10-Q 1 ntra-20190930x10q.htm 10-Q ntra_Current folio_10Q

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549


FORM 10-Q


(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30,  2019

 

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

01‑0894487

(State or Other Jurisdiction of Incorporation or Organization)

(I.R.S. Employer Identification No.)

 

 

 

 

 

 

201 Industrial Road, Suite 410
San Carlos, CA

94070

(Address of Principal Executive Offices)

(Zip Code)

 

(650) 249‑9090

(Registrant’s Telephone Number, Including Area Code)


 

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, 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

 

 

Accelerated filer

 

Non-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 is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

 

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

 

 

 

Common Stock, par value $0.0001 per share

NTRA

The Nasdaq Stock Market LLC (Nasdaq Global Select Market)

As of October 31,  2019, the number of outstanding shares of the registrant’s common stock, par value $0.0001 per share, was 77,528,812.

 

 

 

Natera, Inc.

FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2019

TABLE OF CONTENTS

 

 

 

 

 

 

    

Page

 

 

 

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS 

 

 

 

 

 

 

Part I — Financial Information 

 

 

 

Item 1.  Financial Statements (unaudited)

 

5

 

Condensed Consolidated Balance Sheets at September 30, 2019 and December 31, 2018

 

5

 

Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three and Nine months Ended September 30, 2019 and 2018

 

6

 

Condensed Consolidated Statements of Stockholders’ Equity (Deficit) for the Three and Nine months Ended September 30, 2019 and 2018

 

7

 

Condensed Consolidated Statements of Cash Flows for the Nine months Ended September 30, 2019 and 2018

 

9

 

Notes to Unaudited Interim Condensed Consolidated Financial Statements  

 

10

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

41

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

57

 

Item 4. Controls and Procedures

 

57

 

 

 

 

Part II — Other Information 

 

 

 

Item 1. Legal Proceedings

 

58

 

Item 1A. Risk Factors

 

59

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

100

 

Item 3. Defaults Upon Senior Securities

 

100

 

Item 4. Mine Safety Disclosures

 

100

 

Item 5. Other Information

 

100

 

Item 6. Exhibits

 

100

 

Signatures

 

102

 

 

 

2

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

·

our ability to increase demand for Panorama, obtain favorable coverage and reimbursement determinations from third-party payers, and expand geographically;

·

our expectation that Panorama will be adopted for broader use in average-risk pregnancies and for the screening of microdeletions and that third-party payer reimbursement will be available for these applications;

·

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

·

our ability to successfully develop additional revenue opportunities and expand our product offerings to include new tests, including our more recent offerings;

·

our efforts to successfully develop and commercialize our technology and expertise in prenatal testing into oncology and transplant rejection applications;

·

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 current and future tests;

·

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

·

our ability to successfully commercialize our products through strategic or commercial partnerships, such as our agreements with Qiagen, BGI Genomics Co., Ltd. and Foundation Medicine, Inc., and our ability to enter into additional such partnerships in the future and achieve the anticipated benefits from such partnerships;

·

the scope of protection we establish and maintain for, and developments or disputes concerning, our intellectual property or other proprietary rights;

·

competition in the markets we serve;

·

our ability to successfully commercialize our cloud-based distribution model;

·

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

·

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

3

·

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 or our ability to commercialize and offer our tests;

·

our expectations of the rate of adoption of Panorama 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 clinical data in peer-reviewed medical publications regarding Panorama and any of our current or future tests;

·

our SMART study and our ongoing and planned trials in oncology and transplant rejection;

·

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

·

our estimates regarding our costs and risks associated with our international operations and international expansion;

·

our ability to retain and recruit key personnel;

·

our reliance on our direct sales efforts;

·

our expectations regarding acquisitions, other strategic transactions and strategic operations;

·

our ability to fund our working capital requirements;

·

our compliance with federal, state, and foreign regulatory 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.

 

4

 

 

 

PART I – FINANCIAL INFORMATION

 

ITEM 1.FINANCIAL STATEMENTS

Natera, Inc.

