# Natera, Inc. (NTRA) FY 2021 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Natera, Inc.'s 10-K for fiscal year 2021.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1604821/000155837022002022/ntra-20211231x10k.htm
Accession: 0001558370-22-002022
Filing date: 2022-02-25
Report date: 2021-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/NTRA/
All MD&A years: /company/NTRA/mda/
Next year: /company/NTRA/mda/fy2022/ (FY 2022)

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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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.

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Overview

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We are a diagnostics company with proprietary molecular and bioinformatics technology that we deploy 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 proven 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.

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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 laboratory and offer on a research use only (“RUO”) basis to research laboratories and pharmaceutical companies; and our Prospera organ transplant assessment tests.

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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.

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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.

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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, 2021, we processed approximately 1,570,000 tests, comprised of approximately 1,513,400 tests accessioned in our laboratories, compared to December 31, 2020, in which we processed approximately 1,026,500 tests, comprised of approximately 974,400 tests accessioned in our laboratories, and approximately 804,300 tests processed during the year ended December 31, 2019, comprised of approximately 753,800 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.

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The percent of our revenues attributable to our U.S. direct sales force were 89%, 87% and 80% for the years ended December 31, 2021, 2020, 2019, respectively. The percent of our revenues attributable to U.S. laboratory partners for the year ended December 31, 2021 was 5%, which was down from 7% and 6%, when compared to the years ended December 31, 2020 and 2019. The percent of our revenues attributable to international laboratory partners and other international sales for the years ended December 31, 2021 was 6%, consistent with 6% and down from 14% for the years ended December 31, 2020 and December 31, 2019, respectively.

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For the year ended December 31, 2021, total revenues were $625.5 million, compared to $391.0 million and $302.3 million in the years ended December 31, 2020 and 2019, respectively. Product revenues generated from our testing accounted for $567.1 million or 91% of total revenues for the year ended December 31, 2021, compared to $367.2 million or 94% of total revenues for the year ended December 31, 2020 and $269.9 million or 89% of total revenues for the year ended December 31, 2019. For the years ended December 31, 2021, 2020, and 2019, there were no customers exceeding 10% of the total revenues on an individual basis. Revenues from customers outside the United States were $34.6 million, representing 6% of total revenues for the year ended December 31, 2021. For the years ended December 31, 2020 and 2019, revenues from customers outside the United States were $25.3 million and $41.5 million, representing approximately 6% and 14%, respectively, of total revenues.

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Our net losses for the years ended December 31, 2021, 2020, and 2019, were $471.7 million, $229.7 million, and $124.8 million, respectively. This included non-cash stock compensation expense of $115.2 million, $50.2 million, and $28.6 million for the years ended December 31, 2021, 2020, and 2019, respectively. As of December 31, 2021, we had an accumulated deficit of $1.4 billion.

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COVID-19 Impact

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The COVID-19 pandemic has continued to present a global public health and economic challenge that has affected our business operations and the U.S. and other major economies and financial markets. We have modified our business practices in response to the spread of COVID-19 (including temporary closures of our offices, implementing remote work policies and practices, vaccination requirements, travel restrictions, and other measures as we have deemed necessary or appropriate from time to time), and incur additional operating costs, and we may take further actions from time to time as may be required by government authorities or that we determine are in the best interests of our employees, customers and business partners. Such actions could also impact our ability to fully integrate businesses we may acquire in the future. There is no certainty that such actions will be sufficient to mitigate the continuing risks posed by the virus or otherwise be satisfactory to government authorities. If significant portions of our workforce, and particularly our laboratory staff, are unable to work effectively, including due to illness, quarantines, social distancing, recruiting and retention difficulties, government actions, including the prospect of rising interest rates, inflationary pressure, and stock market volatility, or other restrictions in connection with the COVID-19 pandemic, our operations and financial results will be impacted.

