UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
☒
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2022
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 001-37478
NATERA, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware
State or Other Jurisdiction of Incorporation or Organization
01-0894487
(I.R.S. Employer Identification No.)
13011 McCallen Pass
Building A Suite 100
Austin, TX
(Address of Principal Executive Offices)
78753
(Zip Code)
(650) 980-9190
Registrant’s Telephone Number, Including Area Code
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Common Stock, par value $0.0001 per share
NTRA
Name of each exchange on which registered
The Nasdaq Stock Market LLC
(NASDAQ Global Select Market)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Act. Yes ☐ No
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of
Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such
files). Yes No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an
emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in
Rule 12b-2 of the Exchange Act.:
Large accelerated filer
Non-accelerated filer
☐
Accelerated filer
Smaller reporting company
Emerging growth company
☐
☐
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or
revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control
over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit
report. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant was approximately $2.57 billion based on the
last reported sale price of $35.44 per share as reported on the Nasdaq Global Select Market on June 30, 2022, the last trading day of the most recently completed second
fiscal quarter.
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing
reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by
any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b).
As of February 17, 2023, the number of outstanding shares of the registrant’s common stock, par value $0.0001 per share, was 113,285,675.
DOCUMENTS INCORPORATED BY REFERENCE
Information required in response to Part III of this annual report on Form 10-K is hereby incorporated by reference to portions of the Registrant’s proxy
statement for its Annual Meeting of Stockholders to be held in 2022. The proxy statement will be filed by the registrant with the Securities and Exchange Commission
within 120 days after the end of the registrant’s fiscal year ended December 31, 2022.
Natera, Inc.
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2022
TABLE OF CONTENTS
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART I
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1B. Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 2.
Item 3.
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 4. Mine Safety Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 6.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . .
Item 7A. Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 8.
Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . . . . .
Item 9A. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9B. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9C. Disclosure Regarding Jurisdictions That Prevent Inspections . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART III
Item 10. Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 13. Certain Relationships and Related Transactions, and Director Independence . . . . . . . . . . . . . . . . . . . . . .
Item 14. Principal Accounting Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 15. Exhibits and Financial Statement Schedules. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 16. Form 10-K Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART IV
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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.
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 described in "Risk Factors" and
elsewhere in this report. Given these uncertainties, you should not place undue reliance on these forward-looking
statements. Also, forward-looking statements represent our beliefs and assumptions only as of the date of this report. 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.
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 and Horizon;
our ability to increase demand and reimbursement for our tests, particularly Panorama, Horizon, Signatera
and Prospera;
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 our oncology and organ health products;
our ability to comply with federal, state, and foreign regulatory requirements, programs and policies 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;
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;
3
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 Panorama, Horizon and of any of our other 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;
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 and our ability to make debt
service payments under the Convertible Notes if such Convertible Notes are not converted;
our ability to control our operating expenses and fund our working capital requirements;
the factors that may impact our financial results; and
anticipated trends and challenges in our business and the markets in which we operate.
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.
SUMMARY OF RISK FACTORS
The below is a summary of principal risks to our business and risks associated with ownership of our stock. This
summary does not address all of the risks that we face. We encourage you to carefully review the full risk factors contained
in this Annual Report on Form 10-K in their entirety for additional information regarding the material factors that make
an investment in our securities speculative or risky. These risks and uncertainties include, but are not limited to, the
following:
if we are unable to increase demand for our tests – in particular Panorama and Horizon, which together
represent the majority of our revenues – obtain favorable coverage and reimbursement determinations from
third-party payers, and expand geographically, our business will be harmed;
Panorama may not be adopted for broader use for the screening of microdeletions, or third-party payer
reimbursement may not be available for this testing;
if we are not successful in our efforts to develop additional revenue opportunities and expand our product
offerings to include new tests, including in oncology and organ health, our business and prospects, as well
as our stock price, will be adversely affected;
we have incurred net losses since our inception, and anticipate that we will continue to incur losses for the
foreseeable future;
we have incurred substantial indebtedness that may decrease our business flexibility, access to capital, and/or
increase our borrowing costs, which may adversely affect our operations and financial results;
our quarterly results may fluctuate from period to period, which could adversely impact the value of our
common stock;
competition in our industry is intense, and if we are unable to complete successfully with respect to our
current or future products or services, we may be unable to increase or sustain our revenues or achieve
profitability;
4
our estimates of the total addressable markets for our current and potential product offerings may turn out to
be inaccurate, or the markets for our tests may not grow as we expect;
we may be unable to obtain, maintain or expand third-party payer coverage of, and reimbursement for, our
tests;
if we are not successful in our research and development or clinical development activities, including clinical
trials and publication of compelling data, our ability to commercialize our products, and therefore our
competitive position, will be adversely impacted;
our strategic or commercial partnerships, such as our agreements with BGI Genomics Co., Ltd., Foundation
Medicine, Inc., and our pharmaceutical partners, may not be successful, and we may be unable to enter into
additional partnerships in the future;
we operate in a crowded technology area in which there has been substantial litigation and other proceedings
regarding patent and other intellectual property rights, and we may fail to adequately protect or enforce our
intellectual property relating to our tests, or fail to defend against infringement claims brought against us by
other parties;
we rely 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;
we have experienced rapid growth, particularly in recent years, and may be unable to successfully scale our
operations, which could harm our business and results of operations;
we may engage in acquisitions, dispositions or other strategic transactions that could disrupt our business,
cause dilution to our stockholders or reduce our financial resources;
third-party payers, such as commercial health insurers and government insurance programs, may decide not
to reimburse our existing or future products, may set the amounts of any reimbursements at prices that do
not allow us to cover our expenses or may otherwise adopt policies and procedures that restrict or harm our
business; and
difficult macroeconomic conditions may have an adverse effect on our business.
As used in this Annual Report on Form 10-K, the terms “Natera,” “Registrant,” “Company,” “we,” “us,” and
“our” mean Natera, Inc. and its subsidiaries unless the context indicates otherwise.
5
Item 1.
BUSINESS
PART I
Note: A glossary of terms used in this Form 10-K appears at the end of this Item 1.
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.
Our initial focus was in the women’s health space, in which we develop and commercialize non- or minimally-
invasive tests to evaluate risk for, and thereby enable early detection of, a wide range of genetic conditions, such as Down
syndrome. Our technology is now also being proven in the oncology market, in which we are commercializing, among
others, a personalized blood-based DNA test to detect molecular residual disease, or MRD, and monitor for disease
recurrence, as well as in the organ health market, with tests to assess organ transplant rejection. Since 2009, we have
launched a comprehensive suite of products to improve patient care outcomes in women’s health, oncology and organ
health. We intend to continue to enhance our existing products, expand our product portfolio and launch new products in
the future. We seek to enable even wider adoption of our technology through our global cloud-based distribution model.
In addition to our direct sales force in the United States, we have a global network of over 100 laboratory and distribution
partners, including many of the largest international laboratories. We are committed to generating peer-reviewed clinical
evidence for our tests, and have published over 75 publications in women’s health, 40 in oncology, and over 20 in organ
health.
We launched Panorama, our non-invasive prenatal test, or NIPT, in 2013 and have since gone from being the
fourth company to enter the NIPT market to being the market leader by volume in the United States. We launched our
Horizon carrier screening test in 2012. Panorama and Horizon together represent a majority of our revenues. Our revenues
were $820.2 million in 2022 compared to $625.5 million in 2021 and $391.0 million in 2020. Our product revenues, which
are primarily generated from testing in women’s health, were $797.3 million, $580.1 million, and $377.9 million for the
years ended December 31, 2022, 2021, and 2020, respectively. Our net losses increased to $547.8 million in 2022, from
$471.7 million in 2021 and $229.7 million in 2020. We processed approximately 2.1 million tests in 2022, compared to
approximately 1.6 million tests in 2021 and 1.0 million tests in 2020.
We are headquartered in Austin, Texas, and our laboratory facilities are located in Austin, Texas and San Carlos,
California.
Our Solution
In women’s health, oncology and organ health, the use of blood-based tests offers significant advantages over
older and more invasive methods, but the significant technological challenge is that such testing often requires the
measurement of very small amounts of relevant genetic material – fetal DNA in reproductive health, tumor DNA in
oncology, and donor DNA in transplant rejection – circulating within a much larger blood sample. Our approach combines
proprietary molecular biology and computational techniques to measure genomic variations in tiny amounts of DNA, as
small as a single cell; our core technology has, to date, been proven across these three diverse fields of women’s health,
oncology and organ health.
6
DNA is a naturally occurring information storage system that conveys genetic inheritance. DNA stores
information in a linear sequence of the chemical bases adenine, cytosine, guanine and thymine, represented by the symbols
A, C, G, and T. Billions of bases of A, C, G, and T link together inside living cells to form the genome, which can be read
like a code or a molecular blueprint for life. While differences in the specific sequence and structure of this code drive
biological diversity, certain variations can also cause disease. Examples of genetic diversity include CNVs and SNVs. A
CNV is a genetic mutation in which relatively large regions of the genome have been deleted or duplicated, and an SNV
is a mutation where a single base has changed. When single base changes are common in the population, that position on
the chromosome, or loci, is called a single nucleotide polymorphism, or SNP.
Our molecular biology techniques are based on measuring thousands of SNPs simultaneously using massively
multiplexed polymerase chain reaction, or mmPCR, to multiplex, or target, many thousands of regions of the genome
simultaneously in a single test reaction. Our method avoids losing molecules, which can happen when samples are split
into separate reaction tubes, so that all relevant variants can be detected. To make sense of the resulting deep and rich set
of biological data and deliver a test result, we have developed computationally intensive algorithms that combine the data
generated by mmPCR with our internal databases and the vast and growing sources of publicly available genomic
information to build highly detailed models of the genomic regions of interest. Our technologies allow us to achieve a high
signal-to-noise ratio when detecting fragments of DNA at frequencies as low as a single copy, which allows us to deliver
tests with a high degree of specificity and sensitivity. Furthermore, our tests can be applied to assess a range of conditions
and disease types, including common fetal aneuploidies, microdeletions, triploidy, and inherited genetic conditions that
could be passed on from parent to child; a growing number of cancer types; and rejection of heart, lung, and kidney
transplants.
We believe our approach represents a fundamental advance in molecular biology. In women’s health, this
approach is distinct from the approach employed with other commercially available NIPTs, which use first-generation
“quantitative”, or counting, methods to compare the relative number of sequence reads from a chromosome of interest to
a reference chromosome. Based on data published in the journals Obstetrics & Gynecology, American Journal of
Obstetrics & Gynecology, Prenatal Diagnosis, and others, we believe Panorama is the most accurate NIPT commercially
available in the United States. In oncology, with our Signatera circulating tumor DNA, or ctDNA, test that is custom
designed for, informed by and specific to, the tumor DNA for each patient, we have demonstrated the ability to detect
ctDNA with a high degree of sensitivity and specificity. In organ health, we have demonstrated the ability of our
technology to measure the fraction of cell-free DNA that is donor-derived, or dd-cfDNA, which is DNA that is shed from
a transplanted organ into circulation, each demonstrating a high area under the curve, or AUC, in validation studies in each
of heart, lung, and kidney.
Our technology is compatible with standard equipment used globally and a range of next generation sequencing,
or NGS, platforms, and we have optimized our algorithms to enable laboratories around the world to run tests locally and
access our algorithms in the cloud using our Constellation platform. We sell our tests directly and partner with other
clinical laboratories to distribute our tests globally. Currently, all of our products other than our Constellation cloud
software product are laboratory developed tests, or LDTs. We perform commercial testing in our CLIA-certified
laboratories.
Women’s Health
We provide testing to support a spectrum of women’s health needs, from family planning and prenatal testing to
hereditary cancer screening.
Panorama
Panorama, our NIPT, helps physicians assess the risk of fetal genetic abnormalities by non-invasively screening
for fetal chromosomal abnormalities, including Down syndrome, Edwards syndrome, Patau syndrome, Turner syndrome
and triploidy, which often result in intellectual disability, severe organ abnormalities and miscarriage. Panorama can also
identify fetal sex for single birth pregnancies as well as of each fetus in twin pregnancies. Panorama demonstrates the
capabilities of our technology by employing our fundamentally unique approach of simultaneously measuring thousands
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of SNPs in a single test reaction to identify genetic variations in fetal DNA with a high degree of specificity and sensitivity,
which we believe can give patients and their physicians a greater degree of comfort in choosing to forego unnecessary
invasive procedures, limiting the resulting risk of spontaneous miscarriage associated with invasive procedures and
lowering the total cost to the healthcare system of these procedures. Furthermore, with recent technological advances
validated in our SNP-based Microdeletions and Aneuploidy RegisTry (SMART) study described below, Panorama
leverages artificial intelligence to enable highly accurate results on samples for which a result would otherwise be difficult
to determine. Panorama screens for common genetic conditions that affect both high-risk pregnancies, where maternal age
is 35 years or older and which we estimate represent approximately 800,000 of the approximately 4.4 million pregnancies
in the United States, and average-risk pregnancies, which we estimate represent approximately 3.6 million pregnancies in
the United States.
Panorama is performed on a maternal blood sample and can be performed as early as nine weeks into a pregnancy,
which is significantly earlier than traditional methods, such as serum protein measurement whereby doctors measure the
presence and amount of certain hormones in the blood. Panorama starts with a simple blood draw from the mother, either
in a doctor’s office, in a laboratory or through a phlebotomist that travels to the patient, and the sample is sent to one of
our CLIA-certified and CAP-accredited laboratories for processing. After Panorama generates its result, we provide the
doctor or the laboratory with a report showing whether there is a high risk or low risk that abnormalities are present in the
fetus.
The analytic and clinical validity of our technology demonstrated in NIPT has been described in more peer-
reviewed publications covering more patients than our competitors. Based on data published in Prenatal Diagnosis, Fetal
Diagnosis and Therapy, Obstetrics & Gynecology, and the American Journal of Obstetrics and Gynecology, Panorama
demonstrated greater than 99% overall sensitivity for aneuploidies on chromosomes 13 and 21 and triploidy and 98.2%
sensitivity on chromosome 18, and specificity of greater than 99% for each disorder tested – which we believe makes it
overall the most accurate NIPT commercially available in the United States. A paper published in Obstetrics & Gynecology
reported that Panorama had a statistically significant lower false positive rate than other NIPT methods practiced by our
U.S. competitors. Based on data published in Obstetrics & Gynecology, Prenatal Diagnosis, and American Journal of
Obstetrics & Gynecology, we have also demonstrated the ability to identify fetal sex more accurately than competing
NIPTs. This is partially a result of Panorama’s unique ability to detect a vanishing twin, which is a known driver of fetal
sex errors with quantitative methods used by our competitors. The American Journal of Obstetrics & Gynecology noted
that the ability of Panorama to identify additional fetal haplotypes is expected to result in fewer false positive calls and
prevent incorrect fetal sex calls. A study reporting on the use of Panorama in over 30,000 women, published in the
American Journal of Obstetrics & Gynecology, supported the use of NIPT as a first-line screening test for aneuploidy.
Our Panorama microdeletions panel screens for five of the most common genetic diseases caused by
microdeletions – 22q11.2 deletion syndrome (DiGeorge syndrome), 1p36 deletion, Angelman syndrome, Cri-du-chat
syndrome and Prader-Willi syndrome. 22q11.2 deletion syndrome can also be screened as an individual add-on without
the other four microdeletions on the panel. Microdeletions are missing sub-chromosomal pieces of DNA, and can have
serious health implications depending on the location of the deletion. Unlike Down syndrome, where the risk increases
with maternal age, the risk of these five microdeletions is independent of maternal age. Based on data published in Prenatal
Diagnosis and American Journal of Obstetrics & Gynecology, the combined prevalence of these targeted microdeletions
is approximately one in 1,000 pregnancies, which collectively makes them more common than Down syndrome for women
approximately 28 years of age or younger. Diseases caused by microdeletions are often not detected via common screening
techniques such as ultrasound or hormone-based screening, yet the presence of a microdeletion can critically impact
postnatal treatment. For example, when learning prior to birth that a newborn has 22q11.2 deletion syndrome, doctors will
know to monitor the infant and administer calcium if needed to avoid seizures and permanent cognitive impairment, and
will know to avoid administering routine vaccinations due to the immunodeficiency frequently associated with this
condition.
Panorama has demonstrated best-in-class performance in screening for microdeletions, achieving sensitivity of
over 93% for all five of the microdeletions screened. In particular, the most common microdeletion – 22q11.2 deletion
syndrome – was a focus of our SMART observational study, which evaluated the performance of SNP-based NIPT for
22q11.2 deletion syndrome by tracking birth outcomes in the general population among over 18,000 women who presented
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clinically and elected Panorama microdeletions and aneuploidy screening as part of their routine care. A key finding from
the SMART study, published in American Journal of Obstetrics and Gynecology in January 2022, was a higher-than-
expected prevalence of 22q11.2 deletion syndrome of one in 1,524 pregnancies in the study cohort. In that study, Panorama
demonstrated sensitivity of 83%, clinical PPV of approximately 53%, and a false positive rate of 0.05% for 22q11.2
deletion syndrome using our updated artificial intelligence algorithm.
Panorama is also the only commercially available NIPT for twin pregnancies that can distinguish between each
twin’s DNA, and therefore can determine zygosity, or whether the twins are identical or fraternal, and the fetal sex of each
twin. Determining zygosity early in a pregnancy can help guide the management of a pregnancy, as certain monozygotic,
or identical twin, pregnancies are at higher risk for various complications such as twin-twin transfusion syndrome, where
there is an unequal sharing of blood, and therefore unequal growth, between the twins. Panorama screens twin pregnancies
for Down, Edwards and Patau syndromes and, for identical twins, Turner syndrome and 22q11.2 deletion syndrome,
among others. In validation studies, Panorama identified identical twins with over 99% sensitivity and specificity and
achieved a combined sensitivity of over 99% and specificity of over 99% for Down, Edwards and Patau syndromes in twin
pregnancies.
Panorama has demonstrated substantial commercial success to date. We believe our test performance – including
our continuous research, development and innovation to improve performance and efficiency – has allowed us to command
a price premium compared to low-cost NIPTs while continuing to maintain growth in volume and revenue from Panorama.
Horizon
Our Horizon carrier screening test helps individuals and couples determine if they are carriers of genetic variations
that cause certain genetic conditions. Depending on the condition, if one or both parents are carriers, it could result in a
child affected with the condition. Many people do not know they are a carrier for an inherited genetic condition until they
have an affected child. These conditions are often rare and usually there is no family history, and although certain
conditions are more common in certain ethnic groups, ethnicity may not be a reliable predictor of carrier status, as patients
are increasingly of mixed or uncertain ethnicities. The industry’s approach to carrier screening has accordingly evolved
over time, from screening targeting specific ethnicities with a higher incidence of screened conditions, to pan-ethnic
screening for certain conditions based on incidence and clinical utility, and most recently to expanded screening for many
conditions simultaneously.
Horizon was created based on recommended screening guidelines from ACOG, ACMG, and the Victor Center
for the Prevention of Jewish Genetic Diseases. Horizon screens for more than 200 inherited conditions, including Cystic
Fibrosis, Duchenne Muscular Dystrophy, or DMD, Spinal Muscular Atrophy, Fragile X Syndrome and other conditions.
The sample required for Horizon can be obtained simultaneously with the sample required for Panorama, which makes it
easier for us to offer, and for patients to take, both tests. Horizon employs various methodologies to analyze the DNA from
the individual’s blood or saliva sample to determine if the individual is a carrier for the genetic conditions being screened.
These methodologies include next generation sequencing to detect single nucleotide variants, insertions and deletions, and
copy number changes, and PCR fragment analysis to detect certain genetic variants.
Other women’s health products
While Panorama and Horizon represent a majority of our women’s health revenues, we offer a portfolio of tests
addressing reproductive and women’s health. Our Vistara single-gene NIPT screens for 25 single-gene disorders that cause
severe skeletal, cardiac and neurological conditions which affect quality of life, are often associated with cognitive
disabilities and could benefit from medical and/or surgical intervention. The conditions screened by Vistara have a
combined incidence of approximately 1 in 600, which is higher than that of Down syndrome as well as Cystic Fibrosis;
however, these conditions may otherwise go undetected until after birth or into childhood as traditional NIPTs do not
screen for these conditions, prenatal ultrasound findings are not a reliable indicator, and family history is not a good
indicator of risk for these conditions, which are commonly caused by new, and not inherited, mutations. Screening for
these conditions early in a pregnancy can facilitate early diagnosis, enable patients to be referred to MFMs and other
specialists for targeted evaluations, to guide labor and delivery management, and to allow families to mobilize resources,
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ask questions and anticipate future needs. We have received a CE Mark for Vistara from the European Commission. In
validation studies, Vistara demonstrated a combined analytical sensitivity and analytical specificity of greater than 99%.
Spectrum, our preimplantation genetic tests for couples undergoing IVF, can improve the chance of a successful
pregnancy while reducing the chance of miscarriage or of having a child with a chromosomal condition, by helping to
identify the healthiest embryos during an IVF cycle. In particular, aneuploidy is common in human embryos—particularly
as women age—and is the primary cause of failed IVF. In a study published in April 2018, a retrospective analysis of
pregnancy outcomes demonstrated that use of Spectrum during IVF led to increased rates of implantation, clinical
pregnancy, and live births. Spectrum incorporates our proprietary technology to confirm parentage, determine the parental
origin of the chromosomal abnormality, and further screen for uniparental disomy, in which two copies of a chromosome
come from the same parent.
Anora, our products of conception, or POC, test, analyzes miscarriage tissue from women who have experienced
one or more pregnancy losses to determine whether there was an underlying chromosomal reason for the loss. Anora can
detect trisomy, triploidy, extra or missing chromosome pieces, and uniparental disomy. The Anora test is helpful to
obstetricians, gynecologists and IVF physicians in supporting their patients’ reproductive goals. Anora can help couples
understand the likelihood of another miscarriage, their future reproductive options, and whether there are any steps that
could help them avoid a miscarriage in future pregnancies.
Empower, our hereditary cancer screening test, screens for certain genes associated with increased risk for
common hereditary cancers, such as breast, ovarian, endometrial, and colorectal cancers. Information from the test can
lead to earlier detection of cancer, identify cancer risk-reducing strategies, inform surgical and therapeutic decisions
following a cancer diagnosis, and provide an opportunity to notify family members who may be at similar risk for
hereditary cancer.
Our non-invasive prenatal paternity product allows a couple to safely establish paternity without waiting for the
child to be born. Testing can be done as early as nine weeks of gestation using a blood draw from the pregnant mother and
alleged father. Our internal data indicates that the accuracy of this test is greater than 99.99%. We have licensed this
technology to a third party to perform the test in its clinical laboratory.
Oncology
In oncology, we have been initially focused on detecting molecular residual disease, which we refer to as MRD,
and recurrence monitoring in solid tumors, where we have generated data in over a dozen different cancer types and have
published data in, among others, colorectal, bladder, breast, and lung cancer, as well as multiple myeloma and other tumor
types. Molecular residual disease is the presence of small traces of cancer in the blood, such as ctDNA or microscopic
pieces of tumor DNA that are often undetectable with standard imaging techniques. If left untreated, residual cancer cells
can multiply and cause recurrence. MRD testing and molecular monitoring offers the potential for physicians to change or
escalate treatment in patients who are MRD-positive, and to de-escalate or avoid unnecessary treatment in patients who
are MRD-negative. It also holds potential as a surrogate endpoint in clinical trials. Based on our internal estimates, we
believe that the total addressable market in the United States for recurrence and treatment monitoring for solid tumor
cancers is over $15 billion.
Signatera
Signatera is our personalized ctDNA blood test for MRD assessment and surveillance of disease recurrence in
patients previously diagnosed with cancer. Each patient receives a custom assay that tracks the presence of 16 tumor-
specific clonal mutations that are selected based on the unique mutational signature found in that patient’s tumor tissue,
which is intended to maximize accuracy for detecting the presence or absence of residual disease in a blood sample, even
at variant allele frequency, or VAF, of mutations as low as 0.01% in the blood. We believe this tumor-informed approach
is optimal in the MRD setting, in which it is common for tumor DNA to be present only at low frequencies immediately
after treatment. Unlike static liquid biopsy panels (also known as therapy selection or comprehensive genomic profiling,
or CGP, which screen for a generic set of mutations independent of an individual’s tumor, Signatera is not intended to
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match patients with any particular therapy. Rather, it is intended to detect and assess how much cancer is left in the body
(offering both a qualitative and quantitative measurement), detect recurrence earlier, and help optimize treatment decisions.
Signatera can detect residual disease earlier than clinical or radiological recurrence in patients with solid tumors who have
received treatment.
We launched Signatera in 2017 for research use only to cancer researchers and biopharmaceutical companies.
Signatera was commercially launched in 2019 for clinical use as an LDT in our own CLIA-certified and CAP-accredited
laboratory. We have received a final Medicare local coverage determination, or LCD, for the use of Signatera in patients
with certain forms of colorectal cancer. We have also received a final Medicare LCD for the use of Signatera in
immunotherapy response monitoring for all tumor types in any patient for whom immunotherapy is indicated; this LCD
is also foundational, creating a pathway for coverage of the use of Signatera in additional solid tumor types and indications,
where it is clinically validated with peer-reviewed evidence and where the clinical utility is established. In 2022, we
received a coverage expansion under this foundational LCD, for Signatera for muscle invasive bladder cancer. In
February 2023, we received coverage for Signatera for adjuvant and recurrence monitoring in advanced breast cancer. In
addition, Signatera has been granted Breakthrough Device Designations by the FDA covering its use in various
applications.
Signatera has been shown in various clinical studies – including 40 peer-reviewed publications – to identify MRD
significantly earlier than standard diagnostic tools, and that Signatera test status is a significant indicator of long-term
patient outcomes after surgery and treatment, relative to other clinical and pathological factors. In particular, we have
demonstrated in studies across multiple tumor types, including colon, breast, lung and bladder, that a positive Signatera
test result, without further treatment, has predicted relapse with an overall PPV of over 98%. Furthermore, a study
published in Clinical Cancer Research demonstrated the ability of Signatera to assess the rate of change in quantity over
time, or velocity, of ctDNA in early-stage colorectal cancer patients, providing additional information that may be used to
predict patient survival and outcomes, further stratify MRD-positive patients, and inform disease management. We are
continuing to generate data, building evidence of the clinical validity and utility of the test across multiple cancer types
and in collaboration with leading universities and cancer centers, NIH’s National Cancer Institute, or NCI, non-profit
cancer research groups, and pharmaceutical companies.
Altera
We have also expanded our efforts in oncology into therapy selection, which based on our internal estimates
represents an approximate $6.0 billion market opportunity. We have launched Altera, our tissue based comprehensive
genomic profiling test that provides insight into genomic alterations and biomarkers found in a patient’s tumor, supporting
treatment decisions and therapy selection by prioritizing potentially beneficial therapies based on the patient’s tumor
biomarkers and cancer type. Altera can be ordered as a stand-alone test, as well as in conjunction with our Signatera MRD
test to combine therapy selection with ongoing monitoring.
Empower
We offer Empower, our hereditary cancer test, to oncologists, in addition to physicians through our women’s
health commercial channel. Because Empower screens for genetic mutations in genes that are associated with increased
risk of certain hereditary cancers, information from the test can help determine if a patient who has been diagnosed with
such a cancer is a carrier of a mutation associated with their cancer. This can inform surgical and therapeutic decisions, as
well as provide an opportunity to notify family members who may be at similar risk for hereditary cancer.
Organ Health
Prospera
We began commercializing our first offering in organ health in 2020, with the launch of our Prospera Kidney test
to assess active rejection in patients who have undergone kidney transplantation by measuring the fraction of dd-cfDNA
in the recipient’s blood, which can spike relative to background cfDNA when the transplanted organ is injured due to
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immune rejection. In 2021 we launched our Prospera Heart and Prospera Lung tests, which use the same core technology
to assess heart and lung transplants, respectively. The current tools for assessing organ transplant rejection are either
invasive (biopsies) or inaccurate (serum creatinine for kidney transplants, for example), resulting in an unmet need for
better diagnostic tools to monitor for allograft rejection and improve patient management and outcomes. Many patients
are still subjected to unnecessary biopsies, while other patients remain undiagnosed in the case of subclinical rejection,
which can increase the risk of graft failure. Our Prospera test is designed for use by physicians to help rule in or rule out
active rejection when evaluating the need for diagnostic testing or the results of an invasive biopsy, and thereby potentially
lowering the overall costs associated with transplant care and improving graft survival. We received a final Medicare LCD
for Prospera Kidney in December 2019, covering all kidney transplant recipients, including those with multiple kidney
transplants. Based on our internal estimates, we believe the total addressable market in the United States for tests such as
ours that assess kidney, heart and lung transplant rejection is approximately $3.0 billion.
Our clinical validation study for Prospera Kidney, conducted in collaboration with the University of California,
San Francisco, a recognized leader in transplantation care, and published in the Journal of Clinical Medicine, demonstrated
89% sensitivity in detecting active rejection, with specificity of 73%, based on a cutoff of 1% dd-cfDNA. The assay
performed particularly well in detecting T-cell mediated rejection (TCMR) and subclinical rejection, both of which we
believe are areas of unmet need. In our clinical validation study for Prospera Heart, published in the Journal of Heart and
Lung Transplantation, the test exhibited an overall AUC of 0.86 for identifying acute rejection. Our Prospera Lung test
also exhibited strong performance in our clinical validation study, published in Transplant Direct, distinguishing antibody
mediated and acute cellular rejection from stable patients with an AUC of 0.91, as well as distinguishing organ injury –
including acute rejection, chronic rejection and infection (which can be more challenging) – from stable patients with an
AUC of 0.76.
Furthermore, our Prospera Kidney test has demonstrated excellent performance in an analytical validation study
that included donor-recipient pairs that were related, such as parents or siblings. Related-donor cases are challenging
because it is technically difficult to differentiate between DNA patterns of close relatives; however, we were able to
achieve a high degree of accuracy by leveraging our experience with SNP-based methods in the reproductive health setting.
This is promising for the estimated 52% of live kidney donations that are from a biological relative of the patient.
Furthermore, we recently launched an update to Prospera Kidney to further improve test performance by reporting, in
addition to the fraction of dd-cfDNA, the quantity of dd-cfDNA and total cfDNA; in a study published in the Journal of
the American Society of Nephrology of 41 kidney transplant patients, incorporating these additional two metrics improved
the sensitivity of the Prospera test from detecting 7/9 cases of active rejection to detecting 9/9 cases.
As with oncology, we are continuing to generate data in multiple clinical studies designed to demonstrate clinical
utility and other benefits of our Prospera test, including for patients with multiple organ transplants.
Renasight
We offer Renasight, our kidney gene panel test to determine if there may be a genetic cause for an individual’s
chronic kidney disease, or CKD, or increased hereditary risk for kidney disease due to family history. The test uses a blood
or saliva sample to test over 380 genes associated with CKD, ranging from common inherited kidney disorders to more
rare conditions. Results from our Renasight test may provide valuable information to help manage CKD in a patient, such
as identifying the cause of the disease and helping to predict its progression, or informing more tailored interventions and
treatments.
Constellation
Our Constellation software forms the core of our cloud-based distribution model. Through this model, we have
been able to expand access to our molecular and bioinformatics capabilities worldwide, enabling laboratories, under a
license from us, to run the molecular workflows themselves and then access our computation-intensive bioinformatics
algorithms through Constellation, which runs in the cloud, to analyze the results. We currently have licensing contracts
with various laboratories in the United States and internationally who are using our Constellation platform commercially
in NIPT and in prenatal paternity testing, and we may expand this distribution model to other products in the future. We
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also leverage Constellation to perform our internal commercial laboratory activities and research and development of our
products.
We have received CE Marks from the European Commission for our Constellation software and for the key
reagents that our laboratory licensees use to run their NIPT test prior to accessing our Constellation software. These CE
Marks enable us to offer Constellation in the European Union and other countries that accept a CE Mark. We are pursuing
other regulatory approvals, as needed, to allow the international roll out of Constellation in regions that do not accept a
CE Mark.
Commercial Capabilities
We have established a broad distribution channel, comprising our direct sales efforts and, for our women’s health
and Signatera products, a worldwide network of over 100 laboratory and distribution partners. Our own direct sales force
and managed care teams anchor our commercial engagement with physicians, laboratory partners, and payers, and sell
directly to MFMs, OB/GYNs, physicians or physician practices, IVF centers, transplant centers, or integrated health
systems. We strive to offer an excellent customer and patient experience through our field sales reps, medical science
liaisons and medical affairs, and customer service and mobile phlebotomy offering.
Where possible, we aim to maximize sales opportunities by educating the physician practices on the benefits of
combining complementary tests from our portfolio of products. For example, in women’s health, Panorama NIPT, our
Panorama microdeletions panel, Vistara single-gene NIPT, and Horizon together can provide valuable information for
pregnant women who have not had a carrier screen at the time they are ready to have an NIPT performed; these tests can
all be run using one blood draw from the mother and can be ordered on one requisition form and with one shipment of the
patient’s samples by the physician. Also, because of the importance and demand for screening for 22q11.2 deletion
syndrome, we have made that feature available as part of our basic Panorama panel, or as part of a broader microdeletions
panel. In the year ended December 31, 2022, approximately three-quarters of customers who ordered the basic Panorama
panel directly from us also ordered screening for 22q11.2 deletion syndrome or the full microdeletions panel, and
approximately one-third of customers who ordered Panorama directly from us also ordered Horizon carrier screening.
In addition to our sales force, we market to physicians through channels and media, such as clinical journals,
educational webinars, at conferences and tradeshows, and e-mail and social media marketing campaigns. While we
currently do not sell directly to patients, we do engage in brand awareness campaigns directed at patients to highlight our
products. Our marketing and medical science liaison teams work extensively with key opinion leaders in the women’s
health, oncology and organ health fields.
Our partners’ capabilities augment our direct sales capabilities, and where we have identified laboratory or
distribution partners who share our focus on premium quality and service, we also contract with them to distribute our
tests. In NIPT, we have partnered with leading academic and commercial laboratories and hospital systems in the United
States given their relationships with MFMs and OB/GYNs, large distribution capabilities, and commercial infrastructure.
These distribution partners also frequently have in-network contracts with key third-party payers. Outside of the United
States, where our products are sold in over 80 countries, we currently sell predominantly through partner laboratories.
Enhanced User Experience
NateraCore is our suite of resources designed to enhance the patient and provider experience. Through this
platform, we provide patient and provider educational materials, information about insurance coverage and test costs, test
and phlebotomy, or blood draw, ordering capabilities, test results reporting, and next steps, in each case as applicable to a
particular patient or test. These resources make available a completely remote testing option for patients, fulfilled through
our online tools combined with a nationwide mobile phlebotomy network whereby a patient can request and schedule a
phlebotomist visit at the patient’s home or office. This capability proved to be especially important during the COVID-19
pandemic, enabling continuity of care for all patients despite pandemic-related restrictions and shutdowns, and particularly
for those who may be immunocompromised or immune-suppressed.
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We have also created provider portals that enable physicians to easily complete various tasks online such as
electronic ordering and tracking tests, managing patient consents and results, accessing billing and other documentation,
connecting with genetic counselors and other support, and ordering supplies and educational materials. We also provide a
service to integrate with our customers’ Electronic Medical Records, or EMR, systems to provide physicians a seamless
experience of ordering tests and reviewing patient test results directly through their EMR systems.
We have an internal team of board-certified genetic counselors to support patients with pre- and post-test genetic
information sessions, and physicians should they have any questions or require any support in interpreting the results.
In addition to our mobile phlebotomy service, we have a network of over 2,000 phlebotomy centers across the
United States.
Competition
The markets in which we operate are characterized by innovation and rapid change, and we primarily face
competition from various companies that develop and commercialize molecular diagnostic tests in women’s health,
oncology, and organ transplant rejection.
Our competitors in the NIPT space include Sequenom, Inc., or Sequenom, which was acquired by Laboratory
Corporation of America Holdings, or LabCorp; Illumina, through its subsidiary Verinata; Myriad Genetics, Inc., which
acquired Counsyl, Inc.; Invitae Corp.; Quest Diagnostics Incorporated, or Quest; Premaitha Health PLC; BGI; Bio-
Reference, a business unit of OPKO Health, Inc. and which acquired Ariosa, Inc.; NxGen; BillionToOne Inc.; PerkinElmer
Inc.; and Ambry Genetics, a subsidiary of Konica Minolta. We also compete against companies providing carrier screening
tests such as LabCorp; Myriad Genetics, Inc.; Invitae Corp.; BillionToOne Inc.; Quest; NxGen; Ambry Genetics; and
GenPath Diagnostics, a business unit of Bio-Reference. Each of these companies offers comprehensive carrier screening
panels.
In the field of ctDNA-based MRD assessment and recurrence surveillance, we compete with various companies
that offer or seek to offer competing solutions, such as Roche Diagnostics, Guardant Health, Inc., Adaptive
Biotechnologies, Personal Genome Diagnostics, Inc., a subsidiary of Labcorp, one of our primary competitors in both
NIPT and carrier screening, Exact Sciences Corp., Inivata, Inc., a subsidiary of NeoGenomics, Inc., and ArcherDX, Inc.,
which has been acquired by Invitae Corp., one of our primary competitors in both NIPT and carrier screening.
In organ health, our competitors include CareDx, Inc. and Eurofins Viracor, Inc.
We expect additional competition as other established and emerging companies enter these markets, including
through business combinations, and as new tests and technologies are introduced. These competitors could have greater
technological, financial, reputational and market access resources than us. We believe the principal competitive factors in
our molecular diagnostic testing markets include the following:
test performance, as demonstrated in clinical and analytical studies and clinical trials as well as in commercial
experience;
comprehensiveness of coverage and ease of use, including user experience for both patients and providers;
value of product offerings, including pricing and impact on other healthcare spending;
scope and extent of reimbursement and payer coverage;
effectiveness of sales and marketing efforts;
breadth of distribution of products and partnership base;
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reputation among patients and providers for development and introduction of new, innovative products;
operational execution, including test turn-around time and test failures;
key opinion leader support; and
brand awareness.
We believe that we compare favorably against our competitors based on various key differentiators, including in
particular:
our core technology, which can be applied across a range conditions and disease types with a high degree of
specificity and sensitivity;
our continued investment in generating scientific data through clinical trials and publication in peer-reviewed
studies;
our strong commercial teams; and
our user experience, including ease of use for patients through offerings such as mobile phlebotomy and for
physicians through ordering efficiencies and EMR integrations, and patient and provider educational
materials.
Intellectual Property
Our success and ability to compete depend in part on securing and preserving enforceable patent, trade secret,
trademark and other intellectual property rights; operating without having competitors infringe, misappropriate or
otherwise circumvent these rights; operating without infringing the proprietary rights of others; and obtaining and
maintaining licenses for technology development and/or product commercialization. As of December 31, 2022, we held
over 150 issued U.S. and foreign patents, which expire between November 2026 and February 2044, and over 220 pending
U.S. and foreign patent applications. Our patents and patent applications relate generally to molecular diagnostics, and
more specifically to biochemical and analytical techniques for obtaining and analyzing genetic information to detect
genetic abnormalities in relatively small complex samples, such as cell free fetal DNA or circulating tumor DNA. We
intend to seek patent protection as we develop new technologies and products in this area.
We are or have recently been engaged in patent infringement lawsuits and other intellectual property disputes
against various competitors in each of the industries in which we operate, some of which are infringement claims against
us and some of which are claims we have asserted against third parties, as discussed in “Note 8—Commitments and
Contingencies—Legal Proceedings” in the Notes to Consolidated Financial Statements. We may become subject to and/or
initiate future intellectual property litigation as our product portfolio, and the level of competition in our industry segments,
grow. The field of molecular diagnostics is complex and rapidly evolving, and we expect that we and others in our industry
will continue to be subject to third-party infringement claims.
Reimbursement
We receive reimbursement for our tests from third-party payers, which includes commercial health insurers and
government health benefits programs (such as Medicare and Medicaid). Laboratory tests, as with most other health care
services, are classified for reimbursement purposes under a coding system known as Current Procedure Terminology, or
CPT, which we and our customers must use to bill and receive reimbursement for our diagnostic tests. There are CPT
codes associated with the particular tests that we provide to the patient, including for aneuploidies and microdeletions in
NIPT, and for expanded carrier screening tests. Once the American Medical Association, or AMA, establishes a CPT code,
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the Centers for Medicare & Medicaid Services, or CMS, establishes payment levels and coverage rules under Medicare,
while state Medicaid programs and commercial health plans establish rates and coverage rules independently in accordance
with applicable rules. As such, the reimbursement rates for our diagnostic tests vary by third-party payer. CMS has
established a pricing benchmark of $802 for aneuploidy and microdeletions testing, and approximately $2,450 for
expanded carrier screening testing.
The Protecting Access to Medicare Act of 2014, or PAMA, introduced a multi-year pricing program and new
payment methodology to calculate the rates for tests listed under the CLFS that are reimbursable by Medicare Part B.
Under the new payment methodology, the Medicare Part B CLFS payment rate is derived from a volume-weighted median
of private payer rates for tests. This requires an “applicable laboratory” to report to CMS the private payment rates and the
volume of tests associated with each payment rate for a specific data reporting period. We are required under PAMA to
report to CMS the private payment rates and the volume of tests which are covered under Medicare Part B. PAMA
authorizes CMS to impose civil monetary penalties of up to $10,000 per day for each failure to report or each
misrepresentation or omission in reporting of required information.
We currently submit for reimbursement using CPT codes based on the guidance of coding experts and outside
legal counsel. There is a risk that these codes may be rejected or withdrawn or that third-party payers will seek refunds of
amounts that they claim were inappropriately billed to a specific CPT code or an incorrect diagnosis code. We do not
currently have a specific CPT code assigned for all of our tests, and there is a risk that we may not be able to obtain specific
codes for such tests, or if obtained, we may not be able to negotiate favorable rates for one or more of these codes. In
particular, while we have obtained a CPT code for microdeletions and CMS has set a price for microdeletions testing, we
have experienced low average reimbursement rates for microdeletions testing under this code, and we expect that this code
will continue to cause our microdeletions reimbursement to remain low, at least in the near term, because third-party payers
are declining to reimburse under the code or reimbursing at a low rate. The reimbursement rates for our broader Horizon
screening panel have also declined as a result of the CPT code becoming effective in 2019, as carrier screening tests that
had previously been reimbursed on a per-condition basis may be reimbursed as a combined single panel instead of as
multiple individual tests.
We continue to believe that growing recognition from professional societies of the importance of microdeletions
testing, combined with the performance of our microdeletions test and additional validation data from our SMART study
on the sensitivity and specificity of our tests, will help drive broader reimbursement in the future.
Reimbursement by third-party payers may depend on a number of factors, including the payer’s determination
that tests using our technologies are: not experimental or investigational; medically necessary; demonstrated to lead to
improved patient outcomes; appropriate for the specific patient; cost-saving or cost-effective; supported by peer-reviewed
medical journals; and included in clinical guidelines. In making coverage determinations, third-party payers often rely on
clinical guidelines issued by professional societies. NIPT has received positive coverage determinations for high-risk
pregnancies and in such instances are reimbursed by most commercial health insurers, including United Healthcare, Aetna,
Elevance Health (previously known as Anthem), Humana, Cigna and others. In recent years the reimbursement by third-
party payers for use of NIPT for average-risk pregnancies has improved, as most professional societies now generally
acknowledge that NIPT is the most sensitive screening option for, and/or are generally supportive of the use of NIPT in,
average-risk pregnancies and high-risk pregnancies. Most commercial health insurers, as well as an increasing number of
state Medicaid programs, have a positive coverage determination for NIPT for average-risk pregnancies.
As of December 31, 2022, we and our laboratory distribution partners had in-network contracts with health plans
that accounted for over 231 million covered lives in the United States. Our target markets for each of women’s health,
oncology and organ health represent a smaller subset of these covered lives, because our markets exclude certain
populations who would not be users of our tests (for example, our target market for NIPT excludes men, children and post-
menopausal women).
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Government Regulations
Our business is subject to and impacted by extensive and frequently changing laws and regulations in the United
States (at both the federal and state levels) and internationally. Some of these laws and regulations are particular to our
laboratory business while others relate to conducting business generally (e.g., export controls laws, U.S. Foreign Corrupt
Practices Act and similar laws of other jurisdictions). We also are subject to inspections, audits and other inquiries by
certain federal and state governmental agencies. Set forth below are highlights of certain key regulatory frameworks
applicable to our business.
FDA
In the United States, medical devices are subject to extensive regulation by the FDA under the Federal Food,
Drug, and Cosmetic Act, or FDC Act, and its implementing regulations, and other federal and state statutes and regulations.
The laws and regulations govern, among other things, medical device development, testing, labeling, storage, premarket
clearance, de novo classification or premarket approval, post-market requirements, labeling, advertising and promotion
and product sales and distribution. Unless subject to an exemption, to be commercially distributed in the United States,
medical devices must receive from the FDA prior to marketing, clearance of a 510(k) premarket notification submission ,
grant of a request for de novo classification, or approval of an application for premarket approval, or PMA.