Condensed Consolidated Balance Sheets

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

September 30, 

    

December 31, 

 

 

    

2019

    

2018

 

 

 

(Unaudited)

 

 

 

Assets

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

51,609

 

$

46,407

 

Restricted cash

 

 

55

 

 

4,597

 

Short-term investments

 

 

186,700

 

 

107,461

 

Accounts receivable, net of allowance of $2,277 in 2019 and $1,788 in 2018

 

 

58,905

 

 

62,223

 

Inventory

 

 

12,514

 

 

13,633

 

Prepaid expenses and other current assets

 

 

13,954

 

 

6,197

 

Total current assets

 

 

323,737

 

 

240,518

 

Property and equipment, net

 

 

19,027

 

 

24,336

 

Operating lease right-of-use assets

 

 

24,807

 

 

 —

 

Other assets

 

 

12,679

 

 

3,317

 

Total assets

 

$

380,250

 

$

268,171

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

9,236

 

$

14,587

 

Accrued compensation

 

 

14,238

 

 

12,668

 

Other accrued liabilities

 

 

38,702

 

 

32,442

 

Deferred revenue, current portion

 

 

25,667

 

 

4,131

 

Short-term debt financing

 

 

50,131

 

 

50,153

 

Total current liabilities

 

 

137,974

 

 

113,981

 

Long-term debt financing

 

 

73,583

 

 

73,357

 

Deferred rent, net of current portion

 

 

 —

 

 

8,613

 

Deferred revenue, long-term portion

 

 

56,174

 

 

40,058

 

Operating lease liabilities, long-term portion

 

 

27,825

 

 

 —

 

Total liabilities

 

 

295,556

 

 

236,009

 

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 8)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

Common stock, $0.0001 par value: 750,000 shares authorized at both September 30, 2019 and December 31, 2018, respectively; 70,850 and 62,083 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively

 

 

 7

 

 

 7

 

Additional paid in capital

 

 

747,817

 

 

607,236

 

Accumulated deficit

 

 

(663,988)

 

 

(574,529)

 

Accumulated other comprehensive income (loss)

 

 

858

 

 

(552)

 

Total stockholders’ equity

 

 

84,694

 

 

32,162

 

Total liabilities and stockholders’ equity

 

$

380,250

 

$

268,171

 

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

5

Natera, Inc.

Condensed Consolidated Statements of Operations and Comprehensive Loss

(Unaudited)

 (in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended 

 

Nine months ended

 

 

 

September 30, 

 

September 30, 

 

 

    

2019

  

2018

  

2019

  

2018

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

Product revenues

 

$

66,936

 

$

62,662

 

$

195,399

 

$

177,284

 

Licensing and other revenues

 

 

10,973

 

 

2,618

 

 

23,689

 

 

13,405

 

Total revenues

 

 

77,909

 

 

65,280

 

 

219,088

 

 

190,689

 

Cost and expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of product revenues

 

 

40,138

 

 

39,477

 

 

123,125

 

 

117,736

 

Cost of licensing and other revenues

 

 

3,742

 

 

2,202

 

 

7,883

 

 

5,530

 

Research and development

 

 

12,796

 

 

12,393

 

 

36,355

 

 

38,585

 

Selling, general and administrative

 

 

56,715

 

 

38,374

 

 

147,589

 

 

113,739

 

Gain from disposal of business

 

 

(14,388)

 

 

 —

 

 

(14,388)

 

 

 —

 

Total cost and expenses

 

 

99,003

 

 

92,446

 

 

300,564

 

 

275,590

 

Loss from operations

 

 

(21,094)

 

 

(27,166)

 

 

(81,476)

 

 

(84,901)

 

Interest expense

 

 

(2,672)

 

 

(2,781)

 

 

(8,117)

 

 

(7,730)

 

Interest and other income (expense), net

 

 

673

 

 

449

 

 

1,962

 

 

(3,347)

 

Loss before income taxes

 

 

(23,093)

 

 

(29,498)

 

 

(87,631)

 

 

(95,978)

 

Income tax expense

 

 

(44)

 

 

(118)

 

 

(2,013)

 

 

(335)

 

Net loss

 

$

(23,137)

 

$

(29,616)

 

$

(89,644)

 

$

(96,313)

 

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

 

 

63

 

 

(36)

 

 

1,410

 

 

(128)

 

Comprehensive loss

 

$

(23,074)

 

$

(29,652)

 

$

(88,234)

 

$

(96,441)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per share (Note 14):

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.33)

 

$

(0.49)

 

$

(1.33)

 

$

(1.71)

 

Diluted

 

$

(0.33)

 

$

(0.49)

 

$

(1.33)

 

$

(1.71)

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

70,456

 

 

60,570

 

 

67,198

 

 

56,462

 

Diluted

 

 

70,456

 

 

60,570

 

 

67,198

 

 

56,462

 

 

 

 

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

 

 

6

Natera, Inc.

