CareDx, Inc.
CareDx, Inc. (Form: 10-Q, Received: 08/11/2017 06:11:13)

 

 

 

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 June 30, 2017

or

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

For the transition period from           to           

Commission file number: 001-36536

 

CAREDX, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

94-3316839

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

 

3260 Bayshore Boulevard

Brisbane, California 94005

(Address of principal executive offices and zip code)

(415) 287-2300

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

 

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).  Yes   No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

 

Accelerated filer

 

 

 

 

 

 

 

 

Non-accelerated filer

 

(Do not check if a smaller reporting company)

 

Smaller reporting company

 

 

 

 

 

 

 

 

 

 

 

 

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes   No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

There were 22,541,668 shares of the registrant’s Common Stock issued and outstanding as of August 8, 2017.

 

 

 

 

 

 


 

CareDx, Inc.

TABLE OF CONTENTS

 

 

 

Page No.

PART I. FINANCIAL INFORMATION

 

3

Item 1. Unaudited Condensed Consolidated Financial Statements

 

3

Condensed Consolidated Balance Sheets as of June 30, 2017 and December 31, 2016

 

3

Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2017 and 2016

 

4

Condensed Consolidated Statements of Comprehensive Loss for the Three and Six Months Ended June 30, 2017 and 2016

 

5

Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2017 and 2016

 

6

Notes to Unaudited Condensed Consolidated Financial Statements

 

7

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

 

38

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

55

Item 4. Controls and Procedures

 

55

 

 

 

PART II. OTHER INFORMATION

 

58

Item 1. Legal Proceedings

 

58

Item 1A. Risk Factors

 

58

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

 

93

Item 3. Defaults Upon Senior Securities

 

93

Item 4. Mine Safety Disclosures

 

93

Item 5. Other Information

 

93

Item 6. Exhibits

 

93

Signatures

 

94

Exhibit Index

 

95

 

 

2


 

PART I. FINANCI AL INFORMATION

ITEM 1.

UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CareDx, Inc.

Condensed Consolidated Balance Sheets

(Unaudited)

(In thousands, except share data)

 

 

 

June 30, 2017

 

 

December 31, 2016

 

 

 

 

 

 

 

(Note 2)

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

9,104

 

 

$

17,258

 

Accounts receivable

 

 

3,005

 

 

 

2,768

 

Inventory

 

 

6,343

 

 

 

5,461

 

Prepaid and other assets

 

 

1,457

 

 

 

1,186

 

Total current assets

 

 

19,909

 

 

 

26,673

 

Property and equipment, net

 

 

2,528

 

 

 

2,931

 

Intangible assets, net

 

 

33,743

 

 

 

33,124

 

Goodwill

 

 

12,005

 

 

 

13,839

 

Restricted cash

 

 

9,553

 

 

 

143

 

Other assets

 

 

 

 

 

20

 

Total assets

 

$

77,738

 

 

$

76,730

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

3,599

 

 

$

3,065

 

Accrued payroll liabilities

 

 

3,440

 

 

 

3,851

 

Accrued and other liabilities

 

 

4,960

 

 

 

5,320

 

Accrued royalties

 

 

304

 

 

 

263

 

Deferred revenue

 

 

39

 

 

 

42

 

Deferred purchase consideration

 

 

7,004

 

 

 

5,445

 

Derivative liability

 

 

1,000

 

 

 

 

Current debt

 

 

33,890

 

 

 

22,846

 

Total current liabilities

 

 

54,236

 

 

 

40,832

 

Deferred rent, net of current portion

 

 

1,113

 

 

 

1,301

 

Deferred revenue, net of current portion

 

 

750

 

 

 

759

 

Deferred tax liability

 

 

5,894

 

 

 

6,057

 

Long-term debt, net of current portion

 

 

 

 

 

1,098

 

Contingent consideration

 

 

207

 

 

 

492

 

Common stock warrant liability

 

 

2,203

 

 

 

5,208

 

Other liabilities

 

 

1,349

 

 

 

1,222

 

Total liabilities

 

 

65,752

 

 

 

56,969

 

Commitments and contingencies (Note 9)

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Preferred stock: $0.001 par value; 10,000,000 shares authorized at June 30, 2017

   and December 31, 2016; no shares issued and outstanding at June 30, 2017

   and December 31, 2016

 

 

 

 

 

 

Common stock: $0.001 par value; 100,000,000 shares authorized at June 30,

   2017 and December 31, 2016; 21,421,016 shares and 21,278,373 shares issued and

   outstanding at June 30, 2017 and December 31, 2016, respectively

 

 

21

 

 

 

21

 

Additional paid-in capital

 

 

236,617

 

 

 

235,673

 

Accumulated other comprehensive loss

 

 

(2,724

)

 

 

(3,659

)

Accumulated deficit

 

 

(222,083

)

 

 

(212,553

)

Total CareDx, Inc. stockholders' equity

 

 

11,831

 

 

 

19,482

 

Noncontrolling interest

 

 

155

 

 

 

279

 

Total stockholders’ equity

 

 

11,986

 

 

 

19,761

 

Total liabilities and stockholders’ equity

 

$

77,738

 

 

$

76,730

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

3


 

CareDx, Inc.

Condensed Consolidated Statements of Operations

(Unaudited)

(In thousands, except share and per share data)

 

 

 

Three   Months Ended June 30,

 

 

Six   Months Ended June 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Testing revenue

 

$

8,420

 

 

$

7,249

 

 

$

16,322

 

 

$

13,704

 

Product revenue

 

 

3,376

 

 

 

3,475

 

 

 

7,043

 

 

 

3,475

 

Collaboration, license and other revenue

 

 

250

 

 

 

11

 

 

 

265

 

 

 

118

 

Total revenue

 

 

12,046

 

 

 

10,735

 

 

 

23,630

 

 

 

17,297

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of testing

 

 

3,011

 

 

 

2,852

 

 

 

6,068

 

 

 

5,624

 

Cost of product

 

 

2,178

 

 

 

3,056

 

 

 

4,505

 

 

 

3,056

 

Research and development

 

 

3,118

 

 

 

3,143

 

 

 

6,401

 

 

 

6,302

 

Sales and marketing

 

 

3,270

 

 

 

3,356

 

 

 

6,492

 

 

 

5,093

 

General and administrative

 

 

4,132

 

 

 

5,393

 

 

 

10,634

 

 

 

11,070

 

Goodwill impairment

 

 

 

 

 

 

 

 

1,958

 

 

 

 

Change in estimated fair value of contingent consideration

 

 

(64

)

 

 

(97

)

 

 

(285

)

 

 

(310

)

Total operating expenses

 

 

15,645

 

 

 

17,703

 

 

 

35,773

 

 

 

30,835

 

Loss from operations

 

 

(3,599

)

 

 

(6,968

)

 

 

(12,143

)

 

 

(13,538

)

Interest expense

 

 

(1,691

)

 

 

(526

)

 

 

(2,481

)

 

 

(783

)

Other expense, net

 

 

(188

)

 

 

(274

)

 

 

(874

)

 

 

(3,200

)

Change in estimated fair value of common stock warrant liability and derivative liability

 

 

1,067

 

 

 

(3,165

)

 

 

5,195

 

 

 

(3,165

)

Loss before income taxes

 

 

(4,411

)

 

 

(10,933

)

 

 

(10,303

)

 

 

(20,686

)

Income tax benefit

 

 

376

 

 

 

440

 

 

 

659

 

 

 

440

 

Net loss

 

 

(4,035

)

 

 

(10,493

)

 

 

(9,644

)

 

 

(20,246

)

Net loss attributable to noncontrolling interest

 

 

(67

)

 

 

(23

)

 

 

(114

)

 

 

(23

)

Net loss attributable to CareDx, Inc.

