, the Company entered into a collaboration and commercialization agreement (the “Collaboration Agreement”) with MyOme pursuant to which the parties will partner to offer certain genetic testing services to be developed and funded solely by MyOme and overseen by a joint steering committee. The Company will assist MyOme with commercial activities. In connection with the Collaboration Agreement, the Company received a warrant to purchase shares of MyOme's common stock at an exercise price of $ per share, which will vest upon a MyOme liquidity event (as such terms are defined in MyOme's certificate of incorporation). The warrants were valued using the Black-Scholes valuation model on the date of acquisition and are accounted for using the measurement alternative. impairment was identified as of June 30, 2024. The warrants have been included within other assets and deferred revenue, long-term portion and other liabilities, which will be recognized as a reduction of selling and marketing expense upon commercialization and sale of the products contemplated under the Collaboration Agreement. Subject to the Company's achievement of certain commercialization milestones, the Company may receive additional warrants to purchase MyOme’s Series B Preferred Stock. To the extent the genetic testing services are successfully commercialized, the Company will owe certain royalty payments to MyOme. Should the Company exercise all its MyOme common stock warrants, the Company would hold an accumulated % of MyOme on a fully diluted basis.

customers exceeding 10% of total revenues on an individual basis. As of June 30, 2024 and December 31, 2023, there were customers with an outstanding balance exceeding 10% of net accounts receivable.

For the three months ended June 30, 2024 and 2023, approximately % and %, respectively, of total revenue were paid by Medicare on behalf of multiple customers. For the six months ended June 30, 2024 and 2023, approximately % and %, respectively, of total revenue were paid by Medicare on behalf of multiple customers.

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% and %, respectively, of accounts receivable are expected to be paid by Medicare on behalf of multiple customers.

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% of cash collections attributable to such product revenue occurs within with the remaining collections generally taking an additional . During this time, management routinely reassesses its estimates of actual to expected cash collections, which are based on historical collection rates and adjusted for current information and trends. To the extent cash collections for tests delivered in prior periods are trending higher than expectations, the Company will increase revenue recognized when sufficient evidence is obtained to conclude the additional revenue will not result in a reversal of revenue in a future period. If cash collections for tests delivered in prior periods are trending below expectations, the Company will reduce revenue to the amount expected to be collected based on the latest information and expectations. Increases or decreases to the amount of cash expected to be collected for tests delivered in prior periods are recognized in product revenue with a corresponding impact to accounts receivable during the period such determination is made. During the three months ended June 30, 2024

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million and $ million, respectively, for collections related to tests delivered in prior periods that were fully collected (including an estimate of unapplied receipts). The increased revenue and decreased net loss resulted in a corresponding decrease in loss per share by $ and $ for the three months ended June 30, 2024 and 2023, respectively. During the six months ended June 30, 2024, the Company increased revenue by a net of $ million for collections related to tests delivered in prior periods that were fully collected (including an estimate of unapplied receipts). The increased revenue and decreased net loss resulted in a corresponding decrease in loss per share by $ for the six months ended June 30, 2024. During the six months ended June 30, 2023, the Company reduced revenue by a net of $ million for a reduction in expected collections related to tests delivered in prior periods. The decreased revenue and increased net loss resulted in a corresponding increase in loss per share by $ for the six months ended June 30, 2023.

As of June 30, 2024, the Company had $ million in cash receipts which had not yet been applied to specific accounts receivables primarily due to the disruption to Change Healthcare’s network that occurred in February 2024. The Company reviewed the historical unapplied payment trends. Based on the historical estimation, within the unapplied cash receipt of $ million, the Company estimated approximately $ million was related to tests delivered in prior periods that were fully collected. Additionally, as overpayments were not material in prior periods, the Company accounted for temporary unapplied balances as of June 30, 2024, as contra accounts receivable on the Balance Sheet. As of December 31, 2023, the unapplied accounts receivable balance was $ million.

Product revenue is constrained for refunds estimated to be paid to insurance carriers. Certain refunds are recognized in accrued liabilities until they are either paid to the respective insurance carrier or it is determined the refund will not ultimately be paid, at which time the related accrual is reduced with a corresponding increase to revenue. During the three months ended June 30, 2024 and 2023, the reserves for refunds to insurance carriers were reduced and product revenue increased by $ million and $ million, respectively, for amounts the Company determined would not be refunded to insurance carriers. The increased revenue and corresponding decreased net loss resulted in a decreased loss per share by $ for both the three months ended June 30, 2024 and 2023, respectively. During the six months ended June 30, 2024 and 2023, the reserves for refunds to insurance carriers were reduced and product revenue increased by $ million and $ million, respectively, for amounts the Company determined would not be refunded to insurance carriers. The increased revenue and corresponding decreased net loss resulted in a decreased loss per share by $ and $ for the six months ended June 30, 2024 and 2023, respectively.

In addition, certain other refunds are recognized as a reduction to accounts receivable until they are either paid to the respective insurance carrier or it is determined the refund will not ultimately be paid, at which time the related reserve is reduced with a corresponding increase to revenue. During the three months ended June 30, 2024, the reserves for refunds to insurance carriers were reduced and product revenue increased by $ million for amounts the Company determined would not be refunded to insurance carriers. The increased revenue and corresponding decreased net loss resulted in a decreased loss per share by $ for the three months ended June 30, 2024. During the six months ended June 30, 2024, the reserves for refunds to insurance carriers were reduced and product revenue increased by $ million for amounts the Company determined would not be refunded to insurance carriers. The increased revenue and decreased net loss resulted in a decreased loss per share by $ for the six months ended June 30, 2024. There was no such adjustment in the three and six months ended June 30, 2023.

Licensing and Other Revenues

The Company recognizes licensing revenues from its cloud-based distribution service offering, Constellation, by granting licenses to its licensees to use certain of the Company’s proprietary intellectual properties and cloud-based software and in vitro diagnostic (“IVD”) kits. The Company also recognizes revenues from its strategic collaboration agreements, such as those with BGI Genomics Co., Ltd. (“BGI Genomics”) and Foundation Medicine, Inc. (“Foundation Medicine”). The Company recognizes licensing and other revenues through agreements with pharmaceutical companies in support of potential clinical trials managed by the pharmaceutical companies.

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and expires in February 2029. Pursuant to the BGI Genomics Agreement, the Company licensed its intellectual property to and provided development services for BGI Genomics. Following completion of development services, the Company began providing assay interpretation services over the term of the agreement.

According to the BGI Genomics Agreement, the Company is entitled to a total of $ million, comprised of upfront technology license fees, prepaid royalties relating to future sales of licensed products and performance of assay interpretation services, and milestone payments. Due to uncertainties in achieving certain milestones, $ million of the $ million was constrained. A net of $ million has been collected by the Company in cash, which includes $ million in prepaid royalties.

The Company concluded that the license is not a distinct performance obligation as it does not have a stand-alone value to BGI Genomics apart from the related development services. Therefore, license and related development services, for each of the non-invasive prenatal tests (“NIPTs”) and Oncology products, representing separate performance obligations, to which $ million of transaction consideration was allocated. This performance obligation was fully satisfied in March 2023 and no further related amounts will be recognized as revenue.

As of December 31, 2023, the Company's performance obligation to provide ongoing NIPT assay interpretation services was removed. Therefore, the Company now has a single remaining performance obligation related to Oncology assay interpretation services, to which $ million of transaction consideration was allocated and prepaid by BGI Genomics. During the six months ended June 30, 2023, the Company recognized $ million related to oncology assay interpretation services, of which $ million was recognized against deferred royalties. During the six months ended June 30, 2024, the Company did not record any material amounts related to oncology assay interpretation services. The Company currently has $ million in deferred revenue as of June 30, 2024.

As required by the BGI Genomics Agreement, in June 2019 the Company prepaid $ million to BGI Genomics for future sequencing services and $ million for future sequencing equipment. These advance payments are for equipment and services to be received in future periods, which was assessed as a standalone transaction that did not reduce revenue, aggregated to $ million and was originally recorded in long-term advances on the Company’s Consolidated Balance Sheet and will be periodically assessed for impairment. During both the three and six months ended June 30, 2024, $ million in equipment and services was received. During the three and six months ended June 30, 2023, $ million and $ million, respectively, in equipment and services was received. As of June 30, 2024, the remaining advanced payments were $ million, with $ million recorded in prepaid expenses and other current assets and $ million recorded in other assets.

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, expiring in August 2024, with automatic renewals thereafter for successive terms, unless the Foundation Medicine Agreement is earlier terminated in accordance with its terms. The Company and Foundation Medicine have elected not to renew the agreement beyond the initial term.

Pursuant to the Foundation Medicine Agreement, the Company will provide development services that are required to customize its proprietary Signatera test to work with Foundation Medicine’s FoundationOne CDx in conjunction with granting the use of the Company’s intellectual property. Following completion of those development services, the Company is currently providing assay testing services over the term of the agreement. The intellectual property has been licensed to Foundation Medicine for the customized test. In addition, the Company is responsible for delivering clinical study plans in order to demonstrate efficacy of the customized test which commenced in the second quarter of 2021.

The Company is entitled to a total of $ million, comprised of upfront technology license fees, prepaid royalties relating to future sales of licensed products and performance of assay interpretation services, and milestone payments. $ million is constrained due to uncertainties in achieving certain milestones. A net of $ million has been collected by the Company in cash, which includes $ million of prepaid royalties.