Consolidated Statements of Stockholders’ Equity (Deficit)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended September 30, 2018

 

 

 

Common Stock

 

Additional
Paid-in

 

Accumulated Other Comprehensive

 

Accumulated

 

Total
Stockholders' Equity

(in thousands)

    

  

Shares

    

Amount

    

Capital

    

Loss

 

Deficit

    

(Deficit)

Balance as of June 30, 2018

 

 

55,454

 

$

 6

 

$

491,887

 

$

(858)

 

$

(513,072)

 

$

(22,037)

Issuance of common stock upon exercise of stock options

 

 

985

 

 

 —

 

 

7,867

 

 

 —

 

 

 —

 

 

7,867

Issuance of common stock in connection with Q3'18 equity offering, net

 

 

5,175

 

 

 1

 

 

96,776

 

 

 —

 

 

 —

 

 

96,777

Vesting of restricted stock

 

 

59

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Stock-based compensation

 

 

 —

 

 

 —

 

 

3,616

 

 

 —

 

 

 —

 

 

3,616

Unrealized gain on available-for sale securities

 

 

 —

 

 

 —

 

 

 —

 

 

(36)

 

 

 —

 

 

(36)

Net loss

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(29,616)

 

 

(29,616)

Balance as of September 30, 2018

 

 

61,673

 

$

 7

 

$

600,146

 

$

(894)

 

$

(542,688)

 

$

56,571

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 2018

 

 

 

Common Stock

 

Additional
Paid-in

 

Accumulated Other Comprehensive

 

Accumulated

 

Total
Stockholders'

(in thousands)

    

  

Shares

    

Amount

    

Capital

    

Loss

 

Deficit

    

Equity

Balance as of December 31, 2017

 

 

54,040

 

$

 6

 

$

472,552

 

$

(766)

 

$

(446,375)

 

$

25,417

Issuance of common stock upon exercise of stock options

 

 

1,773

 

 

 —

 

 

12,063

 

 

 —

 

 

 —

 

 

12,063

Issuance of common stock under employee stock purchase plan

 

 

206

 

 

 —

 

 

1,855

 

 

 —

 

 

 —

 

 

1,855

Issuance of common stock in connection with Q3'18 equity offering, net

 

 

5,175

 

 

 1

 

 

96,776

 

 

 —

 

 

 —

 

 

96,777

OrbiMed warrant liability reclass to equity & net shares issued

 

 

333

 

 

 —

 

 

6,762

 

 

 —

 

 

 —

 

 

6,762

Vesting of restricted stock

 

 

146

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Stock-based compensation

 

 

 —

 

 

 —

 

 

10,138

 

 

 —

 

 

 —

 

 

10,138

Unrealized gain on available-for sale securities

 

 

 —

 

 

 —

 

 

 —

 

 

(128)

 

 

 —

 

 

(128)

Net loss

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(96,313)

 

 

(96,313)

Balance as of September 30, 2018

 

 

61,673

 

$

 7

 

$

600,146

 

$

(894)

 

$

(542,688)

 

$

56,571

 

 

 

 

7

Natera, Inc.

Consolidated Statements of Stockholders’ Equity

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended September 30, 2019

 

 

 

Common Stock

 

Additional
Paid-in

 

Accumulated Other Comprehensive

 

Accumulated

 

Total
Stockholders'

(in thousands)

 

 

Shares

    

Amount

    

Capital

    

Income

 

Deficit

    

Equity

Balance as of June 30, 2019

 

 

70,035

 

$

 7

 

$

733,137

 

$

795

 

$

(640,851)

 

$

93,088

Issuance of common stock upon exercise of stock options

 

 

670

 

 

 —

 

 

4,433

 

 

 —

 

 

 —

 

 

