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MarketScreener Homepage  >  Equities  >  Nasdaq  >  CareDx, Inc    CDNA

CAREDX, INC

(CDNA)
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CAREDX : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

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10/31/2019 | 05:32pm EDT
The following discussion and analysis of our financial condition and results of
operations should be read together with the unaudited condensed consolidated
financial statements and related notes included elsewhere in Item 1 of Part I of
this Quarterly Report on Form 10-Q and with the audited consolidated financial
statements and the related notes included in our Annual Report on Form 10-K for
the fiscal year ended December 31, 2018, filed with the Securities and Exchange
Commission, or the SEC, on March 6, 2019.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. All statements
contained in this Quarterly Report on Form 10-Q other than statements of
historical fact, including statements regarding our future results of operations
and financial position, our business strategy and plans, and our objectives for
future operations, are forward-looking statements. The words "believe," "may,"
"will," "potentially," "estimate," "continue," "anticipate," "intend," "could,"
"would," "project," "plan," "expect" and the negative and plural forms of these
words and similar expressions are intended to identify forward-looking
statements.
These forward-looking statements may include, but are not limited to, statements
concerning the following:
•our ability to generate revenue from sales of AlloMap Heart, AlloSure Kidney
and future testing services, if any, and our ability to increase the commercial
success of these testing services;
•our ability to obtain, maintain and expand reimbursement coverage from payers
for AlloMap Heart, AlloSure Kidney and other future testing services, including
AlloMap Kidney, AlloSure Heart, AlloSure Lung and KidneyCare iBox, if any;
•our ability to generate revenue from sales of Olerup SSP, Olerup SBT, QTYPE,
TruSight HLA and future products, if any, and our ability to increase the
commercial success of these products;
•our ability to generate revenue from the license and commercialization
agreement, or the License Agreement with Illumina, Inc., or Illumina;
•our ability to generate revenue from the license and commercialization
agreement, or the Cibiltech Agreement, with Cibiltech SAS, or Cibiltech;
•our plans and ability to develop and commercialize new solutions for the
surveillance of heart, kidney and other solid organ transplant recipients;
•our plans and ability to continue updating our products, services and
technology to maintain our leading position in transplantations;
•the outcome or success of our clinical trial collaborations and registry
studies; including Kidney Allograft Outcomes AlloSure Registry, or K-OAR, the
Surveillance HeartCare Outcomes Registry, or SHORE, and the Outcomes of
KidneyCare on Renal Allografts registry study, or OKRA;
•the favorable review of our testing services and product offerings, and our
future solutions, if any, in peer-reviewed publications;
•our ability to obtain additional financing on terms favorable to us, or at all;
•our anticipated cash needs and our anticipated uses of our funds, including our
estimates regarding operating expenses and capital requirements;
•our ability to integrate our business with the business of Ottr Complete
Transplant Management, or Ottr, and to realize the anticipated benefits of the
acquisition;
•our ability to integrate our business with the business of XynManagement, Inc.,
or XynManagement, and to realize the anticipated benefits of the acquisition;
•anticipated trends and challenges in our business and the markets in which we
operate;
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•our dependence on certain of our suppliers, service providers and other
distribution partners;
•disruptions to our business, including disruptions at our laboratories and
manufacturing facilities;
•our ability to retain key members of our management team;
•our ability to make successful acquisitions or investments and to manage the
integration of such acquisitions or investments;
•our ability to expand internationally;
•our compliance with federal, state and foreign regulatory requirements;
•our ability to protect and enforce our intellectual property rights, our
strategies regarding filing additional patent applications to strengthen our
intellectual property rights and our ability to defend against intellectual
property claims that may be brought against us;
•our ability to successfully assert or defend against, or settle, any litigation
brought by or against us or other legal matters or disputes; and
•our ability to comply with the requirements of being a public company.
These forward-looking statements are subject to a number of risks, uncertainties
and assumptions, including those described in the section entitled "Risk
Factors" in this Quarterly Report on Form 10-Q and in our Annual Report on Form
10-K for the fiscal year ended December 31, 2018, filed with the SEC on March 6,
2019. Moreover, we operate in a very competitive and rapidly changing
environment, and new risks emerge from time to time. It is not possible for us
to predict all risks, nor can we assess the impact of all factors on our
business or the extent to which any factor, or combination of factors, may cause
actual results to differ materially and adversely from those contained in any
forward-looking statements we may make. In light of these risks, uncertainties
and assumptions, the forward-looking events and circumstances discussed in this
report may not occur and actual results could differ materially and adversely
from those anticipated or implied in the forward-looking statements.
You should not rely upon forward-looking statements as predictions of future
events. Although we believe that the expectations reflected in the
forward-looking statements are reasonable, we cannot guarantee that the future
results, levels of activity, performance or events and circumstances reflected
in the forward-looking statements will be achieved or occur. Moreover, neither
we nor any other person assumes responsibility for the accuracy and completeness
of the forward-looking statements. Except as required by law, we undertake no
obligation to update publicly any forward-looking statements for any reason
after the date of this report to conform these statements to actual results or
to changes in our expectations.
You should read this report and the documents that we reference in this report
and have filed with the SEC as exhibits with the understanding that our actual
future results, levels of activity, performance and events and circumstances may
