2015 Annual Report
CAREDX LETTER TO SHAREHOLDERS
Dear Shareholders,
In 2015, CareDx made substantial progress on all three major objectives we set for ourselves. We made a difference in
many heart transplant patients’ lives through wider adoption of AlloMap®, our flagship product. In addition, we made
substantial progress on our internal product pipeline with the development of AlloSure and also initiated a substantial
acquisition as part of our external growth strategy.
AlloMap’s adoption grew in 2015, as evidenced by over 13,000 patient results being reported to our transplant center
cardiologists and their patients. AlloMap is our molecular diagnostic surveillance solution for monitoring heart transplant
patients’ organ health after an organ transplant procedure. This led to revenues of over $28 million in 2015, and included a
net loss of $13.7 million, as we greatly expanded our investment in future product development.
Heart transplant procedures and follow-on care are performed in premier medical centers across the country, and CareDx
is established in the vast majority of them. We support the treatment of these patients, who are frequent users of various
health care services and therefore are some of the highest cost patients in the system. Better surveillance of these patients
through our technology can lead to personalization of care. This is at the forefront of precision medicine, or diagnosing and
then treating patients based on their own unique genetic makeup and reaction to different modes of therapy. We are part of
this movement.
Our main product development effort in 2015 centered around the development of cell free DNA and getting our solution
for kidney transplant recipients into the clinic, with the completion of analytical validation studies in both heart and kidney
patients, and then initiating a clinical validation trial at major transplant centers across the U.S. As of the writing of this
letter, 13 transplant centers have enrolled over 360 patients and more than 1,000 patient results have been reported out.
Finally, regarding the third leg of our growth strategy, at the end of 2015, we entered into an agreement to purchase Allenex,
AB, a publically traded organ transplant company based in Stockholm, Sweden. Allenex provides diagnostic products
measuring the compatibility of a donor organ with the organ transplant recipient. The combination of our two organizations
will create a unique diagnostics company that focuses on patient outcomes along the pre-to-post transplant continuum.
Allenex’s sales are concentrated in Europe and other international markets, which when combined with CareDx creates a
truly international organization with an even greater range of products for organ transplant recipients. It will also increase
the size of CareDx by 50%, creating a company that should have enhanced growth prospects and better access to capital
and other resources.
As 2016 starts to unfold, we see continued progress being made on our cell-free, next generation solution for kidney
transplant patients, closing the Allenex acquisition and integrating our two organizations’ operations, and continuing our
mission of delivering precision medicine solutions in the diagnostic and perhaps other areas of medicine for the transplant
patient.
In 2015, CareDx enjoyed its first full year as a public company, and I am appreciative of the dedication and hard work
from all of our associates and partners. The support from our shareholders in 2015 will help make 2016 an even more
successful year for us all. Thank you.
With Best Wishes,
Peter Maag
President and CEO
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
(cid:95) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2015
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
(cid:134)
For the transition period from to
Commission File Number 001-36536
CAREDX, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
94-3316839
(I.R.S. Employer
Identification Number)
3260 Bayshore Boulevard
Brisbane, California 94005
(Address of Principal Executive Offices, Including Zip Code)
(415) 287-2300
(Registrant’s Telephone Number, Including Area Code)
Securities Registered Pursuant to Section 12(b) of the Act:
Title of Each Class
Common Stock, par value $0.001 per share
Name of Each Exchange on Which Registered
The NASDAQ Global Stock Market LLC
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes (cid:133) No (cid:95)
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes (cid:133) No (cid:95)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes (cid:95) No (cid:134)(cid:3)
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was
required to submit and post such files). Yes (cid:95) No (cid:134)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. (cid:95)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer (cid:134)
Non-accelerated filer (cid:95) (Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes (cid:133) No (cid:95)
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant, based on the closing price of a share of the
registrant’s common stock on June 30, 2015 as reported by The NASDAQ Global Market on such date was approximately $48,622,431. Shares of the
registrant’s common stock held by each executive officer, director and holder of 10% or more of the outstanding common stock have been excluded in that
such persons may be deemed to be affiliates. This calculation does not reflect a determination that certain persons are affiliates of the registrant for any
other purpose.
The number of shares of the registrant’s Common Stock outstanding as of February 29, 2016 was 11,966,899.
Accelerated filer
(cid:134)
Smaller reporting company (cid:134)
(cid:3)
Portions of the registrant’s Proxy Statement relating to the 2016 Annual Meeting of Stockholders to be held on June 16, 2016, are incorporated by
reference into Part III of this Annual Report on Form 10-K where indicated. Such Proxy Statement will be filed with the Securities and Exchange
Commission within 120 days after the end of the registrant’s fiscal year ended December 31, 2015.
DOCUMENTS INCORPORATED BY REFERENCE
TABLE OF CONTENTS
Item No.
PART I .............................................................................................................................................................
Item 1. Business ................................................................................................................................................
Item 1A. Risk Factors .......................................................................................................................................
Item 1B. Unresolved Staff Comments ..............................................................................................................
Item 2. Properties ..............................................................................................................................................
Item 3. Legal Proceedings ................................................................................................................................
Item 4. Mine Safety Disclosures .......................................................................................................................
PART II ...........................................................................................................................................................
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities ..........................................................................................................................................
Item 6. Selected Financial Data ........................................................................................................................
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations ...............
Item 7A. Quantitative and Qualitative Disclosures About Market Risk ...........................................................
Item 8. Financial Statements and Supplementary Data ...................................................................................
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ...............
Item 9A. Controls and Procedures ....................................................................................................................
Item 9B. Other Information ..............................................................................................................................
PART III..........................................................................................................................................................
Item 10. Directors, Executive Officers and Corporate Governance .................................................................
Item 11. Executive Compensation ....................................................................................................................
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters .........................................................................................................................................................
Item 13. Certain Relationships and Related Transactions, and Director Independence ...................................
Item 14. Principal Accountant Fees and Services .............................................................................................
PART IV ..........................................................................................................................................................
Item 15. Exhibits, Financial Statement Schedules ............................................................................................
Signatures .........................................................................................................................................................
Exhibit Index ....................................................................................................................................................
Page
No.
5
5
19
56
56
56
56
57
57
60
61
79
80
114
114
114
115
115
115
115
115
115
116
116
117
118
2
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All
statements contained in this Annual Report on Form 10-K other than statements of historical fact, including
statements regarding our future results of operations and financial position, our business strategy and plans, and our
objectives for future operations, are forward-looking statements. The words “believe,” “may,” “will,” “potentially,”
“estimate,” “continue,” “anticipate,” “intend,” “could,” “would,” “project,” “plan,” “expect” and the negative and
plural forms of these words and similar expressions are intended to identify forward-looking statements.
These forward-looking statements may include, but are not limited to, statements concerning the following:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
our ability to generate revenue from sales of AlloMap and future solutions, if any, and our ability to
increase the commercial success of AlloMap;
our plans and ability to develop and commercialize new solutions, including cell-free DNA solutions for
the surveillance of heart and kidney transplant recipients;
our ability to close our anticipated acquisition of Allenex, or other companies we may acquire, on
currently anticipated terms or within currently anticipated timeframes, and our ability to secure funding
for such transactions;
our ability to obtain, maintain and expand reimbursement coverage for payers for AlloMap and future
solutions, if any;
the outcome or success of our clinical trial collaborations and observational studies;
our dependence on certain of our suppliers and service providers
our compliance with federal, state and foreign regulatory requirements;
the favorable review of AlloMap and our future solutions, if any, in peer-reviewed publications;
our ability to protect and enforce our intellectual property rights, our strategies regarding filing
additional patent applications to strengthen our intellectual property rights, and our ability to defend
against intellectual property claims that may be brought against us;
our anticipated cash needs and our anticipated uses of our funds, including our estimates regarding
operating expenses and capital requirements;
anticipated trends and challenges in our business and the markets in which we operate;
disruptions to our business, including disruptions at our laboratories and manufacturing facilities;
our ability to retain key members of our management;
our ability to make successful acquisitions or investments and to manage the integration of such
acquisitions or investments;
our ability to expand internationally; and
our ability to comply with the requirements of being a public company.
These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those
described in the section entitled “Risk Factors” included in Part I, Item 1A and elsewhere in this Annual Report on
Form 10-K. Moreover, we operate in a very competitive and rapidly changing environment, and new risks emerge
from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all
factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ
materially from those contained in any forward-looking statements we may make. In light of these risks,
uncertainties and assumptions, the forward-looking events and circumstances discussed in this report may not occur
and actual results could differ materially and adversely from those anticipated or implied in the forward-looking
statements.
3
You should not rely upon forward-looking statements as predictions of future events. Although we believe that the
expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results,
levels of activity, performance or events and circumstances reflected in the forward-looking statements will be
achieved or occur. Moreover, neither we nor any other person assumes responsibility for the accuracy and
completeness of the forward-looking statements. Except as required by law, we undertake no obligation to update
publicly any forward-looking statements for any reason after the date of this report to conform these statements to
actual results or to changes in our expectations.
You should read this Annual Report on Form 10-K and the documents that we reference in this Annual Report on
Form 10-K and have filed with the SEC as exhibits to this Annual Report on Form 10-K with the understanding that
our actual future results, levels of activity, performance and events and circumstances may be materially different
from what we expect. We qualify all forward-looking statements by these cautionary statements.
4
ITEM 1. BUSINESS
Company Overview
PART I
We are a molecular diagnostics company focused on the discovery, development and commercialization of clinically
differentiated, high-value diagnostic surveillance solutions for transplant patients. Our first commercialized testing
solution, the AlloMap heart transplant molecular test, or AlloMap, is a gene expression test that helps clinicians
monitor and identify heart transplant recipients with stable graft function who have a low probability of
moderate/severe acute cellular rejection. Since 2008, we have sought to expand the adoption and utilization of our
AlloMap solution through ongoing studies to substantiate the clinical utility and actionability of AlloMap, secure
positive reimbursement decisions for AlloMap from large private and public payers, develop and enhance our
relationships with key members of the transplant community, including opinion leaders at major transplant centers,
and explore opportunities and technologies for the development of additional solutions for post-transplant
surveillance. We believe the use of AlloMap, in conjunction with other clinical indicators, can help healthcare
providers and their patients better manage long-term care following a heart transplant. In particular, we believe
AlloMap can improve patient care by helping healthcare providers to avoid the use of unnecessary, invasive
surveillance biopsies and to determine the appropriate dosage levels of immunosuppressants. We are also pursuing
the development of additional products for transplant monitoring using a variety of technologies, including
AlloSure, our proprietary next-generation sequencing test to detect donor-derived cell-free DNA, or dd-cfDNA,
after transplantation.
AlloMap is the only non-invasive method recommended in the International Society for Heart and Lung
Transplantation, or ISHLT, patient care guidelines for surveillance of heart transplant rejection in patients 15 years
of age or older. AlloMap has received 510(k) clearance from the U.S. Food and Drug Administration, or FDA, for
marketing and sale as a test to aid in the identification of recipients with a low probability of moderate or severe
acute cellular rejection. A 510(k) submission is a premarketing submission made to the FDA. Clearance may be
granted by the FDA if it finds the device or test provides satisfactory evidence pertaining to the claimed intended
uses and indications for the device or test. Additionally, we have obtained a CE mark, which indicates a product’s
compliance with European Union, or EU, legislation and enables the sale of such product within the EU. We have a
certificate of accreditation under the Clinical Laboratory Improvement Amendments of 1988, or CLIA, to perform
“high complexity” testing. Almost all clinical laboratories are subject to regulation under CLIA, which is designed
to ensure that laboratory testing services on materials derived from the human body are accurate and reliable.
Since the launch of AlloMap in January 2005, we have performed more than 81,000 commercial AlloMap tests,
including more than 13,000 tests in 2015, in our Brisbane, California laboratory. In 2015, AlloMap was used in
120 of the approximately 130 heart transplant centers in the United States. As of December 31, 2015, significantly
all of our testing revenue has come from the United States and all of our assets and operations are located in the
United States. In 2014, we began to expand our AlloMap offering through a partnership in Europe for which we
have secured a dedicated laboratory.
AlloMap has received positive coverage decisions for reimbursement from Medicare and many of the largest private
payers, including Aetna, Cigna, Humana, Inc., Kaiser Foundation Health Plan, Inc., TRICARE National Insurance
and WellPoint. We believe our success in achieving reimbursement confirms the value proposition of AlloMap to
our key constituents. As of December 31, 2015, we had been reimbursed for approximately 79% of AlloMap results
delivered in the twelve months ended June 30, 2015.
We have also successfully completed a number of landmark clinical trials in the transplant field demonstrating the
clinical utility of AlloMap for surveillance of heart transplant recipients. We initially established the analytical and
clinical validity of AlloMap on the basis of our Cardiac Transplanted Organ Rejection Gene expression
Observational (Crespo-Leiro M et al., AM. J. Transplantation, 2012), or CARGO, study, which was published in the
American Journal of Transplantation. A subsequent clinical utility trial, Invasive Monitoring Attenuation through
Gene Expression (Pham MX et al., N. Eng. J. Med., 2010), or IMAGE, published in The New England Journal of
Medicine, demonstrated that clinical outcomes in recipients managed with AlloMap surveillance were equivalent to
outcomes in recipients managed with biopsies. The results of our clinical trials have also been presented at major
medical society congresses and published in peer-reviewed publications in leading medical journals.
5
We are also engaged in efforts to develop additional testing solutions in the heart transplant market and new testing
solutions in other organ transplant markets. For instance, AlloSure, our development stage transplant surveillance
solution, applies proprietary next generation sequencing to detect and quantitate genetic differences between donor
derived cell-free DNA, or dd-cfDNA, in the blood stream emanating from the donor heart. We believe this solution
may help determine rejection-specific activity manifested as cell damage in the transplanted heart and other organs.
As part of our efforts to demonstrate the clinical utility of AlloSure, our proprietary next-generation sequencing test
that measures the percent of dd-cfDNA in solid organ transplant recipients, irrespective of the type of organ
transplanted, in May 2015 we initiated the DART trial. DART is designed to establish clinical validation, or the
clinical performance characteristics of dd-cfDNA in detecting clinical and sub-clinical rejection in kidney allograft
recipients. DART is a multicenter observational study of kidney transplant recipients where blood specimens are
drawn periodically after transplant during follow up visits and also after treatment for acute rejection. DART is also
designed to demonstrate the correlation of dd-cfDNA to renal function through comparison to both serum creatinine
and estimated glomerular filtration rate. We expect DART to run for a minimum of 18 months and we expect to
complete an first analysis of the data in 2016. Once we receive relevant information from the first analysis, we
expect to initiate a second clinical trial to establish the clinical utility of our dd-cfDNA kidney solution. At the end
of December 2015, DART had enrolled over 200 patients in 13 centers. Additionally, in late 2015, we announced
the completion of analytical validation for AlloSure. Samples used in the analytical validation included donor
recipient pairs with unrelated as well as closely related family members.
On December 16, 2015 we entered into purchase agreements to acquire, subject to certain conditions, approximately
78% of the outstanding shares of Allenex AB, or Allenex, from its three principal shareholders in exchange for a
combination of cash and our common stock. If we acquire all Allenex shares, the total purchase price for Allenex
will be approximately $35.0 million, payable in a combination of cash and equity. On March 7, 2016, we launched a
tender offer through the issuance of an Offer Document to acquire the remaining 22% of the shares of Allenex. In
connection with, and to fund a portion of the proposed acquisition, on December 15, 2015, we entered into a
commitment letter and fee letter with Oberland Capital SA Davos LLC, collectively with its affiliates and assignees,
Oberland Capital, for a six month bridge loan of $18.0 million, to be borrowed in connection with the closing of the
acquisition. Refer to “Management’s Discussion and Analysis of Results of Operations and Financial Condition—
Overview—Recent Developments—Allenex Tender Offer” included in Part II, Item 7 of this Annual Report on
Form 10-K for additional information.
We are organized and operate in a single segment. See “Management’s Discussion and Analysis of Financial
Conditions and Results of Operations” included in Part II, Item 7 of this Annual Report on Form 10-K.
Our History
We were originally incorporated in Delaware in December 1998 under the name Hippocratic Engineering, Inc. In
April 1999, we changed our name to BioCardia, Inc., in June 2002, we changed our name to Expression
Diagnostics, Inc., in July 2007, we changed our name to XDx, Inc. and in March 2014, we changed our name to
CareDx, Inc. Our principal executive offices are located at 3260 Bayshore Boulevard, Brisbane, California and our
telephone number is (415) 287-2300.