The Company concluded that the license is not a distinct performance obligation as it does not have a stand-alone value to Foundation Medicine apart from the related development services. Therefore, license and related development services, for Oncology products, represent a single performance obligation, to which $ million of transaction consideration was allocated. Of this amount, $ million was recognized in the three months ended March 31, 2023. This performance obligation was fully satisfied in March 2023 and no further related amounts will be recognized as revenue.

Royalties related to assay interpretation services represent separate performance obligations for Oncology products, to which $ million of transaction consideration was allocated and prepaid by Foundation Medicine. During the three and six months ended June 30, 2023, the Company recognized $ million and $ million, respectively, related to oncology assay interpretation services. During the three and six months ended June 30, 2024, the Company recognized $ million related to oncology assay interpretation services. The Company currently has $ million in deferred revenue related to this agreement as of June 30, 2024.

Disaggregation of Revenues

The Company measures its performance results primarily based on revenues recognized from the three categories described below. The following table shows disaggregation of revenues by payer types:

Laboratory and other partners

Patients

Total revenues

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Americas, excluding U.S.

Europe, Middle East, India, Africa

Asia Pacific and Other

Total revenues

The following table summarizes the Company’s beginning and ending balances of accounts receivable and deferred revenues:

Liabilities:

Deferred revenue, current portion

Deferred revenue, long-term portion

Total deferred revenues

The following table summarizes the changes in the balance of deferred revenues during the six months ended June 30, 2024 and 2023:

Increase in deferred revenues

Revenue recognized during the period that was included in deferred revenues at the beginning of the period

()

Revenue recognized from performance obligations satisfied within the same period

()

Ending balance

During the six months ended June 30, 2024, revenue recognized that was included in the deferred revenue balance at the beginning of the period totaled $ million. This balance consisted of approximately a net $ million related to BGI Genomics and Foundation Medicine and $ million related to genetic testing services. The current portion of deferred revenue includes $ million from genetic testing services, $ million from BGI Genomics, and $ million from the Foundation Medicine Agreement as of June 30, 2024. The non-current portion of deferred revenue consists of $ million from the BGI Genomics Agreement as of June 30, 2024.

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—

U.S. Treasury securities

—

Municipal securities

—

Total financial assets

—

(1)

Cash equivalents includes money market deposits and liquid demand deposits.

Fair Value of Short-Term and Long-Term Debt:

As of June 30, 2024 and December 31, 2023, the estimated fair value of the total principal outstanding and accrued interest of the Credit Line was $ million, and were based upon observable Level 2 inputs, including the interest rate based on the 30-day Secured Overnight Financing Rate (“SOFR”) average, plus %. The estimated fair value approximates the carrying value due to the short term duration and variable interest rate.

As of June 30, 2024 and December 31, 2023, the estimated fair value of the Convertible Notes was $ million and $ million, respectively, based upon observable, Level 2 inputs, including pricing information from recent trades of the Convertible Notes. See Note 10, Debt, for additional details and carrying value.

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—

U.S. Treasury securities⁽¹⁾

—

()

Municipal securities⁽¹⁾

—

()

—

()

Total

—

()

Classified as:

Cash, cash equivalents and restricted cash⁽²⁾

Short-term investments

Total

(1)

Per the Company’s investment policy, all debt securities are classified as short-term investments irrespective of holding period.

(2)

Cash equivalents includes liquid demand deposits, and money market funds.

The Company invests in U.S. Treasuries, U.S. agency and high-quality municipal bonds which mature at par value and are all paying their coupons on schedule. The Company has therefore concluded an allowance for expected credit losses of its investments was not necessary and will continue to recognize unrealized gains and losses in other comprehensive income (loss). During the six months ended June 30, 2024, the Company did t sell any investments. The Company uses the specific investment identification method to calculate realized gains and losses and amounts reclassified out of other comprehensive income (loss) to net loss. As of June 30, 2024, the Company had investments in an unrealized loss position in its portfolio. Gross unrealized losses were not material as of June 30, 2024. Gross unrealized losses were primarily due to declines in the value of fixed rate instruments as interest rates in the broader market increased, and were not indictive of a decline in the credit worthiness of the underlying issuer, and as such, the Company did t record a credit loss reserve as of June 30, 2024.

The following table presents debt securities available-for-sale that were in an unrealized loss position as of June 30, 2024, aggregated by major security type in a continuous loss position.

—

()

Municipal securities

—

()

Total

—

()

The following table summarizes the Company’s portfolio of available-for-sale securities by contractual maturity as of June 30, 2024:

Greater than one year but less than five years

Total

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(Reversal of) Provision for doubtful accounts

()

Write-offs

()

—

Total


	Six Months Ended
	June 30,
	2024		2023

		(in thousands)
Beginning balance	$		$
Provision for doubtful accounts
Write-offs		()		—
Total	$		$

Property and Equipment, net

The Company’s property and equipment consisted of the following:

-5 years

Computer equipment

Purchased and capitalized software held for internal use

Leasehold improvements

Lesser of useful life or lease term

Construction-in-process

Less: Accumulated depreciation and amortization

()

Total Property and Equipment, net

The Company’s long-lived assets are located in the United States.

During the six months ended June 30, 2024, the increase in net property and equipment was due to expansion projects and purchases of new equipment for the Company’s laboratories located in Texas and California to expand testing capabilities, offset by depreciation expense of $ million recorded in the six months ended June 30, 2024. Depreciation expense of $ million was recorded in the six months ended June 30, 2023. The Company did t incur any impairment charges during the six months ended June 30, 2024 or 2023.

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Accrued charges for third-party testing

Testing and laboratory materials from suppliers

Marketing and corporate affairs

Short term advances

—

Legal, audit and consulting fees

Accrued shipping charges

Sales and income tax payable

Accrued third-party service fees

Clinical trials and studies

Operating lease liabilities, current portion

Property and equipment purchases

Other accrued interest

Other accrued expenses

Total other accrued liabilities

Reserves for refunds to insurance carriers include overpayments from and amounts to be refunded to insurance carriers, and additional amounts that the Company estimates for potential refund requests during the period. When the Company releases these previously accrued amounts, they are recognized as product revenues in the condensed statements of operations and comprehensive loss.

The following table summarizes the reserve balance and activities for refunds to insurance carriers for the six months ending June 30, 2024 and 2023:

Additional reserves

Refunds to carriers

()

Reserves released to revenue

()

Ending balance

As of June 30, 2024, the Company had $ million in short term advances obtained as a result of the disruption to Change Healthcare’s network in February 2024 which are due and payable within ten days of demand.

square feet in Austin, Texas. The original lease term was beginning in December 2015 and expiring in November 2026 with monthly payments beginning in December 2016. In December 2021, the Company entered into an amendment of the Austin lease agreement which extended the lease of the current premises through March 2033. The amendment also includes additional office spaces (the “First Expansion Premises” and the “Second

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rentable square feet and commenced in February 2022. The Second Expansion Premises consists of rentable square feet and commenced in September 2022. The terms of the First and Second Expansion Premises expire in March 2033.

In October 2016, the Company entered into a lease directly with its landlord for laboratory and office spaces at its facilities located in San Carlos, California. The Company currently occupies approximately square feet comprised of office spaces (the “First Space” and the “Second Space”). The First Space covers approximately square feet, and the Second Space totals approximately square feet. In January 2021, the Company entered into an amendment of the lease to extend the term for to October 2027. The combined annual rent for the First Space and Second Space is $ million which commenced in October 2023.

The Company entered into a lease agreement commencing June 2018 for its cord blood tissue storage facility in Tukwila, Washington that covers approximately square feet. The lease term is and expired in July 2023. The Company had the option to extend this lease for , and the fair market rent upon renewal was not determinable. However, since the Company sold its business related to cord blood and tissue storage in September 2019, the Company has subleased the facility and did not exercise its option to renew the facility upon expiration.

The Company entered into a lease agreement in November 2020 to lease square feet of space located in South San Francisco, California over a 36-month term. The premises are used for general office, laboratory and research use. The annual lease payment starts at $ million and escalates annually after commencing in December 2021. In December 2022, the Company exercised the renewal option of the South San Francisco lease agreement. In January 2023, the Company entered in an amendment to extend the lease term of the South San Francisco premises by , through November 2026.

The Company entered into a lease agreement in September 2023 to lease square feet of space located in Pleasanton, California over a term. The premises are used for laboratory and research use and commenced in December 2023. The annual lease payment starts at $ million and escalates annually.

As part of the IPR&D asset acquisition in September 2021, the Company inherited a 24-month lease for square feet of laboratory space in Canada. The annual lease payment started at $ million and expired in August 2023.

The Company has also historically entered into leases of individual workspaces and storage spaces at various locations on both a month-to-month basis without an established lease term, and more recently for certain locations, has committed to terms approximating one to . For the facilities without a committed lease term, the Company has elected to not recognize them as right-of-use assets on the condensed consolidated balance sheets as they are all considered short-term leases. For individual workspaces where the committed lease term exceeds one year, the Company has recorded a right-of-use asset on the condensed consolidated balance sheets.

For the six months ended June 30, 2024, the Company had $ million in noncash operating activities related to additional right-of-use assets accounted from a new lease and extending existing leases under ASC, Topic 842, Leases

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t have any noncash operating activities related to additional right-of-use assets.

