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Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________________________________
FORM 10-Q
__________________________________________________
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2020
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)
__________________________________________________
Delaware94-3316839
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification Number)
1 Tower Place
South San Francisco, California 94080
(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)
__________________________________________________
Securities registered pursuant to Section 12(b) of the Act
Title of Each ClassTrading SymbolName of Each Exchange on Which Registered
Common Stock, par value $0.001 per shareCDNAThe Nasdaq Stock Market LLC
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 filerAccelerated filer
Non-accelerated filerSmaller 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 49,257,216 shares of the registrant’s Common Stock issued and outstanding as of October 27, 2020.



Table of Contents
CareDx, Inc.
TABLE OF CONTENTS
Page No.
Condensed Consolidated Balance Sheets as of September 30, 2020 and December 31, 2019
September 30, 2020 and 2019
September 30, 2020 and 2019

2

Table of Contents
PART I. FINANCIAL INFORMATION
ITEM 1.    UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CareDx, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
(In thousands, except share data)

September 30, 2020December 31, 2019
Assets
Current assets:
Cash and cash equivalents$213,798 $38,223 
Accounts receivable30,610 24,057 
Inventory9,906 6,014 
Prepaid and other current assets4,345 3,628 
Total current assets258,659 71,922 
Property and equipment, net10,144 4,430 
Operating leases right-of-use assets15,802 4,730 
Intangible assets, net43,830 45,541 
Goodwill23,857 23,857 
Restricted cash260 256 
Other assets1,000 1,000 
Total assets$353,552 $151,736 
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable$9,519 $5,506 
Accrued compensation13,791 12,484 
Accrued and other liabilities18,617 16,838 
Deferred revenue - CMS advance payment (Note 1)20,496  
Total current liabilities62,423 34,828 
Deferred tax liability1,187 1,973 
Common stock warrant liability532 6,607 
Deferred payments for intangible assets3,480 5,207 
Operating lease liability, less current portion16,539 2,370 
Other liabilities747 1,751 
Total liabilities84,908 52,736 
Commitments and contingencies (Note 8)
Stockholders’ equity:
Preferred stock: $0.001 par value; 10,000,000 shares authorized at September 30, 2020 and December 31, 2019; no shares issued and outstanding at September 30, 2020 and December 31, 2019
  
Common stock: $0.001 par value; 100,000,000 shares authorized at September 30, 2020 and December 31, 2019; 49,132,348 shares and 42,498,430 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively
47 42 
Additional paid-in capital621,961 437,976 
Accumulated other comprehensive loss(4,352)(5,205)
Accumulated deficit(349,012)(333,813)
Total stockholders’ equity268,644 99,000 
Total liabilities and stockholders’ equity$353,552 $151,736 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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CareDx, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
(In thousands, except share and per share data)

Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
Revenue:
Testing services revenue$45,529 $28,226 $113,264 $75,421 
Product revenue5,383 4,200 13,369 13,226 
Digital and other revenue2,457 1,385 6,917 2,600 
Total revenue53,369 33,811 133,550 91,247 
Operating expenses:
Cost of testing services11,900 7,421 30,631 21,928 
Cost of product3,705 2,986 9,635 9,161 
Cost of digital and other1,210 1,087 3,966 1,650 
Research and development12,474 8,521 35,616 21,765 
Sales and marketing13,870 11,058 37,727 28,627 
General and administrative13,117 9,485 35,436 27,103 
Total operating expenses56,276 40,558 153,011 110,234 
Loss from operations(2,907)(6,747)(19,461)(18,987)
Other income (expense):
Interest income, net29 37 146 679 
Change in estimated fair value of common stock warrant liability79 4,346 (990)(14)
CARES Act Provider Relief Fund  4,813  
Other expense, net(254)(398)(572)(644)
Total other (expense) income(146)3,985 3,397 21 
Loss before income taxes(3,053)(2,762)(16,064)(18,966)
Income tax benefit235 949 865 1,775 
Net loss$(2,818)$(1,813)(15,199)(17,191)
Net loss per share (Note 3):
Basic$(0.06)$(0.04)$(0.33)$(0.41)
Diluted$(0.06)$(0.04)$(0.33)$(0.41)
Weighted-average shares used to compute net loss per share:
Basic49,010,680 42,393,550 45,526,810 42,048,647 
Diluted49,010,680 42,393,550 45,526,810 42,048,647 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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CareDx, Inc.