On June 10, 2014, we acquired ImmuMetrix, Inc., or ImmuMetrix, a privately held development-stage company
working on dd-cfDNA-based solutions in transplantation and other fields. Through this acquisition, we added to our
existing know-how, expertise and intellectual property in applying dd-cfDNA technology to the surveillance of
transplant recipients, which has contributed to the development of AlloSure. The intellectual property rights of
ImmuMetrix included an exclusive license from Stanford University to a patent relating to the diagnosis of rejection
in organ transplant recipients using dd-cfDNA.
6
Limitations of Existing Approaches for Surveillance of Transplant Recipients
The care of organ transplant recipients is an intense and costly effort and requires life-long surveillance and
management by highly specialized clinicians and other healthcare providers. For example, based on internal
calculations based on an internal analysis as of 2011, heart transplant recipients often incur lifetime costs of more
than $1.9 million and kidney transplant recipients often incur lifetime costs of more than $1.1 million. The historical
standard for heart transplant surveillance has been the microscopic examination of heart tissue obtained through an
invasive endomyocardial biopsy. In the biopsy procedure, a catheter is inserted into the right internal jugular vein
via the recipient’s neck and threaded through blood vessels into the inner chamber of the heart. Four pieces of tissue
are cut from the wall of the heart and sent to a laboratory for examination by a pathologist who uses a microscope to
look for evidence of cellular rejection. Due to the limitations of biopsies, including pathologist evaluations which
are subjective and dependent upon visual assessment and qualitative interpretation, the risk of sampling errors and
the potential for complications and other health risks, these procedures are not frequently used by clinicians to tailor
the use of immunosuppressants. The typical schedule of biopsy surveillance may involve eight to ten biopsies within
the first six months after transplant and a total of ten to fifteen biopsies within the first year post-transplant. Because
repeated biopsies incur cumulative risk and trauma to the recipient, the frequency of biopsy surveillance after one
year has been low, despite the fact that recipients would benefit from continued monitoring for rejection and
management of their immunosuppressive drugs for the rest of their lives. With less biopsy data collected after the
first year post-transplant, clinicians have less information upon which to tailor immunosuppression treatment for
their recipients.
The use of renal biopsies for surveillance of kidney transplants is also limited due to the risks associated with such
invasive procedures. Therefore, the main clinical test indicator of transplanted kidney dysfunction is an increase in
serum creatinine levels, which though widely used, literature suggests may be nonspecific and detected too late,
after significant and irreversible renal function loss has occurred. As the current solutions for the surveillance of
organ transplant recipients provide only limited and infrequent information on the presence or absence of rejection,
clinicians tend to administer relatively high levels of immunosuppression therapy to control rejection risk, which
may be more than required for an individual recipient. Due in part to this long-term high level of
immunosuppression therapy, illness and mortality rates among transplant recipients remain well above those of the
general population and have not significantly improved in the last ten years.
Immunosuppression of Heart and Kidney Transplant Recipients
The risk of rejection in heart and kidney transplant recipients is managed primarily through the use of
immunosuppressive drugs. Surveillance biopsies are infrequent after the first year because of invasive procedural
risks, discomfort, inconvenience, expense and the low rate of finding moderate to severe grade rejection. As a result,
clinicians have limited and infrequent information about an individual recipient’s risk of rejection over the months
and years following transplant. In the average recipient, the immune system gradually adapts to the organ graft, and
the need for immunosuppression declines over time. However, there is meaningful variation in the level of rejection
activity and need for immunosuppression among transplant recipients. Limited insight into the risk profile of the
individual recipient often causes clinicians to apply a ‘one-size-fits’ all approach to immunosuppression to help
protect against the severe consequences of rejection. Although typical doses of immunosuppressants result in a low
rate of rejection in the transplant population as a whole, many individuals receive more immunosuppressants than
they may actually need. Improved post-transplantation diagnostics are necessary to make further gains in the long-
term care and health outcomes of heart, kidney and other organ transplant recipients.
The Need for a Better Surveillance Solution
More effective solutions for the surveillance and risk assessment of recipients would improve the clinician’s ability
to individualize immunosuppression therapy and to reduce the use of invasive biopsies. We believe that core
elements of effective surveillance solutions include:
(cid:120)
(cid:120)
(cid:120)
highly accurate and quantitative results;
non-invasive, without creating risks to the recipient;
easy to administer;
7
(cid:120)
(cid:120)
(cid:120)
differentiate rejection from quiescence;
detect rejection earlier; and
timing and frequency of results that allow informed and effective treatment decisions.
Our Products and Services
We develop and provide a diagnostic surveillance testing solution for heart transplant recipients. Our initial test,
AlloMap, is designed to help clinicians to regularly monitor for heart transplant rejection throughout the life of the
recipient, modulate the use of immunosuppression and make more personalized treatment decisions. The AlloMap
test uses a sample of the patient’s blood. Blood draws are relatively painless and the process is routinely performed
in laboratories around the world. AlloMap may be used instead of a surveillance heart biopsy to rule out acute
cellular rejection in heart transplant recipients. AlloMap offers rapid, high quality results, and for approximately
88% of patients, we return AlloMap results to the clinician within three business days after the blood draw.
Additionally, we are in the process of commercializing AlloSure, our development stage transplant surveillance
solution which applies proprietary next generation sequencing to detect dd-cfDNA after transplantation.
Overview
AlloMap uses gene expression technology to aid in the identification of heart transplant recipients at low risk of
rejection. The test measures the molecular signatures that correlate with biological activity associated with moderate
to severe acute cellular rejection. Gene expression may indicate acute cellular rejection well before the evidence of
damage is visible from a tissue biopsy sample. AlloMap applies a proprietary mathematical algorithm comprised of
the expression values, or RNA levels, of 20 genes of which 11 are informative and 9 are for quality control, and then
yields a single AlloMap score. AlloMap may be used for heart transplant recipients 15 years of age or older, starting
on day 55 post transplant.
AlloMap provides a single integer score ranging from 0 to 40 and determines the probability of the absence of
moderate to severe acute cellular rejection. A key benefit of the AlloMap score is its negative predictive value, or
NPV. The NPV of AlloMap is the likelihood that a heart transplant recipient is at low risk for rejection. The NPV
for recipients with an AlloMap score below the threshold range for one or more years post-transplant can be greater
than 99% depending on the actual score.
The clinical utility of AlloMap is well established. AlloMap is the first and only non-invasive method recommended
in the ISHLT patient care guidelines for surveillance of heart transplant recipients for rejection in non-infants.
AlloMap has obtained 510(k) clearance from the FDA as an In Vitro Diagnostic Multivariate Index Assay, or
IVDMIA. In addition, the clinical utility of AlloMap is supported by numerous clinical trials sponsored by us, the
results of which have been published in leading peer-reviewed medical journals.
Through December 31, 2015, we have performed more than 81,000 commercial AlloMap tests in total. We estimate
that there are approximately 130 centers performing heart transplants in the United States. In 2015, AlloMap was
used in 120 of these centers.
In incorporating AlloMap into their practice, clinicians may consider recipient history, a physical exam, graft
function and the results of AlloMap at each post-transplant clinic visit. If the recipient’s AlloMap score is below an
applicable threshold, in the absence of other clinical indicators of rejection, clinicians may elect not to conduct a
surveillance biopsy at that time. Where there are signs or indications of rejection, evidence of failure or impaired
function or an AlloMap score greater than the applicable threshold, a biopsy may be ordered.
AlloMap Score Variability, or AMV, is a new service offered by us that we believe provides useful, complementary
information to help personalize long-term care of heart transplant recipients. It is available only upon request by
clinicians. A patient’s AMV is based on the variability of a patient’s AlloMap scores over time and may be used as a
stratification tool in estimating the risk of probability that one or more of the clinical events in heart transplant
recipients may occur in the future. AMV is available from four AlloMap test results within a 24-month period. A
low AMV may indicate a lower risk of future events, which suggests that a patient may be a potential candidate for
8
reduced immunosuppression. A high AMV may indicate a higher risk of future events and a patient may merit more
vigilant surveillance. The concept of AMV was developed over the course of several years, beginning as an
observation in clinical studies of low score variability among stable patients which suggested that AMV might be a
predictor of future clinical events and rejection episodes. The Cardiac Allograft Rejection Gene Expression
Observational II Study, or CARGO II, included data which demonstrated that AMV may be useful in estimating the
probability of future events of death, re-transplantation or graft failure in heart transplant recipients who were
undergoing surveillance with AlloMap testing more than 315 days following transplantation.
Clinical Trials of AlloMap and AlloSure
The clinical validation and utility of AlloMap is supported by a number of major clinical trials involving more than
2,000 heart transplant recipients and published in leading peer-reviewed medical journals. Our trials have been
designed to evaluate the clinical utility of our solutions and are an integral part of our business strategy, clinical
development and marketing programs. In heart transplantation, two major observational trials, CARGO and
CARGO II, enabled the initial development, validation and further validation of AlloMap to detect and monitor
acute cellular rejection in heart transplant recipients. Blood samples and clinical data from these two trials have been
preserved in a multi-year, multicenter registry which we are sponsoring. We expect these samples and data to enable
further discovery and product development of new indicators of rejection activity, or biomarkers, and new
diagnostic solutions. We believe these repositories, which contain over 37,000 samples, are rich sources for further
new product research and development because individual recipients were followed for 10 serial visits over one year
or more, on average, and in many cases associated biopsy rejection grades and other clinical outcome endpoints are
available for analysis, correlative studies and validation efforts that we believe will be useful for new product
development.
Additional clinical utility trials, including IMAGE and EIMAGE, have demonstrated that clinical outcomes in
recipients managed with AlloMap surveillance were equivalent to outcomes in recipients managed with biopsies.
We have also published two studies retrospectively analyzing data from two (IMAGE and CARGO II) earlier trials
that demonstrate how the variability in AlloMap scores over time may be useful in predicting the risks of rejection
and graft dysfunction.
In May 2015, we initiated the DART trial to clinically validate AlloSure, our proprietary next-generation sequencing
test that measures the percent of dd-cfDNA in solid organ transplant recipients, regardless of the type of organ
transplanted. DART is designed to establish clinical validation, or the clinical performance characteristics of dd-
cfDNA in detecting acute rejection in kidney allograft recipients. DART is a multicenter observational study of the
clinical status of renal transplant patients and blood specimens are collected periodically at post-transplant follow up
visits and also at the time of renal biopsies following treatment for acute rejection. DART is also designed to
demonstrate the correlation of dd-cfDNA to renal function through comparison to both serum creatinine and
estimated glomerular filtration rate. Patients will be followed in DART for a minimum of 18 months. Once we
receive relevant information from the first planned analysis of DART, we expect to initiate a second clinical trial to
establish the clinical utility of our dd-cfDNA kidney solution. At the end of December 2015, DART had enrolled
over 200 patients in 13 centers.
Research and Development
Our research and development activities focus on developing cutting edge organ transplant surveillance solutions,
and we seek to continuously explore and develop new clinically-relevant approaches to our products. Our ongoing
research and development efforts include:
(cid:120)
(cid:120)
further refinement of the AlloMap product line;
additional studies to expand the clinical utility of AlloMap and generate additional data to enhance
clinical understanding of transplant rejection;
9
(cid:120)
(cid:120)
new product development in other areas of transplant surveillance, such as validating the use of
AlloSure for heart and dd-cfDNA technology as a biomarker for rejection in other organs; and
technology platform development to increase efficiency and lower costs in our testing and laboratory
operations.
Our research and development efforts are not limited to specific technology platforms, biomarkers or
methodologies. Instead, we aim to leverage current and future innovations in biomarker identification and
measurement in developing future solutions.
Our research and development expenses for the years ended December 31, 2015, 2014 and 2013 were $9.3 million,
$3.8 million and $3.2 million, respectively.
During 2015, our European commercial partner Diaxonhit SA, or Diaxonhit, assisted with the design of a health
economic study for AlloMap reimbursement in Europe. Diaxonhit is a French publicly traded specialty diagnostics
company with activities in France, Switzerland and Belgium, and is a leader in specialty in-vitro diagnostics for
transplantation, infectious diseases and cancer. Additionally, the French Ministry of Health has recently approved
the funding of a study designed to demonstrate that AlloMap is non-inferior to biopsy as a method of evaluating the
risk of acute cellular rejection among French heart transplant patients.
dd-cfDNA as a Biomarker for Organ Rejection
We are currently engaged in discovery and development efforts using dd-cfDNA to develop additional post-
transplant diagnostic solutions, with a focus on a test for heart and kidney rejection. We believe dd-cfDNA may be
useful as a biomarker for the detection of rejection related organ damage in solid organ transplant recipients. dd-
cfDNA are short fragments of DNA that are released into the blood stream when cells die. dd-cfDNA assays have
transformed pre-natal testing by providing a non-invasive, accurate method to detect genetic abnormalities in a fetus,
without needing an invasive amniocentesis procedure. In a transplant recipient, we believe the differences in the
relative amounts of dd-cfDNA from the donated organ and the recipient can be used to distinguish between patients
with a healthy or damaged donor organ.
Initial studies such as Heart Transplants Are Genome Transplants: Universal Noninvasive Detection of Organ
Transplant Rejection (Snyder T M et al., Proceedings N. Academy Sciences, 2011) and the Highly Sensitive Non-
Invasive Cardiac Transplant Rejection Monitoring Using Targeted Qualification of Donor Specific Cell Free DNA
(Hidestrand M et. al., J. Am. Coll. Cardiology, 2013) indicate that dd-cfDNA may be a universally applicable
marker for rejection, not only for heart, but for kidney, liver and lung transplant recipients as well. Our initial studies
and other external studies have reported that the proportions of dd-cfDNA in heart transplant recipients increase as
much as five-fold during rejection episodes. Measuring the level and changes in the relative amount of dd-cfDNA in
the blood stream may be a useful new method for detecting rejection. This technique involves measuring the dd-
cfDNA released by dying cells from the donor organ into the recipient’s blood stream. The level of donor specific
dd-cfDNA from the transplanted organ can be monitored in the recipient’s blood stream over time, and changes in
organ status may be detected as changes in the donor dd-cfDNA level. The rationale for this approach arises from
the observation that both acute and chronic rejection processes are associated with high levels of cell death in the
transplanted organ.
In early 2015 we presented preliminary data demonstrating an increase of dd-cfDNA in the plasma of patients prior
to organ rejection and the decrease of dd-cfDNA following immunosuppressive therapy for acute rejection in heart
transplant recipients, using blood samples and clinical data from our CARGO II repository. These tests were
conducted in our research facilities using our library of well annotated blood samples from primarily heart organ
transplant patients. The results were presented at several professional medical society meetings.
10
dd-cfDNA for Heart Transplants
We believe that a dd-cfDNA-based solution for heart transplant recipients could provide additional value to
clinicians, particularly in situations where a recipient’s AlloMap score does not suggest a low probability of acute
rejection. Studies have reported that a higher percentage of dd-cfDNA in the blood stream of patients with moderate
or severe rejection as determined by an associated biopsy specimen. We believe a dd-cfDNA solution for heart
could help clinicians to identify recipients with a higher probability of rejection and make any subsequent biopsy a
more effective diagnostic tool, because the likelihood of detecting rejection in the biopsy specimen would be
substantially enhanced.
We have completed internal studies with our collection of samples. We have established our proprietary strategy for
quantification of donor specific dd-cfDNA and we have completed initial proof of concept studies. We now offer
AlloSure as a laboratory developed test for a limited number of heart transplant centers and physicians as part of the
D-OAR registry study.
Other steps in our AlloSure development process have included publication of abstracts in association with
professional meetings on the results of the clinical validity of AlloSure in our CARGO II sample and data
repository.
dd-cfDNA for Kidney Transplants
Our DART clinical trial is aimed at establishing the clinical validity of a dd-cfDNA for kidney transplant patients.
We are applying expertise we gained developing AlloSure to develop a dd-cfDNA solution for other organ
transplants, beginning with kidney transplants. We have a proprietary library of longitudinal blood and urine
samples from kidney transplant recipients acquired during the course of our Kidney Transplanted Organ Rejection
Gene expression Observational Study, or KARGO.
