CareDx, Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. Unaudited consolidated results. CareDx develops transplant diagnostics, including AlloMap heart-transplant testing and pre-transplant products sold through its Olerup segment. AlloSure kidney-transplant testing launched commercially after quarter-end, on October 9, 2017.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $12.2 million | $12.5 million | $35.8 million | $29.8 million |
| Operating loss | $3.9 million | $4.9 million | $16.0 million | $18.5 million |
| Net loss | $14.3 million | $3.8 million | $23.9 million | $24.0 million |
| Net loss per share | $0.63 | $0.20 | $1.09 | $1.61 |
| Operating cash used | — | — | $12.2 million | $13.5 million |
- Q3 testing revenue was $8.2 million, down 5%; product revenue was $3.9 million, up 3%. Nine-month testing revenue grew 10% to $24.5 million, while product revenue rose 51% to $10.9 million. The latter comparison reflects Allenex being acquired in April 2016, so the prior-year nine-month period does not include a full comparable period of product sales.
- Q3 operating expenses fell to $16.1 million from $17.4 million. Lower product costs and general and administrative expenses were partly offset by higher testing costs. Nine-month operating loss improved despite a $2.0 million goodwill impairment recorded in Q1.
- Q3 net loss widened substantially, primarily because of an $8.6 million noncash expense from remeasuring warrant and derivative liabilities, versus $1.4 million of income in Q3 2016. Nine-month net loss was approximately flat year over year. Interest expense increased to $4.2 million for nine months, from $1.4 million, in part due to the JGB financing and debt-discount amortization.
- Cash and cash equivalents were $6.0 million at September 30, down from $17.3 million at December 31, 2016. Nine-month cash used in operations was $12.2 million; investing used $1.1 million and financing provided $2.1 million. The filing reports cash and cash equivalents separately from restricted cash.
- Reported debt, net of discounts, was $36.2 million, including $15.0 million classified as current. Total scheduled debt maturities before discounts and issuance costs were $41.8 million. The company had $9.6 million of restricted cash, including $9.4 million required as JGB collateral.
- Current assets were $16.9 million versus current liabilities of $31.0 million. Total liabilities of $75.3 million exceeded total assets of $75.1 million; stockholders’ equity was a deficit of $0.2 million.
Material changes, outlook and risks
- After quarter-end, CareDx raised approximately $18.3 million in net proceeds from an October 10 public offering of 4,992,840 shares at $4.00 per share. Management said that, considering the offering, the July debt restructuring and expected revenue, available cash should meet anticipated requirements for at least 12 months. It also warned that additional financing may be needed and is not assured.
- The company remained out of compliance with certain Danske debt covenants at September 30, but had obtained a waiver. A required SEK 6.0 million (approximately $0.7 million) principal repayment was made October 31, 2017. The Danske facility and JGB debt contain financial and operating restrictions; the JGB debt is secured by substantially all company assets.
- AlloSure received a Medicare reimbursement rate of $2,840.75 and became commercially available for Medicare-covered kidney-transplant patients on October 9. Medicare’s preliminary 2018 rate for AlloMap was $3,240, a 14% increase over its 2017 rate. Commercial uptake, broader payer coverage and clinical acceptance remain uncertain.
- In July, the company restructured Allenex purchase consideration: approximately $1.1 million was converted into shares, $0.5 million was repaid, approximately $2.9 million was deferred to March 2019, and approximately $2.1 million was due December 31, 2017 unless converted into shares subject to shareholder approval. Related FastPartner and Al Amoudi notes were deferred to March 2019.
- CareDx recorded a $2.0 million impairment of Olerup goodwill in Q1. Its Q3 contingent-consideration revaluation added $0.6 million of expense; the balance-sheet liability was $0.8 million at quarter-end.
- Management concluded disclosure controls were ineffective and reported four material weaknesses in financial reporting, involving close and consolidation processes, acquisition accounting, payer-contract revenue recognition and inventory valuation. Remediation steps had been implemented but not yet tested.
- Key risks include continued losses and cash consumption, refinancing and covenant compliance, reliance on Medicare and reimbursement decisions, commercialization and adoption of AlloSure, payer collection delays, competition, foreign exchange exposure and internal-control remediation. An unfavorable 10% foreign-exchange movement was estimated to adversely affect nine-month results by $1.7 million.
- The Oberland dispute was settled in March 2017 for a $0.6 million payment, with mutual releases. Roche royalties were payable through September 30, 2017 under the settlement terms, conditional on timely payment. Management stated ordinary-course claims were not expected to have a material adverse effect.
Most important facts to verify
- Whether the October offering proceeds, cash collections and operating burn support the stated 12-month liquidity outlook, given low unrestricted cash and substantial debt maturities.
- Current status of covenant compliance, waiver conditions, debt repayment schedules and the December 2017 deferred purchase consideration obligation.
- AlloSure testing volume, Medicare collections, clinical adoption and progress toward broader payer coverage; also confirm the effective 2018 AlloMap reimbursement rate.
- Progress and independent testing of remediation for the four material weaknesses, and whether future filings remain timely and reliable.
- Potential dilution from the public offering, convertible JGB debentures, warrants and any shareholder-approved conversion of deferred consideration.