CAREDX, INC 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 endedDecember 31, 2021 , filed with theSecurities and Exchange Commission , or theSEC , onFebruary 24, 2022 .
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," "should," "would," "project," "plan," "target," "contemplate," "predict," "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:
•the potential impact to our business, revenue, financial condition and employees, including disruptions to our testing services, laboratories, clinical trials, supply chain and operations, due to the COVID-19 global pandemic;
•our ability to generate revenue and increase the commercial success of our current and future testing services, products and patient and digital solutions;
•our ability to obtain, maintain and expand reimbursement coverage from payers for our current and other future testing services, if any;
•our plans and ability to continue updating our testing services, products and patient and digital solutions 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 Outcomes of KidneyCare™ on Renal Allografts registry study, or OKRA, and the Surveillance HeartCare Outcomes Registry, or SHORE;
•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;
•anticipated trends and challenges in our business and the markets in which we operate;
•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, 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 endedDecember 31, 2021 , filed with theSEC onFebruary 24, 2022 . Moreover, we operate in a very competitive and 29 -------------------------------------------------------------------------------- rapidly changing environment, and new risks emerge from time to time. It is not possible for our management 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 Quarterly Report on Form 10-Q and the documents that we reference in this Quarterly Report on Form 10-Q and have filed with theSEC as exhibits to this Quarterly Report on Form 10-Q 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
CareDx, Inc. , or collectively, the Company, we, us and our, 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. We offer testing services, products, and digital healthcare solutions along the pre- and post-transplant patient journey, and we are a leading provider of genomics-based information for transplant patients.
Highlights for the Three Months Ended
•Achieved total revenue of
•Provided approximately 42,600 AlloSure and AlloMap patient results in the quarter, with March being our highest ever month of testing volume for Heart and Kidney Testing Services
•Showcased scientific leadership with over 25 oral presentations and abstracts
at the
•Incorporated Tx Access into the
•Helped ensure that the transplant community receives accurate information about our tests after a jury found that Natera (Nasdaq: NTRA) made false superiority claims in its advertising, and awardedCareDx monetary damages totaling$44.9 million •Announced the availability of XenoSure™ and XenoMap™, the world's first surveillance solutions for investigational use in xenotransplantation research and post-xenotransplant clinical monitoring
Testing Services
Kidney
AlloSure Kidney, our transplant surveillance solution, was commercially launched inOctober 2017 and is our donor-derived cell-free DNA, or dd-cfDNA offering built on a next generation sequencing, or NGS, platform. In transplantation, more than 100 papers from over 50 studies globally have shown the value of dd-cfDNA in the management of solid organ transplantation. AlloSure Kidney is able to discriminate dd-cfDNA from recipient-cell-free DNA, targeting polymorphisms between donor and recipient. This SNP approach across all the somatic chromosomes is specifically designed for transplantation, allowing a scalable, high-quality test to differentiate dd-cfDNA. AlloSure Kidney has received positive coverage decisions for reimbursement from Medicare. The Medicare reimbursement rate for AlloSure Kidney is$2,841 . AlloSure Kidney has received positive coverage decisions from several commercial payers, and is reimbursed by other private payers on a case-by-case basis. Multiple studies have demonstrated that significant allograft injury can occur in the absence of changes in serum creatinine. Thus, clinicians have limited ability to detect injury early and intervene to prevent long-term damage using this marker. While histologic analysis of the allograft biopsy specimen remains the standard method used to assess injury and differentiate rejection from other injury in kidney transplants, as an invasive test with complications, repetitive biopsies are not well tolerated. 30 -------------------------------------------------------------------------------- AlloSure Kidney provides a non-invasive test, assessing allograft injury that enables more frequent, quantitative and safer assessment of allograft rejection and injury status. Beyond allograft rejection, the assessment of molecular inflammation has shown further utility in the assessment of proteinuria, the formation of De Novo donor specific antibodies, or DSAs, and as a surrogate predictive measure of estimated glomerular filtration rate, or eGFR, decline. Monitoring of graft injury through AlloSure Kidney allows clinicians to optimize allograft biopsies, identify allograft injury and guide immunosuppression management more accurately. Since the analytical validation paper in theJournal of Molecular Diagnostics in 2016 before the commercial launch of AlloSure Kidney, there has been an increasing body of evidence supporting the use of AlloSure Kidney dd-cfDNA in the assessment and surveillance of kidney transplants. Bloom et al evaluated 102 kidney recipients and demonstrated that dd-cfDNA levels could discriminate accurately and non-invasively distinguish rejection from other types of graft injury. In contrast, serum creatinine has area under the curve of 50%, showing no significant difference between patients with and without rejection. Multiple publications and abstracts have shown AlloSure Kidney's value in the management of BK viremia, as well as numerous pathologies that cause molecular inflammation and injury such as DSAs and eGFR decline. Most recently its utility in the assessment of T-cell mediated rejection (TCMR) 1A and borderline rejection was published in theAmerican Journal of Transplant , or AJT, and the outcomes of 1,000 patients was published inKidney International .
