CareDx, Inc. — FY 2017 Form 10-K
Reporting period: Year ended December 31, 2017. CareDx is a transplant diagnostics company with post-transplant testing (AlloMap and newly launched AlloSure) and pre-transplant HLA-typing products. Financial statements are audited; Ernst & Young issued an unqualified opinion.
Financial performance and liquidity
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Total revenue | $48.3 million | $40.6 million |
| Testing revenue | $33.1 million | $29.7 million |
| Product revenue | $14.6 million | $10.7 million |
| Operating loss | $20.3 million | $37.3 million |
| Net loss attributable to CareDx | $55.5 million; $2.38 per share | $39.5 million; $2.39 per share |
| Cash used in operating activities | $14.3 million | $16.5 million |
| Cash and cash equivalents at year-end | $16.9 million | $17.3 million |
| Total debt, net of discount | $34.1 million | $23.9 million |
| Working capital | $(16.1) million | $(14.2) million |
Testing and product cost totaled $21.4 million, implying a combined gross profit of approximately $26.4 million, or 54.6% of revenue. The filing does not present a single consolidated gross-margin measure. Year-end restricted cash was $9.6 million, including $9.4 million required under the JGB debt agreement and unavailable for operations.
Changes versus the prior year
- Revenue rose 19% overall. Testing revenue increased 12%, mainly from higher AlloMap volume and collections; product revenue rose 37%, although comparisons are affected by Allenex being acquired in April 2016.
- AlloMap test results delivered increased 8% to 15,312. AlloSure launched commercially in October 2017; 282 results were delivered through year-end and approximately $0.5 million of revenue was recognized.
- Operating loss narrowed, partly because goodwill impairment fell to $2.0 million from $13.0 million. However, net loss increased, driven heavily by a $29.6 million noncash charge for remeasurement of warrant and embedded derivative liabilities, as well as higher interest expense.
- Operating cash use improved by $2.2 million, but the company remained cash-consuming. Debt increased, and stockholders’ equity attributable to CareDx moved from positive $19.5 million to a deficit of $6.1 million.
Outlook, risks and unusual items
- Products and reimbursement: Medicare reimbursement for AlloMap increased to $3,240 effective January 1, 2018; AlloSure’s Medicare rate was $2,841. AlloSure had no positive private-payer coverage decisions at filing, relying on case-by-case payment. KOAR, a planned registry to build evidence of AlloSure’s clinical utility, commenced in January 2018; the company anticipated broader center activation during 2018.
- Funding and debt: CareDx reported covenant noncompliance at December 31, 2017 under the Danske facility. On March 1, 2018, it signed a binding commitment letter for up to $35 million of Perceptive term financing, subject to conditions and two-tranche funding, intended in part to refinance existing debt. Management said cash, expected revenue and the proposed financing should fund anticipated needs for at least 12 months. This depends on completion and terms of the financing; additional capital may still be needed.
- Potential dilution: JGB debt is convertible and includes warrants and embedded derivatives. From January 1 through March 22, 2018, JGB conversion notices covered $20.8 million of principal and interest, reducing reported JGB principal to $5.9 million. The company also disclosed a planned April 2018 prepayment, subject to an 8% premium; subsequent financing and conversion outcomes should be verified.
- Revenue accounting: Approximately 37% of 2017 testing revenue was recognized on a cash basis. Adoption of ASC 606 in 2018 was expected to create a $2–$3 million cumulative adjustment to opening retained earnings and accounts receivable and to affect period comparability.
- Key operating risks: Continued losses, negative working capital, Medicare dependence, uncertain AlloSure adoption and reimbursement, competition, evolving FDA oversight of laboratory-developed tests, reliance on sole-source suppliers, and dependence on the Brisbane laboratory are material risks. Management reported prior-year material weaknesses in financial controls as remediated at year-end 2017; the auditor was not engaged to opine on internal-control effectiveness.
- Other items: A $0.6 million payment settled the Oberland contract dispute in 2017. The 2017 tax-law impact was provisional, and the company continued evaluating deferred-tax-asset realizability and certain provisions.
Investor verification points
- Confirm whether and on what final terms the Perceptive loan funded, how proceeds were applied, and whether debt covenants were satisfied.
- Track unrestricted cash, cash burn, debt maturities, and any further equity issuance or dilution from convertible debt and warrants.
- Verify AlloSure testing volume, reimbursement collections, private-payer coverage, and evidence from the KOAR study; distinguish delivered tests from tests for which revenue was recognized.
- Assess the sustainability of AlloMap reimbursement and volume, and the effect of ASC 606 on reported revenue and receivables.
- Review subsequent internal-control disclosures and confirm remediation remains effective.