4,433

Vesting of restricted stock

 

 

145

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Stock-based compensation

 

 

 —

 

 

 —

 

 

10,247

 

 

 —

 

 

 —

 

 

10,247

Unrealized gain on available-for sale securities

 

 

 —

 

 

 —

 

 

 —

 

 

63

 

 

 —

 

 

63

Net loss

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(23,137)

 

 

(23,137)

Balance as of September 30, 2019

 

 

70,850

 

$

 7

 

$

747,817

 

$

858

 

$

(663,988)

 

$

84,694

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 2019

 

 

 

Common Stock

 

Additional
Paid-in

 

Accumulated Other Comprehensive

 

Accumulated

 

Total
Stockholders'

(in thousands)

 

 

Shares

    

Amount

    

Capital

    

Income

 

Deficit

    

Equity

Balance as of December 31, 2018

 

 

62,083

 

$

 7

 

$

607,236

 

$

(552)

 

$

(574,529)

 

$

32,162

Issuance of common stock upon exercise of stock options

 

 

2,138

 

 

 —

 

 

10,416

 

 

 —

 

 

 —

 

 

10,416

Issuance of common stock under employee stock purchase plan

 

 

132

 

 

 —

 

 

2,147

 

 

 —

 

 

 —

 

 

2,147

Issuance of common stock for public offering, net

 

 

6,053

 

 

 —

 

 

107,595

 

 

 —

 

 

 —

 

 

107,595

Issuance of common stock to Orbimed

 

 

25

 

 

 —

 

 

506

 

 

 —

 

 

 —

 

 

506

Vesting of restricted stock

 

 

419

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Stock-based compensation

 

 

 —

 

 

 —

 

 

20,102

 

 

 —

 

 

 —

 

 

20,102

Unrealized gain on available-for sale securities

 

 

 —

 

 

 —

 

 

 —

 

 

1,410

 

 

 —

 

 

1,410

Cumulative-effect adjustment upon adoption of ASU 2018-07

 

 

 —

 

 

 —

 

 

(185)

 

 

 —

 

 

185

 

 

 —

Net loss

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(89,644)

 

 

(89,644)

Balance as of September 30, 2019

 

 

70,850

 

$

 7

 

$

747,817

 

$

858

 

$

(663,988)

 

$

84,694

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

 

 

 

8

Natera, Inc.

Consolidated Statements of Cash Flows

(Unaudited)

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Nine months ended

 

 

 

September 30, 

 

 

    

2019

    

2018

 

 

 

 

 

 

 

 

Operating activities

 

 

 

 

 

 

 

Net loss

 

$

(89,644)

 

$

(96,313)

 

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

 

5,921

 

 

5,574

 

Non-cash lease expense

 

 

5,807

 

 

 —

 

Stock-based compensation

 

 

20,102

 

 

10,138

 

Premium amortization and discount accretion on investment securities

 

 

400

 

 

264

 

Amortization of debt discount

 

 

336

 

 

293

 

Interest accrued for borrowings and claims related settlement

 

 

 —

 

 

189

 

Inventory excess adjustments

 

 

719

 

 

230

 

(Gain) loss on disposal of property and equipment

 

 

 —

 

 

(12)

 

Impairment of assets

 

 

1,310

 

 

1,544

 

Impairment of right-of-use assets

 

 

361

 

 

 —

 

Loss on investments

 

 

 —

 

 

42

 

Loss from changes in fair value of warrants

 

 

 —

 

 

4,119

 

Provision for doubtful accounts

 

 

497

 

 

152

 

Other non-cash charges (benefits)

 

 

(22)

 

 

 —

 

Gain on disposal of business

 

 

(14,388)

 

 

 —

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

 

(2,491)

 

 

(16,460)

 

Inventory

 

 

400

 

 

(3,477)

 

Prepaid expenses and other current assets

 

 

(9,321)

 

 

2,371

 

Other assets

 

 

(9,299)

 

 

302

 

Accounts payable

 

 

(5,194)

 

 

967

 

Accrued compensation

 

 

1,569

 

 

(13)

 

Other accrued liabilities

 

 

1,683

 

 

(3,798)

 

Deferred revenue

 

 

42,864

 

 

36,586

 

Deferred rent, net of current portion

 

