cdna-10q_20190331.htm

 

 

 

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 March 31, 2019

or

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

For the transition period from           to           

Commission file number: 001-36536

 

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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes   No

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

 

Large accelerated filer

 

 

Accelerated filer

 

 

 

 

 

 

 

 

Non-accelerated filer

 

 

 

Smaller reporting company

 

 

 

 

 

 

 

 

 

 

 

 

Emerging growth company

 

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

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

 

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

 

 

Title of Each Class

 

Trading Symbol

Name of Each Exchange on Which Registered

Common Stock, par value $0.001 per share

 

CDNA

The Nasdaq Stock Market LLC

 

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

There were 42,119,913 shares of the registrant’s Common Stock issued and outstanding as of May 6, 2019.

 

 

 

 

 

 


 

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 March 31, 2019 and December 31, 2018

 

3

Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2019 and 2018

 

4

Condensed Consolidated Statements of Comprehensive Loss for the Three Months Ended March 31, 2019 and 2018

 

5

Condensed Consolidated Statements of Stockholders’ Equity for the Three Months Ending March 31, 2019 and 2018

 

6

Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2019 and 2018

 

7

Notes to Unaudited Condensed Consolidated Financial Statements

 

8

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

 

23

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

32

Item 4. Controls and Procedures

 

32

 

 

 

PART II. OTHER INFORMATION

 

33

Item 1. Legal Proceedings

 

33

Item 1A. Risk Factors

 

33

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

 

33

Item 3. Defaults Upon Senior Securities

 

33

Item 4. Mine Safety Disclosures

 

33

Item 5. Other Information

 

33

Item 6. Exhibits

 

34

Signatures

 

35

 

 

 

 

2


 

PART I. FINANCIAL INFORMATION

ITEM 1.

UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CareDx, Inc.

Condensed Consolidated Balance Sheets

(Unaudited)

(In thousands, except share data)

 

 

March 31, 2019

 

 

December 31, 2018

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

57,432

 

 

$

64,616

 

Accounts receivable

 

 

12,525

 

 

 

9,760

 

Inventory

 

 

5,177

 

 

 

4,943

 

Prepaid and other current assets

 

 

2,444

 

 

 

1,795

 

Total current assets

 

 

77,578

 

 

 

81,114

 

Property and equipment, net

 

 

3,820

 

 

 

4,134

 

Operating leases right-of-use assets

 

 

2,506

 

 

 

 

Intangible assets, net

 

 

31,759

 

 

 

33,252

 

Goodwill

 

 

12,005

 

 

 

12,005

 

Restricted cash

 

 

191

 

 

 

192

 

Total assets

 

$

127,859

 

 

$

130,697

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

3,859

 

 

$

4,711

 

Accrued compensation

 

 

4,860

 

 

 

9,156

 

Accrued and other liabilities

 

 

7,651

 

 

 

5,637

 

Total current liabilities

 

 

16,370

 

 

 

19,504

 

Deferred tax liability

 

 

2,571

 

 

 

2,968

 

Common stock warrant liability

 

 

10,521

 

 

 

10,003

 

Other liabilities

 

 

2,775

 

 

 

2,294

 

Total liabilities

 

 

32,237

 

 

 

34,769

 

Commitments and contingencies (Note 8)

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Preferred stock: $0.001 par value; 10,000,000 shares authorized at March 31, 2019

   and December 31, 2018; no shares issued and outstanding at March 31, 2019

   and December 31, 2018

 

 

 

 

 

 

Common stock: $0.001 par value; 100,000,000 shares authorized at March 31, 2019

   and December 31, 2018; 41,912,469 shares and 41,384,960 shares issued and

   outstanding at March 31, 2019 and December 31, 2018, respectively

 

 

41

 

 

 

41

 

Additional paid-in capital

 

 

419,959

 

 

 

412,010

 

Accumulated other comprehensive loss

 

 

(5,002

)

 

 

(4,278

)

Accumulated deficit

 

 

(319,376

)

 

 

(311,845

)

Total stockholders' equity

 

 

95,622

 

 