Condensed Consolidated Statements of Comprehensive Loss
(Unaudited)
(In thousands)

Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
Net loss$(2,818)$(1,813)$(15,199)$(17,191)
Other comprehensive loss:
Foreign currency translation adjustments, net of tax962 (863)853 (1,656)
Net comprehensive loss$(1,856)$(2,676)$(14,346)$(18,847)
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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CareDx, Inc.
Condensed Consolidated Statements of Stockholders’ Equity
(Unaudited)
(In thousands, except share data)
Common StockAdditional
Paid-In
Capital
Accumulated
Other
Comprehensive
Loss
Accumulated
Deficit
Total
Stockholders’
Equity
SharesAmount
Balance at December 31, 201942,498,430 $42 $437,976 $(5,205)$(333,813)$99,000 
Issuance of common stock under ESPP38,147 — 699 — — 699 
RSU settlements, net of shares withheld139,552 — (1,507)— — (1,507)
Issuance of common stock for services3,091 — 66 — — 66 
Issuance of common stock for cash upon exercise of stock options
44,861 — 155 — — 155 
Issuance of common stock for cash upon exercise of warrants
295,466 — 6,299 — — 6,299 
Employee stock-based compensation expense— — 4,200 — — 4,200 
Foreign currency translation adjustment— — — (1,705)— (1,705)
Net loss— — — — (5,823)(5,823)
Balance at March 31, 202043,019,547 $42 $447,888 $(6,910)$(339,636)$101,384 
Issuance of common shares through public equity offering, net of commissions and offering costs of $9,166
4,492,187 4 134,580 — — 134,584 
Issuance of common shares in connection with "at-the-market" equity offering, net of commissions and offering costs of $785
1,000,000 1 23,450 — — 23,451 
RSU settlements, net of shares withheld143,101 — (2,030)— — (2,030)
Issuance of common stock for services2,992 — 58 — — 58 
Issuance of common stock for cash upon exercise of stock options
204,469 — 1,962 — — 1,962 
Employee stock-based compensation expense— — 6,320 — — 6,320 
Foreign currency translation adjustment— — — 1,596 — 1,596 
Net loss— — — — (6,558)(6,558)
Balance at June 30, 202048,862,296 $47 $612,228 $(5,314)$(346,194)$260,767 
Issuance of common stock under ESPP38,576 — 694 — — 694 
RSU settlements, net of shares withheld34,602 — (466)— — (466)
Issuance of common stock for services2,731 — 96 — — 96 
Issuance of common stock for cash upon exercise of stock options159,576 — 1,647 — — 1,647 
Issuance of common stock for cash upon exercise of warrants34,567 — 1,109 — — 1,109 
Employee stock-based compensation expense— — 6,653 — 6,653 
Foreign currency translation adjustment— — — 962 — 962 
Net loss— — — — (2,818)(2,818)
Balance at September 30, 202049,132,348 $47 $621,961 $(4,352)$(349,012)$268,644 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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CareDx, Inc.
Condensed Consolidated Statements of Stockholders’ Equity
(Unaudited)
(In thousands, except share data)
Common StockAdditional
Paid-In
Capital
Accumulated
Other
Comprehensive
Loss
Accumulated
Deficit
Total
Stockholders’
Equity
SharesAmount
Balance at December 31, 201841,384,960 $41 $412,010 $(4,278)$(311,845)$95,928 
Issuance of common stock under ESPP31,184 — 341 — — 341 
RSU settlements, net of shares withheld146,159 — (2,378)— — (2,378)
Issuance of common stock for services2,112 — 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 stock-based compensation expense— — 6,001 — — 6,001 
Foreign currency translation adjustment— — — (724)— (724)
Net loss— — — — (7,531)(7,531)
Balance at March 31, 201941,912,469 $41 $419,959 $(5,002)$(319,376)$95,622 
Change in estimated offering costs— — 50 — — 50 
RSU settlements, net of shares withheld112,760 — (1,597)— — (1,597)
Issuance of common stock for services1,663 — 52 — — 52 
Issuance of common stock for cash upon exercise of stock options
240,734 1 1,404 — — 1,405 
Issuance of common stock for cash upon exercise of warrants
38,806 — 612 — — 612 
Employee stock-based compensation expense— — 4,938 — — 4,938 
Foreign currency translation adjustment— — — (69)— (69)
Net loss— — — — (7,847)(7,847)
Balance at June 30, 201942,306,432 $42 $425,418 $(5,071)$(327,223)$93,166 
Contingent consideration classified as equity— — 222 — — 222 
Issuance of common stock under ESPP20,528 — 418 — — 418 
RSU settlements, net of shares withheld2,140 — (29)— — (29)
Issuance of common stock for services1,514 — 54 — — 54 
Issuance of common stock for cash upon exercise of stock options81,473 — 476 — — 476 
Issuance of common stock upon exercise of warrants9,028 — — — — — 
Employee stock-based compensation expense— — 5,912 — — 5,912 