The prospective multicenter trial, the K-OAR study, has enrolled over 1,700 patients, with plans to survey patients with AlloSure Kidney for 3 years and provide further clinical utility of AlloSure Kidney in the surveillance of kidney transplant recipients.
KidneyCare
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 iBox in one surveillance solution. We have not yet made any applications to private payers for reimbursement coverage of AlloMap Kidney or iBox.
In
Heart
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 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, can improve patient care by helping healthcare providers avoid the use of unnecessary, invasive surveillance biopsies and may help to determine the appropriate dosage levels of immunosuppressants. In 2008, AlloMap Heart received 510(k) clearance from theU.S. Food and Drug Administration for marketing and sale as a test to aid in the identification of heart transplant recipients, who have a low probability of moderate/severe acute cellular rejection at the time of testing, in conjunction with standard clinical assessment.
AlloMap Heart has been a covered service for Medicare beneficiaries since
AlloMap Heart has also received positive coverage decisions for reimbursement
from many of the largest
InOctober 2020 , we received a final Palmetto MolDx Medicare coverage decision for AlloSure Heart. InNovember 2020 ,Noridian Healthcare Solutions , our Medicare Administrative Contractor, issued a parallel coverage policy granting coverage when used in conjunction with AlloMap Heart, which became effective inDecember 2020 . The Medicare reimbursement rate for AlloSure Heart is currently$2,753 . AlloSure Heart has received positive coverage decisions from several commercial payers. We have also successfully completed several 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 based on our Cardiac Allograft Rejection Gene Expression Observational (Deng, M. et al., Am J Transplantation 2006) study, which was published in the AJT. A subsequent clinical utility trial, Invasive Monitoring Attenuation through Gene Expression (Pham MX et al.,N. Eng . J. Med., 2010), published inThe New England Journal of Medicine , demonstrated that clinical outcomes in recipients managed with AlloMap Heart surveillance were equivalent (non- 31 -------------------------------------------------------------------------------- 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 ISHLT (International Society for Heart and Lung Transplantation ) guidelines.
HeartCare
HeartCare includes 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 activation, and (ii) AlloSure Heart - a measure of graft injury. Clinical validation data from the Donor-Derived Cell-Free DNA-Outcomes AlloMap Registry (NCT02178943), or D-OAR, was published in the AJT in 2019. D-OAR was an observational, prospective, multicenter study to characterize the AlloSure Heart dd-cfDNA in a routine, clinical surveillance setting with heart transplant recipients. The D-OAR study was designed to validate that plasma levels of AlloSure Heart dd-cfDNA can discriminate acute rejection from no rejection, as determined by endomyocardial biopsy criteria. HeartCare provides robust information about distinct biological processes, such as immune quiescence, active injury, acute cellular rejection and antibody mediated rejection. InSeptember 2018 , we initiated the SHORE study. SHORE is a prospective, multi-center, observational, registry of patients receiving HeartCare for surveillance. Patients enrolled in SHORE will be followed for 5 years with collection of clinical data and assessment of 5-year outcomes.
Lung
InFebruary 2019 , AlloSure Lung became available for lung transplant patients through a compassionate use program while the test is undergoing further studies. One of these studies, launched inApril 2020 , is the ALARM study, or AlloSure Lung Allograft Remote Monitoring, withJohns Hopkins University , where the impact of AlloSure Lung combined with RemoTraC will be measured. AlloSure Lung applies proprietary NGS technology to measure dd-cfDNA from the donor lung in the recipient bloodstream to monitor graft injury. InJune 2020 , we submitted an application to the Palmetto MolDx Technology Assessment program seeking coverage and reimbursement for AlloSure Lung. InOctober 2021 , we launched AlloSure Lung as part of the CHEST 2021 Annual Meeting. We have gained early adoption with some commercial payers.