The operating lease right-of-use assets are classified as noncurrent assets in the balance sheet. The corresponding lease liabilities are separated into current and long-term portions as follows:

Operating lease liabilities, long-term portion

Total operating lease liabilities

The initial recognition of the operating lease liabilities was measured as the present value of the future minimum lease payments using a discount rate determined as of January 1, 2019. The operating right-of-use assets was calculated as the operating lease liabilities discounted at the present value, less the amount of unamortized tenant improvement allowance and deferred rent. The discount rate used was the Company’s incremental borrowing rate given that the implicit rate to each lease was not readily determinable. In accordance with ASC 842, the incremental borrowing rate was estimated as the annual percentage yield resulting from a corporate debt financing over a loan term approximating the remaining term of each lease, with the effect of certain credit risk rating. As of June 30, 2024, the weighted-average remaining lease term was 6.30 years and the weighted-average discount rate was %.

The Company continues to recognize lease expense on a straight-line basis. The lease expense includes the amortization of the right-of-use assets with the associated interest component estimated by applying the effective interest method. For the three months ended June 30, 2024 and 2023, total lease expense of $ million and $ million was recognized in the condensed statements of operations and comprehensive loss, respectively. For the six months ended June 30, 2024 and 2023, total lease expense of $ million and $ million was recognized in the condensed statements of operations and comprehensive loss, respectively. Cash paid for amounts in the measurement of operating lease liabilities totaled $ million and $ million for the three months ended June 30, 2024 and 2023, respectively. Cash paid for amounts in the measurement of operating lease liabilities totaled $ million and $ million for the six months ended June 30, 2024 and 2023, respectively.

The present value of the future annual minimum lease payments under all non-cancellable operating leases as of June 30, 2024 are as follows:

2025

2026

2027

2028

2029 and thereafter

Less: imputed interest

()

Operating lease liabilities

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patent litigations against CareDx, Inc. (“CareDx”) in the United States District Court for the District of Delaware (“CareDx Patent Cases”). In the first CareDx Patent Case, CareDx alleged, in a complaint filed jointly with the Board of Trustees of the Leland Stanford Junior University in March 2019 and amended in March 2020, that the Company infringed patents (the “CareDx Patents”). The complaint sought unspecified damages and injunctive relief. In September 2021, the Court granted the Company’s motion for summary judgment, finding all CareDx Patents invalid. This finding was affirmed on appeal by the United States Court of Appeals for the Federal Circuit. CareDx’s petition for rehearing by the Federal Circuit, and its subsequent petition for certiorari to the United States Supreme Court, were both denied. In the second CareDx Patent Case, the Company alleged, in suits filed in January 2020 and May 2022, infringement by CareDx of certain of the Company’s patents, seeking unspecified damages and injunctive relief. In January 2024, after trial, the jury returned a verdict in favor of the Company, finding both asserted patents valid and patent infringed by CareDx. The jury awarded damages to the Company for lost profits and past royalties totaling $ million.

In January 2020, the Company filed suit against ArcherDX, Inc. (“ArcherDX”) in the United States District Court for the District of Delaware. In January 2021, the Company named an additional Archer DX entity, ArcherDx LLC, and Invitae as defendants. The Company alleged, among other things, that certain ArcherDX products, including the Personalized Cancer Monitoring (“PCM”) test, infringed of the Company’s patents (the “ArcherDX Case”) and sought unspecified monetary damages and injunctive relief. Following a jury trial in May 2023 and a bench trial in June 2023, all asserted patents were found to be valid and infringed by ArcherDX and Invitae, and the jury awarded damages totaling $ million to the Company. In November 2023, the Court granted in part the Company’s motion for a permanent injunction against the PCM test, which the defendants have appealed. In February 2024, Invitae and ArcherDX filed a voluntary Chapter 11 petition in the U.S. Bankruptcy Court for the District of New Jersey, resulting in an automatic bankruptcy stay in the case.

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Ravgen patents and seeking monetary damages and injunctive relief. In January 2024, after trial, the jury returned a verdict of non-willful infringement by the Company and found damages of $ million. The Company intends to appeal certain of the rulings. In addition, various parties, including the Company, have filed petitions challenging the validity of the asserted patents with the United States Patent and Trademark Office, all of which were instituted for review, and some of which were decided in favor of upholding the challenged claims. The petitions filed by the Company and certain others remain pending.

In October 2020, the Company filed suit against Genosity Inc. (“Genosity”), in the United States District Court for the District of Delaware, alleging that various Genosity products infringe of the Company’s patents and seeking unspecified monetary damages and injunctive relief. The case has been stayed pending the entry of a final judgment in the ArcherDX Case, in which the subject patent is also asserted. In February 2024, Genosity filed a voluntary Chapter 11 petiion in the U.S. Bankruptcy Court for the District of New Jersey.

The Company is the subject of lawsuits filed against it by Invitae in the United States District Court of the District of Delaware alleging, in complaints filed in May and November of 2021, infringement of three patents and seeking monetary damages and injunctive relief. The parties have filed cross-motions for summary judgment, which motions are currently pending before the Court. In February 2024, subsequent to Invitae’s voluntary Chapter 11 petition described above, the Court granted Invitae’s request to continue the trial, which is now scheduled for September 2025.

The Company filed suits against Inivata, Inc. and Inivata Ltd. (collectively “Inivata”) in the United States District Court for the District of Delaware in January 2021 and December 2022, alleging that certain of Inivata’s oncology products infringe certain of the Company’s patents and seeking unspecified monetary damages and injunctive relief. The suits have been consolidated. Inivata has filed a motion to dismiss the Company’s complaint with respect to patent, which motion is currently pending before the Court. In March 2024, the Court stayed the case in light of the Company’s case against NeoGenomics Laboratories, Inc. (“NeoGenomics”), which acquired Inivata in 2021, discussed below.

In July 2023, the Company filed suit against NeoGenomics in the United States District Court for the Middle District of North Carolina (the “District Court”), alleging infringement of certain Natera patents by NeoGenomics’ commercialization of the RaDaR test. The complaint seeks monetary damages and injunctive relief. In December 2023, the Court denied NeoGenomics’ motion to dismiss the complaint, and granted the Company’s motion for preliminary injunction. The injunction went into effect as of January 12, 2024. NeoGenomics filed a motion to modify and stay the injunction, which was denied by the District Court and affirmed on appeal in July 2024 by the Federal Circuit Court of Appeals. NeoGenomics has also filed petitions challenging the validity of both of the asserted patents with the United States Patent and Trademark Office. One of the petitions has been denied.

Other Litigation Matters.

CareDx filed suit against the Company in April 2019 in the United States District Court for the District of Delaware, alleging false advertising, and related claims based on statements describing studies that concern the Company’s technology and CareDx’s technology, seeking unspecified damages and injunctive relief. The Company filed a counterclaim against CareDx in the United States District Court for the District of Delaware, alleging false advertising, unfair competition and deceptive trade practices and seeking unspecified damages and injunctive relief. In March 2022, after trial, the jury returned a verdict that the Company was liable to CareDx and found damages of $ million. The jury also returned a verdict against CareDx, finding that CareDx had engaged in false advertising. In July 2023, the Court granted in part the Company’s motion for judgment as a matter of law requesting that the Court set aside the portions of the jury verdict adverse to the Company, ruling that CareDx is not entitled to any damages. The jury verdict of false advertising by CareDx remains in place. Both parties are appealing.

In May 2021, Guardant. Inc. (“Guardant”) filed suit against the Company in the United States District Court of the Northern District of California alleging false advertising and related claims and seeking unspecified damages and injunctive relief. Also in May 2021, the Company filed suit against Guardant in the Western District of Texas, alleging false advertising and related claims. The Company has voluntarily dismissed its Texas suit against Guardant and has

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purported class action lawsuits were filed against the Company in the United States District Court for the Northern District of California. Each suit was filed by an individual patient alleging various causes of action related to the marketing of Panorama and seeking, among other relief, class certification, monetary damages, attorneys’ fees, and costs. These matters have been consolidated. The Company filed a motion to dismiss the consolidated lawsuit, which resulted in the plaintiffs filing an amended complaint in April 2023.

In March 2022, a purported class action lawsuit was filed against the Company and certain of its management in the Supreme Court of the State of New York, County of New York, asserting claims under Sections 11, 12, and 15 of the Securities Act of 1933. The complaint alleges, among other things, that the Company failed to disclose certain information regarding its Panorama test. The complaint seeks, among other relief, monetary damages, attorneys’ fees, and costs. This matter has been dismissed and the claims raised in this matter have been included in the lawsuit discussed below.

A purported class action lawsuit was filed against the Company and certain of its management in the United States District Court for the Western District of Texas, asserting claims under Sections 10(b) and 20(a) of the Securities Act of 1934 and Rule 10b-5 thereunder. The complaint, filed in April 2022 and amended in October 2022 (to include, among others, the claims raised in the lawsuit discussed in the preceding paragraph), alleges, among other things, that the management defendants made materially false or misleading statements, and/or omitted material information that was required to be disclosed, about certain of the Company’s products and operations. The complaint seeks, among other relief, monetary damages, attorneys’ fees, and costs. The Company filed a motion to dismiss this lawsuit, which was granted in part and denied in part.

In each of October 2023 and January 2024, shareholder derivative complaints were filed in the United States District Court for the Western District of Texas and the United States District Court for the District of Delaware, respectively, against the Company as nominal defendant and certain of the Company’s management. Each complaint alleges, among other things, that the management defendants made materially false or misleading statements, and/or omitted material information that was required to be disclosed, about certain of the Company’s products and operations. Each complaint seeks, among other relief, monetary damages, attorneys’ fees, and costs.