be materially different from what we expect. We qualify all forward-looking
statements by these cautionary statements.
Overview and Recent Highlights
We are a global transplant diagnostics company with product and service
offerings along the pre- and post-transplant continuum. We focus on discovery,
development and commercialization of clinically differentiated, high-value
diagnostic solutions for transplant patients. We also offer 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 Heart
Our first commercialized testing solution, the AlloMap Heart transplant
molecular test, or AlloMap Heart, 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, we have sought to expand the adoption and utilization of
our AlloMap Heart solution through ongoing studies to substantiate the clinical
utility and actionability of AlloMap Heart, secure positive reimbursement
decisions for AlloMap Heart from large private and public payers, develop and
enhance our 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. We believe the use of AlloMap Heart, in conjunction with other
clinical indicators, can help healthcare providers and their patients better
manage long-term care following a heart transplant. In particular, we believe
AlloMap Heart can improve patient care by helping healthcare providers avoid the
use of unnecessary, invasive surveillance biopsies and determine the appropriate
dosage levels of immunosuppressants. In 2008, AlloMap Heart received 510(k)
clearance from the U.S. Food and Drug Administration for
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marketing and sale as a test to aid in the identification of recipients with a
low probability of moderate or severe acute cellular rejection.
AlloMap Heart received a positive coverage decision for reimbursement from
Medicare effective January 1, 2006. The Medicare reimbursement rate for AlloMap
Heart was set as $3,240 on January 1, 2018, which remains applicable for
2019. AlloMap Heart has also received positive coverage decisions for
reimbursement from many of the largest U.S. private payers, including Aetna,
Anthem, Cigna, Health Care Services Corporation (HCSC), Humana, Kaiser
Foundation Health Plan, Inc., TRICARE and UnitedHealthcare.
We have also successfully completed a number of landmark clinical trials in the
transplant field demonstrating the clinical utility of AlloMap Heart for
surveillance of heart transplant recipients. We initially established the
analytical and clinical validity of AlloMap Heart on the basis of our Cardiac
Allograft Rejection Gene Expression Observational (Deng, M. et al., Am J
Transplantation 2006), or CARGO, study, which was published in the American
Journal of Transplantation. A subsequent clinical utility trial, Invasive
Monitoring Attenuation through Gene Expression (Pham MX et al., N. Eng. J. Med.,
2010), or IMAGE, published in The New England Journal of Medicine, demonstrated
that clinical outcomes in recipients managed with AlloMap Heart surveillance
were equivalent (non-inferior) to outcomes in recipients managed with
biopsies. The results of our clinical trials have also been presented at major
medical society congresses. AlloMap Heart is now recommended as part of the
International Society for Heart and Lung Transplantation, or ISHLT, guidelines.
During the first nine months of 2019, there were 13,578 AlloMap Heart patient
test results provided to 121 of the approximately 136 heart transplant
management centers in the United States.
AlloSure Kidney
AlloSure Kidney, our transplant surveillance solution which was commercially
launched in October 2017, applies proprietary next generation sequencing
technology to measure donor-derived cell-free DNA, or dd-cfDNA, in the blood
stream emanating from the donor kidney. We believe AlloSure Kidney may help
clinicians determine rejection-specific activity manifested as cell damage in
the transplanted heart, kidney, or other solid organ, irrespective of the type
of organ transplanted. We also believe the use of AlloSure Kidney, in
conjunction with other clinical indicators, can help healthcare providers and
their patients better manage long-term care following a kidney transplant. In
particular, we believe AlloSure Kidney can improve patient care by helping
healthcare providers to reduce the use of invasive biopsies and determine the
appropriate dosage levels of immunosuppressants. Effective October 9, 2017,
AlloSure Kidney became available for commercial testing with Medicare coverage
and reimbursement. The Medicare reimbursement rate for AlloSure Kidney is
$2,841. AlloSure Kidney has also received payment from private payers on a
case-by-case basis, but no positive coverage decisions have been made to the
date of this filing.
Prior to the commercialization of AlloSure Kidney, we generated a strong body of
clinical evidence. In late 2015, we announced the completion of analytical
validation of AlloSure Kidney. A report describing the analytical validation of
AlloSure Kidney including clinical validation detailing the quality, reality and
consistency of analytical results information for heart transplant, appeared in
the November 2016 issue of The Journal of Molecular Diagnostics. The Circulating
Donor-Derived Cell-Free DNA in Blood for Diagnosing Acute Rejection in Kidney
Transplant Recipients, or DART, trial, sponsored by us, was conducted between
April 2015 and January 2018. DART is a 14 center observational study of kidney
transplant recipients where blood specimens are drawn periodically after
transplant during follow up visits and also after treatment for acute
rejection. By the time of completion of the first analysis, 384 patients were
followed in DART for up to 24 months. The results demonstrated that increased
levels of dd-cfDNA, determined by the AlloSure Kidney assay, discriminated
active rejection of a kidney transplant more effectively than serum creatinine
values. In collaboration with clinical investigators, we published these
findings in the scientific peer-reviewed Journal of the American Society of
Nephrology and the Journal Applied Laboratory Medicine in March 2017. A total of
2,109 patient visits had been accrued in DART by January 2019. We analyzed this
data to report on additional findings from this dataset at the American
Transplant Congress ("ATC") 2019 and intend to continue to report into the
future.
In 2018, we initiated the Kidney Allograft Outcomes AlloSure Registry, or K-OAR
study, to develop further data on the clinical utility of AlloSure Kidney for
surveillance of kidney transplant recipients. As of September 30, 2019, 55
centers have been initiated as K-OAR study sites.
During the first nine months of 2019, there were 21,589 AlloSure Kidney patient
test results provided. In the third quarter of 2019, AlloSure Kidney was ordered
by 124 kidney transplant centers in the United States.