Cellular Therapy
InApril 2020 , we initiated a 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. AlloCell is being commercialized through research agreements with biopharma companies developing cell therapies. In 2021, we executed multiple additional agreements with biopharma therapeutics companies to use AlloCell in research and clinical studies. InJuly 2021 , we launched the Assessing Chimerism and Relapse ofBone marrow/ HCT transplant using AlloHeme Testing, or ACROBAT Study. The ACROBAT Study is a prospective, multicenter, observational cohort study to evaluate the use of AlloHeme, a microchimerism NGS tool to predict post-transplant relapse in patients with allogeneic hematopoietic cell transplants, or HCT.
Products
We develop, manufacture, market and sell products that increase the chance of successful transplants by facilitating a better match between a solid organ or stem cell donor and a recipient, and help to provide post-transplant surveillance of these recipients. QTYPE enables 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. Olerup SSP is used to type HLA alleles based on the sequence specific primer, or SSP, technology.
On
OnJune 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 in the field of bone marrow and solid organ transplantation on diagnostic testing. These NGS 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. 32 -------------------------------------------------------------------------------- InSeptember 2019 , we commercially launched AlloSeq cfDNA, our surveillance solution designed to measure dd-cfDNA in blood to detect active rejection in transplant recipients, and we received CE mark authorization onJanuary 10, 2020 . Our ability to increase the clinical uptake for AlloSeq cfDNA will be a result of multiple factors, including local clinical education, customer lab technical proficiency and levels of country-specific reimbursement. Also inSeptember 2019 , we commercially launched AlloSeq Tx, the first of its kind NGS high-resolution HLA typing solution utilizing hybrid capture technology. This technology enables the most comprehensive sequencing, covering more of the HLA genes than other solutions on the market and adding coverage of non-HLA genes that may impact transplant patient matching and management. AlloSeq Tx has simple NGS workflow, with a single tube for processing and steps to reduce errors. AlloSeq Tx 17 received CE mark authorization onMay 15, 2020 . InJune 2020 , we commercially launched AlloSeq HCT, a NGS solution for chimerism testing for stem cell transplant recipients. This technology has the potential to provide better sensitivity and data analysis compared to current solutions on the market. InMarch 2021 , we acquired certain assets of BFS Molecular S.R.L., or BFS Molecular, a software company focused on NGS-based patient testing solutions. BFS Molecular brings extensive software and algorithm development capabilities for NGS transplant surveillance products.
Patient and Digital Solutions
In 2019, we began providing digital solutions to transplant centers following
the acquisitions of
OnMay 7, 2019 , we acquired 100% of the outstanding common stock of Ottr. Ottr was formed in 1993 and is a leading provider of transplant patient management software, or the Ottr software, which provides comprehensive solutions for transplant patient management. The Ottr software enables integration with electronic medical records, or EMR, systems, including Cerner and Epic, providing patient surveillance management tools and outcomes data to transplant centers. OnAugust 26, 2019 , we acquired 100% of the outstanding common stock of XynManagement. XynManagement provides two unique solutions, XynQAPI software, or XynQAPI and XynCare. XynQAPI simplifies transplant quality tracking and Scientific Registry of Transplant Recipients reporting. XynCare 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
InJanuary 2021 , we acquiredTransChart LLC , or TransChart. TransChart provides EMR software to hospitals throughoutthe United States to care for patients who have or may need an organ transplant. As part of our acquisition of TransChart inJanuary 2021 , we acquired Tx Access, a cloud-based service that allows nephrologists and dialysis centers to electronically submit referrals to transplant programs, closely follow and assist patients through the transplant waitlist process, and ultimately, through transplantation.