 

 —

 

 

(466)

 

Net cash used in operating activities

 

 

(48,390)

 

 

(57,768)

 

 

 

 

 

 

 

 

 

Investing activities

 

 

 

 

 

 

 

Purchases of investments

 

 

(197,009)

 

 

(115,066)

 

Proceeds from sale of investments

 

 

 —

 

 

37,387

 

Proceeds from maturity of investments

 

 

118,780

 

 

52,600

 

Net proceeds from disposal of business

 

 

9,675

 

 

 —

 

Purchases of property and equipment, net

 

 

(2,554)

 

 

(1,770)

 

Net cash provided by (used in) investing activities

 

 

(71,108)

 

 

(26,849)

 

 

 

 

 

 

 

 

 

Financing activities

 

 

 

 

 

 

 

Proceeds from exercise of stock options

 

 

10,416

 

 

12,063

 

Proceeds from issuance of common stock under employee stock purchase plan

 

 

2,147

 

 

1,855

 

Proceeds from public offering, net of issuance costs

 

 

107,595

 

 

96,777

 

Net cash provided by financing activities

 

 

120,158

 

 

110,695

 

 

 

 

 

 

 

 

 

Net (decrease) increase in cash, cash equivalents and restricted cash

 

 

660

 

 

26,078

 

Cash, cash equivalents and restricted cash, beginning of period

 

 

51,004

 

 

13,021

 

Cash, cash equivalents and restricted cash, end of period

 

$

51,664

 

$

39,099

 

 

 

 

 

 

 

 

 

Supplemental non-cash investing and financing activities:

 

 

 

 

 

 

 

Obtaining right-of-use assets in exchange for lease liabilities

 

$

28,191

 

 

 —

 

Purchases of property and equipment in accounts payable and accruals

 

$

56

 

$

 —

 

 

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

9

Natera, Inc.

Notes to Unaudited Interim Condensed 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’s mission is to change the management of genetic disease worldwide. The Company operates a laboratory certified under the Clinical Laboratory Improvement Amendments ("CLIA") providing a host of preconception and prenatal genetic 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 has only one segment, which is the discovery, development and commercialization of genetic testing services, and it has a subsidiary that operates in the state of Texas.

The Company's product offerings include its Panorama Non-Invasive Prenatal Test ("NIPT") that screens for chromosomal abnormalities of a fetus typically with a blood draw from the mother; Vistara (“Vistara”), a single-gene mutations screening test performed to identify single-gene disorders; 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; Spectrum Pre-implantation Genetic Screening ("PGS") and Spectrum Pre-implantation Genetic Diagnosis ("PGD") to analyze chromosomal anomalies or inherited genetic conditions during an in vitro fertilization ("IVF") cycle to select embryos with the highest probability of becoming healthy children; Anora Products of Conception ("POC") test to rapidly and extensively analyze fetal chromosomes to understand the cause of miscarriage; and Non-Invasive Paternity Testing ("PAT"), to determine paternity by analyzing the fragments of fetal deoxyribonucleic acid ("DNA") in a pregnant mother's blood and a blood sample from the alleged father(s), which is marketed and sold by a licensee from whom the Company receives a royalty. 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 (“Constellation”), a cloud-based software product that allows laboratory customers to gain access through the cloud to the Company’s algorithms and bioinformatics in order to validate and launch tests based on the Company’s technology. The Company also offers SignateraTM, a circulating tumor DNA technology that analyzes and tracks mutations specific to an individual's tumor. The Company offered Evercord through September 2019, which is a cord blood and cord tissue processing and storage service. The Evercord service line was sold to a third-party buyer in September 2019 (Note 12). Further, the Company has expanded its Panorama test to now screen twin pregnancies for zygosity and chromosomal abnormalities.

 

2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited interim condensed consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information. The unaudited interim condensed consolidated financial information includes only adjustments of a normal recurring nature necessary for a fair presentation of the results of operations, financial position, changes in stockholders’ equity, and cash flows. The results of operations for the three and nine months ended September 30, 2019, are not necessarily indicative of the results for the full year or the results for any future periods. The condensed consolidated balance sheet as of December 31, 2018 has been derived from audited financial statements at that date, these financial statements should be read in conjunction with the audited financial statements, and related notes for the year ended December 31, 2018 included in the Company’s Annual Report on Form 10-K filed with the SEC on March 15, 2019. 

