Natera, Inc. (Form: 10-Q, Received: 11/05/2021 06:10:59)

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

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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, 2021

◻	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.)




13011 McCallen Pass Building A Suite 100 Austin, TX	78753
(Address of Principal Executive Offices)	(Zip Code)

(650) 249-9090

(Registrant’s Telephone Number, Including Area Code)

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)

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:

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 ⌧

As of November 1, 2021, the number of outstanding shares of the registrant’s common stock, par value $0.0001 per share, was 94,594,816.

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Natera, Inc.

FORM 10-Q FOR THE QUARTER ENDED September 30, 2021

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		Page

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Part I — Financial Information
	Item 1. Financial Statements (unaudited)	5
	Condensed Consolidated Balance Sheets at September 30, 2021 and December 31, 2020	5
	Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three and Nine months Ended September 30, 2021 and 2020	6
	Condensed Consolidated Statements of Stockholders’ Equity for the Three and Nine months Ended September 30, 2021 and 2020	7
	Condensed Consolidated Statements of Cash Flows for the Nine months Ended September 30, 2021 and 2020	9
	Notes to Unaudited Interim Condensed Consolidated Financial Statements	10
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	39
	Item 3. Quantitative and Qualitative Disclosures About Market Risk	50
	Item 4. Controls and Procedures	50

Part II — Other Information
	Item 1. Legal Proceedings	51
	Item 1A. Risk Factors	52
	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	52
	Item 3. Defaults Upon Senior Securities	52
	Item 4. Mine Safety Disclosures	52
	Item 5. Other Information	52
	Item 6. Exhibits	53
	Signatures	54

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements, including in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations”. 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 "anticipate," "believe," "continue," "could," "design," "estimate," "expect," "intend," "may," "plan," "potential," "predict," "seek," "should," "will," "would" or the negative version of these words and similar expressions.

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

●

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

●

our ability to increase demand for Panorama and Horizon, including our expectation that Panorama will be adopted for broader use in average-risk pregnancies and for the screening of microdeletions;

●

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, including our expectations regarding the results of our SNP based Microdeletion and Aneuploidy RegisTry, or SMART, Study and our expectations that the results from such study may support broader use and reimbursement for the use of Panorama in average risk pregnancies and for microdeletions;

●

the extent and duration of the impact of the COVID-19 pandemic on our business, results of operations, stock price, or overall financial condition;

●

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

●

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

●

our efforts to successfully develop and commercialize our oncology and organ health products;

●

the effect of improvements in our cost of goods sold;

●

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

●

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

●

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

●

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

●

our ability to successfully compete in the markets we serve;

●

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

●

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

●

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

●

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

●

our ability to complete clinical studies and publish compelling clinical data in peer-reviewed medical publications regarding Panorama and any of our future tests, including our SMART study and our ongoing and planned trials in oncology and transplant rejection;

●

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

●

our expectations regarding acquisitions, dispositions and other strategic transactions;

●

our expectations regarding the conversion of our outstanding 2.25% convertible senior notes due 2027 in the aggregate principal amount of $287.5 million and our ability to make debt service payments under the Convertible Notes if such Convertible Notes are not converted;

●

our ability to fund our working capital requirements;

●

the factors that may impact our financial results;

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●

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

●

whether we will elect to exercise the option we have to acquire certain assets of a third party and, if exercised, whether that acquisition will be consummated and meet our expectations; and

●

our compliance with federal, state, and foreign regulatory requirements.

Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements, including those discussed in Part II, Item 1A, “Risk Factors” in in this report and Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2020 filed with the Securities and Exchange Commission on February 26, 2021. Given these uncertainties, you should not place undue reliance on these forward-looking statements. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame, or at all. You should read this report completely and with the understanding that our actual future results may be materially different from what we expect.

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

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

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PART I – FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

Natera, Inc.

Condensed Consolidated Balance Sheets

(in thousands except par value and per share amounts)


	September 30,		December 31,
	2021		2020
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	95,103	$	48,668
Restricted cash		228		187
Short-term investments		928,596		688,606
Accounts receivable, net of allowance of $2,965 in 2021 and $3,080 in 2020		110,416		78,565
Inventory		28,022		20,031
Prepaid expenses and other current assets, net		28,858		26,606
Total current assets		1,191,223		862,663
Property and equipment, net		59,293		33,348
Operating lease right-of-use assets		47,656		21,399
Other assets		13,202		14,743
Total assets	$	1,311,374	$	932,153
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	8,181	$	8,096
Accrued compensation		35,331		30,371
Other accrued liabilities		96,486		60,407
Deferred revenue, current portion		9,667		50,125
Short-term debt financing		50,049		50,054
Total current liabilities		199,714		199,053
Long-term debt financing		280,085		202,493
Deferred revenue, long-term portion		22,706		22,805
Operating lease liabilities, long-term portion		48,388		21,246
Other long-term liabilities		1,464		320
Total liabilities		552,357		445,917

Commitments and contingencies (Note 8)

Stockholders’ equity:
Common stock, $0.0001 par value: 750,000 shares authorized at both September 30, 2021 and December 31, 2020, respectively; 94,538 and 86,223 shares issued and outstanding at September 30, 2021 and December 31, 2020, respectively		10		9
Additional paid in capital		2,011,788		1,411,286
Accumulated deficit		(1,254,272)		(929,318)
Accumulated other comprehensive gain		1,491		4,259
Total stockholders’ equity		759,017		486,236
Total liabilities and stockholders’ equity	$	1,311,374	$	932,153

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

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Natera, Inc.

Condensed Consolidated Statements of Operations and Comprehensive Loss

(Unaudited)

(in thousands, except per share data)


	Three months ended				Nine months ended
	September 30,				September 30,
	2021		2020		2021		2020

Revenues
Product revenues	$	150,651	$	93,286	$	406,265	$	260,746
Licensing and other revenues		7,465		4,857		46,193		17,881
Total revenues		158,116		98,143		452,458		278,627
Cost and expenses
Cost of product revenues		76,838		46,873		211,387		131,124
Cost of licensing and other revenues		4,533		4,948		12,909		12,614
Research and development		98,457		26,421		192,397		67,651
Selling, general and administrative		128,485		75,678		364,273		209,547
Total cost and expenses		308,313		153,920		780,966		420,936
Loss from operations		(150,197)		(55,777)		(328,508)		(142,309)
Interest expense		(2,078)		(4,270)		(6,226)		(10,772)
Interest and other income, net		1,274		1,749		4,230		5,661
Loss on debt extinguishment		—		—		—		(5,848)
Loss before income taxes		(151,001)		(58,298)		(330,504)		(153,268)
Income tax expense		(272)		(25)		(648)		(63)
Net loss	$	(151,273)	$	(58,323)	$	(331,152)	$	(153,331)
Unrealized gain (loss) on available-for-sale securities, net of tax		(950)		(600)		(2,768)		4,251
Comprehensive loss	$	(152,223)	$	(58,923)	$	(333,920)	$	(149,080)

Net loss per share (Note 12):
Basic and diluted	$	(1.63)	$	(0.72)	$	(3.72)	$	(1.93)
Weighted-average number of shares used in computing basic and diluted net loss per share:
Basic and diluted		92,558		80,908		89,130		79,430

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

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Natera, Inc.

Condensed Consolidated Statements of Stockholders’ Equity

(Unaudited)

(in thousands)


	Three months ended September 30, 2020
	Common Stock			Additional Paid-in		Accumulated Other Comprehensive		Accumulated		Total Stockholders'
	Shares	Amount		Capital		Income		Deficit		Equity
Balance as of June 30, 2020	79,717	$	8	$	1,093,072	$	5,770	$	(794,583)	$	304,267
Issuance of common stock upon exercise of stock options	498		—		4,974		—		—		4,974
Issuance of common stock for public offering, net	4,792		1		270,649		—		—		270,650
Vesting of restricted stock	274		—		—		—		—		—
Stock-based compensation	—		—		15,032		—		—		15,032
Unrealized gain on available-for sale securities	—		—		—		(600)		—		(600)
Net loss	—		—		—		—		(58,323)		(58,323)
Balance as of September 30, 2020	85,281	$	9	$	1,383,727	$	5,170	$	(852,906)	$	536,000


	Nine months ended September 30, 2020
	Common Stock			Additional Paid-in		Accumulated Other Comprehensive		Accumulated		Total Stockholders'
	Shares	Amount		Capital		Income		Deficit		Equity
Balance as of December 31, 2019	78,005	$	8	$	976,955	$	919	$	(699,171)	$	278,711
Issuance of common stock upon exercise of stock options	1,534		—		15,782		—		—		15,782
Issuance of common stock under employee stock purchase plan	97		—		3,062		—		—		3,062
Equity component of Convertible Notes, net	—		—		82,873		—		—		82,873
Issuance of common stock for public offering, net	4,792		1		270,649		—		—		270,650
Vesting of restricted stock	853		—		—		—		—		—
Stock-based compensation	—		—		34,406		—		—		34,406
Unrealized gain on available-for sale securities	—		—		—		4,251		—		4,251
Cumulative-effect adjustment upon adoption of ASU 2016-13	—		—		—		—		(404)		(404)
Net loss	—		—		—		—		(153,331)		(153,331)
Balance as of September 30, 2020	85,281	$	9	$	1,383,727	$	5,170	$	(852,906)	$	536,000

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	Three months ended September 30, 2021
	Common Stock			Additional Paid-in		Accumulated Other Comprehensive		Accumulated		Total Stockholders'
	Shares	Amount		Capital		Income		Deficit		Equity
Balance as of June 30, 2021	88,498	$	9	$	1,399,659	$	2,441	$	(1,102,999)	$	299,110
Issuance of common stock upon exercise of stock options	268		—		3,945		—		—		3,945
Issuance of common stock for public offering, net	5,176		1		550,821		—		—		550,822
Issuance of common stock for IPR&D acquisition	276				30,901		—		—		30,901
Vesting of restricted stock units	320		—		3		—		—		3
Stock-based compensation	—		—		26,459		—		—		26,459
Unrealized loss on available-for sale securities	—		—		—		(950)		—		(950)
Net loss	—		—		—		—		(151,273)		(151,273)
Balance as of September 30, 2021	94,538	$	10	$	2,011,788	$	1,491	$	(1,254,272)	$	759,017


	Nine months ended September 30, 2021
	Common Stock			Additional Paid-in		Accumulated Other Comprehensive		Accumulated		Total Stockholders'
	Shares	Amount		Capital		Income		Deficit		Equity
Balance as of December 31, 2020	86,223	$	9	$	1,411,286	$	4,259	$	(929,318)	$	486,236
Issuance of common stock upon exercise of stock options	1,051		—		10,774		—		—		10,774
Issuance of common stock under employee stock purchase plan	106		—		6,085		—		—		6,085
Issuance of common stock for public offering, net	5,175		1		550,821		—		—		550,822
Issuance of common stock for IPR&D acquisition	276		—		30,901		—		—		30,901
Vesting of restricted stock	1,707		—		—		—		—		—
Stock-based compensation	—		—		84,797		—		—		84,797
Unrealized loss on available-for sale securities	—		—		—		(2,768)		—		(2,768)
Cumulative-effect adjustment upon adoption of ASU 2016-13	—		—		(82,876)		—		6,198		(76,678)
Net loss	—		—		—		—		(331,152)		(331,152)
Balance as of September 30, 2021	94,538	$	10	$	2,011,788	$	1,491	$	(1,254,272)	$	759,017

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

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Natera, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)


	Nine Months Ended
	September 30,
	2021		2020

	(in thousands)
Operating activities
Net loss	$	(331,152)	$	(153,331)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		8,259		6,215
Expensed in-process research and development		35,604		—
Premium amortization and discount accretion on investment securities		5,707		3,333
(Gain) loss on investments		(58)		—
Stock-based compensation		84,797		34,406
Non-cash lease expense		8,106		5,819
Amortization of debt discount and issuance cost		917		149
Inventory reserve adjustments		726		(180)
Other non-cash benefits (charges)		133		(135)
Provision for credit losses		380		1,445
Loss on Debt Extinguishment		—		5,848
Accretion of Convertible Note		—		4,514
Changes in operating assets and liabilities:
Accounts receivable		(32,232)		(17,940)
Inventory		(8,717)		(7,803)
Prepaid expenses and other current assets		(7,851)		(7,288)
Other assets		(550)		97
Accounts payable		183		(1,613)
Accrued compensation		4,960		6,362
Other accrued liabilities		34,845		16,362
Deferred revenue		(40,557)		(5,470)
Cash used in operating activities		(236,500)		(109,210)

Investing activities
Purchases of investments		(674,372)		(479,037)
Proceeds from sale of investments		77,563		11,500
Proceeds from maturity of investments		348,410		247,315
Purchases of property and equipment, net		(32,027)		(12,073)
Cash paid for acquisition of an asset		(4,271)		—
Cash used in investing activities		(284,697)		(232,295)

Financing activities
Proceeds from exercise of stock options		10,774		15,782
Proceeds from issuance of common stock under employee stock purchase plan		6,085		3,062
Proceeds from Convertible Note, net of issuance costs		—		278,316
Loan payment		—		(78,757)
Proceeds from public offering, net of issuance cost		550,814		270,650
Cash provided by financing activities		567,673		489,053

Net increase in cash, cash equivalents and restricted cash		46,476		147,548
Cash, cash equivalents and restricted cash, beginning of period		48,855		61,981
Cash, cash equivalents and restricted cash, end of period	$	95,331	$	209,529

Supplemental disclosure of cash flow information:
Cash paid for interest	$	3,690	$	3,137

Non-cash investing and financing activities:
Purchases of property and equipment in accounts payable and accruals	$	4,957	$	2,814

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

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Natera, Inc.

Notes to Unaudited Interim Condensed Consolidated Financial Statements

1. Description of Business

Natera, Inc. (the "Company") was formed in the state of California as Gene Security Network, LLC in November 2003 and incorporated in the state of Delaware in January 2007. The Company is a diagnostics company with proprietary molecular and bioinformatics technology that it is applying to change the management of disease worldwide. The Company’s cell-free DNA (“cfDNA”) technology combines its novel molecular assays, which reliably measure many informative regions across the genome from samples as small as a single cell, with its statistical algorithms which incorporate data available from the broader scientific community to identify genetic variations covering a wide range of serious conditions with best-in-class accuracy and coverage. The Company’s technology has been proven clinically and commercially in the women’s health space, in which it develops and commercializes non- or minimally-invasive tests to evaluate risk for, and thereby enable early detection of, a wide range of genetic conditions, such as Down syndrome. The Company is now translating its success in women’s health and applying its core technology to the oncology market, in which it is commercializing a personalized blood-based DNA test to detect molecular residual disease and monitor disease recurrence, as well as to the organ health market, initially with a test to assess kidney transplants for rejection. The Company operates laboratories certified under the Clinical Laboratory Improvement Amendments ("CLIA") providing a host of cell-free DNA-based molecular testing services. The Company determines its operating segments based on the way it organizes its business to make operating decisions and assess performance. The Company operates one segment, the development and commercialization of molecular testing services, applying its proprietary technology in the fields of women’s health, oncology and organ health. The Company also has two subsidiaries, one of which operates in the state of Texas and the other in Canada.

The Company's product offerings include its Panorama Non-Invasive Prenatal Test ("NIPT") that screens for chromosomal abnormalities of a fetus as well as in twin pregnancies, typically with a blood draw from the mother; 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 Genetics (“Spectrum”) to evaluate embryos to identify chromosomal anomalies or inherited genetic conditions to improve the chances of a healthy pregnancy during an in vitro fertilization ("IVF") cycle; Anora Miscarriage Test (“Anora”) to rapidly and extensively analyze fetal chromosomes to understand the cause of miscarriage; Non-Invasive Paternity Testing ("PAT"), which is exclusively marketed and sold by a licensee from whom the Company receives a royalty; Signatera, which detects circulating tumor DNA in patients previously diagnosed with cancer to assess molecular residual disease and monitor for recurrence; and Prospera, to assess organ transplant rejection. All testing is available principally in the United States. The Company also offers its Panorama test to customers outside of the United States, primarily in Europe. The Company also offers Constellation, a cloud-based software platform that enables laboratory customers to gain access through the cloud to the Company’s algorithms and bioinformatics in order to validate and launch tests based on the Company’s technology. Through the third quarter of 2019, the Company offered Evercord for the collection and storage of newborn cord blood and cord tissue units, which was sold in the third quarter of 2019 to a third-party buyer.

2. Summary of Significant Accounting Policies

During the nine months ended September 30, 2021, there were no material changes to the Company’s significant accounting policies as disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020 (filed on February 26, 2021), except as described in Recently Adopted Accounting Pronouncements below.

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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, 2021, 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, 2020 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, 2020 included in the Company’s Annual Report on Form 10-K filed with the SEC on February 26, 2021.

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 $331.2 million for the nine months ended September 30, 2021 and an accumulated deficit of $1.3 billion as of September 30, 2021. As of September 30, 2021, the Company had $95.3 million in cash, cash equivalents, and restricted cash, $928.6 million in marketable securities, $50.0 million of outstanding balance of the Credit Line (as defined in Note 10, Debt) including accrued interest, and $287.5 million outstanding principal balance of its 2.25% Convertible Senior Notes (the “Convertible Notes”). In April 2020, the Company used a portion of the net proceeds from the offering of the Convertible Notes to repay its obligations under its 2017 Term Loan with OrbiMed.

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 will experience dilution. Additional debt financing, if available, may involve covenants restricting its operations or its ability to incur additional debt. Any additional debt financing or additional equity that the Company raises may contain terms that are not favorable to it or its stockholders and requires significant debt service payments, which diverts resources from other activities. Additional financing may not be available 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.

In May 2021, the Company entered into a development and option agreement with a third party that requires the third party to use its best efforts to perform an agreed upon development plan and provides the Company with an exclusive option to purchase the third party’s assets. The Company paid the third party $10 million in the second quarter of 2021 for conducting the development work and for entering into the agreement, and if the Company elects to exercise its option, the Company has agreed to pay the third party an additional $290.0 million for the designated assets. There is no assurance that the development plan will be successful, or that the Company will elect to exercise its option to purchase the third party’s assets or, if the Company exercises this option, that it will derive the anticipated benefit from the acquisition of these assets.

On September 10, 2021, the Company entered into an agreement with a third party for an asset acquisition where the acquired asset was in-process research and development (“IPR&D”) in exchange for an equity consideration payment. The third party was a biotechnology company focused on oncology. The total acquisition consideration amounts to $35.6 million composed of the issuance of 276,346 shares of the Company's common stock with a fair value of $30.9 million, approximately $3.9 million of cash consideration, assumed net liabilities of $0.2 million, as well as $0.6 million of acquisition related legal and accounting costs directly attributable to the acquisition of the asset. Further, there are an estimated 269,547 of additional shares, consistent with the registration statement filed with the SEC on September 10,

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2021, that are potentially issuable to legacy shareholders of this third party upon the achievement of defined milestones which will be revalued at each reporting date. These milestones are assessed as probable as of September 30, 2021. As a result, this was accounted as contingent compensation expense recognized over the performance period at fair market value. The Company concluded the acquired IPR&D has no alternative-future use and accordingly expensed on the day of the transaction close as research and development expense which is reflected in our condensed consolidated statement of operations.

In April 2019, the Company completed an underwritten equity offering and sold 6,052,631 shares of its common stock at a price of $19 per share to the public. Before offering expenses of $0.6 million, the Company received proceeds of $108.1 million net of the underwriting discount. In October 2019, the Company 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, the Company received proceeds of $216.2 million net of the underwriting discount. In September 2020, the Company completed an additional underwritten equity offering and sold 4,791,665 shares of its common stock at a price of $60.00 per share to the public. Before offering expenses of $0.3 million, the Company received proceeds of $271.0 million net of the underwriting discount. In July 2021, the Company completed an underwritten equity offering and sold 5,175,000 shares of its common stock at a price of $113 per share to the public. Before offering expenses of $0.4 million, the Company received proceeds of $551.2 million net of the underwriting discount.

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 4, 2021.

Principles of Consolidation

The accompanying condensed consolidated financial statements include all the accounts of the Company and its subsidiaries. The Company established a subsidiary that operates in the state of Texas to support the Company’s laboratory and operational functions. The Company established a subsidiary that operates in Canada following the acquisition of the IPR&D asset, which includes a lease for the laboratory space located in Canada. All intercompany balances and transactions have been eliminated.

Use of Estimates

The preparation of financial statements in accordance with generally accepted accounting principles (GAAP) in the United States requires management to make estimates and assumptions about future events that affect the amounts of assets and liabilities reported, disclosures about contingent assets and liabilities, and reported amounts of revenues and expenses. Significant items subject to such estimates include the allowance for doubtful accounts calculated based on the average selling price expected to be received from insurance payors, the operating right-of-use assets and the associated lease liabilities, deferred revenues associated with unsatisfied performance obligations, accrued liability for potential refund requests, the valuation of the Convertible Notes, stock-based compensation, the fair value of options, income tax uncertainties, and the expected consideration to be received from contracts with customers. These estimates and assumptions are based on management's best estimates and judgment. Management regularly evaluates its estimates and assumptions using historical experience and other factors, including contractual terms and statutory limits; however, actual results could differ from these estimates and could have an adverse effect on the Company's financial statements.

Credit Losses

Trade accounts receivable and other receivables. The allowance for doubtful accounts is based on the Company’s assessment of the collectability of customer accounts. The Company regularly reviews the allowance by considering factors such as historical experience, credit quality, the age of the accounts receivable balances, and current economic conditions that may affect a customer’s ability to pay.

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The following is a roll-forward of the allowances for credit losses related to trade accounts receivable and other receivables for the nine months ended September 30, 2021:


	Nine Months Ended
	September 30,
	2021
		(in thousands)
Beginning balance	$	4,220
Provision for credit losses		380
Write-offs		(495)
Total	$	4,105

Available-for-sale debt securities. The amended guidance from ASU 2016-13 requires the measurement of expected credit losses for available-for-sale debt securities held at the reporting date over the remaining life based on historical experience, current conditions, and reasonable and supportable forecasts. The Company evaluated its investment portfolio under the available-for-sale debt securities impairment model guidance and determined the Company’s investment portfolio is composed of low-risk, investment grade securities.

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, irrespective of maturity date. Available-for-sale securities are carried at fair value, with unrealized gains and losses reported in accumulated other comprehensive income (loss), which is a separate component of stockholders’ equity.

Risk and Uncertainties

The Company is subject to risks and uncertainties as a result of the COVID-19 pandemic. The extent of the impact of the COVID-19 pandemic on the Company's business is highly uncertain and difficult to predict, and the full extent and duration of the impact of the COVID-19 pandemic on its business, its operations, and the global economy as a whole is not yet known. While the Company’s test volumes and overall average selling prices for its tests increased during the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020, the Company cannot predict the potential nature, magnitude and duration of the effects of the COVID-19 pandemic on the macroeconomic environment or its business.

Financial instruments that potentially subject the Company to credit risk consist of cash, accounts receivable and investments. The Company limits its exposure to credit loss by placing its cash in financial institutions with high credit ratings. The Company's cash may consist of deposits held with banks that may at times exceed federally insured limits. The Company performs evaluations of the relative credit standing of these financial institutions and limits the amount of credit exposure with any one institution.

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 nine months ended September 30, 2021, and 2020, there were no customers exceeding 10% of total revenues on an individual basis. As of September 30, 2021 and December 31, 2020, there were no customers with an outstanding balance exceeding 10% of net accounts receivable.

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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,
	2021		2020		2021		2020

	(in thousands)				(in thousands)
Beginning balance	$	2,441	$	5,770	$	4,259	$	919
Net unrealized gain (loss) on available-for-sale securities, net of tax		(950)		(600)		(2,768)		4,251
Ending balance	$	1,491	$	5,170	$	1,491	$	5,170

Recent Accounting Pronouncements

From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (“FASB”) under its accounting standard codifications or other standard setting bodies and adopted by the Company as of the specified effective date. Unless otherwise discussed below, the Company believes that the impact of accounting standards updates recently issued that are not yet effective will not have a material impact on its financial position or results of operations upon adoption.

Recently Adopted Accounting Pronouncements

Fair Value Measurement

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement. ASU 2018-13 proposes new disclosure requirements for unrealized gains or losses recognized in other comprehensive income that are attributable to fair value changes in assets and liabilities categorized within Level III of the fair value hierarchy, as well as quantitative information about significant unobservable inputs used to value such assets and liabilities. It eliminates the requirement to disclose the reasons for the transfers of assets and liabilities measured in fair value on a recurring basis between Level I and Level II. The Company has adopted this ASU as of January 1, 2020, which did not have a material impact on its consolidated financial statements.

Goodwill - Internal-Use Software

In August 2018, the FASB issued ASU 2018‑15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350‑40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. The amendments in this update align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendments in this update. The Company adopted ASU 2018-15 as of January 1, 2020 using the prospective approach, which did not have a material impact on its condensed consolidated financial statements upon the adoption.

Credit Losses

In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses: Measurement of Credit Losses on Financial Instruments and also issued subsequent amendments to the initial guidance: ASU 2018-19, ASU 2019-04, and ASU 2019-05. The standard requires measurement and recognition of expected credit losses for financial assets by requiring an allowance to be recorded as an offset to the amortized cost of such assets. For available-for-sale debt securities, expected credit losses should be estimated when the fair value of the debt securities is below their associated

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amortized costs. The Company adopted ASU 2016-13, as amended, effective January 1, 2020 using the modified retrospective method and recorded a cumulative-effect adjustment of $0.4 million in retained earnings as of January 1, 2020.