An in vitro diagnostic product, or IVD, is a type of medical device that is intended for use in the diagnosis of
diseases or conditions, including a determination of the state of health, in order to cure, mitigate, treat, or prevent disease
or its sequelae. IVDs comprise reagents, instruments, and systems intended for use in the collection, preparation and
examination of specimens from the human body. IVDs can be used to detect the presence of certain chemicals, genetic
information or other biomarkers related to health or disease. IVDs include tests for disease prediction, prognosis, diagnosis,
and screening (e.g., carrier screening). A subset of IVDs are known as analyte specific reagents, or ASRs. An ASR is a
single reagent (e.g., antibody, specific receptor protein, ligand, nucleic acid sequence) that, through specific binding or
chemical reaction with substances in a specimen, is intended for use in a diagnostic application for the identification and
quantification of an individual chemical substance in biological specimens. Most ASRs are exempt from the premarket
review processes but must comply with general controls, as described below, including applicable provisions of the quality
system regulation, or QSR.
The FDC Act classifies medical devices into one of three categories based on the risks associated with the device
and the level of control necessary to provide reasonable assurance of safety and effectiveness. Class I devices are deemed
to be low risk and are subject to the fewest regulatory controls. Many Class I devices are exempt from FDA premarket
review requirements. Class II devices, including some software products to the extent that they qualify as a device, are
deemed to be moderate risk, and generally require 510(k) clearance. Class III devices are generally the highest risk devices
and are subject to the highest level of regulatory control to provide reasonable assurance of the device's safety and
effectiveness. Class III devices typically require a PMA by the FDA before they are marketed. A clinical trial is almost
always required to support a PMA application and is sometimes required for 510(k) clearance. All clinical studies of
investigational devices must be conducted in compliance with any applicable FDA and Institutional Review Board
requirements. Devices that are exempt from FDA premarket review requirements must nonetheless comply with post-
market general controls as described below, unless the FDA has chosen otherwise. Class III devices also include low or
moderate risk for which a predicate device cannot be identified, as discussed below.
510(k) clearance pathway. To obtain 510(k) clearance, a manufacturer must submit a premarket notification
demonstrating to the FDA's satisfaction that the proposed device is substantially equivalent to a legally marketed predicate
device, which can be either a previously 510(k)-cleared device or a device that was in commercial distribution before
May 28, 1976 for which the FDA has not called for submission of a PMA application. The FDA's 510(k) clearance
pathway usually takes from three to 12 months from submission, but it can take longer, particularly for a novel type of
product.
PMA pathway. The PMA pathway requires valid scientific evidence demonstrating to the FDA's satisfaction the
safety and effectiveness of the device for its intended use. The PMA pathway is costly, lengthy, and uncertain. A PMA
application must provide extensive preclinical and clinical trial data as well as information about the device and its
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components regarding, among other things, device design, manufacturing, and labeling. As part of its PMA review process,
the FDA will typically inspect the manufacturer's facilities for compliance with QSR requirements, which impose
extensive testing, control, documentation, and other quality assurance procedures. The PMA review process typically takes
one to three years from submission but can take longer.
De novo pathway. If no predicate device can be identified, a device is automatically classified as Class III,
requiring a PMA application. However, the FDA on its own initiative or at the request of a manufacturer can reclassify as
low- or moderate-risk device for which there is no predicate through the de novo classification process.. If the device is
reclassified as Class II, the FDA will identify “special controls” that the manufacturer must implement, which may include
labeling, performance standards or other requirements. Subsequent applicants can rely upon the de novo product as a
predicate when submitting a 510(k) premarket notification, unless FDA exempts subsequent devices from the need for a
510(k). The de novo route is intended to be less burdensome than the PMA process. In October 2021, the FDA issued final
regulations codifying FDA’s expectations for de novo requests, which went into effect in January 2022. In October 2021,
FDA also issued updated and final guidance on the de novo request and classification process, for the purpose of providing
clarity and transparency regarding the de novo classification process. The de novo route has historically been used for
many IVD products.
Post-market general controls. After a device, including a device exempt from FDA premarket review, is placed
on the market, numerous regulatory requirements apply. These include: the QSR, labeling regulations, registration and
listing, the Medical Device Reporting regulation (which requires that manufacturers report to the FDA if their device may
have caused or contributed to a death or serious injury or malfunctioned in a way that would likely cause or contribute to
a death or serious injury if it were to recur), and the Reports of Corrections and Removals regulation (which requires
manufacturers to report to the FDA corrective actions made to products in the field, or removal of products once in the
field if such actions were initiated to reduce a risk to health posed by the device or to remedy a violation of the FDC Act
that presents a risk to health).
The FDA enforces compliance with its requirements through inspection and market surveillance. If the FDA finds
a violation, it can institute a wide variety of actions, ranging from issuing a Form 483 Notice of Inspectional Observations
or sending an untitled or public warning letter to enforcement actions such as fines, injunctions, and civil penalties; recall
or seizure of products; operating restrictions, partial suspension or total shutdown of production; refusing requests for
510(k) clearance, de novo classification, or PMA approval of new products; withdrawing PMAs already granted; and
criminal prosecution. For additional information, see “Risk Factors—Reimbursement and Regulatory Risks Related to Our
Business.”
Research use only. Research use only, or RUO, products are exempt from FDA medical device requirements
provided their manufacturers comply with specified labeling and restrictions on distribution and promotion. The products
must bear the statement: “For Research Use Only. Not for Use in Diagnostic Procedures.” Manufacturers of RUO products
cannot make any claims related to safety, effectiveness or diagnostic utility, and RUO products cannot be intended by the
manufacturer for clinical diagnostic use. An RUO product promoted for diagnostic use may be viewed by the FDA as
adulterated and misbranded under the FDC Act and the manufacturer of such product could be subject to FDA enforcement
activities. Our LDTs use instruments and reagents labeled as RUO.
Laboratory-developed tests. The FDA considers LDTs to be tests that are designed, developed, validated and
used within a single laboratory. The FDA historically has taken the position that it has the authority to regulate such tests
as medical devices under the FDC Act but has for the most part exercised enforcement discretion and has not required
clearance, de novo classification, or approval of LDTs prior to marketing.
In August 2020, the Department of Health and Human Services, or HHS, announced that FDA would not require
premarket review of LDTs absent notice-and-comment rulemaking, and rescinded FDA guidance documents and other
informal statements concerning premarket review of LDTs. The HHS announcement did not define the term LDT. In an
accompanying FAQ document, HHS stated that, while LDTs are not subject to premarket review, FDA may still regulate
LDTs under the Public Health Service Act. In November 2021, HHS withdrew its 2020 LDT policy, which allowed FDA
to resume its historical approach to LDT oversight. FDA thereafter began requiring submission of emergency use
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authorization, or EUA, requests, for COVID-19 LDTs. FDA has indicated that it may seek to increase its regulation of
LDTs.
In June 2021, Congress introduced legislation called the Verifying Accurate, Leading-edge IVCT Development
Act, or VALID Act, which would have established a new risk-based regulatory framework for in vitro clinical tests, or
IVCTs, a category that would have included IVDs, LDTs, collection devices, and instruments used with such tests. This
legislation was not enacted during that session of Congress but could be introduced again in the future.
In 2016, the 21st Century Cures Act, or the Cures Act, among other things, amended the medical device definition
in the FDC Act to exclude certain software from FDA regulation, including clinical decision support, or CDS, software
that meets certain criteria. Based on an FDA guidance document issued on September 28, 2022, the CDS exemption may
not apply to Constellation. The final guidance interpreted the Cures Act more narrowly than did the draft guidance, which
was issued on September 27, 2019. It is unclear how FDA will apply the guidance document to currently marketed software
and to software that may be developed in the future. It is also unclear whether FDA will apply the final guidance to CDS
software that is used by clinical laboratories as part of an LDT, since LDTs have historically been subject to FDA
enforcement discretion.
Clinical Laboratory Improvement Amendments of 1988 and State Regulation
As a clinical laboratory, we are required to hold certain federal and state licenses, certifications or permits to
conduct our business. As to federal certifications, in 1988, Congress passed the Clinical Laboratory Improvement
Amendments of 1988, or CLIA, establishing more rigorous quality standards for all commercial laboratories that perform
testing on human specimens for the purpose of providing information for the diagnosis, prevention, or treatment of disease
or the assessment of the health or impairment of human beings. CLIA requires such laboratories to be certified by the
federal government and mandates compliance with various operational, personnel, facility, administration, quality and
proficiency testing requirements intended to ensure the accuracy, reliability and timeliness of patient test results. CLIA
certification is also a prerequisite to be eligible to bill state and federal healthcare programs, as well as many commercial
third-party payers, for laboratory testing services.
Our laboratories located in Austin, Texas and in San Carlos, California are CLIA certified, and must comply with
all applicable CLIA regulations and standards. If a clinical laboratory is found to be out of compliance with CLIA standards,
CMS may impose sanctions; suspend, limit or revoke the laboratory’s CLIA certificate (and prohibit the owner, operator
or laboratory director from owning, operating, or directing a laboratory for two or more years following license revocation);
subject the laboratory to a directed plan of correction, on-site monitoring, civil monetary penalties, civil actions for
injunctive relief, criminal penalties; or suspension or exclusion from the Medicare and Medicaid programs.
CLIA provides that a state may adopt laboratory licensure requirements and regulations that are more stringent
than those under federal law, and requires compliance with such laws and regulations. A number of states have
implemented their own more stringent laboratory regulatory requirements. State laws may require the laboratory to obtain
state licensure and/or laboratory personnel to meet certain qualifications, specify certain quality control procedures or
facility requirements, or prescribe record maintenance requirements. Moreover, several states impose the same or similar
state requirements on out-of-state laboratory testing specimens collected or received from, or test results reported back to,
residents within that state. Therefore, we are required to meet certain laboratory licensing requirements for those states in
which we offer services or from which we accept specimens and that have adopted regulations beyond CLIA. For more
information on state licensing requirements, see “—California Laboratory Licensing”, “—New York Laboratory
Licensing,” and “—Other State Laboratory Licensing Laws.”
Our laboratories have each also been accredited by the College of American Pathologists, or CAP, which means
that our laboratories have been certified as following CAP standards and guidelines in operating the laboratory facility and
in performing tests that ensure the quality of our test results.
California Laboratory Licensing
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In addition to federal certification requirements for laboratories under CLIA, we are required under California
law to maintain a California state license for both our San Carlos, California and Austin, Texas clinical laboratories, and
to comply with California state laboratory laws and regulations, because our San Carlos facility is located in, and both
facilities test specimens originating from, California. Similar to the federal CLIA regulations, the California state
laboratory laws and regulations establish standards for the operation of a clinical laboratory and performance of test
services, including the education and experience requirements of the laboratory director and personnel (including
requirements for documentation of competency), equipment validations, and quality management practices. All testing
personnel must maintain a California state license or be supervised by licensed personnel, and our laboratory director must
maintain an additional license issued by the California Department of Public Health, or CDPH.
Clinical laboratories are subject to both routine and complaint-initiated on-site inspections by the state. If a
clinical laboratory is found to be out of compliance with California laboratory standards, the CDPH, may suspend, restrict
or revoke the California state laboratory license to operate the clinical laboratory (and exclude persons or entities from
owning, operating, or directing a laboratory for two years following license revocation), assess civil money penalties,
and/or impose specific corrective action plans, among other sanctions. Clinical laboratories must also provide notice to
CDPH of any changes in the ownership, directorship, name or location of the laboratory. Failure to provide such
notification may result in revocation of the state license and sanctions under the CLIA certificate. Any revocation of a
CLIA certificate or exclusion from participation in Medicare or Medicaid programs may also result in suspension of the
California state laboratory license.
New York Laboratory Licensing
Because we test specimens in both our Austin, Texas and San Carlos, California laboratories originating from,
and return test results to, New York State, both of our laboratories are required to obtain a New York state laboratory
permit and comply with New York state laboratory laws and regulations. We maintain a valid permit in the State of New
York for the respective molecular genetic testing services furnished by each of our Austin and San Carlos laboratories.
The New York state laboratory laws, regulations and rules are equal to or more stringent than the CLIA regulations and
establish standards for the operation of a clinical laboratory and performance of test services, including education and
experience requirements of a laboratory director and personnel, physical requirements of a laboratory facility, equipment
validations, and quality management practices. The laboratory director(s) must maintain a Certificate of Qualification
issued by the New York State Department of Health, or DOH, in the permitted test categories.
Our clinical laboratories are subject to proficiency testing and on-site survey inspections conducted by the Clinical
Laboratory Evaluation Program, or CLEP, under the DOH. If a laboratory is found to be out of compliance with New
York’s CLEP standards, the DOH, may suspend, limit, revoke or annul the New York laboratory permit, censure the holder
of the license or assess civil money penalties. Statutory or regulatory noncompliance may result in a laboratory’s operator,
owners and/or laboratory director being found guilty of a misdemeanor under New York law. Clinical laboratories must
also provide notice to CLEP of any changes in ownership, directorship, name or location of the laboratory. Failure to
provide such notification may result in revocation of the state license and sanctions under the CLIA certificate. Any
revocation of a CLIA certificate or exclusion from participation in the Medicare or Medicaid programs may result in
suspension of the New York laboratory permit.
The DOH also must approve each LDT before the test is offered to patients located in New York. Each of our
Austin and San Carlos clinical laboratories has received approval from New York’s CLEP to offer our tests that are
performed in those locations.
Other State Laboratory Licensing Laws
In addition to New York and California, certain other states require licensing of out-of-state laboratories under
certain circumstances. We have obtained licenses in the states that we believe require us to do so, and believe we are in
compliance with applicable state laboratory licensing laws, including Maryland, Pennsylvania and Rhode Island. The State
of Texas does not impose state licensure or registration requirements upon an independent laboratory facility or collection
station outside of maintaining CLIA certification.
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Potential sanctions for violation of state statutes and regulations can include significant monetary fines, the
rejection of license applications, the suspension or loss of various licenses, certificates and authorizations, and in some
cases criminal penalties, which could harm our business. CLIA does not preempt state laws that have established laboratory
quality standards that are more stringent than federal law.
State Genetic Testing Laws
Many states have implemented genetic testing and privacy laws imposing specific patient consent requirements
and protecting test results. Under some state laws, we are prohibited from conducting genetic tests without appropriate
documentation of patient (or parental/guardian) consent from the physician ordering the test. As discussed in more detail
in “Risk Factors—Reimbursement and Regulatory Risks Related to our Business—If the validity of an informed consent
from a patient intake for Panorama or our other tests is challenged, we could be precluded from billing for such testing,
forced to stop performing such tests, or required to repay amounts previously received, which would adversely affect our
business and financial results,” while we rely on physicians to obtain the required patient consent to perform genetic
testing, the regulatory burden may be deemed to be our responsibility and such consents, or our compliance with applicable
laws and regulations, could be challenged. Requirements of these laws and penalties for violations vary widely from state
to state.
HIPAA and Other Privacy Laws
The privacy and security regulations under the Health Insurance Portability and Accountability Act of 1996, or
HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act of 2009, or HITECH,
establish uniform standards governing the conduct of certain electronic healthcare transactions and require certain entities,
called covered entities, to comply with standards that include the privacy and security of protected health information, or
PHI. HIPAA further requires business associates of covered entities—independent contractors or agents of covered entities
that have access to PHI in connection with providing a service to or on behalf of a covered entity—to enter into business
associate agreements with the covered entity and to safeguard the covered entity’s PHI against improper use and disclosure.
In addition, certain of HIPAA’s privacy and security standards are directly applicable to business associates.
As a covered entity and as a business associate of other covered entities (with whom we have therefore entered
into business associate agreements), we have certain obligations regarding the use and disclosure of any PHI that may be
provided to us, and we could incur significant liability if we or our business associates fail to meet such obligations. Among
other things, HITECH imposes civil and criminal penalties against covered entities and business associates for
noncompliance with privacy and security requirements, which may include fines up to $250,000 per violation and/or
imprisonment, and authorizes states’ attorneys general to file civil actions for damages or injunctions in federal courts to
enforce the federal HIPAA laws and seek attorneys’ fees and costs associated with pursuing federal civil actions. While
HIPAA does not create a private right of action allowing individuals to file suit in civil court for violations of HIPAA, its
standards have been used as the basis for duty of care cases in state civil suits such as those for negligence or recklessness
in the misuse or breach of PHI. In addition, HIPAA mandates that the Secretary of HHS conduct periodic compliance
audits of health care providers, such as us, and their business associates for compliance with the HIPAA privacy and
security standards. HIPAA also tasks HHS with establishing a methodology whereby harmed individuals who were the
victims of breaches of unsecured PHI may receive a percentage of the civil monetary penalty paid by the violator.
As noted above, we are required to comply with HIPAA standards promulgated by the U.S. Department of Health
and Human Services, or HHS. First, we must comply with HIPAA’s standards for electronic transactions, which establish
standards for common healthcare transactions, such as claims information, plan eligibility, payment information and the
use of electronic signatures. We must also comply with the standards for the privacy of individually identifiable health
information, which limit the use and disclosure of most paper and oral communications, as well as those in electronic form,
regarding an individual’s past, present or future physical or mental health or condition, or relating to the provision of
healthcare to the individual or payment for that healthcare, if the individual can or may be identified by such information.
Additionally, we must comply with HIPAA’s security standards, which require us to ensure the confidentiality, integrity
and availability of all electronic PHI that we create, receive, maintain or transmit, to protect against reasonably anticipated
threats or hazards to the security of such information, and to protect such information from unauthorized use or disclosure.
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Various U.S. states have implemented similar restrictive requirements regulating the use and disclosure of health
information and other personal information that are not necessarily preempted by HIPAA or that regulate different
information than HIPAA. For example, in 2020 California enacted the California Consumer Privacy Act, which creates
numerous new privacy requirements, such as greater notice and transparency obligations and consumer rights relating to
the access to, deletion of, and sharing of personal information collected by certain businesses and their service providers.
Also, the California Confidentiality of Medical Information Act, which protects the confidentiality of individually
identifiable medical information obtained by health care providers and their contractors, is much broader than HIPAA and
the data protected is also broader than HIPAA. In addition, Massachusetts law requires that any company that obtains
personal information of any resident of the Commonwealth of Massachusetts implement and maintain a security program
that adequately protects such information from unauthorized use or disclosure. State privacy laws continue to evolve, and
several new state privacy laws that may affect us became, or are expected to become, effective in 2023. For example, this
includes updates to the California Consumer Privacy Act (effective as of January 1, 2023), the Colorado Privacy Act
(effective July 1, 2023), the Virginia Consumer Data Protection Act (effective as of January 1, 2023), the Utah Privacy
Act (effective December 31, 2023), and the Connecticut Data Privacy Act (effective July 1, 2023).
There are also comprehensive foreign privacy and security laws and regulations that impose robust requirements
on the processing of personal information, including health information. In particular, the EU’s General Data Protection
Regulation, or GDPR, became effective in 2018. The GDPR applies not only to organizations within the EU, but also
applies to organizations outside of the EU, such as Natera, that offer goods or services to EU data subjects or that process
personal data of EU data subjects. The GDPR specifies higher potential liabilities for certain data protection violations,
and we anticipate that it will result in a greater compliance burden for us as we conduct our business, particularly through
our Constellation cloud-based distribution model, in the European Union. Fines for non-compliance can range from the
greater of 2% of annual global revenues or €10 million, up to the greater of 4% of annual global revenues or €20 million.
As a business that operates both internationally and throughout the United States, any unauthorized use or
disclosure of personal information, even if it does not constitute PHI, by us or our third-party contractors, including
disclosure due to data theft or unauthorized access to our or our third-party contractors’ computer networks, could subject
us to costs, fines or penalties that could adversely affect our business and results of operations, including the cost of
providing notice, credit monitoring and identity theft prevention services to affected consumers.
Healthcare Fraud and Abuse Laws
Federal and state governmental authorities scrutinize arrangements between healthcare providers and potential
referral sources to ensure that the arrangements are not designed as a mechanism to induce patient care referrals for items
or services billable to governmental health care programs. Law enforcement authorities, courts and Congress have
demonstrated a willingness to look behind the formalities of a transaction to determine the underlying purpose of payments
between healthcare providers and actual or potential referral sources. The penalties for violations under these laws can be
both civil and criminal in nature. The Federal Civil Penalties Inflation Adjustment Act Improvements Act of 2015 provides
for an annual, automatic adjustment of civil monetary penalties authorized under the Social Security Act to account for
inflation, which are published in the Federal Register annually.
The federal Anti-Kickback Statute makes it a felony for a provider or supplier, including a laboratory, to
knowingly and willfully offer, pay, solicit or receive remuneration, directly or indirectly, in order to induce business that
is reimbursable under any federal healthcare program. Generally, courts have taken a broad interpretation of the scope of
the federal Anti-Kickback Statute, holding that the statute may be violated if merely one purpose of a payment arrangement
is to induce future referrals. A violation of the federal Anti-Kickback Statute may result in imprisonment for up to ten
years and/or criminal or civil fines of up to $104,330 and exclusion from participation in federal healthcare programs.
Claims submitted in violation of the federal Anti-Kickback Statute may not be paid by a federal health care program, and
any person collecting any amounts with respect to any such prohibited claim is obligated to refund such amounts. Although
the federal Anti-Kickback Statute applies only to federal healthcare programs, a most U.S. states have passed laws
substantially similar to the federal Anti-Kickback Statute pursuant to which similar types of prohibitions are made
applicable to all commercial health plans or any health care services, depending on the state. Conduct which violates the
federal Anti-Kickback Statute or similar laws also triggers liability under the Federal False Claims Act, which prohibits
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knowingly presenting or causing to be presented a false, fictitious or fraudulent claim for payment to the U.S. Government
and can result in additional penalties and fines.
The HHS Office of Inspector General, or OIG, has issued Special Fraud Alerts on arrangements for the provision
of clinical laboratory services and relationships between, among others, laboratories and referral sources. The Special
Fraud Alerts set forth a number of practices allegedly engaged in by some clinical laboratories and healthcare providers
that raise issues under the federal fraud and abuse laws, including the federal Anti-Kickback Statute. The OIG emphasized
in the Special Fraud Alerts that when one purpose of such arrangements is to induce referrals of government program-
reimbursed laboratory testing, both the clinical laboratory and the healthcare provider (e.g., physician) may be liable under
the federal Anti-Kickback Statute, and may be subject to civil and/or criminal prosecution and exclusion from participation
in any federal healthcare programs, such as the Medicare and Medicaid programs.
Recognizing that the federal Anti-Kickback Statute is broad and may technically prohibit many innocuous or
beneficial arrangements within the healthcare industry, HHS has issued a series of regulatory “safe harbors” for certain
payment arrangements which are not considered improper remuneration under the federal Anti-Kickback Statute if one
can demonstrate compliance with each element of the safe harbor. Although full compliance with these safe harbors
ensures against prosecution under the federal Anti-Kickback Statute, the failure of a transaction or arrangement to fit
within a specific safe harbor does not necessarily mean that the payment is per se illegal or that prosecution under the
federal Anti-Kickback Statute will be pursued.
While we believe that we are in compliance with the federal Anti-Kickback Statute and similar state fraud and
abuse laws that are applicable to us, there can be no assurance that our relationships with physicians, hospitals and other
customers or vendors will not be subject to scrutiny or will survive regulatory challenge under such laws. If imposed for
any reason, enforcement and sanctions under the federal Anti-Kickback Statute or any similar state statute could have a
negative effect on our business.
The federal Civil Monetary Penalty statute pertaining to health care fraud and abuse prohibits, among other things,
the offer or payment of remuneration to a Medicare beneficiary that the offeror or payer knows or should know is likely
to influence the beneficiary to order or receive a reimbursable item or service from a particular provider, practitioner, or
supplier; contracting with an individual or entity that the person knows or should know is excluded from participation in
a federal health care program; and knowingly making or causing to be made any false statement, omission, or
misrepresentation of a material fact in any application, bid, or contract to participate or enroll as a provider of services or
a supplier under a federal health care program. A violation of the federal Civil Monetary Penalty statute may result in
maximum civil fines up to $112,131 plus treble damages and exclusion from participation in any federal health care
program.
Because we operate a laboratory facility located in California and licensed by California’s DHS, California law
is applicable to our business arrangements. California’s state anti-kickback statutes, Business and Professions Code
Section 650 (which applies to all categories of payors) and Insurance Code Section 754, and its Medi-Cal anti-kickback
statute, Welfare and Institutions Code Section 14107.2, are analogous to, and have been interpreted by the California
Attorney General and California courts in substantially the same way as the federal government and the courts have
interpreted, the federal Anti-Kickback Statute. A violation of Section 650 is punishable by up to one year of imprisonment,
a fine up to $50,000, or both imprisonment and a fine. A violation of Section 14107.2 is punishable by imprisonment and
fines of up to $10,000. The California Insurance Code includes similar prohibitions against any consideration for the
referral or procurement of patients if a claim is submitted to a commercial insurer, CA Ins. Code § 750, which is punishable
by criminal penalties mirroring those that apply to violations of Business and Professions Code Section 650.
Because each of our laboratories holds a New York CLEP permit, we must comply with New York state
laboratory statutes and regulations, which include anti-kickback provisions, Public Health Law Section 587, and Medicaid
anti-kickback provisions, 18 NYCRR Section 515.2, related to laboratory services. The New York DOH may suspend,
limit, revoke or annul the New York laboratory permit or otherwise discipline the permit holder for a violation.
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Because we operate a laboratory facility located in Texas, our business arrangements are subject to certain Texas
laws. Texas’s primary anti-kickback statute, Texas Patient Solicitation Act (Tex. Occ. Code § 102.001) (which applies to
all categories of payors), provides for an exception to any business arrangement that complies with the federal Anti-
Kickback Statute or any regulation adopted under that law. Even if a business arrangement is compliant with the Texas
Patient Solicitation Act, disclosure to the patient is required. A violation of Section 102.001 or 102.006 is punishable by
civil penalties (up to $10,000 per violation). The Texas Medicaid anti-kickback laws, 1 TAC 371.1669, cross-references
the Texas Patient Solicitation Act and include other prohibited self-referrals that are grounds for enforcement and sanctions.
The Texas Insurance Code includes criminal penalties for similar prohibitions related to improper referral or procurement
of patients if a claim is submitted to a commercial insurer.
In addition to the requirements that are discussed above, there are other healthcare fraud and abuse laws that
could have an impact on our business.
The federal False Claims Act prohibits a person from knowingly submitting or causing to be submitted false
claims or making a false record or statement in order to secure payment by the federal government. Conduct which violates
another fraud and abuse law identified in this section may also result in liability under the federal False Claims Act as a
result of the submission of claims pursuant to a prohibited payment arrangement. In addition to actions initiated by the
government itself, the federal False Claims Act authorizes actions to be brought on behalf of the federal government by a
private party having knowledge of the alleged fraud (sometimes referred to as a “whistleblower”) under a qui tam
complaint.
Because qui tam complaints are initially filed under seal in federal court, the action may be pending for some
time before the defendant is even aware of the action. If the government is ultimately successful in obtaining redress in
the matter or if the private party plaintiff succeeds in obtaining redress without the government’s involvement, then the
private party plaintiff will receive a percentage of any recovery and penalty imposed. Violation of the federal False Claims
Act may result in fines of up to three times the actual damages sustained by the government, plus mandatory civil penalties
of up to approximately $25,076 per false claim or statement, imprisonment or both, reimbursement of the whistleblower’s
attorneys’ fees, and possible exclusion from any federal health care programs. The penalties will continue to be adjusted,
increasing each year to reflect changes in the inflation rate, pursuant to the 2015 Bipartisan Budget Act.
In 2018, the Eliminating Kickbacks in Recovery Act of 2018, or EKRA, was passed as part of the Substance Use-
Disorder Prevention that Promotes Opioid Recovery and Treatment for Patients and Communities Act (referred to as the
SUPPORT Act). Similar to the federal Anti-Kickback Statute, EKRA creates criminal penalties for knowing or willful
payment or offer, or solicitation or receipt, of any remuneration, whether directly or indirectly, overtly or covertly, in cash
or in kind, in exchange for the referral or inducement of laboratory testing unless a specific exception applies. Unlike the
federal Anti-Kickback Statute, EKRA is not limited to government health care benefit programs, so the prohibitions extend
to services covered by commercial health plans. Additionally, most of the safe harbors available under the federal Anti-
Kickback Statute are not reiterated under EKRA, and certain EKRA safe harbors conflict with the safe harbors available
under the federal Anti-Kickback Statute. Therefore, on its face, compliance with a federal Anti-Kickback safe harbor may
not guarantee protection under EKRA. As currently drafted, EKRA potentially expands the universe of arrangements that
could be subject to government enforcement under federal fraud and abuse laws. Violation of EKRA carries potential
penalties of up to $200,000 in fines and imprisonment of up to ten years for each occurrence, and potential exclusion from
participation in any federal health care program. Because EKRA is a relatively new law, there is very little additional
guidance to indicate how and to what extent it will be interpreted, applied and enforced by the government. Currently,
there is no proposed regulation interpreting or implementing EKRA, nor any public guidance released by a federal agency
concerning EKRA. The only case law issued to date involves decisions interpreting the EKRA as it applies to compensation
of laboratory sales personnel hired as independent contractors, and the courts differ on interpretation and application of
the law. We cannot assure you that our relationships with physicians, hospitals, customers, or sales personnel will not be
subject to scrutiny or will survive a challenge under EKRA. If imposed for any reason, sanctions under EKRA could have
a negative effect on our business.
We are also subject to the Physician Self-Referral law, commonly known as the Stark Law, which prohibits, with
certain exceptions, an ownership or financial arrangement with a physician (or physician’s immediate family member) in
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exchange for the referral of designated health services, including clinical laboratory services, or presenting or causing to
be presented claims to Medicare and Medicaid for such services referred by the physician. The Stark law is a strict liability
statute, which means proof of specific intent to violate the law is not required. Any person who presents or causes to be
presented a claim to the Medicare or Medicaid programs in violation of the Stark Law may be subject to civil monetary
penalties of up to $27,750 per claim submission, an assessment of up to three times the amount claimed, and exclusion
from participation in any federal health care program. A person who engages in a scheme to circumvent the Stark Law’s
referral prohibition may be fined up to $185,009 for each such arrangement or scheme. Claims submitted in violation of
the Stark Law may not be paid by Medicare or Medicaid, and any person collecting any amounts with respect to any such
prohibited claim is obligated to refund such amounts. Actions which violate the Stark Law may be bootstrapped to involve
liability under the federal False Claims Act.
Further, in addition to the privacy and security regulations stated above, HIPAA created two federal crimes:
healthcare fraud and false statements relating to healthcare matters. The healthcare fraud statute prohibits knowingly and
willfully executing a scheme to defraud any healthcare benefit program, including private payers, or to obtain, by means
of false or fraudulent pretenses, representations or promises, any money or property owned by or under the control of any
health care benefit program in connection with the delivery of or payment for health care benefits, items or services. A
violation of this statute is a felony and may result in fines, imprisonment or exclusion from government sponsored
programs. The false statements statute prohibits knowingly and willfully falsifying, concealing or covering up a material
fact or making any materially false, fictitious or fraudulent statement in connection with the delivery of or payment for
healthcare benefits, items or services. A violation of this statute is a felony and may result in fines or imprisonment.
Finally, federal law prohibits any entity from offering or transferring to a Medicare or Medicaid beneficiary any
remuneration that the entity knows or should know is likely to influence the beneficiary’s selection of a particular provider,
practitioner or supplier of Medicare or Medicaid payable items or services, including waivers of copayments and
deductible amounts (or any part thereof), if any apply, and transfers of items or services for free or for other than fair
market value. Entities found in violation may be liable for civil monetary penalties of up to $100,000 for each wrongful
act. Although we believe that our business activities and practices, including our sales and marketing practices, are in
material compliance with all applicable federal and state laws and regulations, relevant regulatory authorities may disagree,
and violation of these laws or our exclusion from such programs as Medicare, Medicaid and other federal health care
programs as a result of a violation of such laws could have a material adverse effect on our business, results of operations,
financial condition and cash flows.
Many states, including California, also have state “physician self-referral” prohibitions and other laws that are
not limited to Medicare and Medicaid referrals, with which we must comply. We are subject to California’s Physician
Ownership and Referral Act, or PORA, which generally prohibits us from billing a patient or any governmental or private
payer for any laboratory services when the physician ordering the service, or any member of such physician’s immediate
family, has a “financial interest” with us, unless the arrangement meets an exception (CA Business and Professions Code
Section 650.02). The term “financial interest” is defined broadly and includes any type of ownership interest, debt, loan,
lease, compensation, remuneration, discount, rebate, refund, etc. between the ordering physician and the entity receiving
the referral. The exceptions to PORA track certain of the Stark Law exceptions, including an exception for personal service
arrangements and for ownership of publicly traded entities. A violation of PORA is punishable by civil and criminal
penalties (civil penalties and criminal fines vary depending on the nature of the violation, but may reach up to $15,000 per
violation).
Other states may have self-referral restrictions with which we have to comply that differ from those imposed by
federal and California law.
We are also subject to applicable state client billing laws, which specify whether a person that did not perform
the service is permitted to submit the claim for payment and if so, whether the non-performing person is permitted to mark
up the cost of the services in excess of the price the purchasing provider paid for such services. California has an anti-
markup statute with which we must comply, which prohibits providers from charging for any laboratory test that it did not
perform unless the provider (a) notifies the patient, client or customer of the name, address, and charges of the laboratory
performing the test, and (b) charges no more than what the provider was charged by the clinical laboratory which
performed
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the test except for any other service actually rendered to the patient by the provider (for example, specimen collection,
processing and handling) (Business and Professions Code Section 655.5). This provision applies, with certain limited
exceptions, to licensed persons such as physicians and clinical laboratories regulated under the Business and Professions
Code. A violation of this provision can lead to imprisonment and/or a fine of up to $10,000. Other states have similar anti-
markup prohibitions with which we must comply. In addition, many states also have “direct-bill” laws, which means that
the services actually performed by an individual or entity must be billed by such individual or entity, thus preventing
ordering physicians from purchasing services from a laboratory and rebilling for the services they order. For example,
California has a direct bill rule specific to anatomic pathology services that prohibits any provider from billing for anatomic
pathology services if those services were not actually rendered by that person or under his or her direct supervision with
some exemptions (CA Business and Professions Code Section 655.7).
While we have attempted to comply with the federal, Texas, California and New York fraud and abuse laws and
similar laws of other states and non-U.S. jurisdictions that are applicable to our business, it is possible that some of our
arrangements could be subject to regulatory scrutiny at some point in the future, and we cannot provide assurance that we
will be found to be in compliance with these laws following any such regulatory review.
Human Capital Management
As of December 31, 2022, our global workforce comprised 3,018 employees, of whom 2,958 were full time
employees, representing an increase of approximately 10.7% during 2022. We also engage consultants and temporary
employees. We have not been subject to labor action or union activities, and our management considers its relationships
with employees to be good.
Our global voluntary turnover rate for 2022 was approximately 18.4%. Based on self-identification data, women
comprised approximately 62.7% of our global workforce in 2022, and over 65% of global new hires were women; and
approximately 0.1% self-identified as transgender female, 0.2% as transgender male, and 0.9% as non-binary/non-
conforming. Also based on self-identification data, minorities comprised over 40% of our U.S. workforce.
We are committed to attracting, retaining, developing, and nurturing a diverse workforce, which we believe is
necessary in order to deliver upon our mission of changing the management of disease worldwide. Our development,
performance, and compensation programs are designed to attract and reward talented, diverse individuals who possess the
skills necessary to support our business objectives, assist in the achievement of our strategic goals and ultimately create
long term value for our stockholders. In addition to base pay, our compensation and benefits programs, which can vary by
region, can include annual bonuses, stock-based compensation awards, a 401(k) plan with employee matching
opportunities, healthcare and insurance benefits, health savings and flexible spending accounts, paid time off, parental
leave, and employee assistance programs. We work to ensure pay equity by annually assessing our compensation practices
and working with external compensation consultants to design and benchmark our programs.
We operate in an industry in which competition for highly qualified personnel is intense. In addition to our
compensation programs, we are highly focused on talent acquisition, retention and development. We periodically conduct
employee engagement surveys, the results of which inform internal company and management goals to help ensure
impactful and meaningful actions in response to feedback received. Our annual employee evaluation process helps us to
support developing employees as well as identify and cultivate high performers, and we have various initiatives underway
to further develop leaders and managers. In 2022, Natera was certified by Great Place to Work® for the second year in a
row.
Embracing diversity is one of our company core values, as we believe that a broad range of perspectives and
experiences is necessary to drive innovation and leadership. To this end, it is important to us to create an inclusive and
equitable environment that represents a broad spectrum of backgrounds and cultures. We have two employee resource
groups, or ERGs, committed to furthering our efforts in this area. Women of Natera and our Diversity & Inclusion Group
both serve as resources to the organization in fostering a culture of inclusion and diversity by providing a platform of
networking, ongoing learning and exchange to support professional development and promote workplace equality and
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diversity. We are working towards a 2025 Environmental, Social and Governance goal of all managers complete annual
diversity training.
Sustainability
We recognize that in our work to improve the state of disease globally, it is important to develop and maintain a
strong ethos of sustainability, responsibility, and stewardship with respect to environmental matters. We have policies and
programs in place to comply with the requirements set forth in applicable local, state, and federal environmental policies,
laws and regulations parameters set forth in such applicable policies, laws and regulations in the course of conducting our
operations. However, we cannot predict how changes in these laws and regulations, or the development of new laws and
regulations, will affect our business operations or the cost of compliance. Climate change may impact our business by
increasing operating costs due to additional regulatory requirements, physical risks to our facilities, energy limitations,
and disruptions to our supply chain. We consider such potential risks in our business continuity planning, including
reviewing investment opportunities in renewable energy, and reducing energy and water consumption, greenhouse gas
emissions, and waste production.
As part of our sustainability and environmental, social, and governance (ESG) program, we have an executive
steering committee responsible for overseeing sustainability projects to reduce the environmental impact of our laboratory
operations, our corporate offices, and our supply chain. Our environmental sustainability program addresses, among others,
emissions reduction; water and energy conservation; sustainability in supply chain management; waste reduction;
employee engagement; and sustainable building design and operations. In particular, we have established Scope 1, 2 and
3 intensity reduction targets as part of our broader climate action plan as outlined in our 2025 Environmental, Social and
Governance goals. Additional information can be found in our annual ESG Report located on our website at
www.natera.com/esg. We do not incorporate the information on, or accessible through, our website into this Annual Report
on Form 10-K or any other report we file with or finish to the SEC, and you should not consider any information on, or
accessible through, our website as part of this Annual Report on Form 10-K or any other report we file with or furnish to
the SEC.
Glossary of Terms
ACOG – the American Congress of Obstetricians and Gynecologists.
ACMG – the American College of Medical Genetics and Genomics.
Allograft – the transplant of an organ or tissue from one individual to another individual of the same species who is not
genetically identical.
AMA – American Medical Association.
AUC – area under the receiver operating curve; a measure of the diagnostic performance of a test, based on sensitivity and
specificity.
cfDNA – cell-free DNA.
CLIA – Clinical Laboratory Improvement Amendments.
CMS – Centers for Medicare and Medicaid Services.
CNV – copy number variation; a genetic mutation in which relatively large regions of the genome have been deleted or
duplicated.
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CPT – Current Procedure Terminology; codes used by doctors and health care professionals for identifying medical
services and procedures.
ctDNA – circulating tumor DNA; tumor DNA circulating in a blood sample.
CS test – carrier screening test.
dd-cfDNA – donor-derived cell-free DNA; DNA that is shed into the blood of a transplant recipient from a transplanted
organ undergoing rejection.
DNA – deoxyribonucleic acid.
FDA – Food and Drug Administration.
Fetal aneuploidy – an inherited genetic condition in which a fetus has a different number of chromosomes than are typical.
IVD – in vitro diagnostic; tests that can be used in any laboratory that has the appropriate qualifications and authorizations.
IVF – in vitro fertilization.
LDT – laboratory developed test; tests that are designed, developed, validated and used within a single laboratory.
MFM – maternal fetal medicine; an MFM physician specialist is an obstetrician who has completed a medical education
specialty in high-risk pregnancy.
Microdeletion – a deletion of a region of DNA from one copy of one chromosome.
mmPCR – massively multiplexed polymerase chain reaction.
NGS – next-generation sequencing; a DNA sequencing technology.
NIPT – non-invasive prenatal test.
No-call – the inability to update the prior risk, or the standard risk assigned based on maternal and gestational age, in order
to provide a high-risk or low-risk test result due to insufficient information in the sample.
OB/GYN – obstetrician-gynecologist; a doctor who specializes in women’s health.
PPV – positive predictive value; the likelihood that a positive result on a test indicates a true positive result in the patient.
Sensitivity – the likelihood that an individual with a condition will be correctly found to have that condition. Sensitivity is
calculated as the ratio between the number of individuals that test positive for the condition over the total number of
individuals in the tested cohort who actually have the condition.
SNP – single nucleotide polymorphism; a position on the chromosome at which single DNA base changes are common in
the population.
SNV – single nucleotide variant; a genetic mutation in which a single chemical base in DNA has changed.
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Specificity – the likelihood that an individual without a condition will be correctly found not to have that condition.
Specificity is calculated as the ratio between the number of individuals that test negative for a condition over the total
number of individuals in the tested cohort who do not have the condition.
Triploidy – a type of fetal aneuploidy in which an individual has three copies of every chromosome instead of two.
Corporate Information
Our principal executive office is located 13011 McCallen Pass, Building A Suite 100, Austin, Texas. Our website
address is www.natera.com. We do not incorporate the information on, or accessible through, our website into this Annual
Report on Form 10-K or any other report we file with or finish to the SEC, and you should not consider any information
on, or accessible through, our website as part of this Annual Report on Form 10-K or any other report we file with or
furnish to the SEC.
Our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and
amendments to those reports filed or furnished pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of
1934, as amended, may be obtained free of charge at
the Investor Relations section of our website,
http://investor.natera.com, as soon as reasonably practicable after we electronically file such material with, or furnish it to,
the Securities and Exchange Commission, or SEC. Additionally, the SEC maintains an internet site that contains reports,
proxy and information statements and other information. The address of the SEC’s website is www.sec.gov.
ITEM 1A.
RISK FACTORS
Investing in our common stock involves a high degree of risk. You should consider carefully the risks and
uncertainties described below, together with all of the other information in this report, including the section titled
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated
financial statements and related notes, before investing in our common stock. The risks and uncertainties described below
are not the only ones we face. If any of the following risks actually occurs, our business, financial condition, results of
operations and prospects could be materially and adversely affected. In that event, the price of our common stock could
decline and you could lose part or all of your investment.
Risks Related to Our Business and Industry
If we are unable to successfully grow revenues for our products or services, and if our efforts to further increase the
use and adoption of our products or to develop new products and services in the future do not succeed, our business
will be harmed.
Our ability to successfully grow revenues for our products and services is uncertain and subject to many risks, as
further described in these Risk Factors. In particular, the majority of our revenues are derived from sales of our Panorama
NIPT and our Horizon carrier screening, or HCS, test, and we expect this to continue to be the case. As such, any adverse
impact we experience with respect to our tests, and in particular with respect to either Panorama or Horizon, could result
in an impact to our overall revenues, or a component of such overall revenues. For example, a decline in our reimbursement
rates for, and therefore our average selling price of, Horizon, could result in a decline in our overall blended average selling
price.