 

$

(3,968

)

 

$

(10,470

)

 

$

(9,530

)

 

$

(20,223

)

Net loss per share attributable to CareDx, Inc. (Note 3):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.19

)

 

$

(0.77

)

 

$

(0.45

)

 

$

(1.58

)

Diluted

 

$

(0.19

)

 

$

(0.77

)

 

$

(0.45

)

 

$

(1.58

)

Weighted average shares used to compute net loss per share attributable to CareDx, Inc.:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

21,412,480

 

 

 

13,568,120

 

 

 

21,378,321

 

 

 

12,768,913

 

Diluted

 

 

21,412,480

 

 

 

13,568,120

 

 

 

21,378,321

 

 

 

12,768,913

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

4


 

CareDx, Inc.

Condensed Consolidated Statements of Comprehensive Loss

(Unaudited)

(In thousands)

 

 

 

 

Three   Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Net loss

 

$

(4,035

)

 

$

(10,493

)

 

$

(9,644

)

 

$

(20,246

)

Other comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

670

 

 

 

(1,408

)

 

 

934

 

 

 

(1,408

)

Net Comprehensive loss

 

 

(3,365

)

 

 

(11,901

)

 

 

(8,710

)

 

 

(21,654

)

Comprehensive loss attributable to noncontrolling interest

 

 

(72

)

 

 

(23

)

 

 

(124

)

 

 

(23

)

Comprehensive loss attributable to CareDx, Inc.

 

$

(3,293

)

 

$

(11,878

)

 

$

(8,586

)

 

$

(21,631

)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

 

5


 

CareDx, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)

 

 

 

Six Months Ended June 30,

 

 

 

2017

 

 

2016

 

Operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(9,644

)

 

$

(20,246

)

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

1,821

 

 

 

1,097

 

Amortization of inventory fair market value adjustment

 

 

170

 

 

 

1,225

 

Stock-based compensation

 

 

886

 

 

 

812

 

Amortization of deferred revenue

 

 

(12

)

 

 

(31

)

Amortization of debt discount and noncash interest expense

 

 

1,769

 

 

 

56

 

Revaluation of contingent consideration to estimated fair value

 

 

(285

)

 

 

(310

)

Revaluation of common stock warrant liability and derivative liability to estimated fair value

 

 

(5,195

)

 

 

3,165

 

Non-cash goodwill impairment

 

 

1,958

 

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(152

)

 

 

(982

)

Inventory

 

 

252

 

 

 

236

 

Prepaid and other assets

 

 

(189

)

 

 

845

 

Accounts payable

 

 

422

 

 

 

(336

)

Accrued payroll liabilities

 

 

(486

)

 

 

39

 

Accrued royalties

 

 

40

 

 

 

18

 

Accrued and other liabilities

 

 

(751

)

 

 

2,153

 

Change in deferred taxes

 

 

(542

)

 

 

 

Net cash used in operating activities

 

 

(9,938

)

 

 

(12,259

)

Investing activities:

 

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(94

)

 

 

(276

)

Acquisition of business, net of cash acquired

 

 

 

 

 

(20,567

)

Restricted cash collateral on lease

 

 

(34

)

 

 

 

Net cash used in investing activities

 

 

(128

)

 

 

(20,843

)

Financing activities:

 

 

 

 

 

 

 

 

Proceeds from debt, net of issuance costs

 

 

24,002

 

 

 

 

Restricted cash collateral on debt

 

 

(9,375

)

 

 

 

Proceeds from private placement and subsequent financing, net of issuance costs

 

 

 

 

 

20,619

 

Proceeds from issuance of common stock under employee stock purchase plan

 

 

44

 

 

 

175

 

Principal payments on debt and capital lease obligations

 

 

(12,871

)

 

 

(232

)

Change in bank overdraft obligation

 

 

176

 

 

 

(196

)

Proceeds from exercise of stock options

 

 

 

 

 

9

 

Net cash provided by financing activities

 

 

1,976

 

 

 

20,375

 

Effect of exchange rate changes on cash and cash equivalents

 

 

(64

)

 

 

(17

)

Net decrease in cash and cash equivalents

 

 

(8,154

)

 

 

(12,744

)

Cash and cash equivalents at beginning of period

 

 

17,258

 

 

 

29,888

 

Cash and cash equivalents at end of period

 

$

9,104

 

 

$

17,144

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Deferred purchase consideration

 

$

1,064

 

 

$

5,700

 

Debt assumed as part of acquisition

 

$

 

 

$

13,421

 

Conversion of convertible private placement and subsequent financing preferred stock to common stock

 

$

 

 

$

13,064

 

Common shares issued as part of acquisition

 

$

 

 

$

7,205

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

6


 

CareDx, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

 

1. ORGANIZATION AND DESCRIPTION OF BUSINESS

CareDx, Inc. (“CareDx” or the “Company”) together with its subsidiaries, is a global transplant diagnostics company with product offerings along the pre- and post-transplant continuum. The Company focuses on discovery, development and commercialization of clinically differentiated, high-value diagnostic surveillance solutions for transplant patients. In post-transplant diagnostics, the Company offers AlloMap®, which is a heart transplant molecular test (“AlloMap”). In pre-transplant diagnostics, the Company offers high quality products that increase the chance of successful transplants by facilitating a better match between a donor and a recipient of stem cells and organs.