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HeartCare
In September 2018, we initiated the SHORE study. 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. An
approach to surveillance using HeartCare provides information from two
complementary measures: (i) AlloMap Heart - a measure of immune activity, and
(ii) AlloSure Heart - monitors graft injury. HeartCare provides robust
information about distinct biological processes, such as immune quiescence,
active injury, Acute Cellular Rejection, or ACR, and Antibody Mediated
Rejection, or AMR. We have not yet made any applications to private payers for
reimbursement coverage of AlloSure Heart except for Medicare.
KidneyCare
In September 2019, we announced the enrollment of the first patient in the OKRA
study, which is an extension of the K-OAR study. 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 in one surveillance
solution. We have not yet made any applications to payers for reimbursement
coverage of AlloMap Kidney or KidneyCare iBox.
AlloSure Lung
In February 2019, AlloSure Lung became available for lung transplant patients
through a compassionate use program while the test is undergoing further
studies. AlloSure Lung applies proprietary next generation sequencing, or NGS,
technology to measure dd-cfDNA in the blood stream emanating from the donor lung
to monitor graft injury. We have not yet made any applications to payers for
reimbursement coverage of AlloSure Lung.
Products
We develop, manufacture, market and sell products that increase the chance of
successful transplants by facilitating a better match between a donor and a
recipient of stem cells and organs.
QTYPE enables speed and precision in Human Leukocyte Antigen, or 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. QTYPE
received CE mark certification on April 10, 2018. Olerup SSP is used to type HLA
alleles based on the sequence specific primer, or SSP technology. Olerup SBT is
a complete product range for sequence-based typing of HLA alleles.
On May 4, 2018, we entered into the License Agreement with Illumina, which
provides us with worldwide distribution, development and commercialization
rights to Illumina's NGS product line for use in transplantation diagnostic
testing.
As a result, on June 1, 2018, we became the exclusive worldwide distributor of
Illumina's TruSight HLA product line. TruSight HLA is a high resolution solution
that uses NGS methodology. In addition, we were granted the exclusive right to
develop and commercialize other NGS product lines. These products include:
AlloSeq Tx, a high-resolution HLA typing solution, AlloSeq cfDNA, our
surveillance solution designed to measure dd-cfDNA in blood to detect active
rejection in transplant recipients, and AlloSeq HCT, a NGS solution for
chimerism testing for stem cell transplant recipients.
Digital
On May 7, 2019, we acquired 100% of the outstanding common stock of Ottr for
total consideration of $16.1 million. Ottr was formed in 1993 and is a leading
provider of transplant patient tracking software, or the Ottr software.
The Ottr software provides comprehensive solutions for transplant patient
management, and is currently used in over 60 leading transplant centers in the
U.S. Ottr software enable integration with electronic medical records, or EMR
systems, including Cerner and Epic, providing patient surveillance management
tools and outcomes data to transplant centers.
On August 26, 2019, we acquired 100% of the outstanding common stock of
XynManagement with a combination of cash consideration of $2.0 million paid
upfront and contingent consideration with a fair value of $1.4 million.
XynManagement provides two unique solutions, XynQAPI software, or XynQAPI, and
Waitlist Management. XynQAPI simplifies transplant quality tracking and
Scientific Registry of Transplant Recipients, or 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. XynManagement products will be added to the CareDx Digital
Solutions portfolio and be integrated with current offerings, including Ottr
software and patient care managers.
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For additional information regarding the XynManagement acquisition, refer to
Note 5, Business Combinations, of the notes to the unaudited condensed
consolidated financial statements included elsewhere in this Quarterly Report on
Form 10-Q.
Recent Highlights
•Achieved total revenue of $33.8 million for the three months ended September
30, 2019, increasing 60% year-over-year
•Provided 8,524 AlloSure Kidney patient results for 6,597 kidney transplant
patients
•Provided 4,726 AlloMap Heart patient results, increasing 16% year-over-year
•Enrolled the first patient in OKRA, a new landmark registry study
•Launched AlloSeq Tx 17 and AlloSeq cfDNA globally
•Generated GAAP net loss of $1.8 million, non-GAAP net income of $0.9 million,
and positive adjusted EBITDA of $0.8 million

