CareDx, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; unaudited. Dollar amounts below are in millions unless otherwise stated. CareDx develops transplant-surveillance diagnostics, principally its AlloMap heart-transplant test. The April 2016 Allenex acquisition occurred after the reporting period.
Financial performance and liquidity
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Revenue | $6.562 | $7.216 | Down 9% |
| Testing revenue | $6.452 | $7.096 | Down 9% |
| Gross profit / margin* | $3.790 / 57.8% | $4.505 / 62.4% | Margin down 4.6 percentage points |
| Operating expenses | $13.131 | $8.607 | Up 53% |
| Operating loss | $(6.569) | $(1.391) | Loss widened |
| Net loss | $(9.752) | $(2.272) | Loss widened |
| Net loss per share, diluted | $(0.81) | $(0.19) | — |
| Cash used in operating activities | $(6.192) | $(1.014) | Use increased |
*Gross profit and margin calculated as revenue less cost of testing, divided by revenue.
- AlloMap test results delivered were 3,364 versus 3,111, up 8%. Management attributed lower testing revenue principally to slower collections from cash-basis payers, partly offset by higher volume from accrual-basis payers. The filing says 32% of Q1 2016 revenue was recognized when cash was received, compared with 34% in Q1 2015.
- Research and development expense rose 122% to $3.159 million, mainly due to higher staffing and dd-cfDNA trial and laboratory costs. General and administrative expense rose 110% to $5.676 million, including $2.2 million of Allenex transaction-related fees. Sales and marketing expense fell 14% to $1.737 million.
- Other expense included a $2.9 million charge for costs associated with a proposed $18 million bridge loan that management determined was not probable of completion; the company disputes the related fees. Interest expense declined to $0.266 million from $0.827 million.
- Cash and cash equivalents were $23.752 million at March 31, down from $29.888 million at December 31, 2015. Total assets were $48.834 million and stockholders’ equity was $20.460 million. Debt and capital-lease obligations were approximately $15.9 million, net of discount and issuance costs; the loan is secured and bears a floating rate.
- Management stated that, absent additional funding or refinancing, cash would be exhausted in December 2016 unless costs and operations were substantially reduced. The filing says this raises substantial doubt about the company’s ability to continue as a going concern.
Material developments, outlook, and risks
- Allenex acquisition, subsequent to quarter-end: On April 14, 2016, CareDx acquired 98.3% of Allenex, a Swedish transplant-diagnostics company. Expected consideration was approximately $35.0 million: $27.8 million cash, including $6.2 million deferred until no later than March 31, 2017, and 1,375,029 CareDx shares valued at $7.2 million. The filing says the acquisition will be accounted for in Q2; purchase-price allocation was still being determined. CareDx intended to pursue compulsory acquisition of the remaining shares.
- Financing after quarter-end: Also on April 14, CareDx completed a private placement with gross proceeds of approximately $14.1 million; approximately $1.4 million was allocated to placement, escrow, and legal fees. An additional $8.0 million was held in escrow in connection with a proposed subsequent financing with Allenex’s majority shareholders. The lender also required CareDx to raise another $20 million in equity by March 31, 2017, before paying the $6.2 million deferred acquisition consideration. The subsequent financing and required stockholder approvals were not yet complete as of the filing.
- The private placement included common stock, mandatorily convertible preferred stock, and warrants, creating potential dilution. Failure to file an effective resale registration statement within 45 days could trigger penalties of about $0.3 million per month, up to $1.4 million.
- CareDx reported a February 2016 financial-covenant violation that the lender waived in principle; a written amendment followed on May 12. The company stated it was in compliance as of March 31. Scheduled principal payments on the term loan begin July 1, 2016.
- Management expected higher R&D spending and capital expenditures, including for clinical development and global expansion. The DART kidney-transplant study had enrolled more than 300 patients at 14 centers by March 2016; the company expected its first data analysis in 2016. No specific revenue or earnings guidance was provided.
- Key risks include payer coverage and collection uncertainty, reliance on AlloMap, need for additional financing, possible dilution and debt constraints, and execution, integration, competition, and product-development risks related to Allenex. CareDx also anticipated increased foreign-currency exposure following the acquisition.
Important facts for investors to verify
- Funding and refinancing progress, liquidity runway, and the status of the required $20 million equity raise and $8 million subsequent financing.
- Stockholder approval, conversion and registration of the private-placement securities, potential warrant dilution, and any registration-delay penalties.
- Allenex purchase-price allocation, full acquisition costs, integration progress, and whether the expected strategic benefits and QTYPE development plans are realized.
- AlloMap reimbursement, collections, and test-volume trends. The filing reports 3,364 Q1 test results in its results table but 3,358 in the business overview; investors should verify the correct figure.
- Debt covenant compliance, scheduled loan payments, and resolution of the disputed bridge-loan fees.