Foreign currency translation adjustment— — — (863)— (863)
Net loss— — — — (1,813)(1,813)
Balance at September 30, 201942,421,115 $42 $432,471 $(5,934)$(329,036)$97,543 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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CareDx, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
Nine Months Ended September 30,
20202019
Operating activities:
Net loss$(15,199)$(17,191)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Stock-based compensation17,424 17,010 
Revaluation of common stock warrant liability to estimated fair value990 14 
Depreciation and amortization5,052 3,840 
Loss on the write-off of fixed assets 160 
Amortization of right-of-use assets1,896 1,129 
Revaluation of contingent consideration to estimated fair value301  
Changes in operating assets and liabilities:
Accounts receivable(5,359)(7,816)
Inventory(3,608)(1,327)
Prepaid and other assets(681)566 
Operating leases liabilities, net(1,096)(1,436)
Accounts payable3,831 1,003 
Accrued compensation1,501 1,038 
Accrued and other liabilities1,581 2,478 
Deferred revenue - CMS advance payment20,496  
Change in deferred taxes(879)(1,154)
Net cash provided by (used in) operating activities26,250 (1,686)
Investing activities:
Acquisition of business (18,119)
Acquisition of intangible assets(3,250)(1,148)
Investment in equity securities (1,000)
Additions of capital expenditures, net(6,670)(970)
Net cash used in investing activities(9,920)(21,237)
Financing activities:
Proceeds from issuance of common shares in public equity offering, net of issuance costs paid134,684  
Proceeds from issuance of common shares in "at-the-market" equity offering, net of issuance costs paid23,451  
Proceeds from issuance of common stock under employee stock purchase plan1,082 760 
Taxes paid related to net share settlement of restricted stock units(4,003)(4,004)
Proceeds from exercise of warrants343 105 
Proceeds from exercise of stock options3,764 3,245 
Principal payments on debt and finance lease obligations(136)(128)
Contingent payments related to the acquisition of Conexio Genomics Pty Ltd. (192)
Net cash provided by (used in) financing activities159,185 (214)
Effect of exchange rate changes on cash and cash equivalents64 (493)
Net increase (decrease) in cash, cash equivalents and restricted cash175,579 (23,630)
Cash, cash equivalents, and restricted cash at beginning of period38,479 64,808 
Cash, cash equivalents, and restricted cash at end of period$214,058 $41,178 

September 30, 2020December 31, 2019
Cash, Cash Equivalents and Restricted Cash as of:
Cash and cash equivalents$213,798 $38,223 
Restricted cash260 256 
Total cash, cash equivalents and restricted cash at the end of period$214,058 $38,479 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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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 leading precision medicine company focused on the discovery, development and commercialization of clinically differentiated, high-value diagnostic solutions for transplant patients and caregivers.  The Company’s headquarters are in South San Francisco, California. The primary operations are in Brisbane, California; Omaha, Nebraska; Fremantle, Australia and Stockholm, Sweden.
The Company’s commercially available testing services consist of AlloSure® Kidney, which is a donor-derived cell-free DNA (“dd-cfDNA”) solution for kidney transplant patients, and AlloMap® Heart, which is a gene expression solution for heart transplant patients. The Company has initiated several clinical studies to generate data on its existing and planned future testing services. In April 2020, the Company announced its first biopharma research partnership for AlloCell, a surveillance solution that monitors the level of engraftment and persistence of allogeneic cells for patients who have received cell therapy transplants. 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. In 2019, the Company began providing digital solutions to transplant centers following the acquisitions of Ottr Complete Transplant Management (“OttrCare”) and XynManagement, Inc. (“XynManagement”).
Testing Services
AlloSure Kidney has been a covered service for Medicare beneficiaries since October 2017. The Medicare reimbursement rate for AlloSure Kidney is currently $2,841. AlloSure Kidney has received positive coverage decisions from Blue Cross Blue Shield (“BCBS”) of South Carolina, BCBS of Kansas City and Capital Health, and is reimbursed by other private payers on a case-by-case basis.