Collaborative Arrangements

In November 2018, the FASB issued ASU 2018-18, Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606, which clarifies that certain transactions between participants in a collaborative arrangement should be accounted for under ASC 606 when the counterparty is a customer. In addition, Topic 808 precludes an entity from presenting consideration from a transaction in a collaborative arrangement as revenue from contracts with customers if the counterparty is not a customer for that transaction. This guidance will be effective for the Company beginning January 1, 2020. The Company has adopted this standard as of January 1, 2020, which did not have a material impact on its condensed consolidated financial statements upon the adoption.

Income Taxes

In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes (Topic 740), which simplifies the accounting for income taxes, eliminates certain exceptions within ASC 740, Income Taxes, and clarifies certain aspects of the current guidance to promote consistency among reporting entities. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020. An entity that elects early adoption must adopt all the amendments in the same period. Most amendments within this ASU are required to be applied on a prospective basis, while certain amendments must be applied on a retrospective or modified retrospective basis. The Company has adopted this standard as of September 30, 2020, which did not have a material impact on its condensed consolidated financial statements upon the adoption.

In October 2020, ASU 2020-10, Codification Improvements, was issued, which simplifies the existing codification. The guidance includes presentation disclosures for the amount of income tax expense or benefit related to other comprehensive income. ASU 2010-10 is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. Early application of the amendments is permitted for public business entities for any annual or interim period for which financial statements have not been issued. The Company has adopted this standard as of January 1, 2021, which did not have a material impact on its condensed consolidated financial statements upon the adoption.

Debt

In August 2020, 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) was issued which simplifies the accounting for convertible instruments. The guidance removes certain accounting models which separate conversion features from the host contract for convertible instruments. Either a modified retrospective method of transition or a fully retrospective method of transition is permissible for the adoption of this standard. Update No. 2020-06 is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted no earlier than the fiscal year beginning after December 15, 2020. The Company has adopted this standard as of January 1, 2021 using the modified retrospective approach. As a result of the adoption of ASU 2020-06, the Convertible Notes due May 2027 are no longer bifurcated into separate liability and equity components in the March 31, 2021 condensed consolidated balance sheet. Rather, the $287.5 million principal amount of the Company’s Convertible Notes was classified only as a liability in the March 31, 2021 condensed consolidated balance sheet. Upon adoption of ASU 2020-06, an adjustment was recorded to the Convertible Notes liability component, equity component (additional paid-in-capital) and retained earnings. The cumulative effect of the change was recognized as an adjustment to the opening balance of retained earnings at the date of adoption. The comparative information has not been restated and continues to be presented according to accounting standards in effect for those periods. This adjustment was calculated based on the carrying amount of the Convertible Notes as if it had always been treated only as a liability. Further, an adjustment was recorded to the debt discount and issuance costs as if these had always been treated as a contra liability only. Interest expense related to the accretion of the Convertible Notes is no longer recognized. Interest expense for the Convertible Notes for the three and nine months ended September 30, 2021 would have been $2.4 million and $7.0 million higher without the adoption of ASU 2020-06,

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respectively. As such, net loss from continuing operations attributable to the Company per common share for the three and nine months ended September 30, 2021 was $0.03 and $0.08 lower due to the effect of adoption of ASU 2020-06, respectively.


	December 31,		ASU 2020-06		January 1,
	2020		Adoption Adjustment		2021

	(in thousands)
Liabilities
Outstanding Principal	$	287,500	$	—	$	287,500
Unamortized debt discount and issuance cost		(85,007)		76,674		(8,333)
Net carrying amount	$	202,493	$	76,674	$	279,167

Equity
Additional paid-in-capital	$	(1,411,286)	$	82,872	$	(1,328,414)
Accumulated deficit		(929,318)		6,198		(923,120)

New Accounting Pronouncements Not Yet Adopted

In March 2020, ASU 2020-04, Reference Rate Reform (Topic 848) was issued which provides temporary optional guidance to ease the potential burden in accounting for reference rate reform. The new guidance provides optional expedients and exceptions for applying generally accepted accounting principles to transactions affected by reference rate reform if certain criteria are met. These transactions include contract modifications, hedging relationship, and sale or transfer of debt securities classified as held-to-maturity. Early adoption of this ASU is permitted, and the Company may elect to apply the amendments prospectively through December 31, 2022. The Company’s financial instruments that are in the scope of ASU 2020-04 include but are not limited to the UBS credit line agreement. The Company is currently evaluating the impact of the adoption of this standard on its consolidated financial statements.

3. Revenue Recognition

The Company recognizes revenues when, or as, performance obligations in the contracts are satisfied, in the amount reflecting the expected consideration to be received from the goods or services transferred to the customers.

Product Revenues

Product revenues are derived from contracts with insurance carriers, laboratory partners and patients in connection with sales primarily related to prenatal genetic tests. The Company enters into contracts with insurance carriers with primarily payment terms related to tests provided to the patients who have health insurance coverage. Insurance carriers are considered as third-party payers on behalf of the patients, and the patients are considered as the customers who receive genetic test services. Tests may be billed to insurance carriers, patients, or a combination of insurance carriers and patients. Further, the Company sells tests to a number of domestic and international laboratory partners and identifies the laboratory partners as customers provided that there is a test services agreement between the two parties.

A performance obligation represents a promise in a contract to transfer a distinct good or service to a customer, which represents a unit of accounting in accordance with ASC 606. A performance obligation is considered distinct from other obligations in a contract when it provides a benefit to the customer either on its own or together with other resources that are readily available to the customer and is separately identified in the contract. The Company considers a performance obligation satisfied once the Company has transferred control of a good or service to the customer, meaning the customer has the ability to use and obtain the benefit of the good or service. A portion of the consideration should be allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. The Company evaluates its contracts with insurance carriers, laboratory partners and patients and identifies the performance obligations in those contracts, which are the delivery of the test results.

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The total consideration which the Company expects to collect in exchange for the Company’s products is an estimate and may be fixed or variable. Consideration includes reimbursement from both patients and insurance carriers, adjusted for variable consideration related to disallowed cases, discounts, refunds and doubtful accounts, and is estimated using the expected value approach. For insurance carriers with similar reimbursement characteristics, the Company uses a portfolio of relevant historical data to estimate variable consideration and total collections for the Company’s products. The Company constrains the estimated variable consideration when it assesses it is probable that a significant reversal in the amount of cumulative revenue recognized may occur in future periods. The consideration expected from laboratory partners usually includes a fixed amount, but it can be variable depending on the volume of tests performed, and the Company determines the variable consideration using the expected value approach. For insurance carriers, laboratory partners and patients, the Company allocates the total consideration to a single performance obligation, which is the delivery of the test results to the customers.

When assessing the total consideration for insurance carriers and patients, a certain percentage of revenues is further constrained for estimated refunds.

The Company generally bills an insurance carrier, a laboratory partner or a patient upon delivery of test results. The Company also bills patients directly for out-of-pocket costs involving co-pays and deductibles that they are responsible for. Tests billed to insurance carriers and directly to patients usually take an average of nine to twelve months to collect payment, and for tests billed to laboratory distribution partners, the average collection cycle takes approximately two to three months. At times, the Company may or may not get reimbursed for the full amount billed. Further, the Company may not get reimbursed at all for tests performed if such tests are not covered under the insurance carrier’s reimbursement policies or the Company is not a qualified provider to the insurance carrier, or if the tests were not previously authorized.

Product revenue is recognized in an amount equal to the total consideration (as described above) at a point in time when the test results are delivered. The Company reserves certain amounts in other accrued liabilities on the balance sheet in anticipation of requests for refunds of payments previously made by insurance carriers, which are accounted for as reductions in product revenues in the statement of operations and comprehensive loss. During the three months ended September 30, 2021 and 2020, $1.6 million and $1.1 million, respectively, were released from amounts previously held in reserves in other accrued liabilities, and recognized as product revenue. During the nine months ended September 30, 2021 and 2020, $4.6 million and $2.7 million, respectively, were released from amounts previously held in reserves in other accrued liabilities, and recognized as product revenue. The release of amounts reserved were recognized as product revenue within that period.

Licensing and Other Revenues

The Company recognizes licensing revenues from its cloud-based distribution service offering, Constellation, by granting licenses to its licensees to use certain of the Company’s proprietary intellectual properties and cloud-based software and IVD kits. The Company also recognizes revenues from the Signatera research use only (“RUO”) offering and from its agreements with Qiagen LLC, (“Qiagen”), BGI Genomics Co., Ltd. (“BGI Genomics”), and Foundation Medicine, Inc. (“Foundation Medicine”).

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Constellation

The laboratory partners with whom the Company enters into a licensing arrangement represent the licensees and are identified as customers. The licensees do not have the right to possess the Company’s software, but rather receive services through the cloud software. These arrangements often include: (i) the delivery of the services through the cloud software, (ii) the necessary support and training, and (iii) the IVD kits to be consumed as tests are processed. The Company does not consider the software as a service, the support or the training as being distinct in the context of such arrangements, and therefore they are combined as a single performance obligation. The software, support and training are delivered simultaneously to the licensees over the term of the arrangement.

The Company bills the majority of licensees, who process the tests in their laboratories, a fixed price for each test processed. Licensing revenues are recognized as the performance obligations are satisfied (i.e., upon the delivery of each test) and reported in licensing and other revenues in the Company’s statements of operations and comprehensive loss.

Signatera

The Company enters into agreements with pharmaceutical companies to utilize the Company’s Signatera tests typically to study new cancer treatments or to validate the outcomes of clinical trials for which the pharmaceutical companies are identified as customers. Such arrangements generally involve performing whole exome sequencing (“WES”) services and the testing of patient samples to detect cancer mutations using its Signatera test. Each test is billable to customers and the personalized cancer profile also makes each test distinct within the context of the contract as customers can exercise control over the test results upon delivery. The Company allocates the contract price to each test using the stand-alone selling price for each service and recognizes the test processing revenue as individual test results are delivered to customers.

Qiagen

In March 2018, the Company entered into a License, Development and Distribution Agreement (the “Qiagen Agreement”) with Qiagen under which the Company granted Qiagen a license to develop, manufacture, distribute and commercialize NGS-based genetic testing assays and sequencing systems utilizing such assays, which incorporate the Company’s proprietary technology. According to the terms of the Qiagen Agreement, the Company is initially entitled to receive an upfront license fee and prepaid royalties totaling $40.0 million, which was fully collected in 2018. All or a portion of the prepaid royalties are refundable in limited circumstances. In addition, the Company was entitled to potential milestone payments from Qiagen upon the successful achievement of certain volume, regulatory and commercial milestones, and tiered royalties of $10.0 million, of which the Company received $5.0 million due December 31, 2018. The Qiagen Agreement has a term of 10 years and expires in March 2028, and it may be terminated earlier in certain circumstances. Upon termination of the Qiagen Agreement, the license granted to Qiagen will also terminate, except in certain limited circumstances. The Company provided to Qiagen standard indemnification protections, which is part of an assurance that the license meets the contract’s specifications and is not an obligation to provide goods or services.

Effective in March 2020, the Company terminated the Qiagen Agreement. Subsequently, in March 2021, the Company and Qiagen signed a Termination and Settlement Agreement where the Company agreed to refund a net $10 million as a result of the termination. The remaining $28.6 million of deferred revenue was recognized as other licensing and other revenue in the first quarter of 2021.

BGI Genomics

In February 2019, the Company entered into a License Agreement (the “BGI Genomics Agreement”) with BGI Genomics to develop, manufacture, and commercialize NGS-based genetic testing assays for clinical and commercial use. The BGI Genomics Agreement has a term of ten years and expires in February 2029. According to the BGI Genomics Agreement, the Company is entitled to a total of $50 million, comprised of upfront technology license fees, prepaid royalties relating to future sales of licensed products and performance of assay interpretation services, and milestone payments. During the three months ended June 30, 2019, the Company received $35.6 million, net of withholding taxes, of these amounts. The Company recorded a receivable of $2.5 million upon achieving the first milestone as of June 30,

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2019, which was received in January 2021. Also, as required by the BGI Genomics Agreement, in June 2019 the Company prepaid $6.0 million to BGI Genomics for future sequencing services and $4.0 million for future sequencing equipment. These advance payments for equipment and services to be received in future periods aggregating to $10.0 million were recorded in long-term advances on the Company’s Condensed Consolidated Balance Sheet.

Pursuant to the BGI Genomics Agreement, the Company licensed its intellectual property and will provide development services. Following completion of development services, the Company will provide assay interpretation services over the term of the BGI Genomics Agreement. The Company concluded that the license is not a distinct performance obligation as it does not have a stand-alone value to BGI Genomics apart from the related development services. Therefore, license and related development services, for each NIPT and Oncology product, represents a single performance obligation.

The Company is responsible for granting a license to specified intellectual property and performing certain development activities to customize its genetic testing assays for oncology and NIPT for use with BGI Genomics’ sequencing instruments and proprietary technology platform. Revenue associated with these performance obligations is recognized over time using the input method, based on costs incurred to perform the development services, since the level of costs incurred over time best reflect the transfer of development services. Revenue associated with the assay interpretation services will be recognized upon delivery of these services. Funds received in advance are recorded as deferred revenue and will be recognized as the related services are delivered.

The initial transaction price was primarily comprised of license and milestone fees. The Company constrains the estimated variable consideration when it assesses it is probable that a significant reversal in the amount of cumulative revenue recognized may occur in future periods. Certain milestone and license fees were constrained and not included in the transaction price due to the uncertainties of research and development. The Company re-evaluates the transaction price, including the estimated variable consideration included in the transaction price and all constrained amounts, in each reporting period and as uncertain events are resolved or other changes in circumstances occur. The allocation of the transaction price was performed based on standalone selling prices, which are based on estimated amounts that the Company would charge for a performance obligation if it were sold separately.

In accordance with ASC 340-40, any incremental costs incurred to obtain a contract with a customer are required to be capitalized and amortized over the period in which the goods and services are transferred to the customer. The Company has elected to apply a practical expedient under ASC 340-40 to recognize the incremental costs of obtaining a contract as an expense when incurred provided that the amortization period of such costs, if capitalized, is one year or less. The incremental costs incurred in connection with the BGI Genomics arrangement is not material on an accumulated basis and therefore will not be capitalized on the balance sheet but will be expensed as incurred.

Foundation Medicine, Inc.

In August 2019, the Company entered into a License and Collaboration Agreement (the “Foundation Medicine Agreement”) with Foundation Medicine to develop and commercialize personalized circulating tumor DNA monitoring assays, for use by biopharmaceutical and clinical customers who order Foundation Medicine’s FoundationOne CDx. The Foundation Medicine Agreement has an initial term of five years, expiring in August 2024, with automatic renewals thereafter for successive one-year terms, unless the Foundation Medicine Agreement is earlier terminated in accordance with its terms. Natera and Foundation Medicine will share the revenues generated from both biopharmaceutical and clinical customers in accordance with the terms of the Foundation Medicine Agreement. The Foundation Medicine Agreement provides for approximately $13.3 million in upfront licensing fees and prepaid revenues payable to the Company, and up to approximately $32.0 million in minimum annual payments and payments tied to the Company’s achievement of certain developmental, regulatory, and commercial milestones. As of December 31, 2019, the Company received $16.3 million of these amounts, of which $3.0 million was for achieving certain milestones, and $13.3 million was for licensing fees and prepaid revenue. There was an additional milestone met in May 2021. The Company accrued a $1.0 million milestone payment against accounts receivable and short-term deferred revenue. This milestone was paid in early July 2021. No other payments have been received in the nine months ending September 30, 2021.

Pursuant to the Foundation Medicine Agreement, the Company will provide development services in conjunction with granting the use of the Company’s intellectual property. Following completion of those development services, the

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Company is currently providing RUO assay testing services over the term of the agreement. The Company has concluded that the license is not a distinct performance obligation as it is highly interrelated and interdependent with the related development services. Therefore, license and related development services represent a single performance obligation.

The Company is responsible for providing the technology license and certain development services that are required to customize its proprietary Signatera test to work with Foundation Medicine’s FoundationOne CDx. The intellectual property has been licensed to Foundation Medicine for the customized test. In addition, the Company is responsible for delivering clinical study plans in order to demonstrate efficacy of the customized test which has commenced in the second quarter of 2021. Revenues associated with each of the performance obligations are recognized over time using the input method, based on costs incurred to perform the development services, since the level of costs incurred over time best reflect the transfer of development services. Revenue associated with the assay testing services will be recognized upon delivery of these services. Funds received in advance are recorded as deferred revenue and will be recognized as the related services are delivered.

The initial transaction price was primarily comprised of license and milestone fees. The Company constrains the estimated variable consideration when it assesses it is probable that a significant reversal in the amount of cumulative revenue recognized may occur in future periods. Certain milestone fees were constrained and not included in the transaction price due to the uncertainties of research and development. The Company re-evaluates the transaction price, including the estimated variable consideration included in the transaction price and all constrained amounts, in each reporting period and as uncertain events are resolved or other changes in circumstances occur. The allocation of the transaction price was performed based on standalone selling prices, which are based on estimated amounts that the Company would charge for a performance obligation if it were sold separately.

Disaggregation of Revenues

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


	Three months ended				Nine months ended
	September 30,				September 30,
	2021		2020		2021		2020
(in thousands)
Insurance carriers	$	132,423	$	78,004	$	351,218	$	216,305
Laboratory and other partners		17,441		13,701		77,575		42,426
Patients		8,252		6,438		23,665		19,896
Total revenues	$	158,116	$	98,143	$	452,458	$	278,627

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The following table presents total revenues by geographic area based on the location of the Company’s payers:


	Three months ended				Nine months ended
	September 30,				September 30,
	2021		2020		2021		2020
(in thousands)
United States	$	148,033	$	93,511	$	427,804	$	260,999
Americas, excluding U.S.		1,247		1,081		3,052		2,584
Europe, Middle East, India, Africa		5,598		3,524		14,322		10,584
Asia Pacific and Other		3,238		27		7,280		4,460
Total revenues	$	158,116	$	98,143	$	452,458	$	278,627

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


	Balance at		Balance at
	September 30,		December 31,
(in thousands)	2021		2020
Assets:
Accounts receivable	$	110,416	$	78,565
Liabilities:
Deferred revenue, current portion	$	9,667	$	50,125
Deferred revenue, long-term portion		22,706		22,805
Total deferred revenues	$	32,373	$	72,930

The following table shows the changes in the balance of deferred revenues during the period:


	Deferred
	Revenues
	(in thousands)
Balance at December 31, 2020	$	72,930
Increase in deferred revenues		4,703
Refunds of revenues previously deferred		(10,000)
Revenue recognized during the period that was included in deferred revenues at the beginning of the period		(32,864)
Revenue recognized from performance obligations satisfied within the same period		(2,396)
Balance at September 30, 2021	$	32,373

During the nine months ended September 30, 2021, revenue recognized that was included in the deferred revenue balance at the beginning of the period totaled $32.9 million, with approximately a net $4.0 million related to BGI Genomics and Foundation Medicine, and $28.6 million related to Qiagen, with the remaining $0.3 million related to genetic testing services. The current portion of deferred revenue includes $3.5 million from the BGI Genomics Agreement and $3.7 million from the Foundation Medicine Agreement.

4. Fair Value Measurements

The Company's financial assets and liabilities carried at fair value are comprised of investment assets that include money market and investments.

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The fair value accounting guidance requires that assets and liabilities be carried at fair value and classified in one of the following three categories:

Level I: Quoted prices in active markets for identical assets and liabilities that the Company has the ability to access.

Level II: Observable market-based inputs or unobservable inputs that are corroborated by market data, such as quoted prices, interest rates, and yield curves.

Level III: Inputs that are unobservable data points that are not corroborated by market data.

This hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value.

Assets and Liabilities That Are Measured at Fair Value on a Recurring Basis

The following table represents the fair value hierarchy for the Company’s financial assets and financial liabilities measured at fair value on a recurring basis:


	September 30, 2021								December 31, 2020
	Level I		Level II		Level III		Total		Level I		Level II		Level III		Total

	(in thousands)
Financial Assets:
Money market deposits	$	55,703	$	—	$	—	$	55,703	$	28,990	$	—	$	—	$	28,990
U.S. Treasury securities		787,875		—		—		787,875		597,744		—		—		597,744
Corporate bonds and notes		—		52,721		—		52,721		—		12,328		—		12,328
Municipal securities		—		88,000		—		88,000		—		78,534		—		78,534
Total financial assets	$	843,578	$	140,721	$	—	$	984,299	$	626,734	$	90,862	$	—	$	717,596

Fair Value of Long-Term Debt:

As of September 30, 2021, the estimated fair value of the Convertible Notes, which are not presented at fair value on the Condensed Consolidated Balance Sheets as of September 30, 2021, was $863.3 million and was based upon observable, Level 2 inputs, including pricing information from recent trades of the Convertible Notes (see Note 10, Debt).

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5. Financial Instruments

The Company elected to invest a portion of its cash assets in conservative, income earning, and liquid investments. Cash equivalents and investments, all of which are classified as available-for-sale securities, consisted of the following:



	September 30, 2021								December 31, 2020
	Amortized Cost		Gross Unrealized Gain		Gross Unrealized Loss		Estimated Fair Value		Amortized Cost		Gross Unrealized Gain		Gross Unrealized Loss		Estimated Fair Value

	(in thousands)
Money market deposits	$	55,703	$	—	$	—	$	55,703	$	28,990	$	—	$	—	$	28,990
U.S. Treasury securities (1)		786,404		1,821		(350)		787,875		594,252		3,512		(20)		597,744
Corporate bonds and notes (1)		52,868		—		(147)		52,721		12,331		2		(5)		12,328
Municipal securities		87,824		378		(202)		88,000		77,764		796		(26)		78,534
Total	$	982,799	$	2,199	$	(699)	$	984,299	$	713,337	$	4,310	$	(51)	$	717,596

Classified as:
Cash equivalents (2)							$	55,703							$	28,990
Short-term investments								928,596								688,606
Total							$	984,299							$	717,596

(1)

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

(2)

Cash equivalents includes cash sweep accounts and U.S. Treasury money market mutual funds.

The Company invests in U.S. Treasuries, U.S. agency and high quality municipal bonds which mature at par value and are all paying their coupons on schedule. The Company has therefore concluded there is currently no other than temporary impairment of its investments and will continue to recognize unrealized gains and losses in other comprehensive income (loss). During the nine months ended September 30, 2021 and 2020, the Company sold $77.6 million and $11.5 million of investments, respectively. During the nine months ended September 30, 2021, the amount of gross realized gains and realized losses upon sales of investments were insignificant. The Company uses the specific investment identification method to calculate realized gains and losses and amounts reclassified out of other comprehensive income to net income. As of September 30, 2021, the Company had 43 investments in an unrealized loss position in its portfolio. An allowance for credit losses was not necessary for the third quarter of 2021 since the investments are low risk, investment grade securities. The Company has assessed the unrealized loss position for available-for-sale debt securities for which an allowance for credit losses has not been recorded. The fair value for investment securities at an unrealized loss position as of September 30, 2021 was $522.0 million. The aggregate amount of unrealized losses of these securities was $0.7 million, and the impact of the securities in a continuous loss position to the condensed consolidated statements of operations and comprehensive loss were not material as of September 30, 2021.

The following table summarizes the Company’s portfolio of available-for-sale securities by contractual maturity as of September 30, 2021:


	September 30, 2021
	Amortized Cost		Fair Value

	(in thousands)
Less than or equal to one year	$	403,211	$	403,784
Greater than one year but less than five years		523,885		524,812
Total	$	927,096	$	928,596

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6. Balance Sheet Components

Property and Equipment, net

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


		September 30,		December 31,
	Useful Life	2021		2020

		(in thousands)
Machinery and equipment	3-5 years	$	64,583	$	51,001
Furniture and fixtures	3 years		1,393		1,376
Computer equipment	3 years		2,772		2,428
Capitalized software held for internal use	3 years		8,776		7,417
Leasehold improvements	Lesser of useful life or lease term		15,351		14,810
Construction-in-process			24,732		6,370
			117,607		83,402
Less: Accumulated depreciation and amortization			(58,314)		(50,054)
Total Property and Equipment, net		$	59,293	$	33,348

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

During the nine months ended September 30, 2021, the increase in net property and equipment was due to purchases of new equipment for the Company’s laboratories located in Texas and California to expand testing capabilities, offset by depreciation expense of $8.3 million recorded in the nine months ended September 30, 2021. The Company did not incur an impairment charge during the nine months ended September 30, 2021.

Accrued Compensation

The Company’s accrued compensation consisted of the following:


	September 30,		December 31,
	2021		2020

	(in thousands)
Accrued paid time off	$	2,472	$	2,260
Accrued commissions		10,950		12,686
Accrued bonuses		12,275		9,635
Other accrued compensation		9,634		5,790
Total accrued compensation	$	35,331	$	30,371

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Other Accrued Liabilities

The Company’s other accrued liabilities consisted of the following:


	September 30,		December 31,
	2021		2020

	(in thousands)
Reserves for refunds to insurance carriers	$	15,879	$	17,366
Accrued charges for third-party testing		17,690		5,141
Testing and laboratory materials from suppliers		6,513		2,720
Marketing and corporate affairs		6,152		3,325
Legal, audit and consulting fees		15,215		4,189
Accrued shipping charges		399		1,604
Sales tax payable		1,758		1,723
Accrued third-party service fees		3,363		2,355
Clinical trials and studies		6,282		2,353
Operating lease liabilities, current portion		6,922		7,300
Fixed asset purchases		4,957		1,691
Other accrued interest		2,695		1,078
Other accrued expenses		8,661		9,562
Total other accrued liabilities	$	96,486	$	60,407

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

The following table summarizes the reserve balance and activities for refunds to insurance carriers for the nine months ended September 30, 2021:


	September 30,		September 30,
	2021		2020

	(in thousands)
Beginning balance	$	17,366	$	9,410
Additional reserves		11,776		11,912
Refunds to carriers		(8,664)		(5,244)
Reserves released to revenue		(4,599)		(2,756)
Ending balance	$	15,879	$	13,322

7. Leases

Operating Leases

In September 2015, the Company’s subsidiary entered into a long-term lease agreement for laboratory and office space totaling approximately 94,000 square feet in Austin, Texas. The lease term is 132 months beginning in December 2015 and expiring in November 2026 with monthly payments beginning in December 2016.