 

95,928

 

Total liabilities and stockholders’ equity

 

$

127,859

 

 

$

130,697

 

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 March 31,

 

 

 

2019

 

 

2018

 

Revenue:

 

 

 

 

 

 

 

 

Testing services revenue

 

$

21,518

 

 

$

10,604

 

Product revenue

 

 

4,433

 

 

 

3,307

 

License and other revenue

 

 

31

 

 

 

142

 

Total revenue

 

 

25,982

 

 

 

14,053

 

Operating expenses:

 

 

 

 

 

 

 

 

Cost of testing services

 

 

6,838

 

 

 

4,112

 

Cost of product

 

 

2,895

 

 

 

2,272

 

Research and development

 

 

5,614

 

 

 

3,368

 

Sales and marketing

 

 

6,925

 

 

 

4,085

 

General and administrative

 

 

9,106

 

 

 

5,307

 

Change in estimated fair value of contingent consideration

 

 

 

 

 

144

 

Total operating expenses

 

 

31,378

 

 

 

19,288

 

Loss from operations

 

 

(5,396

)

 

 

(5,235

)

Other income (expense):

 

 

 

 

 

 

 

 

Interest income (expense), net

 

 

342

 

 

 

(2,695

)

Debt extinguishment expenses

 

 

 

 

 

(2,806

)

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

 

 

(3,009

)

 

 

1,321

 

Other expense, net

 

 

(74

)

 

 

(3

)

Total other income (expense)

 

 

(2,741

)

 

 

(4,183

)

Loss before income taxes

 

 

(8,137

)

 

 

(9,418

)

Income tax benefit

 

 

606

 

 

 

424

 

Net loss

 

 

(7,531

)

 

 

(8,994

)

Net loss attributable to noncontrolling interest

 

 

 

 

 

 

(25

)

Net loss attributable to CareDx, Inc.

 

$

(7,531

)

 

$

(8,969

)

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

 

 

 

 

 

 

 

 

Basic

 

$

(0.18

)

 

$

(0.30

)

Diluted

 

$

(0.18

)

 

$

(0.30

)

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

 

 

 

 

 

 

 

 

Basic

 

 

41,611,399

 

 

 

29,615,441

 

Diluted

 

 

41,611,399

 

 

 

29,615,441

 

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 March 31,

 

 

 

2019

 

 

2018

 

Net loss

 

$

(7,531

)

 

$

(8,994

)

Other comprehensive loss:

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

(724

)

 

 

(137

)

Net comprehensive loss

 

 

(8,255

)

 

 

(9,131

)

Comprehensive loss attributable to noncontrolling interest, net of tax

 

 

 

 

 

(25

)

Comprehensive loss attributable to CareDx, Inc.

 

$

(8,255

)

 

$

(9,106

)

 

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


5


 

CareDx, Inc.

Condensed Consolidated Statements of Stock and Stockholders’ Equity

(Unaudited)

(In thousands, except share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

Other

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

Common Stock

 

 

Paid-In

 

 

Comprehensive

 

 

Accumulated

 

 

Noncontrolling

 

 

Stockholders’

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Loss

 

 

Deficit

 

 

Interest

 

 

Equity

 

Balance at December 31, 2018

 

 

41,384,960

 

 

$

41

 

 

$

412,010

 

 

$

(4,278

)

 

$

(311,845

)

 

$

 

 

$

95,928

 

Issuance of common stock under ESPP

 

 

31,184

 

 

 

 

 

 

341

 

 

 

 

 

 

 

 

 

 

 

 

341

 

RSU settlements, net of shares withheld

 

 

146,159

 

 

 

 

 

 

(2,378

)

 

 

 

 

 

 

 

 

 

 

 

(2,378

)

Issuance of common stock for services

 

 

2,112

 

 

 

 

 

 

51

 

 

 

 

 

 

 

 

 

 

 

 

51

 

Issuance of common stock for cash upon

   exercise of stock options

 

 

253,347

 

 

 

 

 

 

1,365

 

 

 

 

 

 

 

 

 

 

 

 