AlloMap is a gene expression test that helps clinicians monitor and identify heart transplant recipients with stable graft function who have a low probability of moderate to severe acute cellular rejection. Since 2008, the Company has sought to expand the adoption and utilization of its AlloMap solution through ongoing studies to substantiate the clinical utility and actionability of AlloMap, secure positive reimbursement decisions for AlloMap from large private and public payers, develop and enhance its relationships with key members of the transplant community, including opinion leaders at major transplant centers, and explore opportunities and technologies for the development of additional solutions for post-transplant surveillance. The Company believes the use of AlloMap, in conjunction with other clinical indicators, can help healthcare providers and their patients better manage long-term care following a heart transplant. In particular, the Company believes AlloMap can improve patient care by helping healthcare providers avoid the use of unnecessary, invasive surveillance biopsies and determine the appropriate dosage levels of immunosuppressants. AlloMap has received 510(k) clearance from the U.S. Food and Drug Administration (the “FDA”) for marketing and sale as a test to aid in the identification of recipients with a low probability of moderate or severe acute cellular rejection. A 510(k) submission is a premarketing submission made to the FDA. Clearance may be granted by the FDA if it finds the device or test provides satisfactory evidence pertaining to the claimed intended uses and indications for the device or test. The Company is also pursuing the development of additional products for transplant monitoring using a variety of technologies, including AlloSure®, its proprietary next-generation sequencing-based test to detect donor-derived cell-free DNA (“dd-cfDNA”) after transplantation. Through the acquisition of ImmuMetrix, Inc. (“IMX”), a privately held development-stage company working on dd-cfDNA-based solutions in transplantation and other fields, the Company added to its existing know-how, expertise, and intellectual property the ability to apply dd-cfDNA technology to the surveillance of transplant recipients, which has contributed to the development of AlloSure.

With the acquisition of CareDx International AB, formerly Allenex AB (“Allenex” or “Olerup”), on April 14, 2016, the Company develops, manufactures, markets and sells high quality products that increase the chance of successful transplants by facilitating a better match between a donor and a recipient of stem cells and organs. Olerup SSP® is used to type HLA alleles based on the sequence specific primer (“SSP”) technology and has a market in Europe and selected other markets for pre-transplant solutions. The Company also offers Olerup XM-ONE®, a standardized test that identifies a patient’s antigens against HLA Class I or Class II, as well as antibodies against a donor’s endothelium. This cross-match test has primarily been used prior to kidney transplants. With the acquisition of the business assets of Conexio Genomics Pty Ltd (“Conexio”) on January 20, 2017, the Company offers a complete product range for sequence-based typing (“SBT”) of HLA alleles. Olerup SBT Resolver TM is a test kit for sequence based HLA typing, while Assign SBT TM is the companion software for sequence analysis. In 2014, Olerup began active development of a new HLA typing product, Olerup QTYPE® that uses real-time polymerase chain reaction (“PCR”) methodology. Olerup QTYPE® was commercially launched at the end of September 2016.

The Company’s headquarters are in Brisbane, California; primary operations are in Brisbane and Stockholm, Sweden; and the Company operates in two reportable segments.

Liquidity and Going Concern

The Company adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) No. 2014-15, Presentation of Financial Statements - Going Concern (Subtopic 205-40) effective December 31, 2016, which requires the Company to make certain disclosures if it concludes that there is substantial doubt about the entity’s ability to continue as a going concern within one year from the date of the issuance of these financial statements. The Company has incurred significant losses and negative cash flows from operations since its inception and had an accumulated deficit of $222.1 million at June 30, 2017. As of June 30, 2017, the Company had cash and cash equivalents of $9.1 million, and $33.9 million of debt outstanding under its debt obligations, net of debt discount.

In March 2017, the Company received net proceeds of $24.0 million in connection with the issuance of a convertible debt obligation to JGB Collateral LLC and certain of its affiliates (“JGB”), of which $11.2 million was used to repay the Company’s outstanding debt obligations to East West Bank. In addition, the convertible debt obligation requires the Company to maintain a minimum of $9.4

7


 

million of restricted cash at a named financial institution. These funds are restricted as to withdrawal and are not available to the Company to fund its operations or repay indebtedness. In accordance with the Company’s convertible debt financing agreements, the Company filed a registration statement with the Securities and Exchange Commission (the “SEC”) registering for resale the shares underlying the securities issued or issuable to JGB in the financing.

A quarterly debt covenant in the Company’s Term Loan Facility Agreement (the “Term Loan Facility”) with Danske Bank A/S (“Danske”) was violated on June 30, 2016 and September 30, 2016. The Company obtained waivers from Danske for the violations of this debt covenant at June 30, 2016 and September 30, 2016. The relevant covenant for December 31, 2016 and future periods was amended on March 27, 2017. The Company was in compliance with all debt covenants at December 31, 2016.   The Company was not in compliance with certain covenants at March 31, 2017 or June 30, 2017 and is seeking waivers from Danske Bank.  If the loan was no longer available or Danske demanded repayment of the debt, the Company may not have sufficient capital to operate.

The Company believes its cash and cash equivalents of $9.1 million at June 30, 2017 and expected revenues will not be sufficient to allow the Company to fund its current operations beyond March 31, 2018. The Company will require additional financing and/or refinancing of its current debt obligations to fund working capital, repay debt and pay its obligations. The Company may pursue financing and refinancing opportunities in both the private and public debt and equity markets through sales of debt or equity securities. Additional financing might include one or more offerings and one or more of a combination of discounted or at-the-market common stock, securities convertible into or exchangeable for shares of common stock, warrants or other rights to purchase or acquire common stock. However, there can be no assurance that the Company will be successful in acquiring additional funding at levels sufficient to fund its operations or on terms favorable to the Company. These conditions raise substantial doubt about the Company’s ability to continue as a going concern for a period of one year from the date of the issuance of these financial statements. If the Company is unsuccessful in its efforts to raise additional financing and/or refinance the Company’s indebtedness in the near term, the Company will be required to significantly reduce or cease operations.

In connection with the acquisition of Allenex, the Company entered into Conditional Share Purchase Agreements with each of Midroc Invest AB, FastPartner AB (“FastPartner”) and Xenella Holding AB, the former majority shareholders of Allenex (collectively, the “Former Majority Shareholders”), on December 16, 2015, as amended (the “Conditional Share Purchase Agreements”).  Pursuant to the Conditional Share Purchase Agreements, as of June 30, 2017, the Company owed deferred purchase consideration to the Former Majority Shareholders of approximately $6.3 million, including accrued interest, which was due on July 1, 2017.   On July 1, 2017, the Company entered into amendments to the Conditional Share Purchase Agreements with the Former Majority Shareholders, pursuant to which, among other things, the parties agreed to extend the maturity date of a portion of the obligations under the Conditional Share Purchase Agreements to March 31, 2019 (provided that a portion shall be due December 31, 2017 unless converted into shares of common stock prior to such date). In addition, promissory notes issued by Allenex to FastPartner and Mohammed Al Amoudi in an aggregate amount of approximately $4.1 million, including accrued interest (the “Allenex Notes”), were due on July 1, 2017. On July 1, 2017, Allenex entered into new note agreements with each of FastPartner and Mohammed Al Amoudi, pursuant to which, the parties agreed to defer repayment of the amounts owed under the Allenex Notes until March 31, 2019.  See Note 18 for additional detail regarding the agreements described in this paragraph.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. The financial statements do not reflect any adjustments relating to the recoverability and reclassifications of assets and liabilities that might be necessary if the Company is unable to continue as a going concern.