Director and Officer Indemnifications

As permitted under Delaware law, and as set forth in the Company’s Amended and Restated Certificate of Incorporation and its Amended and Restated Bylaws, the Company indemnifies its directors, executive officers, other officers, employees and other agents for certain events or occurrences that may arise while in such capacity. The maximum potential future payments the Company could be required to make under this indemnification is unlimited; however, the Company has insurance policies that may limit its exposure and may enable it to recover a portion of any future amounts paid. Assuming the applicability of coverage, the willingness of the insurer to assume coverage, and subject to certain retention, loss limits and other policy provisions, the Company believes any obligations under this indemnification would

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December 2024

Material suppliers

December 2024

Application service providers

March 2026

Cloud platform service provider

December 2028

Leases⁽¹⁾

March 2029

Other material suppliers

Various

Total

⁽¹⁾ Represents executed leases which have not commenced. Please refer to Note 7, Leases, for additional information.

Research and development

Selling, general and administrative

Total


	Six months ended June 30,
		2024		2023

	(in thousands)
Cost of revenues	$		$
Research and development
Selling, general and administrative
Total	$		$

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Additionally, the stock-based compensation expense for liability-classified awards for the three months ended June 30, 2024 and 2023 was $ million and $ million, respectively. The stock-based compensation expense for liability-classified awards for the six months ended June 30, 2024 and 2023 was $ million and $ million, respectively.

Stock Options

The following table summarizes option activity for the six months ended June 30, 2024:

Options exercised

()

June 30, 2024

Restricted Stock Units and Performance-Based Awards

The following table summarizes unvested RSU and performance-based awards for the six months ended June 30, 2024:

Granted

Vested

()

Cancelled/forfeited

()

Balance at June 30, 2024

The Company grants certain senior-level executives performance stock units which vest based on performance and time-based service conditions, which are referred to herein as performance-based awards. During the six months ended June 30, 2024, the Company granted million performance-based awards with an aggregate grant date fair value of $ million. Achievement at % of target is deemed probable and as a result, the Company expects to recognize a total of $ million over the requisite service period of which $ million and $ million has been recognized for the three and six months ended June 30, 2024, respectively.

The Company has recognized $ million and $ million in stock-based compensation for performance-based awards for the three months ended June 30, 2024 and 2023, respectively. The Company has recognized $ million and $ million in stock-based compensation for performance-based awards for the six months ended June 30, 2024 and 2023, respectively.

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million revolving line of credit which was fully drawn down in 2016. The Credit Line was amended in July 2017 and bears interest at 30-day LIBOR plus %. The interest rate was subsequently changed to the 30-day SOFR average, plus %. The SOFR rate is variable. The interest rate as of June 30, 2024 was %. The Credit Line was subsequently increased from $ million to $ million in 2020. In November 2022, the Company drew down $ million from the $ million available from the Credit Line. The Credit Line is secured by a first priority lien and security interest in the Company’s money market and marketable securities held in its managed investment account with UBS. The Company is required to maintain a minimum of at least $ million in its UBS accounts as collateral. UBS has the right to demand full or partial payment of the Credit Line obligations and terminate the Credit Line, in its discretion and without cause, at any time. In June 2023, the Credit Line decreased from $ million to $ million. In October 2023, the interest rate for the Credit Line was subsequently changed to the 30-day SOFR average, plus %. As of June 30, 2024, the Company has drawn down a total of $ million and there is $ million remaining and available on the Credit Line.

For both the three months ended June 30, 2024 and 2023, the Company recorded interest expense on the Credit Line of $ million. For both the six months ended June 30, 2024 and 2023, the Company recorded interest expense on the Credit Line of $ million. Interest payments on the Credit Line were made within the same periods. As of June 30, 2024 and December 31, 2023, the total principal amount outstanding with accrued interest was $ million.

Convertible Notes

In April 2020, the Company issued $ million aggregate principal amount of Convertible Notes due 2027 in a private placement offering to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended. The Convertible Notes are senior, unsecured obligations of the Company and bear interest at a rate of % per year, payable in cash semi-annually. The Convertible Notes mature in May 2027, unless earlier converted, repurchased or redeemed in accordance with their terms. Upon conversion, the Convertible Notes are convertible into cash, shares of the Company’s common stock or a combination of cash and shares of the Company’s common stock, at the Company’s election.

The Company received net proceeds from the Convertible Notes of $ million, after deducting the initial purchasers’ discounts and debt issuance costs. In 2020, the Company used approximately $ million of the net proceeds from the Convertible Notes offering to repay its obligations under its credit agreement with OrbiMed Royalty Opportunities II, LP.

The holders of the Convertible Notes may convert all or a portion of their Convertible Notes at their option at any time prior to the close of business on the business day immediately preceding February 1, 2027 in multiples of $ principal amount, under any the following circumstances:

●

During any fiscal quarter commencing after September 30, 2020 (and only during such fiscal quarter), if the last reported sale price of the Company’s common stock for at least trading days (whether or not consecutive) during the period of consecutive trading days ending on, and including, the last trading day of the immediately preceding fiscal quarter is greater than or equal to % of the conversion price on each applicable trading day.

●

During the business day period after any consecutive trading day period in which the trading price per $ principal amount of Convertible Notes for each trading day of that five-day consecutive trading period was less than % of the product of the last reported sale price of the Company’s common stock and the conversion rate on each such trading day.

●

If the Company calls any or all of the Convertible Notes for redemption at any time prior to the close of business on the second business day prior to the redemption date.

●

Upon the occurrence of certain distributions.

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per share, at an initial conversion rate of shares of common stock per $ principal amount of the Convertible Notes, which is equivalent to an initial conversion price of approximately $ per share of common stock, convertible to shares of common stock. The conversion rate and corresponding conversion price are subject to adjustment upon the occurrence of certain events but will not be adjusted for any accrued or unpaid interest. The holders of the Convertible Notes who redeem their Convertible Notes in connection with a make-whole fundamental change are, under certain circumstances, entitled to an increase in the conversion rate. Additionally, in the event of a fundamental change, the holders of the Convertible Notes may require the Company to repurchase for cash all or a portion of their Convertible Notes at a price equal to % of the principal amount, plus any accrued and unpaid interest.

The Company may not redeem the Convertible Notes prior to May 2024, and no sinking fund is provided for the Convertible Notes. The Company may redeem for cash all or any portion of the Convertible Notes, at the Company’s option, on or after May 2024, if the last reported sale price of the Company’s common stock has been at least % of the conversion price then in effect for at least trading days during any consecutive trading day period ending on the trading day immediately preceding the date on which the Company provides notice of redemption. The redemption price will be equal to % of the principal amount of the Convertible Notes to be redeemed plus accrued and unpaid interest.

Upon adoption of ASU 2020-06, Debt with Conversion and Other Options (Subtopic 470-20) and Derivative and Heading-Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in Entity’s Own Equity, the Company allocated all of the debt discount to long-term debt. The debt discount is amortized to interest expense using the effective interest method, computed to be %, over the life of the Convertible Notes or approximately its term. The outstanding Convertible Notes balances as of June 30, 2024 and December 31, 2023 are summarized in the following table:

Unamortized debt discount and issuance cost

()

Net carrying amount

The following tables present total interest expense recognized related to the Convertible Notes during the three and six months ended June 30, 2024 and 2023:

Non-cash interest expense

Amortization of debt discount and debt issuance cost

Total interest expense

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Non-cash interest expense

Amortization of debt discount and debt issuance cost

Total interest expense

and ($), respectively. During the six months ended June 30, 2024 and 2023, the Company recorded total income tax expense (benefit) of approximately $ and ($), respectively. The income tax expense is primarily attributable to state income tax and foreign income tax. Due to the Company’s history of cumulative operating losses, the Company concluded that, after considering all the available objective evidence, it is not more likely than not that all of the Company’s net deferred tax assets will be realized. Accordingly, all of the Company’s deferred tax assets, which includes net operating loss carryforwards and tax credits related primarily to research and development, continue to be subjected to a full valuation allowance as of June 30, 2024. The Company will continue to maintain a full valuation allowance until there is sufficient evidence to support recoverability of its deferred tax assets.

Interest and/or penalties related to income tax matters are recognized as a component of income tax expense. As of June 30, 2024 and December 31, 2023, there were accrued interest and penalties related to uncertain tax positions.

million based on the closing price of the Company’s common stock as of June 30, 2024. Since the Company is in a net loss position in the periods presented, the shares which would be issued upon conversion of the Convertible Notes are excluded from the net loss per share calculation as it would have an antidilutive effect. As such, the million shares underlying the conversion option of the Convertible Notes have been excluded from the calculation of diluted earnings per share. If converted, the Company does not intend to settle the obligation in cash.

The following table shows total outstanding potentially dilutive shares excluded from the computation of diluted loss per share as their effect would be anti-dilutive, as of June 30, 2024 and 2023:

Performance-based awards and restricted stock units

Employee stock purchase plan

Convertible Notes

Total

million aggregate principal amount of its outstanding % Convertible Notes due 2027 and instructed Wilmington Trust, National Association, as trustee under the Convertible Notes Indenture (the “Indenture Agreement”) governing the Convertible Notes, to issue a redemption notice to registered holders of the Convertible Notes. The date fixed for the

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% of the principal amount of the Convertible Notes to be redeemed plus accrued and unpaid interest to, but excluding, the Redemption Date. The Company elected physical settlement with the Company’s shares of common stock as the settlement method to apply to all conversions of the Convertible Notes. All terms and conditions associated with physical settlement are noted within the terms of the original Indenture Agreement.The conversion rate for holders who convert their Convertible Notes in connection with the Company’s election to redeem the Convertible Notes will be increased by additional shares pursuant to the Indenture Agreement. Based on the conversion terms of the Convertible Notes and the market price of its common stock, the Company expects that substantially all outstanding Convertible Notes will be converted into shares of its common stock prior to the Redemption Date. Should all holders elect to convert their Convertible Notes, approximately shares of common stock would be issued for settlement.