1,365

 

Issuance of common stock for cash upon

   exercise of warrants

 

 

94,707

 

 

 

 

 

 

2,569

 

 

 

 

 

 

 

 

 

 

 

 

2,569

 

Employee share-based compensation expense

 

 

 

 

 

 

 

 

6,001

 

 

 

 

 

 

 

 

 

 

 

 

6,001

 

Foreign currency translation adjustment

 

 

 

 

 

 

 

 

 

 

 

(724

)

 

 

 

 

 

 

 

 

(724

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(7,531

)

 

 

 

 

 

(7,531

)

Balance at March 31, 2019

 

 

41,912,469

 

 

$

41

 

 

$

419,959

 

 

$

(5,002

)

 

$

(319,376

)

 

$

 

 

$

95,622

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

Other

 

 

 

 

 

 

 

 

 

 

Stockholders’

 

 

 

Common Stock

 

 

Paid-In

 

 

Comprehensive

 

 

Accumulated

 

 

Noncontrolling

 

 

Equity

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Loss

 

 

Deficit

 

 

Interests

 

 

(Deficit)

 

Balance at December 31, 2017

 

 

28,825,019

 

 

$

29

 

 

$

264,204

 

 

$

(2,345

)

 

$

(268,022

)

 

$

180

 

 

$

(5,954

)

Adoption of ASC 606

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,933

 

 

 

 

 

 

2,933

 

Reclassification of warrants from liability to equity

 

 

 

 

 

 

 

 

6,550

 

 

 

 

 

 

 

 

 

 

 

 

6,550

 

Conversion of convertible debt

 

 

6,161,331

 

 

 

6

 

 

 

38,848

 

 

 

 

 

 

 

 

 

 

 

 

38,854

 

Issuance of common stock under ESPP

 

 

34,176

 

 

 

 

 

 

32

 

 

 

 

 

 

 

 

 

 

 

 

32

 

RSU settlements, net of shares withheld

 

 

49,330

 

 

 

 

 

 

(128

)

 

 

 

 

 

 

 

 

 

 

 

(128

)

Issuance of common stock for services

 

 

5,772

 

 

 

 

 

 

62

 

 

 

 

 

 

 

 

 

 

 

 

62

 

Issuance of common stock for cash upon

   exercise of stock options

 

 

142,554

 

 

 

 

 

 

80

 

 

 

 

 

 

 

 

 

 

 

 

80

 

Issuance of common stock for cash upon

   exercise of warrants

 

 

22,600

 

 

 

 

 

 

153

 

 

 

 

 

 

 

 

 

 

 

 

153

 

Employee share-based compensation expense

 

 

 

 

 

 

 

 

573

 

 

 

 

 

 

 

 

 

 

 

 

573

 

Non-employee share-based compensation expense

 

 

 

 

 

 

 

 

61

 

 

 

 

 

 

 

 

 

 

 

 

61

 

Noncontrolling interests upon acquisition

 

 

 

 

 

 

 

 

(537

)

 

 

 

 

 

 

 

 

(155

)

 

 

(692

)

Foreign currency translation adjustment

 

 

 

 

 

 

 

 

 

 

 

(137

)

 

 

 

 

 

 

 

 

(137

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(8,969

)

 

 

(25

)

 

 

(8,994

)

Balance at March 31, 2018

 

 

35,240,782

 

 

$

35

 

 

$

309,898

 

 

$

(2,482

)

 

$

(274,058

)

 

$

 

 

$

33,393

 

 

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

 

6


 

CareDx, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)

 

 

 

Three Months Ended March 31,

 

 

 

2019

 

 

2018

 

Operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(7,531

)

 

$

(8,994

)

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

1,161

 

 

 

1,039

 

Amortization of inventory fair market value adjustment

 

 

 

 

 

164

 

Loss on conversion of JGB Debt to shares of common stock

 

 

 

 

 

2,806

 

Amortization of debt discount and noncash interest expense

 

 

 

 

 

2,084

 

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

 

 

3,009

 

 

 

(1,321

)

Stock-based compensation

 

 