In October 2016, the Company entered into a lease directly with its landlord for laboratory and office spaces at its facilities located in San Carlos, California. The Company currently occupies approximately 113,000 square feet comprised of two office spaces (the “First Space” and the “Second Space”). The First Space covers approximately 88,000 square feet, and the Second Space totals approximately 25,000 square feet. The term of this lease is approximately 84 months and expires in October 2023. This lease contains an option to renew the lease term for five years, but the fair market rent amount upon renewal is not available from the landlord. In January 2021, the Company entered into an

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amendment of the lease to extend the term for 48 months to October 2027. The combined annual rent for the First Space and Second Space will be $9.3 million commencing in October 2023.

The Company entered into a lease agreement commencing June 2018 for its cord blood tissue storage facility in Tukwila, Washington that covers approximately 10,000 square feet. The lease term is 62 months expiring in July 2023. The Company has the option to extend this lease for five years, and the fair market rent upon renewal is not determinable. However, since the Company sold its business related to cord blood and tissue storage in September 2019, the Company has subleased the facility and does not intend to exercise its option to renew the facility upon expiration.

In addition, the Company entered into a sublease agreement in June 2019 with a third party to sublease 25,879 square feet of space located on the third floor of the San Carlos, California building while maintaining its primary obligation as the intermediate lessor. The term of this lease is approximately 48 months commencing in October 2019 and expiring in September 2023. The annual lease payment starts at $1.9 million and will escalate annually commencing in October 2020. In February 2021, the Company entered into an amendment of the San Carlos sublease agreement whereas the third party will surrender 25,879 rentable square feet by the end of the year. For the nine months ended September 30, 2021, the Company had noncash investing activities of $31.3 million primarily related to additional right-of-use assets of which $29.7 million was a result of the San Carlos lease extension which was accounted for as a modification under ASC 842.

The Company entered into a lease agreement in November 2020 to lease 11,395 square feet of space located in South San Francisco, California over a 36-month term. The premises will be used for general office, laboratory and research use. The annual lease payment starts at $0.9 million and will escalate annually commencing in December 2021.

As part of the IPR&D asset acquisition in September 2021, the Company inherited a lease for 7,107 square feet of laboratory space in Canada over a 24-month period. The annual lease payment starts at $0.2 million.

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

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


	September 30,
	2021
		(in thousands)
Operating lease liabilities, current portion included in other accrued liabilities	$	6,922
Operating lease liabilities, long-term portion		48,388
Total operating lease liabilities	$	55,310

The initial recognition of the operating lease liabilities was measured as the present value of the future minimum lease payments using a discount rate determined as of January 1, 2019. The operating right-of-use assets was calculated as the operating lease liabilities discounted at the present value, less the amount of unamortized tenant improvement allowance and deferred rent. The discount rate used was the Company’s incremental borrowing rate given that the implicit rate to each lease was not readily determinable. In accordance with ASC 842, the incremental borrowing rate was estimated as the annual percentage yield resulting from a corporate debt financing over a loan term approximating the remaining term of each lease, with the effect of certain credit risk rating. As of September 30, 2021, the weighted-average remaining lease term was 3.66 years and the weighted-average discount rate was 7.48%.

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The Company continues to recognize lease expense on a straight-line basis. The lease expense includes the amortization of the right-of-assets with the associated interest component estimated by applying the effective interest method. For the three months ended September 30, 2021 and 2020, total lease expense of $2.8 million and $1.9 million was recognized in the condensed statements of operations and comprehensive loss, respectively. For the nine months ended September 30, 2021 and 2020, total lease expense of $8.1 million and $5.8 million was recognized in the condensed statements of operations and comprehensive loss, respectively. Cash paid for amounts in the measurement of operating lease liabilities totaled $2.6 million and $2.2 million for the three months ended September 30, 2021 and 2020, respectively. Cash paid for amounts in the measurement of operating lease liabilities totaled $7.6 million and $6.6 million for the nine months ended September 30, 2021, respectively.

The present value of the future annual minimum lease payments under all non-cancellable operating leases as of September 30, 2021 are as follows:


	Operating Leases
	(in thousands)
Year ending December 31:
2021 (remaining 3 months)	$	2,689
2022		10,909
2023		11,456
2024		11,993
2025		12,216
2026 and thereafter		20,026
		69,289
Less: imputed interest		(13,979)
Operating lease liabilities	$	55,310

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8. Commitments and Contingencies

Legal Proceedings

From time to time, the Company is involved in disputes, litigation, and other regulatory or administrative actions, including those with respect to intellectual property, employment, testing, billing, reimbursement and other matters. Such actions may include allegations of negligence, products/professional liability or other legal claims, and could involve claims for substantial compensatory and/or punitive damages or claims for indeterminate amounts of damages. The Company is aggressively defending and/or prosecuting its current litigation matters, but cannot provide any assurance as to the ultimate outcome or that an adverse resolution would not have a material adverse effect on its financial condition and results of operations. There are many uncertainties associated with any litigation and these actions or other third party claims against the Company, including by governmental entities, or by the Company against third parties, may cause the Company to incur costly litigation and/or substantial settlement charges. In addition, the resolution of any intellectual property litigation may require the Company to make royalty payments, which could adversely affect gross margins in future periods. If this were to occur, the Company's business, financial condition, results of operations, and cash flows could be adversely affected.

The Company assesses legal contingencies to determine the degree of probability and range of possible loss for potential accrual in its financial statements. When evaluating legal contingencies, the Company may be unable to provide a meaningful estimate due to a number of factors, including the procedural status of the matter in question, the presence of complex or novel legal theories, and/or the ongoing discovery and development of information important to the matters. In addition, damage amounts claimed in litigation or other matters may be unsupported, exaggerated or unrelated to possible outcomes, and as such are not meaningful indicators of its potential liability. During the periods presented, the Company has not recorded any accrual for loss contingencies associated with such legal proceedings or other matters, determined that an unfavorable outcome is probable or reasonably possible, or determined that the amount or range of any possible loss is reasonably estimable.

Intellectual Property Litigation Matters.

The Company has been involved in two patent litigations against CareDx, Inc. (“CareDx”) in the United States District Court for the District of Delaware (“CareDx Patent Cases”). In the first suit, CareDx alleged, in a complaint filed jointly with the Board of Trustees of the Leland Stanford Junior University (“Stanford”) in March 2019 and amended in March 2020, that the Company infringed three patents. The complaint sought unspecified damages and injunctive relief. On September 28, 2021, the Court granted the Company’s motion for summary judgment, finding all three patents invalid. CareDx and Stanford have filed a notice of appeal to the United States Court of Appeals for the Federal Circuit. In the second suit, filed by the Company in January 2020, the Company alleged infringement by CareDx of two of the Company’s patents, seeking unspecified damages and injunctive relief. The case is currently pending.

The Company has filed suit against ArcherDX, Inc. (“ArcherDX”) in the United States District Court for the District of Delaware, alleging, in complaints filed in January, April, and August of 2020, which cases were consolidated in September 2020, that certain ArcherDX DNA oncology products infringe five of the Company’s patents. In June 2020, ArcherDX filed a motion to dismiss aspects of the Company’s case, including to invalidate several of the Company’s asserted patents. That motion was denied in its entirety in October 2020. In January 2021, the Company filed a second amended complaint naming an additional Archer DX entity, ArcherDx LLC, and Invitae Corp. as defendants. The Company is seeking unspecified monetary damages and injunctive relief. A jury trial is set for May 16, 2022.

The Company is the subject of a lawsuit filed against it by Ravgen, Inc. (“Ravgen”) in June 2020 in the United States District Court for the Western District of Texas, alleging infringement of two Ravgen patents. The complaint seeks monetary damages and injunctive relief. Trial is set for December 13, 2021.

The Company filed suit against Progenity, Inc. (“Progenity”) in June 2020 in the United States District Court for the Western District of Texas and in the United States District Court for the Northern District of Texas, in each case alleging that Progenity’s NIPT test infringes six of the Company’s patents. The complaints sought treble damages and

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injunctive relief. In July 2020, Progenity filed suit against the Company in the United States District Court for the Southern District of California, seeking declaratory judgment of non-infringement of the Company’s asserted patents. Progenity also petitioned the Patent Trial and Appeal Board (“PTAB”) of the United States Patent and Trademark Office for inter partes review of all of the Company’s asserted patents. The PTAB instituted review of three of the petitions and set trial for March 7, 2022, and denied institution of the other three petitions. On August 3, 2021, the parties entered into a settlement agreement to settle the matters described above.

In October 2020, the Company filed suit against Genosity Inc. (“Genosity”), in the United States District Court for the District of Delaware, alleging that various Genosity oncology products infringe one of the Company’s patents and seeking unspecified monetary damages and injunctive relief. In March 2021, the Company filed a motion to dismiss certain of Genosity’s affirmative defenses and a counterclaim.

In January 2021, the Company filed suit against Inivata, Inc. and Inivata Ltd. (collectively “Inivata”) in the United States District Court for the District of Delaware. The complaint, amended by the Company in May 2021, alleges that various Inivata oncology products infringe two of the Company’s patents and seeks unspecified monetary damages and injunctive relief. In June 2021, Inivata filed a motion to dismiss the Company’s amended complaint.

In May 2021, Invitae Corp. (“Invitae”) filed a complaint against the Company alleging infringement of one patent and seeking monetary damages and injunctive relief. In June 2021, the Company filed a motion to dismiss Invitae’s complaint in its entirety.

Other Litigation Matters.

In August 2019, a suit was filed against the Company in the Circuit Court of Cook County, Illinois by a patient alleging claims relating to a discordant test result and seeking monetary damages. The suit was dismissed in June 2021.

The Company is also the subject of a lawsuit filed by CareDx against the Company in April 2019 in the United States District Court for the District of Delaware, alleging false advertising, trademark disparagement, unfair competition, and unfair or deceptive trade practices based on statements describing studies that concern the Company’s technology and CareDx’s technology (“CareDx’s Advertising Case”). The complaint seeks unspecified damages and injunctive relief. In May 2019, the Company filed a motion to dismiss the entirety of CareDx’s Advertising Case for failure to state a claim, following which in February 2020, CareDx filed an amended complaint withdrawing its trademark disparagement claim. Also in February 2020, the Company filed a counterclaim against CareDx in the United States District Court for the District of Delaware, alleging false advertising, unfair competition and deceptive trade practices and seeking unspecified damages and injunctive relief. The parties cross-moved for partial summary judgment, which was denied in April 2021.

The Company is involved in litigation against Guardant, Inc. (“Guardant”). On or about May 27, 2021, Guardant filed suit against the Company in the United States District Court of the Northern District of California alleging false advertising and related claims and seeking unspecified damages and injunctive relief. On or about May 28, 2021, the Company filed suit against Guardant in the Western District of Texas, alleging false advertising and related claims. The Company has voluntarily dismissed its Texas suit against Guardant. In the California action, the Company has answered Guardant’s complaint and has asserted its claims as counterclaims, seeking unspecified damages and injunctive relief. On August 3, 2021, Guardant moved to dismiss the Company’s counterclaims.

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Director and Officer Indemnifications

As permitted under Delaware law, and as set forth in the Company’s Amended and Restated Certificate of Incorporation and its Amended and Restated Bylaws, the Company indemnifies its directors, executive officers, other officers, employees and other agents for certain events or occurrences that may arise while in such capacity. The maximum potential amount of future payments the Company could be required to make under this indemnification is unlimited; however, the Company has insurance policies that may limit its exposure and may enable it to recover a portion of any future amounts paid. Assuming the applicability of coverage, the willingness of the insurer to assume coverage, and subject to certain retention, loss limits and other policy provisions, the Company believes any obligations under this indemnification would not be material, other than standard retention amounts for securities related claims. However, no assurances can be given that the covering insurers will not attempt to dispute the validity, applicability, or amount of coverage without expensive litigation against these insurers, in which case the Company may incur substantial liabilities as a result of these indemnification obligations.

Third-Party Payer Reimbursement Audits

From time to time, the Company receives recoupment requests from third-party payers for alleged overpayments. The Company disagrees with the contentions of pending requests and/or has recorded an estimated reserve for the alleged overpayments.

Contractual Commitments

The following table sets forth the material contractual commitments as of September 30, 2021 with a remaining term of at least one year:


Party	Commitments		Expiry Date
		(in thousands)
Material suppliers	$	14,717	June 2026
Application service providers		30,331	March 2026
Earnouts for asset development with third party*		35,000	September 2023
Other material suppliers		10,581	Various
Total	$	90,630

* The earnouts for asset development with the third party consists of three milestones which are upon the satisfaction of certain contractual conditions.

9. Stock-Based Compensation

2015 Equity Incentive Plan

General. The Company’s board of directors adopted its 2015 Equity Incentive Plan (the “2015 Plan”) in June 2015. The 2015 Plan replaced all of its prior stock plans.

Share Reserve. The initial number of shares of the Company’s common stock available for issuance under the 2015 Plan was 3,451,495 shares. The number of shares reserved for issuance under the 2015 Plan will be increased automatically on the first business day of each fiscal year, commencing in 2016, by a number equal to the smallest of:

●

3,500,000 shares;

●

4% of the shares of common stock outstanding on the last business day of the prior fiscal year; or

●

the number of shares determined by the Company’s board of directors.

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Stock options vest as determined by the compensation committee. In general, they will vest over a four-year period following the date of grant. Stock options expire at the time determined by the compensation committee but in no event more than ten years after they are granted. These awards generally expire earlier if the participant's service terminates earlier.

Restricted Shares and Stock Units. Restricted shares and stock units may be awarded under the 2015 Plan in return for any lawful consideration, and participants who receive restricted shares or stock units generally are not required to pay cash for their awards. In general, these awards will be subject to vesting. Vesting may be based on length of service, the attainment of performance-based milestones or a combination of both, as determined by the compensation committee.

Performance-based Awards

The Company grants certain senior-level executives performance stock options and units which vest based on either market and time-based service conditions or performance and time-based service conditions, which are referred to herein as performance-based awards. The Company assessed the performance-based awards with the appropriate valuation method and has recognized the applicable stock-based compensation expense. The following table summarizes the performance-based awards as of September 30, 2021:


Period Granted	Options Granted	RSUs Granted	Options Vested	RSUs Vested	Milestone	Valuation Method
(in thousands)
Q1 2019	200	300	201	300	(1)	Monte-Carlo Simulation
Q2 2019	—	188	—	81	(2)	Fair Market Value
Q3 2019	—	50	—	50	(1)	Monte-Carlo Simulation
Q1 2020	150	300	113	225	(1)	Monte-Carlo Simulation
Q1 2020	—	436	—	406	(3)	Fair Market Value
Q1 2020	129	—	129	—	(3)	Black-Scholes-Merton
Q2 2020	—	21	—	21	(3)	Fair Market Value
Q3 2020	10	—	10	—	(4)	Black-Scholes-Merton
Q3 2020	—	27	—	17	(3)	Fair Market Value
Q4 2020	—	32	—	6	(1)	Monte-Carlo Simulation
Q4 2020	—	22	—	2	(5)	Fair Market Value
Q1 2021	150	125	—	—	(1)	Monte-Carlo Simulation
Q1 2021	—	279	—	10	(3)	Fair Market Value
Q2 2021	163	—	—	—	(1)	Monte-Carlo Simulation
Q2 2021	29	—	—	—	(3)	Black-Scholes-Merton
Q2 2021	—	7	—	—	(3)	Fair Market Value

________________________________

(1) The awards will vest based on the achievement of certain values of the Company’s common stock at multiple thresholds within certain periods and are contingent upon the completion of requisite service through the date of such vesting.

(2) The vesting of the awards will be triggered after the end of the achievement milestone, as measured by the Company.

(3) The awards will vest based on achievement of a revenue target and are contingent upon the completion of requisite service through the date of such vesting.

(4) The awards vest based on achievement of a reimbursement target.

(5) The awards will vest based on achievement of certain revenue and recruiting targets.

The Company has recognized $9.6 million and $39.5 million in stock-based compensation for performance-based awards for the three and nine months ended September 30, 2021, respectively. The Company has recognized $6.6 million and $11.8 million in stock-based compensation for performance-based awards for the three and nine months ended September 30, 2020, respectively.

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The Company estimated the fair value of performance-based awards with market conditions using a Monte-Carlo simulation model with the following inputs for the period ended September 30, 2021:


	September 30,
	2021
Risk-free interest rate		0.80	%	—	1.42	%
Expected dividend yield					0.00	%
Expected volatility					60	%
Expected term (years)		7.25		—	10.00

Employee Stock Purchase Plan

During the period ended September 30, 2021, there have not been any changes to the Company’s 2015 Natera, Inc. Employee Stock Purchase Plan (the “ESPP”) as disclosed in Form 10-K for the fiscal year ended December 31, 2020. The Company has made 2,940,084 shares available for issuance under the Plan as of September 30, 2021, a number that is automatically increased by the least of (i) 1% of the total number of shares of common stock actually issued and outstanding on the last business day of the prior fiscal year, (ii) 880,000 shares of common stock (subject to certain adjustments pursuant to Subsection (c) below), or (iii) a number of shares of common stock determined by the Company’s board of directors.

The first offering period of 2021 started on November 1, 2020 and ended on April 30, 2021, and 106,435 shares were purchased for proceeds of $6.1 million. The second offering period of 2021 began on May 1, 2021 and will end on October 31, 2021. As of September 30, 2021, no shares have been purchased in the second offering period.

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Stock Options and Restricted Stock Units

The following table summarizes option activity for the nine months ended September 30, 2021:


	Outstanding Options
					Weighted-
			Weighted-		Average
	Shares		Average		Remaining	Aggregate
	Available for	Number of	Exercise		Contractual	Intrinsic
(in thousands, except for contractual life and exercise price)	Grant	Shares	Price		Life	Value
					(in years)
Balance at December 31, 2020	3,197	6,707	$	11.19	6.04	$	592,468
Additional shares authorized	3,446	—
Options granted	(391)	391	$	104.02
Options exercised	—	(1,051)	$	10.26
Options forfeited/cancelled	35	(35)	$	13.78
RSUs granted	(1,528)	—
RSUs forfeited/cancelled	227	—
Balance at September 30, 2021	4,986	6,012	$	17.37	5.63	$	566,871
Exercisable at September 30, 2021		4,785	$	9.99	4.98	$	485,498
Vested and expected to vest at September 30, 2021		5,936	$	17.00	5.60	$	561,788

The following table summarizes RSU activity for the nine months ended September 30, 2021:



		Weighted-
		Average
		Grant Date
(in thousands, except for grant date fair value)	Shares	Fair Value

Balance at December 31, 2020	4,188	$	34.02
Granted	1,528	$	104.48
Vested	(1,707)	$	25.83
Cancelled/forfeited	(227)	$	49.39
Balance at September 30, 2021	3,782	$	64.78

Stock-Based Compensation Expense

Stock based compensation is related to stock options and RSUs granted to the Company’s employees and is measured at the grant date based on the fair value of the award. The fair value is recognized as expense over the requisite service period, which is generally the vesting period of the respective awards on a straight-line basis. No compensation cost is recognized when the requisite service has not been met and the awards are therefore forfeited.

Employee stock-based compensation expense was calculated based on awards ultimately expected to vest and has been reduced for estimated forfeitures. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods, if actual forfeitures differ from those estimates. Non-employee stock-based compensation expense was not adjusted for estimated forfeitures up until the occurrence of the actual forfeiture of the associated awards.

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The following tables present the effect of employee and non-employee stock-based compensation expense on selected statements of operations line items for the three and nine months ended September 30, 2021 and 2020.


	Three months ended September 30,
	2021						2020
	Employee		Non-Employee		Total		Employee		Non-Employee		Total

	(in thousands)
Cost of revenues	$	1,262	$	—	$	1,262	$	458	$	—	$	458
Research and development		6,242		410		6,652		3,081		17		3,098
Selling, general and administrative		18,478		67		18,544		11,404		72		11,476
Total	$	25,982	$	477	$	26,459	$	14,943	$	89	$	15,032


	Nine months ended September 30,
	2021						2020
	Employee		Non-Employee		Total		Employee		Non-Employee		Total

	(in thousands)
Cost of revenues	$	3,246	$	—	$	3,246	$	1,213	$	—	$	1,213
Research and development		16,168		974		17,142		7,394		459		7,853
Selling, general and administrative		64,231		178		64,409		25,183		157		25,340
Total	$	83,645	$	1,152	$	84,797	$	33,790	$	616	$	34,406

As of September 30, 2021, approximately $195.3 million of unrecognized compensation expense, adjusted for estimated forfeitures, related to unvested option awards and RSUs will be recognized over a weighted-average period of approximately 2.8 years.

Valuation of Stock Option Grants to Employees and Non-employees

The Company utilizes the Black-Scholes option pricing model when estimating the fair value of stock options. For the three nine months ended September 30, 2021, the following valuation assumptions were applied on both the employee and non-employee options. In the same period of the prior year, the valuation assumptions as follows were only used for stock options granted to employees.


	Three months ended September 30,								Nine months ended September 30,
	2021			2020					2021					2020
Expected term (years)		10.00		5.22		—	10.00		5.11		—	10.00		5.22		—	10.00
Expected volatility		56.31	%	54.18	%	—	61.96	%	55.33	%	—	63.30	%	49.94	%	—	61.96	%
Expected dividend rate		0.00	%				0.00	%				0.00	%				0.00	%
Risk-free interest rate		1.30	%	0.31	%	—	0.65	%	0.81	%	—	1.67	%	0.31	%	—	1.70	%

As of September 30, 2021, total options outstanding include 32,053 shares of option awards that were granted to non-employees, of which 1,459 shares are unvested. Stock-based compensation expense related to stock options granted to non-employees is recognized as the stock option is earned and the services are rendered. The Company believes that the estimated fair value of the stock options is more readily measurable than the fair value of the services rendered.

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10. Debt

Credit Line Agreement

In September 2015, the Company entered into a credit line with UBS (the “Credit Line”) providing for a $50.0 million revolving line of credit which was fully drawn down in 2016. The Credit Line was amended in July 2017 and bears interest at 30-day LIBOR plus 1.10%. The Credit Line is secured by a first priority lien and security interest in the Company’s money market and marketable securities held in its managed investment account with UBS. UBS has the right to demand full or partial payment of the Credit Line Obligations and terminate the Credit Line, in its discretion and without cause, at any time.

For the three months ended September 30, 2021 and 2020, the Company recorded interest expense on the Credit Line of $0.2 million for both periods. For the nine months ended September 30, 2021 and 2020, the Company recorded interest expense on the Credit Line of $0.5 million and $0.7 million, respectively. Interest payments on the Credit Line were made within the same periods. As of September 30, 2021, the total principal amount outstanding with accrued interest was $50.0 million.

Convertible Notes

In April 2020, the Company issued $287.5 million aggregate principal amount of Convertible Notes due 2027 in a private placement offering to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended. The Convertible Notes are senior, unsecured obligations of the Company and bear interest at a rate of 2.25% per year, payable in cash semi-annually. The Convertible Notes mature in May 2027, unless earlier converted, repurchased or redeemed in accordance with their terms. Upon conversion, the Convertible Notes are convertible into cash, shares of the Company’s common stock or a combination of cash and shares of the Company’s common stock, at the Company’s election.

The Company received net proceeds from the Convertible Notes of $278.3 million, after deducting the initial purchasers’ discounts and debt issuance costs. The Company used approximately $79.2 million of the net proceeds from the Convertible Notes offering to repay its obligations under the 2017 Term Loan with OrbiMed.

The holders of the Convertible Notes may convert all or a portion of their Convertible Notes at their option at any time prior to the close of business on the business day immediately preceding February 1, 2027 in multiples of $1,000 principal amount, under any the following circumstances:

●

During any fiscal quarter commencing after March 31, 2020 (and only during such fiscal quarter), if the last reported sale price of the Company’s common stock for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding fiscal quarter is greater than or equal to 130% of the conversion price on each applicable trading day.

●

During the five business day period after any five consecutive trading day period in which the trading price per $1,000 principal amount of Convertible Notes for each trading day of that five-day consecutive trading period was less than 98% of the product of the last reported sale price of the Company’s common stock and the conversion rate on each such trading day.

●

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

●

Upon the occurrence of certain distributions.

●

Upon the occurrence of specified corporate transactions.

The Convertible Notes are convertible into shares of the Company’s common stock, par value $0.0001 per share, at an initial conversion rate of 25.7785 shares of common stock per $1,000 principal amount of the Convertible Notes, which is equivalent to an initial conversion price of approximately $38.79 per share of common stock, convertible to 7,411,704 shares of common stock. The conversion rate and corresponding conversion price are subject to adjustment

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upon the occurrence of certain events but will not be adjusted for any accrued or unpaid interest. The holders of the Convertible Notes who redeem their Convertible Notes in connection with a make-whole fundamental change are, under certain circumstances, entitled to an increase in the conversion rate. Additionally, in the event of a fundamental change, the holders of the Convertible Notes may require the Company to repurchase for cash all or a portion of their Convertible Notes at a price equal to 100% of the principal amount, plus any accrued and unpaid interest.