In July 2024, the Company entered into an amendment of the San Carlos lease to extend the term for to October 2032. The annual rent will be approximately $ million when the extension commences in October 2027.

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ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our unaudited condensed consolidated financial statements and related notes included in Part I, Item 1 of this report. Our actual results could differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those discussed in “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2023, filed with the Securities and Exchange Commission on February 29, 2024.

Overview

We are a diagnostics company with proprietary molecular and bioinformatics technology that we are applying to change the management of disease worldwide. Our cell-free DNA, or cfDNA, technology combines our novel molecular assays, which reliably measure many informative regions across the genome from samples as small as a single cell, with our statistical algorithms which incorporate data available from the broader scientific community to identify genetic variations covering a wide range of serious conditions with high accuracy and coverage. We aim to make personalized genetic testing and diagnostics part of the standard of care to protect health and inform earlier and more targeted interventions that help lead to longer, healthier lives.

We currently provide a comprehensive suite of products in women’s health, as well as our oncology and organ health products, and our Constellation cloud-based platform. We generate a majority of our revenues from the sale of Panorama, our non-invasive prenatal test, or NIPT, as well as Horizon, our Carrier Screening, test. In addition to Panorama and Horizon, our product offerings in women’s health include Spectrum Preimplantation Genetics, our Anora miscarriage test, and Vistara single-gene NIPT, as well as our Empower hereditary cancer screening test, which we also plan to offer to oncologists through our oncology sales channel. We also offer our Signatera molecular residual disease test for oncology applications, which we commercialize as a test run in our CLIA (as defined below) laboratory and offer on a research use only basis to research laboratories and pharmaceutical companies; and our Prospera organ transplant assessment tests.

We process tests in our laboratories certified under the Clinical Laboratory Improvement Amendments of 1988 (or CLIA) in Austin, Texas and San Carlos, California. A portion of our testing is performed by third-party laboratories. Our customers include independent laboratories, national and regional reference laboratories, medical centers and physician practices for our screening tests, and research laboratories and pharmaceutical companies. We market and sell our tests through our direct sales force and, for our women’s health tests, through our laboratory distribution partners. We bill clinics, laboratory distribution partners, patients, pharmaceutical companies and insurance payers for the tests we perform. In cases where we bill laboratory distribution partners, our partners in turn bill clinics, patients and insurers. The majority of our revenue comes from insurers with whom we have in-network contracts. Such insurers reimburse us for our tests pursuant to our in-network contracts with them, based on positive coverage determinations, which means that the insurer has determined that the test in general is medically necessary for this category of patient.

In addition to offering tests to be performed at our laboratories, either directly or through our laboratory distribution partners, we also establish licensing arrangements with laboratories under Constellation, our cloud-based distribution model, whereby our laboratory licensees run the molecular workflows themselves and then access our bioinformatics algorithms through our cloud-based software. This cloud-based distribution model results in lower revenues and gross profit per test than cases in which we process a test ourselves; however, because we do not incur the costs of processing the tests, our costs per test under this model are also lower. We began entering into these licensing arrangements starting in the fourth quarter of 2015.

The principal focus of our commercial operations is to offer our tests through both our direct sales force and laboratory distribution partners, and our Constellation licensees under our cloud-based distribution model. The number of tests that we accession is a key indicator that we use to assess our business. A test is accessioned when we receive the test at our laboratory, the relevant information about the test is entered into our computer system, and the test sample is routed into the appropriate workflow. This number is a subset of the number of tests that we process, which includes tests distributed through our Constellation licensees. The number of tests that we process is a key metric as it tracks overall

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volume growth, particularly as our laboratory partners may transition from sending samples to our laboratory to our cloud-based distribution model, as a result of which our tests accessioned would decrease but our tests processed would remain unchanged.

During the six months ended June 30, 2024, we processed approximately 1,496,000 tests, comprised of approximately 1,462,800 tests accessioned in our laboratory, compared to approximately 1,243,400 tests processed, comprised of approximately 1,206,700 tests accessioned in our laboratory, during the six months ended June 30, 2023. This increase in volume primarily represents continued commercial growth of Signatera, Panorama and Horizon, both as tests performed in our laboratory as well as through our Constellation software platform.

The percent of our revenues attributable to our U.S. direct sales force for the six months ended June 30, 2024 was 95%, an increase compared to 90% for the six months ended June 30, 2023. The percent of our revenues attributable to U.S. laboratory distribution partners for the six months ended June 30, 2024 was 3%, a decrease compared to 7% from the same period in the prior year. Our ability to increase our revenues and gross profit will depend on our ability to further penetrate the U.S. market with our direct sales force. The percent of our revenues attributable to international laboratory distribution partners and other international sales for the six months ended June 30, 2024 was 2%, a decrease from 3% in the six months ended June 30, 2023.

For the six months ended June 30, 2024, total revenues were $781.1 million compared to $503.2 million in the six months ended June 30, 2023. Product revenues accounted for $776.0 million, 99% of total revenues for the six months ended June 30, 2024 compared to $496.1 million representing 99% of total revenues for the six months ended June 30, 2023. For the six months ended June 30, 2024 and 2023, no customers exceeded 10% of the total revenues on an individual basis. Revenues from customers outside the United States were $16.8 million, representing approximately 2% of total revenues for the six months ended June 30, 2024. For the six months ended June 30, 2023, revenues from customers outside the United States were $16.6 million, representing approximately 3% total revenues. Most of our revenues have been denominated in U.S. dollars, though we generate some revenue in foreign currency, primarily denominated in Euros and Singapore Dollars.

Our net loss for the six months ended June 30, 2024 and 2023 was $105.1 million and $247.7 million, respectively. This included non-cash stock compensation expense of $131.9 million and $84.8 million for the six months ended June 30, 2024 and 2023, respectively. As of June 30, 2024, we had an accumulated deficit of $2.5 billion.

Components of the Results of Operations

Revenues

Product Revenues

We generate revenues from the sale of our tests, primarily from the sale of our Panorama and Horizon tests. Our two primary distribution channels are our direct sales force and our laboratory partners. In cases where we promote our tests through our direct sales force, we generally bill directly to a patient, clinic or insurance carrier, or a combination of the insurance carrier and patient, for the fees.

Sales of our clinical tests are recorded as product revenues. Revenues recognized from tests processed through our Constellation model, and from our strategic partnership agreements, are reported in licensing and other revenues.

In cases where we sell our tests through our laboratory partners, the majority of our laboratory partners bill the patient, clinic or insurance carrier for the performance of our tests, and we are entitled to either a fixed price per test or a percentage of their collections.

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Our ability to increase our revenues will depend on our ability to further penetrate the domestic and international markets and, in particular, generate sales through our direct sales force, develop and commercialize additional tests, obtain reimbursement from additional third-party payers and increase our reimbursement rates for tests performed. For example, our financial performance depends on reimbursement for microdeletions testing. Many third-party payers do not currently reimburse for microdeletions screening in part because there has historically been limited published data on the performance of microdeletions screening tests, with our single nucleotide polymorphism-based Microdeletion and Aneuploidy RegisTry, or SMART study results only being published in early 2022.

Entering into in-network contracts continues to be an important part of our business strategy, as we believe that in-network coverage of our tests by third-party payers is crucial to our growth and long-term success, as in-network pricing is more predictable than out-of-network pricing, enables us to develop stable, long-term relationships with third-party payers, and provides access to a larger population of covered lives. However, the negotiated fees under our contracts with third party payers are typically lower than the list price of our tests, and in some cases the third party payers that we contract with have negative coverage determinations for some of our offerings, in particular Panorama for microdeletions screening. Therefore, being in network with third party payers has in the past had, and may in the future have, an adverse impact on our revenues and gross margins. We intend to mitigate any impact by driving more business from our most profitable accounts.

Licensing and Other Revenues

Revenues recognized from tests processed through our Constellation model, and from our strategic partnership agreements are reported in licensing and other revenues. We also recognize licensing revenues through the licensing and the provisioning of services to support the use of our proprietary technology by licensees under our cloud-based distribution model.

Our strategy to offer access to our algorithm to laboratory licensees via our Constellation cloud-based software platform may also cause our revenues to decrease because we do not process the tests and perform the molecular biology analysis in our own laboratory under this model, and therefore are not able to charge as high an amount, and as a result realize lower revenues per test than when we perform the entire test ourselves.

Cost of Product Revenues

The components of our cost of product revenues are material and service costs, impairment charges associated with testing equipment, personnel costs, including stock-based compensation expense, equipment and infrastructure expenses associated with testing samples, electronic medical records, order and delivery systems, shipping charges to transport samples, costs incurred from third party test processing fees, and allocated overhead such as rent, information technology costs, equipment depreciation and utilities. Costs associated with Whole Exome Sequencing, are also included, as well as labor costs, relating to our Signatera CLIA and Signatera research use only offerings. Costs associated with performing tests are recorded when the test is accessioned. We expect cost of product revenues in absolute dollars to increase as the number of tests we perform increases.