6,053

 

 

 

706

 

Revaluation of contingent consideration to estimated fair value

 

 

 

 

 

144

 

Non-cash lease expense

 

 

372

 

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(2,782

)

 

 

(606

)

Inventory

 

 

(372

)

 

 

196

 

Prepaid and other assets

 

 

(541

)

 

 

(510

)

Operating leases liabilities

 

 

(475

)

 

 

 

Accounts payable

 

 

(449

)

 

 

835

 

Accrued compensation

 

 

(4,249

)

 

 

(1,358

)

Accrued and other liabilities

 

 

202

 

 

 

644

 

Change in deferred taxes

 

 

(265

)

 

 

(347

)

Net cash used in operating activities

 

 

(5,867

)

 

 

(4,518

)

Investing activities:

 

 

 

 

 

 

 

 

Acquisition of Allenex AB and noncontrolling interests, net of cash acquired

 

 

 

 

 

(692

)

Purchase of property and equipment

 

 

(543

)

 

 

(62

)

Net cash used in investing activities

 

 

(543

)

 

 

(754

)

Financing activities:

 

 

 

 

 

 

 

 

Perceptive term loan issuance costs

 

 

 

 

 

(584

)

Proceeds from issuance of common stock under employee stock purchase plan

 

 

341

 

 

 

32

 

Taxes paid related to net share settlement of restricted stock units

 

 

(2,378

)

 

 

 

Principal payments on debt and finance lease obligations

 

 

(42

)

 

 

(1,633

)

Contingent payments related to the acquisition of Conexio Genomics Pty Ltd.

 

 

(52

)

 

 

(13

)

Change in short term credit facility

 

 

 

 

 

(225

)

Proceeds from exercise of warrants

 

 

78

 

 

 

25

 

Proceeds from exercise of stock options

 

 

1,365

 

 

 

80

 

Net cash used in financing activities

 

 

(688

)

 

 

(2,318

)

Effect of exchange rate changes on cash and cash equivalents

 

 

(87

)

 

 

17

 

Net decrease in cash, cash equivalents and restricted cash

 

 

(7,185

)

 

 

(7,573

)

Cash, cash equivalents, and restricted cash at beginning of period

 

 

64,808

 

 

 

26,474

 

Cash, cash equivalents, and restricted cash at end of period

 

$

57,623

 

 

$

18,901

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Operating leases right-of-use assets

 

$

2,506

 

 

$

 

 

 

 

 

 

 

 

 

 

Cash, Cash Equivalents and Restricted Cash as of:

 

March 31, 2019

 

 

December 31, 2018

 

Cash and cash equivalents

 

$

57,432

 

 

$

64,616

 

Restricted cash

 

 

191

 

 

 

192

 

Total cash, cash equivalents and restricted cash at the end of period

 

$

57,623

 

 

$

64,808

 

 

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

7


 

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’s headquarters are in Brisbane, California. The primary operations are in Brisbane, U.S., Stockholm, Sweden and Fremantle, Australia.

The Company focuses on discovery, development and commercialization of clinically differentiated, high-value diagnostic solutions for transplant patients.  In diagnostic testing services, the Company offers AlloMap®, which is a gene expression solution for heart transplant patients and AlloSure®, which is a donor-derived cell-free DNA (“dd-cfDNA”) solution initially used for kidney transplant patients.  The Company also 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.

Testing Services

AlloMap is a covered service for Medicare beneficiaries since January 1, 2006. In 2018, the Medicare reimbursement rate for AlloMap was set at $3,240, which remains applicable for 2019.  AlloMap has also received positive coverage decisions from many of the largest U.S. private payers.

In October 2017, the Company commercially launched AlloSure, its proprietary next generation sequencing-based test that measures dd-cfDNA in kidney transplant recipients. The Medicare reimbursement rate for AlloSure is currently $2,841.  AlloSure has also received payments from private payers on a case-by-case basis. However, no positive coverage decisions have yet been made for AlloSure. In September 2018, the Company initiated the Surveillance HeartCare® Outcomes Registry (“SHORE”). SHORE is a prospective, multi-center, observational, registry of patients receiving HeartCare for surveillance. HeartCare combines the gene expression profiling technology of AlloMap with the dd-cfDNA analysis of AlloSure-Heart® in one surveillance solution. AlloSure-Heart has not yet received positive coverage decisions from Medicare or other private payers. The Company has not yet made any applications to payers for reimbursement coverage of AlloSure-Heart.

In February 2019, AlloSure-Lung® became available for lung transplant patients through a compassionate use program while the test is undergoing further studies. The Company has not yet made any applications to payers for reimbursement coverage of AlloSure-Lung.

Products

Olerup SSP® is used to type Human Leukocyte Antigen (“HLA”) alleles, based on the sequence specific primer (“SSP”) technology.  Olerup SBTTM is a complete product range for sequence-based typing of HLA alleles. QTYPE® enables speed and precision in HLA typing at a low to intermediate resolution for samples that require a fast turn-around-time and uses real-time polymerase chain reaction, or PCR methodology. The Company received CE mark certification for QTYPE in April 2018.

In May 2018, the Company entered into a License and Commercialization Agreement (the “License Agreement”) with Illumina, Inc. (“Illumina”), which provides the Company with worldwide distribution, development and commercialization rights to Illumina’s next generation sequencing (“NGS”) product line for use in transplantation diagnostic testing. Pursuant to the License Agreement, the Company is the exclusive worldwide distributor of Illumina’s TruSight® HLA v1 and v2 product line. TruSight HLA is a NGS-based high resolution typing solution that provides NGS-level resolution to HLA typing. The Company’s suite of AlloSeq products are development-stage NGS-based kitted solutions that the Company acquired as a result of its License Agreement. These products include: AlloSeq Tx, a high-resolution HLA typing solution, AlloSeq cfDNA, a surveillance solution designed to measure dd-cfDNA in blood to detect active rejection in transplant recipients, and AlloSeq BMT, a solution for chimerism testing for stem cell transplant recipients.

Business Combination

On April 25, 2019, the Company announced that it agreed to acquire OTTR Complete Transplant Management (“OTTR”). See Note 16 for further details.

Liquidity

The Company has incurred significant losses and negative cash flows from operations since its inception and had an accumulated deficit of $319.4 million at March 31, 2019. As of March 31, 2019, the Company had cash and cash equivalents of $57.4 million.

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The Company may require additional financing in the future to fund working capital and pay its obligations as they come due. Additional financing might include issuance of equity securities, debt, cash from collaboration agreements or a combination of these. 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. The Company believes its existing cash balance and expected revenues will be sufficient to meet its anticipated cash requirements for at least the next 12 months.

 

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The significant accounting policies and estimates used in preparation of the unaudited condensed consolidated financial statements are described in the Company’s audited consolidated financial statements as of and for the year ended December 31, 2018, and the notes thereto, which are included in the Company’s Annual Report on Form 10-K. Material changes to the significant accounting policies previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 are reflected below.

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 Securities and Exchange Commission (the “SEC”) for interim reporting.  As permitted under those rules, certain footnotes and other financial information that are normally required by U.S. GAAP can be condensed or omitted.  These unaudited condensed consolidated financial statements have been prepared on the same basis as the Company’s annual consolidated 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, 2018 has been derived from audited consolidated 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 months ended March 31, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019.

The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its subsidiaries. Intercompany transactions have been eliminated.    

Reclassifications

Certain prior year amounts have been reclassified to conform with the current year presentation, including separate presentation of debt extinguishment expenses from other expense, net. These reclassifications had no effect on the reported results of operations.

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 transaction price estimates used for testing services revenue; accrued expenses for clinical studies; inventory valuation; the fair value of issued common stock warrants and embedded derivatives; the fair value of assets and liabilities acquired in a business combination or an assets acquisition (including identifiable intangible assets acquired); the fair value of contingent consideration recorded in connection with a business combination; the grant date fair value assumptions used to estimate stock-based compensation expense; income taxes; impairment of long-lived assets and indefinite-lived assets (including goodwill); and legal contingencies.  Actual results could differ from those estimates.