In
Also inJune 2021 , we entered into a strategic agreement with OrganX to develop clinical decision support tools across the transplant patient journey. Together, we and OrganX will develop advanced analytics that integrate AlloSure, the first transplant specific dd-cfDNA assay, with large transplant databases to provide clinical data solutions. This partnership delivers the next level of innovation beyond multi-modality by incorporating a variety of clinical inputs to create a universal composite scoring system. InNovember 2021 , we acquiredMedActionPlan.com LLC , or MedActionPlan, aNew Jersey -based provider of medication safety, medication adherence and patient education. MedActionPlan is a leader in patient medication management for transplant patients and beyond. InDecember 2021 , we acquiredThe Transplant Pharmacy , or TTP, a transplant focused pharmacy located inMississippi . TTP provides individualized transplant pharmacy services for patients at multiple transplant centers located throughout theU.S. COVID-19 Impact In the final weeks of March and duringApril 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, we experienced a slowdown in testing services volumes in the final weeks of 33 -------------------------------------------------------------------------------- March and duringApril 2020 . As a response to the COVID-19 pandemic, and to enable immune-compromised transplant patients to continue to have their blood drawn, in lateMarch 2020 , we 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 200 transplant and nephrology centers can offer RemoTraC to their patients and over 12,000 kidney, heart and lung transplant patients have enrolled. Based on existing and new relationships with partners, we have established a nationwide network of approximately 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, we have been able to maintain low levels of interruptions to our testing services volumes. There continues to be uncertainty around the COVID-19 pandemic as the Omicron variant has caused an increase in COVID-19 cases globally, impacted the availability of medical personnel in transplant centers and the volume of transplant procedures. A sustained reduction in transplant volume can negatively impact the testing volumes, as we saw in early part of first quarter of 2022. Our product business experienced a reduction in forecasted sales volume throughout the second and third quarters of 2020, as we were unable to undertake onsite discussions and demonstrations of our recently launched NGS products, including AlloSeq Tx 17, which was awarded CE mark authorization inMay 2020 . Our product business regained normalized sales volumes during the fourth quarter of 2020. We are maintaining our testing, manufacturing, and distribution facilities while implementing specific protocols to reduce contact among our employees. In areas where COVID-19 impacts healthcare operations, our field-based sales and clinical support teams are supporting providers through virtual platforms. Although the executive orders that placed certain restrictions on operations inSan Mateo County and theState of California , where our laboratory and headquarters are located, were lifted effectiveJune 15, 2021 , new orders or restrictions may be adopted in the future depending upon the COVID-19 transmission rates in our county and state, as well as other factors.
In addition, we have created a COVID-19 task force that is responsible for crisis decision making, employee communications, and enforcing all safety, monitoring and testing protocols in line with local regulations.
Due to COVID-19, quarantines, shelter-in-place and similar government orders, or the perception that such orders, shutdowns or other restrictions on the conduct of business operations could occur or could impact personnel at third-party suppliers inthe United States and other countries, or the availability or cost of materials, and there may be disruptions in our supply chain. Any manufacturing supply interruption of materials could adversely affect our ability to conduct ongoing and future research and testing activities. In addition, our clinical studies may be affected by the COVID-19 pandemic. Clinical site initiation and patient enrollment may be delayed due to prioritization of hospital resources toward the COVID-19 pandemic or reduced staffing due to staff members contracting COVID-19. Some patients may not be able to comply with clinical study protocols if quarantines impede patient movement or interrupt healthcare services. Similarly, the ability to recruit and retain patients and principal investigators and site staff who, as healthcare providers, may have heightened exposure to, or become infected with, COVID-19, may adversely impact our clinical trial operations.
Financial Operations Overview
Revenue
We derive our revenue from testing services, products sales, patient and digital solutions 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 AlloSure Kidney, AlloMap Heart and AlloSure Heart tests, which represented 84% and 88% of our total revenue for the three months endedMarch 31, 2022 and 2021, 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; and (v) how quickly we can successfully commercialize new product offerings. 34 -------------------------------------------------------------------------------- We currently market testing services to healthcare providers through our direct sales force that targets transplant centers and their physicians, coordinators and nurse practitioners as well as general nephrologists managing transplant recipients. 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.
Product Revenue
Our product revenue is derived primarily from sales of AlloSeq Tx, Olerup SSP and QTYPE products. Product revenue represented 9% of our total revenue for each of the three months endedMarch 31, 2022 and 2021. We recognize product revenue from the sale of products to end-users, distributors and strategic partners when all revenue recognition criteria are satisfied. We generally have a contract or a purchase order from a customer with the specified required terms of order, including the number of products ordered. Transaction prices are determinable and products are delivered and risk of loss passed to the customer upon either shipping or delivery, as per the terms of the agreement. There are no further performance obligations related to a contract and revenue is recognized at the point of delivery consistent with the terms of the contract or purchase order.