Effective January 1, 2019, the Company transitioned to the new accounting requirements under the Accounting Standards Update (“ASU”) No. 2018-07, Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. The Company applied the modified retrospective approach upon transition with a cumulative-effect adjustment of $0.2 million recorded to accumulated deficit as of January 1, 2019. The results in all of the prior period financial statements presented in this Form 10-Q were not retroactively adjusted. See Note 2 under Recently Adopted Accounting Pronouncements for further discussion.

10

On January 1, 2019, the Company adopted the new accounting requirements under ASU 2016-02, Leases, and concurrently elected ASU 2018-11, Leases (Topic 842): Targeted Improvements, which permitted the Company to adjust any cumulative-effect of the accounting change to the balance of accumulated deficit as of the adoption date instead of the earliest period presented by using the modified retrospective approach. None of the prior period financial results in this Form 10-Q were retroactively adjusted as a result of the adoption of ASU 2016-02. See Note 2 under Recently Adopted Accounting Pronouncements for more detail.

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 $89.6 million for the nine months ended September 30, 2019 and recorded a cumulative-effect adjustment of $0.2 million upon the adoption of ASU 2018-07 on January 1, 2019, which increased the accumulated deficit to $664.0 million at September 30, 2019 from $574.6 million at December 31, 2018. At September 30, 2019, the Company had $51.7 million in cash and cash equivalents, $186.7 million in marketable securities, $50.1 million of outstanding balance of the Credit Line (as defined in Note 10) including accrued interest, and $73.6 million of net carrying amount of the 2017 Term Loan (as defined in Note 10). While the Company has introduced multiple products that are generating revenues, these revenues have not been sufficient to fund all operations. Accordingly, the Company has funded the portion of operating costs that exceeds revenues through a combination of equity issuances, debt issuances, and other financings.

The Company continues to develop and commercialize 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 would 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 at all, or in amounts or on terms acceptable to the Company. If the Company is unable to obtain additional financing, it may be required to delay the development and commercialization of its products and significantly scale back its business and operations.

On April 23, 2019, the Company completed an underwritten equity offering to sell 5,263,158 shares of its common stock at a price to the public of $19 per share. On April 26, 2019, the Company sold an additional 789,473 shares of its common stock to the underwriters at the same price upon their exercise of the option to purchase those shares. Before offering expenses of $0.6 million, the Company received proceeds of $108.1 million net of the underwriting discount.

On October 17, 2019, the Company completed an underwritten equity offering to sell 5,714,286 shares of its common stock at a price to the public of $35 per share. The same day, the Company sold an additional 857,142 shares of its common stock to the underwriters at the same price upon their exercise of the option to purchase those shares. Before offering expenses of $0.4 million, the Company received proceeds of $216.2 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 November 8, 2019.  

Principles of Consolidation

The accompanying condensed consolidated financial statements include all the accounts of the Company and its subsidiary. The Company established a subsidiary that operates in the state of Texas to support the Company’s laboratory and operational functions. All intercompany balances and transactions have been eliminated.

Use of Estimates

The preparation of financial statements in accordance with U.S. GAAP 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

11

the allowance for doubtful accounts, the operating right-of-use assets and the associated lease liabilities, deferred revenues associated with unsatisfied performance obligations, accrued liability for potential refund requests, stock-based compensation, the fair value of common stock and warrants, 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. 

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).

Cash and Cash Equivalents

Cash and cash equivalents consist of cash and money market deposits with financial institutions.

Restricted Cash

The Company discloses both short-term and long-term restricted cash. As of September 30, 2019, short-term restricted cash totaled $0.1 million and long-term restricted cash totaled zero in cash deposits held as collateral for the settlement of foreign currency transactions and deposit per credit card terms.

In the first quarter of 2019, the Company paid the final quarterly installment of $1.4 million in connection with the settlement agreement relating to reimbursement-related claims, and accordingly, the restriction imposed on the $4.2 million cash deposits to secure the letter of credit required under the settlement agreement was released.

