CareDx, Inc. — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. Unaudited condensed consolidated results; amounts below are in U.S. dollars. CareDx develops transplant diagnostics, including AlloMap, and acquired 98.3% of Allenex on April 14, adding pre-transplant HLA-typing products such as Olerup SSP.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Total revenue | $10.7M | $7.1M | $17.3M | $14.3M |
| Testing revenue | $7.2M | $7.0M | $13.7M | $14.1M |
| Product revenue | $3.5M | — | $3.5M | — |
| Operating loss | $(7.0)M | $(2.9)M | $(13.5)M | $(4.3)M |
| Net loss | $(10.5)M | $(3.2)M | $(20.2)M | $(5.5)M |
| Net loss per share, basic and diluted | $(0.77) | $(0.27) | $(1.58) | $(0.46) |
- Q2 revenue rose about 51%, mainly reflecting Allenex product sales after the acquisition. Testing revenue increased 3% in Q2, while AlloMap test results delivered increased 10% to 3,597. For the first half, testing revenue declined 3% despite a 9% increase in tests delivered to 6,961; management attributed the decline primarily to lower collections from cash-basis payers.
- Operating expenses were $17.7M in Q2 and $30.8M for the first half. First-half increases included acquisition-related costs and higher R&D spending. Cost of product included $1.3M of acquisition-related inventory fair-value step-up amortization. The filing does not present a consolidated gross-margin figure.
- Q2 and first-half losses included a $3.2M noncash charge from remeasurement of warrants. First-half other expense included $2.9M of costs for an Oberland bridge loan that did not proceed. Acquisition-related expenses were $3.8M for the first half.
Cash, debt and financing
- At June 30, cash and cash equivalents were $17.1M, down from $29.9M at December 31, 2015. First-half operating cash use was $12.3M; investing cash use was $20.8M, including $20.6M net cash paid for Allenex; financing provided $20.4M.
- Debt and capital lease obligations, net of discounts and issuance costs, were $28.2M. Current debt was $18.1M, including Allenex debt reclassified as current after a leverage-covenant violation and waiver. The company reported negative working capital following this reclassification.
- The April private placement and June subsequent financing generated $22.2M gross proceeds combined; net proceeds from the financings were approximately $20.6M. The financings included common shares, preferred shares that converted to common stock, and warrants. The company was required to raise an additional $20M in equity by March 31, 2017 under its East West Bank consent to the acquisition.
- Management stated that additional financing or refinancing is needed and, absent sufficient financing and assuming Danske does not demand repayment, cash could be exhausted in the quarter ending December 2016 unless costs and operations are substantially reduced. The filing states that these conditions raise substantial doubt about the company’s ability to continue as a going concern.
Material changes, outlook and risks
- Allenex acquisition: Purchase consideration was approximately $34.1M, comprising cash and 1.375M CareDx shares; $5.7M was deferred and payable by March 31, 2017. The acquisition added $3.5M of product revenue from April 14 through June 30. Purchase-price allocation remained preliminary.
- Medicare reimbursement: CMS proposed reducing the AlloMap Medicare fee from $2,821 to $732 effective January 1, 2017. The proposal was not final as of the filing; Medicare represented approximately 48% of testing revenue for the first half. Management warned adoption could force it to stop testing Medicare patients and materially harm operations.
- Product development: The DART kidney-transplant study enrolled more than 400 patients and its first analysis showed increased dd-cfDNA levels in acute rejection. Results were under review, with scientific presentation planned for the second half of 2016; management expected to initiate another clinical utility study. No formal financial guidance was provided.
- Other business risks: Conexio products used for SBT HLA typing were expected to be discontinued by December 31, 2016; CareDx was negotiating continued access. Allenex covenant compliance in future periods was uncertain despite a Danske waiver, and Danske could demand repayment if the issue were not resolved.
- Contingencies: Oberland sought at least $1.4M in a contract dispute; CareDx accrued that amount and filed counterclaims. Nasdaq Stockholm identified takeover-rule violations related to the Allenex acquisition; a possible disciplinary process could result in a fine or sanctions, with no provision recorded.
- Controls: Management concluded disclosure controls were ineffective due to two material weaknesses involving the financial close and acquisition accounting. Related errors were corrected in the filing; remediation was being prepared.
Important facts for investors to verify
- Whether CareDx secured financing or refinancing sufficient to address the stated cash runway, debt maturities and required $20M equity raise.
- CMS’s final AlloMap reimbursement decision and its effect on Medicare testing, collections and revenue.
- Danske covenant status, any repayment demand, and the timing and amount of debt due or refinanced.
- Progress integrating Allenex, final acquisition accounting, and the ability to replace or continue SBT product distribution.
- Developments in the Oberland litigation and Nasdaq Stockholm review, and progress remediating material weaknesses in financial controls.