 

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”), and follow the requirements of the SEC for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by U.S. GAAP can be condensed or omitted. These financial statements have been prepared on the same basis as the Company’s annual financial statements and, in the opinion of management, reflect all adjustments, consisting only of normal recurring adjustments that are necessary for a fair statement of the Company’s financial information. The condensed consolidated balance sheet as of December 31, 2016 has been derived from audited financial statements as of that date but does not include all of the financial information required by U.S. GAAP for complete financial statements. Operating results for the three and six months ended June 30, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017.

The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its subsidiaries. Intercompany transactions have been eliminated. Since the Company owns less than 100% of the shares of Allenex, the Company

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rec ords net loss attributable to noncontrolling interest in its condensed consolidated statements of operations equal to the percentage of the economic or ownership interest retained in such entities by the respective noncontrolling parties.

Use of Estimates

The preparation of unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses in the unaudited condensed consolidated financial statements and accompanying notes. On an ongoing basis, management evaluates its estimates, including those related to (i) revenue recognition, (ii) the differences between amounts billed and estimated receipts from payers, (iii) the determination of the accruals for clinical studies, (iv) the determination of refunds to be requested by third-party payers, (v) the fair value of assets and liabilities, including from acquisitions, (vi) inventory valuation, (vii) the valuation of warrants, Series A Preferred, and common stock issued in the Private Placement and Subsequent Financing, (viii) the fair value of contingent consideration in a business acquisition, (ix) the fair value of embedded derivatives, (x) measurement of stock-based compensation expense, (xi) the determination of the valuation allowance and estimated tax benefit associated with deferred tax assets and net deferred tax liability, (xii) any impairment of long-lived assets, including in-process technology and goodwill, and (xiii) legal contingencies. Actual results could differ from those estimates.

Concentrations of Credit Risk and Other Risks and Uncertainties

Financial instruments that potentially subject the Company to credit risk consist of cash and cash equivalents and accounts receivable. The Company’s policy is to invest its cash and cash equivalents in money market funds, obligations of U.S. government agencies and government-sponsored entities, commercial paper and various bank deposit accounts. The counterparties to the agreements relating to the Company’s investments consist of financial institutions of high credit standing. The Company is exposed to credit risk in the event of default by the financial institutions to the extent of amounts recorded on the balance sheets which may be in excess of insured limits.

The Company is also subject to credit risk from its accounts receivable, which are derived from revenue earned from AlloMap tests provided for patients located in the U.S. and billed to various third-party payers, and sales of Olerup products to distributors, strategic partners and end customers in Europe, Middle East and Africa, the U.S., Latin America and other geographic regions. The Company has not experienced any significant credit losses and does not generally require collateral on receivables. For the six months ended June 30, 2017 and 2016, approximately 28% and 48%, respectively, of total revenue was derived from Medicare. No other payers represented more than 10% of total revenue for these periods.  At June 30, 2017, Medicare accounted for approximately 26% of accounts receivable. At December 31, 2016, Medicare accounted for approximately 27% of accounts receivable. No other payers or customers represented more than 10% of accounts receivable at either June 30, 2017 or December 31, 2016.

Cash Equivalents

Cash equivalents consist of short-term, highly liquid investments with original maturities of three months or less from the date of purchase. Cash equivalents consist primarily of amounts invested in money market funds.

Restricted Cash

Under lease agreements for certain facilities and an agreement with the State of Florida Medicaid, the Company must maintain letters of credit, minimum collateral requirements and a surety bond.  These agreements are collateralized by cash. The cash used to support these arrangements is classified as long-term restricted cash on the accompanying balance sheets. Under the Company’s convertible debt financing agreements with JGB, the Company is required to maintain restricted cash of $9.4 million, which is restricted as to withdrawal and is not available to the Company to fund its operations or repay indebtedness.  The restricted cash used to support the convertible debt facility is classified as long-term restricted cash on the accompanying balance sheet as of June 30, 2017.

Inventory

Inventory is finished goods, work in progress and raw materials and consist of AlloMap reagent plates, laboratory supplies, reagents, and Olerup kits. Inventories are used in connection with tests performed and may also be used for research and product development efforts. Laboratory supplies subsequently designated for research and product development use are expensed. Obsolete or damaged inventories are written off and excluded from the physical inventory. Inventories at our Stockholm, Sweden and Fremantle, Australia locations are stated at the lower of purchased cost, determined on an average cost basis, or net realizable value.  Inventories at our other locations are stated at the lower of purchased cost, determined on a first-in, first-out basis or net realizable value.

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Property and Equipment, net

Property and equipment are stated at cost, less accumulated depreciation. Property and equipment are depreciated using the straight-line method over the estimated useful lives of the assets, generally three years for laboratory, computer and office equipment, and generally seven years for furniture and fixtures. Leasehold improvements are amortized over the shorter of their estimated useful lives or the remaining lease term.

Assets held under capital leases are recorded at the lower of the net present value of the minimum lease payments or the fair market value of the leased asset at the inception of the lease. Amortization expense is computed using the straight-line method over the shorter of the estimated useful lives of the assets or the period of the related lease.

The Company capitalizes certain costs incurred for software developed or obtained for internal use. These costs include software licenses, consulting services, and direct materials, as well as employee payroll and payroll-related costs. Capitalized internal-use software costs are depreciated over three years.

Purchased Intangible Assets

Amortizable intangible assets include customer relationships, developed technology, trademarks, contracts and in-process research and development (“IPR&D”) identified intangible assets acquired as part of a business combination. Intangible assets subject to amortization are amortized over their estimated useful lives. Acquired intangible assets with indefinite useful lives are related to IPR&D projects and are measured at their respective fair values as of the acquisition date. The Company does not amortize intangible assets with indefinite useful lives. Intangible assets related to IPR&D projects are considered to be indefinite-lived until the completion or abandonment of the associated research and development efforts. If and when development is complete, which generally occurs if and when regulatory approval to market a product is obtained, the associated assets would be deemed finite-lived and would then be amortized based on their respective estimated useful lives at that point in time.

The Company tests IPR&D for impairment on an annual basis and in between annual tests if it becomes aware of events or changes that would indicate that it is more likely than not that the fair value of the assets is below their carrying amounts. The IPR&D annual impairment test is performed as of December 1 of each fiscal year. If the fair value exceeds the carrying value, then there is no impairment. Impairment losses on indefinite-lived intangible assets are recognized based solely on a comparison of the fair value of an asset to its carrying value, without consideration of any recoverability test. The Company has not identified any such impairment losses to date.

Impairment of Long-lived Assets

The Company evaluates its long-lived assets for indicators of possible impairment when events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. The Company then compares the carrying amounts of the assets with the future net undiscounted cash flows expected to be generated by such asset. Should an impairment exist, the impairment loss would be measured based on the excess carrying value of the asset over the asset’s fair value determined using discounted estimates of future cash flows. The Company has not identified any such impairment losses to date.