AlloMap Heart has been a covered service for Medicare beneficiaries since January 2006. The Medicare reimbursement rate for AlloMap Heart is currently $3,240. AlloMap Heart has also received positive coverage decisions for reimbursement from many of the largest U.S. private payers, including Aetna, Cigna, Health Care Services Corporation, Humana, Kaiser Foundation Health Plan, Inc. and UnitedHealthcare.
In October 2020, AlloSure Heart received a final positive Medicare coverage decision which provides coverage when used in conjunction with AlloMap Heart, with an effective date of November 2020.
AlloCell will initially be commercialized through collaborative research agreements with biopharma companies developing cell therapies.
Clinical Studies
In January 2018, the Company initiated the Kidney Allograft Outcomes AlloSure Kidney Registry study (“K-OAR”), to develop additional data on the clinical utility of AlloSure Kidney for surveillance of kidney transplant recipients. K-OAR is a multicenter, non-blinded, prospective observational cohort study which has enrolled more than 1,600 renal transplant patients who will receive AlloSure Kidney long-term surveillance.
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 Heart with the dd-cfDNA analysis of AlloSure® Heart in one surveillance solution. In October 2020, AlloSure Heart received a final Medicare coverage decision. The Company has not yet made any applications to private payers for reimbursement coverage for 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. In June 2020, the Company submitted an AlloSure Lung application to the Palmetto MolDx Technical Assessment program seeking coverage and reimbursement for Medicare beneficiaries.
In September 2019, the Company announced the commencement of the Outcomes of KidneyCare on Renal Allografts (“OKRA”) study, which is an extension of K-OAR. OKRA is a prospective, multi-center, observational, registry of patients receiving KidneyCare for surveillance. KidneyCare combines the dd-cfDNA analysis of AlloSure Kidney with the gene expression profiling technology of AlloMap Kidney and the predictive artificial intelligence technology of KidneyCare iBox developing a multimodality surveillance solution. The Company has not yet made any applications to private payers for reimbursement coverage of AlloMap Kidney or KidneyCare iBox.
Products
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The Company’s suite of AlloSeq products are commercial next generation sequencing (“NGS”)-based kitted solutions that the Company has developed as a result of its license agreement with Illumina, Inc. (“Illumina”). These products include: AlloSeq Tx, a high-resolution Human Leukocyte Antigen (“HLA”) typing solution, AlloSeq cfDNA, a surveillance solution designed to measure dd-cfDNA in blood to detect active rejection in transplant recipients, and AlloSeq HCT, a solution for chimerism testing for stem cell transplant recipients.
The Company's other HLA typing products include: TruSight HLA, a NGS-based high resolution typing solution; Olerup SSP®, based on the sequence specific primer (“SSP”) technology; and QTYPE®, which uses real-time polymerase chain reaction (“PCR”) methodology, to perform HLA typing at a low to intermediate resolution for samples that require a fast turnaround time.
Digital and Other
Following the acquisitions of both OttrCare and XynManagement, the Company is a leading provider of transplant patient tracking software (“Ottr software”), as well as of transplant quality tracking and waitlist management solutions. Ottr software provides comprehensive solutions for transplant patient management and enables integration with electronic medical record (“EMR”) systems providing patient surveillance management tools and outcomes data to transplant centers. XynManagement provides two unique solutions, XynQAPI software (“XynQAPI”) and Waitlist Management. XynQAPI simplifies transplant quality tracking and Scientific Registry of Transplant Recipients (“SRTR”) reporting. Waitlist Management includes a team of transplant assistants who maintain regular contact with patients on the waitlist to help prepare for their transplant and maintain eligibility.
In September 2020 we launched AlloCare, a mobile app that provides a patient-centric resource for transplant recipients to manage medication adherence, coordinate with Patient Care Managers for AlloSure scheduling and measure health metrics.
COVID-19 Pandemic
On January 30, 2020, the World Health Organization (the “WHO”) announced a global health emergency because of a new strain of coronavirus (“COVID-19”) originating in Wuhan, China and the risks to the international community as the virus spreads globally beyond its point of origin. In March 2020, the WHO classified the COVID-19 outbreak as a pandemic, based on the rapid increase in exposure globally. The full impact of the COVID-19 pandemic, including the impact associated with preventative and precautionary measures that the Company, other businesses and governments are taking, continues to evolve as of the date of this report. As such, it is uncertain as to the full magnitude that the pandemic will have on the Company, but the pandemic may materially affect the Company's financial condition, liquidity and future results of operations.