Financial Operations Overview
Revenue
We derive our revenue from testing services, products sales and digital and
other revenues. Revenue is recorded considering a five-step revenue recognition
model that includes identifying the contract with a customer, identifying the
performance obligations in the contract, determining the transaction price,
allocating the transaction price to the performance obligations and recognizing
revenue when, or as, an entity satisfies a performance obligation.
Testing Services Revenue
Our testing services revenue is derived from AlloMap Heart and AlloSure Kidney,
which represented 83% of our total revenues for each of the three and nine
months ended September 30, 2019, and 80% and 78% of our total revenues for the
three and nine months ended September 30, 2018, respectively. Our testing
services revenue depends on a number of factors, including (i) the number of
tests performed; (ii) establishment of coverage policies by third-party insurers
and government payers; (iii) our ability to collect from payers with whom we do
not have positive coverage determination, which often requires that we pursue a
case-by-case appeals process; (iv) our ability to recognize revenues on tests
billed prior to the establishment of reimbursement policies, contracts or
payment histories; (v) our ability to expand into markets outside of the United
States; and (vi) how quickly we can successfully commercialize new product
offerings.
We currently market testing services to healthcare providers through our direct
sales force that targets transplant centers and their physicians, coordinators
and nurse practitioners. The healthcare providers that order the tests and on
whose behalf we provide our testing services are generally not responsible for
the payment of these services. Amounts received by us vary from payer to payer
based on each payer's internal coverage practices and policies. We generally
bill third-party payers upon delivery of a test result report to the ordering
physician. As such, we take the assignment of benefits and the risk of
collection from the third-party payer and individual patients.
During the nine months ended September 30, 2019, we performed 13,578 commercial
AlloMap Heart tests and 21,589 AlloSure Kidney tests that are included in our
estimated testing services revenue. All tests for both AlloMap Heart and
AlloSure Kidney were performed from our Brisbane, California laboratory.
Product Revenue
Our product revenue is derived primarily from sales of Olerup SSP, QTYPE, Olerup
SBT and TruSight products. Product revenue represented 12% and 14% of total
revenue for the three and nine months ended September 30, 2019, respectively,
and 20% and 21% of our total revenues for the three and nine months ended
September 30, 2018, respectively. We recognize product revenue from the sale of
products to end-users, distributors and strategic partners when all revenue
recognition criteria are satisfied, which is generally upon either shipping or
delivery, as per the terms of the agreement.
Digital and Other Revenue
Our digital and other revenue is mainly derived from sales of our Ottr software
and XynQAPI licenses and services and other licensing agreements. Digital and
other revenue represented 4% and 3% of total revenue for the three and nine
months ended
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September 30, 2019, respectively, and 1% of our total revenues for each of the
three and nine months ended September 30, 2018.
Critical Accounting Policies and Significant Judgments and Estimates
Our management's discussion and analysis of our financial condition and results
of operations is based on our unaudited condensed consolidated financial
statements, which have been prepared in accordance with United States generally
accepted accounting principles. The preparation of these unaudited condensed
consolidated financial statements requires us to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the unaudited condensed
consolidated financial statements, as well as the reported revenue generated and
expenses incurred during the reporting periods. Our estimates are based on our
historical experience and on various other factors that we believe are
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying value of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
We believe that the following critical accounting policies reflect the more
significant estimates and assumptions used in the preparation of our financial
statements. We believe the following critical accounting policies are affected
by significant judgments and estimates used in the preparation of our unaudited
condensed consolidated financial statements:
•Revenue recognition;
•Business combination;
•Acquired intangible assets;
•Impairment of goodwill, intangible assets and other long-lived assets;
•Common stock warrant liability; and
•Derivative liability.
There were no material changes in the matters for which we make critical
accounting estimates in the preparation of our unaudited condensed consolidated
financial statements during the three and nine months ended September 30, 2019
as compared to those disclosed in Management's Discussion and Analysis of
Financial Condition and Results of Operations included in our annual report on
Form 10-K for the year ended December 31, 2018, except that there is no
derivative liability outstanding as of December 31, 2018 and September 30, 2019
and the determination of the leases incremental borrowing rate estimate as
discussed in Note 2, Summary of Significant Accounting Policies, in the
unaudited condensed consolidated financial statements included elsewhere in this
Quarterly Report on Form 10-Q.
Recently Issued Accounting Standards
Refer to Note 2, Summary of Significant Accounting Policies - Recent Accounting
Pronouncements, of the Notes to the unaudited condensed consolidated financial
statements included elsewhere in this Quarterly Report on Form 10-Q for a
description of recently issued accounting pronouncements, including the expected
dates of adoption and estimated effects on our results of operations, financial
position and cash flows.
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Results of Operations
Comparison of the Three Months Ended September 30, 2019 and 2018
(In thousands)
                                                             Three Months Ended September 30,
                                                                  2019                  2018             Change
Revenue:
Testing services revenue                                   $       28,226$  16,847$ 11,379
Product revenue                                                     4,200               4,223               (23)
Digital and other revenue                                           1,385                 114             1,271
Total revenue                                                      33,811              21,184            12,627
Cost of revenue                                                    11,494               8,887             2,607
Gross profit                                                       22,317              12,297            10,020
Operating expenses:
Research and development                                            8,521               3,868             4,653
Sales and marketing                                                11,058               5,971             5,087
General and administrative                                          9,485               5,177             4,308
Total operating expenses                                           29,064              15,016            14,048
Loss from operations                                               (6,747)             (2,719)           (4,028)
Other income (expense):
Interest income (expense), net                                         37                (408)              445

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

                                  4,346             (17,093)           21,439
Other expense, net                                                   (398)                (40)             (358)
Total other income (expense)                                        3,985             (17,541)           21,526
Loss before income taxes                                           (2,762)            (20,260)           17,498
Income tax benefit                                                    949                 290               659
Net loss                                                           (1,813)            (19,970)           18,157
Net loss attributable to CareDx, Inc.                      $       (1,813)