Goodwill

Goodwill represents the excess of the cost of an acquisition over the sum of the amounts assigned to tangible and identifiable intangible assets acquired, less liabilities assumed. Goodwill is not subject to amortization, but is tested for impairment on an annual basis and whenever events or changes in circumstances indicate the carrying amount of these assets may not be recoverable.

The Company has determined that it operates in two reportable segments associated with the delivery of diagnostic tests and the development and commercialization of diagnostic products. The reporting unit’s carrying value is compared to its fair value and an impairment charge is recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss should not exceed the total amount of goodwill allocated to the reporting unit. The estimated fair values of the reporting units are determined using either the market approach, income approach or a combination of the market and income approach. Goodwill is considered impaired if the carrying value of the reporting unit exceeds its estimated fair value. The income approach uses expected future operating results and failure to achieve these expected results may cause a future impairment of goodwill at the reporting unit. The Company conducted a goodwill impairment test as of March 31, 2017 and identified an impairment of $2.0 million related to the goodwill recorded in the Olerup reportable segment. See Note 6 for additional discussion regarding the impairment charge recorded.

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Fair Value of Financial Instruments

Fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining fair value, the Company considers the principal or most advantageous market in which the Company would transact, and it takes into consideration the assumptions that market participants would use when pricing the asset or liability. The Company’s assessment of the significance of a particular input to the fair value measurement of an asset or liability requires management to make judgments and to consider specific characteristics of that asset or liability.

The carrying amounts of certain of the Company’s financial instruments, including cash equivalents, accounts receivable, accounts payable and accrued liabilities, approximate fair value due to their short maturities. The carrying amounts of the common stock warrant liability, derivative liability and contingent consideration liability also represents their fair values.

Common Stock Warrant Liability and Derivative Liability

On April 14, 2016 and June 15, 2016, the Company completed the Private Placement and Subsequent Financing, respectively (as described in Note 12), which included the issuance of free standing warrants to certain accredited investors and placement agents to purchase shares of the Company’s common stock. The exercisability of the warrants was contingent upon the receipt of approval of the Private Placement by the Company’s stockholders pursuant to the rules of The NASDAQ Stock Market LLC (the “Requisite Stockholder Approval”), which occurred on June 16, 2016.

The free standing warrants issued pursuant to the Private Placement and Subsequent Financing are contingently redeemable and are classified as liabilities on the consolidated balance sheet and recorded at their estimated fair value. The warrants are remeasured at each balance sheet date with changes recorded in change in estimated fair value of common stock warrant liability and derivative liability on the consolidated statements of operations.

On March 15, 2017, the Company entered into a Securities Purchase Agreement with JGB, pursuant to which the Company issued Senior Secured Debentures (the “JGB Debt”) and warrants (as described in Note 11).  The Company determined that the Debentures and the warrants were free standing instruments.   

The terms of the warrants include a price-based anti-dilution adjustment provision, which precludes the Company from classifying the warrants in equity. As such, the warrants are classified as liabilities on the consolidated balance sheet.  The full fair value of the warrants was allocated on day one to the warrant liability and the residual value, after allocation of the fair value of the derivative liability discussed below, was ascribed to the Debentures. The warrants will be re-measured at each reporting period with changes recorded in change in estimated fair value of common stock warrant liability and derivative liability on the consolidated statements of operations.  

The Debentures are classified as liabilities on the consolidated balance sheet and include certain embedded derivatives that required bifurcation, including settlement and penalty provisions. The compound embedded derivative will be re-measured at each reporting period with changes recorded in change in estimated fair value of common stock warrant liability and derivative liability on the consolidated statements of operations.

Testing Revenue

The Company recognizes revenues for tests delivered when the following criteria are met: (i) persuasive evidence that an arrangement exists; (ii) delivery has occurred or services rendered; (iii) the fee is fixed or determinable; and (iv) collectability is reasonably assured.

For testing revenue, the first criterion is satisfied when a third-party payer makes a coverage decision or enters into a contractual arrangement with the Company for the test. The second criterion is satisfied when the Company performs the test and delivers the test result to the ordering physician. The third criterion is satisfied if the third-party payer’s coverage decision or reimbursement contract specifies a price for the test. The fourth criterion is satisfied based on management’s judgments regarding the collectability of the fees charged under the arrangement. Such judgments include review of past payment history. AlloMap testing may be considered investigational by some payers and not covered under their reimbursement policies. Others may cover the test, but not pay a set or determinable amount. As a result, in the absence of a reimbursement agreement or sufficient payment history, collectability cannot reasonably be assured so revenue is not recognized at the time the test is delivered.

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If all criteria set forth above are met, revenue is recognized on an accrual basis when the test is performed. When the first, third or fourth criteri a are not met but third-party payers make a payment to the Company for tests performed, the Company recognizes revenue on the cash basis in the period in which the payment is received.

Revenue for tests performed is recognized on the accrual basis net of adjustments for differences between amounts billed and the estimated receipts from payers. The amount the Company expects to collect may be lower than the agreed upon amount due to several factors, such as the amount of patient co-payments, the existence of secondary payers and claim denials. Estimated receipts are based upon historical payment practices of payers. Differences between estimated and actual cash receipts are recorded as an adjustment to revenue, which have been immaterial to date.

Taxes assessed by governmental authorities on revenue, including sales and value added taxes, are excluded from revenue in the statements of operations.

Product Revenue

Product revenue is recognized from the sale of products to end-users, distributors and strategic partners when persuasive evidence of an arrangement exists, the product is complete and tested and has been shipped or delivered, as required to transfer title and risk of loss, the sales price is fixed and determinable, collection of the resulting receivable is reasonably assured, there are no material contingencies and the Company does not have significant obligations for future performance. When collectability is not reasonably assured, the Company defers the revenue until the cash is received. Provisions for estimated future product returns and allowances are recorded in the period of the sale based on the historical and anticipated future rate of returns. Revenue is recorded net of any discounts given to the buyer.

Collaboration, License and Other Revenue

The Company generates revenue from collaboration and license agreements. Collaboration and license agreements may include non-refundable upfront payments, partial or complete reimbursement of research and development costs, contingent payments based on the occurrence of specified events under the agreements, license fees and royalties on sales of products or product candidates if they are successfully commercialized. The Company’s performance obligations under the collaborations may include the transfer of intellectual property rights in the form of licenses, obligations to provide research and development services and obligations to participate on certain development committees with the collaboration partners. The Company makes judgments that affect the periods over which it recognizes revenue. The Company periodically reviews its estimated periods of performance based on the progress under each arrangement and accounts for the impact of any change in estimated periods of performance on a prospective basis.

The Company recognizes contingent consideration received from the achievement of a substantive milestone in its entirety in the period in which the milestone is achieved, which the Company believes is consistent with the substance of its performance under its various license and collaboration agreements. The Company did not recognize any revenue connected with milestones during the three and six months ended June 30, 2017 or 2016.