In the final weeks of March and during April 2020, with hospitals increasingly caring for COVID-19 patients, hospital administrators chose to limit or even defer, non-emergency procedures. Immunosuppressed transplant patients either self-prescribed or were asked to avoid transplant centers and caregiver visits to reduce the risk of contracting COVID-19. As a result, with transplant surveillance visits down, the Company experienced a slowdown in testing services volumes in the final weeks of March and during April 2020. As a response to the COVID-19 pandemic, and to enable immune-compromised transplant patients to continue to have their blood drawn, in late March 2020 the Company launched RemoTraC, a remote home-based blood draw solution using mobile phlebotomy for AlloSure and AlloMap surveillance tests, as well as for other standard monitoring tests. To date, more than 150 transplant centers can offer RemoTraC to their patients and over 5,000 kidney, heart, and lung transplant patients have enrolled. Based on existing and new relationships with partners, the Company has established a nationwide network of more than 10,000 mobile phlebotomists. Following the introduction of RemoTraC and with the easing of stay-at-home restrictions and the opening up of many hospitals to non-COVID-19 patients, the Company’s testing services volumes returned to levels consistent with those experienced immediately prior to the COVID-19 pandemic, and volumes continued to be at or above those levels from May 2020 through to the end of the third quarter of 2020. The Company’s product business experienced a reduction in forecasted sales volume throughout the second and third quarters of 2020, as it was unable to undertake onsite discussions and demonstrations of its recently launched NGS products, including AlloSeq Tx 17, which was awarded CE mark approval in May 2020.
The Company is maintaining its testing, manufacturing, and distribution facilities while implementing specific protocols to reduce contact among employees. In areas where COVID-19 impacts healthcare operations, the Company’s field-based sales and clinical support teams are supporting providers through telephone and online platforms. In August 2020, the state of California released revised criteria for loosening and tightening restrictions on certain activities on generally a county-by-county basis. Under the updated executive orders, San Mateo County, where our laboratory and headquarters are located, continues to be subject to certain restrictions. These orders and others may be further modified, amended and adopted depending upon the COVID-19 transmission rates in our county and state, as well as other factors. In addition, the Company has created a COVID-19 task force that is responsible for crisis decision making, employee communications, enforcing pre-arrival temperature checking, daily health check-ins and enhanced safety training/protocols in its offices for employees that do not work from home.
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Liquidity and Capital Resources
The Company has incurred significant losses and negative cash flows from operations since its inception and had an accumulated deficit of $349.0 million at September 30, 2020. As of September 30, 2020, the Company had cash and cash equivalents of $213.8 million.
CMS Accelerated and Advance Payment Program for Medicare Providers
On March 27, 2020 the U.S. government enacted the Coronavirus Aid, Relief, and Economic Security Act (“the CARES Act”). Pursuant to the CARES Act, the Centers for Medicare & Medicaid Services (CMS”) expanded its current Accelerated and Advance Payment Program in order to increase cash flow to providers of services and suppliers impacted by the COVID-19 pandemic. CMS is authorized to provide accelerated or advance payments during the period of the public health emergency to any Medicare provider who submits a request to the appropriate Medicare Administrative Contractor and meets the required qualifications. During April 2020, the Company received an advance payment from CMS of approximately $20.5 million, and recorded the payment as Deferred revenue - CMS advance payment on the Company's condensed consolidated balance sheet. Refer to Note 7, Balance Sheet Components, for further explanation.
At-the-Market Equity Offering
On August 31, 2018, the Company entered into a sales agreement (the Sales Agreement”), with Jefferies, LLC, as sales agent (Jefferies”), pursuant to which the Company may offer and sell, from time to time, through Jefferies, up to $50.0 million in shares of its common stock, by any method permitted by law deemed to be an “at-the-market” offering as defined in Rule 415 promulgated under the Securities Act of 1933, as amended. During April 2020, the Company issued and sold 1,000,000 shares of its common stock under the Sales Agreement. The shares were sold at an average price of $24.24 per share for aggregate net proceeds to the Company of approximately $23.5 million, after deducting sales commissions and offering costs payable by the Company.