Continued and additional market demand for our tests, and reimbursement for our tests, particularly for NIPT for
the average-risk population and for microdeletions, are key elements to our future success. The market demand for NIPTs,
carrier screening tests and our other tests continue to evolve. We cannot guarantee that physicians will recommend and
order our tests, and our laboratory distribution partners and licensees may not actively or effectively market our tests. Our
ability to increase sales and establish significant levels of adoption and reimbursement for our tests is uncertain, and it may
be challenging for us to achieve profitability for many reasons, including, among others:
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the market for our tests may not grow as we expect; in particular, NIPTs may not gain acceptance for use as
a screen for microdeletions, which would limit the market for Panorama, and we may fail to compete
successfully in this market, whatever its size;
if we are unable to demonstrate that our tests are superior to competing tests, laboratories, clinics, clinicians,
physicians, payers and patients may not adopt the use of our tests on a broad basis, and may not be willing
to pay the price premium over competing tests that we have, to date, been able to achieve;
third-party payers, such as commercial insurance companies and government insurance programs, may
decide not to reimburse for our tests, such as for the screening of microdeletions, may set the amounts of any
reimbursements at prices that do not allow us to cover our expenses, or may otherwise adopt regulations,
programs, policies or procedures that restrict or harm our business; for example, with respect to Panorama,
many third-party payers currently have negative coverage determinations or otherwise do not reimburse for
microdeletions screening and we expect low reimbursement rates for microdeletions screening to continue,
at least in the near term; also, most state Medicaid programs currently either reimburse at low rates or do not
reimburse for our tests;
third-party payers have increasingly required that prior authorization be obtained prior to conducting genetic
testing as a condition to reimbursing for it, which has reduced and/or delayed the reimbursement amounts
we receive for our tests and impacted our results of operations;
the results of our SMART Study evaluating the performance of Panorama may fail to convince laboratories,
clinics, clinicians, physicians or patients of the benefits of utilizing Panorama for microdeletions and may
not increase reimbursement for Panorama;
the results of our clinical trials and any additional clinical and economic utility data that we may develop,
present and publish in the future, or that comes from the commercial use of our tests, may be inconsistent
with our existing data and may raise questions about the performance of our tests, or may fail to convince
laboratories, clinics, clinicians, physicians, payers or patients of the value of our tests;
we may experience supply constraints, including those due to the failure of our key suppliers to provide
required sequencers and reagents in sufficient amounts or of adequate quality or disputes with our key
suppliers, including those with respect to the required sequencers and reagents from our supplier,
Illumina, Inc., or Illumina, who is also one of our main NIPT competitors through its subsidiary, Verinata
Health Inc., or Verinata, and with whom we have historically been involved in patent proceedings;
we may experience increased cost of product revenues, and cost of licensing and other revenues, as a
percentage of total revenues, as has been the case in previous fiscal periods;
the U.S. Food and Drug Administration, or the FDA, or other U.S. or foreign regulatory or legislative bodies
may adopt new regulations or policies, or take other actions that impose significant restrictions on our ability
to market and sell our tests, including requiring FDA clearance or approval for the sale of our tests, or of the
sequencers, reagents, kits and other consumable products that we purchase from third parties in order to
perform our testing;
our laboratory partners may choose to develop their own tests that are competitive with ours or offer tests
provided by our competitors due to pricing or other reasons as has happened in the past, or otherwise fail to
effectively market our tests; and competitors may develop and commercialize more effective and/or less
expensive tests that deliver comparable results to our tests;
we may fail to adequately protect or enforce our intellectual property relating to our tests, leading to increased
competition; or other parties may claim that the practice of our technology by us or our licensees and
collaborators infringes such other party’s intellectual property rights, as certain of our competitors have
claimed in lawsuits filed against us, as discussed further in “Note 8—Commitments and Contingencies—
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Legal Proceedings” in the Notes to Consolidated Financial Statements; if we are required to pay license fees
in order to license third-party intellectual property rights due to actual or alleged infringement based on our
running our tests, we may experience increased costs in running our tests, and we may be unable to pass such
costs on to our customers;
we may be unable to dedicate adequate resources to the maintenance and further technological advancement
of our current tests that are necessary for such tests to be competitive in the marketplace because of the
demands placed on our research and development and product teams with respect to our continuously
expanding portfolio of products and programs, in particular our efforts and focus on developing our oncology
and organ health products;
in the event that it is in our commercial or financial interest or we are forced to transition sequencing
platforms for Panorama, we may be unable to do so in a commercially sustainable way and that could survive
claims of infringement of intellectual property rights of Illumina and other competitors, in a timely manner
or at all; and
we may not be successful in commercializing our cloud-based distribution model.
If we are not able to increase adoption of and grow revenues for our products or services, our business, operating
results and financial condition will be harmed.
We have incurred net losses since our inception and we anticipate that we will continue to incur losses for the
foreseeable future, which could harm our future business prospects.
We have incurred net losses each year since our inception in 2003. To date, we have financed our operations
primarily through private placements of preferred stock, convertible debt and other debt instruments, our initial public
offering, and our registered public equity offerings. Our net loss for the years ended December 31, 2022, 2021 and 2020
was $547.8 million, $471.7 million, and $229.7 million, respectively. As of December 31, 2022, we had an accumulated
deficit of $1.9 billion. Such losses may continue to increase in the future as we continue to devote a substantial portion of
our resources to efforts to increase the adoption of, and reimbursement for, Panorama, Horizon, Signatera, Prospera, and
our other products, improve these products, and research and develop and commercialize new products.
In addition, the rate of growth in our revenues has fluctuated in the past, and may continue to do so in future
periods. In particular, such rate of growth may be negative, flat, or may grow more slowly than we expect, including if the
rate of growth of our test volumes slows. A significant element of our business strategy is to maintain increased in-network
coverage with third-party payers; 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, especially if we are unable to increase the adoption of, and obtain favorable coverage determinations for
reimbursement for, our products. Furthermore, a CPT code for microdeletions went into effect beginning in January 2017.
We have experienced low average reimbursement rates for microdeletions testing under this code, and our microdeletions
reimbursement may continue to remain low, at least in the near term, either due to reduced reimbursement, or third-party
payers declining to reimburse, under the microdeletions code, which has had and will likely continue to have an adverse
effect on our revenues. In addition, a CPT code for expanded carrier screening went into effect beginning in January 2019,
and has had, and may continue to have, an adverse effect on our reimbursement rates for our broader Horizon carrier
screening panel, for which we previously primarily received reimbursement on a per condition basis, as those tests may
be reimbursed as a combined single panel instead of as multiple individual tests.
As further discussed in the risk factor entitled “—We may not be successful in commercializing our cloud-based
distribution model,” our results of operations may be adversely affected if we do not sell a sufficient volume of tests under
our cloud-based distribution model to offset the lower revenues per test performed under that model. Our ability to forecast
our future operating results, including revenues, cash flows and profitability, is limited and subject to a number of
uncertainties. We have also encountered and will continue to encounter risks and uncertainties frequently experienced by
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rapidly growing companies in the life sciences and technology industry, such as those described in this report. If our
assumptions regarding these risks and uncertainties are incorrect or these risks and uncertainties change, or if we do not
address these risks successfully, our operating and financial results may differ materially from our expectations, and our
business may suffer.
Uncertainty in the development and commercialization of our enhanced or new tests or services could materially
adversely affect our business, financial condition and results of operations.
Our success will depend in part on our ability to effectively introduce and increase market adoption of enhanced
or new offerings. In recent years we have developed and launched several new products or enhanced versions of existing
products, including our first offerings in oncology and in organ health, and we expect to continue our efforts in all of these
areas. The development and launch of enhanced or new tests requires the completion of certain clinical development and
commercialization activities that are complex, costly, time-intensive and uncertain, and requires us to accurately anticipate
the preferences and needs of patients, clinicians, payers, and other counterparties, as well as emerging technology and
industry trends. This process is conducted in various stages, and each stage presents the risk that we will not achieve our
goals.
We may not be successful in our current or future efforts to develop and commercialize cell-free DNA tests in
industries that are newer to us. Moreover, we have limited experience forecasting our future financial performance from
our new products in these industries that are newer to us, and our actual results may fall below our financial guidance or
other projections, or the expectations of analysts or investors, which could cause the price of our common stock to decline.
We may experience research and development, regulatory, marketing and other difficulties that could delay or prevent our
introduction of enhanced or new tests and result in increased costs and the diversion of management’s attention and
resources from other business matters, such as from our Panorama and Horizon product offerings, which currently
represent the significant majority of our revenues. For example, any tests that we may enhance or develop may not prove
to be clinically effective in clinical trials or commercially, or may not ultimately meet our desired target product profile,
be offered at acceptable cost and with the sensitivity, specificity and other test performance metrics necessary to address
the relevant clinical need or commercial opportunity; our test performance in commercial experience may be inconsistent
with our validation or other clinical data; we may not be successful in achieving market awareness and demand, whether
through our own sales and marketing operations or through collaborative arrangements; healthcare providers may not order
or use, or third-party payers may not reimburse for, any tests that we may enhance or develop; or we may otherwise have
to abandon a test or service in which we have invested substantial resources. In particular, we are subject to the risk that
the biological characteristics of the genetic mutations we seek to target, and upon which our technologies rely, are uncertain
and difficult to predict. For example, in our efforts to detect and analyze circulating tumor DNA in plasma for MRD
assessment and recurrence surveillance, our success depends on tumors shedding mutant DNA into the bloodstream in
sufficient quantities such that our technology can detect such mutations, as well as patients having sufficient tumor tissue
to design our custom ctDNA test for each patient. As further discussed in the risk factor entitled “If our products do not
perform as expected, our operating results, reputation and business will suffer,” we may also experience unforeseen
difficulties when implementing updates to our processes, as we have occasionally experienced with Panorama, Horizon,
and our other tests.
We cannot assure you that we can successfully complete the clinical development of any new or enhanced product,
or that we can establish or maintain the collaborative relationships that may be essential to our clinical development and
commercialization efforts. Clinical development requires large numbers of patient specimens and, for certain products,
require large, prospective, and controlled clinical trials. We may not be able to enroll patients or collect a sufficient number
of appropriate specimens in a timely manner; or we may experience delays during clinical development due to slower than
anticipated enrollment, which we experienced in the past with our SNP-based Microdeletions and Aneuploidy RegisTry,
or SMART, Study, or due to changes in study design or other unforeseen circumstances, such as our decisions in the past
to expand our SMART Study; or we may be unable to afford or manage the large-sized clinical trials that some of our
planned future products may require.
The publication of clinical data in peer-reviewed journals is a crucial step in commercializing and obtaining
reimbursement for tests such as ours, and our inability to control when, if ever, results are published may delay or limit
our ability to derive sufficient revenues from any test that is the subject of a study. Peer-reviewed publications regarding
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our tests may be limited by many factors, including delays in the completion of, poor design of, or lack of compelling data
from, clinical studies, as well as delays in the review, acceptance and publication process. If our tests or the technology
underlying our current or future tests do not receive sufficient favorable exposure in peer-reviewed publications, the rate
of clinician adoption of our tests and positive reimbursement coverage determinations for our tests could be negatively
affected. Further, the data collected from any studies we complete in the future may not be favorable or consistent with
our existing data or may not be statistically significant or compelling to the medical community or to third-party payers
seeking such data for purposes of determining coverage for our tests. For example, results from our SMART Study have
been published in two publications; however, we cannot assure you that such results or publications will convince
laboratories, clinics, clinicians, physicians or patients of the benefits of utilizing Panorama for microdeletions. We also
cannot be certain whether, or to what extent, the SMART Study may impact insurance coverage and reimbursement for
microdeletions testing. Similarly, certain results of the CIRCULATE-Japan study have recently been published, and we
cannot assure you that such results will impact professional society or practice guidelines, or coverage and reimbursement
determinations from third-party payers, as we anticipate.
In addition, as further described in the risk factor entitled “—If the FDA were to begin actively regulating our
tests, we could incur substantial costs and delays associated with trying to obtain premarket clearance or approval and
incur costs associated with complying with post-market controls,” development of the data necessary to obtain regulatory
clearance and approval of a test is time-consuming and carries with it the risk of not yielding the desired results. The
performance achieved in published studies may not be repeated in later studies that may be required to obtain FDA
premarket clearance or approval or regulatory approvals in foreign jurisdictions. Limited results from earlier-stage
verification studies may not predict results from studies in larger numbers of subjects drawn from more diverse populations
over longer periods of time. Unfavorable results from ongoing preclinical and clinical studies may delay, limit or prevent
regulatory approvals or clearances or commercialization of our product candidates, or could result in delays, modifications
or abandonment of ongoing analytical or future clinical studies, or abandonment of a product development program, any
of which could have a material adverse effect on our business, operating results or financial condition.
These and other factors beyond our control could result in delays or other difficulties in the research and
development, approval, production, launch, ongoing commercialization or distribution of enhanced or new tests and could
adversely affect our competitive position and results of operations.
Our quarterly results may fluctuate from period to period, which could adversely impact the value of our common stock.
Our quarterly results of operations, including our revenues, gross margin, net loss and cash flows, have varied
and may continue to vary from period to period as a result of a variety of factors, many of which are outside of our control,
including those listed elsewhere in this “Risk Factors” section, and as a result, period-to-period comparisons of our
operating results may not be meaningful. Our quarterly results should not be relied upon as an indication of future
performance. In addition, to the extent that we continue to spend considerably on our internal sales and marketing and
research and development efforts, we expect to continue to incur costs in advance of achieving the anticipated benefits of
such efforts. Fluctuations in quarterly results and key metrics may cause our results to fall below our financial guidance
or other projections or goals, or the expectations of analysts or investors, which could adversely affect the price of our
common stock. We also face competitive pricing and reimbursement pressures, and we may not be able to maintain our
premium pricing in the future, which would adversely affect our operating results.
Competition in our industry is intense; if we are unable to compete successfully with respect to our current or future
products or services, we may be unable to increase or sustain our revenues or achieve profitability.
We compete primarily in the molecular testing field, which is characterized by rapid technological changes,
frequent new product introductions, reimbursement challenges, emerging competition, intellectual property disputes and
litigation, price competition, aggressive marketing practices, evolving industry standards and changing customer
preferences. Our principal competition in women’s health comes from existing testing methods, technologies and products
that are used by OB/GYNs, MFM specialists or IVF centers. These include other NIPTs and carrier screening tests offered
by our competitors, as well as established, traditional first-line prenatal screening methods, such as serum protein
measurement, where doctors measure certain hormones in the blood, and invasive prenatal diagnostic tests like
amniocentesis, which have been used for many years and are therefore difficult to displace or supplement. In addition,
new testing methods may be developed which may displace or be preferred over NIPTs, such as whole genome sequencing
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or single cell analysis. We also face competition in the fields of oncology and organ health from other companies, many
of which are larger, more established and have more experience and more resources than we do. Some companies in the
ctDNA-based liquid biopsy field are expanding their research and development efforts to include tracking more
tumor-specific variants and/or other biomarkers in addition to ctDNA on the basis that these analyses may collectively
result in improved sensitivity and earlier detection than currently available tests, such as Signatera, or testing without the
need for a sample of the tumor tissue. We cannot assure you that research, discoveries or other advancements by other
companies will not render our existing or potential products and services uneconomical or result in products and services
that are superior or otherwise preferable to our current or future products and services. We expect that competition in all
of the markets in which we operate will continue to increase.
Some of our competitors’ products and services are sold at a lower price than ours, which could cause sales of
our tests and services to decline or force us to reduce our prices. Our current and future competitors could have greater
technological, financial, reputational and market access advantages than us, and we may not be able to compete effectively
against them. Increased competition is likely to result in pricing pressures, which could harm our revenues, operating
income or market share. We have increasingly been subject to litigation with our competitors; for example, as disclosed
elsewhere in these risk factors, we are or have recently been in active litigation with competitors in each of the women’s
health, oncology and organ health fields, which involve considerable costs to us as well as management time and attention.
If we are unable to compete successfully, we may be unable to increase or sustain our revenues or achieve profitability.
See the section entitled “Business–Overview–Competition” for additional information on our competitors.
We may not be successful in commercializing our cloud-based distribution model.
We utilize a cloud-based distribution model to deploy our bioinformatics technology for use by other laboratories.
Under this model, clinical laboratories around the world, including in the U.S., license our technology to develop and run
their own NIPT or other molecular testing assays in their own facilities as LDTs, and then access our proprietary algorithms
through our cloud-based Constellation software to analyze the assay results. In the diagnostics industry, the market for
cloud-based solutions and services is not as mature as the market for on-premise enterprise software, and it remains
uncertain whether and to what extent our cloud-based distribution model will achieve and sustain high levels of customer
demand and market acceptance. The rate of adoption of our cloud-based distribution model continues to be slower than
we anticipated, and depends on a number of factors, including the cost, performance and perceived value associated with
our solution, as well as our ability to address security, privacy and regulatory requirements or concerns. In particular, all
of our licensees under our cloud-based distribution model are required to use Illumina sequencers and reagents to run their
tests that they develop based on our technology. As further described in the risk factor entitled “—We rely on a limited
number of suppliers or, in some cases, single suppliers, for some of our laboratory instruments and materials and may not
be able to find replacements or immediately transition to alternative suppliers,” we are aware that Illumina has required
our licensees to pay an additional license fee in certain jurisdictions in order to secure a supply agreement for the
sequencers and reagents necessary to run NIPT under our cloud-based distribution model. Furthermore, Illumina competes
with us through its subsidiary Verinata, and may not charge a similar license fee for Verinata’s licensed-based offering to
other laboratories. As a result, our potential or current licensees may be unable to commercially launch their tests under
our cloud-based distribution model in a financially viable manner, which has dissuaded and could continue to dissuade
potential or current licensees from licensing from us or launching a test based on our technology. In addition, if a test
developed by any of our licensees under our cloud-based distribution model in the United States is found not to be an LDT,
the licensee may not be able to market its test, and we would not receive the anticipated revenues from that licensee.
We also do not know whether, over the long term, this model will result in benefits or cost savings at the levels
that we anticipate or at all. For example, to the extent that any of our laboratory customers for whom we currently perform
our tests entirely in our laboratory transition to our cloud-based distribution model, our revenues from such customers will
decrease because we are not able to charge as high an amount per test as when we perform the entire test ourselves. If the
lower revenues per test performed is not offset by a sufficient increase in volume of tests sold, our overall revenues will
be lower, and our results of operations may be adversely affected.
Among the risks to our business and results of operations from our Constellation model are the following:
our and our licensees’ ability to obtain required regulatory authorizations from the FDA and international
regulatory agencies as further described in the risk factor entitled “Regulatory and Compliance Risks—
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Failure to obtain necessary regulatory approvals may adversely affect our ability to expand our operations
internationally, including our ability to continue commercializing our cloud-based distribution model;”
supply constraints, including with respect to the blood collection tubes that are used for many of our tests,
such as Panorama, Signatera and Prospera, and that are supplied by Streck, Inc., or Streck, as further
described in the risk factor entitled “—We rely on a limited number of suppliers or, in some cases, single
suppliers, for some of our laboratory instruments and materials and may not be able to find replacements or
immediately transition to alternative suppliers;”
allegations or potential third-party claims that the tests, based on our technology, developed by our licensees
violate such third parties’ intellectual property rights;
licensing portions of our proprietary technology to third parties that may not take the same security
precautions as we do to protect this information; and
an inability to achieve anticipated benefits and costs savings.
If we or other cloud-based solution providers experience security incidents, loss of customer data or disruptions
in delivery or other problems, the market for cloud-based solutions in the diagnostics industry, including our solutions,
may be adversely affected. Such events could also result in potential lawsuits and liability claims, or, as further described
in the risk factor entitled “—Security breaches, loss of data and other disruptions, including with respect to cybersecurity,
could compromise sensitive information related to our business or prevent us from accessing critical information and
expose us to liability, which could adversely affect our business and reputation,” could subject us to federal and state
privacy laws and regulations or expose us to regulatory action or liability, any of which could have a material adverse
effect on our business. If there is a reduction in demand for cloud-based solutions caused by technological challenges,
weakening economic conditions, security or privacy concerns, competing technologies and products or other challenges,
we may not be successful in executing our Constellation business model, and our results of operations may be adversely
affected.
We rely on internal and third-party data centers and platforms to host our laboratory and cloud-based software, and
any interruptions of service or failures may impair our laboratory operations or the delivery of our cloud-based services
and harm our business.
We currently maintain a data center at our laboratory facilities in San Carlos, California. In addition, our
proprietary bioinformatics algorithms are a crucial component of our test processing, and combine information derived
from our mmPCR assay workflows with publicly available data from the broader scientific community to analyze and
return test results. We host the significant majority of these algorithms on a cloud-based software platform pursuant to an
agreement with DNAnexus, Inc., or DNAnexus, and both we and our Constellation licensees access our algorithms through
the DNAnexus platform. The DNAnexus platform is hosted on third-party data center hosting facilities operated by
Amazon Web Services, or AWS, located primarily in the United States and in the European Union. We also host our
algorithms on AWS platforms directly. Our algorithms are currently used to run our Panorama NIPT, Horizon, Signatera,
and Prospera tests and certain of our research and development activities, as well as for our Constellation licensees. In the
event of any technical problems that may arise in connection with our on-site data center, the DNAnexus platform or the
AWS servers on which the DNAnexus platform is hosted, or the AWS servers that host our data directly, or difficulties in
or termination of our relationship with DNAnexus, we could experience interruptions in our laboratory operations or our
cloud-based services, and we and our Constellation licensees may be unable to access our proprietary algorithms and
therefore be unable to process tests or conduct any other activities that require access to such algorithms. These types of
problems may be caused by a variety of factors, including infrastructure changes, human or software errors, viruses,
security attacks, fraud, spikes in customer usage and denial of service issues. We do not have any backup platform, server
or other means to host our algorithms, and may be unable to find and implement an alternative platform that is satisfactory
for our needs on commercially reasonable terms, in a timely manner, or at all. Interruptions in our operations or service
may reduce our revenue, cause us to issue refunds, result in the loss of customers, cause laboratory licensees to terminate
their contracts with us, adversely affect our ability to attract new laboratory licensees, or harm our reputation. We could
also be exposed to potential lawsuits and liability claims.
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If our products do not perform as expected, our operating results, reputation and business will suffer.
Our success depends on the market’s confidence that we can provide reliable, high-quality testing results. There
is no guarantee that the accuracy and reproducibility we have demonstrated to date will continue as our test volumes
continue to increase and our product portfolio continues to expand. We believe that our customers are particularly sensitive
to test limitations and errors, including inaccurate test results and the need on occasion to perform second blood draws, or
redraws, on patients, for which Panorama has in the past experienced a higher rate than advertised for other NIPTs. As a
result, if our tests do not perform as expected or favorably in comparison to competitive tests, our operating results,
reputation, and business will suffer. We may also become subject to legal claims arising from such limitations, errors, or
inaccuracies.
Our tests use a number of complex and sophisticated biochemical and bioinformatics processes, many of which
are highly sensitive to external factors. An operational, technological or other failure in one of these complex processes,
or fluctuations in external variables, may result in sensitivity or specificity rates that are lower than we anticipate or that
vary between test runs, a higher than anticipated number of tests that require redraws or fail to produce results, or longer
than expected turnaround times, which we have experienced and will likely continue to experience on occasion as a result
of issues with laboratory equipment, components or materials or otherwise. In addition, we regularly evaluate and refine
our testing processes, and any refinements we make may not improve our tests as we expect and may result in unanticipated
issues that may adversely affect our test performance as described above, which we have experienced in the past. Such
operational, technical and other difficulties may impact the commercial attractiveness of our products, may increase our
costs or divert our resources, including management’s time and attention, from other projects and priorities, or may subject
us to legal claims. Furthermore, any changes to our testing process may require us to use new or different suppliers or
materials with whom or which we are unfamiliar, and which may not perform as we anticipate, and could cause delays,
downtime or other operational issues.
We rely on third-party laboratories to perform portions of our service offerings.
Certain of our tests, or components of our tests, are performed by third-party laboratories. These third-party
laboratories are subject to contractual obligations to perform these services for us but are not otherwise under our control.
We therefore do not control the capacity and quality control efforts of these third-party laboratories other than through our
ability to enforce contractual obligations on volume and quality systems, and we have no control over such laboratories’
compliance with applicable legal and regulatory requirements. We also have no control over the timeliness of such
laboratories’ performance of their obligations to us. Third-party laboratories that we have contracted with have in the past
had, and occasionally continue to have, issues with delivering results to us or resolving issues with us, including within
the time frames we expected or established in our contracts with them, which sometimes results in longer than expected
turnaround times for, or negatively impacts the performance of, these tests and services. We have had to review and, in
some cases, revise our processes, procedures and agreements with our business partners to address unforeseen operational
issues and other contingencies, and will likely continue to do so as our business grows. Any natural or other disaster, acts
of war or terrorism, shipping embargoes, labor unrest or political instability or similar events at one or more of our
third-party laboratories’ facilities that causes a loss of capacity would heighten the risks that we face. We may not have
sufficient alternative backup if one or more of the third-party laboratories that we contract with are unable to satisfy their
obligations to us with sufficient performance, quality and timeliness. Changes to or termination of our agreements or
inability to renew our agreements with these third-party laboratories or enter into new agreements with other laboratories
that are able to perform such portions of our service offerings could impair, delay or suspend our efforts to market and sell
these tests and services. In the event of any adverse developments with these third-party laboratories or their ability to
perform their obligations to us in a timely manner and in accordance with the standards that we and our customers expect,
our ability to service our customers may be delayed, interrupted or otherwise adversely affected, which could result in a
loss of customers and harm to our reputation. Furthermore, when these issues arise, we have had to expend time,
management attention and other resources to address and remedy such issues. In addition, certain third-party payers,
including some state Medicaid payers, that we are under contract with may take the position that sending out testing to
third-party laboratories and billing for such tests is contrary to the terms of our provider agreement and may refuse to pay
us for the testing. If any of these events occur, our business, financial condition and results of operations could suffer.
Further, some state laws impose anti-markup restrictions that prevent an entity from realizing a profit margin on outsourced
testing. If we or our subsidiaries are unable to markup outsourced testing, our revenues and operating margins may suffer.
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If either of our CLIA-certified laboratory facilities becomes inoperable, we will be unable to perform our tests and our
business will be harmed.
We currently operate laboratory facilities in Austin, Texas and in San Carlos, California, both of which process
Panorama, Horizon, and Signatera tests, which together represent the significant majority of our revenues. Our other tests
that we perform are currently only able to be performed at one, but not both, of our laboratories, and are primarily
performed at our San Carlos location, and we currently otherwise have no backup or redundant facility to perform these
tests. Our San Carlos laboratory is situated near active earthquake fault lines, and both of our laboratories are located in
areas that have in recent years experienced, and are likely to experience in the future, severe weather events. Either of our
laboratories may be harmed or rendered inoperable, or samples could be damaged or destroyed, by natural or manmade
disasters, including earthquakes, severe weather, flooding, power outages and contamination, including as a result of the
COVID-19 pandemic, which may render it difficult or impossible for us to perform our tests for some period of time. An
inability to perform our tests or the backlog of tests that could develop if either our San Carlos or Austin laboratory is
inoperable for even a short period of time may result in the loss of customers and an adverse effect on our revenues or
harm our reputation.
We rely on a limited number of suppliers or, in some cases, single suppliers, for some of our laboratory instruments
and materials and may not be able to find replacements or immediately transition to alternative suppliers.
We have sourced and will continue to source components of our technology, including sequencers, reagents,
tubes and other laboratory materials, from third parties. In particular, our sequencers, many of our reagents, including for
Panorama, Horizon and Signatera as described below, and our blood collection tubes, are sole sourced.
For example, our molecular diagnostics tests are currently only validated to perform on Illumina’s sequencing
platform; in addition, Illumina is currently the sole supplier of our sequencers and related reagents for Panorama, Horizon,
Signatera and Prospera, along with certain hardware and software, pursuant to a supply agreement that expires in
August 2033. Without sequencers and the related reagents, we would be unable to run our tests and commercialize our
products. In addition, all of the licensees under our Constellation cloud-based distribution model do not have alternatives
other than to use Illumina sequencers and reagents to run the tests that they develop based on our technology. In addition,
Illumina and Sequenom, which was acquired by LabCorp, have entered into a patent pooling agreement pursuant to which
both parties have pooled their intellectual property directed to NIPT. We understand from public filings that under the
patent pooling agreement, Illumina has the exclusive worldwide rights to, among other things, license third-party
laboratories to develop and sell NIPTs utilizing the pooled intellectual property and to enforce the pooled intellectual
property against suspected infringers. Illumina has granted us certain rights to Illumina’s intellectual property related to
NIPT, including the pooled intellectual property, for running our own tests; however, we do not have an express license
to grant rights under the pooled intellectual property to the licensees under our Constellation cloud-based distribution
model. We are aware that Illumina has required our licensees, in order to secure a supply agreement for the sequencers
and reagents necessary to run NIPT under our cloud-based distribution model, to pay an additional fee for a license under
the pooled intellectual property in jurisdictions in which Illumina believes certain of the pooled intellectual property is
enforceable. This additional fee has dissuaded and could continue to dissuade potential or current licensees from licensing
from us or launching a test based on our technology. In addition, we have recently been involved in patent infringement
litigation against Illumina, which we and Illumina have settled. In addition, Illumina competes with us in the NIPT market
through its subsidiary, Verinata. We understand Illumina supplies the same or similar sequencers and consumables to
Verinata. Because of Illumina’s ownership of Verinata, we face increased risk and uncertainty regarding continuity of a
successful working relationship with Illumina under our supply agreement, as well as in our ability to compete with
Verinata in the marketplace in view of economic advantages enjoyed by Verinata with respect to the cost of sequencers
and related consumables. Furthermore, Illumina has acquired GRAIL, a company focused on early detection of cancer, an
area in oncology that we have recently begun to pursue. Our failure to maintain a continued supply of the sequencers and
reagents, along with the right to use certain hardware and software, would adversely impact our business, financial
condition, and results of operations. Validating alternative sequencing platforms requires significant resources,
expenditures and time and attention of management, and there is no guarantee that we will be successful in implementing
any alternative sequencing platforms in a commercially sustainable way. We also cannot guarantee that we will
appropriately prioritize or select alternative sequencing platforms on which to focus our efforts, in particular given our
limited product and research and development resources and various business initiatives, which could result in increased
costs and delayed timelines or otherwise impact our business and results of operations.
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In addition, our Panorama test is currently only validated to be performed using Streck’s blood collection tubes,
and we use only Streck tubes for the primary analysis of Signatera results, and for our Prospera test. Streck is the sole
supplier of the blood collection tubes included in Panorama and our other cell-free DNA tests under a supply arrangement
with Streck under which we are required to exclusively use Streck tubes. Similarly, all of the licensees under our
cloud-based distribution model also have no current alternative but to use these blood collection tubes to run the tests that
they develop based on our technology.
Furthermore, our sequencers, sourced from Illumina, as well as certain other reagents we use for Panorama and
our other tests, are intended for research use only and are labeled as RUO. As discussed further in the risk factor entitled
“Regulatory and Compliance Risks—Changes in the way the FDA regulates the reagents, other consumables, and testing
equipment we use when developing, validating, and performing our tests could result in delay or additional expense in
bringing our tests to market or performing such tests for our customers,” the FDA may determine that a product labeled
RUO is, nonetheless, intended to be used diagnostically, and could take enforcement action against the manufacturer of
the product. If this were to occur with respect to Illumina or any of our other suppliers of RUO products, we could be
required to obtain one or more alternative sources of these products, and we may not be able to do so on commercially
reasonable terms, a commercially reasonable timeframe, or at all. In addition, Streck’s blood collection tubes have not
been registered as a medical device in all countries in which we market our Panorama test. As discussed in the risk factor
entitled “Regulatory and Compliance Risks—Failure to obtain necessary regulatory approvals may adversely affect our
ability to expand our operations internationally, including our ability to continue commercializing our cloud-based
distribution model,” the regulatory authorities in some of these countries may determine that such registration is required,
which could impact our ability to offer Panorama in such countries. Furthermore, because our licensees under our
cloud-based distribution model also exclusively use such sole-sourced components to run the tests they develop based on
our technology, and our laboratory distribution partners must use certain of such sole-sourced components in order to
utilize our tests, any enforcement action against the supplier by the FDA or any other regulatory authority in the
jurisdictions in which our licensees and laboratory distribution partners are located could have an adverse impact on our
business.
Because we rely on third-party manufacturers, we do not control the manufacture of these components, including
whether such components will meet our quality control requirements, nor the ability of our suppliers to comply with
applicable legal and regulatory requirements. In many cases, our suppliers are not contractually required to supply these
components to the quality or performance standards that we require. If the supply of components we receive does not meet
our quality control or performance standards, we may not be able to use the components, or if we use them not knowing
that they are of inadequate quality, our tests may not work properly or at all, or may provide erroneous results, and we
may be subject to significant delays caused by interruption in production or manufacturing or to lost revenue from such
interruption or from spoiled tests. This occasionally occurs with respect to certain reagents. In addition, any natural or
other disaster, acts of war or terrorism, shipping embargoes, labor unrest or political instability or similar events at our
third-party manufacturers’ facilities that cause a loss of manufacturing capacity would heighten the risks that we face.
In the event of any adverse developments with our sole suppliers, or if any of our sole suppliers modifies any of
the components they supply to us, our ability to supply our products may be interrupted, and obtaining substitute
components could be difficult or require us to re-design or re-validate our products. In addition, if we obtain FDA clearance,
approval or de novo classification for any of our tests as an in vitro diagnostic, or IVD, such issues with suppliers or the
components that we source from suppliers could affect our commercialization efforts for such an IVD, as further described
in the risk factor entitled “Regulatory and Compliance Risks—If the FDA were to begin actively regulating our tests, we
could incur substantial costs and delays associated with trying to obtain premarket clearance or approval and incur costs
associated with complying with post-market controls.” Our failure to maintain a continued supply of components, or a
supply that meets our quality control requirements, or changes to or termination of our agreements or inability to renew
our agreements with these parties or enter into new agreements with other suppliers, particularly in the case of sole
suppliers such as Streck and Illumina, could result in the loss of access to important components of our tests and impact
our test performance or affect our ability to perform our tests in a timely manner or at all, which could impair, delay or
suspend our commercialization activities. In the event that we transition to a new supplier from any of our sole suppliers,
doing so could be time-consuming and expensive, may result in interruptions in our ability to supply our products to the
market, could affect the performance of our tests or could require that we re-validate our affected tests using replacement
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equipment and supplies, which could delay the performance of our tests and result in increased costs. Any of these
occurrences could have a material adverse effect on our business, financial condition and results of operations.
We rely on commercial courier delivery services to transport samples to our facilities in a timely and cost-efficient
manner and if these delivery services are disrupted, our business may be harmed.
Our core business depends on our ability to quickly and reliably deliver test results to our customers. We typically
receive blood samples for analysis at our laboratory facilities within days of collection from the patient. Disruptions in
delivery service – whether due to error by the courier service, labor disruptions, bad weather, natural disaster, terrorist acts
or threats or for other reasons – some of which we have experienced in the past, could adversely affect specimen integrity,
our ability to process or store samples in a timely manner and to service our customers, and ultimately our reputation and
our business. In addition, if we are unable to continue to obtain expedited delivery services on commercially reasonable
terms, our operating results may be adversely affected.
Security breaches, loss of data and other disruptions, including with respect to cybersecurity, could compromise
sensitive information related to our business or prevent us from accessing critical information and expose us to liability,
which could adversely affect our business and reputation.
In the ordinary course of our business, we collect and store sensitive data, including legally-protected personal
information, such as test results and other patient health information, credit card and other financial information, insurance
information, and personally identifiable information. We also store sensitive intellectual property and other proprietary
business information, including that of our customers, payers and collaboration partners. We are highly dependent on
information technology networks and systems, including a combination of on-site systems, managed data center systems
and cloud-based data center systems, and the Internet, to securely process, transmit, and store a wide variety of
business-critical information, including research and development information, commercial information and business and
financial information. We also communicate sensitive data, including patient data, telephonically, through our website,
through facsimile, through integrations with third party electronic medical records systems, and through relationships with
third party vendors and their subcontractors, both in the United States and internationally. The laws of some foreign
countries do not protect data privacy to the same extent as the laws of the United States.
The secure processing, storage, maintenance and transmission of this critical information are vital to our
operations and business strategy. Although we take measures to protect sensitive information from unauthorized access,
use or disclosure, our information technology and infrastructure, and that of our technology and other third-party service
providers and their subcontractors, are nevertheless inherently vulnerable, to some extent, to cyber-attacks by hackers or
viruses or breaches due to employee error, technical error, malfeasance or other disruptions. Any such breach or
interruption, whether of our systems or that of our third-party service providers or their subcontractors, could compromise
our data security, and the information we store could be inaccessible by us or could be accessed by unauthorized parties,
publicly disclosed, lost or stolen. Any such interruption in access, improper access, disclosure, modification, or other loss
of information could result in legal claims or proceedings, liability or penalties under laws and regulations that protect the
privacy of personal information, such as the Health Insurance Portability and Accountability Act of 1996, or HIPAA,
European data privacy regulations, such as the General Data Protection Regulation, or GDPR, or state privacy regulations,
such as the California Consumer Privacy Act. We may be required to comply with state breach notification laws, become
subject to mandatory corrective action, or be required to verify the correctness of database contents. Unauthorized access,
loss or dissemination could also disrupt our operations, including our ability to perform tests, provide test results, bill
payers or patients, process claims and appeals, provide customer assistance services, conduct research and development
activities, develop and commercialize tests, collect, process and prepare company financial information, provide
information about our tests, and manage the administrative aspects of our business, any of which could damage our
reputation and adversely affect our business. In addition, these breaches and other inappropriate access can be difficult to
detect, and any delay in identifying them may compound these adverse consequences. Any such breach could also result
in the compromise of our trade secrets and other proprietary information, which could adversely affect our competitive
position.
We are also subject to the risks described above as a result of our relationships with third party vendors and their
subcontractors, whose systems may be breached and may cause our sensitive data, including patient data, to be
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compromised. We have on occasion experienced such disruptions by way of third-party vendors. For example, in 2020 we
were notified of a data security incident that affected a third-party vendor, which affected a number of our patients whose
protected health information was stored in such third-party vendor’s systems. The third-party vendor notified the affected
individuals as required by HIPAA.
Our cloud-based distribution model adds additional data privacy risk, as certain personal health and other
information may be sent to and stored in the cloud by our laboratory licensees, many of which are located outside of the
United States. We contractually prohibit our licensees from sending personally-identifiable information to our cloud
servers, and the vendor that hosts our software in the cloud is contractually required to comply with data privacy laws,
such as HIPAA and GDPR. However, we cannot be certain that these third parties will comply with the terms of our
agreements, nor that they will not experience security breaches or other disruptions.
The marketing, sale, and use of Panorama, Horizon and our other products could result in substantial damages arising
from product liability, professional liability, or other claims that exceed our resources.
The marketing, sale and use of Panorama, Horizon and our other products could lead to product liability claims
against us if someone were to allege that our test failed to perform as it was designed or as claimed in our promotional
materials, was performed pursuant to incorrect or inadequate laboratory procedures, if we delivered incorrect or incomplete
test results or our test failed to produce a result, or if someone were to misinterpret test results. In addition, we may be
subject to liability for errors in, a misunderstanding of, or inappropriate reliance upon, the information we provide, or for
failure to provide such information, in connection with our marketing and promotional activities or as part of the results
generated by Panorama, Horizon and our other products. For example, Panorama could provide a low-risk result which a
patient or physician may rely upon to make a conclusion about the health of the fetus, which may, in fact, have the condition
for which we delivered a low-risk result because the Panorama result was a so-called false negative. Similarly, Panorama
could provide a so-called false positive, which is a high-risk result for a fetus that may not, in fact, have the relevant
condition. Even though Panorama and our other tests are highly accurate, they are not 100% accurate and we may report
false negative or false positive results, which may subject us to lawsuits claiming product or professional liability or other
claims, as has happened in the past and may happen in the future. A product liability or professional liability claim could
result in substantial damages and be costly and time-consuming for us to defend. Although we maintain product and
professional liability insurance, our insurance may not fully protect us from the financial impact of defending against
product liability or professional liability claims or any judgments, fines or settlement costs arising out of any such claims.
Any product liability or professional liability claim brought against us, with or without merit, could increase our insurance
rates, cause our insurance coverage to be terminated or prevent us from securing insurance coverage in the future.
Additionally, any product liability or professional liability lawsuit could harm our reputation, result in a cessation of our
services or cause our partners to terminate our agreements with them, any of which could adversely impact our results of
operations.
If we are unable to successfully scale our operations, our business could suffer.
Our overall test volumes grew from approximately 1,026,500 to 1,570,000 and further to 2,066,500 tests
processed during the years ended 2020, 2021 and 2022, respectively, and since 2009 we have launched 16 product offerings,
four of them in 2017 alone and both Signatera and Prospera, among other products, in 2020, with expansions of both
Signatera and Prospera into additional indications in 2021. In addition, we regularly evaluate and refine our testing process,
often significantly updating our workflows. As our test volumes and product offerings continue to grow, we will need to
continue to ramp up our testing capacity and implement increases in scale, such as increased headcount, additional or new
equipment, laboratory space and qualified laboratory personnel, increased office and laboratory space, expanded customer
service capabilities, billing and systems process improvements, enhanced controls and procedures, and an expanded
internal quality assurance program and technology platform. The value of Panorama, Horizon and our other products
depends on our ability to perform the tests on a timely basis and at an exceptionally high standard of quality, and on
maintaining our reputation for such timeliness and quality. Failure to implement necessary procedures, transition to new
facilities, equipment or processes or to hire the necessary personnel in a timely and effective manner could result in higher
processing costs or an inability to meet market demand, or could otherwise affect our operating results, as we have
experienced in the past.
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In addition, our efforts to scale our operations may be unable to keep pace with an increase in the frequency of
our launches of new or enhanced products and services. Since 2017, we have launched eight new products, three in markets
or industries new to us, with several significant product enhancements and expanded indications in 2021. As we continue
to launch additional offerings and product enhancements, we will need to manage our resources among various initiatives,
and such competing priorities could lead to delays in one or more of our business initiatives. Conversely, to the extent that
we scale our operations, infrastructure and other resources but do not ultimately meet our anticipated timelines in our
product development efforts, we will experience higher costs and expenses than necessary until our project timelines and
operational resources become aligned. We may also, intentionally or unintentionally, allocate resources to new products
or initiatives in a manner disproportionate to the amount of revenue that such initiatives generate compared to our existing
or core offerings. We cannot assure you that our efforts to scale our commercial operations will not negatively affect the
quality of our test process or results, or that we will be successful in managing the growing complexity of our business
operations.
To execute our growth plan, we must attract and retain highly qualified personnel. Competition for these
personnel is intense, especially for sales, scientific, medical, laboratory, research and development and other technical
personnel, and especially in the San Francisco Bay Area where we have an office and laboratory facilities, and the turnover
rate of such personnel can be high. We have from time to time experienced, and we expect to continue to experience,
difficulty in hiring and retaining employees with appropriate qualifications. Many of the companies with which we
compete for highly qualified personnel have greater resources than we have. If we hire employees from competitors or
other companies, their former employers may attempt to assert that these employees or we have breached their legal
obligations to their former employers, which occurs from time to time. In addition, job candidates and existing employees
in the San Francisco Bay Area often consider the value of the equity awards they receive in connection with their
employment. To the extent that our current or potential employees perceive the value of our equity awards to be low, our
ability to recruit, retain and motivate highly skilled employees may be adversely affected, which could then have an adverse
effect on our business and future growth prospects. Furthermore, to the extent that we are unable to retain our employees
and they leave our company to join one of our competitors, we cannot assure you that any invention, non-disclosure or
non-compete agreements we have in place will provide meaningful protection against a departing employee’s unauthorized
use or disclosure of our confidential information, as further discussed in “—Risks Relating to our Intellectual Property—
If we are not able to adequately protect our trade secrets and other proprietary information, the value of our technology
and products could be significantly diminished.”
In addition, our growth may place a significant strain on our operating and financial systems and our management,
sales, marketing and administrative resources. As a result of our growth, our operating costs may escalate faster than we
anticipate, we may face difficulties in obtaining additional office or laboratory space, and some of our internal systems
may need to be enhanced or replaced. If we cannot effectively manage our expanding operations and our costs, we may
not be able to grow successfully or we may grow at a slower pace, and our business could be adversely affected.
If our sales, distribution, development or other partnerships are not successful and we are not able to offset the resulting
impact through our own efforts or through agreements with new partners, our commercialization activities may be
impaired and our financial results could be adversely affected.
Part of our business strategy is to develop relationships with laboratory and other partners to develop or sell our
products, both in the United States and internationally. For example, we have entered into an agreement with BGI
Genomics pursuant to which, among others, we will commercialize Signatera in China on BGI Genomics’s sequencing
platform; and an agreement with Foundation Medicine to develop and commercialize personalized circulating tumor DNA
monitoring assays for use by biopharmaceutical and clinical customers who order Foundation Medicine’s companion
diagnostic cancer test. Developing and commercializing products with third parties reduces our control over such
development and commercialization efforts and subjects us to the various risks inherent in a joint effort with a third party,
such as delays, operational issues, technical difficulties and other contingencies outside of our influence or control.
Distributing Panorama, Signatera and our other products through partners reduces our control over our revenues, our
market penetration and our gross margin on sales by the partner if we could have otherwise made that sale through our
direct sales force. The financial condition of these third parties could weaken, or they could terminate their relationship
with us and/or stop selling our products, as has happened in the past; reduce their marketing efforts in respect of our
products; develop and commercialize or otherwise sell competing products in addition to or in lieu of our tests, as has also
occurred; merge with or be acquired by a competitor of ours or a company that chooses to de-prioritize or cease the efforts
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to develop, sell or otherwise partner with us on our products; or otherwise breach their agreements with us. For example,
as further described in “Note 3—Revenue Recognition—Licensing and Other Revenues—Qiagen” of our consolidated
financial statements, we had entered into a license, distribution and development agreement with Qiagen pursuant to which,
among others, Qiagen would distribute an NIPT based on our Panorama test on a sequencer to be developed by us and
Qiagen; however, Qiagen thereafter discontinued the development of its Next Generation Sequencing Platform and instead
partnered with Illumina to develop next-generation sequencing based tests. Furthermore, our laboratory partners may
misappropriate our trade secrets or use our proprietary information in such a way as to expose us to litigation and potential
liability; and our compliance risk may increase to the extent that we are responsible, or deemed responsible, for our partners’
sales and marketing activities. Disagreements or disputes with our partners, including disagreements over customers,
proprietary rights or our or their compliance with contractual obligations, might cause delays or impair the
commercialization of Panorama, Signatera or our other tests, lead to additional responsibilities for us with respect to new
tests, or result in litigation or arbitration, any of which would divert management attention and resources and be
time-consuming and expensive. As is typical for companies in our industry, we are continually evaluating and pursuing
various strategic or commercial partnerships, relationships, or collaborations, some of which may involve the sale and
issuance of our common stock, which could result in additional dilution of the percentage ownership of our stockholders
and could cause the price of our common stock to decline.
If our partnerships are not successful, our ability to increase sales of our products and to successfully execute our
strategy could be compromised.
Our financial condition and results of operations may be adversely affected by international regulatory and business
risks.
As we expand our operations, including by offering our tests in other countries, we are increasingly subject to
varied and complex foreign and international laws and regulations due to operating, offering our products, or contracting
with employees, contractors and other service providers in various other countries. Compliance with these laws and
regulations often involves significant costs and may require changes in our business practices that may result in reduced
revenues and adversely affect our operating results.
We are subject to the Foreign Corrupt Practices Act of 1977, as amended, or the FCPA, which prohibits
companies and their intermediaries from making payments in violation of law to non-U.S. government officials for the
purpose of obtaining or retaining business or securing any other improper advantage. Our reliance on independent
laboratories to sell Panorama and other products internationally demands a high degree of vigilance in maintaining our
policy against participation in corrupt activity, because these distributors could be deemed to be our agents and we could
be held responsible for their actions. Other U.S. companies in the medical device and pharmaceutical field have faced
criminal penalties under the FCPA for allowing their agents to deviate from appropriate practices in doing business with
foreign government officials. We are also subject to similar anti-bribery laws in the jurisdictions in which we operate,
including the United Kingdom’s Bribery Act of 2010, which also prohibits commercial bribery and makes it a crime for
companies to fail to prevent bribery. These laws are complex and far-reaching in nature. Any violations of these laws, or
allegations of such violations, could disrupt our operations, involve significant management distraction, involve significant
costs and expenses, including legal fees, and we could be subject to severe penalties, including criminal and civil penalties,
disgorgement, and other remedial measures, any of which could result in a material adverse effect on our business,
prospects, financial condition, or results of operations.
In addition, our international activities are subject to U.S. economic and trade sanctions, which restrict or
otherwise limit our ability to do business in certain designated countries. Other limitations, such as restrictions on the
import into the United States or the export to other countries of tissue or genetic data necessary for us to perform our tests,
or restrictions on importation and circulation of blood collection tubes or other equipment or supplies by countries outside
of the United States, may limit our ability to offer our tests internationally. We may also face competition from companies
located in the countries in which we or our partners or licensees offer our tests, and in which we may be at a competitive
disadvantage because the country may favor a local provider or for other reasons.
By operating internationally, we may experience longer accounts receivable payment cycles and difficulties in
collecting accounts receivable; realize lower margins due to lower pricing in many countries; incur potentially adverse tax
consequences, including the complexities of foreign value added tax systems, tax inefficiencies related to our corporate
structure and restrictions on the repatriation of earnings; experience financial accounting and reporting burdens and
42
complexities; experience difficulties in staffing and managing foreign operations, including under labor and employment
laws and regulations that are new or unfamiliar to us; be subject to trade barriers such as tariffs, quotas, preferential bidding
or import or export licensing requirements; be exposed to political, social and economic instability abroad, including
terrorist attacks and security concerns; be exposed to fluctuations in currency exchange rates; and experience reduced or
varied protection for intellectual property rights and practical difficulties in enforcing intellectual property and other rights,
including with respect to assignment of inventions to us by our consultants in foreign jurisdictions.
Outside of the United States we enlist local and regional laboratories, contract employees and other contracted
service providers to assist with various aspects of our business operations, including blood draws, engineering, sales,
marketing, billing and customer support. Subject to regulatory clearance where required, we also contract with
international licensees to run the molecular portion of our tests in their own labs and then access our algorithm for analysis
of the resulting data through our cloud-based Constellation platform. Locating, qualifying and engaging additional
distribution partners and local laboratories with local industry experience and knowledge is necessary to effectively market
and sell our tests outside of the United States. We may not be successful in finding, attracting and retaining such
distribution partners or laboratories, or we may not be able to enter into such arrangements on favorable terms. Sales
practices and other activities utilized by our distribution partners, contract employees and other service providers, some of
which may be locally acceptable, may not comply with relevant standards required under United States laws that apply to
our operations overseas, including through third parties, which could create additional compliance risk. Our training and
compliance program and our other internal control policies and procedures, and our contractual terms with these third
parties, may not always protect us from acts committed by our employees, contractors, partners or agents abroad.
Non-compliance by us or our employees, contractors, partners or agents, whether maliciously or in error, of any applicable
laws or regulations could result in fines or penalties, or adversely affect our ability to operate and grow our business. Even
if we are able to effectively manage our international operations, if our distribution partners and local and regional
laboratory licensees are unable to effectively manage their businesses, our business and results of operations could be
adversely affected. Furthermore, the legal landscape governing advertising, promotional and other marketing activities can
vary widely from jurisdiction to jurisdiction, and is often more complex, less clear or less developed than in the United
States. If our marketing activities are found to be in violation of local laws, regulations or practices, we may be subject to
fines and other penalties, and may be required to cease marketing or commercialization activities in such jurisdiction. If
our sales and marketing efforts are not successful outside of the United States, we may not achieve market acceptance for
our tests outside of the United States, which would harm our business.
Operating internationally requires significant management attention and financial resources. We cannot be certain
that the investment and additional resources required to increase international revenues or expand our international
presence will produce desired levels of revenues or profitability.
If we lose the services of our founder and Executive Chairman, our Chief Executive Officer, or other members of our
senior management team, we may not be able to execute our business strategy.
Our success depends in large part upon the continued service of our senior management team. In particular, our
founder and Executive Chairman, Matthew Rabinowitz, as well as Steve Chapman, our Chief Executive Officer, are
critical to our vision, strategic direction, culture, products and technology. Although Dr. Rabinowitz spends significant
time with us and is active in our management, he is no longer our Chief Executive Officer. In addition, we do not maintain
key-man insurance for Dr. Rabinowitz, Mr. Chapman or any other member of our senior management team. The loss of
our founder and Executive Chairman, our Chief Executive Officer or one or more other members of our senior management
team could have an adverse effect on our business.
We may engage in acquisitions, dispositions or other strategic transactions that could disrupt our business, cause
dilution to our stockholders or reduce our financial resources.
From time to time, we may enter into transactions to acquire or dispose of businesses, products or technologies
or to engage in other strategic transactions. We may not be able to complete such transactions on favorable terms or at all.
Any acquisitions or other strategic transactions we consummate may not strengthen our competitive position, and these
transactions may be viewed negatively by customers or investors. We may decide to incur debt in connection with an
acquisition or issue shares of our common stock or other equity securities to the stockholders of the acquired company,
43
which would cause dilution to our existing stockholders. We could incur losses resulting from such strategic transactions,
including undiscovered liabilities of an acquired business that are not covered by any indemnification we may obtain from
the seller. In addition, we may not be able to successfully integrate any acquired personnel, technologies and operations
into our existing business in an effective, timely and non-disruptive manner. Any dispositions may also cause us to lose
revenue and may not strengthen our financial position. Strategic transactions may also divert management attention from
day-to-day responsibilities, increase our expenses, result in accounting charges, and reduce our cash available for
operations and other uses. We cannot predict the number, timing or size of future strategic transactions or the effect that
any such transactions might have on our operating results.
We are involved in legal proceedings, regulatory investigations and inquiries and other legal matters, which may have
an adverse effect on our business, financial condition, results of operations and prospects.
We are involved in legal matters, including investigations, subpoenas, demands, disputes, litigation, requests for
information, and other regulatory or administrative actions or proceedings, including those with respect to intellectual
property, testing and test performance, billing, reimbursement, marketing, short seller and media allegations, employment,
and other matters. An independent committee of our board of directors initiated and completed an internal investigation
into the allegations made in a March 2022 short seller report, with the assistance of the law firm of WilmerHale LLP, or
WilmerHale. WilmerHale had access to company executives, personnel, records, communications, and documents. Based
on the investigation, the independent committee, on behalf of the board, concluded that the allegations of wrongdoing
against the Company in the report were unfounded.
We are responding to ongoing regulatory and governmental investigations, subpoenas and inquiries, and
contesting our current legal matters, and cannot provide any assurance as to the ultimate outcome with respect to any of
the foregoing. There are many uncertainties associated with these matters. Such matters may cause us to incur costly
litigation and/or substantial settlement charges, divert management attention, result in adverse judgments, fines, penalties,
injunctions or other relief, and may result in loss of customer or investor confidence regardless of their merit or ultimate
outcome. In addition, the resolution of any intellectual property litigation may require us to make royalty payments, which
could adversely affect gross margins in future periods. If any of the foregoing were to occur, our business, financial
condition, results of operations, cash flows, prospects, or stock price could be adversely affected.
We may need to raise additional capital, and if we cannot do so when needed or on commercially acceptable terms, we
will be required to slow or cease our investment in our product development and commercialization plans, which would
have an adverse effect on our business.
We have incurred net losses since our inception, and we anticipate net losses and negative operating cash flows
for the near future. While we have introduced multiple products that are generating revenues, these revenues may not be
sufficient to fund all of our operations, including our product development and commercialization plans. Consequently,
we will need to generate additional revenues to achieve future profitability and may need to raise additional funds through
public or private equity or debt financings, corporate collaborations or licensing arrangements to continue to fund or
expand our operations.
Our actual liquidity and capital funding requirements will depend on numerous factors, including:
our ability to achieve broader commercial success with Panorama, Horizon and our other products;
the costs and success of our research, development, and commercialization efforts for potential new products
and additional indications for, and enhancements to, current products;
our ability to obtain more extensive coverage and reimbursement for our tests, including for microdeletions
screening in NIPT, as well as in additional indications in oncology and organ health as we continue to invest
in expanding our offerings in these fields;
our ability to generate sufficient revenues from our cloud-based distribution model;
44
our ability to collect on our accounts receivable;
our need to finance capital expenditures and further expand our clinical laboratory operations;
our ability to manage our operating costs; and
the timing and results of any regulatory authorizations that we are required to obtain for our tests.
Additional capital, if needed, may not be available on satisfactory terms or at all. Furthermore, any additional
capital raised through the sale of equity or equity-linked securities, or grant of equity or equity-linked securities in
connection with any debt financing, will dilute stockholders’ ownership interests in us and may have an adverse effect on
the price of our common stock. In addition, the terms of any financing may adversely affect stockholders’ holdings or
rights. Debt financing, if available, may include restrictive covenants, and may impose other constraints on us and our
operations. To the extent that we raise capital through collaborations and licensing arrangements, it may be necessary to
relinquish some rights to our technologies or grant licenses on terms that may not be favorable to us.
If we are not able to obtain adequate funding when needed, we may be required to delay or slow our investment
in the development and commercialization of our products and significantly scale back our business and operations, which
would have an adverse effect on our business. In addition, we may have to work with a partner on one or more of our tests
or programs, which could lower the economic value of those programs to our company.
We have incurred substantial indebtedness that may decrease our business flexibility, access to capital, and/or increase
our borrowing costs, which may adversely affect our operations and financial results.
In April 2020, we issued $287.5 million aggregate principal amount of 2.25% Convertible Senior Notes due 2027,
or the Convertible Notes. Our indebtedness may:
limit our ability to borrow additional funds for working capital, capital expenditures, acquisitions or other
general business purposes;
limit our ability to use our cash flow or obtain additional financing for future working capital, capital
expenditures, acquisitions or other general business purposes;
require us to use a substantial portion of our cash flow from operations to make debt service payments;
limit our flexibility to plan for, or react to, changes in our business and industry;
place us at a competitive disadvantage compared to our less leveraged competitors; and
increase our vulnerability to the impact of adverse economic and industry conditions.
Further, the indenture governing the Convertible Notes does not restrict our ability to incur additional
indebtedness and we and our subsidiaries may incur substantial additional indebtedness in the future, subject to the
restrictions contained in any future debt instruments existing at the time, some of which may be secured indebtedness.
As of December 31, 2022, we have $80.4 million of outstanding balance of the Credit Line including accrued
interest. 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. 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.
45
Recent macroeconomic pressures resulting from the COVID-19 pandemic and ongoing geopolitical matters, or future
health epidemics, may have an adverse impact on our business, financial results and prospects.
While the severity of the COVID-19 pandemic has lessened significantly, the pandemic has had a significant
negative impact on the macroeconomic environment, such as decreases in per capita income and level of disposable
income, inflation, rising interest rates, and supply chain issues. Ongoing geopolitical matters have also contributed to
difficult macroeconomic conditions and exacerbated supply chain issues, resulting in significant economic uncertainty as
well as volatility in the financial markets, particularly in the United States. Such conditions may adversely impact our
business, financial results, and prospects. In addition, such macroeconomic conditions could impact our ability to access
the public markets as and when appropriate or necessary to carry out our operations or our strategic goals. We cannot
predict the ongoing extent, duration or severity of these conditions, nor the extent to which we may be impacted.
To the extent that there is a resurgence in the COVID-19 pandemic, or other health epidemics or outbreaks, our
operations could be disrupted and our business adversely impacted. Such disruptions or impacts may be similar to those
we faced during the COVID-19 pandemic, such as mandated business closures in impacted areas, limitations with
employee resources due to stay at home orders or sickness of employees or their families, reduced demand for certain of
our products, or supply constraints.
Ethical, legal and social concerns related to the use of genetic information could reduce demand for our tests.
DNA testing, like that conducted using Panorama, Horizon, Signatera, and our other products, has raised ethical,
legal and social issues regarding privacy and the appropriate uses of the resulting information. Governmental authorities
could, for social or other purposes, limit or regulate the use of genomic information or genomic testing or prohibit testing
for genetic predisposition to certain conditions, particularly for those that have no known cure. Patients may also refuse to
use genetic tests even if permissible, for similar reasons such as religious concerns; they may also refuse genetic testing
due to concerns regarding eligibility for life or other insurance. Ethical and social concerns may also influence U.S. and
foreign patent offices and courts with regard to patent protection for technology relevant to our business. These and other
ethical, legal and social concerns may limit market acceptance of our tests or reduce the potential markets for services and
products enabled by our technology platform, either of which could harm our business.
Our ability to utilize our net operating loss carryforwards and certain other tax attributes may be limited.
We have a significant amount of net operating loss, or NOL, carryforwards that can be used to offset potential
future taxable income and related income taxes. As of December 31, 2022, we had federal, state, and foreign NOL
carryforwards of approximately $1.4 billion, $1.0 billion and $3.8 million, respectively, which, if not utilized, begin to
expire in 2027, 2028, and 2031, respectively. Approximately $1.1 billion of these federal NOLs can be carried forward
indefinitely. We also had federal research and development credit carryforwards of approximately $48.9 million, which
begin to expire in 2027, and state research and development credit carryforwards of approximately $29.7 million, which
can be carried forward indefinitely. Under Section 382 of the Internal Revenue Code of 1986, as amended, if a corporation
undergoes an “ownership change” (generally defined as a greater than 50% change, by value, in equity ownership over
any three-year period), the corporation’s ability to use its pre-change NOL carryforwards and other pre-change tax
attributes to offset its post-change income or taxes may be limited. We may experience ownership changes in the future
as a result of shifts in our stock ownership, some of which may not be within our control. Our ability to use these
carryforwards could be limited if we experience an “ownership change.”
Our estimates of total addressable market opportunity and forecasts of market growth may prove to be inaccurate, and
even if the market in which we compete achieves the forecasted growth, our business could fail to grow at similar rates.
Total addressable market opportunity estimates and growth forecasts are subject to significant uncertainty and
are based on assumptions and estimates that may not prove to be accurate. Our publicly announced estimates and forecasts
relating to the size and expected growth of our market may prove to be inaccurate. Even if a market in which we compete
meets our size estimates and forecasted growth for such market, our business could fail to grow at similar rates.
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Risks Related to Reimbursement
If we are unable to expand, maintain or obtain third-party payer coverage and reimbursement for Panorama, Horizon
and our other tests, or if we are required to refund any reimbursements already received, our revenues and results of
operations would be adversely affected.
Our business depends on our ability to obtain and maintain adequate coverage and reimbursement from
third-party payers and patients. Third-party reimbursement for our testing represents a significant portion of our revenues,
and we expect third-party payers such as insurance companies and government healthcare programs to continue to be our
primary source of payments. In particular, we believe that in order for us to continue to achieve commercial success, we
will need to achieve insurance coverage for microdeletions screening, and obtain positive coverage determinations and
favorable reimbursement rates from commercial third-party payers, the Centers for Medicare & Medicaid, or CMS, and
state reimbursement programs for our tests. Historically, we have not received reimbursement for a significant number of
Panorama tests that we have performed for microdeletions; we have published data from our SMART Study, but we cannot
be certain whether, or to what extent, the SMART Study may impact insurance coverage and reimbursement for Panorama
for microdeletions. In addition, while we have received a positive local coverage determination from the Molecular
Diagnostic Services Program, which identifies and establishes Medicare coverage and reimbursement for molecular
diagnostic tests, to provide Medicare benefits for certain specified uses and indications of our Signatera test, we cannot
guarantee that our test will be reimbursed at the rate we expect. Furthermore, while we have also received a positive
coverage decision for our Prospera Kidney test, we cannot guarantee that our test will continue to be reimbursed at the
same or a similar rate as we have received thus far. If we are unable to obtain or maintain coverage or adequate
reimbursement from, or achieve in network status with, third party payers for our existing or future tests, our ability to
generate revenues will be limited. For example, physicians may be reluctant to order our tests due to the potential of a
substantial cost to the patient if reimbursement coverage is unavailable or insufficient.
In making coverage determinations, third-party payers often rely on practice guidelines issued by professional
societies. The practice guidelines issued by professional societies now generally acknowledge that NIPT is the most
sensitive screening option for, and/or are generally supportive of NIPT in, average-risk pregnancies, in addition to high-risk
pregnancies. However, while most third-party payers now reimburse for NIPT for average-risk patients, it remains the
case that not all third-party payers, particularly state Medicaid payers, do so. Furthermore, many third-party payers do not
reimburse for microdeletions screening. While we have published data on the performance of Panorama for the 22q11.2
deletion syndrome, including most recently from our SMART Study, we have and may continue to experience low
reimbursement rates for Panorama for microdeletions, and we may otherwise be unable to obtain positive coverage
determinations for our test. If third party payers do not reimburse for NIPT for microdeletions in the future, our future
revenues and results of operations would be adversely affected, particularly to the extent that we continue to perform large
volumes of tests for which third party payors do not reimburse.
In addition, a CPT code for microdeletions took effect in January 2017. We have experienced low average
reimbursement rates for microdeletions under this code, and we expect that this code will continue to cause our
microdeletions reimbursement to remain low, at least in the near term, due to third-party payers declining to reimburse
and as a result of reduced reimbursement, under the code, which has had, and we expect to continue to have, an adverse
effect on our revenues. Also, a CPT code for expanded carrier screening tests took effect in January 2019. The code has
caused and may continue to cause reimbursement rates for our broader Horizon carrier screening panel to decrease because
those tests may be reimbursed as a combined single panel instead of as multiple individual tests.
The reimbursement environment, particularly for molecular diagnostics, is continually changing and our efforts
to broaden reimbursement for our tests with third-party payers may not be successful. Third parties, such as commercial
health insurers and government programs, from whom we have received reimbursement may withdraw coverage or
decrease the amount of reimbursement for our tests at any time and for any reason, or may otherwise adopt requirements,
programs or policies that may restrict or adversely affect our business. For example, in September 2022, the California
Department of Public Health, or CDPH, implemented changes to its Prenatal Screening (PNS) Program, under which the
state of California makes prenatal screening and follow-up diagnostic testing available to pregnant Californians, to offer
cfDNA testing as a first line screen instead of the biochemical screening tests previously used. We are participating in the
PNS program, but it remains uncertain whether and to what extent our participation in the PNS Program may impact our
47
overall financial and operating results. In addition, in some cases, our tests or their uses within certain populations, such
as for microdeletions, are considered experimental by third-party payers and, as a result, some payers have decided not to
cover or reimburse for such tests. Some third-party payers bundle payment for multiple tests or tests that screen for multiple
conditions, such as our Horizon test or our Panorama test and the separate Panorama screen for microdeletions, into a
single payment rate, thereby limiting our reimbursement in those situations. Payers may also dispute our billing or coding.
Based on any of the foregoing, third-party payers may also decide to deny payment or recoup payment for testing that they
contend to have been not medically necessary, against their coverage determinations, or for which they have otherwise
overpaid, and we may be required to refund reimbursements already received. We deal with requests for recoupment from
third-party payers from time to time in the ordinary course of our business, and it is likely that we will continue to do so
in the future. See “Note 8—Commitments and Contingencies—Third-Party Payer Reimbursement Audits” in the Notes to
Consolidated Financial Statements. If a third-party payer denies payment for testing, reimbursement revenue for our testing
could decline. If a third-party payer successfully proves that payment for prior testing was in breach of contract or
otherwise contrary to law, they may recoup payment or bring legal action to do so, which amounts could be significant
and would adversely impact our results of operations, and it may decrease reimbursement going forward. We may also
decide to negotiate and settle with a third-party payer in order to resolve an allegation of overpayment. Any of these
outcomes might require us to restate our financials from a prior period, which would likely cause our stock price to decline.
For example, in 2018 we reached a settlement with certain government payers regarding past reimbursement submissions;
although the settlement involved no admission of fault by us and no corporate integrity agreement, we cannot guarantee
that we will not be subject to similar claims, resulting in additional settlements or repayments, in the future.
Furthermore, some of our contracts with third-party payers contain so-called most favored nation provisions,
pursuant to which we have agreed that we will not bill the third-party payer more than we bill any other third-party payer.
We must therefore monitor our billing and claims submissions to ensure that we remain in compliance with these
contractual requirements with third-party payers. If we do not successfully manage these most favored nation provisions,
we may need to forego revenues from some third-party payers or reduce the amount we bill to each third-party payor with
a most-favored nation clause in its contract that is violated, which would adversely affect our revenues. This situation
could also subject us to claims for recoupment, which could require the time and attention of our management, require the
expense of engaging outside counsel or consultants, and may be a distraction from development of our business, adversely
impacting our operations. Such recoupment demands could also ultimately result in an obligation to repay amounts
previously earned.
In addition, if a third-party payer denies coverage, it may be difficult for us to collect from the patient, and we
may not be successful in doing so. In particular, we are often unable to collect the full amount of a patient’s responsibility
where we are an out-of-network provider and the patient is left with a large balance, despite our good faith efforts to collect.
As a result, we cannot always collect the full amount due for our tests when third-party payers deny coverage, cover only
a portion of the invoiced amount or the patient has a large cost-sharing obligation, which may cause payers to raise
questions regarding our billing policies and patient collection practices. We believe that our billing policies and our patient
collection practices are compliant with applicable laws and reimbursement policies. However, from time to time we receive
inquiries from third-party payers regarding our billing policies and collection practices. We address these inquiries as and
when they arise, but there is no guarantee that we will always be successful in addressing such concerns in the future,
which may result in a third-party payer deciding to reimburse for our tests at a lower rate or not at all, seeking recoupment
of amounts previously paid to us, or bringing legal action to seek reimbursement of previous amounts paid. Any of such
occurrences could cause reimbursement revenue for our testing, which constitutes the large majority of our revenue, to
decline. Additionally, if we were required to make a repayment, such repayment could be significant, which would
adversely impact our results of operations, and we might be required to restate our financials from a prior period, which
would likely cause our stock price to decline.
Our revenues may be adversely affected if we are unable to successfully obtain reimbursement from the Medicare
program and state Medicaid programs.
Our revenues from Medicare are currently relatively small, given the population that Medicare covers and the
fact that our testing in women’s health, which comprises the significant majority of our business, generally is not received
by Medicare beneficiaries. As a result, we do not expect our Medicare revenues to change materially with regard to NIPT.
However, Medicare reimbursement impacts our revenues from our oncology and organ health products, as a large
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proportion of these patients are covered by Medicare. Furthermore, Medicare reimbursement can affect both Medicaid
reimbursement, which is relevant to NIPT, and reimbursement from commercial third-party payers. Specifically,
fee-for-service Medicaid programs generally do not reimburse at rates that exceed Medicare’s fee-for-service rates, and
many commercial third-party payers set their payment rates at a percentage of the amounts that Medicare pays for testing
services. Medicare reimbursement rates are typically based on the Clinical Laboratory Fee Schedule, or CLFS, set by
CMS. Our current Medicare Part B reimbursement for Panorama was not set pursuant to a national coverage determination
by CMS. Although we believe that coverage is available under Medicare Part B even without such a determination, we
currently lack the certainty afforded by a formal national coverage determination by CMS. Thus, CMS could issue an
adverse coverage determination as to Panorama which could influence other third-party payers, including Medicaid, and
could have an adverse effect on our revenues.
It is estimated that nearly half of all births in the United States are to state Medicaid program recipients. Each
state’s Medicaid program has its own coverage determinations related to our testing, and many state Medicaid programs
do not provide their recipients with coverage for our testing. Even if our testing is covered by a state Medicaid program,
we must be recognized as a Medicaid provider by the state in which the Medicaid recipient receiving the services resides
in order for us to be reimbursed by a state’s Medicaid program, including under a Medicaid managed care plan. Our San
Carlos, CA laboratory is currently recognized by 48 U.S. states as a Medicaid provider, and we are currently in the process
of obtaining recognition of our Austin, TX laboratory as a Medicaid provider in states in which the Austin laboratory is
not already credentialed. However, even if we are recognized as a Medicaid provider in a state, if Medicare’s CLFS rate
for our services and tests are low, the Medicaid reimbursement amounts are sometimes as low, or lower, than the Medicare
reimbursement rate. In addition, from time to time we receive requests from state Medicaid programs seeking information
or documents to determine eligibility for and the amount of Medicaid reimbursement. As a result of all of these factors,
many state Medicaid programs only reimburse our testing at a low dollar amount, or not at all. Low or zero-dollar Medicaid
reimbursement rates for our tests could have an adverse effect on our business and revenues.
Our revenues may be adversely impacted if third-party payers withdraw coverage or provide lower levels of
reimbursement due to changing policies, billing complexities or other factors.
We are in-network, or under contract, with the significant majority of third-party payers from whom we receive
reimbursement; this means that we have agreements with most third-party payers that govern test approval or payment
terms. However, these contracts do not guarantee reimbursement for all testing we perform. For example, third-party
payers with whom we have written agreements may have time-sensitive deadlines to file claims or may have policies that
state they will not reimburse for the screening of microdeletions, or don’t have a policy in place to reimburse for
microdeletions screening. In addition, the terms of certain of our payer agreements require the ordering physician or
qualified practitioner’s signature on test requisitions or require other controls and procedures prior to conducting a test. In
particular, third-party payers have increasingly required prior authorization to be obtained prior to conducting a test, as a
condition to reimbursing for the test. This has placed a burden on our billing operations as we have to dedicate or source
resources to ensuring that these requirements are met and to conduct follow-up and address issues as they arise, and has
also impacted our results of operations, including our gross margins, since these requirements began to take effect. To the
extent we or the physicians ordering our tests do not follow the prior authorization requirements, we may be subject to
claims for recoupment of reimbursement amounts previously paid to us, or may not receive some or all of the
reimbursement payments to which we would otherwise be entitled. This has occurred in some cases and may occur more
frequently in the future, which does and would have an adverse impact on our revenues.
Where we are considered to be an out of network provider, which is the case with some third-party payers from
whom we receive reimbursement, such third-party payers could deny coverage and decline to reimburse for our tests
according to each plan enrollee’s policy. Managing reimbursement on a case-by-case basis is time-consuming and
contributes to an increase in the number of days it takes us to collect on accounts, which also increases our risk of
non-payment. Negotiating reimbursement on a case-by-case basis also typically results in the receipt of reimbursement at
a significant discount to the list price of our tests.
Even if we are being reimbursed for our tests, third-party payers may review and adjust the rate of reimbursement,
require patient cost-sharing, or stop paying for our tests. Government healthcare programs and other third-party payers
continue to increase their efforts to control the cost, utilization and delivery of healthcare services by demanding price
discounts or rebates and limiting coverage of, and amounts they will pay for, molecular diagnostic tests. These measures
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have resulted in reduced payment rates and decreased utilization in the clinical laboratory industry. Because of these
cost-containment measures, governmental and commercial third-party payers may reduce, suspend, revoke or discontinue
payments or coverage at any time, including payors that currently provide reimbursement for our tests. Reduced
reimbursement of our tests may harm our business, financial condition or results of operations.
Billing for clinical laboratory testing services is complex. We perform tests in advance of payment and without
certainty as to the outcome of the billing process. In cases where we expect to receive a fixed fee per test due to our
reimbursement arrangements, we may nevertheless encounter disputes over pricing and billing. Among the factors
complicating our billing of third-party payers are disparity in coverage among various payers; disparity in, and increasingly
difficult, information and billing requirements among payers, including with respect to prior authorization requirements
and procedures and establishing medical necessity; and incorrect or missing billing information, which is required to be
provided by the ordering healthcare practitioner. These billing complexities, and the associated uncertainty in obtaining
payment for our tests, could result in reduced reimbursement of our tests, which could harm our business, financial
condition and results of operations.
A CPT code specific to NIPT for aneuploidies, and a CPT code for microdeletions, are in place, and CMS has
established a pricing benchmark for aneuploidy and microdeletions testing. However, our microdeletions reimbursement
has remained low because third-party payers are declining to reimburse, or reimbursing at low rates, under the
microdeletions CPT code. Furthermore, we cannot guarantee that any data that we publish, such as from our SMART
Study, will be sufficient to enable us to obtain positive coverage determinations for Panorama for microdeletions, negotiate
favorable rates under the microdeletions CPT code, or receive reimbursement at all for this testing. In addition, a CPT
code for expanded carrier screening tests has been implemented, which has caused and may continue to cause
reimbursement rates for our Horizon expanded carrier screening tests to decline. We do not currently have assay-specific
CPT codes assigned for all of our tests, and there is a risk that we may not be able to obtain such codes or, if obtained, we
may not be able to negotiate favorable rates for such codes. We currently submit for reimbursement using CPT codes
based on the guidance of outside coding experts and legal counsel. There is a risk that the codes we currently submit may
be rejected or withdrawn or that third-party payers will seek refunds of amounts that they claim were inappropriately billed
based on either the CPT code used, or the number of units billed. In addition, third-party payers may not establish positive
coverage policies for our tests or adequately reimburse for any CPT code we may use, or seek recoupment for testing
previously performed, which have occurred in the past.
Regulatory and Compliance Risks
We may be subject to increased compliance risks as a result of our rapid growth, including our dependence on our
sales, marketing and billing efforts.
Approximately 89% of our total revenues for each of the years ended December 31, 2022 and 2021 were
attributable to our U.S. direct sales. We maintain a heightened focus on our training and compliance efforts in line with
our reliance on personnel in our sales, marketing and billing functions, and the significance of these functions as
components of our business. We continue to educate, train and monitor our personnel, but from time to time we experience
situations in which employees fail to strictly adhere to our policies. In addition, sales and marketing activities in the
healthcare space are subject to various rules and regulations, as described in the risk factor entitled “Reimbursement and
Regulatory Risks Related to Our Business—If we or our laboratory distribution partners, consultants or commercial
partners act in a manner that violates healthcare fraud and abuse laws or otherwise engage in misconduct, we may be
subject to civil or criminal penalties.” Moreover, our billing and marketing messaging can be complex and nuanced, and
there may be errors or misunderstandings in our employees’ communication of such messaging. Furthermore, we utilize
text messaging, email, phone calls and other similar methods to communicate with patients who are existing or potential
users of our products for various business purposes. These activities subject us to laws and regulations relating to
communications with consumers, such as the CAN-SPAM Act and the Telephone Consumer Protection Act, violations of
which could subject us to claims by consumers, who may seek actual or statutory damages, as has happened in the past,
which could be material in the aggregate. As our sales and marketing efforts continue to be critical to our business, with
respect to both our expanding product portfolio as well as continued geographical expansion, we will continue to face an
increased need to remain vigilant in monitoring and improving our policies, processes and procedures to maintain
compliance with a growing number and variety of laws and regulations, including with respect to consumer marketing. To
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the extent that there is any violation, whether actual, perceived or alleged, of our policies or applicable laws and regulations,
we may incur additional training and compliance costs; may, and from time to time do, receive inquiries, such as informal
requests for documents, civil investigative demands, and subpoenas, from third-party payers or other third parties,
including government entities; or may be held liable or otherwise responsible for such acts of non-compliance. Any of the
foregoing could adversely affect our cash flow and financial condition.
If the FDA were to begin actively regulating our tests, we could incur substantial costs and delays associated with trying
to obtain premarket 510(k) clearance, de novo classification, or premarket approval and incur costs associated with
complying with post-market controls.
We currently offer a number of genetic tests, and each of those tests is an LDT. The FDA considers an LDT to
be a test that is designed, developed, validated and used within a single laboratory. The FDA has historically taken the
position that it has the authority to regulate such tests as medical devices under the FDC Act, but it has generally exercised
enforcement discretion with regard to LDTs. This means that even though the FDA believes it can impose regulatory
requirements on LDTs, such as requirements to obtain premarket approval, de novo classification, or 510(k) clearance, it
has generally chosen not to enforce those requirements to date. The regulatory environment for LDTs is unstable – in 2020
HHS directed FDA to stop regulating LDTs, but in 2021, HHS reversed its policy. Thereafter, the FDA resumed requiring
submission of emergency use authorization, or EUA, requests, for COVID-19 LDTs, but has not sought to regulate other,
non-COVID, LDTs. FDA has indicated that it may seek to increase its regulation of LDTs. Any future rulemaking,
guidance, or other FDA oversight of LDTs and clinical laboratories that develop and perform them, if and when finalized,
may impact the sales of our products and how customers use our products, and may require us to change our business
model in order to maintain compliance with these laws.
Various legislation has been introduced seeking to substantially revamp the regulation of both LDTs and IVDs.
In June 2021, legislation called the Verifying Accurate, Leading-edge IVCT Development Act, or VALID Act, which
would have established a new risk-based regulatory framework for in vitro clinical tests, or IVCTs, a category that would
have included IVDs, LDTs, collection devices, and instruments used with such tests was introduced in Congress. This
legislation was not enacted during that session of Congress but could be introduced again in the future.
In the meantime, the regulation by the FDA of LDTs remains uncertain. If FDA premarket clearance, approval
or de novo classification is required for any of our existing or future tests, or for any components or materials we use in
tests, we may be forced to stop selling our tests or we may be required to modify claims for or make other changes to our
tests while we or our supplier work to obtain FDA clearance, approval or de novo classification. Our business would be
adversely affected while such review is ongoing and if we or our supplier are ultimately unable to obtain premarket
clearance, approval or de novo classification. For example, the regulatory premarket clearance, approval or de novo
classification process may involve, among other things, successfully completing analytical, pre clinical and/or clinical
studies beyond the studies we have already performed or plan to perform for each of our products and would involve
submitting a 510(k) premarket notification, , a request for de novo classification, or a PMA application to the FDA. As
further described in the risk factor entitled “Uncertainty in the development and commercialization of our enhanced or
new tests or services could materially adversely affect our business, financial condition and results of operations,”
completing such studies requires the expenditure of time, attention and financial and other resources, and may not yield
the desired results, which may delay, limit or prevent regulatory clearances, approvals or de novo classifications. In
addition, we may require cooperation in our filings for FDA clearance, approval or de novo classification from third party
manufacturers of the components of our tests. If we are unable to obtain such required cooperation, we may be unable to
achieve the desired regulatory clearances, approvals or de novo classifications or may be delayed or be required to expend
additional costs and other resources in doing so. For example, Illumina currently is our sole sequencer and sequencing
reagent supplier. If we seek to achieve regulatory clearance, approval or de novo classification for Panorama, to the extent
that Panorama incorporates Illumina’s sequencer or sequencing reagents, we may require Illumina’s cooperation in the
regulatory process. We may face difficulty obtaining cooperation from Illumina because Illumina is the parent company
of Verinata, a direct competitor of ours in the NIPT field. In addition, we have been party to certain intellectual property
proceedings with Illumina as described elsewhere in these Risk Factors. Moreover, if FDA premarket clearance, approval
or de novo classification is required, our cash flows may be adversely affected until we obtain such clearance, approval or
de novo classification, as most third party payers, including Medicaid, will not reimburse for use of medical devices which
are required to, but which do not, have marketing authorization. Furthermore, the FDA may conclude that laboratories
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using Constellation and related products from us do not meet the criteria for qualifying as an LDT, and require that such
laboratories discontinue use of Constellation and related products. Such an FDA determination could have an adverse
impact on the commercialization of Constellation.
The FDA has granted us Breakthrough Device designations for our Signatera test covering its use in various
applications. While receiving such designations enables us to have increased interactions with FDA, we cannot assure you
that these designations will lead to accelerated review or approval of our regulatory submissions for Signatera.
We cannot assure you that, if we decide or are required to seek premarket clearance or approval or de novo
classification for Panorama or any of our other tests, our efforts will succeed on a timely basis or at all. In addition, after
a test has been cleared, approved or reclassified, certain kinds of changes that we may make to improve the test, or certain
modifications by a supplier of a component upon which our approval relies, may result in the need for additional clearance,
approval, or de novo classification by the FDA before we can implement them, which could increase the time and expense
involved in implementing such changes commercially. The need for post-market compliance with FDA regulations would
increase the cost of conducting our business and we could be subject to penalties if we fail to comply with these
requirements, any of which may adversely impact our business and results of operations.
Furthermore, the FDA or the Federal Trade Commission, or FTC, as well as state consumer protection agencies,
may object to the materials and methods we use to promote the use of our current tests or other LDTs we may develop in
the future, including with respect to the product claims in our promotional materials, and may initiate enforcement actions
against us. Enforcement actions by the FDA may include, among others, untitled or warning letters; fines; injunctions;
civil or criminal penalties; recall or seizure of current or future tests, products or services; operating restrictions and partial
suspension or total shutdown of production. Enforcement actions by the FTC and state consumer protection agencies may
include, among others, injunctions, civil penalties, and equitable monetary relief.
If any of our software is determined by FDA to be non-exempt clinical decision support software, this could impede our
ability to perform certain activities, and we could incur substantial costs and delays associated with trying to obtain
premarket 510(k) clearance, de novo classification, or premarket approval and incur costs associated with complying
with post market controls.
We may also need to obtain regulatory clearance, approval or de novo classification in the United States for our
Constellation software in order for it to be used by third parties in the development and commercialization of their
diagnostic tests based on our technology. The 21st Century Cures Act, enacted in 2016, includes a number of provisions
relating to the FDA’s regulatory approach to software that may have bearing on the regulatory status of our Constellation
software. We have discussed with the FDA the regulatory status of a portion of our Constellation software, the copy
number calculator, or CNC. The FDA has indicated that the CNC may be appropriate for review under the de novo
classification process, which is less burdensome than the PMA process. The FDA has stated that it would not prevent us
from marketing Constellation in the United States while we discuss with the FDA how it will be regulated; however, it is
possible that the FDA may reverse itself either on the appropriate regulatory review path or regarding our ability to
continue to market Constellation.
We cannot assure you that, if we decide or are required to seek premarket clearance or approval or de novo
classification for our software, our efforts will succeed on a timely basis or at all. If we are unable to do so, we may be
unable to commercialize our cloud based distribution model in the United States. If we are able to do so, we may be subject
to ongoing FDA obligations and continued regulatory oversight and review. If we are not able to maintain regulatory
compliance to the extent required, we may not be permitted to offer our Constellation software and may be subject to
enforcement action by the FDA, such as the issuance of warning or untitled letters, fines, injunctions and civil penalties;
recall or seizure of products; operating restrictions and criminal prosecution.
Failure to obtain necessary regulatory approvals may adversely affect our ability to expand our operations
internationally, including our ability to continue commercializing our cloud-based distribution model.
An important part of our business strategy is to expand and offer our tests internationally, either by providing our
testing services directly or through our laboratory partners, or through our licensees under our Constellation cloud-based
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distribution model. As we do so, we will become increasingly subject to or impacted by the regulatory requirements of
foreign jurisdictions, which are varied and complex. Our tests, and certain components of our tests, may be subject to the
regulatory approval requirements in each foreign country in which they are sold by us or a laboratory partner, or by our
licensees under our cloud-based distribution model, and our future performance would depend on us or our partners or
licensees obtaining any necessary regulatory approvals in a timely manner. For example, while we have entered into a
license agreement with BGI Genomics to commercialize our Signatera test in China using BGI Genomics’s sequencing
instruments and platform, such commercialization and development activities are subject to obtaining and maintaining
necessary regulatory approvals in the relevant jurisdictions. In addition, we have obtained a CE Mark from the European
Commission for our Constellation software and the key reagents for our licensees to run their NIPT based on our
technology, as well as a CE Mark for our Panorama test as a whole. Therefore, we offer our Panorama test as an IVD both
directly and through our Constellation model in these jurisdictions. We are occasionally required to address inquiries from
regulatory authorities in various countries, such as those in the European Union, regarding the regulatory status of our
Panorama or Constellation offerings. If we do not continue to satisfactorily address any such questions in the future, we
may be required to cease offering our products, either directly or through our partners or licensees, in the relevant country.
This may in turn result in similar concerns, and subsequent cessation of our sources of revenue, in other countries.
In addition, as further described in the risk factor entitled “Risks Related to Our Business and Industry—We rely
on a limited number of suppliers or, in some cases, single suppliers, for some of our laboratory instruments and materials
and may not be able to find replacements or immediately transition to alternative suppliers,” blood collection tubes
sourced solely from Streck are required to run our tests. These blood collection tubes are CE Marked by the European
Commission; however, if such blood collection tubes are not registered in jurisdictions that do not accept a CE Mark, we
may be unable to expand our business in such jurisdictions.
Regulatory approval can be a lengthy, expensive and uncertain process. In addition, regulatory processes are
subject to change, and new or changed regulations can result in unanticipated delays and cost increases. For example, the
European Commission has adopted revised in-vitro diagnostic regulations, or IVDR, which became effective in 2022.
Among others, the new regulations introduce risk-based classification for IVDs and will require notified body involvement
for various classes of devices, including reproductive health tests such as Panorama, which will be classified as a Class C
product. As such, we will also be required to submit clinical evidence and post-market performance data to regulators. We
or our partners or licensees may not be able to obtain regulatory approvals on a timely basis, if at all, which may cause us
to incur additional costs or prevent us from marketing our tests in the United States or in foreign countries.
Changes in laws and regulations, or in their application, may adversely affect our business, financial condition and
results of operations.
The clinical laboratory testing industry is highly regulated, and failure to comply with applicable regulatory,
supervisory, accreditation, registration or licensing requirements may adversely affect our business, financial condition
and results of operations. In particular, the laws and regulations governing the marketing and research of clinical diagnostic
testing are extremely complex and in many instances there are no clear regulatory or judicial interpretations of these laws
and regulations, increasing the risk that we may be found to be in violation of these laws.
Furthermore, the molecular diagnostics industry as a whole is a growing industry and regulatory bodies such as
HHS or the FDA may apply heightened scrutiny to our products or to new developments in the field. While we have taken
steps to ensure compliance with the current regulatory regime in all material respects, given its nature and our geographical
diversity, there could be areas where we are non-compliant. Any change in the federal or state laws or regulations,
including as a result of political pressure, relating to our business may require us to implement changes to our business or
practices, and we may not be able to do so in a timely or cost-effective manner. Should we be found to be non-compliant
with current or future regulatory requirements, we may be subject to sanctions which could include substantial financial
penalties and criminal proceedings, which could result in changes to our operations, adverse publicity and other
consequences, which may adversely affect our business, financial condition and results of operations by increasing our
cost of compliance or limiting our ability to develop, market and commercialize our tests.
While we have a compliance plan to address compliance with federal and state laws and regulations, including
applicable fraud and abuse laws and regulations such as those described in this risk factor, the evolving commercial
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compliance environment and the need to build and maintain robust and scalable systems to comply with regulations in
multiple jurisdictions with different compliance and reporting requirements increases the possibility that we could
inadvertently violate one or more of these requirements.
If we fail to comply with federal, state and foreign laboratory licensing requirements, we could lose the ability to perform
our tests or experience disruptions to our business.
We are subject to CLIA, a federal law that, in partnership with the states, regulates clinical laboratories that
perform testing on specimens derived from humans for the purpose of providing information for the diagnosis, prevention
or treatment of disease or impairment of, or assessment of the health of, human beings. CLIA regulations require clinical
laboratories to obtain a certificate and mandate specific standards in areas including personnel qualifications,
administration, participation in proficiency testing, patient test management and quality assurance. CLIA certification is
also required in order for us to be eligible to bill federal healthcare programs, as well as many commercial third-party
payers, for our tests. Our laboratories located in Austin, Texas and San Carlos, California are both CLIA certified and
accredited by the College of American Pathologists, or CAP, a third party accreditation organization with deeming, or
delegated, authority from CMS to determine compliance. To renew these certifications, we are subject to survey and
inspection every two years. Moreover, CLIA and/or state inspectors may conduct random inspections of our clinical
laboratory or conduct an inspection as a result of a complaint or reported incident, as has occurred. Any failure to address
identified deficiencies, or to otherwise comply with CLIA, CAP or state requirements, can result in enforcement actions,
including the revocation, suspension, or limitation of our CLIA and/or CAP certificate of accreditation or state laboratory
permit, as well as a directed plan of correction, on-site monitoring, civil monetary penalties, civil actions for injunctive
relief, criminal penalties, suspension or exclusion from the Medicare and Medicaid programs and significant adverse
publicity. Bringing our laboratory back into compliance with CLIA requirements could cause us to incur significant
expenses and potentially lose revenues in order to address deficiencies and achieve compliance.
Some U.S. states require that we hold licenses or permits to test samples from patients in those states, even if our
laboratory facilities are not located in those states, and as a result we are also required to maintain standards related to
those states’ licensure requirements to conduct testing in our laboratories. California requires laboratories operating in or
testing specimens from individuals located in California to hold state licensure in addition to CLIA certification. California
laboratory registration is required for our San Carlos, California as well as for our Austin, Texas laboratory, because our
Texas laboratory receives specimens originating from California. The State of Texas imposes CLIA requirements on
laboratories operating within Texas but does not impose additional state licensure or registration requirements.
Additionally, all personnel involved in testing in our California laboratory must maintain a California state license or be
supervised by licensed personnel. We maintain a license in good standing with the California Department of Public Health,
or CDPH, for both our California and Texas laboratories. In addition, the New York State Department of Health, or
NYSDOH, requires out-of-state laboratories that test specimens originating from New York to hold an NYSDOH permit
and to comply with NYSDOH laboratory standards, including prior NYSDOH approval of LDTs. Both our Austin, Texas
and San Carlos, California laboratories have received approval from the NYSDOH to offer certain of our tests to residents
of New York, and we process samples originating from New York at each of these laboratories in accordance with the
NYSDOH approvals. Our laboratory director must also maintain a license to perform testing issued by the CDPH as well
as a Certificate of Qualification issued by NYSDOH.
As under CLIA, we are subject to routine on-site inspections or inspections in response to a complaint under both
California and New York state laboratory laws and regulations. If we are found to be out of compliance with either
California or New York requirements, CDPH or NYSDOH may suspend, restrict or revoke our license or laboratory permit,
respectively (and, with respect to California, may exclude persons or entities from owning, operating or directing a
laboratory for two years following such license revocation), assess civil monetary penalties, or impose specific corrective
action plans, among other sanctions. We cannot assure you that the regulators in any state from which we have obtained a
required license or permit will find us to be in compliance with the applicable laws of their respective state at all times,
which may result in suspension, limitation, revocation or annulment of our laboratory’s license for that state or negative
impact to our CLIA certificate, censure, or civil monetary penalties, and would result in our inability to test samples from
patients in that state. Any such consequences could materially and adversely affect our business by prohibiting or limiting
our ability to offer testing.
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Changes in government healthcare policy could increase our costs and negatively impact coverage and reimbursement
for our tests by governmental and other third-party payers.
The U.S. government has shown significant interest in pursuing healthcare reform and reducing healthcare costs.
Government healthcare policy has been and will likely continue to be a topic of extensive legislative and executive activity
in the U.S. federal government and many U.S. state governments. As a result, our business could be affected by potentially
significant and unanticipated changes in government healthcare policy, such as changes in reimbursement levels by
government third-party payers, or in government-sponsored programs in which we may participate, such as the California
PNS Program. Any such changes could substantially impact our revenues, increase costs and divert management attention
from our business strategy. We cannot predict the impact, if any, of governmental healthcare policy changes on our
business, financial condition and results of operations.
In the United States, the Patient Protection and Affordable Care Act, as amended by the Healthcare and Education
Reconciliation Act of 2010, or collectively, the PPACA expanded, among other things, the healthcare fraud and abuse
laws such as the False Claims Act and the Anti-Kickback Statute, including but not limited to required disclosures of
financial arrangements with physician customers, required reporting of discovered overpayments, lower thresholds for
violations, new government investigative powers, and enhanced penalties for such violations. There have been multiple
attempts to repeal PPACA or significantly scale back its applicability, which if successful could negatively impact
reimbursement for our testing, and could adversely affect our test volumes and, in turn, our business, financial condition,
results of operations, and cash flows. For example, the Tax Cuts and Jobs Act of 2017, or the Tax Act, repealed the
requirement under PPACA that consumers buy insurance or pay a penalty unless they qualified for an applicable exemption.
The repeal of this mandate means that fewer consumers may carry insurance coverage and therefore may be less likely to
elect to receive our testing because they would be required to pay out of pocket for such tests, which could impact our test
volumes and adversely affect our business, financial condition, results of operations, and cash flows. The PPACA also
created a system of health insurance “exchanges” designed to make health insurance available to individuals and certain
groups through state- or federally-administered marketplaces in addition to existing channels for obtaining health insurance
coverage. If Panorama or any of our other tests are not covered by plans offered in the health insurance exchanges, our
business, financial condition and results of operations could be adversely affected. Furthermore, various proposed
legislative initiatives with respect to the PPACA in the past, including possible repeal of the PPACA, have resulted in
considerable uncertainty and concern regarding, for example, a patient’s election to undergo genetic screening and whether
doing so may impact health insurance eligibility. Because it is unclear whether or how the PPACA may continue to evolve,
be modified, or otherwise change, and whether and to what extent NIPT, cancer screening or other genetic screening may
be affected, we are uncertain how our business may be impacted.
In addition to the PPACA, various healthcare reform proposals have also emerged from federal and state
governments. Under PAMA, services payable by Medicare under the CLFS are calculated based on negotiated payment
rates paid by private payers for the same test. The implementation of the PAMA rates negatively impacted overall pricing
and reimbursement for many clinical laboratory testing services. The PAMA rates did not have a material impact on our
business because our revenues from Medicare were historically very low; however, as we continue to increase billing for
our Signatera and Prospera testing, we expect the new rates to have an increasing impact on our business. In addition,
federal budgetary limitations and changes in healthcare policy, such as the creation of broad limits for our tests and
requirements that beneficiaries of government health plans pay for, or pay for higher portions of, clinical laboratory tests
or services received, could substantially diminish the utilization of our tests, increase costs and adversely affect our ability
to generate revenues and achieve profitability.
We cannot predict whether future healthcare initiatives will be implemented at the federal or state level or how
any such future legislation, regulation or initiative may affect us. Current or potential future federal legislation and the
expansion of government’s role in the U.S. healthcare industry, as well as changes to the reimbursement amounts paid by
third-party payers for our current and future tests, may adversely affect our test volumes and adversely affect our business,
financial condition, results of operations, and cash flows.
If we or our laboratory distribution partners, consultants or commercial partners act in a manner that violates
healthcare fraud and abuse laws or otherwise engage in misconduct, we may be subject to civil or criminal penalties.
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We are subject to healthcare fraud and abuse regulation and enforcement by both the U.S. federal government
and the states in which we conduct our business, including:
HIPAA, which created federal civil and criminal laws that prohibit executing a scheme to defraud any
healthcare benefit program or making false statements relating to healthcare matters and also imposes
significant obligations with respect to maintenance of the privacy and security, and transmission, of
individually identifiable health information;
federal and state laws and regulations governing informed consent for genetic testing and the use of genetic
material;
federal and state laws and regulations governing the submission of claims, as well as billing and collection
practices, for healthcare services;
the federal Anti-Kickback Statute, which prohibits, among other things, the knowing and willful solicitation,
receipt, offer or payment of remuneration, directly or indirectly, in exchange for or to induce either the
referral of an individual for, or the purchase, order or recommendation of, any good or service for which
payment may be made under federal healthcare programs, such as Medicare;
the federal False Claims Act which prohibits, among other things, the presentation of false or fraudulent
claims for payment from Medicare, Medicaid, or other government-funded third-party payers;
federal laws and regulations governing the Medicare program, providers of services covered by the Medicare
program, and the submission of claims to the Medicare program, as well as the manuals and guidance issued
by CMS and the local medical policies promulgated by the Medicare Administrative Contractors with respect
to the implementation and interpretation of such laws and regulations;
the federal Stark law, also known as the physician self-referral law, which, subject to certain exceptions,
prohibits a physician from making a referral for certain designated health services covered by the Medicare
program (and according to case law in some jurisdictions, the Medicaid program as well), including
laboratory and pathology services, if the physician or an immediate family member has a financial
relationship with the entity providing the designated health services;
the federal Civil Monetary Penalties statute, which, subject to certain exceptions, prohibits, among other
things, the offer or transfer of remuneration to a Medicare or state healthcare program beneficiary if the
person knows or should know it is likely to influence the beneficiary’s selection of a particular provider,
practitioner or supplier of services reimbursable by Medicare or a state healthcare program;
EKRA, which applies to items or services reimbursed by any health care benefits program, including
commercial insurers, that, among other things, prohibits the knowing or willful payment or offer, or the
solicitation or receipt, of any remuneration, whether directly or indirectly, overtly or covertly, in cash or in
kind, in exchange for the referral or inducement of laboratory testing;
the prohibition on reassignment by the program beneficiary of Medicare claims to any party; and
state law equivalents to the above laws, which may apply to items or services reimbursed by any third-party
payer, including commercial insurers, and state data privacy and security laws which may be more stringent
than HIPAA.
Furthermore, in recent years our industry has experienced increased enforcement of the federal False Claims Act
and, in particular, actions brought pursuant to the False Claims Act’s “whistleblower” or “qui tam” provisions. The False
Claims Act imposes liability for, among other things, knowingly presenting, or causing to be presented, a false or
fraudulent claim for payment by a federal governmental payer program. The qui tam provisions of the False Claims Act
allow a private individual to bring civil actions on behalf of the federal government for violations of the False Claims Act
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and permit such individuals to share in any amounts paid by the defendant to the government in fines or settlement. When
an entity is determined to have violated the False Claims Act, it is subject to mandatory damages of three times the actual
damages sustained by the government, plus mandatory civil penalties of up to approximately $25,076 for each false claim
or statement. In addition, various states have enacted false claim laws analogous to the federal False Claims Act, and in
some cases go even further because many of these state laws apply where a claim is submitted to any third-party payer
and not merely a governmental payer program. For example, in 2018 we reached a settlement with certain government
payers regarding past reimbursement submissions. Although the settlement involved no admission of fault by us and no
corporate integrity agreement, we cannot guarantee that we will not be subject to similar claims in the future.
Many of these laws and regulations have not been fully interpreted by regulatory authorities or the courts, and
their provisions are open to a variety of interpretations. In addition, there has been a recent trend of increased U.S. federal
and state regulation, scrutiny and enforcement relating to payments made to referral sources, which are governed by these
laws and regulations.
We have adopted policies and procedures designed to comply with these laws, and in the ordinary course of our
business, we conduct internal reviews of our compliance with these laws. However, the rapid growth and expansion of our
business both within and outside of the United States may increase the potential for violating these laws or our internal
policies and procedures, and the uncertainty around the interpretation of these laws and regulations increases the risk that
we may be found in violation of these or other laws and regulations, or of allegations of such violations, including pursuant
to private qui tam actions brought by individual whistleblowers in the name of the government as described above. If our
operations, including the conduct of our employees, distributors, consultants and commercial partners, are found to be in
violation of any laws or regulations that apply to us, we may be subject to penalties, including civil, criminal and
administrative penalties, damages, fines, disgorgement of profits, exclusion from participation in government programs,
injunctions, recall or seizure of products, total or partial suspension of production, denial or withdrawal of pre-marketing
product approvals, contractual damages, reputational harm, diminished profits and future earnings and the curtailment or
restructuring of our operations, any of which could materially and adversely affect our business, financial condition and
results of operations.
Failure to comply with privacy and security laws and regulations could result in fines, penalties and damage to our
reputation and have a material adverse effect on our business.
The federal HIPAA privacy and security regulations establish comprehensive federal standards with respect to
the use and disclosure of protected health information by health plans, healthcare providers, and healthcare clearinghouses,
in addition to setting standards to protect the confidentiality, integrity and security of protected health information. The
regulations establish a complex regulatory framework on a variety of subjects, including patient authorization of the use
and disclosure of, administrative, technical and physical safeguards for, and analysis of security incidents and breach
notification requirements with respect to, protected health information. HIPAA provides for significant fines and other
penalties for wrongful use or disclosure of protected health information in violation of privacy and security regulations,
including potential civil and criminal fines and penalties.
The HIPAA privacy and security regulations establish minimum requirements, and do not supersede state laws
that are more stringent. A number of states include medical information in the definition of personal information and have
implemented requirements or standards more stringent than HIPAA. Therefore, while we have implemented policies and
procedures related to compliance with the HIPAA regulations, we are also required to comply with various state privacy
and security laws and regulations, and could incur penalties, compliance costs as a result of non-compliance, or damages
under state laws pursuant to an action brought by a private party for the wrongful use or disclosure of confidential health
information or other private personal information. In addition, other federal and state laws that protect the privacy and
security of patient information may be subject to enforcement and interpretation by various governmental authorities and
courts, resulting in complex compliance issues.
The GDPR data privacy regulations comprehensively reform the prior data protection rules of the European Union,
and are more stringent, provide for higher potential liabilities, and apply to a broader range of personal data than those in
the United States. The GDPR is applicable to U.S.-based companies, such as ours, that do business or offer services in, or
that process or hold personal data of data subjects in, the European Union. While our current processes and practices
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comply with the GDPR, we have needed to expend considerable time and resources, including management attention, to
revise our practices to ensure ongoing compliance with GDPR. Furthermore, the GDPR enables EU member states to enact
jurisdiction-specific requirements in key areas, which could require us to implement multiple policies unique to the
jurisdictions in which we operate, which could make it more difficult and resource-intensive to continue to operate in the
European Union.
As we continue to expand and grow our business, our overall compliance with applicable laws and regulations
may result in increased costs and attention of management, and failure to comply may result in significant fines, penalties
and damage to our reputation. Additionally, the interpretation and application of health-related, privacy and data protection
laws are often uncertain, contradictory and in flux, and it is possible that these laws may be interpreted and applied in a
manner that is inconsistent with our practices. As a result, we could be subject to government-imposed fines or orders
requiring that we change our practices, which could cause us to incur substantial costs and may adversely affect our
business and our reputation.
Changes in the way the FDA regulates the reagents, other consumables, and testing equipment we use when developing,
validating, and performing our tests could result in delay or additional expense in bringing our tests to market or
performing such tests for our customers.
Many of the sequencers, reagents, kits and other consumable products used to perform our testing, as well as the
instruments and other capital equipment that enable the testing, are labeled as for research use only, or RUO. In addition,
we offer a version of our Signatera test as an RUO offering. Products that are intended for research use only and are labeled
as RUO are exempt from compliance with FDA requirements, including the approval, clearance or de novo classification
and other product quality requirements for medical devices. A product labeled RUO but which is actually intended by the
manufacturer for clinical diagnostic use may be viewed by the FDA as adulterated and misbranded under the FDC Act
and subject to FDA enforcement action. The FDA has issued guidance stating that when determining the intended use of
a product labeled RUO, it will consider the totality of the circumstances surrounding distribution of the product, including
how the product is marketed and to whom. In addition, many of the reagents used to perform our testing are offered for
sale as analyte specific reagents, or ASRs. ASRs are medical devices and must comply with QSR provisions and other
device requirements, but most are exempt from premarket review. The FDA could disagree with a manufacturer’s
assessment that the manufacturer’s products are ASRs, or could conclude that products labeled as RUO are actually
intended by the manufacturer for clinical diagnostic use, and could take enforcement action against the manufacturer, such
as us with respect to Signatera (RUO), including requiring the manufacturer to cease offering the product while it seeks
clearance, approval or de novo classification. Manufacturers of RUO products that we employ in our other tests may cease
selling their respective products, and we may be unable to obtain an acceptable substitute on commercially reasonable
terms or at all, which could significantly and adversely affect our ability to provide timely testing results to our customers
or could significantly increase our costs of conducting business.
The sequencers and reagents supplied to us by Illumina are labeled as RUO in the United States. We are using
these sequencers and reagents for clinical diagnostic use. If the FDA were to require clearance, approval or de novo
classification for the sale of Illumina’s sequencers and if Illumina does not obtain such clearance, approval or authorization,
we would have to find an alternative sequencing platform for Panorama. We currently have not validated an alternative
sequencing platform on which Panorama could be run in a commercially viable manner. If we were not successful in
selecting, acquiring on commercially reasonable terms and implementing an alternative platform on a timely basis, our
business, financial condition and results of operations would be adversely affected.
Our use of hazardous materials in the development of our tests exposes us to risks related to accidental contamination
or injury and requires us to comply with regulations governing hazardous waste materials.
Our research and development activities involve the controlled use of hazardous materials and chemicals. We
cannot eliminate the risk of accidental contamination or injury to employees or third parties from the use, storage, handling
or disposal of these materials. In the event of contamination or injury, we could be held liable for any resulting damages,
and any liability could exceed our resources or any applicable insurance coverage we may have. In addition, we are subject
on an ongoing basis to federal, state and local regulations governing the use, storage, handling and disposal of these
materials and specified hazardous waste materials. An increase in the costs of compliance with such laws and regulations
could harm our business and results of operations.
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If the validity of an informed consent from a patient intake for Panorama or our other tests is challenged, we could be
precluded from billing for such testing, forced to stop performing such tests, or required to repay amounts previously
received, which would adversely affect our business and financial results.
All clinical data and blood samples that we receive for genetic testing are required to have been collected from
individuals who have provided appropriate informed consent for us to perform our testing, both commercially and in
clinical trials. We seek to ensure that the individuals from whom the data and samples are collected do not retain or have
conferred any proprietary or commercial rights to the data or any discoveries derived from them. Our partners operate in
a number of different countries in addition to the United States, and, to a large extent, we rely upon them to comply with
the individual’s informed consent and with U.S. and international laws and regulations. The collection of data and samples
in many different U.S. states and foreign countries results in complex legal questions regarding the adequacy of informed
consent and the status of genetic material under different legal systems. The individual’s informed consent obtained could
be challenged in the future in any particular jurisdiction, and those informed consents could be deemed invalid, unlawful
or otherwise inadequate for our purposes. Any findings against us, or our laboratory distribution partners, could deny us
access to, or force us to stop testing samples in, a particular country or could call into question the results of our clinical
trials. We could also be precluded from billing third-party payers for tests for which informed consents are challenged, or
could be requested to refund amounts previously paid by third-party payers for such tests. We could become involved in
legal challenges, which could require significant management and financial resources and adversely affect our revenues
and results of operations.
Risks Related to Our Intellectual Property
Litigation or other proceedings resulting from either third-party claims of intellectual property infringement, or
asserting infringement by third parties of our technology, is costly, time-consuming, and could limit our ability to
commercialize our products or services.
Our success depends in part on our non-infringement of the patents or intellectual property rights of third parties,
and our ability to successfully prevent third parties from infringing our intellectual property. We operate in a crowded
technology area in which there has been substantial litigation and other proceedings regarding patent and other intellectual
property rights in the genetic diagnostics industry. Third parties, including our competitors, have asserted and may in the
future assert that we are infringing their intellectual property rights; in particular, we are or have recently been engaged in
patent infringement lawsuits and other intellectual property disputes against various competitors in each of the industries
in which we operate, as described in “Note 8—Commitments and Contingencies—Legal Proceedings” in the Notes to
Consolidated Financial Statements. We may become subject to and/or initiate future intellectual property litigation as our
product portfolio, and the level of competition in our industry segments, grow.
Should we be unsuccessful defending against patent infringement claims, we may be required to pay substantial
royalties, money damages, change our marketing practices, or be enjoined from offering certain products or services. In
addition, we could experience delays in product introductions or sales growth while we attempt to develop non-infringing
alternatives. Any of these or other adverse outcomes could prevent us from offering our tests or otherwise have a material
adverse effect on our business, financial condition and our results of operations.
We cannot predict whether, or offer any assurance that, the patent infringement claims we have initiated or may
initiate in the future will be successful. We are and may become subject to counterclaims by patent infringement defendants.
Our patents may be declared invalid or unenforceable, or narrowed in scope. Even if we prevail in an infringement action,
we cannot assure you that we would be adequately compensated for the harm to our business. If we are unable to enjoin
third-party infringement, our revenues may be adversely impacted and we may lose market share; and such third-party
product may continue to exist in the market, but fail to meet our regulatory or safety standards, thereby causing irreparable
harm to our reputation as a provider of quality products, which in turn could result in loss of market share and have a
material adverse effect on our business, financial condition and our results of operations.
In addition, our agreements with some of our customers, suppliers, and other entities with whom we do business
require us to defend or indemnify these parties to the extent they become involved in patent infringement claims, including
the types of claims described in this risk factor. We have agreed, and may in the future agree, to defend or indemnify third
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parties if we determine it to be in the best interests of our business relationships. If we are required or agree to defend or
indemnify third parties in connection with any infringement claims, we could incur significant costs and expenses that
could adversely affect our business, financial condition and results of operations.
Any inability to effectively protect our proprietary technologies could harm our competitive position.
Our success and ability to compete depend to a large extent on our ability to develop proprietary products and
technologies and to maintain adequate protection of our intellectual property in the United States and other countries; this
becomes increasingly important as we expand our operations and enter into strategic collaborations with partners to
develop and commercialize products. The laws of some foreign countries do not protect proprietary rights to the same
extent as the laws of the United States, and we may encounter difficulties in establishing and enforcing our proprietary
rights outside of the United States. In addition, the proprietary positions of companies developing and commercializing
tools for molecular diagnostics, including ours, generally are uncertain and involve complex legal and factual questions.
This uncertainty may materially affect our ability to defend or obtain patents or to address the patents and patent
applications owned or controlled by our collaborators and licensors.
We will be able to protect our proprietary rights from unauthorized use by third parties only to the extent that our
proprietary technologies are protected by valid and enforceable patents or are effectively maintained as trade secrets. We
have worked to procure patents protecting our technologies, but our procurement efforts may not always be successful,
and any patents we successfully procure may be challenged in ways that lead to post-procurement scope reduction or
invalidity. For example, certain of our intellectual property is, or recently has been, the subject of challenges instituted by
our competitors, as described in “Note 8—Commitments and Contingencies—Legal Proceedings” in the Notes to
Consolidated Financial Statements. These challenges may impede our ability to protect our proprietary rights from
unauthorized use. In addition, any finding that others have claims of inventorship or ownership rights to our patents and
applications could require us to obtain certain rights to practice related technologies, which may not be available on
favorable terms.
Certain of our intellectual property was partly supported by a U.S. government grant awarded by the National
Institutes of Health, and the government accordingly has certain rights in this intellectual property, including a
non-exclusive, non-transferable, irrevocable worldwide license to use applicable inventions for any governmental purpose.
Such rights also include “march-in” rights, which refer to the right of the U.S. government to require us to grant a license
to the technology to a responsible applicant if we fail to achieve practical application of the technology or if action is
necessary to alleviate health or safety needs, to meet requirements of federal regulations or to give preference to U.S.
industry.
Any of these factors could adversely affect our ability to obtain commercially relevant or competitively
advantageous patent protection for our products.
If we are not able to adequately protect our trade secrets and other proprietary information, the value of our technology
and products could be significantly diminished.
We rely on trade secret and proprietary know-how protection for our confidential and proprietary information
and have taken security measures to protect this information. These measures, however, may not provide adequate
protection. For example, we have a policy of requiring our consultants, advisors and collaborators, including, for example,
our strategic collaborators with whom we seek to develop and commercialize products, to enter into confidentiality
agreements and our employees to enter into invention, non-disclosure and non-compete agreements. However, breaches
of our physical or electronic security systems, or breaches caused by our employees failing to abide by their confidentiality
obligations during or upon termination of their employment with us, could compromise these protection efforts. Any action
we take to enforce our rights may be time-consuming, expensive, and possibly unsuccessful. Even if successful, the
resulting remedy may not adequately compensate us for the harm caused by the breach. These risks are heightened in
countries where laws or law enforcement practices may not protect proprietary rights as fully as in the United States or
Europe. Any unauthorized use or disclosure of, or access to, our trade secrets, know-how or other proprietary information,
whether accidentally or through willful misconduct, could have a material adverse effect on our programs and our strategy,
and on our ability to compete effectively.
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If our trademarks and trade names are not adequately protected, we may not be able to establish or maintain name
recognition in our markets of interest, and our business may be adversely affected.
Failure to maintain our trademark registrations, or to obtain new trademark registrations in the future, could limit
our ability to protect our trademarks and impede our marketing efforts in the countries in which we operate. We may not
be able to protect our rights to trademarks and trade names that we may need to build name recognition with potential
partners or customers in our markets of interest. As a means to enforce our trademark rights and prevent infringement, we
may be required to file trademark claims against third parties or initiate trademark opposition proceedings. This can be
expensive and time-consuming, and possibly unsuccessful. Our registered or unregistered trademarks or trade names may
be challenged, infringed, circumvented, declared generic or determined to infringe on other marks.
Our pending trademark applications in the United States and in other foreign jurisdictions where we may file may
not be successful. Even if these applications result in registered trademarks, third parties may challenge these trademarks
in the future. Over the long term, if we are unable to establish name recognition based on our trademarks and trade names,
then we may not be able to compete effectively and our business may be adversely affected.
We may be subject to claims that our employees, consultants or independent contractors have wrongfully used or
disclosed confidential information of third parties.
We employ individuals who were previously employed at other biotechnology or diagnostic companies. We may
be subject to claims that we or our employees, consultants or independent contractors have inadvertently or willfully used
or disclosed confidential information of our employees’ former employers or other third parties. We may also be subject
to claims that our employees’ former employers or other third parties have an ownership interest in our patents. Litigation
may be necessary to defend against these claims, and if we are unsuccessful, we could be required to pay substantial
damages and could lose rights to important intellectual property. Even if we are successful, litigation could result in
substantial costs to us and could divert the time and attention of our management and other employees.
Risks Related to our Convertible Notes
Servicing our debt will require a significant amount of cash. We may not have sufficient cash flow from our business
to pay our outstanding debt, and we may not have the ability to raise the funds necessary to settle conversions of the
Convertible Notes in cash or to repurchase the Convertible Notes upon a fundamental change, which could adversely
affect our business and results of operations.
Our ability to make scheduled payments of the principal of, to pay interest on, or to refinance our indebtedness,
including the amounts payable under the Convertible Notes, depends on our future performance, which is subject to
economic, financial, competitive, and other factors beyond our control. Our business may not continue to generate cash
flow from operations in the future sufficient to service our indebtedness and make necessary capital expenditures. If we
are unable to generate such cash flow, we may be required to adopt one or more alternatives, such as selling assets,
restructuring debt, or obtaining additional equity capital on terms that may be onerous or highly dilutive. Our ability to
refinance our indebtedness will depend on the capital markets and our financial condition at such time. We may not be
able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on
our debt obligations.
Further, holders of the Convertible Notes have the right to require us to repurchase all or a portion of their
Convertible Notes upon the occurrence of a “fundamental change” (as defined in the indenture governing the Convertible
Notes) before the maturity date at a repurchase price equal to 100% of the principal amount of the Convertible Notes to
be repurchased, plus accrued and unpaid interest, if any. In addition, upon conversion of the Convertible Notes, unless we
elect to deliver solely shares of our common stock to settle such conversion (other than paying cash in lieu of delivering
any fractional share), we will be required to make cash payments in respect of the Convertible Notes being converted.
However, we may not have enough available cash, or be able to obtain sufficient financing, at the time we are required to
repurchase the Convertible Notes.
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The conditional conversion feature of the Convertible Notes, when triggered, may adversely affect our financial
condition and operating results.
The conditional conversion feature of the Convertible Notes has been triggered for certain applicable periods
beginning with the quarter ended September 30, 2020. During periods for which the conditional conversion feature has
been or is triggered, holders of the Convertible Notes are entitled to convert their Convertible Notes at any time during
such periods at their option. If one or more holders elect to convert their Convertible Notes, unless we choose to satisfy
our conversion obligation by delivering solely shares of our common stock (other than paying cash in lieu of delivering
any fractional share), we would elect to settle a portion or all of our conversion obligation in cash, which could adversely
affect our liquidity. No holders have elected to convert their Convertible Notes.
In addition, even if holders of Convertible Notes do not elect to convert their Convertible Notes, we could be
required under applicable accounting rules to reclassify all or a portion of the outstanding principal of the Convertible
Notes as a current rather than long-term liability, which would result in a material reduction of our net working capital.
The accounting method for convertible debt securities that may be settled in cash, such as the Convertible Notes, could
have a material effect on our reported financial results.
In August 2020, the FASB issued Accounting Standards Update ASU 2020-06, or ASU 2020-06 , with the intent
to simplify ASC 470-20 and ASC subtopic 815-40, Contracts in Entity’s Own Equity, or ASC 815-40. Among the changes,
ASU 2020-06 removed the requirement to bifurcate the liability and equity components of convertible debt instruments
(such as the Convertible Notes) that may be settled entirely or partially in cash upon conversion. In addition, ASU 2020-06
precludes the use of the treasury stock method, when calculating diluted earnings per share, for convertible debt
instruments that may be settled entirely or partially in cash upon conversion.
We currently apply the “if-converted” method for calculating any potential dilutive effect of the conversion
options embedded in the Convertible Notes on diluted net income per share, which assumes that all of the Convertible
Notes were converted solely into shares of common stock at the beginning of the reporting period, unless the result would
be anti-dilutive. The application of the if-converted method may reduce our reported diluted net income per share to the
extent we are profitable, and accounting standards may change in the future in a manner that may otherwise adversely
affect our diluted net income per share.
Conversion of the Convertible Notes will dilute the ownership interest of existing stockholders, including holders who
had previously converted their Convertible Notes, or may otherwise depress the price of our common stock.
The conversion of some or all of the Convertible Notes will dilute the ownership interests of stockholders to the
extent we deliver shares of our common stock upon such conversion. The Convertible Notes are currently convertible and
may from time to time in the future be convertible at the option of their holders prior to their scheduled terms under certain
circumstances. Any sales in the public market of the common stock issuable upon such conversion could adversely affect
prevailing market prices of our common stock. In addition, the existence of the Convertible Notes may encourage short
selling by market participants because the conversion of the Convertible Notes could be used to satisfy short positions, or
anticipated conversion of the Convertible Notes into shares of our common stock could depress the price of our common
stock.
Risks Related to Ownership of Our Common Stock
The market price of our common stock has been and may be volatile, which could subject us to litigation.
The trading prices of the securities of life sciences companies, including ours, have been and may continue to be
highly volatile; and financial markets in general, including our stock, experienced particularly high volatility as a result of
the COVID-19 pandemic and continued difficult macroeconomic conditions. Accordingly, the market price of our
common stock is likely to be subject to wide fluctuations in response to numerous factors, many of which are beyond our
control, such as those in this “Risk Factors” section and others including:
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actual or anticipated variations in our and our competitors’ results of operations, as well as how those results
compare to analyst and investor expectations;
announcements by us or our competitors of new products, significant acquisitions, other strategic transactions,
including strategic and commercial partnerships and relationships, joint ventures, divestitures, collaborations
or capital commitments;
changes in reimbursement practices by current or potential payers;
failure of analysts to initiate or maintain coverage of our company, issuance of new securities analysts’
reports or changed recommendations for our stock;
negative publicity, including misinformation, about our company, our tests, or the commercial markets in
which we operate;
forward-looking statements related to our financial guidance or projections, our failure to meet or exceed our
financial guidance or projections or changes in our financial guidance or projections;
actual or anticipated changes in regulatory oversight of our products;
development of disputes concerning our intellectual property or other proprietary rights;
commencement of, or our involvement in, litigation;
announcement or expectation of additional debt or equity financing efforts;
any major change in our management;
general economic conditions and slow or negative growth of our markets, including as a result of changes in
the rate of inflation (including the cost of raw materials, commodities, and supplies) and interest rates; and
changes in business, economic, and political conditions, including war, political instability and related
military action.
In addition, if the market for life sciences stocks or the stock market in general experiences uneven investor
confidence, as has been the case in recent months, the market price of our common stock could decline for reasons
unrelated to our business, operating results or financial condition. The market price of our common stock might also
decline in reaction to events that affect other companies within, or outside, our industry even if these events do not directly
affect us. Some companies, including us, that have experienced volatility in the trading price of their stock have been the
subject of securities class action litigation, and we may in the future become subject to such litigation. For example, we
have in the past been subject to a purported securities class action lawsuit filed against us, our directors and certain of our
officers and stockholders related to our initial public offering. Under certain circumstances, we have contractual and other
legal obligations to indemnify and to incur legal expenses on behalf of current and former directors and officers, and on
behalf of our former underwriters, in connection with any future lawsuits. Any lawsuit to which we are a party, with or
without merit, may result in an unfavorable judgment. We also may decide to settle lawsuits on unfavorable terms. Any
such negative outcome could result in payments of substantial damages or fines, damage to our reputation or adverse
changes to our offerings or business practices. Defending against litigation is costly and time-consuming, and could divert
our management’s attention and resources. Furthermore, during the course of litigation, there could be negative public
announcements of the results of hearings, motions or other interim proceedings or developments, which could have a
material adverse effect on the market price of our common stock.
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If we are unable to implement and maintain effective internal controls over financial reporting in the future, investors
may lose confidence in the accuracy and completeness of our financial reports and the market price of our common
stock could be adversely affected.
We are required to maintain internal controls over financial reporting and to report any material weaknesses in
such internal controls. Section 404 of the Sarbanes-Oxley Act requires that we evaluate and determine the effectiveness
of our internal controls over financial reporting and provide a management report on internal controls over financial
reporting. The Sarbanes-Oxley Act also requires that our management report on internal controls over financial reporting
be attested to by our independent registered public accounting firm.
Although we determined that our internal controls over financial reporting were effective as of December 31,
2022, we must continue to monitor and assess our internal controls over financial reporting. If we have a material weakness
in our internal controls over financial reporting, we may not detect errors on a timely basis and our financial statements
may be materially misstated. If we identify material weaknesses in our internal controls over financial reporting, if we are
unable to comply with the requirements of Section 404 in a timely manner, if we are unable to assert that our internal
controls over financial reporting are effective, or, when required in the future, if our independent registered public
accounting firm is unable to express an opinion as to the effectiveness of our internal controls over financial reporting,
investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our
common stock could be adversely affected, and we could become subject to investigations by the stock exchange on which
our securities are listed, the SEC, or other regulatory authorities.
We do not intend to pay dividends on our capital stock so any returns will be limited to changes in the value of our
common stock.
We have never declared or paid any cash dividends on our capital stock. We currently anticipate that we will
retain future earnings for the development, operation and expansion of our business and do not anticipate declaring or
paying any cash dividends for the foreseeable future. In addition, our ability to pay cash dividends on our capital stock
may be prohibited or limited by the terms of any current or future debt financing arrangement. Any return to stockholders
will therefore be limited to the increase, if any, in the price of our common stock.
Future sales and issuances of our common stock or rights to purchase common stock, including pursuant to our equity
incentive plans or in connection with acquisitions or strategic or commercial transactions, could result in additional
dilution of the percentage ownership of our stockholders and could cause the price of our common stock to decline.
From time to time, we may issue additional securities or sell common stock, convertible securities, such as the
Convertible Notes, or other equity securities in one or more transactions at prices and in a manner we determine. We also
expect to continue to issue common stock to employees and directors pursuant to our equity incentive plans. If we sell or
issue common stock, convertible securities, or other equity securities, or common stock is issued pursuant to equity
incentive plans, investors in our common stock may be materially diluted. As we have done in the past, we may decide to
issue common stock or other equity securities in connection with an acquisition or a strategic or commercial transaction,
which could cause dilution to our existing stockholders. New investors in such transactions could gain rights, preferences
and privileges senior to those of holders of our common stock.
Sales of a substantial number of shares of our common stock in the public markets could cause the price of our common
stock to decline.
Sales of a substantial number of shares of our common stock in the public market or the perception that these
sales might occur could depress the market price of our common stock and could impair our ability to raise capital through
the sale of additional equity securities. We are unable to predict the effect that sales may have on the prevailing market
price of our common stock.
As we have done in the past, we may issue our shares of common stock or securities convertible into our common
stock, such as our Convertible Notes, from time to time in connection with a financing, acquisition, investments or
otherwise. Any such issuance could result in substantial dilution to our existing stockholders and cause the price of our
common stock to decline.
64
If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our
business, our stock price and trading volume could decline.
The trading market for our common stock depends in part on the research and reports that securities or industry
analysts publish about us or our business. Currently, only a small number of securities analysts cover our stock. If more
analysts do not commence coverage of us, or if industry analysts cease coverage of us or fail to publish reports on us
regularly, the trading price for our common stock could be adversely affected. If one or more of the analysts who cover us
downgrade our common stock or publish inaccurate or unfavorable research about our business, our common stock price
would likely decline.
Insiders have substantial control over us and will be able to influence corporate matters.
As of December 31, 2022, our directors and executive officers and their affiliates beneficially owned, in the
aggregate, approximately 9.45% of our outstanding capital stock. As a result, these stockholders are and will continue to
be able to exercise significant influence over all matters requiring stockholder approval, including the election of directors
and approval of significant corporate transactions, such as a merger or other sale of our company or its assets. This
concentration of ownership could limit stockholders’ ability to influence corporate matters and may have the effect of
delaying or preventing a third party from acquiring control over us.
Provisions in our amended and restated certificate of incorporation, amended and restated bylaws, and Delaware
law might discourage, delay or prevent a change in control of our company or changes in our management and, therefore,
depress the market price of our common stock.
Our amended and restated certificate of incorporation and amended and restated bylaws contain provisions that
could depress the market price of our common stock by acting to discourage, delay or prevent a change in control of our
company or changes in our management that the stockholders of our company may deem advantageous. These provisions,
among other things:
authorize the issuance of “blank check” preferred stock that our board of directors could use to implement a
stockholder rights plan;
prohibit stockholder action by written consent, which requires all stockholder actions to be taken at a meeting
of our stockholders;
eliminate the ability of our stockholders to call special meetings of stockholders;
establish advance notice requirements for nominations for election to our board of directors or for proposing
matters that can be acted upon by stockholders at annual stockholder meetings;
establish a classified board of directors so that not all members of our board are elected at one time;
permit the board of directors to establish the number of directors;
provide that directors may only be removed “for cause” and only with the approval of 75% of our
stockholders;
require super-majority voting to amend some provisions in our amended and restated certificate of
incorporation and amended and restated bylaws; and
provide that the board of directors is expressly authorized to make, alter or repeal our amended and restated
bylaws.
65
In addition, Section 203 of the Delaware General Corporation Law may discourage, delay or prevent a change in
control of our company. Section 203 imposes certain restrictions on mergers, business combinations and other transactions
between us and holders of 15% or more of our common stock.
In addition, if a “fundamental change” (as defined in the indenture governing the Convertible Notes) occurs prior
to the maturity date of the Convertible Notes, holders of the Convertible Notes will have the right, at their option, to require
us to repurchase all or a portion of their Convertible Notes. If a “make-whole fundamental change” (as defined in the
indenture governing the Convertible Notes) occurs prior to the maturity date, we will in some cases be required to increase
the conversion rate of the Convertible Notes for a holder that elects to convert its Convertible Notes in connection with
such make-whole fundamental change. Furthermore, we are prohibited from engaging in certain mergers or acquisitions
unless, among other things, the surviving entity of such transaction assumes our obligations under the Convertible Notes.
Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of Delaware is
the exclusive forum for substantially all disputes between us and our stockholders, which could limit our stockholders’
ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees.
Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of
Delaware is the exclusive forum for any derivative action or proceeding brought on our behalf, any action asserting a
breach of fiduciary duty, any action asserting a claim against us arising pursuant to the Delaware General Corporation
Law or any action asserting a claim against us that is governed by the internal affairs doctrine. This choice of forum
provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us
or our directors, officers or other employees and may discourage these types of lawsuits. Alternatively, if a court were to
find the choice of forum provision contained in our certificate of incorporation to be inapplicable or unenforceable in an
action, we may incur additional costs associated with resolving such action in other jurisdictions, which could harm our
business, financial condition and results of operations.
Changes in accounting standards and their interpretations could adversely affect our operating results.
U.S. GAAP is subject to interpretation by the Financial Accounting Standards Board, or FASB, the Public
Company Accounting Oversight Board, or PCAOB, the SEC, and various other bodies that promulgate and interpret
appropriate accounting principles. These principles and related implementation guidelines and interpretations can be
highly complex and involve subjective judgments. A change in these principles or interpretations could have a significant
effect on our reported financial results, and could affect the reporting of transactions completed before or after the
announcement of a change in such principles. Additionally, the adoption of these standards may potentially require
enhancements or changes in our systems and will require significant time and cost on behalf of our financial management.
A discussion of these standards and other pending changes in GAAP, are further discussed in “Note 2—Summary of
Significant Accounting Policies” in the Notes to Consolidated Financial Statements.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2.
PROPERTIES
We lease office facilities under non-cancelable operating lease agreements. We currently occupy approximately
136,000 square feet of laboratory and office space at 201 Industrial Road in San Carlos, California pursuant to a lease that
we directly entered into with our landlord in October 2016. This lease covers two office spaces, referred to as the First
Space and the Second Space. The First Space covers approximately 88,000 square feet at an average base rent of $340,972
per month for the year 2020. The Second Space covers approximately 48,000 square feet at an average base rent of
$197,605 per month. The original lease term is approximately 84 months and expires in October 2023. In January 2021,
we entered into an amendment of the lease to extend the term for 48 months to October 2027. The combined monthly rent
for the First Space and Second Space will be $776,671 commencing in October 2023.
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We entered into a sublease agreement in June 2019 with a third party to sublease 25,879 square feet of space
located on the third floor of the San Carlos, California building while maintaining its primary obligation as the intermediate
lessor. The term of this lease is approximately 48 months commencing in October 2019 and expiring in September 2023.
In February 2021, we entered into an amendment of the San Carlos sublease agreement whereas the third party will initially
return approximately 3,474 rentable square feet with the remainder of the subleased premises, consisting of approximately
22,405 rentable square feet, between October 2021 and December 2021.
In Tukwila, Washington, we lease a facility initially to provide storage of our cord blood tissue units. The facility
covers approximately 10,000 square feet, with a lease term of 62 months beginning in June 2018 and expiring in July 2023.
In the third quarter of 2019, we sold the Evercord business and the facility was subleased to a third party. We do not intend
to exercise its option to renew the facility upon expiration.
Our subsidiary leases laboratory and office space in Austin, Texas, comprising approximately 94,000 square feet
pursuant to a lease expiring in November 2026. The lease term is 132 months beginning in December 2015 and expiring
in November 2026 with monthly payments beginning in December 2016. In December 2021, we entered into an
amendment of the Austin lease agreement which extended the lease of the current premises through March 2033. The
amendment also includes two additional office spaces, referred to as the First Expansion Premises and the Second
Expansion Premises. The First Expansion Premises consists of 32,500 rentable square feet and commenced in
February 2022. The Second Expansion Premises consists of 65,222 rentable square feet and commenced in
September 2022. The terms of the First and Second Expansion Premises expire in March 2033.
We entered into a lease agreement in November 2020 to lease 11,395 square feet of space located in South San
Francisco, California over a three-year term. The premises is used for general office, laboratory and research use. In
December 2022, we exercised the renewal option of the South San Francisco lease agreement. In January 2023, we entered
in an amendment to extend the lease term of the South San Francisco premises by three years, through November 2026.
As part of the in-process research and development, or the IPR&D, asset acquisition in September 2021, we
inherited a 24-month lease for 7,107 square feet of laboratory space in Canada. The annual lease payment starts at
$0.2 million and will expire in August 2023.
We have 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, have committed
to terms approximating one to five years. For the facilities without a committed lease term, we have elected to not
recognize them as the right-of-use assets on the balance sheet as they are all considered short-term leases. For individual
workspaces where the committed lease term exceeds one year, we have recorded a right-of-use asset.
We may expand our facilities capacity as our employee base and laboratory processing needs grow. We believe
that we will be able to obtain additional space on commercially reasonable terms.
ITEM 3.
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.
For information regarding certain current legal proceedings, see “Note 8—Commitments and Contingencies—
Legal Proceedings” in the Notes to Consolidated Financial Statements, which is incorporated herein by reference.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Price of Our Common Stock
Our common stock is listed on the Nasdaq Global Select Market under the symbol “NTRA”.
Holders
As of March 1, 2023, we had 33 holders of record of our common stock. The actual number of stockholders is
greater than this number of record holders and includes stockholders who are beneficial owners, but whose shares are held
in street name by brokers and other nominees. This number of holders of record also does not include stockholders whose
shares may be held in trust by other entities.
Dividends
No cash dividends have ever been paid or declared on our common stock. We currently intend to retain all future
earnings, if any, for use in our business and do not anticipate paying any cash dividends on our common stock in the
foreseeable future. Any future determination to declare cash dividends will be made at the discretion of our board of
directors, subject to applicable laws, and will depend on our financial condition, results of operations, capital requirements,
general business conditions and other factors our board of directors may deem relevant.