Patient and Digital Solutions Revenue
Our patient and digital solutions revenue is mainly derived from sales of our Ottr software, XynQAPI, MedActionPlan, TTP, TransChart and Tx Access licenses, services and SaaS agreements across the digital portfolio. Patient and digital solutions revenue represented 7% and 3% of our total revenue for the three months endedMarch 31, 2022 and 2021, respectively. 35 --------------------------------------------------------------------------------
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. Our significant accounting policies are described in Note 2 of the condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. Some of these accounting policies require us to make difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. 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 combinations;
•Acquired intangible assets;
•Impairment of goodwill, intangible assets and other long-lived assets;
•Stock-based compensation; and
•Common stock warrant 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 months endedMarch 31, 2022 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 endedDecember 31, 2021 , filed with theSEC onFebruary 24, 2022 .
Recently Issued Accounting Standards
Refer to Note 2, Summary of Significant Accounting Policies - Recent Accounting
Pronouncements, 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.
36
--------------------------------------------------------------------------------Results of Operations
Comparison of the Three Months Ended
(In thousands)
Three Months Ended March 31,
2022 2021 Change
Revenue:
Testing services revenue $ 66,444 $ 59,281 $ 7,163
Product revenue 6,788 5,778 1,010
Patient and digital solutions revenue 6,184 2,341 3,843
Total revenue 79,416 67,400 12,016
Operating expenses:
Cost of testing services 17,628 16,483 1,145
Cost of product 4,399 3,647 752
Cost of patient and digital solutions 4,855 1,449 3,406
Research and development 21,880 16,004 5,876
Sales and marketing 23,148 15,452 7,696
General and administrative 26,559 15,223 11,336
Total operating expenses 98,469 68,258 30,211
Loss from operations (19,053) (858) (18,195)
Other income (expense):
Interest income, net 189 126 63
Change in estimated fair value of common stock warrant
liability 27 27 -
Other expense, net (823) (245) (578)
Total other expense (607) (92) (515)
Loss before income taxes (19,660) (950) (18,710)
Income tax benefit 12 263 (251)
Net loss $ (19,648) $ (687) $ (18,961) Testing Services Revenue
Testing services revenue increased by$7.2 million , or 12%, for the three months endedMarch 31, 2022 compared to the same period in 2021. The increase is primarily due to an increase of more than 8,000 AlloSure Kidney, AlloMap Heart and AlloSure Heart patient results provided in the three months endedMarch 31, 2022 , compared to the same period in 2021.
Product Revenue
Product revenue increased by$1.0 million , or 17%, for the three months endedMarch 31, 2022 , compared to the same period in 2021, primarily due to growth from the NGS typing products.
Patient and Digital Solutions Revenue
Patient and digital solutions revenue increased by
Cost of Testing Services
Cost of testing services increased by$1.1 million , or 7%, for the three months endedMarch 31, 2022 , compared to the same period in 2021. The increase is primarily due to increased testing volume, offset by stock-based compensation expense. Cost of Product Cost of product increased by$0.8 million , or 21%, for the three months endedMarch 31, 2022 , compared to the same period in 2021. The increase is primarily due to increased product revenue, freight costs and consulting expenses.
Cost of Patient and Digital Solutions
37
--------------------------------------------------------------------------------
Cost of patient and digital solutions increased by $3.4 million , or 235%, for
the three months ended March 31, 2022 , compared to the same period in 2021. The
increase is primarily due to cost of goods from the acquisition of TTP and
MedActionPlan of $3.0 million , personnel related costs of $0.1 million and
amortization expense of $0.1 million .
Research and Development
Research and development expenses increased by$5.9 million , or 37%, for the three months endedMarch 31, 2022 , compared to the same period in 2021. The increase is primarily due to an increase in headcount and personnel-related costs of$2.8 million , an increase in consultants of$1.3 million , an increase in stock-based compensation expense of$0.8 million , and an increase in partnership expenses of$0.5 million .
Sales and Marketing
Sales and marketing expenses increased by$7.7 million , or 50%, for the three months endedMarch 31, 2022 , compared to the same period in 2021. The increase is primarily due to an increase in headcount and personnel-related costs of$4.6 million , an increase in stock-based compensation expense of$1.5 million and an increase in marketing programs and travel costs of$0.8 million .
General and Administrative
General and administrative expenses increased by$11.3 million , or 74%, for the three months endedMarch 31, 2022 , compared to the same period in 2021. The increase is primarily due to an increase in legal expenses of$6.7 million , an increase in stock-based compensation expense of$2.0 million , an increase in consultants of$1.2 million and an increase in headcount and personnel-related expenses of$0.9 million . Other income (expense) Other expense, net increased by$0.6 million for the three months endedMarch 31, 2022 , compared to the same period in 2021, primarily due to the unrealized loss on the investment in Miromatrix.
Cash Flows for the Three Months Ended
The following table summarizes the primary sources and uses of cash for the
periods presented:
Three Months Ended March 31,
2022 2021
(in thousands)
Net cash provided by (used in):
Operating activities $ (21,468) $ (33,630)
Investing activities (156,032) 19,079
Financing activities 865 189,228Effect of exchange rate changes on cash, cash equivalents and restricted cash
45 (23)
Net (decrease) increase in cash, cash equivalents and restricted
cash $ (176,590) $ 174,654
Operating Activities
Net cash used in operating activities consists of net loss, adjusted for certain
noncash items in the condensed consolidated statements of operations and changes
in operating assets and liabilities.
Cash used in operating activities for the three months ended March 31, 2022 was
$21.5 million . Our net loss of $19.6 million was our primary use of cash in
operating activities that included a number of noncash items. Our noncash items
included $10.6 million in stock-based compensation expense, $2.6 million of
depreciation and amortization expense and $0.9 million of amortization of
right-of-use assets. Net operating assets decreased $16.7 million .
Cash used in operating activities for the three months ended March 31, 2021 was
$33.6 million . Our net loss of $0.7 million was our primary use of cash in
operating activities that included a number of noncash items. Our noncash items
included $6.5 million in stock-based compensation expense and $2.0 million of
depreciation and amortization expense. Net operating assets decreased by
$21.6 million , and Refund liability - CMS advance payment decreased by
$20.5 million .
Investing Activities
For the three months endedMarch 31, 2022 , net cash used in investing activities of$156.0 million was primarily related to the purchases of marketable securities of$148.5 million and$8.5 million related to additions of capital expenditures, net. 38 --------------------------------------------------------------------------------
For the three months ended
Financing Activities
Net cash provided by financing activities for the three months endedMarch 31, 2022 of$0.9 million was primarily related to proceeds from exercises of stock options of$1.6 million and proceeds from issuances of common stock under our employee stock purchase plan of$1.0 million . These proceeds were partially offset by taxes paid related to net share settlements of restricted stock units of$1.5 million and payments of contingent consideration$0.3 million . Net cash provided by financing activities for the three months endedMarch 31, 2021 of$189.2 million was primarily related to$188.7 million of proceeds from the issuance of shares of common stock in an underwritten offering, net of issuance costs, proceeds from exercises of stock options of$2.2 million and proceeds from issuances of common stock under our employee stock purchase plan of$0.7 million . These proceeds were partially offset by taxes paid related to net share settlements of restricted stock units of$2.3 million .
Liquidity and Capital Resources
We have incurred significant losses and negative cash flows from operations
since our inception and had an accumulated deficit of
The spread of COVID-19, which has caused a broad impact globally, may materially affect us economically. While the potential economic impact brought by, and the duration of, COVID-19 may be difficult to assess or predict, a continued widespread pandemic could result in significant disruption of global financial markets, reducing our ability to access capital, which could in the future negatively affect our liquidity. SinceMarch 31, 2020 , and in response to the outbreak of the COVID-19 pandemic, we have increased our cash and cash equivalents. With our continuing growth, we may require additional financing in the future to fund working capital and our development of future products. Additional financing might include issuance of equity securities, including through underwritten public offerings or "at-the-market" offerings, debt offerings or financings or a combination of these financings. There can be no assurance that we will be successful in acquiring additional funding at levels sufficient to fund our operations or on terms favorable to us. We believe our existing cash balance and expected cash from existing operations, including cash from current license agreements and future license and collaboration agreements, or a combination of these, will be sufficient to meet our anticipated cash requirements for the next 12 months.