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The extent to which the COVID-19 pandemic will continue to impact our business, results of operations and financial condition will depend on future developments, which continue to remain highly uncertain and cannot be predicted, including, but not limited to, the continued duration and spread of the pandemic, including the contagiousness

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of variants and their severity, the actions to contain the virus or address its impact, and whether, when and to what extent pre-pandemic economic and operating activities can resume. The COVID-19 pandemic could continue to limit the ability of our customers, suppliers and business partners to perform under their contracts with us, including third-party payers’ ability to make timely payments to us during and following the pandemic. We may also experience a shortage of laboratory supplies and reagents or a suspension of services from other laboratories or third parties. We also increased our dependence on growing and maintaining a network of mobile phlebotomy specialists who can provide testing capabilities, as many consumers are unable to visit clinics, hospitals or other testing facilities as a result of the COVID-19 pandemic. Even after the COVID-19 pandemic has subsided, we may continue to experience an adverse impact to our business because of its global economic impact, including as a result of inflation and any recession that has occurred or may occur in the future.

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Specifically, difficult macroeconomic conditions as a result of COVID-19, such as decreases in per capita income and level of disposable income, increased and prolonged unemployment, a decline in consumer confidence, as well as limited or significantly reduced points of access of our products, could have a material adverse effect on the demand for some of our products, such as our products targeted for the IVF market. Decreased demand for our tests, particularly in the United States, could negatively affect our overall financial performance. A significant portion of our revenue is concentrated in the United States, where the impact of COVID-19 has been significant, and the potential decrease in demand for our tests could have a disproportionately negative impact on our business and financial results.

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In particular, while our test volumes in 2021 have increased compared to the previous year, and the average selling price of our tests collected from insurance payors in the year ended December 31, 2021 increased compared to the year ended December 31, 2020, we cannot predict volatility of the volumes and selling prices of our tests that may result from the continued impact of the COVID-19 pandemic, and either or both of these metrics may fluctuate from period to period. Further, we cannot predict the potential nature, magnitude and duration of the effects of the COVID-19 pandemic on our business.

In response to the COVID-19 pandemic, we have implemented measures to protect the health of our employees and to support the functionality of our laboratories. We will continue to support and incur expenditures towards COVID-19 prevention and employee safety.

Since the World Health Organization ("WHO") declared the global outbreak of COVID-19 to be a pandemic in March 2020, we have operated in an uncertain and disruptive pandemic environment but to date we have successfully maintained our operational effectiveness, including the operation of financial reporting systems, internal control over financial reporting and disclosure controls and procedures. We continue to closely monitor the recent developments surrounding this pandemic and resurgences including, among other developments, local, state, national and global vaccination efforts and the potential impacts of variants.

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Components of the Results of Operations

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The section of this Management’s Discussion and Analysis generally discusses year-to-year comparisons between 2021 and 2020. Discussions of year-to-year comparisons between 2020 and 2019 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, 2020, filed with the SEC on February 26, 2021.

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Revenues

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Product Revenues

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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.

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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.

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Our ability to increase our revenues will depend on our ability to further penetrate the domestic and international markets and, in particular, generate sales through our direct sales force, develop and commercialize additional tests, obtain reimbursement from additional third-party payers and increase our reimbursement rate for tests performed. In particular, our financial performance depends on reimbursement for Panorama in the average risk population and for microdeletions. There has been a significant increase in the number of commercial third-party payers that cover the use of Panorama in the average risk population, representing approximately 95% of commercial covered lives in the United States, as well as an increasing number of state Medicaid payers expanding coverage to average risk pregnancies. Many third-party payers do not currently reimburse for microdeletions screening in part because there is currently limited published data on the performance of microdeletions screening tests. A new current procedure terminology (“CPT”) code for microdeletions went into effect beginning January 1, 2017. We have experienced low average reimbursement rates thus far for microdeletions testing under this new code, and we expect that this new code will cause, at least in the near term, our microdeletions reimbursement to remain low, due to third-party payers declining to reimburse and through reduced reimbursement under the new 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 an increasing 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.

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Our financial performance has also been impacted by the increase in in-network coverage of our tests by third-party payers, which we believe is crucial to our growth and long-term success. However, because the negotiated fees under our contracts with third-party payers are typically lower than the list price of our tests, as we enter into additional in-network contracts with insurance providers, our average reimbursement per test may decrease as compared to out-of-network contracts. While we expect the reduction in average reimbursement per test from in-network pricing to reduce our revenues and gross margins in the near term, in-network pricing is more predictable than out-of-network pricing, and we intend to continue to mitigate the impact by driving more business from our most profitable accounts.