$ (19,970)$ 18,157



Testing Services Revenue
Testing services revenue increased by $11.4 million, or 68%, for the three
months ended September 30, 2019 as compared to the same period in 2018. This
increase is primarily due to the 8,524 AlloSure Kidney patient results provided
in the three months ended September 30, 2019, compared to 3,708 in the same
period in 2018. Additionally, AlloMap Heart patient results increased to 4,726
in the three months ended September 30, 2019, compared to 4,080 in the same
period in 2018.
Product Revenue
Product revenue remained constant at $4.2 million for the three months ended
September 30, 2019, compared to the same period in 2018. This is a result of an
increase in sales of TruSight HLA and QTYPE products, offset by decreased sales
of Olerup SSP and Olerup SBT products.
Digital and Other Revenue
Digital and other revenue increased by $1.3 million for the three months ended
September 30, 2019 compared to the same period in 2018, primarily due to the
acquisition of Ottr in May 2019 and XynManagement in August 2019.
Cost of Revenue and Gross Profit
Cost of revenue increased by approximately $2.6 million, or 29%, for the three
months ended September 30, 2019, compared to the same period in 2018, primarily
due an increase in testing volume and the acquisitions of Ottr in May 2019 and
XynManagement in August 2019.
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Gross profit increased by $10.0 million, or 81%, for the three months ended
September 30, 2019, compared to the same period in 2018, primarily due to an
increase in revenue and an improvement in gross profit margins resulting from
efficiencies in testing services laboratory operations.
Research and Development
Research and development expenses increased by $4.7 million, or 120%, for the
three months ended September 30, 2019, compared to the same period in 2018,
primarily due to a $3.9 million increase in personnel-related costs, a $0.6
million increase in consulting and professional fees and a $0.5 million increase
in clinical studies, partially offset by lower consumable expenditures of $0.8
million.
Sales and Marketing
Sales and marketing expenses increased by approximately $5.1 million, or 85%,
for the three months ended September 30, 2019, compared to the same period in
2018, primarily due to a $2.4 million increase in personnel-related costs, a
$0.9 million increase in stock-based compensation expense, a $0.8 million
increase in tradeshows, sponsorships and other marketing materials and a $0.5
million increase in travel costs.
General and Administrative
General and administrative expenses increased by $4.3 million, or 83%, for the
three months ended September 30, 2019, compared to the same period in 2018. This
increase was primarily due to a $2.7 million increase in stock-based
compensation, a $0.7 million increase in consulting services for Sarbanes-Oxley
Act compliance and other matters, a $0.6 million increase in personnel-related
costs and a $0.2 million increase in legal fees.
Change in Estimated Fair Value of Common Stock Warrant Liability and Derivative
Liability
The change in estimated fair value of common stock warrants and derivative
liability changed from an expense of $17.1 million for the three months ended
September 30, 2018 to income of $4.3 million for the three months ended
September 30, 2019, resulting in a net change of $21.4 million, or 125%.

The $4.3 million income in the three months ended September 30, 2019 consisted
of a fair market value adjustment for outstanding warrants. This remeasurement
gain reflects the decrease in the price of shares of our common stock, and the
reduction of the remaining expected term of outstanding warrants during the
three months ended September 30, 2019.

The $17.1 million expense in the three months ended September 30, 2018 consisted
of a $10.2 million charge related to warrants exercised during the period and a
$6.9 million fair market value adjustment for outstanding warrants. These
remeasurement charges reflect the increase in the price of shares of our common
stock during the three months ended September 30, 2018.
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Comparison of Nine Months Ended September 30, 2019 and 2018
(In thousands)
                                                                  Nine Months Ended
                                                                    September 30,
                                                               2019               2018             Change
Revenue:
Testing services revenue                                   $  75,421$  41,448$ 33,973
Product revenue                                               13,226             11,080             2,146
Digital and other revenue                                      2,600                532             2,068
Total revenue                                                 91,247             53,060            38,187
Cost of revenue                                               32,739             22,478            10,261
Gross profit                                                  58,508             30,582            27,926
Operating expenses:
Research and development                                      21,765             10,732            11,033
Sales and marketing                                           28,627             15,916            12,711
General and administrative                                    27,103             16,080            11,023

Change in estimated fair value of contingent consideration -

       1,017            (1,017)
Total operating expenses                                      77,495             43,745            33,750
Loss from operations                                         (18,987)           (13,163)           (5,824)
Other income (expense):
Interest income (expense), net                                   679             (3,527)            4,206
Debt extinguishment expenses                                       -             (2,806)            2,806

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

                               (14)           (24,540)           24,526
Other expense, net                                              (644)               (85)             (559)
Total other income (expense)                                      21            (30,958)           30,979
Loss before income taxes                                     (18,966)           (44,121)           25,155
Income tax benefit                                             1,775              1,095               680
Net loss                                                     (17,191)           (43,026)           25,835
Net loss attributable to noncontrolling interest                   -                (25)               25
Net loss attributable to CareDx, Inc.                      $ (17,191)