CARES Act Provider Relief Fund for Medicare Providers
Pursuant to the CARES Act, the U.S. Department of Health & Human Services (“HHS”) distributed an initial tranche of $30.0 billion in funds to healthcare providers that received Medicare fee-for-service (FFS”) reimbursements in 2019. These payments to healthcare providers are not loans and will not be required to be repaid. As a condition to receiving these payments, providers must agree to certain terms and conditions and submit sufficient documentation demonstrating that the funds are being used for healthcare-related expenses or lost revenue attributable to the COVID-19 pandemic. Due to the recent enactment of legislation and absence of definitive guidance, there is a high degree of uncertainty around the CARES Act’s implementation and the Company continues to assess the impact on its business. Furthermore, HHS has indicated that it, along with the Office of Inspector General, will be closely monitoring and auditing providers to ensure that recipients comply with the terms and conditions of relief programs and to prevent fraud and abuse. All providers will be subject to civil and criminal penalties for any deliberate omissions, misrepresentations or falsifications of any information given to HHS. Providers will be distributed a portion of the initial $30.0 billion of funds based on their share of total Medicare FFS reimbursements made by the U.S. in 2019. During April 2020, the Company received a payment of approximately $4.8 million representing its portion of the initial tranche of funds, recorded in other income (expense), net on the condensed consolidated statement of operations.
Underwritten Public Equity Offering
In June 2020, the Company sold 4,492,187 shares of common stock (which includes shares sold pursuant to the underwriters’ full exercise of an overallotment option granted to the underwriters in connection with the offering) through an underwritten public offering at a price of $32.00 per share for aggregate net proceeds of approximately $134.6 million.
The Company may require additional financing in the future to fund working capital and the Company's future product developments. Additional financing might include issuance of equity securities and debt. 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 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, 2019, and the notes thereto, which are included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. 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, 2019 are reflected below.
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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 notes 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, 2019 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 and nine months ended September 30, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020.
Changes in Presentation
The presentation of certain prior period amounts within the previously disclosed cost of revenue have been changed, including separate line items for presentation of cost of testing services, cost of product and cost of digital and other. These changes in presentation 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; standalone fair value of digital revenue performance obligations; 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 September 30, 2020 and 2019, approximately 58% and 54%, respectively, of total revenue was derived from Medicare. For the nine months ended September 30, 2020 and 2019, approximately 56% and 39%, 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 September 30, 2020 and December 31, 2019, approximately 28% and 36%, respectively, of accounts receivable was due from Medicare. No other payer or customer represented more than 10% of accounts receivable on either September 30, 2020 or December 31, 2019.
Leases
Effective January 1, 2019, the Company adopted Accounting Standard Codification (“ASC”) Topic 842, Leases using the optional transition method and applied the standard only to leases that existed at that date. The Company determines if an arrangement is or contains a lease at contract inception. 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 Company’s leases have remaining terms of 0.25 years to 8.42 years, some of which include options to extend the lease term.
Recent Accounting Pronouncements
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In August 2018, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2018-15, Intangibles – Goodwill and Other – Internal – Use Software (ASC 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 became 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 adopted the standard on January 1, 2020. The adoption of the new standard did not have a significant impact on the Company’s condensed consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (ASC Topic 820) (“ASU 2018-13”), 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. ASU 2018-13 is effective for the Company’s interim and annual reporting periods during the year ending December 31, 2020, and all annual and interim reporting periods 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 adopted the standard on January 1, 2020. The adoption of the new standard did not have a significant impact on the Company's condensed consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments (ASC Topic 326) (“ASU 2016-13”), which amends the FASB’s guidance on the impairment of financial instruments. The ASU adds to U.S. GAAP an impairment model known as the current expected credit loss (“CECL”) model, which is based on expected losses rather than incurred losses. Under the new guidance, an entity recognizes as an allowance its estimate of lifetime expected credit losses, which the FASB believes will result in more timely recognition of such losses. The new CECL standard is effective for public companies for annual reporting periods beginning after December 15, 2019, and interim periods therein. ASU 2016-13 has a greater impact on banks. However, nonbank entities that have financial instruments or other assets such as trade receivables, contract assets, lease receivables, financial guarantees, loans and loan commitments, and held-to-maturity debt securities are subject to the CECL model. The Company adopted the standard on January 1, 2020. The adoption of the new standard did not have an impact on the Company's 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 September 30,Nine Months Ended September 30,
2020201920202019
Numerator:
Net loss used to compute basic and diluted net loss per share$(2,818)$(1,813)$(15,199)$(17,191)
Denominator:
Weighted-average shares used to compute basic and diluted net loss per share
49,010,680 42,393,550 45,526,810 42,048,647 
Net loss per share:
Basic and diluted$(0.06)$(0.04)$(0.33)$(0.41)
The following potentially dilutive securities have been excluded from diluted net loss per share as at September 30, 2020 and 2019 because their effect would be antidilutive:
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Three and Nine Months Ended September 30,
20202019
Shares of common stock subject to outstanding options3,082,273 2,668,388 
Shares of common stock subject to outstanding common stock warrants14,445 355,240 
Restricted stock units1,912,397 1,552,466 
Total common stock equivalents5,009,115 4,576,094 

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 that 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.