CMS Accelerated and
OnMarch 27, 2020 , theU.S. government enacted the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act. Pursuant to the CARES Act, theCenters for Medicare & Medicaid Services , or CMS, expanded its Accelerated and Advance Payment Program in order to increase cash flow to providers of services and suppliers impacted by the COVID-19 pandemic. CMS was authorized to provide accelerated or advance payments during the period of the public health emergency to any Medicare provider who submitted a request to the appropriate Medicare Administrative Contractor and met the required qualifications. DuringApril 2020 , we received an advance payment from CMS of approximately$20.5 million and recorded the payment as Deferred revenue - CMS advance payment on our condensed consolidated balance sheet. DuringDecember 2020 , we reassessed the Deferred revenue - CMS advance payment and repaid the entire amount inJanuary 2021 .
Pursuant to the CARES Act, theU.S. Department of Health & Human Services , or HHS, distributed an initial tranche of$30.0 billion in funds to healthcare providers that received Medicare fee-for-service, or 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 we continue to assess the impact on our business. Furthermore, HHS has indicated that it, along with theOffice 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 based on their share of total Medicare FFS reimbursements made by theU.S. in 2019. During 39 --------------------------------------------------------------------------------April 2020 , we received a payment of approximately$4.8 million , representing our portion of the initial tranche of funds recorded in other income (expense), net on the condensed consolidated statements of operations. We are complying with the key terms and provisions of theCARES Act Provider Relief Fund which includes, among other things, the requirement that we maintain appropriate records and cost documentation. During the quarter endedSeptember 30, 2021 , we were notified by HHS that the Provider Relief Fund Reporting Portal was open for reporting on the use ofProvider Relief Fund payments, and we completed and submitted a report indicating our use of the funds we received pursuant to the CARES Act.
OnJanuary 25, 2021 , we sold 1,923,077 shares of our common stock through an underwritten public offering at a public offering price of$91.00 per share. The net proceeds to us from the offering were approximately$164.0 million , after deducting underwriting discounts and commissions and offering expenses. OnFebruary 11, 2021 , we sold 288,461 shares of our common stock pursuant to the full exercise of the overallotment option granted to the underwriters in connection with the offering. The net proceeds to us from the full exercise of the underwriters' overallotment option were approximately$24.7 million .
At-the-Market Equity Offering
OnApril 14, 2022 , the Company entered into a sales agreement (the "Sales Agreement") withJefferies, LLC as sales agent ("Jefferies"), pursuant to which the Company may offer and sell, from time to time, through Jefferies, up to$200.0 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. Jefferies is entitled to compensation for its services equal to 3% of the gross proceeds of any shares of common stock sold through Jefferies under the Sales Agreement. Any shares of common stock offered and sold pursuant to the Sales Agreement will be issued and sold pursuant to the Company's Registration Statement on Form S-3ASR (File No. 333-239049), filed with theSEC onJune 9, 2020 , including a base prospectus datedJune 9, 2020 , and a prospectus supplement datedApril 14, 2022 . 40 --------------------------------------------------------------------------------
Factors Affecting Our Performance
COVID-19 Pandemic
COVID-19 may impact personnel at third-party suppliers inthe United States and other countries, or the availability or cost of materials, which would disrupt our supply chain. Any manufacturing supply interruption of materials could adversely affect our ability to conduct ongoing and future research and testing activities. Clinical trials, clinical site initiation and patient enrollment may be delayed due to prioritization of hospital resources toward the COVID-19 pandemic or reduced staffing due to staff members contracting COVID-19. Some patients may not be able to comply with clinical trial protocols if quarantines impede patient movement or interrupt healthcare services. Similarly, the ability to recruit and retain patients and principal investigators and site staff who, as healthcare providers, may have heightened exposure to, or become infected with, COVID-19, may adversely impact our clinical trial operations. COVID-19 may impact availability of medical personnel and reduction in transplant procedure volumes, which in-turn, could adversely affect our testing volumes.