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:

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

    

2019

    

2018

 

 

(in thousands)

Cash and cash equivalents in balance sheet

 

$

51,609

 

$

46,407

Restricted cash, current portion in balance sheet

 

 

55

 

 

4,597

Total cash, cash equivalents and restricted cash in statements of cash flows

 

$

51,664

 

$

51,004

 

Investments

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, even though the stated maturity may be more than one year from the current balance sheet 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.

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

12

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.

The Company bills third-party payers for certain tests performed. The amount that is ultimately received from the payer for the Company’s claim and the timing of such payments are subject to the determination of the payer based on the nature of the test performed and their view of the Company’s business practices with respect to collections of plan deductibles and co-payments from patients and other activities. This determination can impact both the amount and timing of when the Company’s invoices are collected. Payers may also withhold payments and request refunds of prior payments if the payer asserts that the Company has not performed in accordance with the policies of these payers.

The Company performs evaluations of financial conditions for insurance carriers, patients, clinics and laboratory partners and generally does not require collateral to support credit sales. For the three and nine months ended September 30, 2019, and 2018, there were no customers exceeding 10% of total revenues on an individual basis. As of September 30, 2019 and December 31, 2018, there were no customers with an outstanding balance exceeding 10% of net accounts receivable. 

Revenue Recognition

The Company adopted the new revenue recognition guidance, Accounting Standards Codification (“ASC”) Topic 606, beginning January 1, 2018. 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 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, third-party test fees and allocated overhead including rent, information technology costs, equipment depreciation and utilities. Costs associated with the performance of diagnostic services are recorded as tests are accessioned.

Cost of Licensing and Other Revenues

The components of cost of licensing and other revenues are material costs associated with test kits, engineering costs incurred to improve and maintain the Constellation software platform, amortization of Constellation software development costs, and other licensing agreements. Costs also include collection kits consumed during the processing of cord blood samples, processing service and storage of the cord blood samples, and freight charged to transport the samples to the storage facility.    

Stock‑Based Compensation

Stock‑based compensation is related to stock options and restricted stock units (“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 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.

13

 

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 also recognizes stock-based compensation from option awards and RSUs granted to non-employees. Prior to January 1, 2019, the fair value of non-employee awards was subject to remeasurement at the end of each reporting period until the vesting date of such awards, and the resulting change in fair value was recognized in the Company's statements of operations and comprehensive loss during the period that the related services were rendered.

On January 1, 2019, the Company adopted ASU 2018-07, which allows the accounting for non-employee awards to be treated the same as for employee awards. The fair value of non-employee awards is now determined based on a one-time measurement at the grant date, and it is no longer subject to periodic remeasurement. The Company continues to recognize stock-based compensation expense as services are rendered by the non-employees over the vesting period, which is accounted for on a straight-line basis. See further discussion under the Recently Adopted Accounting Pronouncements section within this footnote, as well as the election of certain accounting policy as a result of the adoption.  

The Company uses the Black‑Scholes option‑pricing model and the Monte Carlo simulation model to estimate the fair value of stock options issued to employees and non-employees. 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.

Warrants

The Company historically accounted for warrants to purchase shares of its common stock as a liability at fair value on the balance sheet date because the Company could have been obligated to redeem these warrants at some point in the future. The warrants were subject to re-measurement at each balance sheet date, with changes in fair value of the warrants recognized as a gain or loss in interest and other income in the statements of operations and comprehensive loss. Further adjustments resulting from changes in fair value are no longer required as the warrants were fully exercised in June 2018. 

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. 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 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. See Property and Equipment, net under Note 6 for more detail regarding an impairment charge recorded to write off certain project development costs during the first quarter of 2018. 

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 $1.4 million and $1.7 million as of September 30, 2019 and December 31, 2018, respectively. Amortized expense for amounts previously capitalized for the three months ended September 30, 2019 and 2018 was $0.3 million for each period; and $0.9 million and $1.0 million for the nine months ended September 30, 2019 and 2018, respectively. In addition, the Company recorded $0.1 million of impairment expense in relation to the disposal of business.

14

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.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended 

 

Nine months ended

 

September 30, 

 

September 30, 

 

2019

 

2018

 

2019

 

2018

 

(in thousands)

 

(in thousands)

Beginning balance

$

795

 

$

(858)

 

$

(552)

 

$

(766)