Cost of Testing

Cost of testing reflects the aggregate costs incurred in delivering the Company’s AlloMap test results to clinicians. The components of cost of testing are materials and service costs, direct labor costs, stock-based compensation, equipment and infrastructure expenses associated with testing samples, shipping, logistics and specimen processing charges to collect and transport samples and allocated overhead including rent, information technology, equipment depreciation, utilities and royalties. Costs associated with performing tests (except royalties) are recorded as the test is processed regardless of whether and when the testing revenue is recognized with respect to that test. As a result, the Company’s cost of testing as a percentage of revenue may vary significantly from period to period because the Company does not recognize all revenue in the period in which the associated costs are incurred. Royalties for licensed technology, calculated as a percentage of test revenues, are recorded as license fees in cost of testing at the time the test revenues are recognized.

Cost of Product

Cost of product reflects the aggregate costs incurred in delivering the Company’s products to customers. The components of cost of product are materials costs, manufacturing and kit assembly costs, direct labor costs, equipment and infrastructure expenses associated with preparing kitted products for shipment, shipping, and allocated overhead including rent, information technology, equipment depreciation and utilities. Cost of product also includes amortization of acquired developed technology and adjustments to inventory values, including write-down of impaired, slow moving or obsolete inventory.

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Business Combinations

The Company determines and allocates the purchase price of an acquired business to the tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values as of the business combination date, including identifiable intangible assets which either arise from a contractual or legal right or are separable from goodwill. The Company bases the estimated fair value of identifiable intangible assets acquired in a business combination on independent valuations that use information and assumptions provided by management, which consider management’s best estimates of inputs and assumptions that a market participant would use. The Company allocates any excess purchase price over the estimated fair value assigned to the net tangible and identifiable intangible assets acquired and liabilities assumed to goodwill. The use of alternative valuation assumptions, including estimated revenue projections, growth rates, royalty rates, cash flows, discount rates, estimated useful lives and probabilities surrounding the achievement of contingent milestones could result in different purchase price allocations and amortization expense in current and future periods.

In those circumstances where an acquisition involves a contingent consideration arrangement that meets the definition of a liability under FASB Accounting Standards Codification Topic 480, Distinguishing Liabilities from Equity , the Company recognizes a liability equal to the fair value of the contingent payments the Company expects to make as of the acquisition date. The Company remeasures this liability each reporting period and records changes in the fair value as a component of operating expenses.

Transaction costs associated with acquisitions are expensed as incurred in general and administrative expenses. Results of operations and cash flows of acquired companies are included in the Company’s operating results from the date of acquisition.

Research and Development Expenses

Research and development expenses represent costs incurred to develop new surveillance solutions as well as continued development of the Company’s AlloMap test. These expenses include payroll and related expenses, consulting expenses, laboratory supplies, and certain allocated expenses as well as amounts incurred under certain collaboration and license agreements. Research and development costs are expensed as incurred. The Company records accruals for estimated study costs comprised of work performed by contract research organizations under contract terms.

Advertising Expenses

All advertising costs are expensed as incurred. Advertising expenses were insignificant during all of the periods presented.

Stock-based Compensation

The Company uses the Black-Scholes Model, which requires the use of estimates such as stock price volatility and expected option lives, to value employee stock options. The Company estimates the expected option lives using historical data, volatility using its own historical stock prices and stock prices of peer companies in the diagnostics industry, risk-free rates using the implied yield currently available in the U.S. Treasury zero-coupon issues with a remaining term equal to the expected option lives, and dividend yield using the Company’s expectations and historical data. The fair value of each restricted stock unit is calculated based upon the closing price of the Company’s common stock on the date of the grant.

The Company uses the straight-line attribution method for recognizing compensation expense. Compensation expense is recognized on awards ultimately expected to vest and reduced for forfeitures that are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures are estimated based on the Company’s historical experience.

Compensation expense for stock options issued to nonemployees is calculated using the Black-Scholes Model and is recorded over the service performance period. Options subject to vesting are required to be periodically remeasured over their service performance period, which is generally the same as the vesting period.

Income Taxes

The Company accounts for income taxes under the liability method. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized.

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The Company assesses all material positions taken in any income tax return, including all significant uncertain positions, in all tax years that are still subject to assessment or challenge by relevant taxing authorities. The Company’s assessment of an uncertain tax position begins with the initial determinatio n of the position’s sustainability and is measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. As of each balance sheet date, unresolved uncertain tax positions must be reassessed, and the Company will determine whether (i) the factors underlying the sustainability assertion have changed and (ii) the amount of the recognized tax benefit is still appropriate. The recognition and measurement of tax benefits requires significant judgment. Judgments concerning the recognition and measurement of a tax benefit may change as new information becomes available .

Foreign Currency Translation

The functional currency of the Company’s foreign subsidiaries is the local currency for each entity, including the Swedish Krona, Australian dollar and the Euro. The revenue and expenses of such subsidiaries have been translated into U.S. dollars at average exchange rates prevailing during the period. Assets and liabilities have been translated at the rates of exchange on the balance sheet date. The resulting cumulative translation adjustments are reported in other comprehensive loss. Foreign currency transaction gains and losses are recognized in current operations.

Comprehensive (Loss) Income

Comprehensive (loss) income consists of net (loss) income and other gains and losses affecting stockholders’ equity that, under U.S. GAAP, are excluded from net income or loss. For the Company, such items consist of foreign currency translation losses.

Recent Accounting Pronouncements

In March 2016, the FASB issued ASU No. 2016-06, Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instruments (“ASU 2016-06”) , which clarifies the requirement for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts. An entity performing the assessment under the amendment is required to assess the embedded call (put) options solely in accordance with the four-step decision sequence. The Company adopted ASU 2016-06 effective January 1, 2017 on a prospective basis. The adoption of this ASU did not have any material impact on the Company’s consolidated financial position, results of operations or cash flows.

In March 2016, the FASB issued ASU No 2016-09, Compensation - Stock Compensation (Topic 718) - Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”) . This ASU simplifies the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. In addition, the guidance allows for a policy election to account for forfeitures as they occur rather than on an estimated basis. The Company adopted ASU 2016-09 effective January 1, 2017 on a prospective basis, and has elected to continue to account for forfeitures on an estimated basis.  The adoption of this ASU did not have any material impact on the Company’s consolidated financial position, results of operations or cash flows.

In February 2016, the FASB issued ASU No. 2016-02,  Leases (Topic 842), which, for operating leases, requires the lessee to recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments, in its balance sheet. The guidance also requires a lessee to recognize single lease costs, calculated so that the cost of the lease is allocated over the lease term, on a generally straight-line basis. This guidance will be effective for the Company in fiscal year 2019 and must be adopted using a modified retrospective transition approach. Early adoption is permitted. The Company is currently assessing the impact of this guidance will have on its consolidated financial statements.