The Company may not redeem the Convertible Notes prior to May 2024, and no sinking fund is provided for the Convertible Notes. The Company may redeem for cash all or any portion of the Convertible Notes, at the Company’s option, on or after May 2024, if the last reported sale price of the Company’s common stock has been at least 130% of the conversion price then in effect for at least 20 trading days during any 30 consecutive trading day period ending on the trading day immediately preceding the date on which the Company provides notice of redemption. The redemption price will be equal to 100% of the principal amount of the Convertible Notes to be redeemed plus accrued and unpaid interest.

Upon adoption of ASU 2020-06, the Company allocated all of the debt discount to long-term debt. The debt discount is amortized to interest expense using the effective interest method, computed to be 2.72%, over the life of the Convertible Notes or approximately its seven-year term. The outstanding Convertible Notes balances as of September 30, 2021 are summarized in the following table:


	September 30,
	2021

	(in thousands)
Long-Term Debt
Outstanding Principal	$	287,500
Unamortized debt discount and issuance cost		(7,415)
Net carrying amount	$	280,085

The following table presents total interest expense recognized related to the Convertible Notes during the three and nine months ended September 30, 2021:


	Three months ended		Nine months ended
	September 30,		September 30,
	2021		2021
	(in thousands)
Cash interest expense
Contractual interest expense	$	1,617	$	4,852
Non-cash interest expense
Amortization of debt discount and debt issuance cost		308		917
Total interest expense	$	1,925	$	5,769

11. Income Taxes

In response to the COVID-19 pandemic, the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) was signed into law in March 2020. The CARES Act includes modifications for net operating loss carryovers and carrybacks, limitations of business interest expense, immediate refund of alternative minimum tax (“AMT”) credit carryovers as well as a technical correction to the Tax Cuts and Jobs Act of 2017, for qualified improvement property. As of September 30, 2021, the Company expects that these provisions will not have a material impact as the Company has no net operating losses or AMT credits that would fall under these provisions and does not expect interest expense to be deductible due to current and historical losses.

During the three months ended September 30, 2021 and 2020, the Company recorded total income tax expense of approximately $272,000 and $25,000, respectively. During the nine months ended September 30, 2021 and 2020, the Company recorded total income tax expense of approximately $648,000 and $63,000, respectively. For the three and nine months ended September 30, 2021, the income tax expense is primarily attributable to state income tax and foreign income

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tax expenses resulting from testing to clinics and licenses of cloud-based software and intellectual property that are based in a foreign country. There was no state income tax expense recorded for the three and nine months ended September 30, 2020. Due to the Company’s history of cumulative operating losses, the Company concluded that, after considering all the available objective evidence, it is not more likely than not that all of the Company’s net deferred tax assets will be realized. Accordingly, all of the Company’s deferred tax assets, which includes net operating loss or NOL carryforwards and tax credits related primarily to research and development, continue to be subjected to a valuation allowance as of September 30, 2021. The Company will continue to maintain a full valuation allowance until there is sufficient evidence to support recoverability of its deferred tax assets.

As described in Note 10, Debt, the Company accounted for the issuance of the Convertible Notes by separating the Convertible Notes into separate liability and equity components. The portion of the proceeds allocated to equity created a basis difference at issuance and resulted in a deferred tax liability. The debt issuance costs attributable to the equity component are deductible for tax and represent a deferred tax asset as of the issuance date. However, since the Company has a full valuation allowance, both the deferred tax liability related to the equity component and the deferred tax asset related to the debt issuance costs had no impact to income tax expense in the three and nine months ended September 30, 2021. The Company adopted ASU 2020-06 as of January 1, 2021 which recombined the liability and equity components of the Convertible Notes. Recombining the debt and equity components of the Convertible Notes impacted the difference between the book and tax base of the Convertible Notes. The deferred tax asset and deferred tax liability balances recorded in 2020 have been reversed as of January 1, 2021. Upon reversal of the deferred tax asset and liability the Company recognized an increase in the valuation allowance as of January 1, 2021.

The Company had $13.6 million and $11.5 million in unrecognized tax benefits as of September 30, 2021 and December 31, 2020, respectively. The reversal of the uncertain tax benefits would not affect the effective tax rate to the extent that the Company continues to maintain a full valuation allowance against its deferred tax assets. Unrecognized tax benefits may change during the next twelve months for items that arise in the ordinary course of business.

Interest and/or penalties related to income tax matters are recognized as a component of income tax expense. As of September 30, 2021, there were no accrued interest and penalties related to uncertain tax positions.

As part of the IPR&D acquisition, the Company acquired $5.8 million of deferred tax assets which have been fully offset by a valuation allowance as it is not more likely that these assets will be realized as of September 30, 2021. Included in the deferred tax assets is $12.1 million of NOL carryforwards which begin to expire in 2031. Because the IPR&D was expensed immediately after acquisition, the Company treated this asset as IPR&D expense. For tax purposes the write-off of amounts assigned to IPR&D occurs prior to the measurement of deferred taxes. Therefore a deferred tax liability has not been recorded as of the acquisition date and the value of the IPR&D is expected to be treated as a permanent tax difference.

12. Net Loss per Share

Basic net loss per share is computed by dividing the net loss attributable to common stockholders by the weighted-average number of common shares outstanding for the period, excluding shares subject to repurchase and without consideration of potentially dilutive securities. Diluted net loss per share is computed by giving effect to all potentially dilutive common shares outstanding for the period. For purposes of this computation, outstanding common stock options, and restricted stock units are considered to be common share equivalents. Common share equivalents are excluded from the computation in periods in which they have an anti-dilutive effect, unless the consideration of any one of them gives a dilutive effect.

The Convertible Notes are convertible as of September 30, 2021. Upon conversion, the Company has the option to pay cash, issue shares of common stock, or any combination thereof for the aggregate amount due upon conversion. If converted, the value of the Convertible Notes based on contractual settlement provisions would exceed its principal amount by $564.6 million as of September 30, 2021. Since the Company is in a net loss position in the periods presented, the shares which would be issued upon conversion of the Convertible Notes are excluded from the net loss per share calculation as it would have an antidilutive effect. As such, the 7.4 million shares underlying the conversion option of the Convertible

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Notes will not have an impact on the Company’s diluted earnings per share. If converted, the Company does not intend to settle the obligation in cash.

The following table provides the basic and diluted net loss per share computations for the nine months ended September 30, 2021 and 2020.


	Three months ended				Nine months ended
	September 30,				September 30,
(in thousands, except per share data)	2021		2020		2021		2020
Numerator:
Net loss, basic and diluted	$	(151,273)	$	(58,323)	$	(331,152)	$	(153,331)

Denominator:
Weighted-average number of shares used in computing net loss per share, basic and diluted		92,558		80,908		89,130		79,430

Net loss per share, basic and diluted	$	(1.63)	$	(0.72)	$	(3.72)	$	(1.93)

The following table shows total outstanding potentially dilutive shares excluded from the computation of diluted loss per share as their effect would be anti-dilutive, as of September 30, 2021 and 2020:


	September 30,
	2021	2020

	(in thousands)
Options to purchase common stock	6,012	7,265
Restricted stock units	3,782	3,901
Employee stock purchase plan	73	122
Convertible Notes	7,411	7,411
Estimated earnout shares for an asset acquisition	270	—
Total	17,548	18,699

13. Subsequent Events

None.

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ITEM 2.

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

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our unaudited condensed consolidated financial statements and related notes included in Part I, Item 1 of this report. Our actual results could differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those discussed in “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2020.

Overview

We are a diagnostics company with proprietary molecular and bioinformatics technology that we deploy to change the management of disease worldwide. Our technology has been proven clinically and commercially in women’s health, 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. We are now translating our success in women’s health and applying our core technology in oncology, for which we are commercializing a personalized blood-based DNA test to detect molecular residual disease and help guide treatment decisions, as well as in organ health, with tests to assess the health of organ transplant patients. We seek to enable even wider adoption of our technology through Constellation, our global cloud-based distribution model. In addition to our direct sales force in the United States, we have a global network of over 100 laboratory and distribution partners, including many of the largest international laboratories.

We currently provide a comprehensive suite of women’s health products, as well as our offerings in oncology and organ health, 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 women’s health product offerings include Spectrum Preimplantation Genetics, our Anora miscarriage test, and our Vistara single-gene NIPT. Our oncology product is our Signatera molecular residual disease test, 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 primary organ health offering is our Prospera transplant assessment test.

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 prenatal, oncology, and organ health, screening tests both through our direct sales force and 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 NIPT procedures pursuant to our in-network contracts with them, based on positive coverage determinations, which means that the insurer has determined that NIPT in general is medically necessary for this category of patient. In the United States, the majority of insurance providers provide positive NIPT coverage.

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 compared to cases we process. 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 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 nine months ended September 30, 2021, we processed 1,131,200 tests, comprised of approximately 1,089,200 tests accessioned in our laboratory, compared to approximately 731,500 tests processed, comprised of approximately 693,300 tests accessioned in our laboratory, during the nine months ended September 30, 2020. This increase in volume primarily represents continued commercial growth of Panorama and HCS, both as tests performed in our laboratory as well as through our Constellation software platform.

The percent of our revenues attributable to our U.S. direct sales force for the nine months ended September 30, 2021 was 90%, an increase from 87% for the nine months ended September 30, 2020. The percent of our revenues attributable to U.S. laboratory distribution partners for the nine months ended September 30, 2021 was 5%, a decrease from 7% in the same period in the prior year. Our ability to increase our revenues and gross profit will depend on our ability to further penetrate the U.S. market with our direct sales force. The percent of our revenues attributable to international laboratory distribution partners and other international sales for the nine months ended September 30, 2021 was 5%, down from 6% for the nine months ended September 30, 2020, due primarily to the increase in US direct sales as a percentage of revenue.

For the nine months ended September 30, 2021, total revenues were $452.5 million, compared to $278.6 million in the nine months ended September 30, 2020. Revenues generated from testing accounted for $406.3 million, representing 90% of total revenues for the nine months ended September 30, 2021; compared to $260.7 million representing 94% of total revenues for the nine months ended September 30, 2020. For the nine months ended September 30, 2021 and 2020, no customers exceeded 10% of the total revenues on an individual basis. Revenues from customers outside the United States were $24.7 million, representing approximately 5% of total revenues, for the nine months ended September 30, 2021. For the nine months ended September 30, 2020, revenues from customers outside the United States were $17.6 million, representing approximately 6% total revenues. Most of our revenues have been denominated in U.S. dollars, though we generate some revenue in foreign currency, primarily denominated in Euros and Singapore Dollars.

Our net loss for the nine months ended September 30, 2021 and 2020 were $331.2 million and $153.3 million, respectively. This included non-cash stock compensation expense of $84.8 million and $34.4 million for the nine months ended September 30, 2021 and 2020, respectively. As of September 30, 2021, we had an accumulated deficit of $1.3 billion.

COVID-19 Impact

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, 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 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, government actions or other restrictions in connection with the COVID-19 pandemic, our operations and financial results will be impacted.

The extent to which the COVID-19 pandemic impacts 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

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not limited to, the continued duration and spread of the pandemic, its 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 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 any recession that has occurred or may occur in the future.

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.

In particular, while our test volumes in 2021 have increased compared to the previous year, and the average selling price of our tests in the nine months ended September 30, 2021 increased compared to the nine months ended September 30, 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.

Components of the Results of Operations

Revenues

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

Sales of our clinical tests are recorded as product revenues. Revenues recognized from tests processed through our Constellation model, from the Qiagen, BGI Genomics, and Foundation Medicine agreements (collectively the “Strategic Partnership Agreements”), and from our Signatera research use only offering are reported in licensing and other revenues.

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

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

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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.

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.

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

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 WES, as well as labor costs, relating to our Signatera research use only offering.

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.

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Critical Accounting Policies

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

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, of Item 1, Financial Statement, for recently adopted accounting pronouncements. There have been no material changes to our other critical accounting policies and estimates as compared to the disclosures in our annual report on Form 10-K for the year ended December 31, 2020.

Results of Operations

Comparison of the three months ended September 30, 2021 and 2020


	Three Months Ended
	September 30,				Change
	2021		2020		Amount		Percent
(in thousands except percentage)
Revenues
Product revenues	$	150,651	$	93,286	$	57,365	61.5	%
Licensing and other revenues		7,465		4,857		2,608	53.7
Total revenues		158,116		98,143		59,973	61.1
Cost and expenses
Cost of product revenues		76,838		46,873		29,965	63.9
Cost of licensing and other revenues		4,533		4,948		(415)	(8.4)
Research and development		98,457		26,421		72,036	272.6
Selling, general and administrative		128,485		75,678		52,807	69.8
Total cost and expenses		308,313		153,920		154,393	100.3
Loss from operations		(150,197)		(55,777)		(94,420)	169.3
Interest expense		(2,078)		(4,270)		2,192	(51.3)
Interest and other income, net		1,274		1,749		(475)	(27.2)
Loss before income taxes		(151,001)		(58,298)		(92,703)	159.0
Income tax expense		(272)		(25)		(247)	988.0
Net loss	$	(151,273)	$	(58,323)	$	(92,950)	159.4	%

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 research use only offering. Total revenues increased by $60.0 million, or 61.1%, when compared to the three months ended September 30, 2020.

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We derive our revenues from tests based on units reported to customers—tests delivered with a result. All reported units are either accessioned in our laboratory or processed outside of our laboratory. As noted in the section titled “Overview” above, the number of tests that we process is a key metric as it tracks overall volume growth. During the three months ended September 30, 2021, total reported units were approximately 373,100, comprised of approximately 360,700 tests reported in our laboratory. Comparatively, during the three months ended September 30, 2020, total reported units were approximately 238,600, comprising of approximately 226,700 tests reported in our laboratory.

Product Revenues

During the three months ended September 30, 2021, product revenues increased by $57.4 million, or 61.5% compared to the three months ended September 30, 2020, as a result of the continued revenue growth from test volumes.

Licensing and Other Revenues

Licensing and other revenues increased by $2.6 million, or 53.7%, during the three months ended September 30, 2021 when compared to the three months ended September 30, 2020. The increase in revenue was primarily due to an increase in revenues recognized from our collaborative agreements.

Cost of Product Revenues

During the three months ended September 30, 2021, cost of product revenues increased compared to the three months ended September 30, 2020 by approximately $30.0 million, or 63.9%, due to a $10.0 million increase in third-party fees, higher costs related to inventory consumption of $2.8 million driven by an increase in accessioned tests, a $1.8 million increase in shipping related charges, and a $15.4 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 three months ended September 30, 2021, when compared to the three months ended September 30, 2020, decreased by $0.4 million, or 8.4%, due to a decrease in labor and overhead costs related to license and development support.

Research and Development

Research and development expenses during the three months ended September 30, 2021, increased by $72.0 million, or 272.6%, when compared to the three months ended September 30, 2020. The increase was driven by a $15.5 million increase in salary and related expenditures primarily due to headcount growth, which includes a $3.6 million increase in stock-based compensation expense, an increase of $8.4 million of consulting costs, a $7.9 million increase of costs related to clinical studies to support our new product offerings, a $35.6 million write-off of the acquired in-process research and development asset, $1.2 million of expenses related to acquisition-related milestones and a $3.4 million increase in facilities, office and other costs.

Selling, General and Administrative

Selling, general and administrative expenses increased by $52.8 million, or 69.8%, during the three months ended September 30, 2021 compared to the three months ended September 30, 2020. The increase was attributable to an increase of $29.7 million in salary and related expenditures primarily due to headcount growth, which includes a $7.0 million increase in stock-based compensation expense, a $5.1 million increased in marketing expenses, a $4.1 million increase in travel related costs, a $8.1 million increase in consulting and legal fees, a $1.6 million increase in hardware and software licenses, and a $4.2 million increase from business insurance and other administrative costs.

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Interest Expense

Interest expense decreased by $2.2 million, or 51.3%, in the three months ended September 30, 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, Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40) in January 2021.

Interest and Other Income

Interest and other income for the three months ended September 30, 2021 decreased $0.5 million compared to the same period in the prior year, primarily due to less interest income as a result of lower yields from our investments.

Comparison of the nine months ended September 30, 2021 and 2020


	Nine Months Ended
	September 30,				Change
	2021		2020		Amount		Percent
(in thousands except percentage)
Revenues
Product revenues	$	406,265	$	260,746	$	145,519	55.8	%
Licensing and other revenues		46,193		17,881		28,312	158.3
Total revenues		452,458		278,627		173,831	62.4
Cost and expenses
Cost of product revenues		211,387		131,124		80,263	61.2
Cost of licensing and other revenues		12,909		12,614		295	2.3
Research and development		192,397		67,651		124,746	184.4
Selling, general and administrative		364,273		209,547		154,726	73.8
Total cost and expenses		780,966		420,936		360,030	85.5
Loss from operations		(328,508)		(142,309)		(186,199)	130.8
Interest expense		(6,226)		(10,772)		4,546	(42.2)
Interest and other income, net		4,230		5,661		(1,431)	(25.3)
Loss on debt extinguishment		—		(5,848)		5,848	(100.0)
Loss before income taxes		(330,504)		(153,268)		(177,236)	115.6
Income tax expense		(648)		(63)		(585)	928.6
Net loss	$	(331,152)	$	(153,331)	$	(177,821)	116.0	%

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) offering. Total revenues increased by $173.8 million, or 62.4%, when compared to the nine months ended September 30, 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 laboratory or processed outside of our laboratory. As noted in “Overview,” the number of tests that we process is a key metric as it tracks overall volume growth. During the nine months ended September 30, 2021, total reported units were approximately 1,042,600, comprised of approximately 1,003,100 tests reported in our laboratory. Comparatively, during the nine months ended September 30, 2020, total reported units were approximately 680,100, comprised of approximately 644,300 tests reported in our laboratory.

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Product Revenues

During the nine months ended September 30, 2021, product revenues increased by $145.5 million, or 55.8% compared to the nine months ended September 30, 2020, as a result of the continued revenue growth from test volumes.

Licensing and Other Revenues

Licensing and other revenues increased by $28.3 million, or 158.3%, during the nine months ended September 30, 2021 when compared to the nine months ended September 30, 2020 due to $28.6 million of revenue recognized from Qiagen which was previously recorded in deferred revenue and a $0.3 million decrease in revenues from our collaborative agreements.

Cost of Product Revenues

During the nine months ended September 30, 2021, cost of product revenues increased by $80.3 million, or 61.2% when compared to the nine months ended September 30, 2020, due to higher costs related to inventory consumption of $17.3 million, a $22.0 million increase in third-party fees, and a $5.3 million increase in shipping related charges due to volume, and a $35.7 million increase in labor and overhead costs driven by headcount growth and product support.

Cost of Licensing and Other Revenues

Cost of licensing and other revenues for the nine months ended September 30, 2021, when compared to the nine months ended September 30, 2020, increased by $0.3 million, or 2.3% primarily due to an increase in labor and overhead costs and third-party service fees related to increased volumes for Signatera RUO.

Research and Development

Research and development expenses during the nine months ended September 30, 2021 increased by $124.7 million, or 184.4%, when compared to the nine months ended September 30, 2020. The increase was driven by a $42.6 million increase in salary and related expenditures primarily due to headcount growth, which includes a $9.3 million increase in stock-based compensation expense, an increase of $19.1 million of consulting costs, a $17.3 million increase of costs related to clinical studies to support our new product offerings, a $35.6 million write-off of the acquired in-process research and development asset, $1.2 million of expenses related to acquisition-related milestones, a $5.7 million increase related to software licenses, and a $3.2 million increase in facilities and other costs.

Selling, General and Administrative

Selling, general and administrative expenses increased by $154.7 million, or 73.8%, in the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020. The increase was attributable to an increase of $107.6 million in salary and related expenditures primarily due to headcount growth, which includes a $39.0 million increase in stock-based compensation expense, a $12.2 million increase in marketing expenses, a $7.7 million increase in travel related costs, a $14.6 million increase in consulting and legal fees, a $4.2 million increase related to computer hardware and software licenses, and a $8.4 million increase from business insurance, bank fees, office supplies and other costs.

Interest Expense

Interest expense decreased by $4.5 million, or 42.2%, in the nine months ended September 30, 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

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current period due to the adoption of ASU 2020-06. In addition, the 2017 Term Loan with Orbimed was extinguished in April 2020.

Interest and Other Income

Interest and other income decreased by $1.4 million, or 25.3%, in the nine months ended September 30, 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.

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.

Liquidity and Capital Resources

We have incurred net losses each year since our inception. For the nine months ended September 30, 2021, we had a net loss of $331.2 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 September 30, 2021, we had an accumulated deficit of $1.3 billion. We had $95.3 million in cash and cash equivalents and restricted cash, $928.6 million in marketable securities, $50.0 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 all operations. Accordingly, we have funded the portion of operating costs that exceeds revenues through a combination of equity issuances and debt and other financings. We expect to develop and commercialize future products and, consequently, we will need to generate additional revenues to achieve future profitability and may need to raise additional equity or incur additional debt. If we raise additional funds by issuing equity securities, our stockholders would experience dilution. Additional debt financing, if available, may involve covenants restricting our operations or our ability to incur additional debt. Any additional debt financing or additional equity that we raise may contain terms that are not favorable to us or our stockholders and requires significant debt service payments, which diverts resources from other activities. Additional financing may not be available at all, or in amounts or on terms acceptable to us. If we are unable to obtain additional financing, we may be required to delay the development and commercialization of our products and significantly scale back our business and operations.

In May 2021, we entered into a development and option agreement with a third party that requires the third party to use its best efforts to perform an agreed upon development plan and provides an exclusive option to purchase the third party’s assets. We paid the third party $10 million in the second quarter of 2021 for conducting the development work and for entering into the agreement, and if we elect to exercise the option, we have agreed to pay the third party an additional $290 million for the designated assets. There is no assurance that the development plan will be successful, or that we will elect to exercise the option to purchase the third party’s assets or, if we exercise the option, that it will derive the anticipated benefit from the acquisition of these assets.

On September 10, 2021, we entered into an agreement with a third party for an asset acquisition where the acquired asset was in-process research and development (“IPR&D”) in exchange for an equity consideration payment. The third party was a biotechnology company focused on oncology. The total acquisition consideration amounts to $35.6 million composed of the issuance of 276,346 shares of our common stock with a fair value of $30.9 million, approximately $3.9 million of cash consideration, assumed net liabilities of $0.2 million, as well as $0.6 million of acquisition related legal and accounting costs directly attributable to the acquisition of the asset. Further, there are an estimated 269,547 of additional shares, consistent with the registration statement filed with the SEC on September 10, 2021, that are potentially issuable to legacy shareholders of this third-party upon the achievement of defined milestones which will be revalued at each reporting date. These milestones are assessed as probable as of September 30, 2021. As a result, this was accounted

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as contingent compensation expense recognized over the performance period at fair market value. We concluded the acquired IPR&D has no alternative-future use and accordingly expensed on the day of the transaction close as research and development expense which is reflected in our condensed consolidated statement of 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 our 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, the Company completed an additional underwritten equity offering and sold 4,791,665 shares of our common stock at a price of $60.00 per share to the public. Before offering expenses of $16.5 million, we received proceeds of $271.0 million net of the underwriting discount. In July 2021, the Company completed an underwritten equity offering and sold 5,175,000 shares of its common stock at a price of $113 per share to the public. Before offering expenses of $0.4 million, the Company received proceeds of $551.2 million net of the underwriting discount.

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 November 4, 2021.

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 was fully drawn down in 2016. 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. As of September 30, 2021, the total principal amount outstanding with accrued interest was $50.0 million.

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.

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Cash Flows

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


	Nine Months Ended
	September 30,
	2021		2020
(in thousands)
Cash used in operating activities	$	(236,500)	$	(109,210)
Cash used in investing activities		(284,697)		(232,295)
Cash provided by financing activities		567,673		489,053
Net increase in cash, cash equivalents and restricted cash		46,476		147,548
Cash, cash equivalents and restricted cash, beginning of period		48,855		61,981
Cash, cash equivalents and restricted cash, end of period	$	95,331	$	209,529

Cash Used in Operating Activities

Cash used in operating activities during the nine months ended September 30, 2021 was $236.5 million. The net loss of $331.2 million includes $144.6 million in non-cash charges resulting from $8.3 million of depreciation and amortization, $35.6 million expense of in-process research and development, $5.7 million premium amortization and discount accretion on investment securities, $84.8 million of stock-based compensation expense, $8.1 million of non-cash lease expense, $0.9 million for amortization of debt discount and issuance cost, $0.7 million of inventory reserve adjustments, $0.4 million of provision for credit losses, and $0.1 million of other non-cash charges. Operating assets had cash outflows of $49.3 million resulting from $32.2 million in increases in accounts receivable, $8.7 million in increases in inventory, and $8.4 million in increases in prepaid expenses and other current assets. Operating liabilities resulted in cash outflows of $0.6 million resulting from a $40.6 million decrease in deferred revenue offset by a $34.8 million increase in other accrued liabilities, $5.0 million increase in accrued compensation, and a $0.2 million increase in accounts payable.

Cash used in operating activities during the nine months ended September 30, 2020 was $109.2 million. The net loss of $153.3 million includes $61.4 million in non-cash charges resulting from $6.2 million of depreciation and amortization, $3.4 million premium amortization and discount accretion on investment securities, $34.4 million of stock-based compensation expense, $5.8 million non-cash lease expense, $1.4 million provision for credit losses, and $5.8 million loss on debt extinguishment, $4.5 million for accretion of the convertible note, and $0.2 million of amortization of debt discount, these non-cash charges were offset by $0.2 million of inventory reserve adjustments, and $0.1 million of non-cash benefits. Operating assets had cash outflows of $32.9 million resulting from $17.9 million increases in accounts receivable, $7.8 million increases in inventory, and $7.3 million decreases in prepaid assets, offset by $0.1 million increases in other assets. Operating liabilities generated cash inflows of $15.6 million resulting from a $16.3 million increase in other accrued liabilities, a $6.4 million increase in accrued compensation, offset by a $5.5 million decrease in deferred revenue and a $1.6 million decrease in accounts payable.

