CareDx, Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. CareDx is a transplant diagnostics company with post-transplant testing, led by AlloMap, and pre-transplant products marketed through its Olerup business. Financial statements are unaudited.
Financial performance and position
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Total revenue | $12.0m | $10.7m | $23.6m | $17.3m |
| Operating loss | $(3.6)m | $(7.0)m | $(12.1)m | $(13.5)m |
| Net loss attributable to CareDx | $(4.0)m | $(10.5)m | $(9.5)m | $(20.2)m |
| Basic and diluted loss per share | $(0.19) | $(0.77) | $(0.45) | $(1.58) |
| Operating cash used | — | — | $(9.9)m | $(12.3)m |
Q2 revenue comprised $8.4m testing, $3.4m product, and $0.3m collaboration, license and other revenue. Six-month revenue comprised $16.3m, $7.0m, and $0.3m, respectively. Gross margin, calculated as revenue less testing and product costs, was approximately 57% in Q2 2017 versus 41% in Q2 2016, and 55% for the first half versus 50% in the prior-year first half. These comparisons are affected by the timing of the Allenex acquisition.
At June 30, cash and cash equivalents were $9.1m; restricted cash was $9.6m, including approximately $9.4m pledged under the JGB financing and unavailable for operations or debt repayment. Net carrying-value debt was $33.9m, all classified as current; scheduled gross debt maturities totaled $40.1m before $6.3m of discounts and issuance costs. Total current liabilities were $54.2m versus current assets of $19.9m. Total assets were $77.7m and stockholders’ equity was $12.0m.
Material changes versus prior comparable periods
- Q2 testing revenue rose 16% to $8.4m; AlloMap results delivered increased 7% to 3,861. Management attributed the revenue increase to higher test volume and improved cash collections.
- First-half testing revenue rose 19% to $16.3m; AlloMap results delivered increased 9% to 7,611.
- First-half product revenue rose to $7.0m from $3.5m, but the comparison is not like-for-like: CareDx acquired Allenex in April 2016, so the prior period includes only post-acquisition activity.
- Operating loss narrowed in both comparisons. Q2 expenses were lower, chiefly due to reduced general and administrative costs and lower product costs; the latter comparison also reflects a $1.2m Allenex inventory fair-value charge in Q2 2016.
- First-half 2017 included a $2.0m goodwill impairment for Olerup. Interest expense increased to $2.5m for the first half from $0.8m, primarily reflecting higher-cost JGB debt and amortization of its substantial debt discount.
- Net loss improved substantially, but results benefited from a $5.2m noncash gain from remeasurement of warrant and derivative liabilities; the comparable 2016 period recorded a $3.2m expense. The share-price-driven fair-value changes are not operating cash generation.
Outlook, financing, risks and unusual items
- Going concern and funding: Management says cash and expected revenue will not fund current operations beyond March 31, 2018 and that additional financing and/or debt refinancing is required. The filing states that these conditions raise substantial doubt about the company’s ability to continue as a going concern; failure to obtain funding could require significant reductions or cessation of operations.
- Debt and covenant risk: In March 2017, CareDx received $24.0m net from JGB against $27.8m principal debentures, used $11.2m to repay East West Bank, and pledged restricted cash. JGB debt carries 9.5% interest and conversion, redemption, premium, default and dilution provisions. CareDx reported noncompliance with certain Danske covenants at March 31 and June 30, 2017 and was seeking waivers. Danske could demand repayment if applicable terms permit.
- Subsequent debt extensions and dilution: July 1 agreements converted about $1.1m of Allenex deferred consideration into 1,022,544 shares at $1.12, required a $0.5m cash payment, and extended most remaining consideration to March 31, 2019; about $2.0m may be due December 31, 2017 absent conversion. Related FastPartner and Al Amoudi notes totaling about $4.1m including interest were extended to March 31, 2019. The agreements also reset certain warrant exercise prices and the JGB conversion price.
- Commercial and reimbursement outlook: Management expects research and development and sales and marketing expenses to increase as it develops and commercializes products. AlloSure kidney testing remains dependent on clinical adoption and reimbursement. The TULIP utility study began enrolling patients in April 2017; CareDx received a draft local coverage determination after MolDX technical assessment. No numerical revenue or earnings guidance is provided.
- Revenue and payer exposure: AlloMap is the principal testing revenue source, and Medicare represented 28% of total first-half revenue. Revenue recognition depends on payer coverage, collection history and cash receipts; management reported that 38% of AlloMap revenue was recognized on a cash basis in the first half. Future Medicare pricing under PAMA and payer coverage for AlloSure remain uncertainties.
- Controls and reporting: Management concluded disclosure controls were not effective at quarter-end because of four previously identified material weaknesses involving financial close, acquisition accounting, payer-contract revenue recognition and inventory valuation. Remediation was underway, but completion was not assured. The company also disclosed that late SEC filings made it ineligible to use Form S-3 for new short-form and shelf offerings; it said the earliest expected return to eligibility was May 1, 2018, assuming timely filings.
- Other notable items: A $2.0m Olerup goodwill impairment was recorded after a market-capitalization decline. A prior Oberland dispute was settled in March 2017 for $0.6m. The Roche royalty arrangement’s reduced royalty terms were scheduled to end September 30, 2017, subject to timely payment of royalties.
Most important facts for investors to verify
- Whether CareDx obtains Danske covenant waivers and additional financing or refinancing before liquidity becomes critical.
- Cash available for operations after excluding restricted cash, and actual cash burn relative to the March 31, 2018 funding horizon.
- JGB debt’s redemption, default and conversion terms, related dilution, and the timing and ability to meet debt maturities.
- Progress toward AlloSure commercialization, clinical utility evidence, payer coverage and reimbursement, including TULIP and the MolDX determination.
- AlloMap test volumes, collections, cash-basis revenue recognition, and Medicare/PAMA reimbursement developments.
- Whether internal-control weaknesses are remediated and whether the company regains Form S-3 eligibility as anticipated.