An interventional clinical study to establish clinical utility of dd-cfDNA is expected to commence after initial results
are obtained from the DART validation study. We may seek to acquire rights to access additional well-curated
samples from other university hospitals and other sample repository consortiums in the United States with which we
maintain relationships. We plan to expand the clinical validity evidence in support of commercialization for use in
kidney transplant recipients. If developed, we would commercialize this solution. We recently designed and
expanded our CLIA-CAP-compliant lab to accommodate clinical-grade next generation sequence testing and
released a clinically validated Laboratory Developed Test, or LDT, under CLIA in December 2015.
We previously applied for and obtained FDA clearance for our AlloMap solution based on draft guidance published
by the FDA in September 2006. That guidance was never finalized by the FDA and, at present, we do not anticipate
seeking 510(k) clearance from the FDA for our dd-cfDNA-based kidney solution as part of our initial launch. If the
FDA changes its current policy with respect to the regulation of LDTs, we may be required to seek FDA clearance
or premarket approval for our dd-cfDNA-based kidney solution. The time required to develop and validate a test for
kidney transplants depends on a number of factors, including the success and timing of developing a dd-cfDNA test
for heart transplants and the time required to acquire sufficient samples.
Reimbursement
We have been successful in achieving reimbursement from many payers. The reimbursement process can take six
months or more to complete depending on the payer. As of December 31, 2015, we have been reimbursed for
approximately 79% of AlloMap results delivered in the twelve months ended June 30, 2015.
Reimbursement for AlloMap comes primarily from Medicare, private third party payers such as insurance
companies and managed care organizations, Medicaid and hospitals. A number of payers have adopted coverage
policies approving AlloMap for reimbursement. Such policies often approve reimbursement for tests performed
from six-months or one year post-transplant through five years post-transplant. For tests performed outside the scope
of the payer’s policy, and for tests performed where the payer has not adopted a coverage policy, we pursue
reimbursement on a case-by-case basis. If a reimbursement claim is denied, we generally pursue the appeals process
for the particular payer.
11
AlloMap has been billed since the inception of the test using an unlisted CPT code. This approach is consistent with
the billing approach for many diagnostic tests. However, in February 2015 Medicare assigned a Category 1 CPT
code for AlloMap.
Due to the assignment of a Category 1 CPT, in September 2015, the Centers for Medicare & Medicaid Services, or
CMS, issued a proposed Clinical Laboratory Fee Schedule, or CLFS, Preliminary Determinations for calendar year
2016. In the draft, CMS proposed large changes in reimbursement for a number of established molecular diagnostic
tests, including AlloMap. Under the proposed fee schedule, AlloMap reimbursement would have been reduced by
77% from $2,821.00 to $644.62.
However, in October 2015, CMS reversed its preliminary CLFS and restored the final pricing determinations for
AlloMap in the 2016 CLFS to $2,821.00, which is the same as the previous rate set by a number of Medicare
Administrative Contractors, or MACs, including Noridian Administrative Services, Cigna Governmental Services,
and Palmetto GBA. CMS has deferred formal Category 1 CPT pricing determinations until 2017.
Medicare
We are reimbursed for a substantial portion of our tests performed on recipients covered by Medicare. These
represented 36%, 37% and 39% of all AlloMap tests in 2015, 2014 and 2013, respectively. Approximately 50%,
51% and 53% of all testing revenue was derived from Medicare reimbursements for the years ended December 31,
2015, 2014 and 2013, respectively. Medicare reimbursement for AlloMap began in 2006 and has continued through
three successive Medicare Administrative Contractors, which are the local organizations that make most coverage
decisions for Medicare.
Private Payers and Medicaid Payers
We are reimbursed for a substantial portion of the tests we perform on patients covered by private payers and
Medicaid payers. Coverage policies approving AlloMap for reimbursement have been adopted by many of the
largest private payers, including Aetna, Cigna, Humana, Inc., Kaiser Foundation Health Plan, Inc., TRICARE
National Insurance and WellPoint, and a number of state Medicaid programs. Many of the payers with positive
coverage policies have also entered into contracts with us to formalize pricing and payment terms. With private
payers and Medicaid payers that have not yet adopted positive coverage policies, we obtain reimbursement from
those payers on a case-by-case basis for a significant portion of claims.
International
In 2013 we initiated a commercial agreement with a term of 10 years that provides for exclusive rights to promote
AlloMap in Europe with Diaxonhit, a leader in specialty in-vitro diagnostics for transplantation, infectious diseases
and cancer. Diaxonhit has agreed to commercialize AlloMap in all countries in western and central Europe directly
and through sub-partners. Under the terms of our agreement, we will provide Diaxonhit with training and a license
to perform AlloMap. In Europe, we receive revenue in two ways; first, through our sale of testing materials to our
partner, Diaxonhit, and second, through royalties on Diaxonhit’s net sales of AlloMap. Diaxonhit will pay royalties
to us on the net sales, as defined in the agreement, of AlloMap tests, in the mid to high teens. Diaxonhit made an
upfront payment to us in cash of approximately €387,500 ($503,000) and Diaxonhit’s publicly traded common stock
with a value at the time of €387,000 following execution of the agreement. The cash portion of this upfront payment
will offset the royalties payable to us upon the satisfaction of certain milestones in the first three years following the
first commercial sale. Diaxonhit is also obligated to pay additional royalties based on certain milestones, up to a
maximum of €1,450,000, and some of the royalty payments may be made pursuant to the issuance to us of
Diaxonhit’s publicly traded common stock. Through Diaxonhit, we have also secured a dedicated laboratory, the
Strasbourg University Hospital Central Immunology Laboratory, or HUS, in France.
Our agreement with our Canadian partner, LifeLabs Medical Laboratory Services, was terminated in August 2015
and we now sell directly in Canada with a focus on the largest province: Ontario.
12
Testing and Laboratory Operations
Our laboratory operations are headquartered at our Brisbane, California laboratory, which is certified under the
Clinical Laboratory Improvement Amendment of 1988, or CLIA, and where we perform all testing in support of our
U.S. patients. Through our European commercial partner, we have contracted with a dedicated laboratory in France
with HUS for AlloMap testing in Europe. We undertook a multi-step validation process to demonstrate that
AlloMap test results released from the HUS laboratory are equivalent to AlloMap results generated by our main
laboratory in the United States. The technology transfer was completed in January 2016, and patient samples can
now be tested at HUS. We believe that our laboratory capacity will be adequate to meet demand for AlloMap in
Europe for the next several years.
We have also recently expanded existing lab facilities in Brisbane, CA to accommodate CLIA-compliant space
specifically designed for clinical-grade next-generation sequencing, or NGS, testing. This new laboratory space has
been established to support future products that target dd-cfDNA for the surveillance of organ transplant recipients.
The expanded facility also includes a state-of-the-art laboratory information management system containing best-in-
class NGS bioinformatics and customized software modules.
When AlloMap is ordered by a clinician, a blood sample is drawn and processed to isolate the white blood cells,
which are subsequently broken down, frozen and sent via overnight courier to our laboratory. Each of the 20 genes
comprising AlloMap are tested in triplicate and results are reported to the ordering clinician by fax within three
business days of receipt of the sample. Rigorous quality control testing is conducted at every phase of the test
process. Test samples that fail to meet quality control criteria are immediately re-tested and the ordering clinician is
notified of the need to re-test if turnaround time will be affected.
We rely solely on single suppliers to provide certain laboratory instruments and reagents that we use to perform
AlloMap. These sole source suppliers include Thermo Fisher Scientific Inc., or Thermo Fisher, which supplies us
with instruments, laboratory reagents, a master mix formula and consumables, Becton, Dickinson, and Company
which supplies us with cell preparation tubes, and Therapak Corporation, which supplies us with a proprietary buffer
reagent. One of the reagents supplied to us by Therapak Corporation is, in turn, obtained by Therapak Corporation
from Qiagen N.V. and is a proprietary formulation of Qiagen N.V.
We have completed all the verification and validation studies with Thermo Fisher for the development of a custom
master mix. All three full scale validation lots passed our acceptance testing. We now routinely purchase this
material for routine use in the production of its AlloMap test plates.
Sales and Marketing
Our sales organization consists of a direct sales team in the United States which interacts with all aspects of the
transplantation channel, including sales, medical science, reimbursement, customer service and field laboratory/draw
site support. As of December 31, 2015, our sales and marketing team consisted of 22 employees, including
transplant account sales executives, reimbursement account managers, medical science liaisons and patient service
center and customer service personnel. All personnel are field based except for customer service, which are based in
our California headquarters.
In 2015, AlloMap was used in 120 of the approximately 130 heart transplant centers in the United States. Our
marketing focuses on the clinical and economic benefits of AlloMap and the scientific validation that supports our
test. Our strategy includes continued marketing to and education of clinicians and administrators at treatment centers
that have used our test to increase the number of clinicians at those centers using our test, and to have centers adopt
formal protocols for AlloMap use.
Competition
We believe the principal competitive factors in our target markets include:
(cid:120)
(cid:120)
quality and strength of clinical and analytical validation data;
confidence in diagnostic results;
13
(cid:120)
(cid:120)
(cid:120)
(cid:120)
the extent of reimbursement;
inclusion in practice guidelines;
cost-effectiveness; and
ease of use.
We believe we compete favorably on the factors described above.
Existing diagnostic methods for heart transplant rejection generally involve evaluating biopsy samples to determine
the presence or absence of rejection, and for kidney transplant rejection include general, non-specific clinical
chemistry tests, though biopsies are also a surveillance diagnostic tool. Both of these practices have been the
standard of care in the United States for many years, and we will need to continue to educate clinicians, transplant
recipients and payers about the various benefits of our test in order to change clinical practice. Also, many transplant
centers are located within hospitals that have their own laboratory facilities and have capacity to conduct various
tests, so hospitals may choose to rely on internally developed and/or internally performed surveillance and
diagnostic tests. Competition for kidney surveillance diagnostics can also come from biopsies. However, because of
the risks and discomforts of the invasive kidney biopsy procedure, as well as the expense and relatively low rate of
finding moderate to severe grade rejection, biopsy is not a standard practice for surveillance of transplanted kidneys.
Additional competition for kidney surveillance diagnostics currently comes from general, non-specific clinical
chemistry tests such as serum creatinine, urine protein, complete blood count, lipid profile and others that are widely
ordered by physician offices and routinely performed in clinical reference labs and hospital labs.
We also expect the competition for post-transplant surveillance to increase as there are several established and early-
stage companies in the process of developing novel products and services for the transplant market which may
directly or indirectly compete with AlloMap or our development pipeline. In addition to companies focused on pre-
transplantation such as Thermo Fisher Scientific Inc.’s One Lambda and Immucor, Inc.’s LIFECODES businesses,
companies who have not historically focused on transplantation, but have knowledge of dd-cfDNA technology, have
indicated they are considering this market.
Our potential competitors may have widespread brand recognition and substantially greater financial, technical and
research and development resources and selling and marketing capabilities than we do. Others may develop products
with prices lower than ours that could be viewed by clinicians and payers as functionally equivalent to our solution,
or offer solutions at prices designed to promote market penetration, which could force us to lower the price of our
current and future solutions and affect our ability to achieve or maintain profitability.
Intellectual Property
Patents and Proprietary Technology
In order to remain competitive, we seek to develop and maintain protection on the proprietary aspects of our
technologies. We rely on a combination of patents, copyrights, trademarks, material data transfer agreements and
licenses to protect our intellectual property rights. We also rely upon unpatented trade secrets and improvements,
unpatented know-how and continuing technological innovation to develop and maintain our competitive position.
We generally protect this information with confidentiality and reasonable security measures.
Our core patent position for AlloMap is based on issued patents and patent applications disclosing identification of
genes differentially expressed between activated and resting leukocytes and demonstration of correlation between
gene expression patterns and specific clinical states and outcomes. Our strategy is to continue to broaden our
intellectual property estate for AlloMap through the discovery and protection of gene expression patterns and their
correlation with specific clinical states and outcomes, as well as the algorithms needed for clinical assessment.
14
As of December 31, 2015, we have 16 issued United States patents, and one pending patent application outside the
United States related to transplant rejection and autoimmunity. We have five issued United States patents covering
methods of diagnosing transplant rejection using all 11 informative genes measured in AlloMap. The expiration
dates of these patents range from 2021 to 2024. In the area of dd-cfDNA-based transplant diagnostics, we have filed
a patent application to cover our research and development work in this field. In connection with our June 2014
acquisition of ImmuMetrix, we obtained an exclusive license from Stanford University to a patent relating to the
diagnosis of rejection in organ transplant recipients using dd-cfDNA. This patent has an expiration date of
November 5, 2030.
We have six issued United States patents covering a method of diagnosing or monitoring autoimmune or chronic
inflammatory diseases, such as lupus, by detecting specific genes. While we have clinical samples and patents
covering lupus diagnostics, we do not intend to actively pursue the lupus test opportunity.
AlloMap, XDx and CareDx are registered trademarks of our Company in the United States.
We have developed trade secrets and know-how since our inception. These are found particularly in technical areas
such as optimized systems for making precise and reproducible quantitative PCR measurements, and in the analysis
of genomic data and algorithm development.
License Agreements
We currently rely on license agreements to obtain rights under certain patents that we believe may be necessary to
make, use and sell our AlloMap test and future solutions. We may in the future rely, at least in part, upon licensing
agreements with third parties to obtain patent rights and transfers of technology, information and know-how that
enable us to further our development of additional solutions for post-transplant surveillance.
In November 2004, we entered into a license agreement with Roche Molecular Systems, Inc., or Roche, which was
amended in January 2007, July 2007, October 2008 and September 2014. The agreement grants us the right to use
PCR and quantitative real time PCR for use in clinical laboratory services. This is a non-exclusive license agreement
in the United States covering the claims in multiple Roche patents. Under the terms of the agreement, we are
required to report and pay royalties, after adjustment due to a discount for combination services, in the mid-single
digits on test revenues from products using the licensed intellectual property on a quarterly basis until September
2017, pursuant to a Settlement Agreement and Mutual Release, dated September 11, 2014, or Settlement
Agreement. As part of the Settlement Agreement, we will continue (i) a downward adjustment of the combination
services percentage used to determine the portion of the AlloMap service that is royalty bearing under the terms of
the license until September 30, 2017 and (ii) to report and pay quarterly royalties within 45 days of the end of each
quarter. Roche has agreed that subject to our timely payment of all applicable royalties through such date, no further
royalties will be payable by us for periods after September 20, 2017.
In June 2014, we entered into an amended and restated license agreement with Stanford University (Stanford) which
granted us an exclusive license to a patent relating to the diagnosis of rejection in organ transplant recipients using
dd-cfDNA and a non-exclusive license to related technology provided by Stanford. Subject to various rights of
extension, we are required to achieve certain development and commercialization milestones set forth in the license
agreement. Under the terms of the license agreement, we are required to report and pay an annual license
maintenance fee, six milestone payments and royalties in the low single digits on net sales of products incorporating
the licensed technology.
Regulation
Clinical Laboratory Improvement Amendments of 1988
As a clinical laboratory, we are required to hold certain federal, state and local licenses, certifications and permits to
conduct our business. Under CLIA, administered by CMS, we are required to hold a certificate applicable to the type
of work we perform and to comply with standards covering personnel, facilities administration, quality systems,
proficiency testing and performance. Almost all clinical laboratories are subject to regulation under CLIA, which is
designed to ensure that laboratory testing services on materials derived from the human body are accurate and
reliable.
15
We have a certificate of accreditation under CLIA to perform “high complexity” testing. Laboratories performing
high complexity testing are required to meet more stringent personnel and quality system requirements than
laboratories performing less complex tests. To renew our CLIA certificate, we are subject to survey and inspection
every two years to assess compliance with program standards. The standards applicable to the testing which we
perform may change over time. We were inspected and recertified under CLIA in February 2014. We expect the
next regular inspection under CLIA to occur in 2016.
California Laboratory Licensing
In addition to federal certification requirements of laboratories under CLIA, licensure is required and maintained for
our laboratory under California law. Such laws establish standards for the day-to-day operation of a clinical
laboratory, including the training and skills required of personnel and quality control. In addition, California laws
mandate proficiency testing, which involves testing of specimens that have been specifically prepared for the
laboratory. We are required to maintain compliance with California standards as a condition to continued operation
of our laboratory.