Cash Used in Investing Activities

Cash used in investing activities for the nine months ended September 30, 2021 totaled $284.7 million, which was comprised of $674.4 million in purchasing of new investments, $32.0 million in acquisitions of property, plant and equipment, and $4.3 million in cash paid for the acquisition of an asset, offset by $77.6 million from proceeds from sale of investments and $348.4 million from proceeds of investments maturities.

Cash used in investing activities for the nine months ended September 30, 2020 totaled $232.3 million, which was comprised of purchasing new investments of $479.0 million and $12.1 million in acquisitions of property, plant and equipment, offset by $247.3 million from proceeds of investments maturities and $11.5 million proceeds from sale of investments.

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Cash Provided by Financing Activities

Cash provided by financing activities for the nine months ended September 30, 2021 totaled $567.7 million which was comprised of $550.8 million net proceeds from our equity offering completed in the third quarter of 2021, $10.8 million of proceeds from the exercise of stock options and $6.1 million from issuance of common stock under the employee stock purchase plan.

Cash provided by financing activities for the nine months ended September 30, 2020 totaled $489.1 million comprised of $15.8 million cash proceeds from the exercise of stock options, $3.1 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

See Note 8 – Commitments and Contingencies for details.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

We are exposed to market risks in the ordinary course of our business. These risks primarily relate to interest rates. Our Credit Line has an interest rate of one-month LIBOR plus 1.10%. The LIBOR rate is variable. An incremental change in the borrowing rate of 100 basis points would increase our annual interest expense by $0.5 million based on our $50.0 million gross debt outstanding on our Credit Line, including principal and accrued interest as of September 30, 2021. The interest rate for our Convertible Notes is fixed at 2.25% and not exposed market risk related to interest rates. Our investment portfolio is exposed to market risk from changes in interest rates. This risk is mitigated as we have maintained a relatively short average maturity for our investment portfolio. An incremental change in the investment yield of 100 basis points would increase our annual interest income by approximately $9.3 million annually in relation to amounts we would expect to earn, based on our short-term investments as of September 30, 2021.

Foreign Currency Exchange Rate Fluctuations

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

ITEM 4.

CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2021. The term “disclosure controls and procedures,” as defined in Rule 13a-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the

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Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to our management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

Based on the evaluation of our disclosure controls and procedures as of September 30, 2021, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control over Financial Reporting

There were no material changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting despite a large group of our employees who are working remotely due to the COVID-19 pandemic.

Inherent Limitations on Effectiveness of Controls

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

PART II – OTHER INFORMATION

ITEM 1.LEGAL PROCEEDINGS

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

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

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ITEM 1A.RISK FACTORS

Investing in our common stock involves a high degree of risk. In addition to the information set forth in this Quarterly Report on Form 10-Q, including the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes, you should consider carefully the factors discussed in Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2020 filed with the Securities and Exchange Commission on February 26, 2021. The occurrence of any of the risks and uncertainties described in such Annual Report could materially and adversely affect our business, financial condition, results of operations and prospects. In that event, the price of our common stock could decline and you could lose part or all of your investment. Furthermore, such risks are not the only ones we face; additional risks and uncertainties not currently known or that we currently deem to be immaterial may also materially adversely affect our business, financial condition or results of operations.

ITEM 2 UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

(a) Recent Sales of Unregistered Securities

None.

(b) Use of Proceeds

Not applicable.

None.

ITEM 3 DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4 MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5 OTHER INFORMATION

On November 3, 2021, the Company’s Board of Directors amended and restated the Company’s Amended and Restated Bylaws (as amended and restated, the “Bylaws”), effective as of such date, to (i) update certain indemnification provisions provided therein to provide consistency and clarity as between the indemnification provisions in the Bylaws and the indemnification provisions in the indemnification agreements the Company has previously entered into with its directors and officers, and (ii) include a forum selection provision for the adjudication of certain disputes.

The Bylaws include the following amendments:

•Section 7.3 of Article VII (Indemnification) was amended to, among other things, provide that upon written request by a director or officer for indemnification, indemnification under Article VII (unless ordered by a court) shall be made by the Company upon a determination, if required by applicable law, that indemnification of the director or officer is proper in the circumstances because such person has met the applicable standard of conduct set forth in Section 7.1 or Section 7.2 of Article VII of the Bylaws.

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•Article VIII was added to, among other things, provide that, unless the Company consents in writing to the selection of an alternative forum, the federal district courts of the United States shall be the sole and exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act of 1933, as amended.

The foregoing description of the Bylaws is qualified in its entirety by reference to the full text of the Bylaws, a copy of which is attached hereto as Exhibit 3.1 and incorporated herein by reference.

ITEM 6 EXHIBITS

INDEX TO EXHIBITS


		Incorporated by Reference
Exhibit No.	Description	Form	File No.	Exhibit	Filing Date	Filed Herewith
3.1	Amended and Restated Bylaws of the Registrant, effective as of November 3, 2021.					X
10.1*	Seventh Amendment to Supply Agreement, dated October 7, 2021, by and between the Registrant and Illumina, Inc.					X
31.1	Certification of Principal Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.					X
31.2	Certification of Principal Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.					X
32.1†	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.					X
32.2†	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.					X
101.INS	XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.					X

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		Incorporated by Reference
Exhibit No.	Description	Form	File No.	Exhibit	Filing Date	Filed Herewith
101.SCH	XBRL Taxonomy Extension Schema Document.					X
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document.					X
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document.					X
101.LAB	XBRL Taxonomy Extension Label Linkbase Document.					X
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document.					X
Exhibit 104	Cover Page Interactive Data File - The cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.					X

*Portions of this exhibit (indicated by asterisks) have been omitted and are subject to confidential treatment.

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

SIGNATURES

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



	NATERA, INC.

Date: November 4, 2021	By:	/ s / Steve Chapman
	Name:	Steve Chapman
	Title:	Chief Executive Officer, President, and Director
		(Principal Executive Officer)

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

Exhibit 3.1

LOGO

DESCRIPTION AUTOMATICALLY GENERATED

Amended and Restated Bylaws

Natera, Inc.

(as of November 3, 2021)

GDSVF&H\7706247.2

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Page

Article I Stockholders‌1

1.1Place of Meetings‌1

1.2Annual Meeting‌1

1.3Special Meetings‌1

1.4Notice of Meetings‌1

1.5Voting List‌1

1.6Quorum‌1

1.7Adjournments‌2

1.8Voting and Proxies‌2

1.9Action at Meeting‌2

1.10Nomination of Directors‌2

1.11Notice of Business at Annual Meetings‌5

1.12Conduct of Meetings‌6

Article II Directors‌7

2.1General Powers‌7

2.2Number, Election and Qualification‌7

2.3Chairman of the Board; Vice Chairman of the Board‌7

2.4Classes of Directors‌7

2.5Terms of Office‌7

2.6Quorum‌8

2.7Action at Meeting‌8

2.8Removal‌8

2.9Vacancies‌8

2.10Resignation‌8

2.11Regular Meetings‌8

2.12Special Meetings‌8

2.13Notice of Special Meetings‌8

2.14Meetings by Conference Communications Equipment‌8

2.15Action by Consent‌8

2.16Committees‌8

2.17Compensation of Directors‌9

Article III Officers‌9

3.1Titles‌9

3.2Appointment‌9

3.3Qualification‌9

3.4Tenure‌9

3.5Removal; Resignation‌9

3.6Vacancies‌9

3.7President; Chief Executive Officer‌9

3.8Chief Financial Officer‌10

3.9Vice Presidents‌10

3.10Secretary and Assistant Secretaries‌10

3.11Salaries‌10

3.12Delegation of Authority‌10

3.13Execution of Contracts‌10

Article IV Capital Stock‌10

4.1Issuance of Stock‌10

4.2Stock Certificates; Uncertificated Shares‌10

4.3Transfers‌11

4.4Lost, Stolen or Destroyed Certificates‌11

4.5Record Date‌11

GDSVF&H\7706247.2

4.6Regulations‌11

4.7Dividends‌12

Article V General Provisions‌12

5.1Fiscal Year‌12

5.2Corporate Seal‌12

5.3Waiver of Notice‌12

5.4Voting of Securities‌12

5.5Evidence of Authority‌12

5.6Certificate of Incorporation‌12

5.7Severability‌12

5.8Pronouns‌12

5.9Electronic Transmission‌12

Article VI Amendments‌12

Article VII Indemnification and Advancement‌12

7.1Power to Indemnify in Actions, Suits or Proceedings other than Those by or in the Right of the Corporation‌12

7.2Power to Indemnify in Actions, Suits or Proceedings by or in the Right of the Corporation‌13

7.3Authorization of Indemnification‌13

7.4Good Faith Defined‌13

7.5Right of Claimant to Bring Suit‌13

7.6Expenses Payable in Advance‌14

7.7Nonexclusivity of Indemnification and Advancement of Expenses‌14

7.8Insurance‌14

7.9Certain Definitions‌14

7.10Survival of Indemnification and Advancement of Expenses‌14

7.11Limitation on Indemnification‌14

7.12Contract Rights‌15

Article VIII Exclusive Forum‌15

GDSVF&H\7706247.2

Article I
Stockholders

1.1Place of Meetings. All meetings of stockholders shall be held at such place, if any, as may be designated from time to time by the Board of Directors (the “Board”) of Natera, Inc. (the “Corporation”), the Chairman of the Board, the Chief Executive Officer or the President or, if not so designated, at the principal executive office of the Corporation. The Board may, in its sole discretion, determine that a meeting shall not be held at any place, but may instead be held solely by means of remote communication in accordance with Section 211(a) of the General Corporation Law of the State of Delaware or any applicable successor act thereto, as the same may be amended from time to time (the “DGCL”).

1.2Annual Meeting. The annual meeting of stockholders for the election of directors to succeed those whose terms expire and for the transaction of such other business as may properly be brought before the meeting shall be held on a date and at a time designated by the Board, the Chairman of the Board, the Chief Executive Officer or the President (which date shall not be a legal holiday in the place, if any, where the meeting is to be held). The Board acting pursuant to a resolution adopted by the majority of the Whole Board may postpone, reschedule or cancel any previously scheduled annual meeting of stockholders, before or after the notice for such meeting has been sent to the stockholders. For purposes of these Bylaws, the term “Whole Board” will mean the total number of authorized directors whether or not there exist any vacancies in previously authorized directorships.

1.3Special Meetings. Special meetings of stockholders for any purpose or purposes may be called at any time by a resolution adopted by the majority of the Whole Board, the Chairman of the Board or the Chief Executive Officer, and may not be called by any other person or persons. The Board acting pursuant to a resolution adopted by the majority of the Whole Board may postpone, reschedule or cancel any previously scheduled special meeting of stockholders, before or after the notice for such meeting has been sent to the stockholders. Business transacted at any special meeting of stockholders shall be limited to matters relating to the purpose or purposes stated in the notice of meeting.

1.4Notice of Meetings. Except as otherwise provided by law, notice of each meeting of stockholders, whether annual or special, shall be given not less than ten (10) nor more than sixty (60) days before the date of the meeting to each stockholder entitled to vote at such meeting as of the record date for determining the stockholders entitled to notice of the meeting. Without limiting the manner by which notice otherwise may be given to stockholders, any notice shall be effective if given by a form of electronic transmission consented to (in a manner consistent with the DGCL) by the stockholder to whom the notice is given. The notices of all meetings shall state the place, if any, date and time of the meeting, the means of remote communications, if any, by which stockholders and proxyholders may be deemed to be present in person and vote at such meeting, and the record date for determining the stockholders entitled to vote at the meeting (if such date is different from the record date for stockholders entitled to notice of the meeting). The notice of a special meeting shall state, in addition, the purpose or purposes for which the meeting is called. If notice is given by mail, such notice shall be deemed given when deposited in the United States mail, postage prepaid, directed to the stockholder at such stockholder’s address as it appears on the records of the Corporation. If notice is given by electronic transmission, such notice shall be deemed given at the time specified in Section 232 of the DGCL.

1.5Voting List. The Secretary shall prepare, at least ten (10) days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting (provided, however, if the record date for determining the stockholders entitled to vote is less than ten (10) days before the date of the meeting, the list shall reflect the stockholders entitled to vote as of the tenth day before the meeting date), arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, for a period of at least ten (10) days prior to the meeting: (a) on a reasonably accessible electronic network, provided that the information required to gain access to such list is provided with the notice of the meeting, or (b) during ordinary business hours, at the principal place of business of the Corporation. If the meeting is to be held at a place, then the list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. If the meeting is to be held solely by means of remote communication, then the list shall also be open to the examination of any stockholder during the whole time of the meeting on a reasonably accessible electronic network, and the information required to access such list shall be provided with the notice of the meeting. Except as otherwise provided by law, the list shall presumptively determine the identity of the stockholders entitled to vote at the meeting and the number of shares held by each of them.

1.6Quorum. Except as otherwise provided by law, the Certificate of Incorporation or these Bylaws, the holders of a majority in voting power of the shares of the capital stock of the Corporation issued and outstanding and entitled to vote at the meeting, present in person, present by means of remote communication in a manner, if any, authorized by the

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Board in its sole discretion, or represented by proxy, shall constitute a quorum for the transaction of business; provided, however, that where a separate vote by a class or classes or series of capital stock is required by law or the Certificate of Incorporation, the holders of a majority in voting power of the shares of such class or classes or series of the capital stock of the Corporation issued and outstanding and entitled to vote on such matter, present in person, present by means of remote communication in a manner, if any, authorized by the Board in its sole discretion, or represented by proxy, shall constitute a quorum entitled to take action with respect to the vote on such matter. A quorum, once established at a meeting, shall not be broken by the withdrawal of enough votes to leave less than a quorum.

If, however, such quorum is not present or represented at any meeting of the stockholders, then either (i) the chairperson of the meeting, or (ii) the stockholders entitled to vote at the meeting, present in person or represented by proxy, shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum is present or represented.

1.7Adjournments. Any meeting of stockholders, annual or special, may be adjourned from time to time to any other time and to any other place at which a meeting of stockholders may be held under these Bylaws by the chairman of the meeting or by the stockholders present or represented at the meeting and entitled to vote thereon, although less than a quorum. If the adjournment is for more than thirty (30) days, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. If after the adjournment a new record date for determination of stockholders entitled to vote is fixed for the adjourned meeting, the Board shall fix as the record date for determining stockholders entitled to notice of such adjourned meeting the same or an earlier date as that fixed for determination of stockholders entitled to vote at the adjourned meeting, and shall give notice of the adjourned meeting to each stockholder of record as of the record date so fixed for notice of such adjourned meeting. At the adjourned meeting, the Corporation may transact any business which might have been transacted at the original meeting.

1.8Voting and Proxies. Each stockholder shall have such number of votes, if any, for each share of stock entitled to vote and held of record by such stockholder as may be fixed in the Certificate of Incorporation and a proportionate vote for each fractional share so held, unless otherwise provided by law or the Certificate of Incorporation. Each stockholder of record entitled to vote at a meeting of stockholders may vote in person (including by means of remote communications, if any, by which stockholders may be deemed to be present in person and vote at such meeting) or may authorize another person or persons to vote for such stockholder by a proxy executed or transmitted in a manner permitted by applicable law. No such proxy shall be voted upon after three years from the date of its execution, unless the proxy expressly provides for a longer period.

1.9Action at Meeting. When a quorum is present at any meeting, any matter other than the election of directors to be voted upon by the stockholders at such meeting shall be decided by the vote of the holders of shares of stock having a majority in voting power of the votes cast by the holders of all of the shares of stock present or represented at the meeting and voting affirmatively or negatively on such matter (or if there are two or more classes or series of stock entitled to vote as separate classes, then in the case of each such class or series, the holders of a majority in voting power of the shares of stock of that class or series present or represented at the meeting and voting affirmatively or negatively on such matter), except when a different vote is required by applicable law, regulation applicable to the Corporation or its securities, the rules or regulations of any stock exchange applicable to the Corporation, the Certificate of Incorporation or these Bylaws. For the avoidance of doubt, neither abstentions nor broker non-votes will be counted as votes cast for or against such matter. Other than directors who may be elected by the holders of shares of any series of Preferred Stock or pursuant to any resolution or resolutions providing for the issuance of such stock adopted by the Board, each director shall be elected by a plurality of the voting power of the shares present in person or represented by proxy at the meeting and entitled to vote on the election of directors. Voting at meetings of stockholders need not be by written ballot.

1.10Nomination of Directors.

(a)Except for (1) any directors entitled to be elected by the holders of Preferred Stock, (2) any directors elected in accordance with Section 2.9 hereof by the Board to fill a vacancy or newly-created directorship or (3) as otherwise required by applicable law or stock exchange regulation, at any meeting of stockholders, only persons who are nominated in accordance with the procedures in this Section 1.10 shall be eligible for election or re-election as directors. Nomination for election to the Board at a meeting of stockholders may be made (i) by or at the direction of the Board (or any committee thereof) or (ii) by any stockholder of the Corporation who (x) timely complies with the notice procedures in Section 1.10(b), (y) is a stockholder of record on the date of the giving of such notice and on the record date for the determination of stockholders entitled to vote at such meeting and (z) is entitled to vote at such meeting.

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(b)To be timely, a stockholder’s notice must be received in writing by the Secretary at the principal executive offices of the Corporation as follows: (i) in the case of an election of directors at an annual meeting of stockholders, not less than ninety (90) days nor more than one hundred and twenty (120) days prior to the first anniversary of the preceding year’s annual meeting; provided, however, that (x) in the case of the annual meeting of stockholders of the Corporation to be held in 2016 or (y) in the event that the date of the annual meeting in any other year is advanced by more than twenty (20) days, or delayed by more than sixty (60) days, from the first anniversary of the preceding year’s annual meeting, a stockholder’s notice must be so received not earlier than the one hundred and twentieth (120th) day prior to such annual meeting and not later than the close of business on the later of (A) the ninetieth (90th) day prior to such annual meeting and (B) the tenth (10th) day following the day on which notice of the date of such annual meeting was mailed or public disclosure of the date of such annual meeting was made, whichever first occurs; or (ii) in the case of an election of directors at a special meeting of stockholders, provided that the majority of the Whole Board, the Chairman of the Board or the Chief Executive Officer has determined, in accordance with Section 1.3, that directors shall be elected at such special meeting and provided further that the nomination made by the stockholder is for one of the director positions that the Board, the Chairman of the Board or the Chief Executive Officer, as the case may be, has determined will be filled at such special meeting, not earlier than the one hundred and twentieth (120th) day prior to such special meeting and not later than the close of business on the later of (x) the ninetieth (90th) day prior to such special meeting and (y) the tenth (10th) day following the day on which notice of the date of such special meeting was mailed or public disclosure of the date of such special meeting was made, whichever first occurs. In no event shall the adjournment or postponement of a meeting (or the public disclosure thereof)commence a new time period (or extend any time period) for the giving of a stockholder’s notice.

The stockholder’s notice to the Secretary shall set forth: (A) as to each proposed nominee (1) such person’s name, age, business address and, if known, residence address, (2) such person’s principal occupation or employment, (3) the class and series and number of shares of stock of the Corporation that are, directly or indirectly, owned, beneficially or of record, by such person, (4) a description of all direct and indirect compensation and other material monetary agreements, arrangements and understandings during the past three years, and any other material relationships, between or among (x) the stockholder, the beneficial owner, if any, on whose behalf the nomination is being made and the respective affiliates and associates of, or others acting in concert with, such stockholder and such beneficial owner, on the one hand, and (y) each proposed nominee, and his or her respective affiliates and associates, or others acting in concert with such nominee(s), on the other hand, including all information that would be required to be disclosed pursuant to Item 404 of Regulation S-K if the stockholder making the nomination and any beneficial owner on whose behalf the nomination is made or any affiliate or associate thereof or person acting in concert therewith were the “registrant” for purposes of such Item and the proposed nominee were a director or executive officer of such registrant, (5) a description of any agreement, arrangement or understanding (including any derivative or short positions, swaps, profit interests, options, warrants, convertible securities, stock appreciation or similar rights, hedging transactions, and borrowed or loaned shares) that has been entered into by, or on behalf of, such proposed nominee, the effect or intent of which is to mitigate loss to, manage risk or benefit of share price changes for, or increase or decrease the voting power of, such proposed nominee with respect to shares of stock of the Corporation, and (6) any other information concerning such person that must be disclosed as to nominees in proxy solicitations pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the “Exchange Act”); and (B) as to the stockholder giving the notice and the beneficial owner, if any, on whose behalf the nomination is being made (1) the name and address of such stockholder, as they appear on the Corporation’s books, of such beneficial owner, and any Stockholder Associated Person (as defined below), (2) the class and series and number of shares of stock of the Corporation that are, directly or indirectly, owned, beneficially or of record, by such stockholder, such beneficial owner and any Stockholder Associated Person, (3) a description of any agreement, arrangement or understanding between or among such stockholder, such beneficial owner and/or any Stockholder Associated Person and each proposed nominee and any other person or persons (including their names) pursuant to which the nomination(s) are being made or who may participate in the solicitation of proxies in favor of electing such nominee(s), (4) a description of any agreement, arrangement or understanding (including any derivative or short positions, swaps, profit interests, options, warrants, convertible securities, stock appreciation or similar rights, hedging transactions, and borrowed or loaned shares) that has been entered into by, or on behalf of, such stockholder, such beneficial owner or any Stockholder Associated Person, the effect or intent of which is to mitigate loss to, manage risk or benefit of share price changes for, or increase or decrease the voting power of, such stockholder, such beneficial owner or any Stockholder Associated Person with respect to shares of stock of the Corporation, (5) any other information relating to such stockholder, such beneficial owner and any Stockholder Associated Person that would be required to be disclosed in a proxy statement or other filings required to be made in connection with solicitations of proxies for the election of directors in a contested election pursuant to Section 14 of the Exchange Act and the rules and regulations promulgated thereunder, (6) a representation that such stockholder intends to appear in person or by proxy at the meeting to nominate the person(s) named in its notice and (7) a representation whether such stockholder, such beneficial owner and/or such Stockholder Associated Person intends or is part of a group which intends (x) to deliver a proxy statement and/or form of proxy to holders of at least the percentage of the Corporation’s outstanding capital stock reasonably believed by such

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stockholder, such beneficial owner or such Stockholder Associated Person to be sufficient to elect the nominee and/or (y) otherwise to solicit proxies or votes from stockholders in support of such nomination. Such information provided and statements made as required by clauses (A) and (B) above or otherwise by this Section 1.10 are hereinafter referred to as a “Nominee Solicitation Statement.” Not later than ten (10) days after the record date for determining stockholders entitled to notice of the meeting, the information required by Items (A)(1)-(5) and (B)(1)-(5) of the prior sentence shall be supplemented by the stockholder giving the notice to provide updated information as of such record date. In addition, to be effective, the stockholder’s notice must be accompanied by the written consent of the proposed nominee to serve as a director if elected and a written statement executed by the proposed nominee acknowledging that as a director of the Corporation, the nominee will owe a fiduciary duty under Delaware law with respect to the Corporation and its stockholders. The Corporation may require any proposed nominee to furnish such other information as the Corporation may reasonably require to determine the eligibility of such proposed nominee to serve as a director of the Corporation or whether such nominee would be independent under applicable Securities and Exchange Commission and stock exchange rules and the Corporation’s publicly disclosed corporate governance guidelines. A stockholder shall not have complied with this Section 1.10(b) if the stockholder (or beneficial owner, if any, on whose behalf the nomination is made) solicits or does not solicit, as the case may be, proxies or votes in support of such stockholder’s nominee in contravention of the representations with respect thereto required by this Section 1.10. For purposes of these Bylaws, a “Stockholder Associated Person” of any stockholder shall mean (i) any person controlling, directly or indirectly, or acting in concert with, such stockholder, (ii) any beneficial owner of shares of stock of the corporation owned of record or beneficially by such stockholder and on whose behalf the proposal or nomination, as the case may be, is being made, or (iii) any person controlling, controlled by or under common control with such person referred to in the preceding clauses (i) and (ii).

(c)Without exception, no person shall be eligible for election or re-election as a director of the Corporation at a meeting of stockholders unless nominated in accordance with the provisions set forth in this Section 1.10. In addition, a nominee shall not be eligible for election or re-election if a stockholder or Stockholder Associated Person, as applicable, takes action contrary to the representations made in the Nominee Solicitation Statement applicable to such nominee or if the Nominee Solicitation Statement applicable to such nominee contains an untrue statement of a material fact or omits to state a material fact necessary to make the statements therein not misleading. The chairman of any meeting shall have the power and duty to determine whether a nomination was made in accordance with the provisions of this Section 1.10 (including the previous sentence of this Section 1.10(c)), and if the chairman should determine that a nomination was not made in accordance with the provisions of this Section 1.10, the chairman shall so declare to the meeting and such nomination shall not be brought before the meeting.

(d)Except as otherwise required by law, nothing in this Section 1.10 shall obligate the Corporation or the Board to include in any proxy statement or other stockholder communication distributed on behalf of the Corporation or the Board information with respect to any nominee for director submitted by a stockholder.