$ (43,001)$ 25,810



Testing Services Revenue
Testing services revenue increased by $34.0 million, or 82%, for the nine months
ended September 30, 2019, compared to the same period in 2018. This increase is
mainly due to an increase in volume of AlloSure Kidney patient results, with
21,589 AlloSure Kidney patient results provided in the nine months ended
September 30, 2019, compared to 7,059 in the same period in 2018. Additionally,
AlloMap Heart patient results increased to 13,578 in the nine months ended
September 30, 2019, compared to 12,059 in the same period in 2018.
Product Revenue
Product revenue increased by $2.1 million, or 19%, for the nine months ended
September 30, 2019, compared to the same period in 2018, primarily due to nine
months of sales of TruSight HLA products for the nine months ended September 30,
2019 compared to four months of sales of TruSight HLA products for the nine
months ended September 30, 2018 following the License Agreement with Illumina
which was signed in May 2018. QTYPE sales also increased, partially offset by
decreased sales of Olerup SSP and Olerup SBT products.
Digital and Other Revenue
Digital and other revenue increased by $2.1 million for the nine months ended
September 30, 2019, compared to the same period in 2018, due to the acquisitions
of Ottr in May 2019 and XynManagement in August 2019, resulting in $2.5 million
of digital revenue, partially offset by a $0.4 million reduction of other
revenue.
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Cost of Revenue and Gross Profit
Cost of revenue increased by $10.3 million, or 46%, for the nine months ended
September 30, 2019 due to an increase in the cost of testing service revenue of
$7.7 million as a result of higher testing volume, an increase in cost of
product revenue of $0.9 million due to increased product sales, and an increase
in cost of digital and other revenue of $1.6 million as a result of the
acquisitions of Ottr in May 2019 and XynManagement in August 2019.
Gross profit increased by $27.9 million, or 91%, for the nine months ended
September 30, 2019, compared to the same period in 2018, primarily due to an
increase in revenue and an improvement in gross profit margins resulting from
efficiencies in testing services laboratory operations.
Research and Development
Research and development expenses increased by $11.0 million, or 103%, for the
nine months ended September 30, 2019, compared to the same period in 2018. This
increase is due to a $9.0 million increase in personnel-related costs, a $1.6
million increase in stock-based compensation expense, a $1.1 million increase in
consulting and professional costs and a $0.7 million increase in clinical
studies, partially offset by lower consumable expenditures of $1.9 million.
Sales and Marketing
Sales and marketing expenses increased by $12.7 million, or 80%, for the nine
months ended September 30, 2019, compared to the same period in 2018, primarily
due to an increase in personnel-related costs of $5.7 million, tradeshow and
marketing costs of $2.9 million and stock-based compensation costs of $2.1
million.
General and Administrative
General and administrative expenses increased by $11.0 million, or 69%, for the
nine months ended September 30, 2019, compared to the same period in 2018. This
increase is primarily due to a $6.8 million increase in stock-based compensation
expense, a $2.5 million increase in personnel-related costs, a $1.5 million
increase in legal fees and a $1.0 million increase in consulting services for
Sarbanes-Oxley Act compliance and other matters.
Change in Estimated Fair Value of Contingent Consideration
We estimated the contingent consideration liability fair value at each period
end based on our common stock price at the end of the period and a probability
of meeting the contractual milestone related to the number of patient results by
June 2020, in accordance with the ImmuMetrix, Inc. acquisition agreement. The
contingent consideration liability was settled in the nine months ended
September 30, 2018, with the achievement of the contractual milestone of 2,500
AlloSure Kidney patient results. The $1.0 million expense reflected an increase
in our share price from January 1, 2018 to the date of the issuance of the
227,848 shares and the settlement of the liability.
Interest Income (Expense), net
For the nine months ended September 30, 2019, we recorded interest income of
$0.9 million related to interest earned by our money market accounts, offset by
a $0.2 million accretion expense.

For the nine months ended September 30, 2018, interest expense of $3.5 million
consisted of $2.4 million of interest expense and debt discount amortization
related to our convertible debt (the "JGB Debt"), $0.9 million of interest
expense and debt amortization recorded in relation to the Perceptive Credit
Agreement entered into on April 17, 2018 and $0.2 million of interest expense
recorded on the Allenex Notes, the Danske Bank Term Loan and the SSP Primers
Loan.
Debt Extinguishment Expenses
For the nine months ended September 30, 2019, there was no debt extinguishment
expense. For the nine months ended September 30, 2018, debt extinguishment
expense was $2.8 million related to a loss recorded on the conversion of the JGB
Debt, calculated as the difference between the value of the shares of common
stock issued on the days of conversion and the amount of principal debt
converted on those days, net of the allocated debt discount and derivative
liability balances.
Change in Estimated Fair Value of Common Stock Warrant Liability and Derivative
Liability
The expense for the change in estimated fair value of common stock warrants
decreased by $24.5 million, or 100%, for the nine months ended September 30,
2019, compared to the same period in 2018. The expense in the nine months ended
September 30, 2019 was $14 thousand, comprised of a $1.0 million remeasurement
charge for warrants exercised during the period and a $1.0 million remeasurement
gain related to the change in fair value of our common stock warrant liability.
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The $24.5 million expense in the nine months ended September 30, 2018 consisted
of a $18.2 million remeasurement charge for warrants exercised during the period
and a $8.9 million remeasurement charge related to the changes in fair value of
our remaining common stock warrant liability. These remeasurement charges
reflect the increase in the price of shares of our common stock during the nine
months ended September 30, 2018. These expenses were partially offset by a $2.6
million gain recorded for the changes in fair value of the JGB Debt embedded
derivative between January 1, 2018 and the conversion date of March 27, 2018.
Other Expense, net
Other expense, net increased by $0.6 million for the nine months ended September
30, 2019, compared to the same period in 2018. The increase is primarily related
to a foreign currency loss in the nine months ended September 30, 2019.
Cash Flows for the Nine Months Ended September 30, 2019 and 2018
The following table summarizes the primary sources and uses of cash for the
periods presented:
                                                                          Nine Months Ended
                                                                            September 30,
                                                                       2019               2018
                                                                           (in thousands)
Net cash (used in) provided by:
Operating activities                                               $  (1,686)$  (6,005)
Investing activities                                                 (21,237)            (6,969)
Financing activities                                                    (214)            12,956