Other States’ Laboratory Testing
Other states require out-of-state laboratories which accept specimens from those states to be licensed. We have
obtained licenses in California, Florida, New York, Maryland and Pennsylvania and believe we are in compliance
with applicable licensing laws.
Food and Drug Administration
The U.S. Food and Drug Administration regulates the design, testing, development, manufacture, safety, labeling,
marketing, promotion, storage, sale and distribution of medical devices pursuant to its authority under the Federal
Food, Drug and Cosmetic Act, or FFDCA. The FFDCA and its implementing regulations govern, among other
things, the following activities relating to our medical devices: preclinical and clinical testing, design, manufacture,
safety, efficacy, labeling, storage, record keeping, sales and distribution, post-market adverse event reporting,
import/export, and advertising and promotion. The FDA has also asserted that it has the authority to regulate
laboratory-developed tests, known as LDTs, as medical devices under the FFDCA. An LDT is a test developed by a
single laboratory for use only in that laboratory, such as AlloMap.
The FDA has traditionally chosen not to exercise its authority to regulate LDTs because it regulates the primary
components in most laboratory-developed tests and because it believes that laboratories certified as high complexity
under CLIA, such as ours, have demonstrated expertise and ability in test procedures and analysis. However,
beginning in September 2006, the FDA issued draft guidance on a subset of LDTs known as “in vitro diagnostic
multivariate index assays,” or IVDMIAs. According to the draft guidance, IVDMIAs do not fall within the scope of
LDTs over which FDA has exercised enforcement discretion because such tests incorporate complex and unique
interpretation functions which require clinical validation. We believed that AlloMap met the definition of IVDMIA
set forth in the draft guidance document. As a result, we applied for and obtained in August 2008 510(k) clearance
for AlloMap for marketing and sale as a test to aid in the identification of recipients with a low probability of
moderate or severe rejection.
On October 3, 2014, the FDA published two draft guidance documents that set forth the FDA’s proposed risk-based
framework for regulating LDTs. The draft guidance documents provide the anticipated details through which the
FDA would propose to establish an LDT oversight framework, including premarket review for higher-risk LDTs,
such as those that have the same intended use as FDA-approved or cleared companion diagnostics currently on the
market. The FDA allotted 90 days for comment from stakeholders in order to further advance their thinking on their
regulatory oversight of LDTs. In addition, the FDA convened a public meeting January 8-9, 2015 also for the
purpose of stakeholders to provide input into the FDA process.
16
The FDA’s LDT guidance documents, if and when finalized, may significantly impact the timing, availability and
reimbursement of our future tests, and could require us to modify our business model in order to maintain
compliance with these new requirements. For our dd-cfDNA test and all similar testing solutions, we may be
required to conduct additional clinical trials to demonstrate clinical validity and utility of our test, and submit to the
FDA a premarket approval application, or PMA, or 510(k) premarket notification application and obtain approval or
clearance for the test before it can be commercialized. We cannot predict the ultimate timing or form of any FDA
final guidance or regulation of LDTs, or when we must obtain regulatory approval or clearance for our LDT
solutions. There can be no assurance that any of our tests or additional uses of our tests for which we seek clearance
or approval in the future will be cleared or approved on a timely basis, or at all, nor can there be any assurance that
labeling claims will be consistent with our current claims or adequate to support continued adoption of and
reimbursement for our current and future tests. Moreover, any new FDA requirements could conflict with CLIA
requirements and thereby complicate our compliance efforts.
Health Insurance Portability and Accountability Act
Under the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, the U.S. Department of
Health and Human Services has issued regulations to protect the privacy and security of protected health
information used or disclosed by healthcare providers, such as us. HIPAA also regulates standardization of data
content, codes and formats used in healthcare transactions and standardization of identifiers for health plans and
providers. Penalties for violations of HIPAA regulations include civil and criminal penalties.
We have developed policies and procedures to comply with these regulations. The requirements under these
regulations may change periodically and could have an effect on our business operations if compliance becomes
substantially more costly than under current requirements.
In addition to federal privacy regulations, there are a number of state laws governing confidentiality of health
information that are applicable to our operations. New laws governing privacy may be adopted in the future as well.
We have taken steps to comply with health information privacy requirements to which we are aware that we are
subject.
Federal and State Self-Referral Prohibitions
We are subject to the federal self-referral prohibitions, commonly known as the Stark Law, and to similar state
restrictions such as California’s Physician Ownership and Referral Act, commonly known as PORA. Where
applicable, these restrictions generally prohibit us from billing patients or certain governmental or private payers for
clinical laboratory testing services when the physician ordering the test, or any member of such physician’s
immediate family, has an investment interest in, or compensation arrangement with, us, unless the arrangement
meets an exception to the prohibition.
Both the Stark Law and PORA contain exceptions for compensation paid to a physician for personal services
rendered by the physician, provided that certain conditions are satisfied. We have compensation arrangements with a
number of physicians for personal services, such as speaking engagements and specimen tissue preparation. We
have structured these arrangements with terms intended to comply with the requirements of the applicable
exceptions to Stark and PORA. However, we cannot be certain that regulators would find these arrangements to be
in compliance with Stark, PORA or similar state laws.
Sanctions for a violation of the Stark Law include the following:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
denial of Medicare payment for the services provided in violation of the prohibition;
refunds of amounts collected by an entity in violation of the Stark Law;
a civil penalty of up to $15,000 for each service arising out of the prohibited referral;
exclusion from federal healthcare programs, including the Medicare and Medicaid programs; and
a civil penalty of up to $100,000 against parties that enter into a scheme to circumvent the Stark Law’s
prohibition.
17
Further, a violation of PORA is a misdemeanor and could result in civil penalties and criminal fines. Finally, other
states have self-referral restrictions with which we have to comply that differ from those imposed by federal and
California law.
Federal and State Fraud and Abuse Laws
Because of the significant federal funding involved in Medicare and Medicaid, Congress and the states have
enacted, and actively enforce, a number of laws to eliminate fraud and abuse in federal healthcare programs. Our
business is subject to compliance with these laws. In March 2010, the Patient Protection and Affordable Care Act, as
amended by the Healthcare and Education Affordability Reconciliation Act, which we refer to collectively as “the
Affordable Care Act,” was enacted in the United States. The provisions of the Affordable Care Act are effective on
various dates. The Affordable Care Act expands the government’s investigative and enforcement authority and
increases the penalties for fraud and abuse, including amendments to both the Anti-Kickback Statute and the False
Claims Act, to make it easier to bring suit under these statutes. The Affordable Care Act also allocates additional
resources and tools for the government to police healthcare fraud, with expanded subpoena power for HHS,
additional funding to investigate fraud and abuse across the healthcare system and expanded use of recovery audit
contractors for enforcement.
Anti-Kickback Statutes
The federal healthcare programs’ Anti-Kickback Statute prohibits persons from knowingly and willfully soliciting,
offering, receiving or providing remuneration, directly or indirectly, in exchange for or to induce either the referral
of an individual, or the furnishing or arranging for a good or service, for which payment may be made under a
federal healthcare program such as Medicare or Medicaid.
The definition of “remuneration” has been broadly interpreted to include anything of value, including, for example,
gifts, certain discounts, the furnishing of free supplies, equipment or services, credit arrangements, payment of cash
and waivers of payments. Several courts have interpreted the statute’s intent requirement to mean that if any one
purpose of an arrangement involving remuneration is to induce referrals of federal healthcare covered businesses,
the statute has been violated. Penalties for violations include criminal penalties and civil sanctions such as fines,
imprisonment and possible exclusion from Medicare, Medicaid and other federal healthcare programs. In addition,
violations of the Anti-Kickback Statute also are actionable under the Federal False Claims Act.
Many states have adopted laws similar to the Anti-Kickback Statute. Some of these state prohibitions apply to
referral of recipients for healthcare items or services reimbursed by any source, not only the Medicare and Medicaid
programs.
Government officials have focused their enforcement efforts on the marketing of healthcare services and products,
among other activities, and recently have brought cases against companies, and certain individual sales, marketing
and executive personnel, for allegedly offering unlawful inducements to potential or existing customers in an
attempt to procure their business.
Federal False Claims Act
Another development affecting the healthcare industry is the increased use of the federal False Claims Act, and in
particular, action brought pursuant to the False Claims Act’s “whistleblower” or “qui tam” provisions. The False
Claims Act imposes liability on any person or entity that, among other things, knowingly presents, or causes to be
presented, a false or fraudulent claim for payment by a federal healthcare program. The qui tam provisions of the
False Claims Act allow a private individual to bring actions on behalf of the federal government alleging that the
defendant has violated the False Claims Act and to share in any monetary recovery. In recent years, the number of
suits brought against healthcare providers by private individuals has increased dramatically. In addition, various
states have enacted false claims law analogous to the False Claims Act, and many of these state laws apply where a
claim is submitted to any third-party payer and not merely a federal healthcare program.
18
When an entity is determined to have violated the False Claims Act, it may be required to pay up to three times the
actual damages sustained by the government, plus civil penalties of between $5,500 and $11,000 for each separate
instance of false claim. There are many potential bases for liability under the False Claims Act. Liability arises,
primarily, when an entity knowingly submits, or causes another to submit, a false claim for reimbursement to the
federal government. The federal government has used the False Claims Act to assert liability on the basis of causing
physicians to order excessive or unnecessary services, providing false documentation in support of claims,
kickbacks, Stark Law violations and other improper referrals, and CLIA violations, in addition to the more
predictable allegations as to misrepresentations with respect to the services rendered. In addition, the federal
government has pursued enforcement actions under the False Claims Act in connection with off-label promotion of
products. Our future activities relating to billing, compliance with CLIA and Medicare reimbursement requirements,
physician and other healthcare provider financial relationships and the sale and marketing of our products may be
subject to scrutiny under these laws.
Employees
As of December 31, 2015, we had a total of 95 employees, including 22 employees in sales and marketing and 33
employees in research and development. From time to time we also employ independent contractors, consultants and
temporary employees to support our operations. None of our employees are subject to collective bargaining
agreements. We have never experienced a work stoppage and believe that our relations with our employees are
good.
Environmental Matters
Our operations require the use of hazardous materials (including biological materials) which subjects us to a variety
of federal, state and local environmental and safety laws and regulations. Some of these regulations provide for strict
liability, holding a party potentially liable without regard to fault or negligence. We could be held liable for damages
and fines as a result of our, or others’, business operations should contamination of the environment or individual
exposure to hazardous substances occur. We could also be subject to significant fines for failure to comply with
applicable environmental, health and safety requirements. We cannot predict how changes in laws or new
regulations will affect our business, operations or the cost of compliance.
Available Information
Our website is www.caredx.com. Information contained on, or that can be accessed through, our website is not part
of this Annual Report on Form 10-K, and you should not consider information on our website to be part of this
report unless specifically incorporated herein by reference. Our Annual Report on Form 10-K, Quarterly Reports on
Form 10-Q, Current Reports on Form 8-K and amendments to reports filed or furnished pursuant to Sections 13(a)
and 15(d) of the Securities Exchange Act of 1934, as amended, are available free of charge on our investor relations
website as soon as reasonably practicable after we electronically file such material with, or furnish it to the
Securities and Exchange Commission, or SEC. The SEC also maintains a website that contains our SEC filings. The
address of the website is www.sec.gov. Further, a copy of this Annual Report on Form 10-K is located at the SEC’s
Public Reference Room at 100 F Street, NE, Washington, DC 20549. Information on the operation of the Public
Reference Room can be obtained by calling the SEC at 1-800-SEC-0300.
ITEM 1A. RISK FACTORS
Investing in our common stock involves a high degree of risk. You should carefully consider the risks and
uncertainties described below, together with all of the other information in this Annual Report on Form 10-K,
including the section titled “Management’s Discussion and Analysis of Financial Condition and Results of
Operations” and our consolidated financial statements and related notes, before investing in our common stock. If
any of the follows risks occur, our business, financial condition, results of operations and prospects could be
materially harmed. In that event, the market price of our common stock could decline, and you could lose part or all
of your investment.
19
Risks Related to the Acquisition
The acquisition of Allenex will require us to obtain additional financing.
On December 16, 2015, we entered into purchase agreements, to acquire, subject to certain conditions,
approximately 78% of the outstanding shares of Allenex from its three principal shareholders in exchange for a
combination of cash and our common stock, and on March 7, 2016, we launched a tender offer through the issuance
of an Offer Document to acquire the remaining 22% of the shares of Allenex. Refer to “Management’s Discussion
and Analysis of Results of Operations and Financial Condition—Overview—Recent Developments—Allenex
Tender Offer” included in Part II, Item 7 of this Annual Report on Form 10-K for additional information.
If we acquire all Allenex shares, the total purchase price will be approximately $35.0 million, payable in a
combination of cash and equity. If the Allenex minority shareholders accept the all cash alternative, together with
the cash component payable to the three principal shareholders, we will distribute approximately $27.0 million in
cash, excluding financial advisory, legal and accounting fees (which must be paid whether or not the acquisition is
completed). If the Allenex minority shareholders elect to receive both shares and a cash payment, we will distribute
approximately $24.6 million in cash, excluding financial advisory, legal and accounting fees (which must be paid
whether or not the acquisition is completed). Additionally, if in the tender offer we acquire more than 90%, but less
than 100%, of the shares of Allenex, we intend to initiate compulsory acquisition proceedings under Swedish laws
and to purchase the remaining shares in Allenex for cash. The actual price per share purchased pursuant to such
compulsory acquisition proceedings will be determined by an arbitrational tribunal. As a result of the compulsory
acquisition proceedings under Swedish law, we may ultimately have to pay, in the aggregate, a higher price per
share in order to purchase the remaining Allenex shares, further depleting our cash reserves.
The acquisition will require us to refinance or amend our existing $16.0 million debt loan with our existing lender,
and we also expect to incur costs as we integrate Allenex’s business and operations with ours. To fund a portion of
the proposed acquisition and to refinance our existing loan, on December 15, 2015, we entered into a commitment
letter and fee letter with Oberland Capital for a six month bridge loan of $18.0 million, to be borrowed in connection
with the closing of the acquisition. The Oberland Capital bridge loan will be secured by substantially all of our
assets and will contain operating and financial covenants. These include, among others, restrictions on our ability to
incur additional debt. These restrictions and covenants may restrict our ability to finance our operations and engage
in, expand, or otherwise pursue our business activities and strategies. Breaches of these covenants and restrictions
could result in a default and an acceleration of our obligations under the Oberland Capital loan agreement.
Even with the Oberland Capital bridge loan, the acquisition will consume a significant portion of our current cash
and cash equivalents. We will require additional financing to fund our working capital and, within six months
following entry into the bridge loan, to refinance the Oberland Capital bridge loan. We are pursuing financing
opportunities in both the private and public debt and equity markets through sales of equity or debt securities. On
August 10, 2015, we filed a registration statement on Form S-3 with the Securities and Exchange Commission
pursuant to which we are allowed to sell equity and debt securities. We cannot initiate sales under the Form S-3
until mid-2016.
Absent additional funding and assuming completion of the acquisition and entry into the bridge loan, we will
exhaust our cash and cash equivalents in July 2016 unless we substantially reduce costs and operations, including
research and development and other operating costs. Such costs reductions would significantly impair our ability to
operate our business effectively, and raises substantial doubt about our ability to continue as a going concern.
Our ability to raise additional financing for working capital and to refinance our indebtedness will depend, in part,
on the conditions of the capital markets. Additional capital may not be available on attractive terms, or at all.
Raising additional funds by issuing equity securities would result in dilution to our existing shareholders. Any
equity securities issued also may provide for rights, preferences or privileges senior to those of holders of our
common stock. If we raise additional funds by issuing debt securities, these debt securities would have rights,
preferences and privileges senior to those of holders of our common stock. Any refinancing of our indebtedness
could be at significantly higher interest rates, require additional restrictive financial and operational covenants,
require us to incur significant transaction fees and also require that we issue warrants or other equity securities, or
issue convertible securities. Any debt arrangement we enter into may contain restrictive covenants, including
restrictions on the ability of us and our subsidiaries to incur additional debt, grant liens, make investments, including
20
acquisitions and pay dividends and distributions. These restrictions and covenants may restrict our ability to finance
our operations and engage in, expand, or otherwise pursue our business activities and strategies. Our ability to
comply with these covenants and restrictions may be affected by events beyond our control, and breaches of these
covenants and restrictions could result in a default and an acceleration of our obligations under a debt agreement. If
we raise additional funds through collaborations and licensing arrangements, we might be required to relinquish
significant rights to our technologies or our solutions under development, or grant licenses on terms that are not
favorable to us, which could lower the economic value of those programs to us. If adequate funds are not available,
we would have to curtail our research and development and other activities and this would adversely affect our
business and future prospects.
If we do not complete the acquisition of Allenex, we may be subject to fines or penalties from Swedish securities
regulatory authorities.
Our obligation to complete the Allenex acquisition is subject to certain closing conditions, but is not subject to a
financing condition. The bridge loan funding is subject to multiple closing conditions, including with respect to our
financial condition and adequacy of capital. If Oberland Capital fails to extend us the bridge loan and other capital is
not available, we would be unable to complete the acquisition. If we do not perform our obligation to complete the
acquisition, we may be subject to fines and penalties under Swedish law, in addition to stockholder claims. Nasdaq
Stockholm Takeover Rules authorize the institution to impose a special fine ranging between SEK 50,000
(approximately $6,000) and SEK 100 million (approximately $12.0 million). If we fail to perform our obligation to
close the acquisition, we may also be subject to stockholder claims for damages under the purchase agreements and
under the Swedish Takeover Rules. Such penalties, fines and contract damages claims may also trigger a default
under our current loan agreement, and could have other unforeseen consequences that could negatively affect our
business and the price of our common stock.
Each of our and Allenex’s business relationships, including customer relationships, may be subject to disruption
due to uncertainty associated with the Offer.
After announcement of the acquisition, and during the tender offer period, customers, vendors, licensors, suppliers
and other third parties with whom we and Allenex do business or otherwise have relationships may experience
uncertainty on whether the transaction will be completed, and this uncertainty could materially affect their decisions
with respect to existing or future business relationships while the transaction is pending, or with us following
completion of the acquisition. Additionally, as we complete the integration of the Allenex business, business
relationships with third parties may be subject to disruptions or delays. These third parties may also attempt to
negotiate changes to existing business agreements, which may result in additional obligations imposed on us and
Allenex. These types of disruptions could have a material adverse effect on our business, financial condition and
results of operations both during and following the completion of the transaction. In addition, the acquisition could
be viewed negatively by investors, which may adversely affect our business and the price of our common stock.
We may not be able to successfully integrate our business with the business of Allenex, and we may not be able to
achieve the anticipated strategic benefits from our acquisition of Allenex.
The integration of Allenex will be a time-consuming process. The integration process will require substantial
management time and attention, which may divert attention and resources from other important areas, including our
existing business. In addition, we may not be able to fully realize the anticipated strategic benefits of the
combination, which includes a complementary product portfolio and significant cross-selling opportunities. The
failure to successfully integrate the combined operations, including retention of key employees, could impact our
ability to realize the full benefits of our acquisition of Allenex. If we are not able to achieve the anticipated strategic
benefits of the combination, it could adversely affect our business, financial condition and results of operations, and
could adversely affect the market price of our common stock if the integration or the anticipated financial and
strategic benefits of the acquisition are not realized as rapidly as, or to the extent anticipated by investors and
analysts. Failure to achieve these anticipated benefits could result in increased costs and decreases in future revenue
and/or net income following the acquisition.
21
Uncertainty regarding the completion of the acquisition may have a negative impact on the market price of our
common stock and/or Allenex’s shares.
We have established certain conditions for completion of the acquisition. The fulfillment of the conditions is not
within our control. There are therefore no guarantees that the Offer will be completed, or, when it can be completed,
if at all, and the resulting uncertainty may negatively affect the market price for our shares of common stock.
Further, all or a portion of the costs incurred in connection with the preparation for the acquisition will have to be
paid by us regardless of whether the acquisition is completed, which would have a negative effect on our results of
operation and cash flows.
The market price of our shares may decline due to increased selling pressure as a result of the acquisition.
In connection with the acquisition, we could issue approximately 1.75 million shares if all Allenex shareholders
elect to receive both cash and shares of our common stock. The common stock to be issued as consideration in the
acquisition will be freely tradable upon consummation of the acquisition. Sales of a substantial number of our shares
of common stock in the public market in connection with the acquisition, or the perception that these sales could
occur, could adversely affect the market price of our common stock and may make it more difficult for you to sell
your common stock at a time and price that you deem appropriate.
Allenex shareholders who may not have the ability or desire to hold shares in a U.S. company may lead to sales of
our shares of common stock or the perception that such sales may occur, either of which may adversely affect the
market for, and the market price of, our shares.
The uncertainties associated with our combination with Allenex may cause key personnel to leave.
Our employees may perceive uncertainty about their future role with the combined business until strategies with
regard to the combined business are announced or executed. Any uncertainty may affect our ability to attract and
retain our key personnel, or the key employees of Allenex.
Charges to earnings resulting from acquisition and integration costs may materially adversely affect the market
value of our shares following the completion of the acquisition.
As part of the acquisition, we expect to pay a substantial amount of cash and incur debt to pay for the acquisition.
The incurrence of indebtedness is anticipated to also result in increased fixed obligations, increase interest expense,
and include covenants or other restrictions that could impede our ability to manage our operations. We may also
discover liabilities or deficiencies associated with the acquisition of Allenex that were not identified in advance,
which may result in significant unanticipated costs.
Intangibles acquired in connection with the acquisition may subsequently be impaired and, if so, could increase
our net accumulated deficit.
We are accounting for the combination with Allenex under the acquisition method of accounting in accordance with
U.S. GAAP. The purchase price of Allenex is allocated to the fair value of the identifiable tangible and intangible
assets and liabilities that are acquired from Allenex. The excess of the purchase price over Allenex’s net assets and
intangibles is allocated to goodwill. We are required to perform periodic impairment tests on goodwill and
intangibles to evaluate whether the intangible assets and goodwill as a result of the Offer continue to have fair values
that meet or exceed the amounts recorded on our balance sheet. If the fair values of such assets decline below their
carrying value on the balance sheet, we may be required to recognize an impairment charge related to such decline.
We cannot predict whether or when there will be an impairment charge, or the amount of such charge, if any.
However, if the charge is significant, it could cause the market price of our shares to decline.
22
Full integration of our business with Allenex may not be achieved until we acquire the remaining shares of
Allenex shareholders.
Under Swedish law, we may only effect a compulsory acquisition if the holders of more than 90% of the outstanding
shares in Allenex accept our tender offer. If we are unable to achieve the requisite shareholder consent, this could
prevent us from realizing some or all of the anticipated strategic benefits of the acquisition of Allenex. We may be
somewhat limited in our freedom and ability to manage Allenex due to the shareholder minority protection rules in
the Swedish Companies Act. Even if we acquire more than 90% of the outstanding shares in Allenex, full
integration of the Allenex business may not be achieved until we have compulsorily acquired the remaining shares
of Allenex Shareholders.
Our acquisition of Allenex may not result in material benefits to our business and our development efforts.
Through the acquisition of Allenex, we expect to create an international transplantation diagnostics company with a
strong presence and direct distribution in both the US and Europe. Allenex’s products are used to evaluate organ
transplant patients prior to their transplant procedure with Human Leukocyte Antigen, or HLA, matching diagnostic
tests to ensure that a donor’s organ is compatible with the transplant recipient’s immune system to prevent rejection.
While Allenex has well-known products in the field of genomic HLA, Allenex faces market risk in the form of
competition from other producers, transition to more automated typing processes as well as new technologies, which
may make it difficult for the business to maintain current market share and margins. The markets for clinical
diagnostic products are competitive, and there are a number of companies which currently compete with Allenex for
product sales. Allenex’s competitors or new market entrants may be in a better position than we are to respond
quickly to new or emerging technologies, may be able to undertake more extensive marketing campaigns, may adopt
more aggressive pricing policies and may be more successful in attracting potential customers, employees and
strategic partners. These competitors may also have substantially greater expertise in conducting clinical trials and
research and development, greater ability to obtain necessary intellectual property licenses and greater brand
recognition than we do, any of which may adversely affect the use of our genomic HLA products.
Additionally, the results from the acquisition of Allenex will be dependent on the performance of Allenex’s new
product, QTYPE. The development and commercialization of QTYPE may fail for many reasons, including:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
lack of clinical validation data to support the effectiveness of the test;
delays resulting from the failure of third-party suppliers or contractors to meet their obligations in a timely
and cost-effective manner;
failure to obtain or maintain necessary clearances or approvals to market the test; or
lack of commercial acceptance by patients, clinicians, laboratories or third-party payers.
We have limited experience with respect to acquiring other companies and limited experience with respect to the
acquisition of strategic assets or the formation of collaborations, strategic alliances and joint ventures. The
acquisition of Allenex could result in significant write-offs or the incurrence of debt and contingent liabilities, any of
which could harm our operating results. We may not identify or complete this transaction in a timely manner, on a
cost-effective basis, or at all, and we may not realize the anticipated benefits of this acquisition.
Risks Related to Our Business
We have a history of losses, and we expect to incur net losses for the next several years.
We have incurred substantial net losses since our inception, and we expect to continue to incur additional losses for
the next several years. For the year ended December 31, 2015, our net loss was $13.7 million. For the year ended
December 31, 2014, we had net income of $0.8 million, and for the year ended December 31, 2013, we incurred net
loss of $3.5 million. As of December 31, 2015, we had an accumulated deficit of $173.1 million. We expect to
continue to incur significant operating expenses and anticipate that our expenses will increase due to costs relating
to, among other things:
(cid:120)
researching, developing, validating and commercializing potential future diagnostic solutions, including
AlloSure, our solution currently in development;
23
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
developing, presenting and publishing additional clinical and economic utility data intended to increase
payer coverage and clinician adoption of our current and future solutions;
expansion of our operating capabilities;
maintenance, expansion and protection of our intellectual property portfolio and trade secrets;
the process of integrating the Allenex business with our business and the associated potential disruptions
to our business;
future clinical trials;
expansion of the size and geographic reach of our sales force and our marketing capabilities to
commercialize potential future solutions;
employment of additional clinical, quality control, scientific, customer service, laboratory, billing and
reimbursement and management personnel; and
employment of operational, financial, accounting and information systems personnel, consistent with
expanding our operations and our status as a newly public company.
Even if we achieve significant revenues, we may not become profitable, and even if we achieve profitability, we
may not be able to sustain or increase profitability on a quarterly or annual basis. Our failure to become and remain
consistently profitable could adversely affect the market price of our common stock and could significantly impair
our ability to raise capital, expand our business or continue to pursue our growth strategy. For a detailed discussion
of our financial condition and results of operations, see “Management’s Discussion and Analysis of Financial
Condition and Results of Operations.”
We receive a substantial portion of our revenues from Medicare, and the loss of, or a significant reduction in,
reimbursement from Medicare would adversely affect our financial performance.
For the years ended December 31, 2015, 2014 and 2013, payments from Medicare for AlloMap represented
approximately 50%, 51% and 53%, respectively, of testing revenue. We anticipate that Medicare will continue to be
the payer for a significant portion of our claims for the foreseeable future. However, we may not be able to maintain
or increase our tests reimbursed by Medicare for a variety of reasons, including changes in reimbursement practices,
general policy shifts, or reductions in reimbursement amounts. We cannot predict whether Medicare reimbursements
will continue at the same payment amount or with the same breadth of coverage in the future, if at all.
Our financial results are largely dependent on sales of one test, AlloMap, and we will need to generate sufficient
revenues from this and other future solutions to grow our business.
Our ability to generate revenue is currently dependent on sales of AlloMap for heart transplant recipients, and we
expect that sales of AlloMap will account for a substantial portion of our revenue for at least the next several years.
Although we are working to commercialize AlloSure, our dd-cfDNA-based solution for heart transplant recipients,
even if we are successful in developing this new test, we expect that it would be marketed as part of AlloMap and
that it would not generate additional standalone revenue for us. In addition, while we are in the process of
developing a dd-cfDNA solution for kidney transplant recipients, even if we are successful in developing this test,
we do not expect this test to be commercially available for at least the next several years. If we are unable to
increase sales of AlloMap or successfully develop and commercialize other solutions or enhancements, our revenues
and our ability to achieve profitability would be impaired, and the market price of our common stock could decline.
24
The development and commercialization of additional diagnostic solutions, including solutions related to the
acquisition of Allenex, are a key to our growth strategy. New test development involves a lengthy and complex
process, and we may not be successful in our efforts to develop and commercialize additional diagnostic
solutions.
Key elements of our strategy are to discover, develop, validate and commercialize a portfolio of new diagnostic
solutions in addition to AlloMap. While we have engaged in discovery and development activity for AlloSure, our
dd-cfDNA solution for heart transplant recipients, we will be required to devote considerable additional efforts and
resources to the further research and development of this test before it can be made available. Our planned new
diagnostic solutions for organs other than the heart, such as our planned dd-cfDNA solution for kidney transplant
recipients, are at much earlier stages of development. dd-cfDNA solutions are a novel technology, and to date have
not been used commercially in the field of transplantation surveillance. We are seeking to acquire Allenex in order
to offer solutions addressing pre-transplantation testing needs. We cannot assure you that we will be able to
successfully complete development of or commercialize any of our planned future solutions, or that they will prove
to be capable of reliably being used for organ surveillance in the heart or in other types of organs. Before we can
successfully develop and commercialize any of our currently planned or other new diagnostic solutions, we will
need to:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
conduct substantial research and development;
obtain the necessary testing samples and related data;
conduct clinical validation studies;
expend significant funds;
expand and scale-up our laboratory processes;
expand and train our sales force;
gain acceptance from ordering clinicians at a larger number of transplant centers; and
seek and obtain regulatory clearance or approvals of our new solutions, as required by applicable
regulations.
This process involves a high degree of risk and may take up to several years or more. Our test development and
commercialization efforts may be delayed or fail for many reasons, including:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
failure of the test at the research or development stage;
difficulty in accessing suitable testing samples, especially testing samples with known clinical results;
lack of clinical validation data to support the effectiveness of the test;
delays resulting from the failure of third-party suppliers or contractors to meet their obligations in a
timely and cost-effective manner;
failure to obtain or maintain necessary clearances or approvals to market the test; or
lack of commercial acceptance by patients, clinicians, or third-party payers.
Few research and development projects result in commercial products, and success in early clinical studies often is
not replicated in later studies. At any point, we may abandon development of new diagnostic solutions, or we may
be required to expend considerable resources repeating clinical trials, which would adversely impact the timing for
generating potential revenues from those new diagnostic solutions. In addition, as we develop diagnostic solutions,
we will have to make additional investments in our sales and marketing operations, which may be prematurely or
unnecessarily incurred if the commercial launch of a test is abandoned or delayed. If a clinical validation study fails
to demonstrate the prospectively defined endpoints of the study, we would likely abandon the development of the
test or test feature that was the subject of the clinical trial, which could harm our business.
25
If we do not achieve our projected development goals in the time frames we announce and expect, the
commercialization of additional diagnostic solutions by us may be delayed and, as a result, our business will
suffer and our stock price may decline.
From time to time, we expect to estimate and publicly announce the anticipated timing of the accomplishment of
various clinical and other product development goals. In addition, we have included a discussion of a number of
anticipated targets elsewhere in this Annual Report on Form 10-K. The actual timing of accomplishment of these
targets could vary dramatically compared to our estimates, in some cases for reasons beyond our control. We cannot
assure you that we will meet our projected targets and if we do not meet these targets as publicly announced, the
commercialization of our diagnostic solutions may be delayed or may not occur at all and, as a result, our business
will suffer and our stock price may decline. Please see the section entitled “Business—Research and Development”
for more information regarding our strategies.
The field of diagnostic testing in transplantation is evolving and is subject to rapid technological change. If we
are unable to develop solutions to keep pace with rapid medical and scientific change, our operating results could
be harmed.
The field of diagnostic testing in transplantation is evolving. Although there have been few advances in technology
relating to organ rejection in transplant recipients, the market for medical diagnostic companies is marked by rapid
and substantial technological development and innovations which could make AlloMap, and our solutions in
development, outdated. We must continually innovate and expand our test offerings to address unmet needs in
monitoring transplant related conditions. AlloMap and our solutions under development could become obsolete
unless we continually innovate and expand our product offerings to include new clinical applications. If we are
unable to demonstrate the effectiveness of AlloMap and future diagnostic solutions, if any, compared to new
methodologies and technologies, then sales of our solutions could decline, which would harm our business and
financial results.