(e)Notwithstanding the foregoing provisions of this Section 1.10, unless otherwise required by law, if the stockholder (or a qualified representative of the stockholder) does not appear at the meeting to present a nomination, such nomination shall not be brought before the meeting, notwithstanding that proxies in respect of such nominee may have been received by the Corporation. For purposes of this Section 1.10, to be considered a “qualified representative of the stockholder”, a person must be authorized by a written instrument executed by such stockholder or an electronic transmission delivered by such stockholder to act for such stockholder as proxy at the meeting of stockholders and such person must produce such written instrument or electronic transmission, or a reliable reproduction of the written instrument or electronic transmission, at the meeting of stockholders.

(f)For purposes of this Section 1.10, “public disclosure” shall include disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable national news service or in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act.

(g)Notwithstanding the foregoing provisions of this Section 1.10, a stockholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations promulgated thereunder with respect to the matters set forth in this Section 1.10; provided, however, that any references in these Bylaws to the Exchange Act or the rules and regulations promulgated thereunder are not intended to and shall not limit any requirements applicable to nominations to be considered pursuant to this Section 1.10 (including paragraph (a)(ii) hereof), and compliance with paragraph (a)(ii) of this Section 1.10 shall be the exclusive means for a stockholder to make nominations. Nothing in this Section 1.10 shall be deemed to affect any rights of the holders of any series of Preferred Stock to elect directors pursuant to any applicable provisions of the Certificate of Incorporation.

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1.11Notice of Business at Annual Meetings.

(a)At any annual meeting of the stockholders, only such business shall be conducted as shall have been properly brought before the meeting. To be properly brought before an annual meeting, business must be (1) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board, (2) otherwise properly brought before the meeting by or at the direction of the Board (or any committee thereof), or (3) properly brought before the annual meeting by a stockholder. For business to be properly brought before an annual meeting by a stockholder, (i) if such business relates to the nomination of a person for election as a director of the Corporation, the procedures in Section 1.10 must be complied with and (ii) if such business relates to any other matter, the business must constitute a proper matter under Delaware law for stockholder action and the stockholder must (x) have given timely notice thereof in writing to the Secretary in accordance with the procedures in Section 1.11(b), (y) be a stockholder of record on the date of the giving of such notice and on the record date for the determination of stockholders entitled to vote at such annual meeting and (z) be entitled to vote at such annual meeting.

(b)To be timely, a stockholder’s notice must be received in writing by the Secretary at the principal executive offices of the Corporation not less than ninety (90) days nor more than one hundred and twenty (120) days prior to the first anniversary of the preceding year’s annual meeting; provided, however, that (x) in the case of the annual meeting of stockholders of the Corporation to be held in 2016 or (y) in the event that the date of the annual meeting in any other year is advanced by more than twenty (20) days, or delayed by more than sixty (60) days, from the first anniversary of the preceding year’s annual meeting, a stockholder’s notice must be so received not earlier than the one hundred and twentieth (120th) day prior to such annual meeting and not later than the close of business on the later of (A) the ninetieth (90th) day prior to such annual meeting and (B) the tenth (10th) day following the day on which notice of the date of such annual meeting was mailed or public disclosure of the date of such annual meeting was made, whichever first occurs. In no event shall the adjournment or postponement of an annual meeting (or the public disclosure thereof) commence a new time period (or extend any time period) for the giving of a stockholder’s notice.

The stockholder’s notice to the Secretary shall set forth: (A) as to each matter the stockholder proposes to bring before the annual meeting (1) a brief description of the business desired to be brought before the annual meeting, (2) the text of the proposal (including the exact text of any resolutions proposed for consideration and, in the event that such business includes a proposal to amend the Bylaws, the exact text of the proposed amendment), and (3) the reasons for conducting such business at the annual meeting, and (B) as to the stockholder giving the notice and the beneficial owner, if any, on whose behalf the proposal is being made (1) the name and address of such stockholder, as they appear on the Corporation’s books, of such beneficial owner and of any Stockholder Associated Person, (2) the class and series and number of shares of stock of the Corporation that are, directly or indirectly, owned, beneficially or of record, by such stockholder, such beneficial owner and any Stockholder Associated Person, (3) a description of any material interest of such stockholder, such beneficial owner or any Stockholder Associated Person and the respective affiliates and associates of, or others acting in concert with, such stockholder, such beneficial owner or any Stockholder Associated Person in such business, (4) a description of any agreement, arrangement or understanding between or among such stockholder, such beneficial owner and/or any Stockholder Associated Person and any other person or persons (including their names) in connection with the proposal of such business or who may participate in the solicitation of proxies in favor of such proposal, (5) a description of any agreement, arrangement or understanding (including any derivative or short positions, swaps, profit interests, options, warrants, convertible securities, stock appreciation or similar rights, hedging transactions, and borrowed or loaned shares) that has been entered into by, or on behalf of, such stockholder, such beneficial owner or any Stockholder Associated Person, the effect or intent of which is to mitigate loss to, manage risk or benefit of share price changes for, or increase or decrease the voting power of, such stockholder, such beneficial owner or any Stockholder Associated Person with respect to shares of stock of the Corporation, (6) any other information relating to such stockholder, such beneficial owner and any Stockholder Associated Person that would be required to be disclosed in a proxy statement or other filings required to be made in connection with solicitations of proxies for the business proposed pursuant to Section 14 of the Exchange Act and the rules and regulations promulgated thereunder, (7) a representation that such stockholder intends to appear in person or by proxy at the annual meeting to bring such business before the meeting and (8) a representation whether such stockholder, such beneficial owner and/or any Stockholder Associated Person intends or is part of a group which intends (x) to deliver a proxy statement and/or form of proxy to holders of at least the percentage of the Corporation’s outstanding capital stock required to approve or adopt the proposal and/or (y) otherwise to solicit proxies or votes from stockholders in support of such proposal. Such information provided and statements made as required by clauses (A) and (B) above or otherwise by this Section 1.11 are hereinafter referred to as a “Business Solicitation Statement.” Not later than ten (10) days after the record date for determining stockholders entitled to notice of the meeting, the information required by Items (A)(3) and (B)(1)-(6) of the prior sentence shall be supplemented by the stockholder giving the notice to provide updated information as of such record date. Notwithstanding anything in these Bylaws to the contrary, no business shall be conducted at any annual meeting of

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stockholders except in accordance with the procedures in this Section 1.11; provided that any stockholder proposal which complies with Rule 14a-8 of the proxy rules (or any successor provision) promulgated under the Exchange Act and is to be included in the Corporation’s proxy statement for an annual meeting of stockholders shall be deemed to comply with the notice requirements of this Section 1.11. A stockholder shall not have complied with this Section 1.11(b) if the stockholder (or beneficial owner, if any, on whose behalf the proposal is made) solicits or does not solicit, as the case may be, proxies or votes in support of such stockholder’s proposal in contravention of the representations with respect thereto required by this Section 1.11.

(c)Without exception, no business shall be conducted at any annual meeting except in accordance with the provisions set forth in this Section 1.11. In addition, business proposed to be brought by a stockholder may not be brought before the annual meeting if such stockholder or a Stockholder Associated Person, as applicable, takes action contrary to the representations made in the Business Solicitation Statement applicable to such business or if the Business Solicitation Statement applicable to such business contains an untrue statement of a material fact or omits to state a material fact necessary to make the statements therein not misleading. The chairman of any annual meeting shall have the power and duty to determine whether business was properly brought before the annual meeting in accordance with the provisions of this Section 1.11 (including the previous sentence of this Section 1.11(c)), and if the chairman should determine that business was not properly brought before the annual meeting in accordance with the provisions of this Section 1.11, the chairman shall so declare to the meeting and such business shall not be brought before the annual meeting.

(d)Except as otherwise required by law, nothing in this Section 1.11 shall obligate the Corporation or the Board to include in any proxy statement or other stockholder communication distributed on behalf of the Corporation or the Board information with respect to any proposal submitted by a stockholder.

(e)Notwithstanding the foregoing provisions of this Section 1.11, unless otherwise required by law, if the stockholder (or a qualified representative of the stockholder) does not appear at the annual meeting to present business, such business shall not be considered, notwithstanding that proxies in respect of such business may have been received by the Corporation.

(f)For purposes of this Section 1.11, the terms “qualified representative of the stockholder” and “public disclosure” shall have the same meaning as in Section 1.10.

(g)Notwithstanding the foregoing provisions of this Section 1.11, a stockholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations promulgated thereunder with respect to the matters set forth in this Section 1.11; provided, however, that any references in these Bylaws to the Exchange Act or the rules and regulations promulgated thereunder are not intended to and shall not limit any requirements applicable to proposals as to any business to be considered pursuant to this Section 1.11 (including paragraph (a)(3) hereof), and compliance with paragraph (a)(3) of this Section 1.11 shall be the exclusive means for a stockholder to submit business (other than, as provided in the penultimate sentence of (b), business other than nominations brought properly under and in compliance with Rule 14a-8 of the Exchange Act, as may be amended from time to time). Nothing in this Section 1.11 shall be deemed to affect any rights of stockholders to request inclusion of proposals in the Corporation’s proxy statement pursuant to applicable rules and regulations promulgated under the Exchange Act.

1.12Conduct of Meetings.

(a)Meetings of stockholders shall be presided over by the Chairman of the Board, if any, or in the Chairman’s absence by the Vice Chairman of the Board, if any, or in the Vice Chairman’s absence by the Chief Executive Officer, or in the Chief Executive Officer’s absence, by the President, or in the President’s absence by a Vice President, or in the absence of all of the foregoing persons by a chairman designated by the Board. The Secretary shall act as secretary of the meeting, but in the Secretary’s absence the chairman of the meeting may appoint any person to act as secretary of the meeting.

(b)The Board may adopt by resolution such rules, regulations and procedures for the conduct of any meeting of stockholders of the Corporation as it shall deem appropriate including, without limitation, such guidelines and procedures as it may deem appropriate regarding the participation by means of remote communication of stockholders and proxyholders not physically present at a meeting. Except to the extent inconsistent with such rules, regulations and procedures as adopted by the Board, the chairman of any meeting of stockholders shall have the right and authority to convene and (for any or no reason) to recess and/or adjourn the meeting, to prescribe such rules, regulations and procedures and to do all such acts as, in the judgment of such chairman, are appropriate for the proper conduct of the meeting. Such rules, regulations or procedures, whether adopted by the Board or prescribed by the chairman of the meeting, may include, without limitation, the

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following: (i) the establishment of an agenda or order of business for the meeting; (ii) rules and procedures for maintaining order at the meeting and the safety of those present; (iii) limitations on attendance at or participation in the meeting to stockholders of record of the Corporation, their duly authorized and constituted proxies or such other persons as shall be determined; (iv) restrictions on entry to the meeting after the time fixed for the commencement thereof; and (v) limitations on the time allotted to questions or comments by participants. Unless and to the extent determined by the Board or the chairman of the meeting, meetings of stockholders shall not be required to be held in accordance with the rules of parliamentary procedure.

(c)The chairman of the meeting shall announce at the meeting when the polls for each matter to be voted upon at the meeting will be opened and closed. After the polls close, no ballots, proxies or votes or any revocations or changes thereto may be accepted.

(d)(In advance of any meeting of stockholders, the Board, the Chairman of the Board, the Chief Executive Officer or the President shall appoint one or more inspectors of election to act at the meeting and make a written report thereof. One or more other persons may be designated as alternate inspectors to replace any inspector who fails to act. If no inspector or alternate is present, ready and willing to act at a meeting of stockholders, the chairman of the meeting shall appoint one or more inspectors to act at the meeting. Unless otherwise required by law, inspectors may be officers, employees or agents of the Corporation. Each inspector, before entering upon the discharge of such inspector’s duties, shall take and sign an oath faithfully to execute the duties of inspector with strict impartiality and according to the best of such inspector’s ability. The inspector shall have the duties prescribed by law and, when the vote is completed, shall make a certificate of the result of the vote taken and of such other facts as may be required by law. Every vote taken by ballots shall be counted by a duly appointed inspector or duly appointed inspectors.

Article II
Directors

2.1General Powers. The business and affairs of the Corporation shall be managed by or under the direction of a Board, who may exercise all of the powers of the Corporation except as otherwise provided by law or the Certificate of Incorporation.

2.2Number, Election and Qualification. Subject to the rights of holders of any series of Preferred Stock to elect directors, the number of directors of the Corporation shall be fixed from time to time by resolution of the majority of the Whole Board. Election of directors need not be by written ballot. Directors need not be stockholders of the Corporation.

2.3Chairman of the Board; Vice Chairman of the Board. The Board may appoint from its members a Chairman of the Board and a Vice Chairman of the Board, neither of whom need be an employee or officer of the Corporation. If the Board appoints a Chairman of the Board, such Chairman shall perform such duties and possess such powers as are assigned by the Board and, if the Chairman of the Board is also designated as the Corporation’s Chief Executive Officer, shall have the powers and duties of the Chief Executive Officer prescribed in Section 3.7 of these Bylaws. If the Board appoints a Vice Chairman of the Board, such Vice Chairman shall perform such duties and possess such powers as are assigned by the Board. Unless otherwise provided by the Board, the Chairman of the Board or, in the Chairman’s absence, the Vice Chairman of the Board, if any, shall preside at all meetings of the Board.

2.4Classes of Directors. Subject to the rights of holders of any series of Preferred Stock to elect directors, the Board shall be and is divided into three classes, designated: Class I, Class II and Class III. Each class shall consist, as nearly as may be possible, of one-third of the total number of directors constituting the entire Board. The Board is authorized to assign members of the Board already in office to Class I, Class II or Class III at the time such classification becomes effective. If the number of such directors is changed, any increase or decrease shall be apportioned among the classes so as to maintain the number of directors in each class as nearly equal as possible, and any such additional director of any class elected to fill a newly created directorship resulting from an increase in such class shall hold office for a term that shall coincide with the remaining term of that class, but in no case shall a decrease in the number of directors remove or shorten the term of any incumbent director.

2.5Terms of Office. Subject to the rights of holders of any series of Preferred Stock to elect directors, and except as set forth in the Certificate of Incorporation, each director shall serve for a term ending on the date of the third annual meeting of stockholders following the annual meeting of stockholders at which such director was elected; provided that the term of each director shall continue until the election and qualification of his or her successor and be subject to his or her earlier death, disqualification, resignation or removal.

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2.6Quorum. The greater of (a) a majority of the directors at any time in office and (b) one-third of the number of directors fixed by the Board pursuant to Section 2.2 of these Bylaws shall constitute a quorum of the Board. If at any meeting of the Board there shall be less than a quorum, a majority of the directors present may adjourn the meeting from time to time without further notice other than announcement at the meeting, until a quorum shall be present. A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of directors, if any action taken is approved by at least a majority of the required quorum for that meeting.

2.7Action at Meeting. Every act or decision done or made by a majority of the directors present at a meeting duly held at which a quorum is present shall be regarded as the act of the Board, unless a greater number is required by law or by the Certificate of Incorporation or these Bylaws.

2.8Removal. Subject to the rights of holders of any series of Preferred Stock, directors of the Corporation may be removed only as expressly provided in the Certificate of Incorporation.

2.9Vacancies. Subject to the rights of holders of any series of Preferred Stock, any newly created directorship that results from an increase in the number of directors or any vacancy on the Board that results from the death, disability, resignation, disqualification or removal of any director or from any other cause shall be filled solely by the affirmative vote of a majority of the total number of directors then in office, even if less than a quorum, or by a sole remaining director and shall not be filled by the stockholders. Any director elected to fill a vacancy not resulting from an increase in the number of directors shall hold office for the remaining term of his or her predecessor.

2.10Resignation. Any director may resign only by delivering a resignation in writing or by electronic transmission to the Chairman of the Board or the Chief Executive Officer. Such resignation shall be effective upon delivery unless it is specified to be effective at some later time or upon the happening of some later event.

2.11Regular Meetings. Regular meetings of the Board may be held without notice at such time and place as shall be determined from time to time by the Board; provided that any director who is absent when such a determination is made shall be given notice of the determination. A regular meeting of the Board may be held without notice immediately after and at the same place as the annual meeting of stockholders.

2.12Special Meetings. Special meetings of the Board may be held at any time and place designated in a call by the Chairman of the Board, the Chief Executive Officer, the President, two or more directors, or by one director in the event that there is only a single director in office.

2.13Notice of Special Meetings. Notice of the date, place and time of any special meeting of the Board shall be given to each director by the Chairman of the Board, the Chief Executive Officer, the Secretary or by the officer or one of the directors calling the meeting. Notice shall be duly given to each director (a) in person or by telephone at least twenty-four (24) hours in advance of the meeting, (b) by sending written notice by reputable overnight courier, telecopy, facsimile or other means of electronic transmission, or delivering written notice by hand, to such director’s last known business, home or means of electronic transmission address at least twenty-four (24) hours in advance of the meeting, or (c) by sending written notice by first-class mail to such director’s last known business or home address at least seventy-two (72) hours in advance of the meeting. A notice or waiver of notice of a meeting of the Board need not specify the purposes of the meeting.

2.14Meetings by Conference Communications Equipment. Directors may participate in meetings of the Board or any committee thereof by means of conference telephone or other communications equipment by means of which all persons participating in the meeting can hear each other, and participation by such means shall constitute presence in person at such meeting.

2.15Action by Consent. Any action required or permitted to be taken at any meeting of the Board or of any committee thereof may be taken without a meeting, if all members of the Board or committee, as the case may be, consent to the action in writing or by electronic transmission, and the writing or writings or electronic transmission or transmissions are filed with the minutes of proceedings of the Board or committee thereof. Such filing shall be in paper form if the minutes are maintained in paper form and shall be in electronic form if the minutes are maintained in electronic form.

2.16Committees. The Board may designate one or more committees, each committee to consist of one or more of the directors of the Corporation with such lawfully delegable powers and duties as the Board thereby confers, to serve at the pleasure of the Board. The Board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of a member

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of a committee, the member or members of the committee present at any meeting and not disqualified from voting, whether or not such member or members constitute a quorum, may unanimously appoint another member of the Board to act at the meeting in the place of any such absent or disqualified member. Any such committee, to the extent provided in the resolution of the Board and subject to the provisions of law, shall have and may exercise all the powers and authority of the Board in the management of the business and affairs of the Corporation and may authorize the seal of the Corporation to be affixed to all papers which may require it; but no such committee shall have the power or authority to (i) approve or adopt, or recommend to the stockholders,any action or matter (other than the election or removal of directors) expressly required by the DGCL to be submitted to stockholders for approval, or (ii) adopt, amend or repeal any bylaw of the Corporation. Each such committee shall keep minutes and make such reports as the Board may from time to time request. Except as the Board may otherwise determine, any committee may make rules for the conduct of its business, but unless otherwise provided by the directors or in such rules, its business shall be conducted as nearly as possible in the same manner as is provided in these Bylaws for the Board. Except as otherwise provided in the Certificate of Incorporation, these Bylaws, or the resolution of the Board designating the committee, a committee may create one or more subcommittees, each subcommittee to consist of one or more members of the committee, and delegate to a subcommittee any or all of the powers and authority of the committee.

2.17Compensation of Directors. Directors may be paid such compensation for their services and such reimbursement for expenses of attendance at meetings as the Board may from time to time determine. No such payment shall preclude any director from serving the Corporation or any of its parent or subsidiary entities in any other capacity and receiving compensation for such service.

Article III
Officers

3.1Titles. The “Executive Officers” of the Corporation shall be such persons as are designated as such by the Board and shall include, but not be limited to, a Chief Executive Officer, a President and a Chief Financial Officer. Additional Executive Officers may be appointed by the Board from time to time. In addition to the Executive Officers of the Corporation described above, there may also be such “Non-Executive Officers” of the Corporation as may be designated and appointed from time to time by the Board or the Chief Executive Officer of the Corporation in accordance with the provisions of Section 3.2 of these Bylaws. In addition, the Secretary and Assistant Secretaries of the Corporation may be appointed by the Board from time to time.

3.2Appointment. The Executive Officers of the Corporation shall be chosen by the Board, subject to the rights, if any, of an Executive Officer under any contract of employment. Non-Executive Officers of the Corporation shall be chosen by the Board or the Chief Executive Officer of the Corporation.

3.3Qualification. No officer need be a stockholder. Any two or more offices may be held by the same person.

3.4Tenure. Except as otherwise provided by law, by the Certificate of Incorporation or by these Bylaws, each officer shall hold office until such officer’s successor is duly elected and qualified, unless a different term is specified in the resolution electing or appointing such officer, or until such officer’s earlier death, resignation, disqualification or removal.

3.5Removal; Resignation. Subject to the rights, if any, of an Executive Officer under any contract of employment, any Executive Officer may be removed, either with or without cause, at any time by the Board at any regular or special meeting of the Board. Any Non-Executive Officer may be removed, either with or without cause, at any time by the Chief Executive Officer of the Corporation or by the Executive Officer to whom such Non-Executive Officer reports. Any officer may resign only by delivering a resignation in writing or by electronic transmission to the Chief Executive Officer. Such resignation shall be effective upon receipt unless it is specified to be effective at some later time or upon the happening of some later event.

3.6Vacancies. The Board may fill any vacancy occurring in any office for any reason and may, in its discretion, leave unfilled, for such period as it may determine, any offices.

3.7President; Chief Executive Officer. Unless the Board has designated another person as the Corporation’s Chief Executive Officer, the President shall be the Chief Executive Officer of the Corporation. The Chief Executive Officer shall have general charge and supervision of the business of the Corporation subject to the direction of the Board, and shall perform all duties and have all powers that are commonly incident to the office of chief executive or that are delegated to such officer by the Board. The President shall perform such other duties and shall have such other powers as the Board or the Chief Executive Officer (if the President is not the Chief Executive Officer) may from time to time prescribe.

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3.8Chief Financial Officer. The Chief Financial Officer shall perform such duties and shall have such powers as may from time to time be assigned by the Board or the Chief Executive Officer. In addition, the Chief Financial Officer shall perform such duties and have such powers as are incident to the office, including without limitation the duty and power to keep and be responsible for all funds and securities of the Corporation, to deposit funds of the Corporation in depositories selected in accordance with these Bylaws, to disburse such funds as ordered by the Board, to make proper accounts of such funds, and to render as required by the Board statements of all such transactions and of the financial condition of the Corporation.

3.9Vice Presidents. Each Vice President shall perform such duties and possess such powers as the Board or the Chief Executive Officer may from time to time prescribe. The Board or the Chief Executive Officer may assign to any Vice President the title of Executive Vice President, Senior Vice President or any other title.

3.10Secretary and Assistant Secretaries. The Secretary shall perform such duties and shall have such powers as the Board or the Chief Executive Officer may from time to time prescribe. In addition, the Secretary shall perform such duties and have such powers as are incident to the office of the secretary, including without limitation the duty and power to give notices of all meetings of stockholders and special meetings of the Board, to attend all meetings of stockholders and the Board and keep a record of the proceedings, to maintain a stock ledger and prepare lists of stockholders and their addresses as required, to be custodian of corporate records and the corporate seal and to affix and attest to the same on documents.

Any Assistant Secretary shall perform such duties and possess such powers as the Board, the Chief Executive Officer or the Secretary may from time to time prescribe.

In the absence of the Secretary or any Assistant Secretary at any meeting of stockholders or directors, the chairman of the meeting shall designate a temporary secretary to keep a record of the meeting.

3.11Salaries. Executive Officers of the Corporation shall be entitled to such salaries, compensation or reimbursement as shall be fixed or allowed from time to time by the Board or a committee thereof.

3.12Delegation of Authority. The Board may from time to time delegate the powers or duties of any officer to any other officer or agent, notwithstanding any provision hereof.

3.13Execution of Contracts. Each Executive Officer and Non-Executive Officer of the Corporation may execute, affix the corporate seal and/or deliver, in the name and on behalf of the Corporation, deeds, mortgages, notes, bonds, contracts, agreements, powers of attorney, guarantees, settlements, releases, evidences of indebtedness, conveyances or any other document or instrument which (i) is authorized by the Board or (ii) is executed in accordance with policies adopted by the Board from time to time, except in each case where the execution, affixation of the corporate seal and/or delivery thereof shall be expressly and exclusively delegated by the Board to some other officer or agent of the Corporation.

Article IV
Capital Stock

4.1Issuance of Stock. Subject to the provisions of the Certificate of Incorporation, the whole or any part of any unissued balance of the authorized capital stock of the Corporation or the whole or any part of any shares of the authorized capital stock of the Corporation held in the Corporation’s treasury may be issued, sold, transferred or otherwise disposed of by vote of the Board in such manner, for such lawful consideration and on such terms as the Board may determine.

4.2Stock Certificates; Uncertificated Shares. The shares of the Corporation shall be represented by certificates, provided that the Board may provide by resolution or resolutions that some or all of any or all classes or series of the Corporation’s stock shall be uncertificated shares. Every holder of stock of the Corporation represented by certificates shall be entitled to have a certificate, in such form as may be prescribed by law and by the Board, representing the number of shares held by such holder registered in certificate form. Each such certificate shall be signed in a manner that complies with Section 158 of the DGCL.

Each certificate for shares of stock which are subject to any restriction on transfer pursuant to the Certificate of Incorporation, these Bylaws, applicable securities laws or any agreement among any number of stockholders or among such holders and the Corporation shall have conspicuously noted on the face or back of the certificate either the full text of the restriction or a statement of the existence of such restriction.

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If the Corporation shall be authorized to issue more than one class of stock or more than one series of any class, the powers, designations, preferences and relative participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights shall be set forth in full or summarized on the face or back of each certificate representing shares of such class or series of stock, provided that in lieu of the foregoing requirements there may be set forth on the face or back of each certificate representing shares of such class or series of stock a statement that the Corporation will furnish without charge to each stockholder who so requests the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights.