In April 2016, the FASB issued ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing (“ASU 2016-10”) . In March 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net) (“ASU 2016-08”). These amendments provide additional clarification and implementation guidance on the previously issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), or (“ASU 2014-09”) , which is based on principles that govern the recognition of revenue at an amount an entity expects to be entitled to when products are transferred to customers. The amendments in ASU 2016-10 provide clarifying guidance on materiality of performance obligations; evaluating distinct performance obligations; treatment of shipping and handling costs; and determining whether an entity’s promise to grant a license provides a customer with either a right to use an entity’s intellectual property or a right to access an entity’s intellectual property. The amendments in ASU 2016-08 clarify how an entity should identify the specified good or service for the principal versus agent evaluation and how it should apply the control principle to certain types of arrangements. In May 2016, the FASB issued ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, which addresses certain issues on assessing collectability, presentation of sales taxes, noncash consideration, and completed contracts and contract modifications at transition. In December 2016, the FASB

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issued ASU No. 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers, which makes technical corrections and improvements to the new revenue standard. These ASUs will be effective for the Company in the first quarter of fiscal year 2018. The guidance may be applied (i) retrospectively to each prior period presente d, or (ii) retrospectively with the cumulative effect recognized as of the date of adoption. The Company has formed an implementation work team and has commenced the review of its revenue generating contracts and agreements to assess and quantify the impac ts the adoption of ASU 2014-09 will have on the Company’s financial position and results of operations. The Company has not yet selected an adoption method for this standard.

In August 2016, the FASB issued ASU No. 2016-15, Classification of Certain Cash Receipts and Cash Payments , to reduce the diversity in practice with respect to the presentation of certain cash flows. The ASU is effective for interim and annual periods beginning after December 15, 2017, with early adoption permitted. Adoption of the ASU is retrospective. The Company does not expect the adoption of ASU 2016-15 to have a material impact on its condensed consolidated financial statements.

In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force) (“ASU 2016-18”) . This guidance requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. ASU 2016-18 is effective for all interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted. The Company does not expect the adoption of ASU 2016-18 to have a material impact on its consolidated financial statements .

In January 2017, the FASB issued ASU No. 2017-01,  Business Combinations (Topic 805): Clarifying the Definition of a Business (“ASU 2017-01”) . In an effort to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The amendments of ASU 2017-01 are effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. The Company adopted ASU No. 2017-01 on January 1, 2017 on a prospective basis and its adoption did not have a material impact on its consolidated financial statements.

In January 2017, the FASB issued ASU No. 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (“ASU 2017-04”) . This guidance eliminates Step 2 from the goodwill impairment test. Instead, under the amendments in ASU 2017-04, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. ASU 2017-04 is effective for all interim and annual reporting periods beginning after December 15, 2019. The Company adopted ASU No. 2017-04 on January 1, 2017 on a prospective basis.  

In February 2017, the FASB issued ASU No. 2017-05, Other Income —Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20) Clarifying the Scope of Asset Derecogition Guidance and Accounting for Partial Sales of Nonfinancial Assets (“ASU 2017-05”) . ASU 2017-05 clarifies the scope of derecognition of assets, defines in substance nonfinancial asset, adds guidance for partial sales of nonfinancial assets and clarifies the recognition of gains and losses from the transfer of nonfinancial assets in contracts with noncustomers. ASU 2017-05 will become effective for all interim and annual reporting periods beginning after December 15, 2018 and may be adopted using a full retrospective or a modified retrospective approach. The Company is required to adopt the amendments in ASU 2017-05 at the same time it adopts the amendments in ASU 2014-09.  The Company does not expect the adoption of ASU 2017-05 to have a material impact on its condensed consolidated financial statements.

In May 2017, the FASB issued ASU No. 2017-09, Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting (“ASU 2017-09”). The amendments provide guidance about how to account for changes to terms or conditions of a share-based payment award required under modification accounting.  ASU 2017-09 is effective for all interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted. Any updates will be applied prospectively. The Company does not currently have modifications of share based payments.

 

 

3. NET LOSS PER SHARE

Basic and diluted net loss per share have been computed by dividing the net loss by the weighted-average number of common shares outstanding during the period, without consideration of common share equivalents as their effect would have been antidilutive.

15


 

The following tables set forth the computation of the Company’s basic and diluted net loss per share (in thousands, except shares and per share data):

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss attributable to CareDx, Inc. used to compute basic

   net loss per share

 

$

(3,968

)

 

$

(10,470

)

 

$

(9,530

)

 

$

(20,223

)

Net loss attributable to CareDx, Inc. used to compute diluted

   net loss per share

 

$

(3,968

)

 

$

(10,470

)

 

$

(9,530

)

 

$

(20,223

)

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average shares used to compute basic net loss per

   share attributable to CareDx, Inc.

 

 

21,412,480

 

 

 

13,568,120

 

 

 

21,378,321

 

 

 

12,768,913

 

Weighted-average shares used to compute diluted

   net loss per share attributable to CareDx, Inc.

 

 

21,412,480

 

 

 

13,568,120

 

 

 

21,378,321

 

 

 

12,768,913

 

Net loss per share attributable to CareDx, Inc.:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.19

)

 

$

(0.77

)

 

$

(0.45

)

 

$

(1.58

)

Diluted

 

$

(0.19

)

 

$

(0.77

)

 

$

(0.45

)

 

$

(1.58

)

 

The following potentially dilutive securities have been excluded from diluted net loss per share, because their effect would be antidilutive:

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Shares of common stock subject to outstanding options

 

 

1,898,389

 

 

 

1,842,110

 

 

 

1,898,389

 

 

 

1,842,110

 

Shares of common stock subject to outstanding common

   stock warrants

 

 

4,509,926

 

 

 

3,279,157

 

 

 

4,509,926

 

 

 

3,279,157

 

Shares of common stock subject to convertible notes

 

 

6,092,105

 

 

 

 

 

 

6,092,105

 

 

 

 

Restricted stock units

 

 

353,807

 

 

 

285,445

 

 

 

353,807

 

 

 

285,445

 

Total common stock equivalents

 

 

12,854,227

 

 

 

5,406,712

 

 

 

12,854,227

 

 

 

5,406,712

 

 

The Company issued 4,630,145 shares of preferred stock pursuant to the Private Placement and Subsequent Financing (as described in Note 12), which were completed on April 14, 2016 and June 15, 2016, respectively. All of the preferred stock was converted to common stock upon receipt of the Requisite Stockholder Approval on June 16, 2016. As of June 30, 2017, there was no preferred stock outstanding. On September 26, 2016, the Company completed an underwritten public offering pursuant to which the Company issued and sold an aggregate of 2,250,000 shares of common stock.

