CareDx, Inc. — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise. CareDx develops transplant diagnostics, including AlloMap for post-transplant heart monitoring. Its April 2016 acquisition of Allenex added pre-transplant HLA-typing products, sold through the Olerup business.
Financial performance and liquidity
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $12.48 | $7.15 | $29.77 | $21.50 |
| Operating loss | $(4.93) | $(3.19) | $(18.47) | $(7.47) |
| Net loss attributable to CareDx | $(3.76) | $(3.49) | $(23.99) | $(8.95) |
| Basic loss per share | $(0.20) | $(0.29) | $(1.61) | $(0.76) |
- Revenue mix and growth: Q3 testing revenue was $8.61 million, up 23%; product revenue was $3.75 million, principally from Allenex, which was acquired in April. Q3 AlloMap results delivered rose 6% to 3,616. For the nine months, testing revenue increased 6% to $22.32 million, with 10,577 AlloMap results delivered, up 8%; product revenue was $7.23 million.
- Gross margin: Calculated from reported revenue less testing and product costs, consolidated gross margin was approximately 51% in Q3 2016 versus 62% in Q3 2015, and approximately 51% for the 2016 nine-month period versus 64% in 2015. Comparability is affected by Allenex product revenue and acquisition-related inventory fair-value amortization.
- Expenses and unusual items: Q3 operating expenses were $17.41 million, including R&D of $2.93 million, sales and marketing of $3.45 million, and G&A of $5.18 million. Nine-month G&A rose to $16.25 million, including $4.3 million of acquisition-related expenses. Nine-month other expense included $2.9 million of fees for a proposed Oberland bridge loan that did not proceed. The Q3 results included a noncash $1.39 million gain from warrant remeasurement; the nine-month results included a $1.78 million noncash warrant remeasurement loss.
- Cash flow: Nine-month cash used in operations was $13.46 million, compared with $5.78 million in 2015. Investing used $21.19 million, principally the $20.57 million net cash cost of the Allenex acquisition. Financing provided $27.06 million, mainly from private financings and the September public offering. Cash and cash equivalents fell $7.62 million from year-end to $22.27 million.
- Balance sheet and debt: At September 30, cash was $22.27 million, current assets $35.12 million, and current liabilities $39.61 million, a working-capital deficit of about $4.48 million. Debt carrying value was $26.40 million, net of discount and issuance costs; $17.90 million was classified current and $8.50 million long-term. The balance sheet also showed $5.94 million of current deferred purchase consideration.
Material changes and developments
- CareDx acquired 98.3% of Allenex for approximately $34.1 million in cash and stock. Allenex contributed $7.2 million of revenue and a $3.4 million net loss from acquisition through September 30. The preliminary purchase-price allocation included $31.6 million of identifiable intangible assets and $16.9 million of goodwill; valuation remained subject to adjustment.
- The company raised approximately $14.2 million gross in an April private placement, $8.0 million gross in a June financing with Allenex’s majority shareholders, and $9.0 million gross ($7.8 million net) in a September public offering. Common shares outstanding increased to 21.23 million at quarter-end; 21.28 million were outstanding on November 10. Warrants were reset to a $4.00 exercise price in connection with the public offering and are recorded as liabilities.
- Asset growth reflected the acquisition: intangible assets increased to $35.44 million and goodwill to $28.05 million from $6.65 million and $12.01 million, respectively, at year-end 2015.
Outlook, risks, and contingencies
- Going concern and financing: Management stated that available cash was not expected to cover projected operating needs for the next 12 months without additional financing. Absent sufficient financing and assuming Danske did not demand repayment, CareDx expected to exhaust cash in the quarter ending March 2017 unless it substantially cut costs and operations. The filing says failure to obtain financing or refinance debt could require significant reductions or cessation of operations and raises substantial doubt about the company’s ability to continue as a going concern.
- Debt covenant and maturities: Allenex violated Danske’s leverage covenant at June 30 and September 30; waivers were obtained, but management did not consider future compliance probable. Consequently, the Danske term debt was classified as current. Danske could demand repayment if covenant issues are not resolved. CareDx also had a contractual requirement to raise another $20 million in equity by March 31, 2017 before paying deferred acquisition consideration; the September offering supplied $9 million gross toward that requirement.
- Medicare reimbursement: Medicare represented approximately 45% of testing revenue in the first nine months. CMS’s September 30 proposed final gapfill rate for AlloMap was $1,921 per test, compared with the then-current $2,821 rate; CareDx requested reconsideration. Management warned that the lower rate, if finalized for 2017, could make Medicare testing uneconomic and materially harm revenue and operations.
- Products and development: QTYPE launched commercially at the end of September. Early DART study analysis showed increased dd-cfDNA levels in acute kidney rejection; the company was developing a follow-on clinical utility study for AlloSure. The filing also reports that Conexio’s SBT products were to be discontinued by December 31, 2016, and CareDx was negotiating continued access.
- Litigation and regulatory matter: Oberland sought at least $1.4 million over the failed bridge-loan arrangement; CareDx accrued that amount and asserted counterclaims. Separately, Nasdaq OMX Stockholm referred alleged Allenex takeover-rule violations to its Disciplinary Committee, which could impose a fine up to approximately $12 million; no provision was recorded.
- Controls and other risks: Management concluded disclosure controls were ineffective due to material weaknesses involving the financial close and acquisition accounting. Remediation was planned but not assured. Other risks include acquisition integration, reimbursement uncertainty, foreign-currency exposure, and potential inventory or intangible-asset impairment.
Important facts for investors to verify
- Whether CareDx raised adequate additional capital or refinanced debt, and whether it met the $20 million equity-raising condition by March 31, 2017.
- The final 2017 CMS reimbursement rate for AlloMap and its effect on Medicare test volume, pricing, and collections.
- Danske covenant compliance, any further waivers or repayment demands, and the timing and funding of debt and deferred acquisition payments.
- Allenex integration results, final purchase-price allocation, product margins, QTYPE adoption, and continuity of SBT product distribution.
- Outcomes of the Oberland litigation and Nasdaq Stockholm disciplinary review, plus progress in remediating the reported material weaknesses.