The following table sets forth the Company’s financial assets and liabilities measured at fair value on a recurring basis, as of September 30, 2020 and December 31, 2019 (in thousands):
September 30, 2020
Fair Value Measured Using 
(Level 1)(Level 2)(Level 3)Total
Balance
Assets    
Money market funds$197,187 $ $ $197,187 
Liabilities
Common stock warrant liability$ $ $532 $532 

December 31, 2019
 Fair Value Measured Using 
 (Level 1)(Level 2)(Level 3)Total
Balance
Assets    
Money market funds$29,177 $ $ $29,177 
Liabilities
Common stock warrant liability$ $ $6,607 $6,607 
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):
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 (Level 3)
 Common Stock Warrant Liability
Balance as of December 31, 2019
$6,607 
Exercise of warrants(7,065)
Change in estimated fair value990 
Balance as of September 30, 2020
$532 
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. Money market funds are valued at the closing price reported by the fund sponsor from an actively traded exchange. At September 30, 2020 and December 31, 2019, money market funds were included as cash and cash equivalents in the condensed consolidated balance sheets.
Common stock warrant liability – The Company utilizes a binomial-lattice pricing model (the “Monte Carlo Simulation Model”) that involves a market condition simulation 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.  Increases (decreases) in the assumptions discussed above result in a directionally similar impact to the fair value of the common stock warrant liability.
Common Stock Warrant Liability Valuation Assumptions:
September 30, 2020December 31, 2019
Private Placement Common Stock Warrant Liability
Stock Price$37.94 $21.57 
Exercise Price$1.12 $1.12 
Remaining term (in years)2.543.29
Volatility73.00 %81.00 %
Risk-free interest rate0.15 %1.62 %

5. BUSINESS COMBINATIONS
OttrCare
On May 7, 2019, the Company acquired 100% of the outstanding common stock of OttrCare for total consideration of $16.1 million. OttrCare was formed in 1993 and is a leading provider of organ transplant patient tracking software. The Ottr software provides comprehensive solutions for transplant patient management and enables integration with EMR systems providing patient surveillance management tools and outcomes data to transplant centers.
The Company accounted for the transaction as a business combination using the acquisition method of accounting. Results of operations of OttrCare have been included with the Company’s results since the date of the acquisition. Acquisition-related costs of $0.6 million associated with the acquisition were expensed as incurred, and classified as part of general and administrative expenses in the condensed consolidated statement of operations.
Goodwill of $10.2 million arising from the acquisition primarily consists of synergies from integrating the Ottr software with transplant center EMR systems and the current testing solutions offered by the Company. Goodwill synergies also arise from acquired workforce know-how of transplant centers workflow. None of the goodwill is expected to be deductible for income tax purposes. All of the goodwill has been assigned to the Company’s existing operating segment.
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The following table summarizes the consideration paid for OttrCare and the provisional amounts of the assets acquired and liabilities assumed recognized at their estimated fair value at the acquisition date (in thousands):
Total
Consideration
Cash$16,037 
Accrued purchase consideration111 
Total consideration$16,148 
Recognized amounts of identifiable assets acquired and
liabilities assumed
Current assets$1,525 
Fixed assets35 
Identifiable intangible assets6,600 
Current liabilities(2,210)
Total identifiable net assets acquired5,950 
Goodwill10,198 
Total consideration$16,148 
The allocation of the purchase price to assets acquired and liabilities assumed was based on the Company’s best estimate of the fair value of such assets and liabilities as of the acquisition date.