Concentrations of Credit Risk and Other Risks and Uncertainties

For the three months ended March 31, 2019 and 2018, approximately 55% and 42%, respectively, of total revenue was derived from Medicare. No other payers or customers represented more than 10% of total revenue for these periods.

As of March 31, 2019 and December 31, 2018, approximately 34% and 27%, respectively, of accounts receivable was due from Medicare.  No other payer or customer represented more than 10% of accounts receivable on either March 31, 2019 or December 31, 2018.

 

 

 

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Leases

Effective January 1, 2019, the Company adopted ASC Topic 842, Leases (“ASC 842”). The Company determines if an arrangement is or contains a lease at contract inception. The Company leases office space and equipment primarily through operating leases with a limited number of finance leases. A right-of-use (“ROU”) asset, representing the underlying asset during the lease term, and a lease liability, representing the payment obligation arising from the lease, are recognized on the condensed consolidated balance sheet at lease commencement based on the present value of the payment obligation. For operating leases, expense is recognized on a straight-line basis over the lease term. For finance leases, interest expense on the lease liability is recognized using the effective interest method and amortization of the ROU asset is recognized on a straight-line basis over the shorter of the estimated useful life of the asset or the lease term. Short-term leases with an initial term of 12 months or less are not recorded on the balance sheet.

The present value of lease payments is determined by using the interest rate implicit in the lease, if that rate is readily determinable; otherwise, the Company uses its incremental borrowing rate. The incremental borrowing rate is determined by using the rate of interest that the Company would pay to borrow on a collateralized basis an amount equal to the lease payments for a similar term and in a similar economic environment.

The Company's leases have remaining terms of less than 1 year to 2.33 years, some of which include options to extend the lease term. The Company's lease terms may include renewal options that are reasonably certain to be exercised and termination options that are reasonably certain not to be exercised. Certain finance leases also include bargain purchase options of the leased equipment.

Recent Accounting Pronouncements

Effective January 1, 2019, the Company adopted ASC 842 using the optional transition method and applied the standard only to leases that existed at that date. Under the optional transition method, the Company does not need to restate the comparative periods in transition and will continue to present financial information and disclosures for periods before January 1, 2019 in accordance with ASC Topic 840.  The Company has also chosen to apply the package of practical expedients for existing leases, which provides relief from reassessing: (i) whether a contract is or contains a lease, (ii) lease classification, and (iii) whether initial direct costs (IDCs) can be capitalized. The Company has also made some accounting policy elections to: (i) allow the Company not to separate nonlease components from lease components, and instead to account for those as a single lease component, and (ii) elect not to recognize a ROU asset and a lease liability for leases with a term of 12 months or less (“short-term leases”).

Upon adoption of ASC 842 on January 1, 2019, the Company recorded a ROU asset of approximately $3.0 million and a lease liability of approximately $3.8 million. The lease liability was determined based on the present value of the remaining minimum lease payments. The ROU asset was determined based on the value of the lease liability, adjusted for the deferred rent balances of approximately $0.8 million, which were previously included in accrued and other liabilities as well as deferred rent, net of current portion. See Note 8 for further details.

The standard did not have a material impact on the condensed consolidated statement of cash flows or the condensed consolidated statement of operations.

In February 2018, the FASB issued ASU No. 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220):  Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (“ASU 2018-02”).  The amendments in ASU 2018-02 allow a reclassification from accumulated other comprehensive income to retained earnings for certain tax effects resulting from the Tax Cuts and Jobs Act (the “Tax Act”).  ASU 2018-02 will become effective for all interim and annual reporting periods beginning after December 15, 2018 and may be applied retrospectively or as of the beginning of the period of adoption. The adoption of the new standard did not have a material impact on the Company’s unaudited condensed consolidated financial statements.