Within a reasonable time after the issuance or transfer of uncertificated shares, the Corporation shall send to the registered owner thereof a written notice containing the information required to be set forth or stated on certificates pursuant to Sections 151, 156, 202(a) or 218(a) of the DGCL or, with respect to Section 151 of DGCL, a statement that the Corporation will furnish without charge to each stockholder who so requests the powers, designations, preferences and relative participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights.

4.3Transfers. Shares of stock of the Corporation shall be transferable in the manner prescribed by law, the Certificate of Incorporation and in these Bylaws. Transfers of shares of stock of the Corporation shall be made only on the books of the Corporation or by transfer agents designated to transfer shares of stock of the Corporation. Subject to applicable law, shares of stock represented by certificates shall be transferred only on the books of the Corporation by the surrender to the Corporation or its transfer agent of the certificate representing such shares properly endorsed or accompanied by a written assignment or power of attorney properly executed, and with such proof of authority or the authenticity of signature as the Corporation or its transfer agent may reasonably require. Except as may be otherwise required by law, by the Certificate of Incorporation or by these Bylaws, the Corporation shall be entitled to treat the record holder of stock as shown on its books as the owner of such stock for all purposes, including the payment of dividends and the right to vote with respect to such stock, regardless of any transfer, pledge or other disposition of such stock until the shares have been transferred on the books of the Corporation in accordance with the requirements of these Bylaws.

4.4Lost, Stolen or Destroyed Certificates. The Corporation may issue a new certificate or uncertificated shares in place of any previously issued certificate alleged to have been lost, stolen or destroyed, upon such terms and conditions as the Board may prescribe, including the presentation of reasonable evidence of such loss, theft or destruction and the giving of such indemnity and posting of such bond as the Board may require for the protection of the Corporation or any transfer agent or registrar.

4.5Record Date. In order that the Corporation may determine the stockholders entitled to notice of any meeting of stockholders or any adjournment thereof, the Board may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board, and which record date shall, unless otherwise required by law, not be more than sixty (60) nor less than ten (10) days before the date of such meeting. If the Board so fixes a date, such date shall also be the record date for determining the stockholders entitled to vote at such meeting unless the Board determines, at the time it fixes such record date, that a later date on or before the date of the meeting shall be the date for making such determination. If no record date is fixed by the Board, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board may fix a new record date for determination of stockholders entitled to vote at the adjourned meeting, and in such case shall also fix as the record date for stockholders entitled to notice of such adjourned meeting the same or an earlier date as that fixed for determination of stockholders entitled to vote in accordance herewith at the adjourned meeting.

In order that the Corporation may determine the stockholders entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board may fix a record date, which shall not be more than sixty (60) days prior to such action. If no such record date is fixed, the record date for determining stockholders for any such purpose shall be at the close of business on the day on which the Board adopts the resolution relating thereto.

4.6Regulations. The issue and registration of shares of stock of the Corporation shall be governed by such other regulations as the Board may establish.

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4.7Dividends. Dividends on the capital stock of the Corporation, subject to the provisions of the Certificate of Incorporation, if any, may be declared by the Board at any regular or special meeting, pursuant to law, and may be paid in cash, in property or in shares of capital stock.

Article V
General Provisions

5.1Fiscal Year. Except as from time to time otherwise designated by the Board, the fiscal year of the Corporation shall begin on the first day of January of each year and end on the last day of December in each year.

5.2Corporate Seal. The corporate seal shall be in such form as shall be approved by the Board.

5.3Waiver of Notice. Whenever notice is required to be given by law, by the Certificate of Incorporation or by these Bylaws, a written waiver signed by the person entitled to notice, or a waiver by electronic transmission by the person entitled to notice, whether before, at or after the time of the event for which notice is to be given, shall be deemed equivalent to notice required to be given to such person. Neither the business nor the purpose of any meeting need be specified in any such waiver. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened.

5.4Voting of Securities. Except as the Board may otherwise designate, the Chief Executive Officer, the President or the Treasurer may waive notice, vote, consent, or appoint any person or persons to waive notice, vote or consent, on behalf of the Corporation, and act as, or appoint any person or persons to act as, proxy or attorney-in-fact for this Corporation (with or without power of substitution) with respect to, the securities of any other entity which may be held by this Corporation.

5.5Evidence of Authority. A certificate by the Secretary, or an Assistant Secretary, or a temporary Secretary, as to any action taken by the stockholders, directors, a committee or any officer or representative of the Corporation shall as to all persons who rely on the certificate in good faith be conclusive evidence of such action.

5.6Certificate of Incorporation. All references in these Bylaws to the Certificate of Incorporation shall be deemed to refer to the Certificate of Incorporation of the Corporation, as amended and/or restated and in effect from time to time.

5.7Severability. Any determination that any provision of these Bylaws is for any reason inapplicable, illegal or ineffective shall not affect or invalidate any other provision of these Bylaws.

5.8Pronouns. All pronouns used in these Bylaws shall be deemed to refer to the masculine, feminine or neuter, singular or plural, as the identity of the person or persons may require.

5.9Electronic Transmission. For purposes of these Bylaws, “electronic transmission” means any form of communication, not directly involving the physical transmission of paper, that creates a record that may be retained, retrieved, and reviewed by a recipient thereof, and that may be directly reproduced in paper form by such a recipient through an automated process.

Article VI
Amendments

These Bylaws may be altered, amended or repealed, in whole or in part, or new Bylaws may be adopted by the Whole Board or by the stockholders as expressly provided in the Certificate of Incorporation.

Article VII
Indemnification and Advancement

7.1Power to Indemnify in Actions, Suits or Proceedings other than Those by or in the Right of the Corporation. Subject to Section 7.3, the Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Corporation) by reason of the fact that such person is or was a

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director or officer of the Corporation, or, while a director or officer of the Corporation, is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding if such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe such person’s conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea or nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which such person reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that such person’s conduct was unlawful.

7.2Power to Indemnify in Actions, Suits or Proceedings by or in the Right of the Corporation. Subject to Section 7.3, the Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that such person is or was a director or officer of the Corporation, or, while a director or officer of the Corporation, is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise against expenses (including attorneys’ fees) actually and reasonably incurred by such person in connection with the defense or settlement of such action or suit if such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the Corporation; except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the Corporation unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper.

7.3Authorization of Indemnification. Upon written request by a director or officer for indemnification, indemnification under this Article VII (unless ordered by a court) shall be made by the Corporation upon a determination, if required by applicable law, that indemnification of the director or officer is proper in the circumstances because such person has met the applicable standard of conduct set forth in Section 7.1 or Section 7.2, as the case may be. Such determination shall be made, with respect to a person who is a director or officer at the time of such determination, (i) by a majority vote of the directors who are not parties to such action, suit or proceeding, even though less than a quorum, or (ii) by a committee of such directors designated by a majority vote of such directors, even though less than a quorum, or (iii) if there are no such directors, or if such directors so direct, by independent legal counsel in a written opinion or (iv) by the stockholders. Such determination shall be made, with respect to former directors and officers, by any person or persons having the authority to act on the matter on behalf of the Corporation. To the extent, however, that a present or former director or officer of the Corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding set forth in Section 7.1 or Section 7.2 or in defense of any claim, issue or matter therein, such person shall be indemnified against expenses (including attorneys’ fees) actually and reasonably incurred by such person in connection therewith, without the necessity of authorization in the specific case.

7.4Good Faith Defined. For purposes of any determination under Section 7.3, a person shall be deemed to have acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the Corporation, or, with respect to any criminal action or proceeding, to have had no reasonable cause to believe such person’s conduct was unlawful, if such person’s action is based on good faith reliance on the records or books of account of the Corporation or another enterprise, or on information supplied to such person by the officers of the Corporation or another enterprise in the course of their duties, or on the advice of legal counsel for the Corporation or another enterprise or on information or records given or reports made to the Corporation or another enterprise by an independent certified public accountant or by an appraiser or other expert selected with reasonable care by the Corporation or another enterprise. The term “another enterprise” as used in this Section 7.4 shall mean any other corporation or any partnership, joint venture, trust, employee benefit plan or other enterprise of which such person is or was serving at the request of the Corporation as a director, officer, employee or agent. The provisions of this Section 7.4 shall not be deemed to be exclusive or to limit in any way the circumstances in which a person may be deemed to have met the applicable standard of conduct set forth in Section 7.1 or 7.2, as the case may be.

7.5Right of Claimant to Bring Suit. Notwithstanding any contrary determination in the specific case under Section 7.3, and notwithstanding the absence of any determination thereunder, if a claim under Sections 7.1 or 7.2 of the Article VII is not paid in full by the Corporation within (i) ninety (90) days after a written claim for indemnification has been received by the Corporation, or (ii) thirty (30) days after a written claim for an advancement of expenses has been received

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by the Corporation, the claimant may at any time thereafter (but not before) bring suit against the Corporation in the Court of Chancery in the State of Delaware to recover the unpaid amount of the claim, together with interest thereon, or to obtain advancement of expenses, as applicable. It shall be a defense to any such action brought to enforce a right to indemnification (but not in an action brought to enforce a right to an advancement of expenses) that the claimant has not met the standards of conduct which make it permissible under the DGCL (or other applicable law) for the Corporation to indemnify the claimant for the amount claimed, but the burden of proving such defense shall be on the Corporation. Neither a contrary determination in the specific case under Section 7.3 nor the absence of any determination thereunder shall be a defense to such application or create a presumption that the claimant has not met any applicable standard of conduct. If successful, in whole or in part, the claimant shall also be entitled to be paid the expense of prosecuting such claim, including reasonable attorneys’ fees incurred in connection therewith, to the fullest extent permitted by applicable law.

7.6Expenses Payable in Advance. Expenses, including without limitation attorneys’ fees, incurred by a current or former director or officer in defending any civil, criminal, administrative or investigative action, suit or proceeding shall be paid by the Corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such current or former director or officer to repay such amount if it shall ultimately be determined that such person is not entitled to be indemnified by the Corporation as authorized in this Article VII.

7.7Nonexclusivity of Indemnification and Advancement of Expenses. The rights to indemnification and advancement of expenses provided by or granted pursuant to this Article VII shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under the Certificate of Incorporation, any agreement, vote of stockholders or disinterested directors or otherwise, both as to action in such person’s official capacity and as to action in another capacity while holding such office, it being the policy of the Corporation that, subject to Section 7.11, indemnification of the persons specified in Sections 7.1 and 7.2 shall be made to the fullest extent permitted by law. The provisions of this Article VII shall not be deemed to preclude the indemnification of any person who is not specified in Section 7.1 or 7.2 but whom the Corporation has the power or obligation to indemnify under the provisions of the DGCL, or otherwise.

7.8Insurance. The Corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise against any liability asserted against such person and incurred by such person in any such capacity, or arising out of such person’s status as such, whether or not the Corporation would have the power or the obligation to indemnify such person against such liability under the provisions of this Article VII.

7.9Certain Definitions. For purposes of this Article VII, references to “the Corporation” shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, employees or agents so that any person who is or was a director, officer, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, shall stand in the same position under the provisions of this Article VII with respect to the resulting or surviving corporation as such person would have with respect to such constituent corporation if its separate existence had continued. For purposes of this Article VII, references to “fines” shall include any excise taxes assessed on a person with respect of any employee benefit plan; and references to “serving at the request of the Corporation” shall include any service as a director, officer, employee or agent of the Corporation which imposes duties on, or involves services by, such director, officer, employee or agent with respect to an employee benefit plan, its participants or beneficiaries; and a person who acted in good faith and in a manner such person reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner “not opposed to the best interests of the Corporation” as referred to in this Article VII.

7.10Survival of Indemnification and Advancement of Expenses. The indemnification and advancement of expenses provided by, or granted pursuant to, this Article VII shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a director or officer and shall inure to the benefit of the heirs, executors and administrators of such a person.

7.11Limitation on Indemnification. Notwithstanding anything contained in this Article VII to the contrary, except for proceedings to enforce rights to indemnification (which shall be governed by Section 7.5), the Corporation shall not be obligated to indemnify any director, officer, employee or agent in connection with an action, suit or proceeding (or part thereof):

GDSVF&H\7706247.2

(a)for which payment has actually been made to or on behalf of such person under any statute, insurance policy, indemnity provision, vote or otherwise, except with respect to any excess beyond the amount paid;

(b)for an accounting or disgorgement of profits pursuant to Section 16(b) of the Exchange Act, or similar provisions of federal, state or local statutory law or common law, if such person is held liable therefor (including pursuant to any settlement arrangements);

(c)for any reimbursement of the Corporation by such person of any bonus or other incentive-based or equity-based compensation or of any profits realized by such person from the sale of securities of the corporation, as required in each case under the Exchange Act (including any such reimbursements that arise from an accounting restatement of the Corporation pursuant to Section 304 of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), or the payment to the Corporation of profits arising from the purchase and sale by such person of securities in violation of Section 306 of the Sarbanes-Oxley Act), if such person is held liable therefor (including pursuant to any settlement arrangements);

(d)initiated by such person, including any action, suit or proceeding (or part thereof) initiated by such person against the Corporation or its directors, officers, employees, agents or other indemnitees, unless (i) the Board authorized the action, suit or proceeding (or relevant part thereof) prior to its initiation, (ii) the Corporation provides the indemnification, in its sole discretion, pursuant to the powers vested in the Corporation under applicable law, (iii) otherwise required to be made under Section 7.5 or (iv) otherwise required by applicable law; or

(e)if prohibited by applicable law.

7.12Contract Rights. The obligations of the Corporation under this Article VII to indemnify, and advance expenses to, a person who is or was a director or officer of the Corporation shall be considered a contract between the Corporation and such person, and no modification or repeal of any provision of this Article VII shall affect, to the detriment of such person, such obligations of the Corporation in connection with a claim based on any act or failure to act occurring before such modification or repeal.

Article VIII
Exclusive Forum

Unless the Corporation consents in writing to the selection of an alternative forum, the federal district courts of the United States of America shall be the sole and exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act of 1933, as amended.

Any person or entity purchasing or otherwise acquiring any interest in any security of the Corporation shall be deemed to have notice of and consented to the provisions of this Article VIII. For the avoidance of doubt, nothing contained in this section Article VIII shall apply to any action brought to enforce a duty or liability created by the 1934 Act or any successor thereto.

GDSVF&H\7706247.2

THE SYMBOL “[*]” DENOTES PLACES WHERE CERTAIN IDENTIFIED INFORMATION HAS BEEN EXCLUDED FROM THE EXHIBIT BECAUSE IT IS BOTH (i) NOT MATERIAL, AND (ii) WOULD LIKELY CAUSE COMPETITIVE HARM TO THE COMPANY IF PUBLICLY DISCLOSED

Confidential ‌Exhibit 10.1

SEVENTH AMENDMENT TO SUPPLY AGREEMENT

This Seventh Amendment to Supply Agreement (the “Seventh Amendment”) is effective as of the date last signed below (the “Seventh Amendment Date”) between Illumina, Inc., a Delaware corporation having a place of business at 5200 Illumina Way, San Diego, CA 92122 ("Illumina") and Natera, Inc., having a place of business at 201 Industrial Road, Suite 410, San Carlos, CA 94070 (“Customer”). Customer and Illumina may be referred to herein as “Party” or “Parties.”

WHEREAS, Illumina and Customer are Parties to a Supply Agreement having an Effective Date of August 16, 2013, and amended on September 18, 2014, September 23, 2015, June 8, 2016, January 3, 2019, December 18, 2019, and May 8, 2020 (“Agreement”);

WHEREAS, on August 18, 2021 GRAIL, Inc. (now GRAIL, LLC”) became a wholly owned subsidiary of Illumina;

WHEREAS, the Parties have agreed upon certain amendments to (i) add products available for purchase and any applicable discounts under the Agreement, (ii) incorporate, effective as of the Seventh Amendment Date, [*], and (iii) address specific points relating to Customer’s IVD development rights under the Agreement;

NOW, THEREFORE, in consideration of the mutual promises and covenants hereinafter set forth, the Parties hereto agree to amend the Agreement as follows:

1.	Section 1 of the Agreement is amended as follows:

The definition of “Consumables” is amended to add the following sentence at the end:

For clarity purposes only, Consumables include any Certain Sequencing Consumables.

ii.

The definition of “Product” is amended to add the following sentence at the end:

For clarity purposes only, Products include any Supplied Products.

2.	The following new definitions are incorporated into Section 1 of the Agreement:

“Certain Sequencing Consumables” means those Consumables intended by Illumina to be used to perform a sequencing process on Illumina’s [*] instruments and any future sequencing hardware launched by Illumina or its Affiliates, and includes core consumables that are (i) commercialized or otherwise made available by Illumina to customers or Affiliates of Illumina and (ii) intended by Illumina to be used to perform a sequencing process on any such system. Certain Sequencing Consumables do not include products that were at the “end of life” or “end of sales” or were announced (before [*]) to customers as a planned “end of life” or “end of sale”. The Certain Sequencing Consumables are limited to Products that are shipped to and used in [*]. The Certain Sequencing Consumables purchasable under this Agreement as of the Seventh Amendment Date are contained within Exhibit B.

Confidential

“Equivalent” means, with respect to the comparison of Customer to another customer, that (a) the aggregate volume of all Supplied Products purchased by such other customer from Illumina in the immediately preceding year (measured in U.S. dollars) is not more than [*]% greater than the volume purchased by Customer in prior year, and (b) such other customer is a For-Profit Entity.

“For-Profit Entity” means a for-profit company in the United States that purchases Supplied Products for performing sequencing for liquid biopsy cancer screening or diagnostic tests for clinical oncology purposes, on human samples received from, and delivered to, unaffiliated health care professionals, health care organizations or other laboratories for clinical oncology purposes. A For-Profit Entity excludes governments, government agencies, hospitals, research institutes, academic institutions, non-profits and Illumina Affiliates (including GRAIL).

“GRAIL” means GRAIL, LLC for so long as it is an Affiliate of Illumina, or any successor to GRAIL, LLC or any substantial part of the business of GRAIL, LLC that in either case is Illumina or an Affiliate of Illumina.

“Grandfathered Pricing” means any pricing (either under a quote of duration longer than 30 days or a supply agreement) that is operative for the Customer for use of the Supplied Products on [*], provided that this pricing is for ongoing, ordinary course purchases of Supplied Products.

“Pre-Release Sequencing Product” means Illumina sequencing hardware or Certain Sequencing Consumables that are not available for purchase in Illumina’s product catalogue. Such sequencing hardware or Certain Sequencing Consumables shall include any re-designed or modified products made available to any For-Profit Entity or to GRAIL that optimize, in any material respect, a product’s interoperability, capabilities, or performance.

“Short Term Project” means a project or circumstance giving rise to a discrete purchase of Certain Sequencing Consumables outside of ongoing ordinary course of purchases made by a For-Profit Entity. The duration of a Short Term Project is no more than two years.

“Supplied Product(s)” means the following Products: Illumina’s [*]instruments, and any future sequencing instruments launched by Illumina or its Affiliates, or Certain Sequencing Consumables, that are purchased by Customer for any Customer Use pursuant to the Agreement. Supplied Products do not include products that were at the “end of life” or “end of sale” or were announced (before [*]) to customers as a planned “end of life” or “end of sale”. Supplied Products are limited to products that are shipped to and used in [*]. The Supplied Products purchasable under this Agreement as of the Seventh Amendment Date are contained within Exhibit B.

“Volume-Based Net Price” means the actual list price of a Supplied Product less the applicable discount for Customer’s volume under a volume-based discount schedule.

3.	Section 2.d. of the Agreement is amended by adding the following sentence:

“Customer will have access to the same product and support services that a For-Profit Entity or GRAIL has access to, or that Customer has access to as of the Seventh Amendment Date. For such services, Customer shall have access to the same volume-based pricing that GRAIL has access to for the equivalent level of service, or to which Customer had access to as of the Seventh Amendment Date, at Customer’s option.”

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4.	Subsection (d) of Section 4 of the Agreement is deleted in its entirety and replaced with the following: “In no event will Illumina have the right to cease shipping of the Supplied Products solely on the basis of any alleged claim of infringement of any intellectual property rights of Illumina.”

5.	Section 7.c. of the Agreement is amended by adding the following sentence:

“Purchase Orders submitted in accordance with this Agreement may be rejected by Illumina only if Illumina does not have sufficient supply of the applicable Supplied Product to fulfill the order or if the Purchase Order is not in accordance with standard lead times for the applicable Supplied Product. In the event Illumina is experiencing a supply shortage of the applicable Supplied Product (or components therein), Illumina will allocate the existing supply in an equitable manner among its customers (including Affiliates) based on expiring lots, and which shall not favor Affiliates over other customers.”

6.	The following is hereby added to the Agreement as Section 7.f.:

“Access to Supplied Products. Customer shall have access to the Supplied Products for purchase that GRAIL or any For-Profit Entity has access, within [*]of when GRAIL or such For-Profit Entity, as applicable, is offered such access (if not earlier) for purchase.”

7.	The following is added to the Agreement as Section 7.g.:

“Access to Pre-Release Sequencing Products. Customer shall have access for purchase to any Pre-Release Sequencing Product to which GRAIL or any For-Profit Entity is offered access within [*] of when GRAIL or such For-Profit Entity, as applicable, is offered such access (if not earlier), and for the same categories of uses, specifically: (i) feedback to Illumina for development of NGS products, including through alpha or beta testing; (ii) for clinical trials; (iii) for clinical validation; (iv) for pre- commercial test development not relating to clinical trials; or (v) for a commercialized product developed by Customer. Customer’s purchase of any Pre-Release Sequencing Product is subject to the pricing terms in this Agreement. This provision does not apply to Pre-Release Sequencing Products that are developed by Illumina for a specific For-Profit Entity pursuant to a development agreement under Section 7.h with such For-Profit Entity. “

8.	The following is added to the Agreement as Section 7.h.:

“Development Agreement. Illumina shall enter into, upon Customer request, a separate development agreement with Customer on commercially reasonable terms, relating to the design or modification of any Supplied Product, in a manner that optimizes interoperability with Customer’s tests, including, without limitation, capabilities, performance, speed, efficiency, cost, convenience, accuracy, specificity, precision, ease of use and user experience.“

9.	The following is added to the Agreement as Section 7.i.:

“No Obsolescence. Illumina shall not discontinue (i) any Supplied Product so long as Customer continues to purchase that Supplied Product, or (ii) any [*] that Customer has purchased (for on-going development or commercial testing purposes) at least [*]. Illumina shall also make the

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Confidential

following extensions to previously announced obsolescence dates: (a) Consumables bearing the Illumina catalogue numbers [*] and [*] shall continue to be available for purchase by Customer so long as any such purchase is made using a binding purchase order with a [*] lead time for shipment and with a last possible shipment date for such Consumables of [*]; and (b) Illumina will continue to provide technical support for Customer’s [*] sequencing systems in Customer’s possession as of the Seventh Amendment Date until [*] at the same service level owed as of the Seventh Amendment Date to Customer for such systems (provided, however, Customer acknowledges that Microsoft Windows 10 will no longer be supported by Microsoft after 2022, and certain spare parts for such sequencing systems may not be available for support that is requested after [*], which could affect Illumina’s ability to provide such technical support).”