If clinicians and hospital administrators do not adopt our diagnostic solutions, we will not achieve future sales
growth.
Clinicians and healthcare administrators are traditionally slow to adopt new products, testing practices and clinical
treatments, partly because of perceived liability risks and the uncertainty of third-party reimbursement. It is critical
to the success of our sales efforts that we continue to educate clinicians and administrators about AlloMap and,
subject to their development, our future solutions, and demonstrate the clinical benefits of these solutions. We
believe that clinicians and transplant centers may not use our solutions unless they determine, based on published
peer-reviewed journal articles and the experience of other clinicians, that our solutions provide accurate, reliable and
cost-effective information that is useful in monitoring their post-transplant recipients.
We estimate that there are approximately 130 centers managing heart transplant recipients in the United States. In
2015, AlloMap was used in 120 of these centers. However, not all clinicians in these centers are currently using our
test. In order for AlloMap sales to grow, we must continue to market to and educate clinicians and
administrators at treatment centers that have used our test to increase the number of clinicians ordering our test, the
number of recipients tested and the number of tests per recipient. In addition, we must actively solicit additional
treatment centers to establish policies and procedures for ordering our test and to encourage clinicians at those
centers to incorporate our test into their standard clinical practice. Some of the challenges that our sales team must
overcome include explaining the clinical benefits of AlloMap, which is a highly technical product, and changing a
30-year patient management paradigm of using biopsy as the basis of transplant recipient monitoring. If clinicians
and hospital administrators do not adopt and continue to use AlloMap or our future solutions, our business and
financial results will suffer.
26
Our quarterly operating results may fluctuate significantly or may fall below the expectations of investors or
securities analysts, each of which may cause our stock price to fluctuate or decline.
Historically, our financial results have been, and we expect that our operating results will continue to be, subject to
quarterly fluctuations. Our net income (loss) and other operating results will be affected by numerous factors,
including:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
our ability to successfully market and sell AlloMap;
our ability to commercialize new diagnostic solutions such as AlloSure;
the amount of our research and development expenditures;
the timing of cash collections from third-party payers;
the extent to which our current test and future solutions, if any, are eligible for coverage and
reimbursement from third-party payers;
the process of integrating new acquisitions, such as Allenex, with our business and the associated
potential disruption to our business;
changes in coverage and reimbursement or in reimbursement-related laws directly affecting our
business;
any intellectual property infringement lawsuit or opposition, interference or cancellation proceeding in
which we may become involved;
announcements by our competitors of new or competitive products;
regulatory developments affecting our test or competing products;
total operating expenses; and
changes in expectation as to our future financial performance, including financial estimates, publications
or research reports by securities analysts.
If our quarterly operating results fall below the expectations of investors or securities analysts, the price of our
common stock could decline substantially. Furthermore, any quarterly fluctuations in our operating results may, in
turn, cause the price of our stock to fluctuate substantially. We believe that quarterly comparisons of our financial
results are not necessarily meaningful and should not be relied upon as an indication of our future performance.
If the utility of our current solution and solutions in development is not supported by studies published in peer-
reviewed medical publications, the rate of adoption of our current and future solutions by clinicians and
treatment centers and the rate of reimbursement of our current and future solutions by payers may be negatively
affected.
The results of our clinical trials involving AlloMap have been presented at major medical society congresses and
published in peer-reviewed publications in leading medical journals. We need to maintain a continued presence in
peer-reviewed publications to promote clinician adoption and favorable reimbursement decisions. We believe that
peer-reviewed journal articles that provide evidence of the utility of our current and future solutions or the
technology underlying AlloMap or future solutions are very important to the commercial success of our current and
any future solutions. Clinicians typically take a significant amount of time to adopt new products, testing practices
and clinical treatments, partly because of perceived liability risks and the uncertainty of third-party reimbursement.
It is critical to the success of our sales efforts that we educate a sufficient number of clinicians and administrators
about AlloMap and our future solutions, and demonstrate the clinical benefits of these solutions. Clinicians may not
adopt, and third-party payers may not cover or adequately reimburse for, our current and future solutions unless they
determine, based on published peer-reviewed journal articles and the experience of other clinicians, that our
diagnostic current and future solutions provide accurate, reliable and cost-effective information that is useful in
monitoring transplant recipients and making informed and timely treatment decisions.
27
The administration of clinical and economic utility studies is expensive and demands significant attention from our
management team. Data collected from these studies may not be positive or consistent with our existing data, or may
not be statistically significant or compelling to the medical community. If the results obtained from our ongoing or
future studies are inconsistent with certain results obtained from our previous studies, adoption of our current and
future solutions would suffer and our business would be harmed. While we have had success in generating peer-
reviewed publications regarding AlloMap, peer-reviewed publications regarding our future solutions may be limited
by many factors, including delays in the completion of, poor design of, or lack of compelling data from clinical
studies that would be the subject of the article. If our current and future solutions or the technology underlying
AlloMap or our future solutions do not receive sufficient favorable exposure in peer-reviewed publications, the rate
of clinician adoption and positive reimbursement coverage decisions could be negatively affected. The publication
of clinical data in peer-reviewed journals is a crucial step in commercializing and obtaining reimbursement for
diagnostic solutions such as ours, and our inability to control when, if ever, results are published may delay or limit
our ability to derive sufficient revenue from any product that is the subject of a study.
We are also in the process of completing clinical trials demonstrating the clinical validity of AlloSure, our
development stage transplant surveillance solution, and clinical performance characteristics of dd-cfDNA. To
ensure the success of AlloSure and future tests based on dd-cfDNA, we will need to continue our efforts to complete
and publicize research and trials that provide evidence of the utility of dd-cfDNA and validate AlloSure as a
solution.
Transplant centers may not adopt AlloMap or future solutions due to historical practices or due to more
favorable reimbursement policies associated with other means of monitoring transplants.
Due to the historically limited monitoring options and the well-established coverage and reimbursement for biopsies,
clinicians are accustomed to monitoring for acute cellular rejection in heart transplant recipients by utilizing
biopsies. Many clinicians use our test in parallel with biopsies rather than as an alternative to biopsies. While we do
not market AlloMap as a biopsy alternative, per se, if treatment center administrators view our test as an alternative
to a biopsy and believe they would derive more revenue from the performance of biopsies, such administrators may
be motivated to reduce or avoid the use of our test. We cannot provide assurance that our efforts will increase the
use of our test by new or existing customers. Our failure to increase the frequency of use of our test by new and
existing customers would adversely affect our growth and revenues.
If we are unable to successfully compete with larger and more established players in the clinical surveillance of
the transplantation field, we may be unable to increase or sustain our revenues or achieve profitability.
Our AlloMap solution for heart transplant recipients competes against existing diagnostic tests utilized by
pathologists, which, in the case of heart transplant rejection, generally involve evaluating biopsy samples to
determine the presence or absence of rejection. This practice has been the standard of care in the United States for
many years, and we will need to continue to educate clinicians, transplant recipients and payers about the various
benefits of our test in order to change clinical practice.
Competition for kidney surveillance diagnostics can also come from biopsies. However, because of the risks and
discomforts of the invasive kidney biopsy procedure, as well as the expense and relatively low rate of finding
moderate to severe grade rejection, biopsy is not a standard practice for surveillance of transplanted kidneys.
Additional competition for kidney surveillance diagnostics currently comes from general, non-specific clinical
chemistry tests such as serum creatinine, urine protein, complete blood count, lipid profile and others that are widely
ordered by physician offices and routinely performed in clinical reference labs and hospital labs.
We expect the competition for post-transplant surveillance to increase as there are numerous established and startup
companies in the process of developing novel products and services for the transplant market which may directly or
indirectly compete with AlloMap or our development pipeline. In addition to companies focused on pre-
transplantation such as Thermo Fisher Scientific Inc.’s One Lambda and Immucor, Inc.’s LIFECODES businesses,
companies who have not historically focused on transplantation, but with existing knowledge of dd-cfDNA
technology have indicated they are considering this market.
28
The field of clinical surveillance of transplantation is evolving. New and well established companies are devoting
substantial resources to the application of molecular diagnostics to the treatment of medical conditions. Some of
these companies may elect to develop and market diagnostic solutions in the post-transplant surveillance market.
Many of our potential competitors have greater brand recognition and substantially greater financial and technical
resources and development, production and marketing capabilities than we do. Others may develop lower-priced,
less complex tests that could be viewed by clinicians and payers as functionally equivalent to our test, which could
force us to lower the current list price of our test and impact our operating margins and our ability to achieve
profitability. If we are unable to compete successfully against current or future competitors, we may be unable to
increase market acceptance for and sales of AlloMap and our future solutions, which could prevent us from
increasing or sustaining our revenues or achieving profitability and could cause the market price of our common
stock to decline.
Our research and development efforts will be hindered if we are not able to acquire or contract with third parties
for access to additional tissue and blood samples.
Our clinical development relies on our ability to secure access to tissue and blood samples, as well as recipient
information including biopsy results and clinical outcomes from the same patient. Furthermore, the studies through
which our future solutions are developed rely on access to multiple samples from the same recipient over a period of
time as opposed to samples at a single point in time or archived samples. We will require additional samples and
recipient data for future research, development and validation. Access to recipients and samples on a real-time, or
non-archived, basis is limited and often on an exclusive basis, and there is no guarantee that initiatives such as the
DART study will be successful in obtaining and validating additional samples. Additionally, the process of
negotiating access to new and archived recipient data and samples is lengthy since it typically involves numerous
parties and approval levels to resolve complex issues, such as usage rights, institutional review board approval,
recipient consent, privacy rights and informed consent of recipients, publication rights, intellectual property
ownership and research parameters. If we are not able to acquire or negotiate access to new and archived recipient
data and blood samples with source institutions, or if other laboratories or our competitors secure access to these
samples before us, our ability to research, develop and commercialize future solutions will be limited or delayed.
If we cannot enter into and maintain new clinical collaborations, our efforts to commercialize AlloMap and our
development of new products could be delayed.
In the past, we have entered into clinical trial collaborations with highly regarded academic institutions and leading
treatment centers in the transplant field. Our success in the future may depend in part on our ability to enter into
agreements with other leading institutions in the transplant field. Securing these agreements can be difficult due to
internal and external constraints placed on these organizations. Some organizations may limit the number of
collaborations they have with any one company so as to not be perceived as biased or conflicted. Organizations may
also have insufficient administrative and related infrastructure to enable collaborations with many companies at
once, which can extend the time it takes to develop, negotiate and implement a collaboration. In addition to
completing clinical trial collaborations, publication of clinical data in peer-reviewed journals is a crucial step in
commercializing and obtaining coverage and reimbursement for solutions such as ours. Our inability to control
when, if ever, results of such studies are published may delay or limit our ability to derive sufficient revenues from
any test that may result from a collaboration.
From time to time we expect to engage in discussions with potential clinical collaborators, which may or may not
lead to collaborations. We cannot guarantee that any discussions will result in clinical collaborations or that any
clinical studies which may result will be enrolled or completed in a reasonable time frame or with successful
outcomes. Once news of discussions regarding possible collaborations become known in the medical community,
regardless of whether the news is accurate, failure to announce a collaborative agreement or the other entity’s
announcement of a collaboration with an entity other than us may result in adverse speculation about us, our current
and future solutions or our technology, resulting in harm to our reputation and our business.
29
If we are unable to successfully manage our growth and support demand for our test, our business may suffer.
As our test volume grows, we will need to continue to ramp up our testing capacity, implement increases in scale
and related processing, customer service, billing and systems process improvements and expand our internal quality
assurance program to support testing on a larger scale. We will also need additional certified laboratory scientists
and other scientific and technical personnel to process our tests. We cannot assure you that any increases in scale,
related improvements and quality assurance will be successfully implemented or that appropriate personnel will be
available. As additional products are developed, we may need to bring new equipment on-line, implement new
systems, technology, controls and procedures and hire personnel with different qualifications. We plan to expand
our sales force to support additional products. There is significant competition for qualified, productive sales
personnel with advanced sales skills and technical knowledge in our field. Our ability to achieve significant growth
in revenue in the future will depend, in large part, on our success in recruiting, training, and retaining sufficient
qualified sales personnel.
The value of AlloMap depends, in large part, on our ability to perform AlloMap on a timely basis and at a high
quality standard, and on our reputation for such timeliness and quality. Failure to implement necessary procedures,
transition to new equipment or processes or to hire new personnel could result in higher costs of processing or an
inability to meet market demand in a timely manner. There can be no assurance that we will be able to perform
AlloMap or our future solutions, if any, on a timely basis at a level consistent with demand, that our efforts to scale
our commercial operations will not negatively affect the quality of test results or that we will be successful in
responding to the growing complexity of our testing operations. If we encounter difficulty meeting market demand
for our current and future solutions, our reputation could be harmed and our future prospects and our business could
suffer.
In addition, our growth may place a significant strain on our management, operating and financial systems and our
sales, marketing and administrative resources. As a result of our growth, our operating costs may escalate even
faster than planned, and some of our internal systems may need to be enhanced or replaced. If we cannot effectively
manage our expanding operations and our costs, we may not be able to grow effectively or we may grow at a slower
pace, and our business could be adversely affected.
Our recent testing revenue growth rates may not be indicative of future growth, and we may not continue to grow
at our recent pace, or at all.
From 2014 to 2015, our testing revenue grew from $25.8 million to $27.9 million, which represents annual growth
of 8%. In the future, our revenue may not grow as rapidly as it has over the past several years. We believe that our
future revenue growth will depend on, among other factors:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
the continued usage and acceptance of our current and future solutions;
demand for our products and services;
the introduction and acceptance of new or enhanced products or services by us or by competitors;
our ability to maintain reimbursement for AlloMap and secure reimbursement for our future solutions;
our ability to anticipate and effectively adapt to developing markets and to rapidly changing
technologies;
our ability to attract, retain and motivate qualified personnel;
the initiation, renewal or expiration of significant contracts with our commercial partners;
pricing changes by us, our suppliers or our competitors; and
general economic conditions and other factors.
We may not be successful in our efforts to manage any of the foregoing, and any failure to be successful in these
efforts could materially and adversely affect revenue growth. You should not consider our past revenue growth to be
indicative of future growth.
30
If our sole laboratory facility in the U.S. becomes inoperable, we will be unable to perform AlloMap and future
solutions, if any, and our business will be harmed.
We perform all of our diagnostic services for the U.S. in our laboratory located in Brisbane, California.
Additionally, through our partnership with Diaxonhit we have recently validated a dedicated laboratory for AlloMap
testing in Europe through the Strasbourg University Hospital Central Immunology Laboratory. We do not have
redundant laboratory facilities. Brisbane is situated on or near earthquake fault lines. Our facility and the equipment
we use to perform AlloMap would be costly to replace and could require substantial lead time to repair or replace, if
damaged or destroyed. Our facilities may be harmed or rendered inoperable by natural or man-made disasters,
including earthquakes, wildfires, flooding and power outages, which may render it difficult or impossible for us to
perform our tests for some period of time. The inability to perform our tests may result in the loss of customers or
harm our reputation, and we may be unable to regain those customers in the future. Although we possess insurance
for damage to our property and the disruption of our business, this insurance may not be sufficient to cover all of our
potential losses and may not continue to be available to us on acceptable terms, if at all.
In order to establish a redundant laboratory facility, we would have to spend considerable time and money securing
adequate space, constructing the facility, recruiting and training employees, and establishing the additional
operational and administrative infrastructure necessary to support a second facility. Additionally, any new clinical
laboratory facility opened by us in the U.S. would be required to be certified under the CLIA, a federal law that
regulates clinical laboratories that perform testing on specimens derived from humans for the purpose of providing
information for the diagnosis, prevention or treatment of disease. We would also be required to secure and maintain
state licenses required by several states, including California, Florida, Maryland, New York and Pennsylvania,
which can take a significant amount of time and result in delays in our ability to begin operations at that facility. If
we failed to secure any such licenses, we would not be able to process samples from recipients in such states. We
also expect that it would be difficult, time-consuming and costly to train, equip and use a third-party to perform tests
on our behalf. We could only use another facility with the established state licensures and CLIA certification
necessary to perform AlloMap or future solutions following validation and other required procedures. We cannot
assure you that we would be able to find another CLIA-certified facility willing or able to adopt AlloMap or future
solutions and comply with the required procedures, or that this laboratory would be willing or able to perform the
tests for us on commercially reasonable terms.
Any additional laboratories opened in Europe would need to undergo a multi-step validation process demonstrating
that AlloMap test results raised from such laboratory are equivalent to AlloMap results generated by our Brisbane
laboratory. Training and other preparation is required before the laboratory is operational, and our commercial
partner in Europe may encounter unanticipated obstacles. We do not have access to redundant facilities in Europe
and our exclusive arrangement precludes the engagement by us of another collaboration partner whose laboratories
we could use in the event that our primary facility is harmed or rendered inoperable. Without immediate access to an
alternative facility, any disruption to our European partner’s laboratory may result in delays in the delivery of test
results, patient claims, loss of customers or harm to our reputation.
Performance issues, service interruptions or price increases by our shipping carriers could adversely affect our
business and harm our reputation and ability to provide our services on a timely basis.
Expedited, reliable shipping is essential to our operations. We rely heavily on providers of transport services for
reliable and secure point-to-point transport of recipient samples to our laboratory and enhanced tracking of these
recipient samples. Should a carrier encounter delivery performance issues such as loss, damage or destruction of a
sample, it may be difficult to replace our recipient samples in a timely manner and such occurrences may damage
our reputation and lead to decreased demand for our services and increased cost and expense to our business. In
addition, any significant increase in shipping rates could adversely affect our operating margins and results of
operations. Similarly, strikes, severe weather, natural disasters or other service interruptions affecting delivery
services we use would adversely affect our ability to receive and process recipient samples on a timely basis.
31
Our ability to commercialize the diagnostic solutions that we develop is dependent on our relationships with
laboratory services providers and their willingness to support our current and future solutions.
We rely on third-party laboratory services providers to draw the recipient blood samples that are analyzed in our
Brisbane, California laboratory. Our business will suffer if these service providers do not support AlloMap or the
other solutions that we may develop. For example, these laboratories may deem the effort to process the samples for
our solutions to require too much additional effort. Additionally, if transplant facilities have relationships with large
reference laboratories that will not process and send out our specimens, the clinicians at these facilities may deem
ordering our tests outside of these relationships too inconvenient for their patients. A lack of acceptance of our
current and future solutions by these service providers could result in lower test volume.
If we are unable to raise additional capital on acceptable terms in the future, it may limit our ability to develop
and commercialize new diagnostic solutions and technologies, and we may have to curtail or cease operations.
We expect capital outlays and operating expenditures to increase over the next several years as we expand our
infrastructure, commercial operations and research and development activities. Specifically, we may need to raise
additional capital to, among other things:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
complete development of AlloSure, our proposed dd-cfDNA test for heart and kidney, or develop other
solutions for clinical surveillance in transplantation;
increase our selling and marketing efforts to drive market adoption and address competitive
developments;
expand our clinical laboratory operations;
fund our clinical validation study activities;
expand our research and development activities;
sustain or achieve broader commercialization of AlloMap or enhancements to that test;
acquire or license products or technologies including through acquisitions; and
finance our capital expenditures and general and administrative expenses.
Our present and future funding requirements will depend on many factors, including:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
the level of research and development investment required to develop our dd-cfDNA test for heart and
kidney transplant recipients and additional solutions for the surveillance of transplantation of other
organs;
costs of filing, prosecuting, defending and enforcing patent claims and other intellectual property rights;
our need or decision to acquire or license complementary technologies or acquire complementary
businesses;
changes in test development plans needed to address any difficulties in commercialization;
competing technological and market developments;
whether our diagnostic solutions become subject to additional U.S. Food and Drug Administration, or
FDA, or other regulation; and
changes in regulatory policies or laws that affect our operations.
Additional capital, if needed, may not be available on satisfactory terms, or at all. Furthermore, if we raise additional
funds by issuing equity securities, dilution to our existing stockholders could result. Any equity securities issued
also may provide for rights, preferences or privileges senior to those of holders of our common stock. For example,
upon completion of our acquisition accounting related to Allenex, we have the ability to sell additional shares of our
common stock to the public through an “at the market” offering and a Controlled Equity Offering Sales Agreement
with Cantor Fitzgerald & Co. Any shares of common stock issued in the at-the-market offering will result in dilution
32
to the existing shareholders. If we raise additional funds by issuing debt securities, these debt securities would have
rights, preferences and privileges senior to those of holders of our common stock, and the terms of the debt
securities issued could impose significant restrictions on our operations. If we raise additional funds through
collaborations and licensing arrangements, we might be required to relinquish significant rights to our technologies
or our solutions under development, or grant licenses on terms that are not favorable to us, which could lower the
economic value of those programs to us. If adequate funds are not available, we may have to scale back our
operations or limit our research and development activities, which may cause us to grow at a slower pace, or not at
all, and our business could be adversely affected.
The loss of key members of our senior management team or our inability to attract and retain highly skilled
scientists, clinicians and laboratory and field personnel could adversely affect our business.
Our success depends largely on the skills, experience and performance of key members of our executive
management team. The efforts of each of these persons will be critical to us as we continue to develop our
technologies and testing processes and as we attempt to transition to a company with more than one commercialized
test. If we were to lose one or more of these key employees, we may experience difficulties in competing
effectively, developing our technologies and implementing our business strategies.
Our research and development programs and commercial laboratory operations depend on our ability to attract and
retain highly skilled scientists and technicians, including geneticists, biostatisticians, engineers, licensed laboratory
technicians and chemists. We may not be able to attract or retain qualified scientists and technicians in the future
due to the intense competition for qualified personnel among life science businesses, particularly in the San
Francisco Bay Area. We also face competition from universities, public and private research institutions and other
organizations in recruiting and retaining highly qualified scientific personnel.
In addition, our success depends on our ability to attract and retain laboratory and field personnel with extensive
experience in post-transplant recipient care and surveillance and close relationships with clinicians, pathologists and
other hospital personnel. We may have difficulties locating, recruiting or retaining qualified salespeople, which
could cause a delay or decline in the rate of adoption of AlloMap or our future solutions, if any. If we are not able to
attract and retain the necessary personnel to accomplish our business objectives, we may experience constraints that
will adversely affect our ability to support our discovery, development, verification and commercialization
programs.
Recent and future acquisitions and investments could disrupt our business and harm our financial condition and
operating results.
Our success will depend, in part, on our ability to expand our existing know-how, expertise and intellectual property
in other fields, including for the development of other commercial tests. In some circumstances, we may decide to
do so through the acquisition of complementary businesses and technologies rather than through internal
development, including, for example, our 2014 acquisition of ImmuMetrix, Inc., a privately held development-stage
company working on dd-cfDNA-based solutions in transplantation and other fields, and our potential acquisition of
Allenex. The identification of suitable acquisition candidates can be difficult, time-consuming and costly, and we
may not successfully complete acquisitions that we target in the future. The risks we face in connection with
acquisitions, including our acquisition of ImmuMetrix and our potential acquisition of Allenex, include:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
diversion of management time and focus from operating our business to addressing acquisition
integration challenges;
reduction of available cash reserves, assumption of debt or dilutive issuances of equity securities due to
payment of consideration;
coordination of research and development and sales and marketing functions;
integration of product and service offerings;
acquired technology or research and development expectations prove unsuccessful;
retention of key personnel from the acquired company;
33
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
financial reporting, revenue recognition or other financial control deficiencies of the acquired company
that we do not adequately address and that cause our reported results to be incorrect;
liability for activities of the acquired company before the acquisition, including intellectual property
infringement claims, violations of laws, commercial disputes, tax liabilities and other known and
unknown liabilities;
litigation or other claims in connection with the acquired company, including claims from terminated
employees, customers, former stockholders or other third parties;
integrating a global workforce of the acquired company into our business;
obtaining the approval of minority shareholders to complete an acquisition; and
commercialization of new products being developed by the acquired company.
Our failure to address these risks or other problems encountered in connection with our past or future acquisitions
and investments could cause us to fail to realize the anticipated benefits of these acquisitions or investments, cause
us to incur unanticipated liabilities, and harm our business generally. For example, we completed our acquisition of
ImmuMetrix, Inc. in June 2014, and some risks remain, including the risks that the intellectual property we acquired
in this acquisition may not lead to a successful product, risks associated with milestone payments due under the
merger agreement and the probability of achieving them, and the risk that Stanford University could terminate our
patent license relating to the diagnosis of rejection in organ transplant recipients using dd-cfDNA if we do not meet
certain performance and commercialization conditions. There is also a risk that future acquisitions will result in the
incurrence of debt, contingent liabilities, amortization expenses, incremental operating expenses or the write-off of
goodwill and other intangible assets, any of which could harm our business and results of operations.
We may acquire other businesses or assets or form joint ventures that could harm our operating results, dilute
your ownership of us, increase our debt or cause us to incur significant expense.
As part of our business strategy, we may pursue acquisitions of complementary businesses and assets, as well as
technology licensing arrangements. We also may pursue strategic alliances that leverage our core technology and
industry experience to expand our test offerings or distribution. We have limited experience with respect to
acquiring other companies and limited experience with respect to the acquisition of strategic assets or the formation
of collaborations, strategic alliances and joint ventures. If we make any acquisitions, we may not be able to integrate
these acquisitions successfully into our existing business, and we could assume unknown or contingent liabilities.
Any future acquisitions by us also could result in significant write-offs or the incurrence of debt and contingent
liabilities, any of which could harm our operating results. Integration of an acquired company, product or technology
also may require management resources that otherwise would be available for ongoing development of our existing
business. We may not identify or complete these transactions in a timely manner, on a cost-effective basis, or at all,
and we may not realize the anticipated benefits of any acquisition, technology license, strategic alliance or joint
venture.
For example, in March 2016, we initiated a tender offer for the acquisition of Allenex. Allenex’s technology and
products are new to us, and accordingly we may need to make substantial investments of resources to support the
integration of Allenex, which will result in increased operating expenses and may divert resources and management
attention from other areas of our business. Additional unanticipated costs may be incurred in the course of
integrating the respective businesses. We cannot make any assurances that these investments will be successful. As a
result of any of the aforementioned challenges, as well as other challenges and factors that may be unknown to us,
we may not be able to fully realize the anticipated strategic benefits of the acquisition, which includes a
complementary product portfolio and significant cross-selling opportunities. If we fail to successfully integrate
Allenex, we may not realize the benefits expected from the transaction and our business may be harmed.
To finance any acquisitions, we may choose to issue shares of our common stock as consideration, which would
dilute your interest in us. If the price of our common stock is low or volatile, we may not be able to acquire other
companies using our stock as consideration. Alternatively, it may be necessary for us to raise additional funds for
acquisitions through public or private financings. Additional funds may not be available on terms that are favorable
to us, or at all.
34
Defects in AlloMap or other solutions we develop could result in substantial product liabilities or professional
liabilities that exceed our resources.
The marketing, sale and use of AlloMap and future solutions could lead to the filing of product liability claims if
someone were to allege that our test failed to perform as it was designed. For example, a defect in one of our
diagnostic solutions could lead to a false positive or false negative result, affecting the eventual diagnosis. Any
incomplete or inaccurate analysis on the part of our technicians could also affect the reliability of the test results. A
product liability or professional liability claim could result in substantial damages and be costly and time-consuming
for us to defend. Although we maintain product and professional liability insurance, our insurance may not fully
protect us from the financial impact of defending against product liability or professional liability claims or any
judgments, fines or settlement costs arising out of any such claims. Any product liability or professional liability
claim brought against us, with or without merit, could increase our insurance rates or prevent us from securing
insurance coverage in the future. Additionally, any product liability lawsuit could cause injury to our reputation,
result in the suspension of our testing pending an investigation into the cause of the alleged failure, or cause current
collaborators to terminate existing agreements and potential collaborators to seek other partners, any of which could
negatively impact our results of operations.
We rely extensively on third party service providers. Failure of these parties to perform as expected, or
interruptions in our relationship with these providers or their provision of services to us, could interfere with our
ability to provide test results.
Our relationship with any of our third party service providers may impair our ability to perform our services. The
failure of any of our third party service providers to adequately perform their service obligations may reduce our
revenues and increase our expenses or prevent us from providing our services in a timely manner if at all. In
addition, our reputation, business and financial performance could be materially harmed if we are unable to, or are
perceived as unable to, perform reliable services.
We rely solely on certain suppliers to supply some of the laboratory instruments and key reagents that we use to
perform AlloMap. These sole source suppliers include Thermo Fisher Scientific Inc., which supplies us with
instruments, laboratory reagents and consumables, Becton, Dickinson and Company, which supplies us with cell
preparation tubes, or CPTs, and Therapak Corporation, which supplies us with a proprietary buffer reagent. One of
the reagents supplied to us by Therapak Corporation is, in turn, obtained by Therapak Corporation from Qiagen
N.V. and is a proprietary formulation of Qiagen N.V. We have no relationship with or control over, Qiagen N.V. We
do not have guaranteed supply agreements with Thermo Fisher Scientific Inc., Becton, Dickinson and Company,
Therapak Corporation or Qiagen N.V., which exposes us to the risk that these suppliers may choose to discontinue
doing business with us at any time. We periodically forecast our needs to these sole source suppliers and enter into
standard purchase orders based on these forecasts.
In addition, our ABI 7900 Thermocycler, a real time PCR instrument used in AlloMap, is no longer in production.
Thermo Fisher Scientific Inc. has committed to provide service and support of this instrument through 2017. We
believe that there are relatively few suppliers other than Thermo Fisher Scientific Inc., Becton, Dickinson and
Company and Qiagen N.V. that are currently capable of supplying the instruments, reagents and other supplies
necessary for AlloMap. Even if we were to identify secondary suppliers, there can be no assurance that we will be
able to enter into agreements with such suppliers on a timely basis on acceptable terms, if at all. If we should
encounter delays or difficulties in securing from Thermo Fisher Scientific Inc., Becton, Dickinson and Company or
Therapak Corporation, or Therapak Corporation encounters delays or difficulties in securing from Qiagen N.V., the
quality and quantity of reagents, or supplies, or instruments that we require for AlloMap or other solutions we
develop, we may need to reconfigure our test processes, which would result in delays in commercialization or an
interruption in sales. Clinicians who order AlloMap rely on the continued availability of our test and have an
expectation that results will be reported within two to three business days. If we are unable to provide results within
a timely manner, clinicians may elect not to use our test in the future and our business and operating results could be
harmed.
35
Security breaches, loss of data and other disruptions could compromise sensitive information related to our
business or prevent us from accessing critical information and expose us to liability, which could adversely affect
our business and our reputation.
In the ordinary course of our business, we still work with our third-party billing agent to collect and store sensitive
data, including legally-protected health information, credit card information and personally identifiable information
about our customers, payers, recipients and collaboration partners. We also store sensitive intellectual property and
other proprietary business information, including that of our customers, payers and collaboration partners. We
manage and maintain our applications and data utilizing a combination of on-site systems, managed data center
systems and cloud-based data center systems. These applications and data encompass a wide variety of business
critical information, including research and development information, commercial information and business and
financial information.
We face four primary risks relative to protecting this critical information: loss of access risk, inappropriate
disclosure risk, inappropriate modification risk and the risk of our being unable to identify and audit our controls
over the first three risks.
We are highly dependent on information technology networks and systems, including the Internet, to securely
process, transmit and store this critical information. Security breaches of this infrastructure, including physical or
electronic break-ins, computer viruses, attacks by hackers and similar breaches, can create system disruptions,
shutdowns or unauthorized disclosure or modification of confidential information. The secure processing, storage,
maintenance and transmission of this critical information are vital to our operations and business strategy, and we
devote significant resources to protecting such information. Although we take measures to protect sensitive
information from unauthorized access or disclosure, our information technology and infrastructure, and that of our
third-party billing and collections provider, may be vulnerable to attacks by hackers or viruses or breached due to
employee error, malfeasance or other disruptions.
A security breach or privacy violation that leads to disclosure or modification of or prevents access to consumer
information (including personally identifiable information or protected health information) could harm our
reputation, compel us to comply with disparate state breach notification laws, require us to verify the correctness of
database contents and otherwise subject us to liability under laws that protect personal data, resulting in increased
costs or loss of revenue. If we are unable to prevent such security breaches or privacy violations or implement
satisfactory remedial measures, our operations could be disrupted, and we may suffer loss of reputation, financial
loss and other regulatory penalties because of lost or misappropriated information, including sensitive consumer
data. In addition, these breaches and other inappropriate access can be difficult to detect, and any delay in
identifying them may lead to increased harm of the type described above.