In June 2018, the FASB issued ASU No. 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share Based Payment Accounting (“ASU 2018-07”). ASU 2018-07 is effective for all interim and annual reporting periods beginning on or after December 15, 2018. The Company adopted ASU 2018-07 on January 1, 2019 applying a modified retrospective approach.  On transition, the Company only had nonemployee equity-classified awards with an established measurement date. Accordingly, the Company did not record a cumulative-effect adjustment to retained earnings.

In August 2018, the FASB issued ASU No. 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 (“ASU 2018-15”). ASU 2018-15 is effective for fiscal years beginning after December 15, 2019 and interim periods therein. Early adoption of ASU 2018-15 is permitted including adoption in any interim period. The Company plans to adopt the standard during 2019. The Company expects the new standard will impact its prospective unaudited condensed consolidated financial statements after adoption related to implementation costs in a cloud computing arrangement if and when entered by the Company.

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In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820), which modifies, removes and adds certain disclosure requirements on fair value measurements based on the FASB Concepts Statement, Conceptual Framework for Financial Reporting—Chapter 8: Notes to Financial Statements. The ASU is effective for the Company’s interim and annual reporting periods during the year ending December 31, 2020, and all annual and interim reporting period thereafter. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. Early adoption is permitted upon issuance of ASU 2018-13. An entity is permitted to early adopt any removed or modified disclosures upon issuance of ASU 2018-13 and delay adoption of the additional disclosures until their effective date. The Company is in the process of assessing the impact that the ASU will have in its unaudited condensed consolidated financial statements and disclosures. The Company does not believe adoption of the guidance will have a significant impact on its condensed consolidated financial statements.

 

 

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.

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 March 31,

 

 

 

2019

 

 

2018

 

Numerator:

 

 

 

 

 

 

 

 

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

  and diluted net loss per share

 

$

(7,531

)

 

$

(8,969

)

Denominator:

 

 

 

 

 

 

 

 

Weighted-average shares used to compute basic and diluted

   net loss per share attributable to CareDx, Inc.

 

 

41,611,399

 

 

 

29,615,441

 

Net loss per share attributable to CareDx, Inc.:

 

 

 

 

 

 

 

 

Basic and diluted

 

$

(0.18

)

 

$

(0.30

)

The following potentially dilutive securities have been excluded from diluted net loss per share as at March 31, 2019 because their effect would be antidilutive:

 

 

 

March 31,

 

 

 

2019

 

 

2018

 

Shares of common stock subject to outstanding options

 

 

2,536,412

 

 

 

1,940,010

 

Shares of common stock subject to outstanding common

   stock warrants

 

 

530,627

 

 

 

3,633,565

 

Restricted stock units

 

 

1,034,484

 

 

 

441,804

 

Shares of common stock subject to contingent consideration

 

 

 

 

 

227,848

 

Total common stock equivalents

 

 

4,101,523

 

 

 

6,243,227

 

 

 

4. FAIR VALUE MEASUREMENTS

The Company records its financial assets and liabilities at fair value.  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.  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.

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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.

The following table sets forth the Company’s financial assets and liabilities measured at fair value on a recurring basis, as of March 31, 2019 and December 31, 2018 (in thousands):

 

 

 

March 31, 2019

 

 

 

Fair Value Measured Using

 

 

 

 

 

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

 

Total

Balance

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

20,543

 

 

$

 

 

$

 

 

$

20,543

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock warrant liability

 

$

 

 

$

 

 

$

10,521

 

 

$

10,521

 

 

 

 

December 31, 2018

 

 

 

Fair Value Measured Using

 

 

 

 

 

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

 

Total

Balance

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

59,471

 

 

$

 

 

$

 

 

$

59,471

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock warrant liability

 

$

 

 

$

 

 

$

10,003

 

 

$

10,003

 

 

The following table presents the issuances, exercises, 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)

 

 

 

 

Common Stock Warrant Liability

 

Balance as of December 31, 2018

 

 

$

10,003

 

Exercise of warrants

 

 

 

(2,491

)

Change in estimated fair value

 

 

 

3,009

 

Balance as of March 31, 2019

 

 

$

10,521

 

 

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 March 31, 2019 and December 31, 2018, money market funds were included on the balance sheets in cash and cash equivalents.