10.	The following is added to the Agreement as Section 7.j.:

“Quality of Supplied Products. Supplied Products provided pursuant to the “No Obsolescence” provision in Section 7.i. above shall be manufactured to at least the quality standards and provided with at least the level of product support in effect upon Customer’s initial purchase of such Supplied Products.“

11.	The following is added to the Agreement as Section 7.k.:

“No Price Increases. The inflation-adjusted (based on the Bureau of Labor Statistics’ Analytical Laboratory Instrument Manufacturing Index in the Producer Price Index (“PPI”)) Volume-Based Net Price (under Tables 2, 5, or 6(a) (subject to Table 6(b)) of Exhibit B, as applicable) that Customer has access to for each Supplied Product purchased under this Agreement (under Tables 2, 5, or 6(a) (subject to Table 6(b)) of Exhibit B, as applicable) following the Seventh Amendment Date shall not increase. To the extent Illumina’s costs of goods sold for a Supplied Product materially increase due to factors beyond Illumina’s control, then such Volume-Based Net Price (under Tables 2, 5, or 6(a) (subject to Table 6(b)) of Exhibit B, as applicable) may increase solely to reflect that cost increase and solely for the duration of that cost increase.“

12.	The following is added to the Agreement as Section 7.l.:

“New Product Pricing. To the extent that Illumina launches a new version of any Supplied Product (e.g., a sequencing instrument of similar throughput, or a Certain Sequencing Consumable of the same sequencing read length and similar number of sequencing reads per flow cell), the new version of the Supplied Product shall be automatically added to Exhibit B of this Agreement with pricing and the inflation-adjusted (based on the PPI) Volume-Based Net Price per gigabase of sequencing shall not be higher as compared to the Volume-Based Net Price of the prior version of the Supplied Product, provided that the new version of the Supplied Product does not result in any material improvements in performance or capability. In addition, Illumina commits that by 2025, under this Agreement, the Volume-Based Net Price to Customer per gigabase of sequencing using the highest throughput Illumina instrument then available, with the highest throughput, best-performance flow cell and kit then available, at full capacity, will be at least 43% lower than the inflation-adjusted (based on the PPI) Volume-Based Net Price (under Table 2 of Exhibit B as applicable as of the Seventh Amendment Date), per gigabase of sequencing using the NovaSeq instrument, with an S4 300 flow cell, at full capacity. For the avoidance of doubt, in accordance with the previous sentence, holding volume constant, every customer (regardless of their application, or whether they are in

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oncology screening) using the highest throughput instrument and best-performance flow cell would observe by 2025 a reduction in price, under the Universal Pricing option, per gigabase of sequencing, of 43%. By way of example, for a customer at the highest volume discount tier today, the per gigabase sequencing price is $4, using a NovaSeq instrument with an S4 300 flow cell. Under this commitment, the per gigabase of sequencing price for that customer at the same volume discount tier in 2025 would be no greater than $2.26 (inflation-adjusted based on the PPI) using the highest throughput Illumina instrument then available, with the highest-throughput, best-performance flow cell and kit then available. To the extent Illumina’s costs of goods sold for a Supplied Product materially increase due to factors beyond Illumina’s control, then the Volume-Based Net Price as referenced in this Section 7.l. may increase solely to reflect that cost increase and solely for the duration of that cost increase. The price for a new Product or a new version of a materially improved Product must be commercially reasonable.“

13.	The following is added to the Agreement as Section 7.m.:

“Most-Favored Pricing. If Customer is not receiving Grandfathered Pricing for Supplied Product, Customer shall have access to Volume-Based Net Prices for that Supplied Product that are no less favorable than the Volume-Based Net Prices provided to an Equivalent customer or to GRAIL (inclusive of transfer pricing, portability fees, and royalties) for that Supplied Product. “

14.	The following is added to the Agreement as Section 7.n.:

“Notification and Refund. In the event that Section 7.m is triggered, Illumina will notify Customer promptly, and no later than 45 days after the end of the applicable Illumina fiscal quarter, and the pricing made available to Customer for the applicable Supplied Products will be reduced in accordance with Section 7.m., effective as of the date on which GRAIL or the Equivalent customer received the triggering pricing, and the Customer will receive such reduced pricing for the period of time that the triggering pricing is available to GRAIL or the Equivalent customer. With respect to units of Supplied Product ordered and invoiced pursuant to a Purchase Order accepted after the date the triggering purchase was made, and for which Customer has paid the applicable invoice, Illumina will refund to Customer the difference between the pricing made available to Customer and the triggering pricing, multiplied by the number of affected units of Supplied Product.“

15.	The following is added to the Agreement as Section 7.o.:

“Short Term Projects. Customer shall have access to Short Term Project pricing that is no less favorable than pricing extended to Equivalent customer or GRAIL for a Short Term Project of substantially similar size (i.e., using between [*]% and [*]% of the volume of Certain Sequencing Consumables) and duration (i.e., for a period of not more than [*] longer than the other Short Term Project), provided that Customer has requested such pricing. If Illumina offers GRAIL pricing for a Short Term Project under this section, Illumina shall make Customer aware of such pricing promptly, but in no event later than 45 days after the end of the applicable Illumina fiscal quarter. No customer, including GRAIL, may receive Short Term Project pricing for more than two consecutive years. No customer, including GRAIL, may use Short Term Project pricing for ongoing ordinary course purchases, including for its standard commercial testing. Pricing for Short Term Projects will not be considered as triggering with respect to the obligations in Section 7.m.“

16.	The following is added to the Agreement as Section 7.p.:

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Confidential

“Access to Information. Customer shall have access to the same information about final product specifications of any new Supplied Product, any new version of a Supplied Product or any Pre-Release Sequencing Product within [*] of when GRAIL is provided such information.“

17.	The following is added to the Agreement as Section 7.q.:

“GRAIL Purchases and Services. Illumina shall publish, on the “Oncology Contract Terms” website, (i) the Supplied Products, by SKU, that GRAIL is purchasing; (ii) the service plans, by SKU, that GRAIL is purchasing; and (iii) the pricing grid for both products and services under which GRAIL is purchasing Supplied Products and services. To the extent necessary, Illumina shall update this website within [*] of entry of any purchase order for Supplied Products or any service contract relating to the Supplied Products by GRAIL.“

18.	The following is added to the Agreement as Section 14.g:

“Confidential Information. To the extent that Illumina may have access to Confidential Information of Customer in connection with this Agreement or the provision of supplied Products by Illumina to Customer, Illumina shall in no event share such Confidential Information of Customer with GRAIL or any subsidiary of GRAIL, or any employees who work within GRAIL. Any Confidential Information received shall be used by Illumina only (i) to perform Illumina’s product supply obligations, service or obligations under any agreement to Customer, or (ii) for performance of general business practices by non-technical functions (e.g., accounting, customer service) within Illumina, which functions shall have access to such information only on a need-to-know basis, and Illumina shall not use such Confidential Information for any other purpose, expressly including without limitation, for any of its own or Affiliates’ internal purposes. All employees who may receive Confidential Information will be advised of these confidentiality obligations and use restrictions. Illumina shall continue its practice of maintaining all Confidential Information of Customer confidential as to any other entity. Illumina shall establish a firewall designed to prevent any GRAIL personnel (and any Illumina personnel carrying out activities with respect to the GRAIL business or products) from accessing any Confidential Information obtained by or made available to Illumina relating to Customer or its business or products, whether pursuant to this Agreement or otherwise.”

19.	Section 17.a. The first sentence of Section 17.a. of the Agreement is deleted in its entirety and replaced with the following:

“This Agreement shall commence on the Effective Date and shall terminate on August 18, 2033, unless otherwise terminated as provided hereunder or extended by mutual written agreement of the Parties.”

20.	Section 17.c.i. Section 17.c.i. of the Agreement is deleted in its entirety and replaced with the following:

“Breach of Provision. If either party materially breaches this Agreement and fails to cure such breach within 60 days after receiving written notice of the breach, the non-breaching party shall have the right to terminate this Agreement by providing written notice to the other party; provided, however, that if such breach is curable, but not reasonably curable within such 60-day period, and

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the breaching Party is using commercially reasonable efforts to cure the breach, then such cure period will be extended to not longer than 180 days.”

21.	Section 17.c.v. of the Agreement is deleted in its entirety and replaced with the following:

“Termination by Customer for Convenience. Customer has a unilateral right to terminate its supply relationship with Illumina at any time and for any reason without termination liability upon [*] prior written notice to Illumina, provided, however, that Customer shall honor all invoices, which invoices shall be issued upon shipment, for supplied Products ordered under a Purchase Order that was accepted by Illumina prior to the termination date. Illumina cannot terminate this Agreement for convenience during the Term.”

22.	The following is added to the Agreement as Section 20.p.:

“Illumina agrees to a [*] audit by a Big 4 accounting firm to assess Illumina’s compliance with the terms contained in Sections 2.d., 7.c., 7.f., 7.g., 7.i., 7.k.-7.q., and 14.a. of this Agreement. Illumina will provide Customer with a written report (with reasonable redactions) confirming compliance with the commitments set forth herein. Illumna shall provide cooperation, including access to necessary books and records, in support of any [*] audit conducted. To the extent Customer has a good faith basis for alleging that Illumina is in breach of a commitment contained in this Agreement, Illumina shall engage an auditor to assess Customer’s allegation separate from and in addition to Illumina’s audit. In addition to providing the written report, in the event of any finding of potential noncompliance with Illumina’s performance under the Agreement, Customer shall be notified within [*] days of identifying such a finding of potential noncompliance.”

23.	Exhibit A. Exhibit A, Part 1, Section 3.a. is hereby deleted in its entirety and replaced with the following: 'a. Exclusivity. Reserved.'"

24.	The following shall be added as Section 5.vi. to Exhibit A, Part 4:

“Illumina will use commercially reasonable efforts to provide Customer the same level of timely access to Illumina’s device design history file(s) and/or any other filing or documentation that is customarily provided to other IVD partners as useful or required in connection with any submission by Customer to any regulatory authority for a Natera IVD Kit. Such access will be provided without further payment by Customer.”

25.	The following shall be added as Section 8.a.iii. to Exhibit A, Part 4:

“iii. The [*] set forth in Exhibit A, Part 4, Section 8.a.i and ii shall be the only [*] due to Illumina upon execution of each Development Plan for a Natera IVD Kit and/or approval by the U.S. FDA of a PMA for each Natera IVD Kit so approved.”

26.	Exhibit A, Part 4, Section 9 shall be amended by replacing references to “*[]” with “[]*”.

27.	The following shall be added as Section 10 to Exhibit A, Part 4:

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“Customer may enter into, at any time from today until [*], an additional agreement with Illumina under which Customer may develop and commercialize additional in-vitro diagnostic (“IVD”) test kits on Illumina’s diagnostic (“Dx”) sequencing platforms. Illumina will provide standard terms for Customer to enter into a stand-alone agreement to enable Customer to develop and commercialize additional IVD test kits on one or all of Illumina’s Dx sequencing platforms. Illumina will provide any documentation or information reasonably required for Customer to seek FDA approval or FDA marketing authorization to sell a for-profit, clinical test using the Supplied Products.”

28.Customer may elect, at [*] as of the Seventh Amendment Date and through the Term, on a Supplied Product-by-Supplied Product basis, to switch from (a) the existing pricing and discounting in the Agreement effective immediately prior to and as of [*] to (b) the universal grid pricing set forth in Tables 2, 5 and 6(a) (subject to Table 6(b)) of Exhibit B.

29.Exhibit B. Exhibit B to the Agreement is hereby deleted in its entirety and replaced by the new Exhibit B set forth on Attachment 1 hereto.

30.Entire Agreement. Except as expressly stated herein, this Seventh Amendment does not alter any term or condition of the Agreement. This Seventh Amendment represents the entire agreement between the Parties regarding the subject matter hereof and supersedes all prior discussions, communications, agreements, and understandings of any kind and nature between the Parties regarding the subject matter hereof.

31.Reference to Agreement. On and after the Seventh Amendment Date, each reference in the Agreement to “this Agreement”, “hereunder”, or words of like import referring to the Agreement shall mean and be a reference to the Agreement as modified by this Seventh Amendment.

32.Governing Law. This Seventh Amendment and performance by the Parties hereunder shall be construed in accordance with the laws of the State of California, U.S.A., without regard to provisions on the conflicts of laws.

33.Counterparts. This Seventh Amendment may be executed in one or more counterparts, and each of which shall be deemed to be an original, and all of which shall constitute one and the same instrument.

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IN WITNESS WHEREOF, the Parties hereto acknowledge and agree to the terms and conditions of this Seventh Amendment and have caused this Agreement to be executed by their respective duly authorized representatives to be effective as of the Seventh Amendment Date.


Natera, Inc.:		Illumina, Inc.:

By:	/s/ John Fesko	By:	/s/ Nicole Berry

Name:	John Fesko	Name:	Nicole Berry

Title:	Chief Business Officer	Title:	SVP & GM, AMR Commercial Operations

Date:	10/7/21	Date:	10/5/21

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ATTACHMENT 1

EXHIBIT B

Only the Products listed in Table 1 of this Exhibit B are subject to purchase under this Agreement.

The following pricing schedule replaces and supersedes all conflicting pricing terms in this Agreement. Notwithstanding anything to the contrary, no additional discounts shall apply unless otherwise specified by Illumina in writing at a later date.

Exhibit B Definitions

“Annual Sequencing Consumable Spend” equals the total of all amounts invoiced (excluding amounts paid for taxes and shipping, insurance, customs, and other transportation costs) by Illumina to Customer for the purchase of Certain Sequencing Consumables shipped to a particular country under this Agreement during the immediately precedingContract Year during the Term.

“Contract Year” means the period from February 15^th of a given calendar year during the Term through and including February 14^th of the immediately following calendar year during the Term.

The following are set forth for example purposes only:

Example 1: If the Seventh Amendment Date is October 1, 2021, then the applicable Annual Sequencing Consumable Spend for purposes of determining discounts applicable to the purchase of Certain Sequencing Consumables by Customer shipped to the applicable country during the period from October 1, 2021 – February 14, 2022, would equal the total of all amounts invoiced (excluding amounts paid for taxes and shipping, insurance, customs, and other transportation costs) by Illumina to Customer for the purchase of Certain Sequencing Consumables shipped to a particular country during the period from February 15, 2020 to February 14, 2021.

Example 2: If the Seventh Amendment Date is October 1, 2021, then the applicable Annual Sequencing Consumable Spend for purposes of determining discounts applicable to the purchase of Certain Sequencing Consumables by Customer shipped to the applicable country during the period from February 15, 2022 – February 14, 2023, would equal the total of all amounts invoiced (excluding amounts paid for taxes and shipping, insurance, customs, and other transportation costs) by Illumina to Customer for the purchase of Certain Sequencing Consumables shipped to a particular country during the period from February 15, 2021 to February 14, 2022.

Example 3: If the Seventh Amendment Date is October 1, 2021, then the applicable Annual Sequencing Consumable Spend for purposes of determining discounts applicable to the purchase of Certain Sequencing Consumables by Customer shipped to the applicable country, during the period from February 15, 2023 – February 14, 2024, would equal the total of all amounts invoiced (excluding amounts paid for taxes and shipping, insurance, customs, and other transportation costs) by Illumina to Customer for the purchase of Certain Sequencing Consumables shipped to a particular country during the period from February 15, 2022 to February 14, 2023.

The tables that follow list the Consumables subject to purchase under this Agreement and any applicable discounts off the then-current list price (or in the case of [*] Consumables set

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forth in Table 3, the Base Price)) in the country to which the applicable Products will be shipped by Illumina. Discounts for Consumables shall be determined on a country-specific basis (i.e., shipments to multiple countries may not be aggregated for purposes of Consumables discounting).

Table 1 below and on the following page contains a list of the Consumables subject to this Agreement together with applicable part numbers and the applicable list price as of the Seventh Amendment Date.

TABLE 1

Product Name	Part Number	2021 US List Price
*[]**
*[]**	*[]**	*[]**
*[]**	*[]**	*[]**
*[]**	*[]**	*[]**
*[]**	*[]**	*[]**
*[]**	*[]**	*[]**
*[]**	*[]**	*[]**
*[]**	*[]**	*[]**
*[]**	*[]**	*[]**
*[]**	*[]**	*[]**
*[]**	*[]**	*[]**
*[]**	*[]**	*[]**
*[]**	*[]**	*[]**
*[]**	*[]**	*[]**
*[]**	*[]**	*[]**
*[]**	*[]**	*[]**
*[]**	*[]**	*[]**
*[]**	*[]**	*[]**
*[]**
*[]**	*[]**	*[]**
*[]**	*[]**	*[]**
*[]**	*[]**	*[]**
*[]**	*[]**	*[]**
*[]**	*[]**	*[]**
*[]**	*[]**	*[]**
*[]**	*[]**	*[]**
*[]**	*[]**	*[]**
*[]**	*[]**	*[]**
*[]**	*[]**	*[]**
*[]**	*[]**	*[]**
*[]**	*[]**	*[]**
*[]**	*[]**	*[]**
*[]**
*[]**	*[]**	*[]**
*[]**	*[]**	*[]**

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*[]**	*[]**	*[]**
*[]**	*[]**	*[]**
*[]**	*[]**	*[]**
*[]**	*[]**	*[]**
*[]**
*[]**	*[]**	*[]**
*[]**	*[]**	*[]**
*[]**	*[]**	*[]**
*[]**	*[]**	*[]**
*[]**
*[]**	*[]**	*[]**
*[]**	*[]**	*[]**
*[]**	*[]**	*[]**
*[]**	*[]**	*[]**
*[]**	*[]**	*[]**
*[]**	*[]**	*[]**
*[]**	*[]**	*[]**
*[]**
*[]**	*[]**	*[]**
*[]**	*[]**	*[]**
*[]**	*[]**	*[]**
*[]**	*[]**	*[]**
*[]**	*[]**	*[]**

Discounts for new versions of Supplied Products (e.g., future consumables for [*], or future platforms) shall be added to this Exhibit B in compliance with the terms and conditions of this Exhibit B and the Agreement, including without limitation Sections 7.k, 7.l, 7.m, 7.n, and 7.o.

Quotations: Solely with respect to the pricing (including applicable discounts) of Consumables as set forth in this Exhibit B:

First Quote. Illumina will provide Customer a quotation referencing this Agreement and specifying the price consistent with this Exhibit B which will apply for each Consumable the Customer may purchase until February 14 immediately following the Seventh Amendment Date (“First Quote”). The First Quote and pricing shall commence on the Seventh Amendment Date and expires on February 14 immediately following the Seventh Amendment Date (“First Quote Period”). All purchase orders placed during the First Quote Period must reference this Agreement to be valid. Any purchase orders which reference the First Quote, but are not received by Illumina until after the expiry of the First Quote Period will be invalid and may not be accepted by Illumina; however, if Illumina does accept such purchase order, it will fill the same in accordance with this Agreement.

Annual Quotes and Purchase Orders for Consumables. No later than February 15 of each calendar year of this Agreement, Illumina will issue a quotation referencing this Agreement and specifying the price consistent with this Exhibit B for each Consumable (the “Annual Quote”) for the Contract Year beginning on that February 15. Each Annual Quote and pricing found therein expires on February 14 of the next consecutive calendar year and sets forth the pricing that will be used on all Purchase Orders that are

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provided by Customer prior to the end of such Contract Year. The Purchase Orders placed against each Annual Quote must reference this Agreement to be valid. Any Purchase Orders which reference an Annual Quote, but are not received by Illumina until after the expiry of the relevant Annual Quote Period will be invalid and may not be accepted by Illumina; however, if Illumina does accept such purchase order, it will fill the same in accordance with this Agreement. For clarity, if Illumina fails to timely issue any Annual Quote, then the prior Annual Quote shall remain in effect until such subsequent Annual Quote is so issued.

Consumables Discounting

The following tables set forth the discounts for the applicable Consumables, as specified in such tables.

Discounting for [*] Consumables. Discounts off then-current list price of [*] Consumables listed in Table 1 are set forth in Table 2 below. Discounts for new catalogue versions of Consumables (e.g., future Consumables for [*], or future platforms) shall be added to this Exhibit B at the time such Consumables are added to this Agreement. Illumina shall make such Consumables available to Customer upon commercial launch of such Consumables. The discounts applicable to the purchase of the applicable Consumables set forth in Table 2, during a given period during the Term, are determined by the applicable Annual Sequencing Consumable Spend.

TABLE 2

Annual Sequencing Consumable Spend (in USD)	*[]**	*[]**
*[]**	*[]**	*[]**
*[]**	*[]**	*[]**
*[]**	*[]**	*[]**
*[]**	*[]**	*[]**
*[]**	*[]**	*[]**
*[]**	*[]**	*[]**
*[]**	*[]**	*[]**
*[]**	*[]**	*[]**
*[]**	*[]**	*[]**
*[]**	*[]**	*[]**

Discounting for [*] Consumables:

Solely with respect to discounting for the [*] Consumables described in Table 3 below, “Total Spend” is determined quarterly at the first day of each calendar quarter (i.e., January 1, April 1, July 1, October 1), and equals (1) the total amount (minus freight, taxes, and any product credits or offsets) Illumina has invoiced Customer for shipments of all Products delivered to Customer during the 12 calendar month period that immediately precedes such first day of a calendar quarter under this Agreement, which includes Products purchased under this Agreement and Products purchased from Illumina outside of this Agreement, (2) the total amount Illumina has invoiced customer for Services during the 12 calendar month period that immediately precedes such first day of a calendar quarter under this Agreement, which includes Services purchased under this Agreement and Services purchased from Illumina outside of this Agreement; and (3) the total amount of NIPT Test Fees paid by Customer to Illumina during the 12 calendar month period that immediately precedes such first day of a calendar quarter under this Agreement.

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Natera’s price (1) with respect to the [*] Consumables described in Table 3 below bearing the Illumina catalogue numbers [*], until [*], (2) with respect to the [*] Consumables described in Table 3 below bearing the Illumina catalogue numbers [*], during availability as set forth in Section 7.i. of the Agreement, and (3) with respect to the [*] Consumables described in Table 3 below, will be the base price listed in Table 3 without any discount; provided that, beginning [*], if Customer achieves Total Spend above $[*], an additional [*] discount will apply corresponding to the Total Spend amount specified in Table 3 below. After [*], Customer’s prices for the [*] Consumables described in Table 3 will be Illumina’s then-current list price for each such product less the volume-based discount listed in Table 4 below (in the column designated as “[*]”).

TABLE 3

Product Name	Part #	Base Price	Total Spend *[]**	Total Spend *[]**	Total Spend *[]**
*[]**	*[]**	*[]**	*[]**	*[]**	*[]**
*[]**	*[]**	*[]**	*[]**	*[]**	*[]**
*[]**	*[]**	*[]**	*[]**	*[]**	*[]**
*[]**	*[]**	*[]**	*[]**	*[]**	*[]**
*[]**	*[]**	*[]**	*[]**	*[]**	*[]**
*[]**	*[]**	*[]**	*[]**	*[]**	*[]**
*[]**	*[]**	*[]**	*[]**	*[]**	*[]**
*[]**	*[]**	*[]**	*[]**	*[]**	*[]**
*[]**	*[]**	*[]**	*[]**	*[]**	*[]**
*[]**	*[]**	*[]**	*[]**	*[]**	*[]**

Table 4: Discounting for [*] Consumables

Solely with respect to [*] Consumables, “Overall Sequencing Consumable Spend” is determined quarterly at the first day of each calendar quarter (i.e., January 1, April 1, July 1, October 1), and equals the total amount (minus freight, taxes, and any product credits or offsets) Illumina has

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invoiced Customer for shipments of all Sequencing Consumables delivered to Customer during the 12 calendar month period that immediately precedes such first day of a calendar quarter under this Agreement, which includes Sequencing Consumables purchased under this Agreement and Sequencing Consumables purchased from Illumina outside of this Agreement. Overall Sequencing Consumable Spend does not include, by way of example, amounts invoiced for array products, Test Fees, Services, or Illumina Hardware.

	*[]**		*[]**
Overall Sequencing Consumable Spend	*[] Discount**	*[] Discount**	*[] Discount**	*[] Discount**
*[]**	*[]**	*[]**	*[]**	*[]**
*[]**	*[]**	*[]**	*[]**	*[]**
*[]**	*[]**	*[]**	*[]**	*[]**
*[]**	*[]**	*[]**	*[]**	*[]**

As used in the definition of “Overall Sequencing Consumable Spend”, “Sequencing Consumables” means a Consumable directed for use on an Illumina sequencing instrument.

Customer’s prices for the [*] Consumable Products specified in Table 1 will be the then-current list price for each such Product less the discount listed in Table 4 above corresponding to the applicable Overall Sequencing Consumable Spend and the aggregate number of [*] sequencing systems purchased by Customer from Illumina.

Table 5. Universal Consumables Discount Schedule:

In the event Customer elects to switch from pricing under Table 3 (with respect to the listed [*] skus) or Table 4 (with respect to certain [*] (including [*] as applicable) skus after [*]), as applicable, to universal grid pricing, as set forth under paragraph 28 in the Seventh Amendment, the following discounts shall apply:

Annual Sequencing Consumable Spend (in USD)	*[]**	*[]**
*[]**	*[]**	*[]**
*[]**	*[]**	*[]**
*[]**	*[]**	*[]**
*[]**	*[]**	*[]**
*[]**	*[]**	*[]**
*[]**	*[]**	*[]**
*[]**	*[]**	*[]**
*[]**	*[]**	*[]**
*[]**	*[]**	*[]**
*[]**	*[]**	*[]**

Universal Hardware Discount Schedule:

In the event Customer elects to switch from existing Illumina Hardware discounting to universal grid pricing, as set forth under paragraph 28 of the Seventh Amendment, the following discounts shall apply:

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Table 6(a): Universal Hardware Discount Schedule:

The table below lists any applicable discounts off the then-current list price in the country to which the applicable Supplied Products will be shipped by Illumina. Instrument credits shall be determined on a country-specific basis and applied solely to instrument purchases within that country (i.e., Installed Instruments in multiple countries may not be aggregated for purposes of instrument discounting).

Tier	Instrument Credits	Discount off *[]Instrument**	Discount off *[] Instrument**
1	*[]**	*[]**	*[]**
2	*[]**	*[]**	*[]**
3	*[]**	*[]**	*[]**
4	*[]**	*[]**	*[]**
5	*[]**	*[]**	*[]**
6	*[]**	*[]**	*[]**

Table 6(b): Allocation of Instrument Credits:

Installed Instrument	Instrument Credits
*[]**	*[]**
*[]**	*[]**
*[]**	*[]**

For each Installed Instrument, Customer shall be entitled to a specific number of Instrument Credits as set forth in Table 6(b).

“Installed Instrument” means a Supplied Product that is a sequencing instrument covered under an active service contract with Illumina, and is installed in Customer’s or its Affiliates’ facility in a particular country.

[*] and Other Products:

Customer’s price for the following Products will be the price specified in Table 7 below without any additional discount:

Table 7:

*[]**	*[]**
*[]**	*[]**
*[]**	*[]**
*[]**	*[]**

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Page 17 of 17

Exhibit 31.1

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER

PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Steve Chapman, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Natera, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

3
Date: November 4, 2021	By:	/s/ Steve Chapman
	Name:	Steve Chapman
	Title:	Chief Executive Officer and President
		(Principal Executive Officer)

Exhibit 31.2

CERTIFICATION OF PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER

PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Michael Brophy, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Natera, Inc.;

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

3
Date: November 4, 2021	By:	/ s / Michael Brophy
	Name:	Michael Brophy
	Title:	Chief Financial Officer
		(Principal Financial and Accounting Officer)

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

I, Steve Chapman, Chief Executive Officer and President of Natera, Inc. (the “Company”), certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

(1) The quarterly report on Form 10-Q for the Company for the quarter ended September 30, 2021 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

3
Date: November 4, 2021	By:	/ s / Steve Chapman
	Name:	Steve Chapman
	Title:	Chief Executive Officer and President
		(Principal Executive Officer)

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

I, Michael Brophy, Chief Financial Officer of Natera, Inc. (the “Company”), certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

3
Date: November 4, 2021	By:	/ s / Michael Brophy
	Name:	Michael Brophy
	Title:	Chief Financial Officer
		(Principal Financial and Accounting Officer)