The Number of AlloMap Heart, AlloSure Kidney and AlloSure Heart Tests We Receive and Report
The growth of our testing services business is tied to the number of AlloSure Kidney, AlloSure Lung, AlloMap Heart and AlloSure Heart 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.
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 the ISHLT included AlloMap in guidelines, payers adopted coverage policies and no longer consider AlloMap Heart to be experimental and investigational. The rate at which our tests are covered and reimbursed has varied, and is expected to continue to vary, by payer. Revenue growth depends on our ability to maintain Medicare and third party payer reimbursement, and to expand utilization by healthcare providers. The Protecting Access to Medicare Act of 2014, or PAMA, included a substantial new payment system for clinical laboratory tests under theClinical 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 issuedJune 17, 2016 indicating that data for reporting for the new PAMA process would begin in 2017 and the new market based rates took effect onJanuary 1, 2018 . EffectiveJanuary 1, 2018 , Medicare reimburses us$3,240 for AlloMap Heart testing of Medicare beneficiaries, an increase from the 2017 reimbursement rate of$2,841 . The CARES Act freezes current (2020) CMS CLFS rates through 2021. Further, the CARES Act delays the reporting cycle under PAMA toJanuary 1 andMarch 31, 2022 . The next data collection period will becomeJanuary 1 through June 30, 2024 .
AlloMap Heart has also received positive coverage decisions for reimbursement
from many of the largest
Reimbursement for AlloSure Kidney
OnSeptember 26, 2017 , we received notice that the MolDX Program developed byPalmetto GBA had set AlloSure Kidney reimbursement at$2,841 . EffectiveOctober 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.
Reimbursement for AlloSure Heart
InOctober 2020 , we received a final Palmetto MolDx Medicare coverage decision for AlloSure Heart. InNovember 2020 ,Noridian Healthcare Solutions , our Medicare Administrative Contractor, issued a parallel coverage policy granting coverage when used in conjunction with AlloMap Heart, which became effective inDecember 2020 . The Medicare reimbursement rate for AlloSure Heart is currently$2,753 .
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 solid organs.
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QTYPE enables speed and precision in HLA typing at a low to intermediate
resolution for samples that require a fast turn-around-time and uses real-time
PCR methodology. QTYPE received CE mark certification on April 10, 2018 . Olerup
SSP is used to type HLA alleles based on the SSP technology.
On May 4, 2018 , we entered into a license and collaboration 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 for use in the field of bone marrow and solid organ
transplantation diagnostic testing. These NGS 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.
In September 2019 , we commercially launched AlloSeq cfDNA, our surveillance
solution designed to measure dd-cfDNA in blood to detect active rejection in
transplant recipients, which received CE mark authorization on January 20, 2020 .
Our ability to increase the clinical uptake for AlloSeq cfDNA will be a result
of multiple factors, including local clinical education, customer lab technical
proficiency and levels of country-specific reimbursement.
Also in September 2019 , we commercially launched AlloSeq Tx, the first of its
kind NGS high-resolution HLA typing solution utilizing hybrid capture
technology. This technology enables the most comprehensive sequencing, covering
more of the HLA genes than current solutions and adding coverage of non-HLA
genes that may impact transplant patient matching and management. AlloSeq Tx has
a simple NGS workflow that reduces complexity and can reduce errors. AlloSeq Tx
17 received CE mark authorization on May 15, 2020 .
In June 2020 , we commercially launched AlloSeq HCT, a NGS solution for chimerism
testing for stem cell transplant recipients. This technology has the potential
to provide better sensitivity and data analysis compared to current solutions on
the market.
Continued Growth of Patient and Digital Sales
The growth of our patient and digital revenues is tied to the continued
successful implementation of our Ottr, MedActionPlan and XynQAPI software
businesses, as well as continued support and maintenance of existing
MedActionPlan,
Development of Additional Services and Products
Our development pipeline includes other transplant diagnostic solutions to help clinicians and transplant centers make personalized treatment decisions throughout a transplant patient's lifetime. 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 services and 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 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
For a discussion regarding our significant contractual obligations as of
Foreign Operations
The accompanying unaudited condensed consolidated balance sheets contain certain recorded assets in foreign countries, namelyStockholm, Sweden and Fremantle,Australia . Although these countries are considered economically stable and we 42 --------------------------------------------------------------------------------
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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