As we continue to achieve scale, we have increased our focus on more efficient use of labor, automation, and DNA sequencing. For example, we updated the molecular and bioinformatics process for Panorama to further reduce the sequencing reagents, test steps and associated labor costs required to obtain a test result, while increasing the accuracy of the test to allow it to run with lower fetal fraction input. These improvements also reduced the frequency of the need to require blood redraws from the patient.

Cost of Licensing and Other Revenues

The components of our cost of licensing and other revenues are material costs associated with test kits sold to Constellation clients, development and support services relating to our strategic partnership agreements and other costs.

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We consider our cost of licensing and other revenues for the Constellation software platform to be relatively low, and therefore we expect its associated gross margin is higher. We expect our cost of licensing will increase in relation to volume growth.

Expenses

Research and Development

Research and development expenses include costs incurred to develop our technology, collect clinical samples and conduct clinical studies to develop and support our products. These costs consist of personnel costs, including stock-based compensation expense; prototype materials; laboratory supplies; consulting costs; regulatory costs; electronic medical record set up costs; and costs associated with setting up and conducting clinical studies at domestic and international sites and allocated overhead, including rent, information technology, equipment depreciation and utilities. We expense all research and development costs in the periods in which they are incurred. We expect our research and development expenses to increase in absolute dollars as we continue to invest in research and development activities related to developing enhanced and new products.

Selling, General and Administrative

Selling, general and administrative expenses include executive, selling and marketing, legal, finance and accounting, human resources, billing and client services. These expenses consist of personnel costs, including stock-based compensation expense; direct marketing expenses; audit and legal expenses; consulting costs; training and medical education activities; payer outreach programs and allocated overhead, including rent, information technology, equipment depreciation, and utilities.

Interest Expense

Interest expense is attributable to borrowing under our Convertible Senior Notes (the “Convertible Notes”) and credit line with UBS (the “Credit Line”), including the amortization of debt discounts.

Interest Income and Other (Expense) Income, Net

Interest income and other (expense) income, net is comprised of interest earned on our cash, realized gains and losses on investments and assets, sublease rental income, and foreign currency remeasurement gains and losses.

Critical Accounting Policies

Our management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenue generated, and expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We consider our critical accounting policies and estimates to be revenue recognition and stock-based compensation attributable to performance-based awards.

There have been no material changes to our other critical accounting policies and estimates as compared to the disclosures in our Annual Report on Form 10-K for the year ended December 31, 2023.

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Recent Accounting Pronouncements

We believe that the impact of accounting standards updates recently issued that are not yet effective will not have a material impact on our financial position or results of operations upon adoption.

Results of Operations

Comparison of the three months ended June 30, 2024 and 2023


	Three Months Ended
	June 30,				Change
	2024		2023		Amount		Percent

	(in thousands except percentage)
Revenues
Product revenues	$	411,364	$	258,256	$	153,108	59.3	%
Licensing and other revenues		1,987		3,148		(1,161)	(36.9)
Total revenues		413,351		261,404		151,947	58.1
Cost and expenses
Cost of product revenues		169,850		142,808		27,042	18.9
Cost of licensing and other revenues		329		341		(12)	(3.5)
Research and development		89,109		78,173		10,936	14.0
Selling, general and administrative		197,965		152,508		45,457	29.8
Total cost and expenses		457,253		373,830		83,423	22.3
Loss from operations		(43,902)		(112,426)		68,524	61.0
Interest expense		(3,127)		(3,177)		50	1.6
Interest and other income, net		10,457		4,518		5,939	131.5
Loss before income taxes		(36,572)		(111,085)		74,513	67.1
Income tax (expense) benefit		(892)		282		(1,174)	(416.3)
Net loss	$	(37,464)	$	(110,803)	$	73,339	66.2	%

Revenues

Total revenues are comprised of product revenues, which are primarily driven by sales of our Panorama and Horizon tests, oncology testing, and licensing and other revenues, which primarily includes development licensing revenue and licensing of our Constellation software. Total revenues increased by $151.9 million, or 58.1%, when compared to the three months ended June 30, 2023.

We derive our revenues from tests based on units reported to customers—tests delivered with a result. All reported units are either accessioned in our laboratory or processed outside of our laboratory. As noted in the section titled “Overview” above, the number of tests that we process is a key metric as it tracks our overall volume growth. During the three months ended June 30, 2024, total reported units were approximately 725,200, comprised of approximately 709,800 tests reported in our laboratory. Comparatively, during the three months ended June 30, 2023, total reported units were approximately 594,900, comprising of approximately 578,200 tests reported in our laboratory. During the three months ended June 30, 2024 and 2023, total oncology units processed were approximately 125,400 and 83,500, respectively.

Product Revenues

During the three months ended June 30, 2024, product revenues increased by $153.1 million, or 59.3%, compared to the three months ended June 30, 2023, primarily as a result of the continued revenue growth from increased test volumes, average selling price improvements, as well as cash receipts during the quarter related to tests delivered in prior periods that were fully collected.

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Licensing and Other Revenues

Licensing and other revenues decreased by $1.2 million, or 36.9%, during the three months ended June 30, 2024 when compared to the three months ended June 30, 2023. The decrease was primarily due to a decrease in revenue from our collaborative agreements.

Cost of Product Revenues

During the three months ended June 30, 2024, cost of product revenues increased compared to the three months ended June 30, 2023 by approximately $27.0 million, or 18.9%, primarily due to a $13.1 million increase in third-party fees, higher costs related to inventory consumption of $7.5 million driven by an increase in accessioned cases, and a $6.4 million increase in equipment and related depreciation expense, labor, overhead, shipping and other related costs driven by headcount growth and product support.

Cost of Licensing and Other Revenues

Cost of licensing and other revenues for the three months ended June 30, 2024, when compared to the three months ended June 30, 2023, was flat, primarily due to minimal change in costs to support our collaborative agreements.

Expenses

Research and Development

Research and development expenses during the three months ended June 30, 2024, increased by $10.9 million, or 14.0%, when compared to the three months ended June 30, 2023. The increase was attributable to a $11.5 million increase in salary and related compensation expenditures, which includes a $7.0 million increase in stock-based compensation expense. This was offset by a $0.6 million net decrease in lab and clinical trial related expenses, consulting, travel, office, facilities, and other expenses.

Selling, General and Administrative

Selling, general and administrative expenses increased by $45.5 million, or 29.8%, during the three months ended June 30, 2024 compared to the three months ended June 30, 2023. The increase was attributable to a $26.6 million increase in salary and related compensation expenditures, which includes a $15.4 million increase in stock-based compensation expense, a $4.1 million increase in consulting and legal expenses, a $4.0 million increase in marketing expenses, a $5.0 million increase in vendor expenses, and a $5.8 million increase in travel, facilities, office and other costs.

Interest Expense

Interest expense decreased by $0.1 million in the three months ended June 30, 2024 compared to the same period in the prior year. The interest expense decreased primarily as a result of the slight decrease in interest rate.

Interest and Other Income

Interest and other income for the three months ended June 30, 2024 increased $5.9 million compared to the same period in the prior year, primarily due to greater cash and investment balances driving higher interest income.

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Comparison of the six months ended June 30, 2024 and 2023


	Six Months Ended
	June 30,				Change
	2024		2023		Amount		Percent

	(in thousands except percentage)
Revenues
Product revenues	$	776,036	$	496,053	$	279,983	56.4	%
Licensing and other revenues		5,056		7,107		(2,051)	(28.9)
Total revenues		781,092		503,160		277,932	55.2
Cost and expenses
Cost of product revenues		328,683		290,562		38,121	13.1
Cost of licensing and other revenues		636		711		(75)	(10.5)
Research and development		177,746		160,479		17,267	10.8
Selling, general and administrative		392,243		302,135		90,108	29.8
Total cost and expenses		899,308		753,887		145,421	19.3
Loss from operations		(118,216)		(250,727)		132,511	52.9
Interest expense		(6,251)		(6,238)		(13)	(0.2)
Interest and other income, net		20,724		9,103		11,621	127.7
Loss before income taxes		(103,743)		(247,862)		144,119	58.1
Income tax (expense) benefit		(1,320)		122		(1,442)	(1,182.0)
Net loss	$	(105,063)	$	(247,740)	$	142,677	57.6	%

Revenues

Total revenues are comprised of product revenues, which are primarily driven by sales of our Panorama and Horizon tests, oncology testing, and licensing and other revenues, which primarily includes development licensing revenue and licensing of our Constellation software. Total revenues increased by $277.9 million, or 55.2%, when compared to the six months ended June 30, 2023.

We derive our revenues from tests based on units reported to customers—tests delivered with a result. All reported units are either accessioned in our laboratory or processed outside of our laboratory. As noted in the section titled “Overview” above, the number of tests that we process is a key metric as it tracks overall volume growth. During the six months ended June 30, 2024, total reported units were approximately 1,404,600, comprised of approximately 1,373,300 tests reported in our laboratory. Comparatively, during the six months ended June 30, 2023, total reported units were approximately 1,178,300, comprising of approximately 1,144,200 tests reported in our laboratory. During the six months ended June 30, 2024 and 2023, total oncology units processed were approximately 240,200 and 154,500, respectively.