Effect of exchange rate changes on cash, cash equivalents and restricted cash

                                                         (493)               (62)

Net decrease in cash, cash equivalents and restricted cash $ (23,630)$ (80)



Operating Activities
Net cash used in operating activities consists of net loss, adjusted for certain
noncash items in the condensed consolidated statement of operations and changes
in operating assets and liabilities.

Cash used in operating activities for the nine months ended September 30, 2019
was $1.7 million. Our net loss of $17.2 million was our primary use of cash in
operating activities and included a number of noncash items. Our noncash items
included a $17.0 million stock-based compensation expense, and a $3.8 million of
depreciation and amortization expense. Net operating assets decreased by $6.6
million.

Cash used in operating activities for the nine months ended September 30, 2018
was $6.0 million. Our net loss of $43.0 million was our primary use of cash in
operating activities and included a number of noncash items. Our noncash items
included a $24.5 million loss on the revaluation of common stock warrant and
derivative liabilities to estimated fair value, a $5.1 million stock-based
compensation expense, $3.0 million of depreciation and amortization expense,
$2.8 million loss on the conversion of debt to shares of our common stock, $2.2
million amortization expense related to the JGB Debt discount, $1.0 million
contingent consideration revaluation expense and $0.2 million of amortization
expense of inventory on fair market value adjustment. Net operating assets
decreased by $1.8 million.
Investing Activities
For the nine months ended September 30, 2019, net cash used in investing
activities was $21.2 million and consisted of $18.1 million related to the
acquisitions of Ottr and XynManagement, $1.1 million related to acquisition of
intangible assets, $1.0 million related to investment in equity securities, and
investments of $1.0 million related to additions of capital expenditures.

For the nine months ended September 30, 2018, net cash used in investing
activities was $7.0 million and consisted of $5.2 million related to the
acquisition of intangible assets per the Illumina License Agreement, $1.1
million for purchases of property and equipment and $0.7 million for the
acquisition of the Allenex minority interest.
Financing Activities
For the nine months ended September 30, 2019, net cash used in financing
activities of $0.2 million was primarily related to taxes paid related to net
share settlement of restricted stock units of $4.0 million, partially offset by
proceeds from exercise of stock options of $3.2 million and proceeds from the
issuance of common stock pursuant to our employee stock purchase plan of $0.8
million.