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Performance Graph
This performance graph shall not be deemed “filed” for purposes of Section 18 of the Exchange Act, or
incorporated by reference into any of our other filings under the Exchange Act or the Securities Act except to the extent
we specifically incorporate it by reference into such filing. The following graph compares the cumulative total stockholder
return on our common stock between our initial public offering on July 2, 2015 and December 31, 2022 with the
cumulative total return of (i) the NASDAQ Biotechnology Index and (ii) the NASDAQ Composite Index over the same
period. The chart assumes $100 was invested at the close of market on July 2, 2015, and assumes the reinvestment of any
dividends. The stock price performance on the following graph is not necessarily indicative of future stock price
performance.
Trade Date
Base period 7/2/2015 . . . . . . . . . . . . . . . . . . . . . . . .
12/31/2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
12/31/2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
12/31/2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
12/31/2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
12/31/2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
12/31/2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
12/31/2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
12/31/2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
$
$
$
$
$
$
Natera, Inc.
Nasdaq
Biotechnology
Nasdaq
Composite
100
47.49
51.50
39.53
61.39
147.45
437.64
408.40
176.65
$
$
$
$
$
$
$
$
$
100 $
91.34 $
71.53 $
86.6 $
78.52 $
97.34 $
122.78 $
122.00 $
108.69 $
100
99.96
107.46
137.81
132.46
178.59
257.29
312.32
208.94
Recent Sales of Unregistered Securities
None.
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Purchases of Equity Securities by the Issuer and Affiliated Parties
None.
ITEM 6.
SELECTED FINANCIAL DATA
Information required by Item 6 of Form 10-K is omitted pursuant to the SEC's adoption of amendments to
Regulation S-K effective February 10, 2021.
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ITEM 7. 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 consolidated financial statements and related notes included in Part II, Item 8 of this report. This discussion
contains forward-looking statements that involve risks and uncertainties. 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” included elsewhere in this report.
Overview
We are a diagnostics company with proprietary molecular and bioinformatics technology that we are applying to
change the management of disease worldwide. We began in the women’s health space, in which we develop and
commercialize non- or minimally- invasive tests to evaluate risk for, and thereby enable early detection of, a wide range
of genetic conditions, such as Down syndrome. Our technology is now also being used in the oncology market, in which
we are commercializing, among others, a personalized blood-based DNA test to detect molecular residual disease and
monitor disease recurrence, as well as in the organ health market, with tests to assess organ transplant rejection. We seek
to enable even wider adoption of our technology through Constellation, our global cloud-based distribution model. In
addition to our direct sales force in the United States, we have a global network of over 100 laboratory and distribution
partners, including many of the largest international laboratories.
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 (“NIPT”), as well as Horizon, our Carrier Screening (“HCS”) 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
(“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
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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
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 year ended December 31, 2022, we processed approximately 2,066,500 tests, comprised of
approximately 2,004,000 tests accessioned in our laboratories. During the year ended December 31, 2021, we processed
approximately 1,570,000 tests, comprised of approximately 1,513,400 tests accessioned in our laboratories. During the
year ended December 31, 2020, we processed approximately 1,026,500 tests, comprised of approximately 974,400 tests
accessioned in our laboratories. This increase in volume represents continuous commercial growth of Panorama and HCS,
both as tests performed in our laboratories as well as through our Constellation software platform.
The percent of our revenues attributable to our U.S. direct sales force were 89%, 89% and 87% for the years
ended December 31, 2022, 2021, and 2020, respectively. The percent of our revenues attributable to U.S. laboratory
partners for the year ended December 31, 2022, 2021, and 2020 were 7%, 5% and 7%, respectively. The percent of our
revenues attributable to international laboratory partners and other international sales for the year ended December 31,
2022 was 4%, down from 6% for both the years ended December 31, 2021 and December 31, 2020.
For the year ended December 31, 2022, total revenues were $820.2 million, compared to $625.5 million and
$391.0 million in the years ended December 31, 2021 and 2020, respectively. Product revenues generated from our testing
accounted for $797.3 million or 97% of total revenues for the year ended December 31, 2022, compared to $580.1 million
or 93% of total revenues for the year ended December 31, 2021 and $377.9 million or 97% of total revenues for the year
ended December 31, 2020. For the years ended December 31, 2022, 2021, and 2020, there were no customers exceeding
10% of the total revenues on an individual basis. Revenues from customers outside the United States were $34.4 million,
representing 4% of total revenues for the year ended December 31, 2022. For the years ended December 31, 2021 and
2020, revenues from customers outside the United States were $34.6 million and $25.3 million, respectively, representing
approximately 6% of total revenues in both years.
Our net losses for the years ended December 31, 2022, 2021, and 2020, were $547.8 million, $471.7 million, and
$229.7 million, respectively. This included non-cash stock compensation expense of $152.4 million, $115.2 million, and
$50.2 million for the years ended December 31, 2022, 2021, and 2020, respectively. As of December 31, 2022, we had an
accumulated deficit of $1.9 billion.
Components of the Results of Operations
The section of this Management’s Discussion and Analysis generally discusses year-to-year comparisons between
2022 and 2021. Discussions of year-to-year comparisons between 2021 and 2020 that are not included in this Annual
Report on Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of
Operations” in Item 7 of Part II of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, filed
with the SEC on February 24, 2022.
Revenues
Product Revenues
We generate revenues from the sale of our tests, primarily from the sale of our Panorama and HCS 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.
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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.
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 SMART study results being published relatively recently, in early
2022. A current procedure terminology (“CPT”) code for microdeletions went into effect beginning January 1, 2017. We
have experienced low average reimbursement rates for microdeletions testing under this code, and we expect that this will
continue to be the case, at least in the near term, due to third-party payers declining to reimburse and through reduced
reimbursement under the CPT code. This has had, and we expect it will continue to have, an adverse impact on our
revenues. In addition, a new CPT code for expanded carrier screening went into effect beginning January 1, 2019, and has
had, and may continue to have, an adverse effect on our reimbursement rates for our broader Horizon carrier screening
panel for which we previously primarily received reimbursement on a per-condition basis, as those tests may be reimbursed
as a combined single panel instead of as multiple individual tests. Because our revenues from Horizon continue to represent
a significant proportion of our overall revenues, a decline in our reimbursement rates for, and therefore our average selling
price of, Horizon, could result in a decline in our overall revenue.
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 (which during the three years ended December 31, 2020, 2021 and 2022 comprised the Qiagen LC, or Qiagen,
BGI Genomics Co. Ltd., and Foundation Medicine, Inc. 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. As of December 31, 2022, we are recognizing revenues
on 11 licensing and service arrangements with laboratories under our Constellation 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. However, cost of licensing and other
revenues for the Constellation software platform are relatively low, and therefore, its associated gross margin is higher.
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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 (“WES”) 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.
We currently have 11 revenue generating licensing and service agreements with laboratories under our
Constellation distribution model. 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.
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.
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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.
Loss on Debt Extinguishment
The loss on debt extinguishment of $5.8 million was a result of the repayment of the outstanding principal and
interest under the 2017 Term Loan with Orbimed in the second quarter of 2020.
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, leases, fair value measurements, and stock-based
compensation.
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.
Revenue Recognition
We recognize revenues when, or as, performance obligations in the contracts are satisfied, in the amount reflecting
the expected consideration to be received from the goods or services transferred to the customers.
Product Revenues
Product revenues are derived from contracts with insurance carriers, laboratory partners and patients in
connection with sales of prenatal genetic and other diagnostics tests. We enter into contracts with insurance carriers with
primarily payment terms related to tests provided to the patients who have health insurance coverage. Insurance carriers
are considered to be third-party payers on behalf of the patients, and the patients are considered as the customers who
receive genetic test services. Tests may be billed to insurance carriers, patients, or a combination of insurance carriers and
patients. Further, we sell tests to a number of domestic and international laboratory partners and identify the laboratory
partners as customers provided that there is a test services agreement between us and them.
Licensing and Other Revenues
We recognize licensing revenues from our Constellation cloud-based distribution model, pursuant to which we
grant licenses to laboratories to access our proprietary bioinformatics algorithms through our cloud-based software to
analyze the results of molecular workflows that such licensees develop and perform in their laboratories. In addition, the
royalties we receive from our arrangement with a prenatal paternity licensee are recognized Constellation revenues.
We also recognize revenues from our strategic partnership agreements. The performance obligations are unique
in each agreement and would typically require the license of intellectual property, development services, support services,
and future test work. We also record revenues from the sale of IVD kits in licensing and other revenues.
75
Income Taxes
We account for income taxes in accordance with ASC 740, Income Taxes (“ASC 740”), which requires
recognition of deferred tax assets and liabilities for the expected tax consequences of our future financial and operating
activities. Under ASC 740, we determine deferred tax assets and liabilities based on the temporary difference between the
financial statement and tax bases of assets and liabilities using the tax rates in effect for the year in which we expect such
differences to reverse. If we determine that it is more likely than not that we will not generate sufficient taxable income
to realize the value of some or all of our deferred tax assets (net of our deferred tax liabilities), we establish a valuation
allowance offsetting the amount we do not expect to realize. We perform this analysis each reporting period and reduce
our measurement of deferred taxes, if the likelihood we will realize them becomes uncertain.
We also account for uncertain tax positions in accordance with ASC 740, which requires us to adjust our financial
statements to reflect only those tax positions that are more-likely-than-not to be sustained upon review by federal or state
examiners. We may recognize a tax benefit only if it is more likely than not the tax position will be sustained on
examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the
financial statements from such positions are then measured based on the largest benefit that has a greater than 50%
likelihood of being realized upon settlement. We maintained a full valuation allowance against our net deferred tax assets
in 2022 and 2021 due to the uncertainty surrounding realization of these assets (for details, please refer to Note 13, Income
Taxes). In addition, our policy is to report interest and penalties related to unrecognized tax benefits as income tax
expenses.
Stock-Based Compensation
We have included stock-based compensation as part of our cost of revenues and our operating expenses in our
statements of operations as follows:
Employee Non-Employee Total
2022
Year ended December 31,
2021
Employee Non-Employee Total
(in thousands)
Employee Non-Employee Total
2020
Cost of
revenues . . . . . . . . . $
7,905 $
— $
7,905 $
4,811 $
— $
4,811 $ 1,691 $
— $ 1,691
Research and
development . . . . . .
44,655
1,890
46,545
24,507
1,361
25,868
10,777
647
11,424
Selling, general
and administrative . .
97,379
Total . . . . . . . . . . . . . . $ 149,939 $
555
97,934
84,368
2,445 $ 152,384 $ 113,686 $
172
1,533
84,540
36,747
$ 115,219 $ 49,215 $
309
37,056
956 $ 50,171
Stock-based compensation related to stock options granted to our employees and non-employees is measured at
the grant date based on the fair value of the award, which is determined by the Black-Scholes option-pricing model and
the Monte Carlo simulation model. The fair value is recognized as expense over the requisite service period, which is
generally the vesting period of the respective awards. No compensation cost is recognized on stock options for employees
and non-employees who do not render the requisite service and therefore forfeit their rights to the stock options. The
measurement of stock-based compensation is subject to periodic adjustments as the underlying equity instruments vest,
and the resulting change in value, if any, is recognized in our statements of operations and comprehensive loss during the
period that the related services are rendered.
Impairment of Long-Lived Assets
We evaluate our long-lived assets for indicators of possible impairment when events or changes in circumstances
indicate the carrying amount of an asset may not be recoverable. We then compare the carrying amounts of the assets with
the future net undiscounted cash flows expected to be generated by such asset. Should an impairment exist, the impairment
loss would be measured based on the excess carrying value of the asset over the asset’s fair value determined using
76
discounted estimates of future cash flows. There were no asset impairment charges for the years ended December 31, 2022
and 2021.
Results of Operations
Comparison of the years ended December 31, 2022, 2021, and 2020
(in thousands)
Year Ended December 31,
2021
2022
2020
Changes
2022 - 2021
2021 - 2020
Amount
Percent
Amount
Percent
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 on debt extinguishment . . . . . .
Loss before income taxes. . . . . . . . .
Income tax expense . . . . . . . . . . . . .
Net loss . . . . . . . . . . . . . . . . . . . . . $
Revenues
797,307 $
22,915
820,222
$
580,080
45,406
625,486
377,877
13,128
391,005
$
217,227
(22,491)
194,736
37.4 % $
(49.5)
31.1
202,203
32,278
234,481
53.5 %
245.9
60.0
453,632
315,195
200,097
138,437
43.9
115,098
57.5
2,624
316,415
3,223
264,208
588,591
1,361,262
(541,040)
(9,319)
3,538
—
(546,821)
(978)
(547,799) $
511,034
1,093,660
(468,174)
(8,305)
5,381
—
(471,098)
(618)
(471,716) $
3,523
100,035
303,627
607,282
(216,277)
(15,082)
7,562
(5,848)
(229,645)
(98)
(229,743)
(599)
52,207
(18.6)
19.8
77,557
267,602
(72,866)
(1,014)
(1,843)
—
(75,723)
(360)
(76,083)
$
15.2
24.5
15.6
12.2
(34.3)
—
16.1
58.3
16.1 % $
(300)
164,173
207,407
486,378
(251,897)
6,777
(2,181)
5,848
(241,453)
(520)
(241,973)
(8.5)
164.1
68.3
80.1
116.5
(44.9)
(28.8)
100.0
105.1
530.6
105.3 %
Total revenues are comprised of product revenues, which are primarily driven by sales of our Panorama and HCS
tests, and licensing and other revenues, which primarily includes development licensing revenue, licensing of our
Constellation software to our licensees. Total revenues for the year ended December 31, 2022 increased by $194.7 million,
or 31.1%, when compared to the year ended December 31, 2021.
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 laboratories or processed outside of our laboratories. As noted in “Overview,” the
number of tests that we process is a key metric as it tracks overall volume growth. During the year ended December 31,
2022, total reported units were approximately 1,919,600, comprised of approximately 1,861,000 tests reported in our
laboratories. Comparatively, during the year ended December 31, 2021, total reported units were approximately 1,453,500,
comprised of approximately 1,400,100 tests reported in our laboratories. During the year ended December 31, 2022 and
2021, total oncology units processed were approximately 196,400 and 76,400, respectively.
Product Revenues
During the year ended December 31, 2022, product revenues increased by $217.2 million, or 37.4% compared to
the year ended December 31, 2021, as a result of the continued revenue growth from increased test volumes.
77
Licensing and Other Revenues
Licensing and other revenues decreased by $22.5 million, or 49.5%, during the year ended December 31, 2022
compared to the year ended December 31, 2021. The decrease in revenue was primarily due to $28.6 million of revenue
recognized from Qiagen associated with deferred revenues recognized as a result from a settlement with Qiagen in prior
year partially offset by a $6.1 million net increase in revenue from our collaborative and royalty agreements.
Cost of Product Revenues
During the year ended December 31, 2022, cost of product revenues increased by $138.4 million or 43.9% when
compared to the year ended December 31, 2021, primarily due to higher costs related to inventory consumption of
$21.9 million driven by an increase in accessioned cases, a $58.6 million increase in third-party fees, a $14.2 million
increase in shipping related charges due to higher volume, and a $43.7 million increase in labor and overhead costs driven
by headcount growth and product support.
Cost of Licensing and Other Revenues
Cost of licensing and other revenues for the year ended December 31, 2022, when compared to the year ended
December 31, 2021, decreased by approximately $0.6 million, or 18.6%, primarily due to a net decrease in costs to support
our collaborative agreements.
Research and Development
Research and development expenses during the year ended December 31, 2022 increased by $52.2 million, or
19.8%, when compared to the year ended December 31, 2021. The increase was driven by a $61.8 million increase in
salary and related expenditures primarily due to headcount growth, which includes a $20.7 million increase in stock-based
compensation expense, a $19.2 million increase in clinical trial expenses, and an increase of $3.4 million of marketing,
travel, facilities, office and other costs to support increases in the Company’s headcount, new product offerings and
research and development project pipeline. This was offset by a net $27.0 million decrease in IPR&D expense mainly
related to a $35.0 million upfront payment made in September 2021 upon acquisition, offset by an increase in accruals for
the remaining milestones, and a $5.2 million decrease in consulting and legal fees.
Selling, General and Administrative
Selling, general and administrative expenses increased by $77.6 million, or 15.2%, in the year ended December 31,
2022 compared to the year ended December 31, 2021. The increase was attributable to an increase of $48.7 million in
salary and related expenditures primarily due to headcount growth to support new product offerings, which includes a
$13.5 million increase in stock-based compensation expense, a $11.1 million increase in travel related costs, a
$10.5 million increase from consulting and legal related costs, and a $14.1 million increase related to business support
including business insurance, billing services, facilities, office and other costs to support increases in the Company’s
headcount and new product offerings. This was offset by a $6.8 million decrease in marketing expenses.
Interest Expense
Interest expense increased by $1.0 million, 12.2%, in the year ended December 31, 2022 compared to the same
period in the prior year due to an increase in interest rate as well as a $30.0 million drawdown from November 2022 for
the UBS Credit Line.
Interest and Other Income
Interest and other income decreased by $1.8 million, or 34.3%, in the year ended December 31, 2022, compared
to the same period in the prior year, primarily due to less interest income as a result of less investments held by the
Company compared to the prior year.
78
Liquidity and Capital Resources
We have incurred net losses each year since our inception. For the year ended December 31, 2022, we had a net
loss of $547.8 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 December 31, 2022, we had an accumulated deficit of $1.9 billion. As of December 31, 2022, we had $466.1 million
in cash and cash equivalents and restricted cash, $432.3 million in marketable securities, $80.4 million of outstanding
balance of the Credit Line including accrued interest, and $287.5 million outstanding principal balance on the Convertible
Notes. As of December 31, 2022, we have $70.0 million 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
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 2020, we completed an additional underwritten equity offering and sold 4,791,665 shares of our
common stock at a price of $60 per share to the public. Before offering expenses of $0.3 million, we received proceeds of
$271.0 million net of the underwriting discount. In July 2021, we completed an additional underwritten equity offering
and sold 5,175,000 shares of our common stock at a price of $113 per share to the public. Before offering expenses of
$0.4 million, we received proceeds of $551.2 million net of the underwriting discount. In November 2022, we completed
an additional underwritten equity offering and sold 13,144,500 shares of our common stock at a price of $35 per share to
the public. Before offering expenses of $0.5 million, we received proceeds of $433.2 million net of the underwriting
discount. As cash flows from our operations are currently negative, our contractual obligations and other commitments are
satisfied by the equity financing described above, our convertible note financing conducted in April 2020 described below,
the Credit Facility 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 March 1, 2023.
Credit Line Agreement
In September 2015, we entered into a Credit Line with UBS (“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. The Credit Line was subsequently
increased from $50.0 million to $150.0 million in 2020. The interest rate was subsequently changed to the 30-day Secured
Overnight Financing Rate (“SOFR”) average, plus 1.21% in 2022. 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. As
of December 31, 2022, the total principal amount outstanding with accrued interest was $80.4 million.
79
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.
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.
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 the 2017 Term Loan with OrbiMed.
Cash Flows
The following table summarizes our cash flows for the periods indicated:
2022
Year Ended
December 31,
2021
(in thousands)
2020
Cash used in operating activities . . . . . . . . . . . . . . . . . . . . . $ (431,501) $ (335,236) $ (182,512)
Cash provided by (used in) investing activities . . . . . . . . .
(205,193) (331,461)
Cash provided by financing activities . . . . . . . . . . . . . . . . .
500,847
576,188
Net increase (decrease) in cash, cash equivalents and
restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash, cash equivalents and restricted cash, beginning of
period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash, cash equivalents and restricted cash, end of year . . . $ 466,091 $
48,855
84,614 $
330,338
482,640
61,981
48,855
35,759
(13,126)
381,477
84,614
Cash Used in Operating Activities
Cash used in operating activities during the year ended December 31, 2022 was $431.5 million. The net loss of
$547.8 million includes $200.9 million in non-cash charges resulting from $16.7 million of depreciation and amortization,
$9.2 million milestone expense for in-process research and development, $13.8 million of non-cash lease expense,
$152.4 million of stock-based compensation expense, $4.8 million premium amortization and discount accretion on
investment securities, $0.9 million loss on investments, $1.2 million for amortization of debt discount and issuance cost,
$0.3 million in other non-cash benefits, and $1.8 million of provision for credit losses offset by $0.2 million of inventory
reserve adjustments. Operating assets had cash outflows of $133.6 million resulting from $124.1 million in increases in
accounts receivable, $8.3 million in increases in inventory, and $1.2 million in increases in prepaid expenses and other
current assets. Operating liabilities resulted in cash inflows of $49.0 million resulting from a $5.5 million increase in
accounts payable, a $3.1 million increase in accrued compensation, a $47.7 million increase in other accrued liabilities, a
$2.1 million increase in deferred revenue offset by a $9.4 million decrease in operating lease liabilities.
Cash used in operating activities during the year ended December 31, 2021 was $335.2 million. The net loss of
$471.7 million includes $182.5 million in non-cash charges resulting from $11.3 million of depreciation and amortization,
$35.6 million expense of in-process research and development, $10.9 million of non-cash lease expense, $115.2 million of
stock-based compensation expense, $0.6 million of inventory reserve adjustments, $7.8 million premium amortization and
discount accretion on investment securities, $1.2 million for amortization of debt discount and issuance cost, $0.1 million in
other non-cash benefits, offset by $0.2 million of provision for credit losses. Operating assets had cash outflows of $54.0
million resulting from $43.4 million in increases in accounts receivable, $7.5 million in increases in inventory,
80
and $0.2 million in increases in prepaid expenses and $2.9 million in increases of other current assets. Operating liabilities
resulted in cash inflows of $8.0 million resulting from a $19.2 million increase in accounts payable, a $10.5 million
increase in accrued compensation, a $32.7 million increase in other accrued liabilities, offset by a $44.2 million decrease
in deferred revenue and a $10.3 million decrease in operating lease liabilities.
Cash Used in Investing Activities
Cash provided by investing activities for the year ended December 31, 2022 totaled $330.3 million, which was
comprised of $248.4 million in proceeds from sale of investments and $216.5 million proceeds of investments maturities,
offset by $86.9 million purchases of new investments and $47.7 million in cash paid for the purchase of property and
equipment.
Cash used in investing activities for the year ended December 31, 2021 totaled $205.2 million, which was
comprised of purchasing new investments of $876.1 million, $41.0 million in acquisitions of property and equipment, and
$8.6 million in cash paid for the acquisition of an asset, offset by $187.6 million proceeds from sale of investments and
$532.9 million from proceeds of investments maturities.
Cash Provided by Financing Activities
Cash provided by financing activities for the year ended December 31, 2022 totaled $482.6 million comprised of
$433.2 million net proceeds from our equity offering completed in the fourth quarter of 2022, $30.0 million proceeds from
Credit Line, $13.0 million in issuance of common stock under the employee stock purchase plan, and $6.4 million cash
proceeds from the exercise of stock options.
Cash provided by financing activities for the year ended December 31, 2021 totaled $576.2 million comprised of
$11.8 million cash proceeds from the exercise of stock options, $13.6 million in issuance of common stock under the
employee stock purchase plan, and $550.8 million net proceeds from our equity offering completed in the third quarter of
2021.
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 (as
defined below), 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 UBS Credit Line
(the “Credit Line’) 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% in 2022. 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. 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
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. Please refer to Note 10, Debt,
for further details.
81
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. The contractual obligations also
include the potential earnout payment from our IPR&D asset acquisition less the portion accrued on the Balance Sheet.
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 for further details.
The following table summarizes our unconditional purchase and contractual commitments as of December 31,
2022:
Short-term debt obligations(1) . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt obligations(2) . . . . . . . . . . . . . . . . . . . . . . .
Interest accrued on debt(3) . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventory purchase and other contractual obligations(4) . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total
80,000
287,500
1,428
78,353
$ 447,281
Less Than
1 Year
3 to 5
Years
Payments Due by Period
1 to 3
Years
(in thousands)
—
—
—
20,742
—
287,500
—
81
$ 20,742 $ 287,581
80,000
—
1,428
57,530
$ 138,958
More Than
5 Years
—
—
—
—
—
$
(1) Represents proceeds drawn from our Credit Line.
(2) Represents the principal amount of our Convertible Notes due 2027.
(3) Represents interest accrued on our Convertible Notes and Credit Line.
(4) Represents various inventory purchase and other contractual obligations. Please refer to contractual commitments
disclosures provided in Note 8, Commitments and contingencies for additional information.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements during the periods presented.
ITEM 7A: 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 has an interest rate of 30-day LIBOR plus 1.10%. The interest rate was subsequently changed to the
30-day Secured Overnight Financing Rate (“SOFR”) average, plus 1.21%. The SOFR rate is variable. 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 December 31, 2022.
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 $4.3 million annually in relation to amounts we would
expect to earn, based on our short-term investments as of December 31, 2022.
For the fiscal year ending December 31, 2022, compared to the fiscal year ending December 31, 2021, our total
comprehensive loss increased by approximately $7.5 million due to the increase average yield rate.
82
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 Annual Report, we do not believe that inflation has had a material effect on our
business, financial condition, or results of operations. If the Company’s costs were to become subject to significant
inflationary pressures, the Company may not be able to fully offset such higher costs through increases in revenue as
increases in core inflation rates, higher interest rates, and lower equity prices may also negatively affect demand for our
product offerings, our ability to raise capital and cashflow impact. The Company’s inability or failure to fully offset any
such higher costs could harm the Company’s business, financial condition, and results of operations.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
NATERA, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm (PCAOB ID 42) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Operations and Comprehensive Loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Stockholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Page No.
84
86
87
88
89
90
83
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Natera, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Natera, Inc. (the Company) as of December 31, 2022
and 2021, and the related consolidated statements of operations and comprehensive loss, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 2022, and the related notes (collectively referred to as
the "consolidated financial statements"). In our opinion, the consolidated financial statements present fairly, in all material
respects, the financial position of the Company at December 31, 2022 and 2021, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 2022, in conformity with U.S. generally accepted
accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the Company’s internal control over financial reporting as of December 31, 2022, based on criteria established
in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (2013 framework) and our report dated March 1, 2023 expressed an unqualified opinion thereon.
Change in Accounting Principle
As discussed in Note 2 to the consolidated financial statements, the Company has changed its method of accounting for
convertible instruments as of January 1, 2021 due to the adoption of Accounting Standards Update No. 2020-06, Debt –
Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own
Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU
2020-06”).
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion
on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB
and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and
the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement,
whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of
the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such
procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.
Our audits also included evaluating the accounting principles used and significant estimates made by management, as well
as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for
our opinion.
84
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements
that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or
disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex
judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated
financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a
separate opinion on the critical audit matter or on the account or disclosure to which it relates.
Genetic Test Revenue
Description of the
Matter
For the year ended December 31, 2022, the Company’s revenue from sales of genetic tests was
$797.3 million. As explained in Note 3 of the consolidated financial statements, revenue from
genetic tests is recognized upon delivery of the test results. The revenue recognized for the genetic
tests billed to insurance carriers, patients or a combination of insurance carriers and patients is based
on an estimate of the total consideration expected to be received for the genetic tests. In particular,
the estimate of total consideration is affected by assumptions of reimbursement from patients and
insurance carriers, including estimates for disallowed cases and refunds.
Auditing the measurement of revenue related to the Company’s genetic tests billed to insurance
carriers, patients or a combination of insurance carriers and patients was complex due to the required
analysis of extensive data to determine the total consideration to be received by the Company for
delivered tests and the amounts involved are material to the financial statements taken as a whole.
How We
Addressed the
Matter in Our
Audit
We obtained an understanding, evaluated the design, and tested the operating effectiveness of
internal controls that address the risks of material misstatement relating to the measurement of
revenue related to the genetic tests billed to insurance carriers, patients or a combination of insurance
carriers and patients. This included testing controls related to management’s review of the
significant assumptions and inputs used in the determination of the estimated amount that would be
collected for tests performed during the period. We also tested controls over the data used by
management in determining this estimate, including the completeness and accuracy of the data.
We performed audit procedures that included, among others, assessing methodologies and testing
the significant assumptions discussed above and the underlying data used by the Company in its
analysis. We compared the significant assumptions used by management to those used in prior
periods and examined evidence regarding the changes in assumptions.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2012
San Mateo, California
March 1, 2023
85
Natera, Inc.
Consolidated Balance Sheets
(in thousands, except par value per share amount)
December 31, December 31,
2022
2021
$
466,005 $
86
432,301
244,385
35,406
33,634
1,211,817
92,453
71,874
18,330
84,386
228
829,896
122,074
26,909
29,645
1,093,138
65,516
59,013
18,820
$ 1,394,474 $ 1,236,487
$
31,148 $
44,010
144,214
10,777
80,350
310,499
281,653
20,001
76,577
—
688,730
27,206
40,941
93,353
7,404
50,052
218,956
280,394
21,318
61,036
1,479
583,183
11
2,664,730
(1,942,635)
(16,362)
705,744
10
2,050,417
(1,394,836)
(2,287)
653,304
$ 1,394,474 $ 1,236,487
Assets
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts receivable, net of allowance of $3,830 in 2022 and $2,429 in 2021 . . . . . . .
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating lease liabilities, long-term portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commitments and contingencies (Note 8)
Stockholders’ equity:
Common stock, $0.0001 par value: 750,000 shares authorized at December 31, 2022
and 2021, respectively; 111,255 and 95,140 shares issued and outstanding at
December 31, 2022 and 2021, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional paid in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities and stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
See accompanying notes.
86
Natera, Inc.
Consolidated Statements of Operations and Comprehensive Loss
(in thousands, except per share data)
Revenues
Product revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Licensing and other revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
797,307 $ 580,080 $ 377,877
13,128
22,915
45,406
391,005
625,486
820,222
Year ended December 31,
2021
2022
2020
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 on debt extinguishment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized gain (loss) on available-for-sale securities, net of tax . . . . . . . . . . .
Comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
453,632
2,624
316,415
588,591
315,195
3,223
264,208
511,034
1,361,262 1,093,660
(468,174)
(541,040)
(8,305)
(9,319)
5,381
3,538
—
—
(471,098)
(546,821)
(618)
(978)
200,097
3,523
100,035
303,627
607,282
(216,277)
(15,082)
7,562
(5,848)
(229,645)
(98)
$ (547,799) $ (471,716) $ (229,743)
3,340
$ (561,874) $ (478,262) $ (226,403)
(14,075)
(6,546)
Net loss per share (Note 13):
Basic and diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
(5.57) $
(5.21) $
(2.84)
Weighted-average number of shares used in computing basic and diluted
net loss per share:
Basic and diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
98,408
90,558
81,011
See accompanying notes.
87
Natera, Inc.
Consolidated Statements of Stockholders’ Equity
(in thousands)
Balance as of December 31, 2019 . . . . . . . . . . . . .
78,005 $
8 $
Common Stock
Shares Amount
Issuance of common stock upon exercise of
stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issuance of common stock under employee
stock purchase plan . . . . . . . . . . . . . . . . . . . . . . . .
Vesting of restricted stock . . . . . . . . . . . . . . . . . . .
Stock-based compensation . . . . . . . . . . . . . . . . . .
Unrealized gain on available-for sale securities . .
ASC 326 Adoption - CECL . . . . . . . . . . . . . . . . .
Equity component of Convertible Notes, net . . . .
Issuance of common stock for public offering,
net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance as of December 31, 2020 . . . . . . . . . . . . .
Issuance of common stock upon exercise of
stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issuance of common stock under employee
stock purchase plan . . . . . . . . . . . . . . . . . . . . . . . .
Vesting of restricted stock . . . . . . . . . . . . . . . . . . .
Stock-based compensation . . . . . . . . . . . . . . . . . .
Unrealized loss on available-for sale securities . . .
Cumulative-effect adjustment upon adoption of
ASU 2016-13 . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issuance of common stock for public offering,
net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issuance of common stock for IPR&D
acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance as of December 31, 2021 . . . . . . . . . . . . .
Issuance of common stock upon exercise of
stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issuance of common stock under employee
stock purchase plan . . . . . . . . . . . . . . . . . . . . . . . .
Vesting of restricted stock . . . . . . . . . . . . . . . . . . .
Stock-based compensation . . . . . . . . . . . . . . . . . .
Unrealized loss on available-for sale securities . . .
Issuance of common stock for public offering,
net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issuance of common stock for IPR&D
milestone . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance as of December 31, 2022 . . . . . . . . . . . . .
2,092
234
1,100
—
—
—
—
4,792
—
86,223
1,165
186
2,117
—
—
—
5,175
274
—
95,140
828
437
1,480
—
—
13,145
—
—
—
—
—
—
—
1
—
9
—
—
—
—
—
—
1
—
—
10
—
—
—
—
—
1
Additional
Paid-in
Capital
976,955 $
23,524
7,114
—
50,171
—
—
82,873
270,649
—
1,411,286
11,816
13,550
—
115,219
—
(82,876)
550,821
Accumulated
Other
Comprehensive Accumulated
Income (Loss)
Deficit
(699,171) $
Total
Stockholders'
Equity
278,711
919 $
—
—
—
—
3,340
—
—
—
—
4,259
—
—
—
—
(6,546)
—
—
—
23,524
—
—
—
—
(404)
—
7,114
—
50,171
3,340
(404)
82,873
—
(229,743)
(929,318)
270,650
(229,743)
486,236
—
—
—
—
—
11,816
13,550
—
115,219
(6,546)
6,198
(76,678)
—
550,822
30,601
—
2,050,417
—
—
(2,287)
—
(471,716)
(1,394,836)
30,601
(471,716)
653,304
6,411
—
13,037
—
152,384
—
433,191
—
—
—
(14,075)
—
—
—
—
—
—
—
—
—
—
(547,799)
6,411
13,037
—
152,384
(14,075)
433,192
9,290
(547,799)
705,744
(16,362) $ (1,942,635) $
225
—
111,255 $
—
—
11 $ 2,664,730 $
9,290
—
88
Natera, Inc.
Consolidated Statements of Cash Flows
(in thousands)
Year Ended December 31,
2021
2020
2022
$
(547,799)
$
(471,716) $
(229,743)
Operating activities:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expensed in-process research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-cash lease expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventory reserve adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Premium amortization and discount accretion on investment securities . . . . . . . . . . .
(Gain) loss on investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized losses on investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of debt discount and issuance cost . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other non-cash benefits (charges) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for credit losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on debt extinguishment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accretion of Convertible Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in operating assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating lease liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other long term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash used in operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investing activities:
Purchases of investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sale of investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from maturity of investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases of property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash paid for acquisition of an asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financing activities:
Proceeds from exercise of stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from issuance of common stock under employee stock purchase plan . . . . . . .
Proceeds from Convertible Note, net of issuance costs . . . . . . . . . . . . . . . . . . . . . . . . . .
Loan payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from public offering, net of issuance cost . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from Credit Line . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
16,702
9,290
13,770
152,384
(240)
4,837
906
(2)
1,259
302
1,770
—
—
(124,081)
(8,257)
(1,196)
(6)
5,462
3,069
(9,377)
47,650
2,056
—
(431,501)
(86,947)
248,482
216,500
(47,697)
—
330,338
6,411
13,037
—
—
433,192
30,000
482,640
11,254
35,604
10,926
115,219
628
7,814
(46)
(11)
1,227
94
(156)
—
—
(43,353)
(7,506)
(249)
(2,933)
19,222
10,569
(10,296)
32,682
(44,209)
—
(335,236)
(876,095)
187,580
532,910
(41,030)
(8,558)
(205,193)
11,816
13,550
—
—
550,822
—
576,188
Net increase (decrease) in cash equivalents and restricted cash. . . . . . . . . . . . . . . . . . . .
Beginning - cash equivalents & restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ending - cash equivalents and restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Supplemental disclosure of cash flow information:
Cash paid for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash paid for interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-cash investing and financing activities:
Purchases of property and equipment in accounts payable and accruals . . . . . . . . . . . . .
$
$
$
$
381,477
84,614
466,091 $
35,759
48,855
84,614 $
549
8,060
(1,940)
$
$
$
283 $
7,077 $
5,173 $
See accompanying notes
89
8,613
—
7,834
50,171
(163)
5,761
(105)
—
149
(149)
1,354
5,848
7,048
(25,831)
(7,474)
(14,393)
(60)
(118)
14,284
(8,993)
10,340
(6,895)
10
(182,512)
(685,239)
30,067
343,315
(19,604)
—
(331,461)
23,524
7,114
278,316
(78,757)
270,650
—
500,847
(13,126)
61,981
48,855
67
3,296
2,781
Natera, Inc.
Notes to Consolidated Financial Statements
1. Description of Business
Natera, Inc. (the “Company”) was formed in the state of California as Gene Security Network, LLC in
November 2003 and incorporated in the state of Delaware in January 2007. The Company is a diagnostics company with
proprietary molecular and bioinformatics technology that it is applying to change the management of disease worldwide.
The Company’s cell-free DNA (“cfDNA”) technology combines its novel molecular assays, which reliably measure many
informative regions across the genome from samples as small as a single cell, with its 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. The Company’s technology has been proven clinically and
commercially in the women’s health space, in which it develops and commercializes non- or minimally-invasive tests to
evaluate risk for, and thereby enable early detection of, a wide range of genetic conditions, such as Down syndrome. The
Company is now translating its success in women’s health and applying its core technology to the oncology market, in
which it is commercializing a personalized blood-based DNA test to detect molecular residual disease and monitor disease
recurrence, as well as to the organ health market, initially with a test to assess kidney transplants for rejection. The
Company operates laboratories in Austin, Texas and San Carlos, California certified under the Clinical Laboratory
Improvement Amendments ("CLIA") providing a host of cell-free DNA-based molecular testing services. The Company
determines its operating segments based on the way it organizes its business to make operating decisions and assess
performance. The Company operates one 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 ("NIPT") 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 ("HCS") to determine carrier status for a large number of severe genetic diseases that could be passed
on to the carrier’s children; Signatera molecular residual disease (“MRD”) test, which detects circulating tumor DNA in
patients previously diagnosed with cancer to assess molecular residual disease and monitor for recurrence; and Prospera,
to assess organ transplant rejection. 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.
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements have been prepared in conformity with U.S. generally
accepted accounting principles (“U.S. GAAP”).
Some items in the prior period financial statements, including product revenues and costs of product revenues,
were reclassified to conform to the current presentation. Revenues and costs related to tests associated with research use
only (“RUO”) and companion diagnostics purposes are classified in product revenues and cost of product revenue,
respectively. To conform with the presentation in the current period, (i) revenues related to these products during the years
ended December 31, 2021 and 2020 of $12.9 million and $10.7 million, respectively, have been reclassified from licensing
and other revenues to product revenues; and (ii) costs related to these products during the years ended December 31, 2021
and 2020 of $12.5 million and of $14.2 million, respectively, have been reclassified from cost of licensing and other
revenues to cost of product revenues.
90
Liquidity Matters
The Company has incurred net losses since its inception and anticipates net losses and negative operating cash
flows for the near future. The Company had a net loss of $547.8 million for the year ended December 31, 2022 and an
accumulated deficit of $1.9 billion as of December 31, 2022. As of December 31, 2022, the Company had $466.1 million
in cash, cash equivalents, and restricted cash, $432.3 million in marketable securities, $80.4 million of outstanding balance
of the Credit Line (as defined in Note 10, Debt) including accrued interest, and $287.5 million outstanding principal
balance of its 2.25% Convertible Senior Notes (the “Convertible Notes”). As of December 31, 2022, the Company had
$70.0 million remaining available on the 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 its operating
costs and business plans that exceed 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 or slow its investment
in the development and commercialization of its products and significantly scale back its business and operations.
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
$35.6 million composed of the issuance of 276,346 shares of the Company's common stock with a fair value of
$30.9 million, approximately $3.9 million of cash consideration, assumed net liabilities of $0.2 million, as well as
$0.6 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 ASU 2017-01. 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 $35.6 million, on the day the transaction closed as research and development expense, which is reflected in
its consolidated statement of operations.
Further, additional consideration aggregating up to approximately $35.0 million may be paid in an estimated
269,547 of additional shares, consistent with the registration statement filed with the SEC on September 10, 2021, that are
potentially issuable to legacy shareholders of this third party upon the achievement of defined milestones relating to
product development, commercial launch and continued employment of certain selling shareholders, each of which will
be revalued at each reporting date and amount of compensation expense will be adjusted accordingly. In November 2022,
the remaining consideration was modified, resulting in a $10.0 million milestone payment primarily made in the form of
the Company’s stock in December 2022 and a remaining $15.0 million milestone payment estimated to be payable by
March 31, 2023 primarily in the form of the Company’s stock.
The Company assessed the remaining milestone as probable as of December 31, 2022. As achievement of the
milestone is contingent upon the continued employment of certain selling shareholders, the Company accounted for the
consideration related to all of the milestones as compensation expenses and recognized these expenses ratably over the
estimated performance period.
91
In July 2021, the Company completed an underwritten equity offering and sold 5,175,000 shares of its common
stock at a price of $113 per share to the public. Before offering expenses of $0.4 million, the Company received proceeds
of $551.2 million net of the underwriting discount. In November 2022, the Company completed an underwritten equity
offering and sold 13,144,500 shares of its common stock at a price of $35 per share to the public. Before offering expenses
of $0.5 million, the Company received proceeds of $433.2 million net of the underwriting discount. 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 March 1, 2023.
Principles of Consolidation
The accompanying consolidated financial statements include all the accounts of the Company and its subsidiaries.
The Company established a subsidiary that operates in the state of Texas to support the Company’s laboratory and
operational functions. The Company established a subsidiary that operates in Canada following the acquisition of the
IPR&D asset, which includes a lease for the laboratory space located in Canada. All intercompany balances and
transactions have been eliminated.
Use of Estimates
The preparation of financial statements in accordance with generally accepted accounting principles (GAAP) in
the United States requires management to make estimates and assumptions about future events that affect the amounts of
assets and liabilities reported, disclosures about contingent assets and liabilities, and reported amounts of revenues and
expenses. Significant items subject to such estimates include the allowance for doubtful accounts calculated based on the
historical uncollected balances applied to current outstanding accounts receivable balances, average selling price expected
to be received from insurance payors, the operating right-of-use assets and the associated lease liabilities, the average
useful life for property and equipment, deferred revenues associated with unsatisfied performance obligations, accrued
liability for potential refund requests, stock-based compensation, the fair value of options, income tax uncertainties, and
the expected consideration to be received from contracts with customers. These estimates and assumptions are based on
management's best estimates and judgment. Management regularly evaluates its estimates and assumptions using historical
experience and other factors, including contractual terms and statutory limits; however, actual results could differ from
these estimates and could have an adverse effect on the Company's financial statements.
Revenue
The total consideration which the Company expects to be entitled to from patients and insurance carriers in
exchange for the Company's products is a significant estimate when the Company calculates Average Selling Price based
on the contractual pricing agreed to with each insurance carrier for each test (CPT code) performed adjusted for variable
consideration related to historical percent of cases allowed, historical percent of patient responsibility collected, and
historical percent of contract price collected from insurance carriers. The Company uses the expected-value approach of
estimating variable consideration. The Company also considers recent trends, past events not expected to recur, and future
known changes such as anticipated contractual pricing changes or insurance coverages. For insurance carriers with similar
reimbursement characteristics, the Company uses a portfolio approach to estimate the effects of variable consideration.
The Company also applies a constraint to the estimated variable consideration when it assesses it is probable that a
significant reversal in the amount of cumulative revenue may occur in future periods.
When assessing the total consideration for insurance carriers and patients, a certain percentage of revenues is
further constrained for estimated refunds.
Stock-based compensation
The Company’s stock-based compensation relates to stock options, restricted stock units (“RSUs”), performance-
based awards, market-based awards, and stock purchase rights under an Employee Stock Purchase Plan (“ESPP”).
92
Stock based compensation granted to the Company’s employees is measured at the grant date based on the fair
value of the award. The fair value is recognized as expense over the requisite service period, which is generally the vesting
period or estimated performance period of the respective awards.
The Company uses the Black‑Scholes option‑pricing model to estimate the fair value of stock options issued to
employees and non-employees. Stock-based compensation expense for stock-based awards are based on their grant date
fair value. The fair value of stock option awards is recognized as compensation expense on a straight-line basis over the
requisite service period in which the awards are expected to vest and forfeitures are estimated based on historical trends at
the time of grant and revised as necessary. Stock option awards that include a service condition and a performance
condition are considered expected to vest when the performance condition is probable of being met. The Black-Scholes
model considers several variables and assumptions in estimating the fair value of stock-based awards. These variables
include the per share fair value of the underlying common stock, exercise price, expected term, risk-free interest rate,
expected annual dividend yield and the expected stock price volatility over the expected term. For all stock options granted,
we calculate the expected term based on the weighted average actual terms of stock option awards. We determine expected
volatility using the historical volatility of the stock price of similar publicly traded peer companies. The risk-free interest
rate is based on the yield available on U.S. Treasury zero-coupon issues similar in duration to the expected term of the
equity-settled award.