Product Revenues

During the six months ended June 30, 2024, product revenues increased by $280.0 million, or 56.4% compared to the six months ended June 30, 2023, primarily as a result of the continued revenue growth from increased test volumes, average selling price improvements, as well as cash receipts during the quarter related to tests delivered in prior periods that were fully collected.

Licensing and Other Revenues

Licensing and other revenues decreased by $2.1 million, or 28.9%, during the six months ended June 30, 2024 when compared to the six months ended June 30, 2023. The decrease was primarily due to a decrease in revenue from our collaborative agreements.

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Cost of Product Revenues

During the six months ended June 30, 2024, cost of product revenues increased compared to the six months ended June 30, 2023 by approximately $38.1 million, or 13.1%, due to a $14.8 million increase in third-party fees, higher costs related to inventory consumption of $11.3 million driven by an increase in accessioned cases, and a $12.0 million increase in shipping, equipment and related depreciation expense, labor, overhead, and other related costs driven by headcount growth and product support.

Cost of Licensing and Other Revenues

Cost of licensing and other revenues for the six months ended June 30, 2024, when compared to the six months ended June 30, 2023, decreased by $0.1 million, or 10.5%, primarily due to a net decrease in costs to support our collaborative agreements.

Expenses

Research and Development

Research and development expenses during the six months ended June 30, 2024, increased by $17.3 million, or 10.8%, when compared to the six months ended June 30, 2023. The increase was attributable to an increase of $19.5 million increase in salary and related compensation expenditures, which includes a $13.3 million increase in stock-based compensation expense, and a $1.8 million net increase in consulting, office, facilities, and other expenses. This was offset by a decrease of $4.0 million in lab and clinical trial related expenses.

Selling, General and Administrative

Selling, general and administrative expenses increased by $90.1 million, or 29.8%, during the six months ended June 30, 2024 compared to the six months ended June 30, 2023. The increase was attributable to an increase of $52.5 million increase in salary and related compensation expenditures, which includes a $32.1 million increase in stock-based compensation expense, a $20.3 million increase in consulting and legal expenses, a $8.9 million increase in vendor expenses, and a $8.4 million increase in marketing, travel, facilities, office and other costs.

Interest Expense

Interest expense was flat in the six months ended June 30, 2024 compared to the same period in the prior year.

Interest and Other Income

Interest and other income for the six months ended June 30, 2024 increased $11.6 million compared to the same period in the prior year, primarily due to greater cash and investment balances driving higher interest income.

Liquidity and Capital Resources

We have incurred net losses each year since our inception. For the six months ended June 30, 2024, we had a net loss of $105.1 million, and we expect to continue to incur losses in future periods as we continue to devote a substantial portion of our resources to our research and development and commercialization efforts for our existing and new products. As of June 30, 2024, we had an accumulated deficit of $2.5 billion. As of June 30, 2024, we had $796.8 million in cash and cash equivalents and restricted cash, $90.3 million in marketable securities, $80.4 million of outstanding balance under the Credit Line including accrued interest, and $287.5 million outstanding principal balance on the Convertible Notes. As of June 30, 2024, we had $20.0 million remaining and available on the Credit Line.

While we have introduced multiple products that are generating revenues, these revenues have not been sufficient to fund all operations. Accordingly, we have funded the portion of operating costs that exceeds revenues through a combination of equity issuances and debt and other financings. We expect to develop and commercialize future products

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and continue to invest in the growth of our business and, consequently, we will need to generate additional revenues to achieve future profitability and may need to raise additional equity or incur additional debt. If we raise additional funds by issuing equity securities, our stockholders would experience dilution. Additional debt financing, if available, may involve covenants restricting our operations or our ability to incur additional debt. Any additional debt financing or additional equity that we raise may contain terms that are not favorable to us or our stockholders and requires significant debt service payments, which diverts resources from other activities. Additional financing may not be available at all, or in amounts or on terms acceptable to us. If we are unable to obtain additional financing, we may be required to delay the development and commercialization of our products and significantly scale back our business and operations.

In September 2023, we completed an underwritten equity offering and sold 4,550,000 shares of our common stock at a price of $55 per share to the public. Before offering expenses of approximately $0.4 million, we received proceeds of approximately $235.8 million net of the underwriting discount. Our contractual obligations and other commitments have been satisfied by the equity offering described above, our convertible note financing conducted in April 2020 described below, the Credit Line described below, and our product, licensing, and other sales. For our commitments, refer to the “Contractual Obligations and Other Commitments” section below.

Refer to additional disclosures associated with risks and our ability to generate and obtain adequate amounts of cash to meet capital requirements for both short-term and long-term obligations.

Based on our current business plan, we believe that our existing cash and marketable securities will be sufficient to meet our anticipated cash requirements for at least 12 months after August 8, 2024.

Credit Line Agreement

In September 2015, we entered into a Credit Line with UBS, or the Credit Line, providing for a $50.0 million revolving line of credit which could be drawn in increments at any time. The Credit Line was amended in July 2017 and bears interest at 30-day LIBOR plus 1.10%, and it is secured by a first priority lien and security interest in our money market and marketable securities held in our managed investment account with UBS. UBS has the right to demand full or partial payment of the Credit Line obligations and terminate it, in its discretion and without cause, at any time. The interest rate was subsequently changed to the 30-day Secured Overnight Financing Rate (“SOFR”) average, plus 1.21%. The SOFR rate is variable. The Credit Line was subsequently increased from $50.0 million to $150.0 million. In June 2023, the Credit Line decreased to $100.0 million. In October 2023, the interest rate for the Credit Line was subsequently changed to the 30-day SOFR average, plus 0.5%. As of June 30, 2024, the total principal amount outstanding with accrued interest was $80.4 million and $20.0 million is remaining as available under the Credit Line.

Convertible Notes

In April 2020, we issued $287.5 million aggregate principal amount of Convertible Notes in a private placement offering to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended.

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The Convertible Notes are senior, unsecured obligations of the Company and bear interest at a rate of 2.25% per year, payable in cash semi-annually in arrears in May and November of each year, beginning in November 2020. The Convertible Notes mature in May 2027, unless earlier converted, repurchased or redeemed in accordance with their terms. Upon conversion, the Convertible Notes are convertible into cash, shares of our common stock or a combination of cash and shares of our common stock, at our election. On July 19, 2024, we elected to exercise our optional redemption right to redeem all $287.5 million aggregate principal amount of our outstanding 2.25% Convertible Notes due 2027 and instructed Wilmington Trust, National Association, as trustee under the Indenture Agreement governing the Convertible Notes, to issue a redemption notice to registered holders of the Convertible Notes. The Redemption Date fixed for the redemption of the Convertible Notes is October 11, 2024. The redemption price for the Convertible Notes is equal to 100% of the principal amount of the Convertible Notes to be redeemed plus accrued and unpaid interest to, but excluding, the Redemption Date. We elected physical settlement with shares of our common stock as the settlement method to apply to all conversions of the Convertible Notes. Based on the conversion terms of the Convertible Notes and the market price of our common stock, we expect that substnaitally all outstanding Convertible Notes will be converted into shares of our common stock prior to the Redemption Date. As a result, we do not expect that our redemption of the Convertible Notes will have a material effect on our liquidity. Should all holders elect to convert their Convertible Notes, approximately 7,534,000 shares of common stock would be issued for settlement.

We received net proceeds from the Convertible Notes of $278.3 million, after deducting the initial purchasers’ discounts and debt issuance costs. We used approximately $79.2 million of the net proceeds from the Convertible Notes offering to repay our obligations under our credit agreement with OrbiMed Royalty Opportunities II, LP.

Cash Flows

The following table summarizes our condensed consolidated cash flows for the periods indicated:


	Six Months Ended
	June 30,
	2024		2023

	(in thousands)
Cash provided by (used in) operating activities	$	30,991	$	(159,651)
Cash provided by investing activities		106,202		63,060
Cash provided by financing activities		17,510		11,613
Net change in cash, cash equivalents and restricted cash		154,703		(84,978)
Cash, cash equivalents and restricted cash, beginning of period		642,095		466,091
Cash, cash equivalents and restricted cash, end of period	$	796,798	$	381,113

Cash Provided by (Used in) Operating Activities

Cash provided by operating activities during the six months ended June 30, 2024 was $31.0 million. The net loss of $105.1 million includes $154.5 million in non-cash charges resulting from $15.0 million of depreciation and amortization, $131.9 million of stock-based compensation expense, $7.2 million of non-cash lease expense, $0.6 million for amortization of debt discount and issuance cost, and $0.4 million for foreign exchange adjustment, offset by a $0.6 million decrease in premium amortization and discount accretion on investment securities. Operating assets had cash outflows of $36.9 million resulting from a $57.6 million increase in accounts receivable, a $0.2 million increase in inventory, offset by a $20.9 million decrease in prepaid expenses and other assets. Operating liabilities resulted in cash inflows of $18.5 million resulting from a $16.7 million increase in accounts payable, $19.7 million increase in accrued compensation and a $1.0 million increase in deferred revenue, offset by, a $8.3 million decrease in lease liabilities and a $10.6 million decrease in other accrued liabilities.