The fair value of the acquired current liabilities as of June 30, 2019 included a preliminary deferred revenue balance of $2.3 million. During the three months ended September 30, 2019, the Company recorded an adjustment of $0.5 million to the initial valuation amount of deferred revenue, decreasing its balance to $1.8 million as of the acquisition date. This change is a result of updated assumptions and methodologies for acquired software maintenance contracts. As part of this adjustment, goodwill decreased by approximately $0.5 million.
At the acquisition date the Company estimated net deferred tax assets of approximately $0.2 million arising from temporary differences related to assets acquired and liabilities assumed. The Company estimated that OttrCare had net operating losses (“NOLs”) carryforward of approximately $6.9 million, $4.3 million of which will begin to expire in 2033, and the remaining $2.6 million will be carried forward indefinitely. A full valuation allowance of $0.2 million was recognized as of the acquisition date resulting in no impact from deferred taxes to OttrCare’s opening balance. An Internal Revenue Code Section 382 study for NOLs was finalized during the third quarter of 2019 and deferred taxes acquired are finalized as of December 31, 2019.
The following table summarizes the fair values of the intangible assets acquired as of the acquisition date ($ in thousands):
Estimated Fair ValueEstimated Useful Lives (Years)
Customer relationships$4,200 15
Developed technology2,300 10
Trademark100 2
Total$6,600 
Customer relationships acquired by the Company represent the fair value of future projected revenue that is expected to be derived from sales of OttrCare’s products to existing customers. The customer relationships’ fair value has been estimated utilizing a multi-period excess earnings method under the income approach, which reflects the present value of the projected cash flows that are expected to be generated by the customer relationships, less charges representing the contribution of other assets to those cash flows that use projected cash flows with and without the intangible asset in place. The economic useful life was determined based on the distribution of the present value of the cash flows attributable to the intangible asset.
The acquired developed technology represents the fair value of OttrCare’s proprietary software. The trademark acquired consists primarily of the OttrCare brand and markings. The fair value of both the developed technology and the trademark were determined using the relief-from-royalty method under the income approach. This method considers the value of the asset to be the value of the royalty payments from which the Company is relieved of due to its ownership of the asset. The royalty rates of 15.0% and 1.0% were used to estimate the fair value of the developed technology and the trademark, respectively.
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The Company utilized a discount rate of 14.5% in estimating the fair value of these three intangible assets. Unaudited supplemental pro forma information is not disclosed because it is considered immaterial.
XynManagement
On August 26, 2019, the Company acquired 100% of the outstanding common stock of XynManagement for total cash consideration of $2.0 million. As a result of the acquisition, the Company recognized contingent consideration of $1.4 million, including liability and equity components, goodwill of $1.7 million and intangible assets of $2.1 million. Goodwill synergies arise from acquired workforce know-how of transplant centers workflow. The goodwill for this acquisition is not deductible for income tax purposes. The contingent consideration relates to potential future cash payments upon reaching specified revenue and non-financial targets.
6. GOODWILL AND INTANGIBLE ASSETS
Goodwill
Goodwill is recorded when the purchase price of an acquisition exceeds the fair value of the net tangible and identified intangible assets acquired.
Goodwill is tested annually for impairment at the reporting unit level during the fourth quarter or earlier upon the occurrence of certain events or substantive changes in circumstances. There were no indicators of impairment in the three and nine months ended September 30, 2020. The balance of the Company's goodwill as of September 30, 2020 was $23.9 million.
Intangible Assets
The following tables present details of the Company’s intangible assets as of September 30, 2020 ($ in thousands):
September 30, 2020
Gross Carrying AmountAccumulated AmortizationForeign Currency TranslationNet Carrying AmountWeighted Average Remaining
Useful Life
(In Years)
Intangible assets with finite lives:
Acquired and developed technology$31,209 $(8,323)$(1,573)$21,313 9.4
Customer relationships18,168 (4,349)(1,239)12,580 11.1
Commercialization rights8,079 (837) 7,242 8.9
Trademarks and tradenames2,360 (755)(160)1,445 10.1
Total intangible assets with finite lives$59,816 $(14,264)$(2,972)$42,580 
Acquired in-process technology1,250 — — 1,250 
Total intangible assets$61,066 $(14,264)$(2,972)$43,830 
The following table presents details of the Company’s intangible assets as of December 31, 2019 ($ in thousands):
December 31, 2019
Gross Carrying AmountAccumulated AmortizationForeign Currency TranslationNet Carrying AmountWeighted Average Remaining
Useful Life
(In Years)
Intangible assets with finite lives: