CareDx, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. Amounts are in U.S. dollars; financial statement amounts are in millions unless noted. The company is a transplant diagnostics business: CareDx provides AlloMap testing and develops AlloSure, while its acquired Olerup business sells pre-transplant matching products. Allenex was acquired in April 2016; Conexio business assets were acquired in January 2017, so comparisons are affected by acquisitions.
Financial performance and position
| Metric | Q1 2017 | Q1 2016 / comparison |
|---|---|---|
| Testing revenue | $7.902 | $6.452; up 22% |
| Product revenue | $3.667 | None reported; primarily reflects acquired Allenex business |
| Total revenue | $11.584 | $6.562; up $5.022, or about 77% |
| Gross profit and margin | Approximately $6.2; 53.5% | Approximately $3.8; 57.8%. Comparability is limited because 2016 had no product revenue. |
| Operating loss | $(8.544) | $(6.569) |
| Net loss attributable to CareDx | $(5.562); $(0.26) per share | $(9.752); $(0.81) per share |
| Cash used in operating activities | $(6.741) | $(6.192) |
| Cash and cash equivalents | $12.187 at March 31 | $17.258 at December 31, 2016 |
| Restricted cash | $9.553 | $0.143 at December 31, 2016 |
| Debt, net of discount | $32.386, all classified current | $23.944 at December 31, 2016, including $1.098 long-term |
| Total assets / stockholders’ equity | $80.322 / $14.860 | $76.730 / $19.761 at December 31, 2016 |
The reported net loss improved year over year, but included a $4.128 non-cash gain from revaluing warrant and derivative liabilities. The operating loss worsened, including a $1.958 goodwill impairment charge, higher sales and marketing costs, and acquisition-related expenses. Interest expense increased to $0.790 from $0.266. The company reported a $0.283 income tax benefit.
Material changes and financing
- AlloMap test results delivered rose 12% to 3,750. Management attributed the $1.450 increase in testing revenue to higher test volume and improved collections.
- Product revenue of $3.667 came from the acquired Olerup business. CareDx also acquired Conexio assets; the acquired business contributed $0.1 of revenue and incurred a $0.123 net loss from January 20 through March 31.
- In March, CareDx issued JGB senior secured debentures with $27.8 principal for $24.0 net proceeds. It used $11.2 to repay East West Bank debt and must keep $9.4 in restricted cash. The debentures bear 9.5% interest, are convertible at the holder’s option, and are secured by substantially all company assets, subject to stated exceptions.
- CareDx breached the amended Danske leverage covenant at March 31; the company also cited continuing liquidity concerns. The Danske debt and all other borrowings were classified as current.
- Olerup’s remaining goodwill was written off: a $1.958 impairment followed a decline in market capitalization and a valuation below carrying value.
Outlook, risks and unusual items
- Going concern and liquidity: Management said cash and expected revenue would not fund current operations beyond June 30, 2017. Additional financing and/or debt refinancing is required; failure could require significant operating cuts or cessation. The filing states substantial doubt about the company’s ability to continue as a going concern for one year from issuance.
- Debt and dilution: JGB debentures include monthly holder redemption rights beginning March 2018, potential discounted share settlement, default premiums, and restrictive covenants. The company also owed $5.749 in deferred Allenex purchase consideration, due July 1, 2017, with 10% interest accruing from January 2017. Certain Allenex-related notes were also due July 1, 2017, subject to intercreditor restrictions.
- Commercial outlook: Management expected R&D and sales and marketing spending to increase. AlloSure development and commercialization depend on clinical validation, adoption and payer coverage. TULIP kidney study enrollment began in April 2017; a draft local coverage determination for AlloSure was received May 4, 2017. The filing does not provide quantified revenue or earnings guidance.
- Reimbursement and operating risks: Medicare represented 28% of total revenue in Q1 2017; reimbursement levels, payer coverage, collections and PAMA implementation may affect results. Management cited dependence on AlloMap and Olerup products, competition, acquisition integration, foreign exchange exposure and reliance on key suppliers.
- Controls and filing status: Disclosure controls were deemed ineffective, and four material weaknesses in financial reporting remained, involving close processes, business combinations, payer revenue recognition and inventory valuation. The 10-Q was filed late, after its May 22 due date; the filing states this affected Form S-3 and shelf-offering eligibility. Separately, JGB waived liquidated damages related to a late resale registration statement after it was filed in April.
- Other items: CareDx settled its Oberland litigation for $0.6 in March. A Nasdaq Stockholm fine of approximately $0.1 was paid in February. Roche royalties were $0.3 in Q1; the agreement provides for no further royalties after September 30, 2017, subject to timely payment of applicable royalties.
Important facts for investors to verify
- Whether CareDx secured financing or refinancing sufficient to meet near-term operating needs and debt obligations, including the July 2017 deferred purchase consideration.
- Whether Danske waived or otherwise addressed the March 31 covenant breach, and whether JGB or other lenders asserted defaults or exercised contractual rights.
- Unrestricted cash available for operations, distinguishing it from the $9.553 of restricted cash, and the actual cash burn following quarter-end.
- AlloMap test volume, payer collections and Medicare reimbursement; progress on AlloSure coverage, commercialization and clinical studies.
- Progress in remediating the four material weaknesses and the effect of late periodic filings on registration eligibility and access to capital markets.
- Potential dilution from convertible debt, warrants and any equity financing, as well as performance and impairment risk in the Olerup business.