The Company determines the fair value of RSUs based on the closing price of our stock price, which is listed on
Nasdaq, at the date of the grant.
For stock options and performance-based awards that vest upon meeting performance conditions or market
conditions in combination with performance conditions, the Company derives the requisite service period from the grant
date to the date it is probable that the vesting conditions will be met. For stock options with market conditions, the
Company derives the requisite service period using the Monte Carlo simulation model.
The Monte Carlo simulation model is used to estimate the fair value of market-based condition awards. The model
requires the input of the Company's expected stock price and peer stock price volatility, the expected term of the awards,
and a risk-free interest rate. Determining these assumptions requires judgment. See further discussion on the valuation
assumptions used under Note 9.
Income Taxes
Income taxes are recorded in accordance with Financial Accounting Standards Board ASC Topic 740, Income
Taxes ("ASC 740"), which provides for deferred taxes using an asset and liability approach. Deferred tax assets and
liabilities are recognized for the future tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax bases using enacted tax rates in effect for the
year in which the differences are expected to affect taxable income. Tax benefits are recognized when it is more likely
than not that a tax position will be sustained during an audit. Deferred tax assets are reduced by a valuation allowance if
current evidence indicates that it is considered more likely than not that these benefits will not be realized. See further
discussion in Note 12, Income Taxes.
Allowance for doubtful accounts
The allowance for doubtful accounts for trade accounts receivable and other receivables is based on the
Company’s assessment of the collectability of customer accounts. The Company regularly reviews the allowance by
considering factors such as historical experience, credit quality, the age of the accounts receivable balances, and current
economic conditions that may affect a customer’s ability to pay.
Appropriate provision has been made for lifetime expected credit losses in accordance with ASC Topic 326-20,
Financial Instruments—Credit Losses (“Topic 326”), for trade receivables and available-for-sale debt securities. The
Company’s estimate of expected credit losses includes consideration of past events, current conditions and forecasts of
future economic conditions.
93
Inventory
Inventory is recorded at the lower of cost or net realizable value, determined on a first-in, first-out basis. The
Company uses judgment to analyze and determine if the composition of its inventory is obsolete, slow-moving or unsalable
and frequently reviews such determinations. A write down of specifically identified unusable, obsolete, slow-moving or
known unsalable inventory in the period is first recognized by using a number of factors including product expiration dates
and scrapped inventory. Any write-down of inventory to net realizable value establishes a new cost basis and will be
maintained even if certain circumstances suggest the inventory is recoverable in subsequent periods. Costs associated with
the write-down of inventory are recorded to cost of revenue on our consolidated statements of operations. The Company
makes assumptions about future demand, market conditions and the release of new products that may supersede older
products. However, if actual market conditions are less favorable than anticipated, additional inventory write-downs may
be required.
Investments and financial instruments
The Company classifies its investments as Level 1 or 2 within the fair value hierarchy. Fair values determined by
Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets that the Company has the ability to
access. Fair values determined by Level 2 inputs utilize data points that are observable such as quoted prices, interest rates
and yield curves. The Company holds Level 2 securities which are initially valued at the transaction price and subsequently
valued by a third-party service provider using inputs other than quoted prices that are observable either directly or indirectly,
such as yield curve, volatility factors, credit spreads, default rates, loss severity, current market and contractual prices for
the underlying instruments or debt, broker and dealer quotes, as well as other relevant economic measures. The Company
performs certain procedures to corroborate the fair value of these holdings.
Right-of-use assets
The incremental borrowing rate is used to determine the present value of the minimum future lease payments.
The Company estimates the incremental borrowing rate of its leases based on corporate bonds with a similar credit rating
as the Company and a similar bond term as the lease term as of the approximate lease commencement date. The Company
calculates the weighted-average annual percentage yield of bonds with a similar credit rating and term to determine the
incremental borrowing rate.
Property and equipment
Property and equipment, including purchased and internally developed software, are stated at cost. Depreciation
and amortization is calculated using the straight-line method over the estimated useful lives of the assets, which are
generally three to five years determined by the classification of the property and equipment class in accordance with the
Company’s fixed asset policy. Leasehold improvements are amortized using the straight-line method over the estimated
useful lives of the assets or the remaining term of the lease, whichever is shorter. The Company periodically reviews the
useful lives assigned to property and equipment placed in service in accordance with the Company’s fixed asset policy
and changes the estimates of useful lives to reflect the results of such reviews. The Company amortizes its internal-use
software over the estimated useful lives of three years.
Other accrued liabilities
The Company uses estimates, judgments, and assumptions to determine liabilities primarily related to refunds
reserve, tax-related liabilities, payroll and related expenses, marketing liabilities, clinical trials and other operating
expenses. Estimates consist of historical trends, analytical procedures, review of supporting documentation, inquiries with
supply partners and vendors, and other relevant assumptions. Estimates are used in several areas including, but not limited
to, estimates of progress to date for certain contacts with vendors, liabilities related to clinical trials, reserves associated
with insurance and general overpayments, and the provision for income taxes. Although the Company believe its estimates,
assumptions, and judgment are reasonable, it is based upon information presently available and are subject to change.
94
Cash and Cash Equivalents
Cash and cash equivalents consist of cash, liquid demand deposits, and money market funds with financial
institutions. Highly liquid investments purchased with an original maturity of three months or less are also considered cash
equivalents.
Restricted Cash
Restricted cash is currently presented as a separate line item in the Company’s balance sheet. In the statements
of cash flows, it is included together with cash and cash equivalents and considered as part of the total ending cash balance.
The following is the reconciliation between how restricted cash is presented in the balance sheet and the statements of
cash flows for all periods presented:
Cash and cash equivalents in balance sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted cash, current portion in balance sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total cash, cash equivalents and restricted cash in statements of cash flows . . . . . . . . . . . .
Investments
December 31, December 31,
2022
2021
(in thousands)
$
466,005 $
86
$
466,091 $
84,386
228
84,614
Investments consist primarily of debt securities such as U.S. Treasuries, U.S. agency and municipal bonds.
Management determines the appropriate classification of securities at the time of purchase and re-evaluates such
determination at each balance sheet date. The Company generally classifies its entire investment portfolio as available-
for-sale. The Company views its available-for-sale portfolio as available for use in current operations. Accordingly, the
Company classifies all investments as short-term, irrespective of maturity date. Available-for-sale securities are carried at
fair value, with unrealized gains and losses reported in accumulated other comprehensive income (loss), which is a separate
component of stockholders’ equity.
Related Party
On December 6, 2021, the Company participated along with certain other investors in the series B financing of
MyOme, Inc. (“MyOme”), and purchased preferred shares and warrants in exchange for approximately $4.0 million cash
payment. Matthew Rabinowitz is the Chairman of the board of directors and Co-Founder of both the Company and
MyOme. The Company’s investment in MyOme is recorded at cost and will be evaluated for impairment at the end of
each reporting period.
Fair Value
The Company discloses the fair value of financial instruments for financial assets and liabilities for which the
value is practicable to estimate. Fair value is defined as the price that would be received upon the sale of an asset or paid
to transfer a liability in an orderly transaction between market participants at the measurement date (exit price).
Risk and Uncertainties
Financial instruments that potentially subject the Company to credit risk consist of cash, accounts receivable and
investments. The Company limits its exposure to credit loss by placing its cash in financial institutions with high credit
ratings. The Company's cash may consist of deposits held with banks that may at times exceed federally insured limits.
The Company performs evaluations of the relative credit standing of these financial institutions and limits the amount of
credit exposure with any one institution.
95
For the years ended December 31, 2022, 2021, and 2020, there were no customers exceeding 10% of total
revenues on an individual basis. As of December 31, 2022 and 2021, there were no customers with an outstanding balance
exceeding 10% of net accounts receivable.
Credit Losses
Trade accounts receivable and other receivables. The allowance for doubtful accounts is based on the Company’s
assessment of the collectability of customer accounts. The Company regularly reviews the allowance by considering
factors such as historical experience, credit quality, the age of the accounts receivable balances, and current economic
conditions that may affect a customer’s ability to pay.
Available-for-sale debt securities. The amended guidance from ASU 2016-13 requires the measurement of
expected credit losses for available-for-sale debt securities held at the reporting date over the remaining life based on
historical experience, current conditions, and reasonable and supportable forecasts. The Company evaluated its investment
portfolio under the new available-for-sale debt securities impairment model guidance. The vast majority of the Company’s
investment portfolio are low risk, investment grade securities.
Revenue Recognition
The Company adopted the new revenue recognition guidance, ASC 606, beginning January 1, 2018 on a full
retrospective basis. ASC 606 mandates revenue recognition to be evaluated using the following five steps:
Identification of a contract, or contracts, with a customer;
Identification of the performance obligations in the contract;
Determination of the transaction price;
Allocation of the transaction price to the performance obligations in the contract; and
Revenue recognition when, or as, the performance obligations are satisfied
See Note 3, Revenue Recognition, for detailed discussions of product revenues, licensing and other revenues, and
how the five steps described above are applied.
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 (“WES”) are also
included, as well as labor costs, relating to our Signatera CLIA offering. Costs associated with performing tests are
recorded when the test is accessioned.
However, having rapidly achieved 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.
96
Research and Development
The Company records research and development costs in the period incurred. Research and development costs
consist of personnel costs, including stock-based compensation expense, contract services, cost of materials utilized in
performing tests, costs of clinical trials and allocated facilities and related overhead expenses.
Advertising Costs
The Company expenses advertising costs as incurred. The Company incurred advertising costs of $1.8 million,
$2.2 million, and $0.6 million for the years ended December 31, 2022, 2021, and 2020, respectively.
Product Shipment Costs
The Company expenses product shipment costs in cost of product revenues in the accompanying statements of
operations. Shipping and handling costs for the years ended December 31, 2022, 2021, and 2020 were $36.0 million,
$22.0 million, and $13.3 million, respectively.
Income Taxes
Income taxes are recorded in accordance with Financial Accounting Standards Board ASC Topic 740, Income
Taxes ("ASC 740"), which provides for deferred taxes using an asset and liability approach. Deferred tax assets and
liabilities are recognized for the future tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax bases using enacted tax rates in effect for the
year in which the differences are expected to affect taxable income. Tax benefits are recognized when it is more likely
than not that a tax position will be sustained during an audit. Deferred tax assets are reduced by a valuation allowance if
current evidence indicates that it is considered more likely than not that these benefits will not be realized.
Stock-Based Compensation
Stock-based compensation related to stock options and restricted stock units (“RSUs”) granted to the Company’s
employees is measured at the grant date based on the fair value of the award. The fair value is recognized as expense over
the requisite service period, which is generally the vesting period of the respective awards. No compensation cost is
recognized when the requisite service has not been met and the awards are therefore forfeited.
For stock options with market conditions, the Company derives the requisite service period using the Monte Carlo
simulation model. For stock options and RSUs that vest upon meeting performance conditions or market conditions in
combination with performance conditions, the Company derives the requisite service period from the grant date to the date
it is probable that the vesting conditions will be met.
The Company uses the Black‑Scholes option‑pricing model to estimate the fair value of stock options issued to
employees and non-employees. The Monte Carlo simulation model is used to estimate the fair value of market-based
condition awards. The model requires the input of the Company's expected stock price volatility, the expected term of the
awards, and a risk-free interest rate. Determining these assumptions requires significant judgment. See further discussion
on the valuation assumptions used under Note 9.
Capitalized Software Held for Internal Use
The Company capitalizes salaries and related costs of employees and consultants who devote time to the
development of internal-use software development projects. Capitalization begins during the application development
stage, once the preliminary project stage has been completed, which includes successful validation and approval from
management. If a project constitutes an enhancement to previously developed software, the Company assesses whether
the enhancement is significant and creates additional functionality to the software, thus qualifying the work incurred for
capitalization. Once the project is available for general release, capitalization ceases and the Company estimates the useful
life of the asset and begins amortization. The Company periodically assesses whether triggering events are present to
97
review internal-use software for impairment. Changes in estimates related to internal-use software would increase or
decrease operating expenses or amortization recorded during the reporting period.
The Company amortizes its internal-use software over the estimated useful lives of three years. The net book
value of capitalized software held for internal use was $5.9 million and $2.3 million as of December 31, 2022 and 2021,
respectively. Amortization expense for amounts previously capitalized for the years ended December 31, 2022, 2021, and
2020, was $0.2 million, $1.1 million, and $1.0 million, respectively.
Accumulated Other Comprehensive Income (Loss)
Comprehensive loss and its components encompass all changes in equity other than those with stockholders, and
include net loss, unrealized gains and losses on available-for-sale marketable securities, and foreign currency translation
adjustments.
December 31,
2022
2021
(in thousands)
Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
(2,287)
$
4,259
Net unrealized loss on available-for-sale securities, net of tax and foreign currency
translation adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(14,075)
Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (16,362)
(6,546)
(2,287)
$
Property and Equipment
Property and equipment, including purchased and internally developed software, are stated at cost. Depreciation
is calculated using the straight-line method over the estimated useful lives of the assets, which are generally three to five
years. Leasehold improvements are amortized using the straight-line method over the estimated useful lives of the assets
or the remaining term of the lease, whichever is shorter. The Company periodically reviews the depreciable lives assigned
to property and equipment placed in service and change the estimates of useful lives to reflect the results of such reviews.
Impairment of Long-lived Assets
The Company evaluates its long-lived assets for indicators of possible impairment when events or changes in
circumstances indicate the carrying amount of an asset may not be recoverable. The Company then compares the carrying
amounts of the assets with the future net undiscounted cash flows expected to be generated by such asset. Should an
impairment exist, the impairment loss would be measured based on the excess carrying value of the asset over the asset’s
fair value determined using discounted estimates of future cash flows.
Inventory
Inventory is valued at the lower of the standard cost, which approximates actual cost, or net realizable value. Cost
is determined using the first-in, first-out (“FIFO”) method. Inventory consists entirely of supplies, which are consumed
when providing its test reports, and therefore does not maintain any finished goods inventory. The Company enters into
inventory purchases and commitments so that it can meet future delivery schedules based on forecasted demand for its
tests.
The Company recorded inventory obsolescence charges totaling $0.2 million, $0.9 million, and $0.2 million, in
the years ended December 31, 2022, 2021, and 2020, respectively.
Recent Accounting Pronouncements
From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (the
“FASB”) under its accounting standard codifications (“ASC”) or other standard setting bodies and adopted by the
98
Company as of the specified effective date. Unless otherwise discussed below, the Company believes that the impact of
recently issued standards that are not yet effective will not have a material impact on its financial position or results of
operations upon adoption.
New Accounting Pronouncements Not Yet Adopted
In March 2020, ASU 2020-04, Reference Rate Reform (Topic 848) was issued which provides temporary optional
guidance to ease the potential burden in accounting for reference rate reform. The new guidance provides optional
expedients and exceptions for applying generally accepted accounting principles to transactions affected by reference rate
reform if certain criteria are met. These transactions include contract modifications, hedging relationships, and sale or
transfer of debt securities classified as held-to-maturity. Early adoption of this ASU is permitted, and the Company may
elect to apply the amendments prospectively through December 31, 2022. The Company’s financial instruments which
were previously in the scope of ASU 2020-04 include the UBS credit line agreement, which bore interest at 30-day LIBOR
plus 1.10%. The interest rate was subsequently changed to the 30-day Secured Overnight Financing Rate (“SOFR”)
average, plus 1.21%. The Company does not expect adoption of this standard to have a material impact on its consolidated
financial statements.
3. Revenue Recognition
The Company recognizes revenues when, or as, performance obligations in the contracts are satisfied, in the
amount reflecting the expected consideration to be received from the goods or services transferred to the customers.
Product Revenues
Product revenues are derived from contracts with insurance carriers, laboratory partners and patients in
connection with sales primarily related to prenatal genetic tests. The Company enters into contracts with insurance carriers
with primarily payment terms related to tests provided to the patients who have health insurance coverage. Insurance
carriers are considered as third-party payers on behalf of the patients, and the patients are considered as the customers who
receive genetic test services. Tests may be billed to insurance carriers, patients, or a combination of insurance carriers and
patients. Further, the Company sells tests to a number of domestic and international laboratory partners and identifies the
laboratory partners as customers provided that there is a test services agreement between the two parties.
A performance obligation represents a promise in a contract to transfer a distinct good or service to a customer,
which represents a unit of accounting in accordance with ASC 606. A performance obligation is considered distinct from
other obligations in a contract when it provides a benefit to the customer either on its own or together with other resources
that are readily available to the customer and is separately identified in the contract. The Company considers a performance
obligation satisfied once the Company has transferred control of a good or service to the customer, meaning the customer
has the ability to use and obtain the benefit of the good or service. A portion of the consideration should be allocated to
each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. The
Company evaluates its contracts with insurance carriers, laboratory partners and patients and identifies the performance
obligations in those contracts, which are the delivery of the test results.
The total consideration which the Company expects to be entitled to from patients and insurance carriers in
exchange for the Company's products is determined based on agreements with insurance carriers, effects of variable
consideration, and customary business practices. The transaction price is estimated based on the contractual pricing agreed
to with each insurance carrier for each test (CPT code) performed adjusted for variable consideration related to historical
percent of cases allowed, historical percent of patient responsibility collected, and historical percent of contract price
collected from insurance carriers. The Company uses the expected-value approach of estimating variable consideration.
The Company also considers recent trends, past events not expected to recur, and future known changes such as anticipated
contractual pricing changes or insurance coverages. For insurance carriers with similar reimbursement characteristics, the
Company uses a portfolio approach to estimate the effects of variable consideration. The Company also applies a constraint
to the estimated variable consideration when it assesses it is probable that a significant reversal in the amount of cumulative
revenue may occur in future periods. The total consideration which the Company expects to be entitled to from lab partners
is generally fixed, but can be variable depending on the volume of tests performed, which is estimated using the expected-
99
value approach. For insurance carriers, laboratory partners and patients, the Company allocates the total consideration to
a single performance obligation, which is the delivery of the test results to the customers.
When assessing the total consideration for insurance carriers and patients, a certain percentage of revenues is
further constrained for estimated refunds.
The Company generally bills an insurance carrier, a laboratory partner or a patient upon delivery of test results.
The Company also bills patients directly for out-of-pocket costs involving co-pays and deductibles that they are responsible
for. Tests billed to insurance carriers and directly to patients usually take an average of nine to twelve months to collect
takes
laboratory distribution partners,
payment, and
approximately two to three months. At times, the Company may or may not get reimbursed for the full amount billed.
Further, the Company may not get reimbursed at all for tests performed if such tests are not covered under the insurance
carrier’s reimbursement policies or the Company is not a qualified provider to the insurance carrier, or if the tests were
not previously authorized.
the average collection cycle
tests billed
for
to
Product revenue is recognized in an amount that equals to the total consideration (as described above) at a point
in time when the test results are delivered. The Company reserves certain amounts in other accrued liabilities on the balance
sheet in anticipation of requests for refunds of payments previously made by insurance carriers, which are accounted for
as reductions in product revenues in the statement of operations and comprehensive loss. During the years ended
December 31, 2022, 2021, and 2020, $7.4 million, $5.7 million, and $5.4 million, respectively, were released from
amounts previously held in reserves in other accrued liabilities and recognized as product revenue.
Signatera Product Revenues with Pharmaceutical Companies
The Company enters into agreements with pharmaceutical companies to utilize the Company’s Signatera tests
typically to study new cancer treatments or to validate the outcomes of clinical trials for which the pharmaceutical
companies are identified as customers. Such arrangements generally involve performing whole exome sequencing
(“WES”) services and the testing of patient samples to detect cancer mutations using its Signatera test. Each test is billable
to customers and the personalized cancer profile also makes each test distinct within the context of the contract as
customers can exercise control over the test results upon delivery. The Company allocates the contract price to each test
using the stand-alone selling price for each service and recognizes the test processing revenue as individual test results are
delivered to customers.
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 IVD kits. The Company also recognizes revenues from its strategic collaboration agreements, such as those
with BGI Genomics Co., Ltd. and Foundation Medicine, Inc.
Constellation
The laboratory partners with which the Company enters into a licensing arrangement represent the licensees and
are identified as customers. The licensees do not have the right to possess the Company’s software, but rather receive
professional services through the cloud software. These arrangements often include: (i) the delivery of the services through
the cloud software, (ii) the necessary support and training, and (iii) the IVD kits to be consumed as tests are processed.
The Company does not consider the software as a service, the support and training as being distinct in the context of such
arrangements, and therefore they are combined as a single performance obligation. The software, support and training are
delivered simultaneously to the licensees over the term of the arrangement.
The Company bills the majority of licensees, who process the tests in their laboratories, a fixed price for each test
processed. Licensing revenues are recognized as the performance obligations are satisfied (i.e., upon the delivery of each
test) and reported in licensing and other revenues in the statements of operations and comprehensive loss.
100
Qiagen
In March 2018, the Company entered into a License, Development and Distribution Agreement (the “Qiagen
Agreement”) with Qiagen under which the Company granted Qiagen a license to develop, manufacture, distribute and
commercialize NGS-based genetic testing assays and sequencing systems utilizing such assays, which incorporate the
Company’s proprietary technology. Effective in March 2020, the Company terminated the Qiagen Agreement.
Subsequently, in March 2021, the Company and Qiagen signed a Termination and Settlement Agreement where the
Company agreed to refund a net $10.0 million as a result of the termination. The remaining $28.6 million of deferred
revenue was recognized as licensing and other revenue in the first quarter of 2021.
BGI Genomics
In February 2019, the Company entered into a License Agreement with BGI Genomics Co., Ltd. (“BGI
Genomics”) to develop, manufacture, and commercialize NGS-based genetic testing assays for clinical and commercial
use. The agreement has a term of ten years and expires in February 2029. According to the agreement, the Company is
entitled to a total of $50 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. During the three months
ended June 30, 2019, the Company received $35.6 million, net of withholding taxes, of these amounts. Also, as required
by the agreement with BGI Genomics, in June 2019 the Company prepaid $6.0 million to BGI Genomics for future
sequencing services and $4.0 million for future sequencing equipment. These advance payments for equipment and
services to be received in future periods aggregating to $10.0 million were originally recorded in other assets on the
Balance Sheet. During the year ending December 31, 2022, $4.0 million was reclassified as prepaid expenses and other
current assets. During the year ending December 31, 2022, the Company recognized $4.5 million as revenue upon
achieving a milestone.
Pursuant to the agreement, the Company licensed its intellectual property and will provide development services.
Following completion of development services, the Company will provide assay interpretation services over the term of
the agreement. 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 NIPT and Oncology products, represents a single performance obligation.
The Company is responsible for granting a license to specified intellectual property and performing certain
development activities to customize its genetic testing assays for oncology and NIPT for use with BGI Genomics’
sequencing instruments and proprietary technology platform. Revenue associated with these performance obligations is
recognized over time using the input method, based on costs incurred to perform the development services, since the level
of costs incurred over time best reflect the transfer of development services. Revenue associated with the assay
interpretation services will be recognized upon delivery of these services. Funds received in advance are recorded as
deferred revenue and will be recognized as the related services are delivered.
The initial transaction price was primarily comprised of license and milestone fees. The Company constrains the
estimated variable consideration when it assesses it is probable that a significant reversal in the amount of cumulative
revenue recognized may occur in future periods. Certain milestone and license fees were constrained and not included in
the transaction price due to the uncertainties of research and development. The Company re-evaluates the transaction price,
including the estimated variable consideration included in the transaction price and all constrained amounts, in each
reporting period and as uncertain events are resolved or other changes in circumstances occur. The allocation of the
transaction price was performed based on standalone selling prices, which are based on estimated amounts that the
Company would charge for a performance obligation if it were sold separately.
In accordance with ASC 340-40, any incremental costs incurred to obtain a contract with a customer are required
to be capitalized and amortized over the period in which the goods and services are transferred to the customer. The
incremental costs incurred in connection with the BGI Genomics arrangement is not material on an accumulated basis and
therefore will not be capitalized on the balance sheet but will be expensed as incurred.
101
Foundation Medicine, Inc.
In August 2019, the Company entered into a License and Collaboration Agreement (the “Foundation Medicine
Agreement”) with Foundation Medicine to develop and commercialize personalized circulating tumor DNA monitoring
assays, for use by biopharmaceutical and clinical customers who order Foundation Medicine’s FoundationOne CDx. The
Foundation Medicine Agreement has an initial term of five years, expiring in August 2024, with automatic renewals
thereafter for successive one-year terms, unless the Foundation Medicine Agreement is earlier terminated in accordance
with its terms. Natera and Foundation Medicine will share the revenues generated from both biopharmaceutical and clinical
customers in accordance with the terms of the Foundation Medicine Agreement. The Foundation Medicine Agreement
provides for approximately $13.3 million in upfront licensing fees and prepaid revenues payable to the Company, and up
to approximately $32.0 million in minimum annual payments and payments tied to the Company’s achievement of certain
developmental, regulatory, and commercial milestones. As of December 31, 2022, the Company has invoiced and received
a payment of $16.8 million for all milestones achieved through December 2022.
Pursuant to the agreement, the Company will provide development services in conjunction with granting the use
of the Company’s intellectual property. Following completion of those development services, the Company will provide
assay testing services over the term of the agreement. The Company has concluded that the license is not a distinct
performance obligation as it is highly interrelated and interdependent with the related development services. Therefore,
license and related development services represent a single performance obligation.
The Company is responsible for providing the technology license and certain development services that are
required to customize its proprietary Signatera test to work with Foundation Medicine’s FoundationOne CDx. 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. Revenues associated
with each of the performance obligations are recognized over time using the input method, based on costs incurred to
perform the development services, since the level of costs incurred over time best reflect the transfer of development
services. Revenue associated with the assay testing services will be recognized upon delivery of these services. Funds
received in advance are recorded as deferred revenue and will be recognized as the related services are delivered.
The initial transaction price was primarily comprised of license and milestone fees. The Company constrains the
estimated variable consideration when it assesses it is probable that a significant reversal in the amount of cumulative
revenue recognized may occur in future periods. Certain milestone fees were constrained and not included in the
transaction price due to the uncertainties of research and development. The Company re-evaluates the transaction price,
including the estimated variable consideration included in the transaction price and all constrained amounts, in each
reporting period and as uncertain events are resolved or other changes in circumstances occur. The allocation of the
transaction price was performed based on standalone selling prices, which are based on estimated amounts that the
Company would charge for a performance obligation if it were sold separately.
In accordance with ASC 340-40, any incremental costs incurred to obtain a contract with a customer are required
to be capitalized and amortized over the period in which the goods and services are transferred to the customer. The
Company has elected to apply a practical expedient under ASC 340-40 to recognize the incremental costs of obtaining a
contract as an expense when incurred provided that the amortization period of such costs, if capitalized, is one year or less.
Since the incremental costs to obtain the Foundation Medicine Agreement would be amortized over a period of one year
or less, these costs were expensed as incurred.
102
Disaggregation of Revenues
The following table shows disaggregation of revenues by payer types:
Insurance carriers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Laboratory partners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Patients . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
2022
Year Ended December 31,
2021
(in thousands)
690,754
94,910
34,558
820,222
$
$
492,563 $
100,019
32,904
625,486 $
2020
300,220
58,196
32,589
391,005
The following table presents total revenues by geographic area based on the location of the Company’s payers:
United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Americas, excluding U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Europe, Middle East, India, Africa . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asia Pacific and Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
2022
Year ended December 31,
2021
(in thousands)
785,849
3,705
16,640
14,028
820,222
$
$
590,872 $
4,047
20,429
10,138
625,486 $
2020
365,660
3,469
14,332
7,544
391,005
The following table summarizes the Company’s beginning and ending balances of accounts receivable and
deferred revenues:
Assets:
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Liabilities:
Deferred revenue, current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred revenue, long-term portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deferred revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at
December 31,
2022
Balance at
December 31,
2021
(in thousands)
$
$
$
244,385 $
122,074
10,777 $
20,001
30,778 $
7,404
21,318
28,722
103
The following table shows the changes in the balance of deferred revenues during the period:
Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase in deferred revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reclasses from deferred revenues to other short-term liabilities . . . . . . . . . . . . . . . .
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
Balance at
December 31,
2022
Balance at
December 31,
2021
(in thousands)
28,722 $
28,978
(337)
72,930
7,915
(10,080)
(8,782)
(37,784)
(17,803)
30,778 $
(4,259)
28,722
During the year ended December 31, 2022, revenue recognized that was included in the deferred revenue balance
at the beginning of the period totaled $8.8 million with approximately $5.4 million related to BGI Genomics and
Foundation Medicine, and the remaining $3.3 million related to genetic testing services. During the year ended
December 31, 2022, $17.8 million was recognized as deferred revenue and later earned as revenue in the same period with
approximately $6.4 million related to BGI Genomics and Foundation Medicine, and the remaining $11.4 million related
to genetic testing services. The current portion of deferred revenue includes $10.7 million from genetic testing services
and $0.1 million from the BGI Genomics agreement. The non-current portion of deferred revenue includes $20.0 million
from the BGI Genomics agreement.
4. Fair Value Measurements
The Company's financial assets and liabilities carried at fair value are comprised of investment assets that include
money market and investments.
The fair value accounting guidance requires that assets and liabilities be carried at fair value and classified in one
of the following three categories:
Level I: Quoted prices in active markets for identical assets and liabilities that the Company has the ability to
access.
Level II: Observable market-based inputs or unobservable inputs that are corroborated by market data, such as
quoted prices, interest rates, and yield curves.
Level III: Inputs that are unobservable data points that are not corroborated by market data.
This hierarchy requires the Company to use observable market data, when available, and to minimize the use of
unobservable inputs when determining fair value.
104
Assets and Liabilities That Are Measured at Fair Value on a Recurring Basis
The following table represents the fair value hierarchy for the Company’s financial assets and financial liabilities
measured at fair value on a recurring basis:
Level I
December 31, 2022
Level II Level III
Total
Level I
Level II
Level III
Total
December 31, 2021
(in thousands)
Financial Assets:
— $ — $ 283,358 $ 10,041 $
— —
125,596
— — 346,057 688,097
—
— $
—
—
— $ 10,041
—
—
— 688,097
Money market deposits. . . $ 283,358 $
Liquid demand deposits . . 125,596
U.S. Treasury securities . . 346,057
Corporate bonds and
notes . . . . . . . . . . . . . . . . . .
Municipal securities . . . . .
— 23,529 —
52,337
89,462
— 62,715 —
Total financial assets . . . . . . $ 755,011 $ 86,244 $ — $ 841,255 $ 698,138 $ 141,799 $
23,529
62,715
—
—
—
52,337
89,462
—
— $ 839,937
Fair Value of Short-Term and Long-Term Debt:
As of December 31, 2022, the estimated fair value of the total principal outstanding and accrued interest of the
Credit Line, which are not presented at fair value on the Consolidated Balance Sheets as of December 31, 2022 and 2021,
was $80.4 million and $50.1 million, respectively, and were based upon observable Level 1 inputs, including the interest
rate based on the 30-day SOFR average, plus 1.21% (see Note 10, Debt).
As of December 31, 2022, the estimated fair value of the Convertible Notes, which are not presented at fair value
on the Consolidated Balance Sheets as of December 31, 2022 and 2021, was $358.4 million and $715.7 million,
respectively, was based upon observable Level 2 inputs, including pricing information from recent trades of the
Convertible Notes (see Note 10, Debt).
5. Financial Instruments
The Company elected to invest a portion of its cash assets in conservative, income earning, liquid investments.
Cash equivalents and investments, all of which are classified as available-for-sale securities, consisted of the following:
December 31, 2022
Gross
Unrealized
Gain
Gross
Unrealized
(Loss)
Amortized
Cost
Estimated Fair
Value
Amortized
Cost
December 31, 2021
Gross
Unrealized
Gain
Gross
Unrealized
(Loss)
Estimated Fair
Value
Money market deposits . . . . . . . $ 283,358 $
Liquid demand deposits . . . . . . .
U.S. Treasury securities (1) . . . .
Corporate bonds and notes (1) . .
Municipal securities . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . $ 857,357 $
125,596
358,385
24,045
65,973
— $
—
—
—
1
1
— $
—
(12,328)
(516)
(3,259)
$ (16,103) $
(in thousands)
283,358 $
125,596
346,057
23,529
62,715
841,255 $ 842,224 $
10,041 $
—
689,640
52,729
89,814
— $
—
1,081
—
261
1,342 $
— $
—
(2,624)
(392)
(613)
(3,629) $
10,041
—
688,097
52,337
89,462
839,937
Classified as:
Cash equivalents (2) . . . . . . . .
Short-term investments . . . . . .
Total . . . . . . . . . . . . . . . . . . . . .
$
$
408,954
432,301
841,255
$
$
10,041
829,896
839,937
(1) Per the Company’s investment policy, all debt securities are classified as short-term investments irrespective of
holding period.
(2) Cash equivalents includes cash sweep accounts, liquid demand deposits and U.S. Treasury money market mutual
funds.
105
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 there is currently no other than
temporary impairment of its investments and will continue to recognize unrealized gains and losses in other comprehensive
income (loss). The Company sold $248.5 million and $187.6 million of investments during the years ended December 31,
2022 and 2021, respectively. During the year ended December 31, 2022, the amount of gross realized losses upon sales of
investments were $0.9 million. The amount of gross realized gains and losses in 2021 were insignificant. The Company
uses the specific investment identification method to calculate realized gains and losses and amounts reclassified out of
other comprehensive income to net income. As of December 31, 2022, the Company had 61 investments in an unrealized
loss position in its portfolio. The fair value for investment securities at an unrealized loss position as of December 31,
2022 was $430.8 million. An allowance for credit losses was not necessary as decrease in the fair market value for a
majority of the available-for-sale securities was as a result of a significant average yield rate decrease for similar securities
as of December 31, 2022. The Company has assessed the unrealized loss position for available-for-sale debt securities for
which an allowance for credit losses has not been recorded.
The following table presents debt securities available-for-sale that were in an unrealized loss position as of
December 31, 2022, aggregated by major security type and length of time in a continuous loss position.
Less Than 12 Months
12 Months or Longer
Total
Fair Value
Unrealized
Loss
Fair Value
Unrealized
Loss
Fair Value
Unrealized
Loss
(in thousands)
U.S. Treasury securities . . . . . . . $
Corporate bonds and notes . . . . .
Municipal securities . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . $
18,677
—
16,371
35,048
$
$
(565) $ 327,374
—
23,529
44,843
(127)
(692) $ 395,746
$
(11,762) $ 346,051 $
(516)
(3,133)
(15,411) $ 430,794 $
23,529
61,214
$
(12,327)
(516)
(3,260)
(16,103)
The following table summarizes the Company’s portfolio of available-for-sale securities by contractual maturity
as of December 31, 2022:
Less than or equal to one year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 329,499 $ 320,708
Greater than one year but less than five years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
111,593
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 448,403 $ 432,301
118,904
December 31, 2022
Fair
Value
Amortized
Cost
(in thousands)
106
6. Balance Sheet Components
Credit Losses
The following is a roll-forward of the allowances for credit losses related to trade accounts receivable for the
years ended December 31, 2022, 2021 and 2020:
Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cumulative-effect adjustment upon adoption of ASU 2016-13. . . . . .
Provision for credit losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Write offs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
2,429
—
1,770
(369)
3,830
$
$
4,220 $
—
(156)
(1,635)
2,429 $
2,919
404
1,354
(457)
4,220
December 31,
2022
December 31,
2021
(in thousands)
December 31,
2020
Property and Equipment, net
The Company’s property and equipment consisted of the following:
Useful Life
December 31, December 31,
2022
2021
(in thousands)
Machinery and equipment . . . . . . . . . . . . . . . . . . . . . . . . .
Computer equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchased and capitalized software held for internal use .
Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction-in-process . . . . . . . . . . . . . . . . . . . . . . . . . . .
3-5 years
3 years
3 years
Lesser of useful life or lease term
$
Less: Accumulated depreciation and amortization . . . . . .
Total Property and Equipment, net . . . . . . . . . . . . . . . . . .
$
66,262 $
1,308
5,464
29,747
25,370
128,151
(35,698)
92,453 $
33,722
4,893
2,395
13,640
30,279
84,929
(19,413)
65,516
The Company’s property and equipment are primarily located in the United States.
During the years ended December 31, 2022 and 2021, depreciation expense of $16.7 million and $11.3 million
was recorded, respectively. There were no material write-offs of fully depreciated assets in the year ended December 31,
2022. During the year ended December 31, 2021, the Company wrote off $41.9 million in fully depreciated assets. The
Company did not incur any material impairment charges during the year ended December 31, 2022 or December 31, 2021.
107
Accrued Compensation
The Company’s accrued compensation consisted of the following:
Accrued paid time off . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Accrued commissions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued bonuses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other accrued compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total accrued compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2,930
11,821
20,426
8,833
44,010
$
$
2,567
15,726
15,854
6,794
40,941
December 31, December 31,
2022
2021
(in thousands)
108
Other Accrued Liabilities
The Company’s other accrued liabilities consisted of the following:
December 31, December 31,
2022
2021
(in thousands)
Reserves for refunds to insurance carriers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued charges for third-party testing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Testing and laboratory materials from suppliers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Marketing and corporate affairs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Legal, audit and consulting fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued shipping charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales and income taxes 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
18,948 $
17,036
13,281
8,943
36,710
485
4,319
6,631
23,301
7,639
1,821
1,078
4,022
144,214 $
17,210
5,849
3,799
7,853
11,758
969
2,230
13,442
11,218
5,752
1,853
1,078
10,342
93,353
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 and if
these previously accrued amounts are no longer required based on actual refunds requested, any remaining reserve amounts
are released. When the Company releases these previously accrued amounts, they are recognized as product revenues in
the statements of operations and comprehensive loss.
The following table summarizes the reserve balance and activities for refunds to insurance carriers for the years
ended December 31, 2022 and 2021:
Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Refunds to carriers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reserves released to revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31, December 31,
2022
2021
(in thousands)
$
$
17,210 $
23,718
(14,558)
(7,422)
18,948 $
17,366
16,340
(10,784)
(5,712)
17,210
7. Leases
Operating Leases
In September 2015, the Company entered into a long-term lease agreement for laboratory and office space totaling
approximately 94,000 square feet in Austin, Texas. The original lease term was 132 months 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 two additional office spaces (the “First Expansion Premises” and the “Second
Expansion Premises”). The First Expansion Premises consists of 32,500 rentable square feet and commenced in
February 2022. The Second Expansion Premises consists of 65,222 rentable square feet and commenced in
September 2022. The terms of the First and Second Expansion Premises expire in March 2033.
109
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 136,000 square feet
comprised of two office spaces (the “First Space” and the “Second Space”). The First Space covers approximately
88,000 square feet, and the Second Space totals approximately 48,000 square feet. The term of this lease is approximately
84 months and expires in October 2023. This lease contains an option to renew the lease term for five years, but the fair
market rent amount upon renewal is not available from the landlord. In January 2021, the Company entered into an
amendment of the lease to extend the term for 48 months to October 2027. The combined annual rent for the First Space
and Second Space will be $9.3 million commencing in October 2023.
In addition, the Company entered into a sublease agreement in June 2019 with a third party to sublease
25,879 square feet of space located on the third floor of the San Carlos, California building while maintaining its primary
obligation as the intermediate lessor. The term of this lease is approximately 48 months commencing in October 2019 and
expiring in September 2023. The annual lease payment starts at $1.9 million and will escalate annually commencing in
October 2020. In February 2021, the Company entered into an amendment of the San Carlos sublease agreement whereas
the third party will surrender 25,879 rentable square feet by December 31, 2021.
The Company entered into a lease agreement commencing June 2018 for its cord blood tissue storage facility in
Tukwila, Washington that covers approximately 10,000 square feet. The lease term is 62 months expiring in July 2023.
The Company has the option to extend this lease for five years, and the fair market rent upon renewal is 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 does not intend to exercise its option to renew the facility upon expiration.
The Company entered into a lease agreement in November 2020 to lease 11,395 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 $0.9 million and will escalate annually 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 three years,
through November 2026.
As part of the IPR&D asset acquisition in September 2021, the Company inherited a 24-month lease for
7,107 square feet of laboratory space in Canada. The annual lease payment starts at $0.2 million and will expire in
August 2023.
For the year ended December 31, 2022, the Company recorded noncash activities of $22.1 million primarily
related to additional right-of-use assets of which $20.1 million was a result of the first and second Austin expansion
premises. For the year ended December 31, 2021, the Company recorded noncash activities of $44.4 million primarily
related to additional right-of-use assets of which $29.7 million was a result of the San Carlos lease extension which was
accounted for as a modification under ASC 842.
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 five years. For the facilities without a committed lease term, the Company has
elected to not recognize them as right-of-use assets on the 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 consolidated balance sheets.
110
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, current portion included in other accrued liabilities. . . . . . . . . . . . . . . . . . . . . $
Operating lease liabilities, long-term portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total operating lease liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
December 31,
2022
(in thousands)
7,639
76,577
84,216
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 December 31, 2022, the weighted-average remaining
lease term was 7.53 years and the weighted-average discount rate was 6.7%.
The Company continues to recognize lease expense on a straight-line basis. The lease expense includes the
amortization of the right-of-assets with the associated interest component estimated by applying the effective interest
method. Total lease expense recognized in the statements of operations and comprehensive loss were $13.8 million,
$10.9 million, and $7.8 million for the years ended December 31, 2022, 2021, and 2020, respectively. Cash paid for
amounts in the measurement of operating lease liabilities totaled $9.4 million, $10.3 million, and $9.0 million for the years
ended December 31, 2022, 2021, and 2020, respectively.
The present value of the future minimum lease payments under all non-cancellable operating leases as of
December 31, 2022 is as follows:
Year ending December 31:
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2024 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2025 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2026 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2027 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2028 and thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total future minimum lease payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: imputed interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating lease liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
12,443
16,007
16,352
16,732
13,676
33,992
109,202
(24,986)
84,216
Operating Leases
(in thousands)
111
8. Commitments and Contingencies
Legal Proceedings
The Company is involved in legal matters, including investigations, subpoenas, demands, disputes, litigation,
requests for information, and other regulatory or administrative actions or proceedings, including those with respect to
intellectual property, testing and test performance, billing, reimbursement, marketing, short seller and media allegations,
employment, and other matters.
An independent committee of the Company’s board of directors initiated and has completed an internal
investigation into the allegations made in a March 2022 short seller report, with the assistance of the law firm of
WilmerHale LLP. WilmerHale had access to company executives, personnel, records, communications, and documents.
Based on the investigation, the independent committee, on behalf of the board, has concluded that the allegations of
wrongdoing against the Company in the report were unfounded.
The Company is responding to ongoing regulatory and governmental investigations, subpoenas and inquiries, and
contesting its current legal matters, but cannot provide any assurance as to the ultimate outcome with respect to any of the
foregoing. There are many uncertainties associated with these matters. Such matters may cause the Company to incur
costly litigation and/or substantial settlement charges, divert management attention, result in adverse judgments, fines,
penalties, injunctions or other relief, and may result in loss of customer or investor confidence regardless of their merit or
ultimate outcome. In addition, the resolution of any intellectual property litigation may require the Company to make
royalty payments, which could adversely affect gross margins in future periods. If any of the foregoing were to occur, the
Company's business, financial condition, results of operations, cash flows, prospects, or stock price could be adversely
affected.
The Company assesses legal contingencies to determine the degree of probability and range of possible loss for
potential accrual in its financial statements. When evaluating legal contingencies, the Company may be unable to provide
a meaningful estimate due to a number of factors, including the procedural status of the matter in question, the presence
of complex or novel legal theories, and/or the ongoing discovery and development of information important to the matters.
In addition, damage amounts claimed in litigation or other matters may be unsupported, exaggerated or unrelated to
possible outcomes, and as such are not meaningful indicators of its potential liability. Loss contingencies, including claims
and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable
and an amount or range of loss can be reasonably estimated. During the periods presented, the Company does not believe
there are such matters that will have a material effect on the financial statements.
Intellectual Property Litigation Matters.
The Company has been involved in two 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 (“Stanford”) in March 2019
and amended in March 2020, that the Company infringed three patents. The complaint sought unspecified damages and
injunctive relief. In September 2021, the Court granted the Company’s motion for summary judgment, finding all three
patents invalid. This finding was affirmed on appeal in July 2022 by the United States Court of Appeals for the Federal
Circuit, and CareDx’s petition for a rehearing has been denied. In the second CareDx Patent Case, the Company alleges,
in suits filed in January 2020 and May 2022, infringement by CareDx of three of the Company’s patents, seeking
unspecified damages and injunctive relief. The case is currently pending and is scheduled for trial in January 2024.
The Company has filed suit against ArcherDX, Inc. (“ArcherDX”) in the United States District Court for the
District of Delaware, alleging, in complaints and amended complaints filed in January, April, and August of 2020, which
cases were consolidated in September 2020, that certain ArcherDX products infringe five of the Company’s patents (the
“ArcherDX case”). In January 2021, the Company filed a second amended complaint naming an additional Archer DX
entity, ArcherDx LLC, and Invitae Corp. as defendants. The Company is seeking unspecified monetary damages and
injunctive relief. Trial is currently scheduled for May 2023.