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Cash used in operating activities during the six months ended June 30, 2023 was $159.7 million. The net loss of $247.7 million includes $107.5 million in non-cash charges resulting from $10.2 million of depreciation and amortization, $2.7 million in-process research and development, $1.5 million premium amortization and discount accretion on investment securities, $84.8 million of stock-based compensation expense, $7.4 million of non-cash lease expense, $0.6 million for amortization of debt discount and issuance cost, and $0.3 million for foreign exchange adjustment. Operating assets had cash outflows of $10.4 million resulting from a $15.7 million increase in accounts receivable, a $7.3 million increase in inventory, offset by a $12.6 million decrease in prepaid expenses and other assets. Operating liabilities resulted in cash outflows of $9.1 million resulting from a $9.0 million decrease in accounts payable, a $11.2 million decrease in other accrued liabilities and a $5.2 million decrease in lease liabilities, offset by a $9.9 million increase in accrued compensation and a $6.4 million increase in deferred revenue.

Cash Provided by Investing Activities

Cash provided by investing activities for the six months ended June 30, 2024 totaled $106.2 million, which was comprised of $221.5 million from proceeds of investments maturities, offset by $72.8 million in purchasing of new investments, $32.0 million in acquisitions of property and equipment and $10.5 million in asset acquisition.

Cash provided by investing activities for the six months ended June 30, 2023 totaled $63.1 million, which was comprised of $83.2 million from proceeds of investments maturities, offset by $20.2 million in acquisitions of property and equipment.

Cash Provided by Financing Activities

Cash provided by financing activities for the six months ended June 30, 2024, totaled $17.5 million which was comprised of $8.6 million from proceeds from the exercise of stock options and $8.9 million from the issuance of common stock under the employee stock purchase plan.

Cash provided by financing activities for the six months ended June 30, 2023, totaled $11.6 million which was comprised of $2.9 million from proceeds from the exercise of stock options and $8.7 million from the issuance of common stock under the employee stock purchase plan.

Contractual Obligations and Other Commitments

We have entered into arrangements that contractually obligate us to make payments that will affect our liquidity and cash flows in future periods. Such arrangements include those related to our lease commitments, Credit Line, Convertible Notes, commercial supply agreements and other agreements.

Credit Line

The short-term debt obligations consist of the $80.4 million principal amount drawn from the Credit Line with UBS and applicable interest. The Credit Line was amended in July 2017 and bears interest at 30-day LIBOR plus 1.10%, and it is secured by a first priority lien and security interest in our money market and marketable securities held in our managed investment account with UBS. The interest rate was subsequently changed to the 30-day SOFR average, plus 1.21%. The SOFR rate is variable. UBS has the right to demand full or partial payment of the Credit Line obligations and terminate it, in its discretion and without cause, at any time. In October 2023, the interest rate was subsequently changed to the 30-day SOFR average, plus 0.5%. Please refer to Note 10, Debt, for further details.

Convertible Notes

The long-term debt obligations consist of the $287.5 million principal amount from a private placement offering to qualified institutional buyers and applicable interest. The Convertible Notes are senior, unsecured obligations of the Company and bear interest at a rate of 2.25% per year, payable in cash semi-annually in arrears in May and November of each year, beginning in November 2020. The Convertible Notes mature in May 2027, unless earlier converted, repurchased

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or redeemed in accordance with their terms. Upon conversion, the Convertible Notes are convertible into cash, shares of our common stock or a combination of cash and shares of our common stock, at our election.

Inventory purchase and other contractual obligations

We enter into contracts in the normal course of business with various third parties for clinical trials, preclinical research studies, testing, manufacturing, and other services for operational purposes. Payments due upon cancellation generally consist only of payments for services provided or expenses incurred, including non-cancellable obligations of our service providers, up to the date of cancellation. These payments have not been included separately within these contractual and other obligations disclosures. Please refer to Note 8, Commitments and Contingencies in the Notes to Unaudited Interim Condensed Consolidated Financial Statements for further details.

Operating leases

Our lease commitments consist of $0.3 million of payments, which will be paid over the terms of the leases. The leases have not commenced under Accounting Standards Codification, or ASC, Topic 842, Leases (ASC 842), as of June 30, 2024. As a result, these leases are not reflected within the consolidated balance sheets.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements during the periods presented.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

We are exposed to market risks in the ordinary course of our business. These risks primarily relate to interest rates. Our Credit Line had an interest rate of 30-day LIBOR plus 1.10%. The interest rate was subsequently changed to the 30-day SOFR average, plus 1.21%. The SOFR rate is variable. In October 2023, the interest rate for the Credit Line was subsequently changed to the 30-day SOFR average, plus 0.5%. An incremental change in the borrowing rate of 100 basis points would increase our annual interest expense by $0.8 million based on our $80.4 million gross debt outstanding on our Credit Line, including principal and accrued interest as of June 30, 2024. The interest rate for our Convertible Notes is fixed at 2.25% and not exposed market risk related to interest rates. Our investment portfolio is exposed to market risk from changes in interest rates. This risk is mitigated as we have maintained a relatively short average maturity for our investment portfolio. An incremental change in the investment yield of 100 basis points would increase our annual interest income by approximately $0.9 million annually in relation to amounts we would expect to earn, based on our short-term investments as of June 30, 2024.

Foreign Currency Exchange Rate Fluctuations

Our operations are currently conducted primarily in the United States. As we expand internationally, our results of operations and cash flows may become subject to fluctuations due to changes in foreign currency exchange rates. In periods when the U.S. dollar declines in value as compared to the foreign currencies in which we incur expenses, our foreign currency-based expenses will increase when translated into U.S. dollars. In addition, future fluctuations in the value of the U.S. dollar may affect the price at which we sell our tests outside the United States. To date, our foreign currency risk has been minimal, and we have not historically hedged our foreign currency risk; however, we may consider doing so in the future.

Inflation Risk

As of the date of filing of this Quarterly Report on Form 10-Q, we do not believe that inflation has had a material effect on our business, financial condition, or results of operations. If our costs were to become subject to significant

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inflationary pressures, we may not be able to fully offset such higher costs through increases in revenue as increases in core inflation rates may also negatively affect demand for our product offerings. Our inability or failure to do so could harm our business, financial condition, and results of operations.

ITEM 4.

CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2024. The term “disclosure controls and procedures,” as defined in Rule 13a-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to our management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

Based on the evaluation of our disclosure controls and procedures as of June 30, 2024, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the period ended June 30, 2024, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations on Effectiveness of Controls

Our management, including our Chief Executive Officer and Chief Financial Officer, do not expect that our disclosure controls or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

PART II – OTHER INFORMATION

ITEM 1.LEGAL PROCEEDINGS

From time to time, we are involved in legal proceedings. The results of such legal proceedings and claims cannot be predicted with certainty, and regardless of the outcome, legal proceedings could have an adverse impact on us because of defense and settlement costs, diversion of resources and other factors.

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For information regarding certain current legal proceedings, see “Note 8—Commitments and Contingencies—Legal Proceedings” in the Notes to Unaudited Interim Condensed Consolidated Financial Statements, which is incorporated herein by reference.

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ITEM 1A.RISK FACTORS

Investing in our common stock involves a high degree of risk. In addition to the information set forth in this Quarterly Report on Form 10-Q, including the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes, you should consider carefully the factors discussed in Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2023 filed with the Securities and Exchange Commission on February 29, 2024. The occurrence of any of the risks and uncertainties described in such Annual Report could materially and adversely affect our business, financial condition, results of operations and prospects. In that event, the price of our common stock could decline and you could lose part or all of your investment. Furthermore, such risks are not the only ones we face; additional risks and uncertainties not currently known or that we currently deem to be immaterial may also materially adversely affect our business, financial condition or results of operations.

ITEM 2 UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

(a) Recent Sales of Unregistered Securities

None.

(b) Use of Proceeds

Not applicable.

None.

ITEM 3 DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4 MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5 OTHER INFORMATION

Securities Trading Plans of Directors and Executive Officers

During the quarter ended , of our officers or directors, as defined in Rule 16a-1(f), informed us of the or of a Rule 10b5-1 trading arrangement or a non-Rule 10b5-1 trading arrangement, each as defined in Regulation S-K Item 408.

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ITEM 6 EXHIBITS

INDEX TO EXHIBITS


		Incorporated by Reference
Exhibit No.	Description	Form	File No.	Exhibit	Filing Date	Filed Herewith
10.1	Amended and Restated Employment Agreement, by and between Registrant and Steve Chapman, dated August 1, 2024.					X
10.2	Amended and Restated 2015 Equity Incentive Plan	8-K	001-37478	10.1	June 18, 2024
31.1	Certification of Principal Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.					X
31.2	Certification of Principal Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.					X
32.1†	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.					X
32.2†	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.					X
101.INS	XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.					X
101.SCH	XBRL Taxonomy Extension Schema Document.					X
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document.					X
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document.					X
101.LAB	XBRL Taxonomy Extension Label Linkbase Document.					X
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document.					X

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		Incorporated by Reference
Exhibit No.	Description	Form	File No.	Exhibit	Filing Date	Filed Herewith
104	Cover Page Interactive Data File - The cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.					X

†The certifications attached as Exhibits 32.1 and 32.2 that accompany this Quarterly Report on Form 10-Q are not deemed filed with the SEC and are not to be incorporated by reference into any filing of Natera, Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Quarterly Report on Form 10-Q, regardless of any general incorporation language contained in any filing.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	NATERA, INC.

Date: August 8, 2024	By:	/ s / Steve Chapman
	Name:	Steve Chapman
	Title:	Chief Executive Officer, President, and Director
		(Principal Executive Officer)

	By:	/ s / Michael Brophy
	Name:	Michael Brophy
	Title:	Chief Financial Officer
		(Principal Financial and Accounting Officer)

Natera, Inc. - Quarter Report: 2024 June (Form 10-Q)

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