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Licensing and Other Revenues

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Revenues recognized from tests processed through our Constellation model, from our Qiagen, BGI Genomics, and Foundation Medicine agreements (collectively the “Strategic Partnership Agreements”), and from our Signatera research use only and companion diagnostics (“CDx”) offering 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, 2021, we are recognizing revenues on 15 licensing and service arrangements with laboratories under our Constellation model.

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Our strategy to offer 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 offering. 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

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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 costs associated with specimens and Whole Exome Sequencing (“WES”), as well as labor costs, relating to our Signatera (RUO) and CDx offering.

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We currently have 15 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

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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.

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Selling, General and Administrative

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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.

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Gain on Disposal of Business

In September 2019, we sold our Evercord business that provided cord tissue processing and storage services for total estimated consideration of $15.4 million, including $9.7 million in cash, $1.0 million of cash deposited in a third-party escrow account recorded in short-term other receivables, and $4.7 million of additional consideration. We recognized a gain of $14.4 million on the sale, which was included in loss from operations in the consolidated statements of operations and comprehensive loss.

Interest Expense

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Interest expense is attributable to borrowing under our Credit Line, the 2017 Term Loan, as well as the Convertible Note, including the amortization of debt discounts.

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Interest Income and Other (Expense) Income, Net

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Interest income and other (expense) income, net is comprised of interest earned on our cash, realized gains and losses on investments, foreign currency remeasurement gains and losses, changes in the fair value of our warrants, and finance charges related to the unused borrowing capacity of our 2017 Term Loan.

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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. Refer to note 10, Debt, for details.

Critical Accounting Policies

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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, inventory, fair value measurements, and stock-based compensation. Refer to note 2, Summary of Accounting Policies, for details.

Recent Accounting Pronouncements

We have adopted ASU 2020-06, Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40) which simplifies the accounting for convertible instruments. See Note 2, Summary of Significant Accounting Policies, for recently adopted accounting pronouncements.

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. The majority of our revenues are derived from Panorama NIPT, HCS, and to a lesser extent, other genetic tests including Signatera CLIA and Prospera. We enter into

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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.

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Licensing and Other Revenues

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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.

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We also recognize revenues from our Signatera (RUO) offering, which is for research use only to cancer researchers and biopharmaceutical companies as well as our CDx offering. We enter into agreements with pharmaceutical companies to utilize our 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.

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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.

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Income Taxes

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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 2021 and 2020 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.

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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:

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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.

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Impairment of Long-Lived Assets

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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 discounted estimates of future cash flows. There were no asset impairment charges for the years ended December 31, 2021 and 2020.

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For the year ended December 31, 2019, an asset impairment charge of $1.7 million was recorded in general and administrative expenses in the statements of operations and comprehensive loss. This charge is comprised of $1.2 million from the impairment of leasehold improvements, $0.1 million from the impairment of capitalized software held for internal use, and $0.4 million from the right-of-use asset related to the disposal of business. The right-of-use asset and the leasehold improvements relate to the storage facility located in Tukwila, Washington, and both assets were evaluated for impairment as a single asset group. Subsequent to the sale of Evercord, we recognized an impairment charge for the leasehold improvements that was previously capitalized for the storage facility and wrote down the right-of-use asset to its fair value as of the sale date.

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Results of Operations

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Comparison of the years ended December 31, 2021, 2020, and 2019