112
The Company is the subject of a lawsuit filed against it by Ravgen, Inc. (“Ravgen”) in June 2020 in the United
States District Court for the Western District of Texas, alleging infringement of two Ravgen patents. The complaint seeks
monetary damages and injunctive relief. Various parties, including Natera, 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. The
petitions filed by the Company and certain others remain pending. The lawsuit against the Company has been stayed
pending the outcome of these petitions.
The Company was involved in litigation against Progenity, Inc. (“Progenity”), in which the Company alleged
that Progenity’s NIPT test infringes six of the Company’s patents. Progenity sought declaratory judgment of non-
infringement of the Company’s asserted patents, and petitioned the Patent Trial and Appeal Board of the United States
Patent and Trademark Office for inter partes review of all of the Company’s asserted patents. In August 2021, the parties
entered into a settlement agreement to settle the matters described above.
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 one of the Company’s patents and seeking
unspecified monetary damages and injunctive relief. In April 2022, the Court granted the parties’ stipulated request to stay
the case pending the entry of a final judgment in the ArcherDX Litigation, in which the subject patent is also asserted.
In January 2021, the Company filed suit against Inivata, Inc. and Inivata Ltd. (collectively “Inivata”) in the United
States District Court for the District of Delaware. The complaint, amended by the Company in May 2021, alleges that
various Inivata oncology products infringe two of the Company’s patents and seeks unspecified monetary damages and
injunctive relief. Inivata filed a motion to dismiss the Company’s amended complaint, which the Court denied in
March 2022.
The Company is the subject of lawsuits filed against it by Invitae Corp. (“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.
Other Litigation Matters.
In August 2019, a suit was filed against the Company in the Circuit Court of Cook County, Illinois by a patient
alleging claims relating to a discordant test result and seeking monetary damages. The suit was dismissed in June 2021.
The Company is involved in litigation with CareDx. 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. In February 2020, 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 Natera was liable to
CareDx and found damages of $44.9 million. The jury also returned a verdict against CareDx, finding that CareDx had
engaged in false advertising. The Company has filed a motion for judgment as a matter of law, requesting that the Court
set aside the portions of the jury verdict adverse to Natera and issue a judgment accordingly. Because the Court has not
issued an order of judgment, and because the motion for judgment as a matter of law remains pending, Natera does not
consider a loss related to this matter to be probable and estimable.
The Company is involved in litigation against Guardant, Inc. (“Guardant”). On or about May 27, 2021, 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. On or about May 28, 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. In the California action, the Company has answered
Guardant’s complaint and has asserted the claims from the action it dismissed in Texas as counterclaims, seeking
unspecified damages and injunctive relief. In August 2021, Guardant moved to dismiss the Company’s counterclaims,
which motion was denied in all material respects. Trial is currently scheduled for July 2023.
113
In November 2021, a purported class action lawsuit was filed against the Company in the United States District
Court for the Northern District of California, by a patient alleging various causes of action relating to the Company’s
patient billing and seeks, among other relief, class certification, injunctive relief, restitution and/or disgorgement,
attorneys’ fees, and costs. The Company has filed a motion to dismiss the lawsuit, which is currently pending before the
Court.
In February 2022, two 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. In May 2022, these matters were consolidated into one lawsuit. The Company has filed a motion to dismiss
the consolidated lawsuit, which is currently pending before the Court.
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. In
July 2022, the parties filed a request for dismissal of the lawsuit. This matter has been dismissed and the claims raised in
this matter were 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 has filed a motion to dismiss this lawsuit, which is currently
pending before the Court.
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 amount of 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 not be material, other than standard retention amounts for securities related claims. However, no
assurances can be given that the covering insurers will not attempt to dispute the validity, applicability, or amount of
coverage without expensive litigation against these insurers, in which case the Company may incur substantial liabilities
as a result of these indemnification obligations.
Third-Party Payer Reimbursement Audits
From time to time, the Company receives recoupment requests from third-party payers for alleged overpayments.
The Company disagrees with the contentions of pending requests and/or has recorded an estimated reserve for the alleged
overpayments.
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Contractual Commitments
The following table sets forth the material unconditional purchase obligations and contractual commitments as
of December 31, 2022 with a remaining term of at least one year:
Party
Total Commitments
Expiry Date
(in thousands)
Laboratory instruments supplier . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Material suppliers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Application service providers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnouts for development with third party (1) . . . . . . . . . . . . . . . . . . . . . . .
Other suppliers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
16,900
15,665
23,095
2,679
20,014
78,353
December 2024
June 2026
March 2026
March 2023
Various
(1) The earnouts for asset development represent the potential earnout payments for asset development with the acquired
Canadian entity which are to be achieved upon the satisfaction of certain contractual conditions less the portion
accrued on the Company’s Consolidated Balance Sheet. Upon achievement, the earnout consideration will primarily
be paid in shares of the Company’s common stock, calculated based upon the fair market value of the Company’s
common stock at the time such shares are issued.
9. Stock-Based Compensation
Equity Plans
2015 Equity Incentive Plan
General. The Company’s board of directors adopted its 2015 Equity Incentive Plan (the “2015 Plan”), in
June 2015. The Company’s 2015 Plan replaced all of its prior stock plans.
Share Reserve. The initial number of shares of the Company’s common stock available for issuance under the
2015 Plan was 3,451,495 shares. The number of shares reserved for issuance under the 2015 Plan will be increased
automatically on the first business day of each fiscal year, commencing in 2016, by a number equal to the least of:
3,500,000 shares;
4% of the shares of common stock outstanding on the last business day of the prior fiscal year; or
the number of shares determined by the Company’s board of directors.
Stock options vest as determined by the compensation committee. In general, they will vest over a four-year
period following the date of grant. Stock options expire at the time determined by the compensation committee but in no
event more than ten years after they are granted. These awards generally expire earlier if the participant's service terminates
earlier.
Restricted Shares and Stock Units. Restricted shares and stock units may be awarded under the 2015 Plan in
return for any lawful consideration, and participants who receive restricted shares or stock units generally are not required
to pay cash for their awards. In general, these awards will be subject to vesting. Vesting may be based on length of service,
the attainment of performance-based and market-based milestones or a combination of both, as determined by the
compensation committee.
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2015 Employee Stock Purchase Plan
General. The Company’s 2015 Employee Stock Purchase Plan (the “2015 ESPP”), was adopted by its board of
directors in June 2015 and its stockholders approved it in June 2015. The 2015 ESPP is intended to qualify under Section
423 of the Internal Revenue Code.
Share Reserve. The Company has reserved 893,548 shares of its common stock for issuance under the 2015
ESPP. As of December 31, 2022, 3,303,261 shares were available for issuance under the 2015 ESPP. The number of shares
reserved for issuance under the 2015 ESPP will automatically be increased on the first business day of each of the
Company’s fiscal years, commencing in 2016, by a number equal to the least of:
880,000 shares;
1% of the shares of common stock outstanding on the last business day of the prior fiscal year; or
the number of shares determined by the Company’s board of directors.
The number of shares reserved under the 2015 ESPP will automatically be adjusted in the event of a stock split,
stock dividend or a reverse stock split (including an adjustment to the per-purchase period share limit).
Purchase Price. Employees may purchase each share of common stock under the 2015 ESPP at a price equal
to 85% of the lower of the fair market values of the stock as of the beginning or the end of the six-month offering periods.
An employee’s payroll deductions under the ESPP are limited to 15% of the compensation, and up to a maximum of 5,000
shares may be purchased during any offering period. A participant shall not be granted an option under the ESPP if such
option would permit the participant’s rights to purchase stock to accrue at a rate exceeding $25,000 fair market value of
stock for each calendar year in which such option is outstanding at any time.
Offering Periods. Each offering period will last a number of months determined by the compensation committee,
not to exceed 27 months. A new offering period will begin periodically, as determined by the compensation committee.
Offering periods may overlap or may be consecutive. Unless otherwise determined by the compensation committee, two
offering periods of six months' duration will begin in each year on May 1 and November 1.
The following table summarizes the offering activity during the years ended December 31, 2022 and 2021:
Offering Period
November 1, 2020 - April 30, 2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
May 1, 2021 - October 31, 2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
November 1, 2021 - April 30, 2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
May 1, 2022 - October 31, 2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(in thousands)
106,435 $
79,820 $
284,583 $
171,721 $
6,085
7,465
8,496
4,541
Number of
Shares Purchased
Total
Proceeds
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Stock Options
The following table summarizes option and RSU activity during the year ended December 31, 2022:
Outstanding Options
Weighted-
Weighted-
Average
(in thousands, except for contractual life and exercise price)
Balance at December 31, 2021 . . . . . . . . . . . . . . . . . . . . .
Additional shares authorized . . . . . . . . . . . . . . . . . . . .
Options granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options forfeited/cancelled . . . . . . . . . . . . . . . . . . . . .
RSUs granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
RSUs forfeited/cancelled . . . . . . . . . . . . . . . . . . . . . . .
Balance at December 31, 2022 . . . . . . . . . . . . . . . . . . . . .
Exercisable at December 31, 2022 . . . . . . . . . . . . . . . . . .
Vested and expected to vest at December 31, 2022 . . . .
4,319
3,500
(266)
—
38
(5,039)
711
3,263
Shares
Available for Number of
Grant
Shares
Average
Exercise
Price
Remaining
Contractual
Life
(in years)
5.40
Aggregate
Intrinsic
Value
$ 451,505
5,900
$
— $
266
$
(828) $
(38) $
17.54
—
61.30
7.74
39.92
5,300
4,585
5,253
$
$
$
21.11
12.27
20.62
4.84
4.29
4.81
$ 131,385
$ 129,670
$ 131,276
The total intrinsic value of stock options exercised during the years ended December 31, 2022, 2021, and 2020
were $26.9 million, $97.0 million, and $184.7 million, respectively.
The weighted-average grant date fair value of options granted during the years ended December 31, 2022, 2021,
and 2020 were $61.30, $104.03, and $27.70 per share, respectively.
The total fair value of stock options vested during the years ended December 31, 2022, 2021, and 2020 were
$49.0 million, $46.0 million, and $52.5 million, respectively.
Performance-based Awards
The Company grants certain senior-level executives performance stock options and units which vest based on
either market and time-based service conditions or performance and time-based service conditions, which are referred to
herein as performance-based awards. The Company has assessed the performance-based award with the appropriate
valuation method and has recognized the applicable stock-based compensation expense. The following table summarizes
the performance-based and market-based awards as of December 31, 2022:
Period Granted Options Granted RSUs Granted Options Vested RSUs Vested Milestone
Valuation Method
(in thousands)
Q1 2020 . .
Q1 2020 . .
Q1 2020 . .
Q2 2020 . .
Q3 2020 . .
Q3 2020 . .
Q4 2020 . .
Q4 2020 . .
Q1 2021 . .
Q1 2021 . .
Q2 2021 . .
Q2 2021 . .
150
—
129
—
10
—
—
—
150
—
163
29
300
436
—
21
—
27
32
22
125
279
—
—
300
408
—
21
—
17
19
2
—
15
—
—
(1)
(3)
(3)
(3)
(4)
(3)
(1)
(5)
(1)
(3)
(1)
(3)
Monte-Carlo Simulation
Grant Date Stock Price
Black-Scholes-Merton
Grant Date Stock Price
Black-Scholes-Merton
Grant Date Stock Price
Monte-Carlo Simulation
Grant Date Stock Price
Monte-Carlo Simulation
Grant Date Stock Price
Monte-Carlo Simulation
Black-Scholes-Merton
150
—
129
—
10
—
—
—
—
—
—
—
117
Q2 2021 . .
Q4 2021 . .
Q4 2021 . .
Q1 2022 . .
Q1 2022 . .
Q2 2022 . .
Q3 2022 . .
Q4 2022 . .
—
—
—
110
—
—
—
—
7
20
205
—
849
103
54
4
—
—
—
—
—
—
—
—
2
—
37
—
—
—
4
—
(3)
(1)
(3)
(3)
(3)
(3)
(2)
(2)
Grant Date Stock Price
Monte-Carlo Simulation
Grant Date Stock Price
Black-Scholes-Merton
Grant Date Stock Price
Grant Date Stock Price
Grant Date Stock Price
Grant Date Stock Price
(1) The awards vest based on the achievement of certain values of the Company’s common stock at multiple thresholds
within certain periods and are contingent upon the completion of requisite service through the date of such vesting.
(2) The vesting of the awards will be triggered after the end of the achievement milestone, as measured by the Company.
(3) The awards vest based on achievement of certain revenue targets, units, and system implementation, contingent upon
the completion of requisite service through the date of such vesting.
(4) The awards have vested based on a change of coverage.
(5) The awards will vest based on achievement of certain revenue and recruiting targets.
The Company has recognized $48.2 million in stock-based compensation for performance-based awards for the
year ended December 31, 2022 compared to $50.3 million in stock-based compensation for performance-based awards for
the year ended December 31, 2021.
No performance-based awards with market conditions estimated using a Monte Carlo simulation model were
granted in the current year. The fair value of the performance-based awards with market conditions granted estimated
using a Monte Carlo simulation model used the following inputs for the years ended December 31, 2022 and 2021:
Risk-free interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected volatility. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected term (years) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted Stock Units
December 31,
2022
December 31,
2021
0.80%— 1.52 %
—
60 %
7.25 —10.00
—
—
—
—
The following table summarizes unvested restricted stock unit (“RSU”) activity for the year ended December 31,
2022:
Balance at December 31, 2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cancelled/Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at December 31, 2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock-Based Compensation Expense
Number of
Shares
(in thousands)
3,988 $
5,039 $
(1,480) $
(711) $
6,836 $
Weighted-
Average
Grant Date
Fair Value
74.33
43.82
58.58
56.26
57.12
Stock based compensation is related to stock options and RSUs granted to the Company’s employees and is
measured at the grant date based on the fair value of the award. The fair value is recognized as expense over the requisite
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service period, which is generally the vesting period of the respective awards on a straight-line basis. No compensation
cost is recognized when the requisite service has not been met and the awards are therefore forfeited.
Employee stock-based compensation expense was calculated based on awards ultimately expected to vest and
has been reduced for estimated forfeitures. Forfeitures are estimated at the time of grant and revised, if necessary, in
subsequent periods, if actual forfeitures differ from those estimates. Non-employee stock-based compensation expense
was not adjusted for estimated forfeitures up until the occurrence of the actual forfeiture of the associated awards.
The following table presents the effect of employee and non-employee stock-based compensation expense on
selected statements of operations line items for the years ended December 31, 2022, 2021, and 2020.
Employee Non-Employee Total
2022
Year ended December 31,
2021
Employee Non-Employee Total
(in thousands)
Employee Non-Employee Total
2020
7,905 $
Cost of revenues . . . . $
Research and
development . . . . . . .
Selling,
general and
administrative . . . . . .
97,379
Total . . . . . . . . . . . . . $ 149,939 $
44,655
— $
7,905 $
4,811 $
— $
4,811 $
1,691 $
— $ 1,691
1,890
46,545
24,507
1,361
25,868
10,777
647
11,424
555
97,934
84,368
2,445 $ 152,384 $ 113,686 $
172
36,747
1,533 $ 115,219 $ 49,215 $
84,540
309
37,056
956 $ 50,171
As of December 31, 2022, approximately $265.1 million of unrecognized compensation expense, adjusted for
estimated forfeitures, related to unvested option awards and RSUs will be recognized over a weighted-average period of
approximately 2.6 years.
Valuation of Stock Option Grants to Employees and Non-Employees
The Company utilizes Black-Scholes option pricing model when estimating the fair value of stock options. The
following valuation assumptions were applied on both the employee and non-employee options. In the same period of the
prior year, the valuation assumptions as follows were only used for stock options granted to employees.
Expected term (years) . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected volatility. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected dividend rate . . . . . . . . . . . . . . . . . . . . . . . . .
Risk-free interest rate . . . . . . . . . . . . . . . . . . . . . . . . . .
Year ended December 31,
2022
2021
5.12 — 10.00
5.11 — 10.00
55.91% — 62.30% 55.33% — 63.30% 49.94%— 61.96%
0 %
1.62 % — 4.16 % 0.81 % — 1.67 % 0.31 %— 1.70 %
2020
5.22 — 10.00
0 %
0 %
As of December 31, 2022, total options outstanding include 2,860 shares of option awards that were granted to
non-employees, of which all are vested. Stock-based compensation expense related to stock options granted to non-
employees is recognized as the stock option is earned and the services are rendered. The Company believes that the
estimated fair value of the stock options is more readily measurable than the fair value of the services rendered.
10. Debt
Credit Line Agreement
In September 2015, the Company entered into a credit line with UBS (the “Credit Line”) providing for a $50.0
million revolving line of credit which can be drawn down 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 the
Company’s money market and marketable securities held in its managed investment account with UBS. The Credit Line was
subsequently increased from $50.0 million to $150.0 million in 2020. The interest rate was subsequently changed to
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the 30-day SOFR average, plus 1.21% in 2022. The SOFR rate is variable. 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. 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.
For the years ended December 31, 2022, 2021, and 2020, the Company recorded interest expense of $1.6 million,
$0.6 million, and $0.8 million, respectively. Interest payments totaling $1.6 million, $0.6 million, and $0.8 million had
been made on the Credit Line during the years ended December 31, 2022, 2021, and 2020, respectively. As of December 31,
2022, remaining accrued interest was $0.4 million, and the total principal amount outstanding including accrued interest
was $80.4 million.
Convertible Notes
In April 2020, the Company issued $287.5 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 2.25% 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 $278.3 million, after deducting the initial
purchasers’ discounts and debt issuance costs. The Company used approximately $79.2 million of the net proceeds from
the Convertible Notes offering to repay its obligations under the 2017 Term Loan with OrbiMed.
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 $1,000
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 20 trading days (whether or not
consecutive) during the period of 30 consecutive trading days ending on, and including, the last trading day
of the immediately preceding fiscal quarter is greater than or equal to 130% of the conversion price on each
applicable trading day.
During the five business day period after any five consecutive trading day period in which the trading price
per $1,000 principal amount of Convertible Notes for each trading day of that five-day consecutive trading
period was less than 98% 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.
Upon the occurrence of specified corporate transactions.
The Convertible Notes are convertible into shares of the Company’s common stock, par value $0.0001 per share,
at an initial conversion rate of 25.7785 shares of common stock per $1,000 principal amount of the Convertible Notes,
which is equivalent to an initial conversion price of approximately $38.79 per share of common stock, convertible to
7,411,704 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 100% of the principal amount, plus any accrued and unpaid interest.
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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 130% of the
conversion price then in effect for at least 20 trading days during any 30 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 100% of the principal amount of the Convertible Notes to be redeemed plus accrued and unpaid interest.
Upon adoption of ASU 2020-06, the Company reallocated all of the debt discount to long-term debt financing.
The debt discount is amortized to interest expense using the effective interest method, computed to be 2.72%, over the life
of the Convertible Notes or approximately its seven-year term. The outstanding Convertible Notes balance as of
December 31, 2022 is summarized in the following table:
Liability Component
Outstanding Principal
Unamortized debt discount and debt issuance cost
Net carrying amount
December 31,
2022
(in thousands)
$
$
287,500
(5,847)
281,653
The following table presents total interest expense recognized related to the Convertible Notes during the year
ended December 31, 2022:
December 31,
2022
(in thousands)
Cash interest expense
Contractual interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Non-cash interest expense
Amortization of debt discount and debt issuance cost. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
6,469
1,259
7,728
11. Stockholders’ Equity
In September 2020, the Company completed an underwritten equity offering and sold 4,791,665 shares of its
common stock at a price of $60 per share to the public. Before offering expenses of $0.3 million, the Company received
proceeds of $271.0 million net of the underwriting discount.
In July 2021, the Company completed an underwritten equity offering and sold 5,175,000 shares of its common
stock at a price of $113 per share to the public. Before offering expenses of $0.4 million, the Company received proceeds
of $551.2 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.
The total upfront acquisition consideration amounts to $35.6 million composed of the issuance of 276,346 shares of the
Company's common stock with a fair value of $30.9 million, approximately $3.9 million of cash consideration, assumed
net liabilities of $0.2 million, as well as $0.6 million of acquisition related legal and accounting costs directly attributable
to the acquisition of the asset. In November 2022, the remaining consideration was modified, resulting in a $10.0 million
121
milestone payment primarily made in the form of equity in December 2022 and a remaining $15.0 million milestone
payment estimated to be payable by March 31, 2023 primarily in the Company’s stock.
In November 2022, the Company completed an underwritten equity offering and sold 13,144,500 shares of its
common stock at a price of $35 per share to the public. Before offering expenses of $0.5 million, the Company received
proceeds of $433.2 million net of the underwriting discount.
As of December 31, 2022, the Company had 50,000,000 authorized shares of its preferred stock, of which no
shares were issued and outstanding; and 750,000,000 authorized shares of its common stock, at $0.0001 par value, and
there were 111,255,000 shares of common stock issued and outstanding.
12. Income Taxes
The Company's effective tax rates for the years ended December 31, 2022, 2021, and 2020 differ from the U.S.
federal statutory rate as follows:
2022
December 31,
2021
(in thousands, except percentages)
2020
U.S. federal taxes (benefit) at statutory rate . . . $ (114,832)
(21,676)
State tax expense . . . . . . . . . . . . . . . . . . . . . . . . .
(7,024)
Research and development credits . . . . . . . . . . .
3,949
Stock-based compensation . . . . . . . . . . . . . . . . .
Foreign tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
332
1,964
Other nondeductible items . . . . . . . . . . . . . . . . .
4,883
Nondeductible officers' compensation . . . . . . . .
3,226
Acquisition costs . . . . . . . . . . . . . . . . . . . . . . . . .
130,156
Change in valuation allowance . . . . . . . . . . . . . .
978
Provision for income taxes . . . . . . . . . . . . . . . . .
$
(21.00)% $ (98,931) (21.00)% $ (48,226) (21.00)%
(4.65)%
(3.96)% (29,206)
(1.28)%
(1.73)%
(9,193)
(10.36)%
0.72 % (46,128)
0.02 %
167
0.06 %
0.35 %
344
0.36 %
3.91 %
24,387
0.89 %
8,901
0.59 %
— %
33.50 %
23.80 % 150,277
0.04 %
618
(6.20)% (10,672)
(1.95)%
(3,964)
(9.80)% (23,791)
55
0.04 %
792
0.07 %
8,984
5.18 %
—
2 %
76,920
31.90 %
98
0.13 % $
0.18 % $
During the year ended December 31, 2022, the Company recorded total income tax expense of $1.0 million. The
Company provides testing to clinics and also licenses its cloud-based software to licensees that are based in a foreign
country, which contributed to a foreign income tax expense of $0.4 million. Total income tax expense also included a state
income tax expense of $0.6 million for the year ended December 31, 2022.
During the year ended December 31, 2021, the Company recorded total income tax expense of $0.6 million. The
Company provides testing to clinics and also licenses its cloud-based software to licensees that are based in a foreign
country, which contributed to a foreign income tax expense of $0.3 million. Total income tax expense also included a state
income tax expense of $0.3 million for the year ended December 31, 2021.
During the year ended December 31, 2020, the Company recorded total income tax expense of $0.1 million,
which included foreign withholding tax expense and state income tax benefit.
122
Deferred income taxes reflect the net tax effects of temporary differences between carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax purposes as well as net operating loss and
tax credit carryforwards. The components of the net deferred income tax assets are as follows:
Deferred tax assets:
Net operating loss carryforwards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Research and development tax credit carryforwards . . . . . . . . . . . . . . . . . . . .
Capitalized research costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reserves and accruals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Lease Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deferred tax assets before valuation allowance . . . . . . . . . . . . . . . . . . .
Less: valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deferred tax assets after valuation allowance . . . . . . . . . . . . . . . . . . . . .
Deferred tax liabilities:
Fixed Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Right-of-use lease assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31,
2022
2021
(in thousands)
$ 358,109 $ 315,552
4,443
38,725
—
14,098
16,843
6,363
15,928
411,952
(396,079)
15,873
4,068
52,319
59,128
22,781
21,000
5,094
23,814
546,313
(526,235)
20,078
(1,219)
(18,859)
(20,078)
$
— $
—
(15,873)
(15,873)
—
The Company established a full valuation allowance against its net deferred tax assets in 2022 and 2021 due to
the uncertainty surrounding realization of these assets. The valuation allowance increased to $526.2 million as of 2022
from $396.1 million as of 2021 due to current year losses and credits claimed.
As of December 31, 2022, the Company had federal, state, and foreign net operating loss (“NOLs”) carryforwards
of approximately $1.4 billion, $1.0 billion, and $3.8 million, respectively, which begin to expire in 2027, 2028, and 2031,
respectively, if not utilized. Approximately $1.1 billion of federal net operating loss included above can be carried forward
indefinitely.
The Company also had federal research and development credit carryforwards of approximately $48.9 million,
which begin to expire in 2027, and state research and development credit carryforwards of approximately $29.7 million,
which can be carried forward indefinitely. Realization of these deferred tax assets would require $2.0 billion in taxable
income to fully utilize. Realization is dependent on generating sufficient taxable income prior to expiration of the loss and
credit carryforwards.
Federal, state and foreign tax laws impose substantial restrictions on the utilization of NOLs and credit
carryforwards in the event of an "ownership change" for tax purpose, as defined in Section 382 of the Internal Revenue
Code. Accordingly, the Company's ability to utilize these carryforwards may be limited as the result of such ownership
change. Such a limitation could result in limitation in the use of the NOLs in future years and possibly a reduction of the
NOLs available.
123
A reconciliation of the beginning and ending amount of gross unrecognized tax benefits is as follows:
Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additions based on tax positions related to the current year . . . . . . . . . . . . . .
Additions (reductions) for tax positions of prior years. . . . . . . . . . . . . . . . . . .
Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
17,514 $ 11,500 $
6,301
29
6,017
(3)
$
23,844 $ 17,514 $
2022
December 31,
2021
(in thousands)
2020
8,619
2,889
(8)
11,500
During the years ended December 31, 2022, 2021, and 2020, the amount of unrecognized tax benefits increased
$6.3 million, $6.0 million, and $2.9 million, respectively, due to additional research and development credits generated
during the year. As of December 31, 2022, 2021, and 2020, the total amount of unrecognized tax benefits was $23.8 million,
$17.5 million, and $11.5 million, respectively. The reversal of the uncertain tax benefits would not affect the Company's
effective tax rate to the extent that it continues to maintain a full valuation allowance against its deferred tax assets.
The Company is subject to U.S. federal, state, and foreign income taxes. Tax regulations within each jurisdiction
are subject to the interpretation of the related tax laws and regulations, and require significant judgment to apply. The
Company is subject to U.S. federal, state and local tax examinations by tax authorities for all prior tax years since
incorporation. The Company does not anticipate significant changes to its current uncertain tax positions through
December 31, 2022.
The Company recognizes any interest and/or penalties related to income tax matters as a component of income
tax expense. As of December 31, 2022, there were no accrued interest and penalties related to uncertain tax positions.
13. Net Loss per Share
Basic net loss per share is computed by dividing the net loss attributable to common stockholders by the weighted-
average number of common shares outstanding for the period, excluding shares subject to repurchase and without
consideration of potentially dilutive securities. Diluted net loss per share is computed by giving effect to all potentially
dilutive common shares outstanding for the period. For purposes of this computation, outstanding common stock options,
and restricted stock units are considered to be common share equivalents. Common share equivalents are excluded from
the computation in periods in which they have an anti-dilutive effect, unless the consideration of any one of them gives a
dilutive effect.
The Convertible Notes are convertible as of December 31, 2022. Upon conversion, the Company has the option
to pay cash, issue shares of common stock, or any combination thereof for the aggregate amount due upon conversion. If
converted, the value of the Convertible Notes based on contractual settlement provisions would exceed its principal amount
by $5.1 million as of December 31, 2022. 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 7.4 million shares underlying the conversion option of the Convertible
Notes will not have an impact on the Company’s diluted earnings per share. If converted, the Company does not intend to
settle the obligation in cash.
124
The following table provides the basic and diluted net loss per share computations for the years ended
December 31, 2022, 2021, and 2020:
2022
December 31,
2021
(in thousands, except per share data)
2020
Numerator:
Net loss used to compute net loss per share, basic and diluted . . . . . . . . . . . . .
$ (547,799) $ (471,716) $ (229,743)
Denominator:
Weighted-average number of shares used in computing net loss per share,
basic and diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
98,408
90,558
81,011
Net loss per share, basic and diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
(5.57) $
(5.21) $
(2.84)
The following table shows the potentially dilutive common stock equivalents that were excluded from the
computations of diluted net loss per share as their effect would be anti-dilutive, as of December 31, 2022, 2021, and 2020:
Options to purchase common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted stock units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Employee stock purchase plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Convertible Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Estimated earnout shares for an asset acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
14. Subsequent Events
None.
2022
5,300
6,836
90
7,411
361
19,998
December 31,
2021
(in thousands)
5,898
3,988
33
7,411
353
17,683
2020
6,707
4,188
37
7,411
—
18,343
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A: 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 December 31, 2022. The term “disclosure controls and
procedures,” as defined in Rules 13a-15(e) and 15d-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 the company’s management, including
its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required
disclosure.
125
Based on the evaluation of our disclosure controls and procedures as of December 31, 2022, management has
concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.
Management’s Annual Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting as
defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act. Our internal control over financial reporting is designed to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management has evaluated the effectiveness of our internal control over financial reporting as of December 31,
2022 using the criteria set forth in the 2013 Internal Control — Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission, or COSO. Based on our evaluation, management has concluded
that we maintained effective internal control over financial reporting as of December 31, 2022 based on the COSO criteria.
The effectiveness of our internal control over financial reporting as of December 31, 2022 has been audited by
Ernst & Young LLP, an independent registered public accounting firm, as stated in their report which appears in Item 9A
of this Annual Report on Form 10-K.
Changes in Internal Control over Financial Reporting
During the year ended December 31, 2022, we have completed the implementation of certain modules for a new
Enterprise Resource Planning (“ERP”) software system. Accordingly, we have modified certain existing internal control
processes relating to the implementation of the new ERP system. There have been no additional 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 December 31, 2022, 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.
126
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Natera, Inc.
Opinion on Internal Control Over Financial Reporting
We have audited Natera, Inc.’s internal control over financial reporting as of December 31, 2022, based on criteria
established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (2013 framework), (the COSO criteria). In our opinion, Natera, Inc. (the Company) maintained,
in all material respects, effective internal control over financial reporting as of December 31, 2022, based on the COSO
criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the 2022 consolidated financial statements of the Company and our report dated March 1, 2023 expressed an
unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s
Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company's
internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB
and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and
the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained
in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material
weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed
risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s internal control over financial reporting includes those policies
and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded
as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles,
and that receipts and expenditures of the company are being made only in accordance with authorizations of management
and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial
statements.
127
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
San Mateo, California
March 1, 2023
ITEM 9B. OTHER INFORMATION
Following extensive discussions regarding succession planning, the Company and Robert Schueren, the
Company’s Chief Operating Officer, have agreed that Mr. Schueren’s role with the Company will transition over the
course of March 2023, with gradually reducing duties and responsibilities, into a part-time role with the Company of two
days per week. Mr. Schueren’s base salary will be adjusted on a pro rata basis to reflect his reduced time commitment.
As a result of the foregoing, the Company’s board of directors determined that, effective as of February 24, 2023,
Mr. Schueren is no longer a Section 16 officer of the Company.
ITEM 9C. Disclosure Regarding Foreign Jurisdictions That Prevent Inspections
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this item will be contained in our definitive proxy statement to be filed with the
Securities and Exchange Commission in connection with our 2023 annual meeting of stockholders (the “Proxy Statement”),
which we expect to file no later than 120 days after the end of our fiscal year ended December 31, 2022, and is incorporated
in this report by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item will be contained in the Proxy Statement, which we expect to file no later
than 120 days after the end of our fiscal year ended December 31, 2022, and is incorporated in this report by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required by this item will be contained in the Proxy Statement, which we expect to file no later
than 120 days after the end of our fiscal year ended December 31, 2022, and is incorporated in this report by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
The information required by this item will be contained in the Proxy Statement, which we expect to file no later
than 120 days after the end of our fiscal year ended December 31, 2022, and is incorporated in this report by reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this item will be contained in the Proxy Statement, which we expect to file no later
than 120 days after the end of our fiscal year ended December 31, 2022, and is incorporated in this report by reference.
128
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this Annual Report on Form 10-K:
(1) Financial Statements (included in Part II of this report):
Report of Independent Registered Public Accounting Firm
Balance Sheets
Statement of Operations
Statement of Stockholders’ Equity
Statement of Cash Flows
Notes to Financial Statements
(2) Financial Statement Schedules:
All financial statement schedules are omitted because the information is inapplicable or presented in the
notes to the financial statements.
(b) The following exhibits are filed with or incorporated by reference as part of this Annual Report on Form 10-K:
INDEX TO EXHIBITS
Exhibit No.
Description
Form
File No.
Exhibit
Filing Date
Filed
Herewith
Incorporated by Reference
3.1
3.2
4.1
4.2
4.3
4.4
Amended and Restated Certificate of
Incorporation of Registrant.
Amended and Restated Bylaws of
Registrant, effective as of November 3,
2021
8-K
001-37478
3.1
07/09/2015
10-Q
001-37478
3.1
11/05/2021
Form of Common Stock Certificate
S-1/A
333-204622
4.1
06/22/2015
Amended and Restated Investors'
Rights Agreement, dated November 20,
2014.
S-1
333-204622
4.2
06/01/2015
Description of Common Stock
10-K
001-37478
4.3
02/26/2021
Indenture (including form of Note) with
respect to the Company’s 2.25%
Convertible Senior Notes due 2027,
dated as of April 16, 2020, between the
Registrant and Wilmington Trust,
National Association, as trustee
8-K
001-37478
4.1
04/16/2020
10.1.1
UBS Credit Line Agreement, dated
September 23, 2015, as amended.
10-Q
001-37478
10.2
11/12/2015
129
Exhibit No.
10.1.2
10.2.1*
10.2.2*
10.2.3*
10.2.4*
10.2.5**
10.2.6**
10.2.7**
10.3.1*
10.3.2*
10.3.3*
10.3.4*
10.4.1*
10.4.2*
Description
Amendment to UBS Credit Line
Agreement, dated July 5, 2017.
Supply Agreement, dated
September 18, 2014, by and between
Registrant and Illumina, Inc., as
amended (conformed copy).
Second Amendment to Supply
Agreement, dated September 21, 2015,
by and between Registrant and
Illumina, Inc.
Third Amendment to Supply
Agreement, dated June 8, 2016, by and
between Registrant and Illumina, Inc.
Fourth Amendment to Supply
Agreement, dated January 3, 2019, by
and between Registrant and Illumina,
Inc.
Fifth Amendment to Supply
Agreement, dated December 18, 2019,
by and between Registrant and
Illumina, Inc.
Sixth Amendment to Supply
Agreement, dated May 8, 2020, by and
between Registrant and Illumina, Inc.
Seventh Amendment to Supply
Agreement, dated October 7, 2021, by
and between the Registrant and
Illumina, Inc.
Application Service Provider
Agreement, dated September 19, 2014,
by and between Registrant and
DNAnexus, Inc., as amended
Third Amendment to Application
Service Provider Agreement, dated
January 1, 2018, by and between
Registrant and DNAnexus, Inc.
Fourth Amendment to Application
Service Provider Agreement, dated
July 1, 2018, by and between
Registrant and DNAnexus, Inc.
Fifth Amendment to Application
Service Provider Agreement, dated
October 18, 2019, by and between
Registrant and DNAnexus, Inc.
Credit Agreement, dated as of
August 8, 2017, by and between
Registrant and OrbiMed Royalty
Opportunities II, LP.
Amendment and Waiver to Credit
Agreement, dated as of December 28,
2018, by and between Registrant,
Natera International, Inc., NSTX, Inc.
and OrbiMed Royalty Opportunities II,
LP.
Incorporated by Reference
Form
10-Q
File No.
Exhibit
Filing Date
001-37478
10.1
08/09/2017
Filed
Herewith
S-1/A
333-204622
10.13
06/30/2015
10-Q
001-37478
10.1
08/11/2016
10-Q
001-37478
10.2
08/11/2016
10-K
001-37478
10.8
03/15/2019
10-K
001-37478
10.5.5
03/02/2020
10-Q
001-37478
10.1
08/07/2020
10-Q
001-37478
10.1
11/05/2021
10-K
001-37478
10.11
03/16/2017
10-Q
001-37478
10.1
11/09/2018
10-Q
001-37478
10.2
11/09/2018
10-Q
001-37478
10.2
11/08/2019
10-Q
001-37478
10.1
11/09/2017
10-K
001-37478
10.20
03/15/2019
130
Exhibit No.
Description
Form
File No.
Exhibit
Filing Date
Filed
Herewith
Incorporated by Reference
10.4.3*
10.4.4*
10.5*
10.6
10.7*
10.8.1
10.8.2
10.9.1
10.9.2
10.9.3
10.9.4
10.10***
10.11***
10.12***
Second Amendment to Credit
Agreement, dated as of April 15, 2019,
by and between Registrant, Natera
International, Inc., NSTX, Inc. and
OrbiMed Royalty Opportunities II, LP.
Third Amendment to Credit
Agreement, dated as of September 12,
2019, by and between Registrant,
Natera International, Inc., NSTX, Inc.
and OrbiMed Royalty Opportunities II,
LP.
Pledge and Security Agreement, dated
as of August 8, 2017, by and between
Registrant, Natera International, Inc.,
NSTX, Inc. and OrbiMed Royalty
Opportunities II, LP.
Guarantee, dated as of August 8, 2017,
by and between Natera International,
Inc., NSTX, Inc. and OrbiMed Royalty
Opportunities II, LP.
License, Development and
Distribution Agreement, dated as of
March 9, 2018, by and between
Registrant and QIAGEN LLC
Lease, dated October 26, 2015, by and
between Registrant and BMR-201
Industrial Road LP.
First Amendment to Lease, dated
October 6, 2016, by and between
Registrant and BMR-201 Industrial
Road LP.
Lease Agreement dated September 24,
2015, by and between NSTX, Inc. and
Karlin McCallen Pass, LLC.
First Amendment to Lease Agreement
dated January 26, 2016, by and
between NSTX, Inc. and Karlin
McCallen Pass, LLC.
Second Amendment to Lease
Agreement dated March 10, 2021, by
and between NSTX, Inc. and KCP
Parmer 3.2 Fee Owner, LLC.
Third Amendment to Lease
Agreement dated December 29, 2021,
by and between NSTX, Inc. and 13011
McCallen Pass, LLC.
2007 Stock Plan and form of
agreements thereunder.
2015 Equity Incentive Plan and forms
of agreements thereunder.
2015 Employee Stock Purchase Plan.
10-Q
001-37478
10.3
05/10/2019
10-Q
001-37478
10.1
11/08/2019
10-Q
001-37478
10.2
11/09/2017
10-Q
001-37478
10.3
11/09/2017
10-Q/A
001-37478
10.1
02/06/2019
10-K
001-37478
10.23
03/23/2016
10-Q
001-37478
10.1
11/10/2016
10-Q
001-37478
10.1
11/09/2022
10-Q
001-37478
10.2
11/09/2022
10-Q
001-37478
10.3
11/09/2022
10-Q
001-37478
10.4
11/09/2022
.
S-1
333-204622
10.1
06/01/2015
10-K
001-37478
10.2
03/24/2016
S-1/A
333-204622
10.3
06/25/2015
131
Exhibit No.
10.13
10.14.1***
10.14.2***
10.15***
10.16.1***
10.16.2***
10.17***
10.18.1***
Description
Form of Indemnification Agreement,
by and between Registrant and each of
its directors and executive officers.
Amended Compensation Program for
Non-Employee Directors.
Amended and Restated Compensation
Program for Non-Employee Directors.
Natera, Inc. Management Cash
Incentive Plan.
Amended Employment Agreement, by
and between Registrant and Matthew
Rabinowitz, dated June 7, 2007.
Amended Employment Agreement, by
and between Registrant and Matthew
Rabinowitz, dated May 9, 2021.
Amended Employment Agreement, by
and between Registrant and Jonathan
Sheena, dated June 7, 2007.
Amended and Restated Employment
Agreement, by and between
Registrant and Steve Chapman, dated
January 2, 2019.
Incorporated by Reference
Form
File No.
Exhibit
Filing Date
Filed
Herewith
10-K
001-37478
10.4
03/16/2017
10-Q
001-37478
10.2
05/10/2019
8-K
001-37478
10.1
03/14/2022
10-Q
001-37478
10.3
11/12/2015
S-1/A
333-204622
10.15
06/25/2015
8-K
001-37478
10.2
05/10/2021
S-1/A
333-204622
10.16
06/25/2015
10-Q
001-37478
10.1
05/10/2019
10.18.2***
Amendment No. 1 to Amended and
Restated Employment Agreement
10.19***
Amended Employment Agreement, by
and between Registrant and Daniel
Rabinowitz, dated June 7, 2007.
10-Q
001-37478
10.1
05/06/2022
10-Q
001-37478
10.1
08/05/2022
21.1
23.1
24.1
31.1
31.2
32.1†
List of Subsidiaries of the Registrant.
10-K
001-37478
21.1
03/16/2017
Consent of Independent Registered
Public Accounting Firm.
Power of Attorney (see signature page
of this Annual Report on Form 10-K).
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.
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.
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.
132
X
X
X
X
X
Exhibit No.
Description
Form
File No.
Exhibit
Filing Date
Filed
Herewith
Incorporated by Reference
32.2†
101.INS
101.SCH
101.CAL
101.DEF
101.LAB
101.PRE
104
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.
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.
XBRL Taxonomy Extension Schema
Document.
XBRL Taxonomy Extension
Calculation Linkbase Document.
XBRL Taxonomy Extension
Definition Linkbase Document.
XBRL Taxonomy Extension Label
Linkbase Document.
XBRL Taxonomy Extension
Presentation Linkbase Document.
Cover Page Interactive Data File
(formatted as Inline XBRL and
contained in Exhibit 101)
X
X
X
X
X
X
X
X
* Portions of this exhibit (indicated by asterisks) have been omitted pursuant to an order granting confidential treatment.
Omitted portions have been submitted separately to the Securities and Exchange Commission (SEC).
** Portions of this exhibit (indicated by asterisks) have been omitted pursuant to a request for confidential treatment.
*** Indicates a management contract or compensatory plan.
† The certifications attached as Exhibits 32.1 and 32.2 that accompany this Annual Report on Form 10-K 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 Annual Report on Form 10-K, regardless of any general incorporation language contained in any filing.
ITEM 16. FORM 10-K SUMMARY
None.
133
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in the following Registration Statements:
(1) Registration Statements (Form S-8 Nos. 333-205441, 333-210374, 333-216747, 333-223751, 333-230324,
333-236873, 333-253785 and 333-263052) pertaining to the 2015 Equity Incentive Plan, 2007 Stock Plan
and 2015 Employee Stock Purchase Plan of Natera, Inc., and
(2) Registration Statements (Forms S-3 No. 333-248690, 333-258047, 333-259429, and 333-268391) of Natera,
Inc.,
of our reports dated March 1, 2023, with respect to the consolidated financial statements of Natera, Inc. and the
effectiveness of the internal control over financial reporting of Natera, Inc. included in this Annual Report (Form 10-K)
of Natera, Inc. for the year ended December 31, 2022.
/s/ Ernst & Young LLP
San Mateo, California
March 1, 2023
134
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Annual
Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Austin, State
of Texas, on this 1st day of March, 2023.
SIGNATURES
Natera, Inc.
/ s / Michael Brophy
Michael Brophy
Chief Financial Officer
135
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby
constitutes and appoints Steve Chapman and Michael Brophy as his or her true and lawful attorney-in-fact and agent with
full power of substitution, for him or her in any and all capacities, to sign any and all amendments to this Annual Report
on Form 10-K, and to file the same, with all exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and
perform each and every act and thing requisite and necessary to be done in connection therewith, as fully for all intents
and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent,
or his substitute, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Annual Report on
Form 10-K has been signed by the following persons in the capacities and on the dates indicated.
Signature
Title
Date
/ s / Steve Chapman
Steve Chapman
Chief Executive Officer, President and Director
(Principal Executive Officer)
March 1, 2023
/ s / Michael Brophy
Michael Brophy
Chief Financial Officer
(Principal Financial Officer and Principal
Accounting Officer)
March 1, 2023
/ s / Matthew Rabinowitz
Matthew Rabinowitz
/ s / Jonathan Sheena
Jonathan Sheena
/ s / Roy Baynes
Roy Baynes
/ s / Roelof F. Botha
Roelof F. Botha
/ s / Rowan Chapman
Rowan Chapman
/ s / James I. Healy
James I. Healy
/ s / Gail Marcus
Gail Marcus
/ s / Herm Rosenman
Herm Rosenman
Executive Chairman
March 1, 2023
Founder and Director
March 1, 2023
March 1, 2023
March 1, 2023
March 1, 2023
March 1, 2023
March 1, 2023
March 1, 2023
Director
Director
Director
Director
Director
Director
136