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For the nine months ended September 30, 2018, net cash provided by financing
activities of $13.0 million was primarily related to the $14.3 million net
proceeds from the Perceptive Credit Agreement, cash proceeds of $11.0 million
from the exercise of warrants and $0.6 million cash proceeds from the exercise
of stock options, partially offset by $11.4 million of principal payments of the
promissory notes issued to FastPartner AB and Mohammed Al Amoudi, the Danske
Term Loan and the SSP Primers Loan, $0.7 million related to the repurchase of
common stock under employee incentive plans, a $0.7 million repayment of the
Danske Credit Facility and $0.2 million related to the acquisition of Conexio
Genomics Pty Ltd.
Liquidity and Capital Resources
We have incurred significant losses and negative cash flows from operations
since our inception and had an accumulated deficit of $329.0 million at
September 30, 2019. As of September 30, 2019, we had cash and cash equivalents
of $40.9 million and no debt outstanding.
Factors Affecting Our Performance
The Number of AlloMap Heart and AlloSure Kidney Tests We Receive and Report
The growth of our testing services business is tied to the number of AlloMap
Heart and AlloSure Kidney patient samples we receive and patient results we
report. We incur costs in connection with collecting and shipping all samples
and a portion of the costs when we cannot ultimately issue a report. As a
result, the number of patient samples received largely correlates directly to
the number of patient results reported.
The Number of Diagnostic Products We Sell
The growth of our product revenues is tied to the sales of the Olerup SSP,
QTYPE, Olerup SBT and TruSight HLA product lines. The product sales
organizations are located in Stockholm, Sweden; Vienna, Austria; Fremantle,
Australia and West Chester, Pennsylvania. Products are sold directly to
customers in 14 countries. We also use distributors to sell products in
approximately 60 countries.
Continued Adoption of and Reimbursement for AlloMap Heart
AlloMap Heart test volume and the corresponding reimbursement revenue has
generally increased over time since the launch of AlloMap Heart, as Medicare
provided reimbursement and payers adopt coverage policies and fewer payers
consider AlloMap Heart to be experimental and investigational. The rate at which
our tests are covered and reimbursed has, and is expected to continue to vary by
payer. Revenue growth depends on our ability to maintain Medicare reimbursement,
achieve broader reimbursement from third party payers and to expand the number
of tests per patient and the base of healthcare providers.
The Protecting Access to Medicare Act of 2014, or PAMA, includes a substantial
new payment system for clinical laboratory tests under the Clinical Laboratory
Fee Schedule, or CLFS. Under PAMA, laboratories that receive the majority of
their Medicare revenues from payments made under the CLFS would report initially
and then on a subsequent three-year basis thereafter (or annually for advanced
diagnostic laboratory tests, or ADLTs), private payer payment rates and volumes
for their tests. The final PAMA ruling was issued June 17, 2016 indicating that
data for reporting for the new PAMA process would begin in 2017 and the new
market based rates took effect on January 1, 2018. Effective January 1, 2018,
Medicare reimburses us $3,240 for AlloMap Heart testing of Medicare
beneficiaries, an increase from the 2017 reimbursement rate of $2,841. AlloMap
Heart has also received positive coverage decisions for reimbursement from many
of the largest U.S. private payers, including Aetna, Anthem, Cigna, Health Care
Services Corporation (HCSC), Humana, Kaiser Foundation Health Plan, Inc.,
TRICARE and UnitedHealthcare.
Reimbursement for AlloSure Kidney
On September 26, 2017 we received notice that the MolDX Program developed by
Palmetto GBA had set AlloSure Kidney reimbursement at $2,841. Effective October
9, 2017, AlloSure Kidney was made available for commercial testing with Medicare
coverage and reimbursement. We believe the use of AlloSure Kidney, in
conjunction with other clinical indicators, can help healthcare providers and
their patients better manage long-term care following a kidney transplant. In
particular, we believe AlloSure Kidney can improve patient care by helping
healthcare providers to reduce the use of invasive biopsies and determine the
appropriate dosage levels of immunosuppressants.
Continued Growth of Product Sales
We develop, manufacture, market and sell 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 SSP technology. Olerup SBT is a complete product range for sequence-based
typing of HLA alleles. QTYPE enables speed and
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precision in HLA typing at a low to intermediate resolution for samples that
require a fast turn-around time and uses real-time PCR methodology. QTYPE
received CE mark certification on April 10, 2018.
In May 2018, we entered into the License Agreement with Illumina, which provides
us with worldwide distribution, development and commercialization rights to
Illumina's NGS product line for use in transplantation diagnostic testing. As a
result, from June 1, 2018, we are the exclusive worldwide distributor of
Illumina's TruSight HLA v1 and v2 product line. In addition, we were also
granted the exclusive right to develop and commercialize other NGS product lines
for use in the Field, as defined in the agreement.
Continued Growth of Software Sales
The growth of our digital revenues is tied to the successful implementation of
our Ottr and XynQAPI software businesses, as well as continued support and
maintenance of existing Ottr and XynManagement customers. The Ottr software and
XynQAPI are currently implemented in multiple locations in the U.S. The Ottr
software implementation and support teams are based in Omaha, Nebraska. XynQAPI
implementation and support teams are based in Boerne, Texas.
Development of Additional Products
We rely on sales of AlloMap Heart, AlloSure Kidney, Olerup SSP, Olerup SBT,
QTYPE, TruSight HLA and our proprietary Ottr software to generate the majority
of our revenue. Our development pipeline includes other transplant diagnostic
solutions to help clinicians and transplant centers make personalized treatment
decisions throughout a transplant patient's lifetime, including HeartCare and
KidneyCare. We expect to invest in research and development in order to develop
additional products. Our success in developing new products and services will be
important in our efforts to grow our business by expanding the potential market
for our products and diversifying our sources of revenue.
Timing of Research and Development Expenses
Our spending on research and development may vary substantially from quarter to
quarter. We also expend funds to secure clinical samples that can be used in
discovery, product development, clinical validation, utility and outcome
studies. The timing of these research and development activities is difficult to
predict. If a substantial number of clinical samples are acquired in a given
quarter or if a high-cost experiment is conducted in one quarter versus the
next, the timing of these expenses will affect our financial results. We conduct
clinical studies to validate our new products, as well as on-going clinical and
outcome studies to further the published evidence to support our commercialized
tests. Spending on research and development for both experiments and studies may
vary significantly by quarter depending on the timing of these various expenses.
Contractual Obligations
We are a smaller reporting company, as defined by Rule 12b-2 of the Securities
Exchange Act of 1934, as amended, or the Exchange Act, and are not required to
provide the information required under this item.
Off-Balance Sheet Arrangements
As of September 30, 2019, we had no off-balance sheet arrangements as defined
under Regulation S-K 303(a)(4) of the Exchange Act, and the instructions
thereto.
JOBS Act Accounting Election
We are an emerging growth company, as defined in the Jumpstart Our Business
Startups Act of 2012, or the JOBS Act. Under the JOBS Act, emerging growth
companies can delay adopting new or revised accounting standards issued
subsequent to the enactment of the JOBS Act until such time as those standards
apply to private companies. We have irrevocably elected not to avail ourselves
of this exemption from new or revised accounting standards and, therefore, we
will be subject to the same new or revised accounting standards as other public
companies that are not emerging growth companies.
Foreign Operations
The accompanying unaudited condensed consolidated balance sheets contain certain
recorded assets in foreign countries, namely Stockholm, Sweden, Vienna, Austria
and Fremantle, Australia. Although these countries are considered economically
stable and we have experienced no notable burden from foreign exchange
transactions, export duties or government regulations, unanticipated events in
foreign countries could have a material adverse effect on our operations.
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