​

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","Year Ended December 31,","\u200b","\u200b","Changes"],["(in thousands)","2021","","2020","","2019","","","2021 - 2020","\u200b","","2020 - 2019"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","Amount","\u200b","Percent","\u200b","\u200b","Amount","\u200b","Percent","\u200b"],["Revenues:","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Product revenues","$","567,149","\u200b","$","367,211","\u200b","$","269,881","\u200b","\u200b","$","199,938","\u200b","54.4","%","\u200b","$","97,330","\u200b","36.1","%"],["Licensing and other revenues","\u200b","58,337","\u200b","\u200b","23,794","\u200b","\u200b","32,447","\u200b","\u200b","\u200b","34,543","\u200b","145.2","\u200b","\u200b","\u200b","(8,653)","\u200b","(26.7)","\u200b"],["Total revenues","\u200b","625,486","\u200b","\u200b","391,005","\u200b","\u200b","302,328","\u200b","\u200b","\u200b","234,481","\u200b","60.0","\u200b","\u200b","\u200b","88,677","\u200b","29.3","\u200b"],["Cost and expenses:","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Cost of product revenues","\u200b","302,663","\u200b","\u200b","185,865","\u200b","\u200b","162,604","\u200b","\u200b","\u200b","116,798","\u200b","62.8","\u200b","\u200b","\u200b","23,261","\u200b","14.3","\u200b"],["Cost of licensing and other revenues","\u200b","15,755","\u200b","\u200b","17,755","\u200b","\u200b","12,866","\u200b","\u200b","\u200b","(2,000)","\u200b","(11.3)","\u200b","\u200b","\u200b","4,889","\u200b","38.0","\u200b"],["Research and development","\u200b","264,208","\u200b","\u200b","100,035","\u200b","\u200b","51,357","\u200b","\u200b","\u200b","164,173","\u200b","164.1","\u200b","\u200b","\u200b","48,678","\u200b","94.8","\u200b"],["Selling, general and administrative","\u200b","511,034","\u200b","\u200b","303,627","\u200b","\u200b","206,176","\u200b","\u200b","\u200b","207,407","\u200b","68.3","\u200b","\u200b","\u200b","97,451","\u200b","47.3","\u200b"],["Gain on disposal of business","\u200b","\u2014","\u200b","\u200b","\u2014","\u200b","\u200b","(14,388)","\u200b","\u200b","\u200b","\u2014","\u200b","*","\u200b","\u200b","\u200b","14,388","\u200b","*","\u200b"],["Total cost and expenses","\u200b","1,093,660","\u200b","\u200b","607,282","\u200b","\u200b","418,615","\u200b","\u200b","\u200b","486,378","\u200b","80.1","\u200b","\u200b","\u200b","188,667","\u200b","45.1","\u200b"],["Loss from operations","\u200b","(468,174)","\u200b","\u200b","(216,277)","\u200b","\u200b","(116,287)","\u200b","\u200b","\u200b","(251,897)","\u200b","116.5","\u200b","\u200b","\u200b","(99,990)","\u200b","86.0","\u200b"],["Interest expense","\u200b","(8,305)","\u200b","\u200b","(15,082)","\u200b","\u200b","(10,693)","\u200b","\u200b","\u200b","6,777","\u200b","(44.9)","\u200b","\u200b","\u200b","(4,389)","\u200b","41.0","\u200b"],["Interest and other income, net","\u200b","5,381","\u200b","\u200b","7,562","\u200b","\u200b","4,152","\u200b","\u200b","\u200b","(2,181)","\u200b","(28.8)","\u200b","\u200b","\u200b","3,410","\u200b","82.1","\u200b"],["Loss on debt extinguishment","\u200b","\u2014","\u200b","\u200b","(5,848)","\u200b","\u200b","\u2014","\u200b","\u200b","\u200b","5,848","\u200b","(100.0)","\u200b","\u200b","\u200b","(5,848)","\u200b","100.0","\u200b"],["Loss before income taxes","\u200b","(471,098)","\u200b","\u200b","(229,645)","\u200b","\u200b","(122,828)","\u200b","\u200b","\u200b","(241,453)","\u200b","105.1","\u200b","\u200b","\u200b","(106,817)","\u200b","87.0","\u200b"],["Income tax expense","\u200b","(618)","\u200b","\u200b","(98)","\u200b","\u200b","(1,999)","\u200b","\u200b","\u200b","(520)","\u200b","530.6","\u200b","\u200b","\u200b","1,901","\u200b","(95.1)","\u200b"],["Net loss","$","(471,716)","\u200b","$","(229,743)","\u200b","$","(124,827)","\u200b","\u200b","$","(241,973)","\u200b","105.3","%","\u200b","$","(104,916)","\u200b","84.0","%"]]
[[/GREPCENT_TABLE]]

_______________________

​

* Not meaningful

​

Revenues

​

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, and revenues from our Signatera (RUO) and CDx offering. Total revenues increased by $234.5 million, or 60.0%, when compared to the year ended December 31, 2020.

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, 2021, total reported units were approximately 1,453,500, comprised of approximately 1,400,100 tests reported in our laboratories. Comparatively, during the year ended December 31, 2020, total reported units were approximately 962,400, comprised of approximately 912,500 tests reported in our laboratories.

Product Revenues

​

During the year ended December 31, 2021, product revenues increased by $199.9 million, or 54.4% compared to the year ended December 31, 2020, as a result of the continued revenue growth from increased test volumes.

​

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Licensing and Other Revenues

​

Licensing and other revenues increased by $34.5 million, or 145.2%, during the year ended December 31, 2021 compared to the year ended December 31, 2020. The increase in revenue was primarily due to an increase in revenues recognized from our collaborative agreements and Signatera CDx development revenues.

​

Cost of Product Revenues

​

During the year ended December 31, 2021, cost of product revenues increased by $116.8 million or 62.8% when compared to the year ended December 31, 2020, primarily due to higher costs related to inventory consumption of $19.0 million driven by an increase in accessioned cases, a $47.0 million increase in third-party fees, a $8.5 million increase in shipping related charges due to higher volume, and a $42.3 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, 2021, when compared to the year ended December 31, 2020, decreased by approximately $2.0 million, or 11.3%, primarily due a decrease of $2.2 million from third party service fees associated with volume discounts and a $0.7 million net decrease in labor and overhead related costs, offset by a $0.9 million increase in costs related to inventory consumption.

​

Research and Development

​

Research and development expenses during the year ended December 31, 2021 increased by $164.2 million, or 164.1%, when compared to the year ended December 31, 2020. The increase was driven by a $60.3 million increase in salary and related expenditures primarily due to headcount growth, which includes a $14.4 million increase in stock-based compensation expense, an increase of $24.4 million of consulting costs, a $23.0 million increase of costs related to clinical studies to support our new product offerings and research and development project pipeline, $35.6 million in-process research and development related to the asset acquired in 2021, $6.3 million of expenses related to acquisition-related milestones, a $8.2 million increase related to software licenses to support the Company’s technology for use in research and development, and a $6.4 million increase in facilities and other costs to support increases in the Company’s headcount.

​

Selling, General and Administrative

​

Selling, general and administrative expenses increased by $207.4 million, or 68.3%, in the year ended December 31, 2021 compared to the year ended December 31, 2020. The increase was attributable to an increase of $140.6 million in salary and related expenditures primarily due to headcount growth to support new product offerings, which includes a $47.5 million increase in stock-based compensation expense, a $21.3 million increase in marketing expenses, a $11.9 million increase in travel related costs, a $6.7 million increase from third party billing services fees, a $15.2 million increase in legal fees related to the Company’s ongoing legal matters, and a $11.7 million increase related to computer hardware and software licenses, and bank fees, office supplies and other costs to support new product offerings.

​

Interest Expense

​

Interest expense decreased by $6.8 million, 44.9%, in the year ended December 31, 2021 compared to the same period in the prior year. The interest expense from the Convertible Notes issued in April 2020, was lower in the current period due to the adoption of ASU 2020-06 where the majority of the non-cash interest expense was eliminated. In addition, the 2017 Term Loan with Orbimed was extinguished in April 2020.

​

Interest and Other Income

​

Interest and other income decreased by $2.2 million, or 28.8%, in the year ended December 31, 2021, compared to the same period in the prior year, primarily due to less interest income as a result of lower yields from our investments.

​

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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 April 2020.

​

Liquidity and Capital Resources

​

We have incurred net losses each year since our inception. For the year ended December 31, 2021, we had a net loss of $471.7 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, 2021, we had an accumulated deficit of $1.4 billion. We had $84.6 million in cash and cash equivalents and restricted cash, $829.9 million in marketable securities, $50.1 million of outstanding balance of the Credit Line including accrued interest, and $287.5 million outstanding principal balance on the Convertible Notes. We used a portion of the net proceeds from the offering of the Convertible Notes to repay our obligations under our 2017 Term Loan with OrbiMed.

​

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

In April 2019, we completed an underwritten equity offering and sold 6,052,631 shares of common stock at a price of $19 per share to the public. Before offering expenses of $0.6 million, we received proceeds of $108.1 million net of the underwriting discount. In October 2019, we completed another underwritten equity offering and sold 6,571,428 shares of its common stock at a price of $35 per share to the public. Before offering expenses of $0.4 million, we received proceeds of $216.2 million net of the underwriting discount. 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 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. As cash flows from our operations are currently negative, our contractual obligations and other commitments are satisfied by both the equity financing described above 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 February 24, 2022.

Credit Line Agreement

​

In September 2015, we entered into the Credit Line with UBS providing for a $50.0 million revolving line of credit which can 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

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securities held in our managed investment account with UBS. UBS has the right to demand full or partial payment of the Credit Line obligations and terminate it, in its discretion and without cause, at any time.

​

2017 Term Loan

In August 2017, we entered into the 2017 Term Loan with OrbiMed, which has a maximum borrowing capacity of $100.0 million. On the closing date of August 8, 2017, we borrowed $75.0 million, with the remaining $25.0 million available to borrow at our option at any time through December 31, 2019. Subsequently, we entered into several amendments and extended the expiration date until December 31, 2019 to draw the unused borrowing capacity of $50.0 million. After the amendments, the interest rate was equal to the sum of (i) 8.25% plus (ii) the higher of 1.00% or LIBOR, provided we draws the minimum capacity of $25.0 million. If the amount drawn is less than $25.0 million, the interest rate would remain at the sum of (i) 8.75% plus (ii) the higher of 1.00% or LIBOR. As a fee in consideration of extending the commitment to provide this option to draw until December 31, 2019, we issued an additional 25,000 shares of our common stock to OrbiMed. We did not exercise such option, and the right to draw the unused borrowing capacity expired. In April 2020, we used a portion of the net proceeds from the offering of the Convertible Notes to repay our obligations under the 2017 Term Loan with OrbiMed.

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:

​

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","Year Ended","\u200b"],["\u200b","\u200b","December 31,","\u200b"],["\u200b","","2021","","2020","\u200b","2019"],["\u200b","\u200b","(in thousands)"],["Cash used in operating activities","\u200b","$","(335,236)","\u200b","$","(182,512)","\u200b","$","(63,444)","\u200b"],["Cash used in investing activities","\u200b","","(205,193)","\u200b","","(331,461)","\u200b","\u200b","(266,353)","\u200b"],["Cash provided by financing activities","\u200b","","576,188","\u200b","","500,847","\u200b","\u200b","340,774","\u200b"],["Net increase (decrease) in cash, cash equivalents and restricted cash","\u200b","","35,759","\u200b","\u200b","(13,126)","\u200b","\u200b","10,977","\u200b"],["Cash, cash equivalents and restricted cash, beginning of period","\u200b","","48,855","\u200b","","61,981","\u200b","\u200b","51,004","\u200b"],["Cash, cash equivalents and restricted cash, end of year","\u200b","$","84,614","\u200b","$","48,855","\u200b","$","61,981","\u200b"]]
[[/GREPCENT_TABLE]]

​

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Table of Contents

Cash Used in Operating Activities

​

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 $64.3 million resulting from $43.4 million in increases in accounts receivable, $7.5 million in increases in inventory, and $10.5 million in increases in prepaid expenses and $2.9 million in increases of other current assets. Operating liabilities resulted in cash inflows of $18.2 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.

Cash used in operating activities during the year ended December 31, 2020 was $182.5 million. The net loss of $229.7 million includes $86.4 million in non-cash charges resulting from $8.6 million of depreciation and amortization, $7.8 million non-cash lease expense, $50.2 million of stock-based compensation expense, $5.7 million premium amortization and discount accretion on investment securities, $1.3 million provision for credit losses, $7.0 million for accretion of the convertible note, $5.8 million loss on debt extinguishment, and $0.1 million of amortization of debt discount. These non-cash charges were offset by $0.2 million of inventory reserve adjustments, $0.1 million of gain on investments, and $0.2 million of non-cash benefits. Operating assets had cash outflows of $56.8 million resulting from $25.8 million increases in accounts receivable, $7.5 million increases in inventory, and $23.4 million decreases in prepaid assets, and $0.1 million increases in other assets. Operating liabilities generated cash inflows of $17.6 million resulting from a $10.3 million increase in other accrued liabilities, a $14.3 million increase in accrued compensation offset by $0.1 million decrease in accounts payable and $6.9 million decrease in deferred revenue.

​

Cash Used in Investing Activities

​

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 used in investing activities for the year ended December 31, 2020 totaled $331.5 million, which was comprised of purchasing new investments of $685.2 million and $19.6 million in acquisitions of property, plant and equipment, offset by $343.3 million from proceeds of investments maturities and $30.0 million proceeds from sale of investments.

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Table of Contents

Cash Provided by Financing Activities

​

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.

​

Cash provided by financing activities for the year ended December 31, 2020 totaled $500.8 million comprised of $23.5 million cash proceeds from the exercise of stock options, $7.1 million in issuance of common stock under the employee stock purchase plan, $278.3 million net proceeds from the issuance of the Convertible Notes, and $270.7 million in net proceeds from our equity offering completed in the third quarter of 2020. This was offset by a $78.8 million repayment of the 2017 Term Loan with OrbiMed.

​

Contractual Obligations and Other Commitments

​

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

​

Operating leases

​

Our lease commitments consist of $115.7 million of payments, which will be paid over the term of the lease, including the additional office spaces totaling $29.7 million (the “First Expansion Premises” and the “Second Expansion Premises”) from the lease amendment for the laboratory and office space in Austin, Texas.  The leases for the First and Second Premises have not commenced under Accounting Standards Codification (ASC) Topic 842, Leases (ASC 842), as of December 31, 2021. As a result, these leases are not reflected within the consolidated balance sheets. We expect these leases to commence in 2022 and expire in March 2033. For additional information on our leases and timing of future payments, please refer to Note 7, Leases.

​

Credit Line

​

The short-term debt obligations consist of the $49.0 million principal amount drawn from the UBS 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. 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.

​

Inventory purchase and other contractual obligations

​

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Table of Contents

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 a $35.0 million potential earnout payment from our IPR&D asset acquisition. 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, 2021:

​

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","Payments Due by Period"],["\u200b","","\u200b","","Less Than","","1 to 3","","3 to 5","","More Than"],["\u200b","\u200b","Total","\u200b","1 Year","\u200b","Years","\u200b","Years","\u200b","5 Years"],["\u200b","\u200b","(in thousands)"],["Operating leases(1)","\u200b","$","115,674","\u200b","$","9,980","\u200b","$","27,441","\u200b","$","30,981","\u200b","$","47,272","\u200b"],["Short-term debt obligations(2)","\u200b","","49,000","\u200b","","49,000","\u200b","","\u2014","\u200b","","\u2014","\u200b","","\u2014","\u200b"],["Long-term debt obligations(3)","\u200b","\u200b","287,500","\u200b","\u200b","\u2014","\u200b","\u200b","\u2014","\u200b","\u200b","\u2014","\u200b","\u200b","287,500","\u200b"],["Interest accrued on debt(4)","\u200b","\u200b","2,130","\u200b","\u200b","2,130","\u200b","\u200b","\u2014","\u200b","\u200b","\u2014","\u200b","\u200b","\u2014","\u200b"],["Inventory purchase and other contractual obligations(5)","\u200b","","108,292","\u200b","","87,400","\u200b","","20,352","\u200b","","540","\u200b","","\u2014","\u200b"],["Total","\u200b","$","562,596","\u200b","$","148,510","\u200b","$","47,793","\u200b","$","31,521","\u200b","$","334,772","\u200b"]]
[[/GREPCENT_TABLE]]

​

​

[[GREPCENT_TABLE]]
[["","(1)","Includes executed leases which have not commenced. Please refer to Note 7, Leases for additional information."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","(2)","Represents proceeds drawn from our Credit Line."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","(3)","Represents the principal amount of our Convertible Notes due 2027."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","(4)","Represents interest accrued on our Convertible Notes and Credit Line."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","(5)","Represents various inventory purchase and other contractual obligations. Please refer to contractual commitments disclosures provided in Note 8, Commitments and contingencies for additional information."]]
[[/GREPCENT_TABLE]]

​

Off-Balance Sheet Arrangements

​

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

​