 

 

4. FAIR VALUE MEASUREMENTS

The Company records its financial assets and liabilities at fair value except for its debt, which is recorded at amortized cost. The carrying amounts of certain financial instruments of the Company, including cash and cash equivalents, prepaid expenses and other current assets, accounts payable and accrued liabilities, approximate fair value due to their relatively short maturities. The accounting guidance for fair value provides a framework for measuring fair value, clarifies the definition of fair value, and expands disclosures regarding fair value measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the reporting date. The accounting guidance establishes a three-tiered hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value as follows:

 

Level 1: Inputs which include quoted prices in active markets for identical assets and liabilities.

 

Level 2: Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 

Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

16


 

The following table sets forth the Company’s financial assets and liabil ities measured at fair value on a recurring basis, as of June 30, 2017 and December 31, 2016 (in thousands):

 

 

 

June 30, 2017

 

 

 

Fair Value Measured Using

 

 

 

 

 

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

 

Total

Balance

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

7,663

 

 

$

 

 

$

 

 

$

7,663

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contingent consideration

 

$

 

 

$

 

 

$

207

 

 

$

207

 

Common stock warrant liability

 

 

 

 

 

 

 

 

2,203

 

 

 

2,203

 

Derivative liability

 

 

 

 

 

 

 

 

1,000

 

 

 

1,000

 

Total liabilities

 

$

 

 

$

 

 

$

3,410

 

 

$

3,410

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

 

 

 

Fair Value Measured Using

 

 

 

 

 

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

 

Total

Balance

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

14,497

 

 

$

 

 

$

 

 

$

14,497

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contingent consideration

 

$

 

 

$

 

 

$

492

 

 

$

492

 

Common stock warrant liability

 

 

 

 

 

 

 

 

5,208

 

 

 

5,208

 

Total liabilities

 

$

 

 

$

 

 

$

5,700

 

 

$

5,700

 

 

The following table presents the issuances, changes in fair value and reclassifications of the Company’s Level 3 financial instruments that are measured at fair value on a recurring basis (in thousands):

 

 

 

(Level 3)

 

 

 

Contingent

Consideration

Liability

 

 

Common   Stock Warrant Liability

 

 

Derivative

Liability

 

 

Total

 

Balance as of December 31, 2016

 

$

492

 

 

$

5,208

 

 

$

 

 

$

5,700

 

Issuance of JGB Debt and warrants

 

 

 

 

 

900

 

 

 

2,290

 

 

 

3,190

 

Change in estimated fair value

 

 

(285

)

 

 

(3,905

)

 

 

(1,290

)

 

 

(5,480

)

Balance as of June 30, 2017

 

$

207

 

 

$

2,203

 

 

$

1,000

 

 

$

3,410

 

 

The Company recognizes transfers between levels of the fair value hierarchy as of the end of the reporting period. There were no transfers between Level 1, Level 2 and Level 3 categories during the periods presented.

In determining fair value, the Company uses various valuation approaches within the fair value measurement framework. The valuation methodologies used for the Company’s instruments measured at fair value and their classification in the valuation hierarchy are summarized below:

 

 

Money market funds - Investments in money market funds are classified within Level 1. At June 30, 2017 and December 31, 2016, money market funds were included on the balance sheets in cash and cash equivalents.

 

17


 

 

Contingent consideration - As of June 30, 2017 and December 31, 2016, the Company had a contingent obligation to issue 227,845 shares of its common stock to the former owners of IMX in con junction with its acquisition of IMX in June 2014. The issuance will occur if the Company completes 2,500 commercial tests involving the measurement of dd-cfDNA in organ transplant recipients in the United States by June 10, 2020. The Company recorded its estimate of the fair value of the contingent consideration based on its evaluation of the probability of achievement of the contractual conditions that would result in the payment of the contingent consideration. The fair value of the contingent considerat ion was estimated using the fair value of the shares to be paid if the contingency is met multiplied by management’s estimate at June 30, 2017 and December 31, 2016 of the probability of success. The significant input in the Level 3 measurement not support ed by market activity is the Company’s probability assessment of the milestone being met. The value of the liability is subsequently remeasured to fair value at each reporting date, and the change in estimated fair value is recorded to a component of opera ting expenses item captioned “change in estimated fair value of contingent consideration” until the milestone contingency is paid, expires or is no longer achievable. Increases (decreases) in the estimation of the probability percentage result in a directi onally similar impact to the fair value measurement of the contingent consideration liability. The carrying amount of the contingent consideration liability represents its fair value.

The fair value of the contingent consideration decreased by $0.1 million and $0.3 million in the three and six months ended June 30, 2017, respectively, as a result of the decreases in the fair market value of the Company’s common stock price during the period, partially offset by management’s estimate of the probability of meeting the milestone increasing to 85% at March 31, 2017 from 80% at December 31, 2016. Management’s estimate of the probability of meeting the milestone remained at 85% at June 30, 2017.

 

Common stock warrant liability – As of June 30, 2017, the Company had warrants to purchase 2,978,087 shares of common stock outstanding that it issued to certain accredited investors and its placement agents following the closing of the Private Placement on April 14, 2016 and Subsequent Financing on June 15, 2016 (as described in Note 12). In addition, as of June 30, 2017, the Company had warrants to purchase 1,250,000 shares of common stock outstanding that it issued to JGB following the closing of the convertible debt agreement on March 15, 2017 (as described in Note 11). The common stock warrants are classified as liabilities within Level 3. The Company utilizes a binomial-lattice pricing model (the Monte Carlo simulation model) that involves a market condition to estimate the fair value of the warrants. The application of the Monte Carlo simulation model requires the use of a number of complex assumptions including the Company’s stock price, expected life of the warrants, stock price volatility determined from the Company’s historical stock prices and stock prices of peer companies in the diagnostics industry, and risk-free rates based on the implied yield currently available in the U.S. Treasury zero-coupon issues with a remaining term equal to the expected life of the warrants. The estimated fair value of the warrants was subsequently remeasured at June 30, 2017, and the change in estimated fair value of common stock warrant liability was recorded on the Company’s condensed consolidated statements of operations.

 

Derivative liability – The JGB Debt (as described in Note 11) includes certain embedded derivatives that require bifurcation, including settlement and penalty provisions. The Company utilizes the Monte Carlo simulation model to estimate the fair value of the compound derivative liability for the measurement at issuance and subsequent remeasurement at June 30, 2017. The application of the Monte Carlo simulation model requires the use of a number of complex assumptions, which included the probability and size of additional financing rounds.  

18


 

Common Stock Warrant Liability and Derivative Liability Assumptions

 

 

 

June 30, 2017

 

 

 

December 31, 2016

 

 

Private Placement Common Stock Warrant Liability

 

 

 

 

 

 

 

 

 

 

Stock Price

 

$

1.11

 

 

 

$

2.70

 

 

Exercise Price 1

 

$

1.12

 

 

 

$

4.00

 

 

Remaining term (in years)

 

 

5.79

 

 

 

 

6.29

 

 

Volatility