Any such breach or interruption could compromise our networks or those of our third-party billing agent, and the
information stored there could be inaccessible or could be accessed by unauthorized parties, publicly disclosed, lost
or stolen. Any such interruption in access, improper access, disclosure or other loss of information could result in
legal claims or proceedings, liability under laws that protect the privacy of personal information, such as the Health
Insurance Portability and Accountability Act of 1996, or HIPAA, and regulatory penalties. Unauthorized access,
loss or dissemination could also disrupt our operations, including our ability to perform tests, provide test results,
bill payers or patients, process claims and appeals, provide customer assistance services, conduct research and
development activities, collect, process and prepare company financial information, provide information about our
current and future solutions and other patient and clinician education and outreach efforts through our website, and
manage the administrative aspects of our business and damage our reputation, any of which could adversely affect
our business. Any such breach could also result in the compromise of our trade secrets and other proprietary
information, which could adversely affect our competitive position.
In addition, the interpretation and application of consumer, health-related, privacy and data protection laws in the
U.S., Europe and elsewhere are often uncertain, contradictory and in flux. It is possible that these laws may be
interpreted and applied in a manner that is inconsistent with our practices. If so, this could result in government-
imposed fines or orders requiring that we change our practices, which could adversely affect our business.
Complying with these various laws could cause us to incur substantial costs or require us to change our business
practices and compliance procedures in a manner adverse to our business.
36
International expansion of our business exposes us to business, regulatory, political, operational, financial and
economic risks associated with doing business outside of the United States, some of which may be enhanced
following our acquisition of Allenex.
As part of our longer-term growth strategy, we intend to target select international markets to grow our presence
outside of the U.S. We currently have a commercial agreement for the promotion of AlloMap in Europe with
Diaxonhit and are distributing AlloMap tests directly in Canada. Allenex currently distributes its products in
Germany, Austria, Slovenia, Benelux, Canada, China and India. Allenex also sells, via sub-distributors, to certain
countries in Central and South America. To promote the growth of our business internationally, we will need to
attract additional partners to expand into new markets. Relying on partners for our sales and marketing subjects us to
various risks, including:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
our partners may fail to commit the necessary resources to develop a market for our products, may
spend the majority of their time selling products unrelated to ours, or may be unsuccessful in marketing
our products for other reasons;
under certain agreements, our partners’ obligations, including their required level of promotional
activities, may be conditioned upon our ability to achieve or maintain a specified level of reimbursement
coverage;
agreements with our partners may terminate prematurely due to disagreements or may result in disputes
or litigation with our partners;
we may not be able to renew existing partner agreements, or enter into new agreements, on acceptable
terms;
our existing relationships with partners may preclude us from entering into additional future
arrangements;
our partners may violate local laws or regulations, potentially causing reputational or monetary damage
to our business;
our partners may engage in sales practices that are locally acceptable but do not comply with standards
required under U.S. laws that apply to us; and
our partners in Europe may be negatively affected by the financial instability of, and austerity measures
implemented by, several countries in Europe.
If our present or future partners do not perform adequately, or we are unable to enter into agreements in new
markets, we may be unable to achieve revenue growth or market acceptance in jurisdictions in which we depend on
partners.
In addition, conducting international operations subjects us to new risks that, generally, we have not faced in the
U.S., including:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
uncertain or changing regulatory registration and approval processes associated with AlloMap and other
potential diagnostic solutions;
failure by us to obtain regulatory approvals or adequate reimbursement for the use of our current and
future solutions in various countries;
competition from companies located in the countries in which we offer our products may put us at a
competitive disadvantage;
financial risks, such as longer accounts receivable payment cycles and difficulties in collecting accounts
receivable;
logistics and regulations associated with shipping recipient samples, including infrastructure conditions
and transportation delays;
limits in our ability to penetrate international markets if we are not able to process solutions locally;
37
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
difficulties in managing and staffing international operations and assuring compliance with foreign
corrupt practices laws;
potentially adverse tax consequences, including the complexities of foreign value added tax systems, tax
inefficiencies related to our corporate structure and restrictions on the repatriation of earnings;
increased financial accounting and reporting burdens and complexities;
multiple, conflicting and changing laws and regulations such as healthcare regulatory requirements and
other governmental approvals, permits and licenses;
the imposition of trade barriers such as tariffs, quotas, preferential bidding or import or export licensing
requirements;
political and economic instability, including wars, terrorism, and political unrest, general security
concerns, outbreak of disease, boycotts, curtailment of trade and other business restrictions;
fluctuations in currency exchange rates;
regulatory and compliance risks that relate to maintaining accurate information and control over
activities that may fall within the purview of the Foreign Corrupt Practices Act of 1977, its books and
records provisions or its anti-bribery provisions, as well as risks associated with other anti-bribery and
anti-corruption laws; and
reduced or varied protection for intellectual property rights in some countries.
The occurrence of any one of the above could harm our business and, consequently, our revenues and results of
operations. Our expanding international operations could be affected by changes in laws, trade regulations, labor and
employment regulations, and procedures and actions affecting approval, production, pricing, reimbursement and
marketing of our current and future solutions, as well as by inter-governmental disputes. Any of these changes could
adversely affect our business. Additionally, operating internationally requires significant management attention and
financial resources. We cannot be certain that the investment and additional resources required in establishing
operations in other countries will produce desired levels of revenue or profitability.
In addition, any failure to comply with applicable legal and regulatory obligations could impact us in a variety of
ways that include, but are not limited to, significant criminal, civil and administrative penalties, including
imprisonment of individuals, fines and penalties, denial of export privileges, seizure of shipments, and restrictions
on certain business activities. Also, the failure to comply with applicable legal and regulatory obligations could
result in the disruption of our distribution and sales activities.
Our success expanding internationally will depend, in part, on our ability to develop and implement policies and
strategies that are effective in anticipating and managing these and other risks in the countries in which we do
business. Failure to manage these and other risks may have a material adverse effect on our operations in any
particular country and on our business as a whole.
Our insurance policies are expensive and protect us only from some business risks, which will leave us exposed to
significant uninsured liabilities.
We do not carry insurance for all categories of risk that our business may encounter. For example, we do not carry
earthquake insurance. In the event of a major earthquake in our region, our business could suffer significant and
uninsured damage and loss. Some of the policies we currently maintain include general liability, foreign liability,
employee benefits liability, property, automobile, umbrella, workers’ compensation, products liability and directors’
and officers’ insurance. We do not know, however, if we will be able to maintain existing insurance with adequate
levels of coverage. Any significant uninsured liability may require us to pay substantial amounts, which would
adversely affect our cash position and results of operations.
38
If we use hazardous materials in a manner that causes injury, we could be liable for damages.
Our activities currently require the use of hazardous chemicals. We cannot eliminate the risk of accidental
contamination or injury to employees or third parties from the use, storage, handling or disposal of these materials.
In the event of contamination or injury, we could be held liable for any resulting damages, and any liability could
exceed our resources or any applicable insurance coverage we may have. Additionally, we are subject on an ongoing
basis to federal, state and local laws and regulations governing the use, storage, handling and disposal of these
materials and specified waste products.
We may use third party collaborators to help us develop, validate or commercialize any new diagnostic solutions,
and our ability to commercialize such solutions could be impaired or delayed if these collaborations are
unsuccessful.
We may in the future selectively pursue strategic collaborations for the development, validation and
commercialization of any new diagnostic solutions we may develop. In any future third party collaboration, we may
be dependent upon the success of the collaborators in performing their responsibilities and their continued
cooperation. Our collaborators may not cooperate with us or perform their obligations under our agreements with
them. We cannot control the amount and timing of our collaborators’ resources that will be devoted to performing
their responsibilities under our agreements with them. Our collaborators may choose to pursue alternative
technologies in preference to those being developed in collaboration with us. The development, validation and
commercialization of our potential solutions may be delayed if collaborators fail to fulfill their responsibilities in a
timely manner or in accordance with applicable regulatory requirements or if they breach or terminate their
collaboration agreements with us. AlloMap testing in Europe is being conducted through an exclusive distribution
agreement with a sole collaborator. Any issues arising from these arrangements will affect our ability to serve the
entire region, and our reputation may suffer even if we subsequently locate new partners, which may permanently
affect our business. Disputes with our collaborators could also impair our reputation or result in development delays,
decreased revenues and litigation expenses.
Changes in, or interpretations of, accounting rules and regulations could result in unfavorable accounting
changes or require us to change our compensation policies.
Accounting methods and policies for diagnostic companies, including policies governing revenue recognition,
research and development and related expenses and accounting for stock-based compensation, are subject to further
review, interpretation and guidance from relevant accounting authorities, including the SEC. Changes to, or
interpretations of, accounting methods or policies may require us to reclassify, restate or otherwise change or revise
our financial statements, including those contained in this Annual Report on Form 10-K.
Risks Related to Billing and Reimbursement
Health insurers and other third-party payers may decide to revoke coverage of our existing test, decide not to
cover our future solutions or may provide inadequate reimbursement, which could jeopardize our commercial
prospects.
Successful commercialization of AlloMap depends, in large part, on the availability of coverage and adequate
reimbursement from government and private payers. Favorable third-party payer coverage and reimbursement are
essential to meeting our immediate objectives and long-term commercial goals. We do not recognize revenue for test
results delivered without a contract for reimbursement, or an established coverage policy and a history of payment.
Revenue for AlloMap is recognized on a cash basis if the conditions for recognizing revenue on an accrual basis are
not met. We delivered approximately 13,000 AlloMap results in 2015 and recognized revenue for approximately
9,100 tests; approximately 1,300 of which were for test results delivered prior to 2015.
For new diagnostic solutions, each private and government payer decides whether to cover the test, the amount it
will reimburse for a covered test and the specific conditions for reimbursement. Clinicians and recipients may be
likely not to order a diagnostic test unless third-party payers pay a substantial portion of the test price. Therefore,
coverage determinations and reimbursement levels and conditions are critical to the commercial success of a
diagnostic product, and if we are not able to secure positive coverage determinations and reimbursement levels, our
business will be materially adversely affected.
39
Coverage and reimbursement by a commercial payer may depend on a number of factors, including a payer’s
determination that our current and future solutions are:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
not experimental or investigational;
medically necessary;
appropriate for the specific recipient;
cost-saving or cost-effective; and
supported by peer-reviewed publications.
In addition, several payers and other entities conduct technology assessments of new medical tests and devices and
provide the results of their assessments for informational purposes to other parties. These assessments may be used
by third-party payers and healthcare providers as grounds to deny coverage for or refuse to use a test or procedure.
We believe we have received a negative technology assessment from at least one of these entities and could receive
more.
If third-party payers decide not to cover our diagnostic solutions or if they offer inadequate payment amounts, our
ability to generate revenue from AlloMap and future solutions could be limited. Payment for diagnostic tests
furnished to Medicare beneficiaries is typically made based on a fee schedule set by the Centers for Medicare &
Medicaid Services, or CMS. In recent years, payments under these fee schedules have decreased and may decrease
further. Any third-party payer may stop or lower payment at any time, which could substantially reduce our revenue.
For example, in September 2015, CMS proposed drastic changes in reimbursement for a number of established
molecular diagnostic tests, including AlloMap, under which AlloMap reimbursement would have been reduced by
77%. Ultimately this proposal was not implemented, but a reduction in reimbursement could occur in the future and
there is no guarantee that CMS will maintain current reimbursement rates or seek changes in the future.
Since each payer makes its own decision as to whether to establish a policy to reimburse for a test, seeking payer
coverage and other approvals is a time-consuming and costly process. We cannot assure you that adequate coverage
and reimbursement for AlloMap or future solutions will be provided in the future by any third-party payer.
Reimbursement for AlloMap comes primarily from Medicare, private third party payers such as insurance
companies and managed care organizations, Medicaid and hospitals. The reimbursement process can take six
months or more to complete depending on the payer. As of December 31, 2015, we had been reimbursed for
approximately 79% of AlloMap results delivered in the twelve months ended June 30, 2015. Coverage policies
approving AlloMap have been adopted by many of the largest private payers, including Aetna, Cigna, Humana, Inc.,
Kaiser Foundation Health Plan, Inc., TRICARE National Insurance and WellPoint, and a number of state Medicaid
programs. Many of the payers with positive coverage policies have also entered into contracts with us to formalize
pricing and payment terms. We continue to work with third-party payers to seek such coverage and to appeal denial
decisions based on existing and ongoing studies, peer reviewed publications, support from physician and patient
groups and the growing number of AlloMap tests that have been reimbursed by public and private payers. There are
no assurances that the current policies will not be modified in the future. If our test is considered on a policy-wide
level by major third-party payers, whether at our request or on their own initiative, and our test is determined to be
ineligible for coverage and reimbursement by such payers, our collection efforts and potential for revenue growth
could be adversely impacted.
Our Medicare Part B coverage for AlloMap is included in a formal local coverage decision for molecular
diagnostics; however, any change in this coverage decision or other future adverse coverage decisions by the
Centers for Medicare & Medicaid Services, or CMS, including with respect to coding, could substantially reduce
our revenue.
Medicare reimbursements currently comprise a significant portion of our revenue. Our current Medicare Part B
reimbursement was not set pursuant to a national coverage determination by CMS. Although we believe that
coverage is available under Medicare Part B even without such a determination, we currently lack the national
coverage certainty afforded by a formal coverage determination by CMS. This means that Medicare contractors,
including our California Medicare contractor, currently may continue to develop their own coverage and
reimbursement policies with respect to our technology.
40
Decisions by CMS with respect to coding could also affect our revenue. For example, on September 25, 2013, CMS
released the preliminary payment determinations for the Clinical Laboratory Fee Schedule, or CLFS, for 2014. CMS
proposed to not recognize certain Current Procedural Terminology codes, or CPT codes, called Multianalyte Assays
with Algorithmic Analyses codes, or MAAA codes, as valid for Medicare purposes under the CLFS because it
determined that an algorithm is not a clinical diagnostic test. This preliminary determination would have reversed a
CMS final determination released on November 6, 2012 for 2013 that withdrew a proposal to not cover algorithmic
analysis and stated that laboratories performing MAAA tests for Medicare beneficiaries should continue to bill for
these tests in 2013 as they were then billed under the CLFS. When the final payment determination for 2014 was
issued, CMS stated instead that it will continue to consider each test classified by the CPT as a MAAA on its own
merits, and payment amounts would be determined using a gapfilling methodology if the Medicare contractor
determines the code is payable.
AlloMap has been billed since the inception of the test using an unlisted CPT code and recently received a Category
1code. The test also has been granted a second code through a Medicare program for molecular diagnostics, which is
included on all Medicare claims. If AlloMap is assigned a different MAAA CPT code in the future, a determination
not to pay for such MAAA CPT code could be harmful to our business, and could have negative spillover
implications that prevent or limit coverage by other third-party payers that might mirror aspects of Medicare
payment criteria. Reimbursement for AlloMap under an MAAA code could also be lower than that currently
received when AlloMap is billed under a miscellaneous CPT code.
We receive a substantial portion of our revenues from Medicare, and the loss of, or a significant reduction in,
reimbursement from Medicare would adversely affect our financial performance
To date, we have received a substantial portion of our revenues from Medicare, which has been paid by our
California Medicare Administrative Contractor. Payments from Medicare for AlloMap represented approximately
50% of testing revenue for the year ended December 31, 2015 and approximately 51% of testing revenue for the
year ended December 31, 2014. We anticipate that Medicare will continue to be the payer for a significant portion of
our claims for the foreseeable future. However, we may not be able to maintain or increase our rate of
reimbursement by Medicare for a variety of reasons, including:
(cid:120)
(cid:120)
(cid:120)
changes in the local Medicare Administrative Contractor, or MAC, servicing our jurisdiction, which
may result in a change in reimbursement practices for Medicare claims submitted by us or others in
California and other states affected by the change;
any policy level review of our test by the CMS contractors could result in a reduction or denial of
coverage and payment for our test; and
the assignment of a specific billing code to our test by CMS may result in reductions in the per test
amount reimbursed for our current and future solutions by Medicare.
On a five-year rotational basis, Medicare requests bids for its regional MAC services. Medicare reimbursement for
AlloMap began in 2006 and has continued through three successive MACs. The MAC for California is currently
Noridian Healthcare Solutions. Our current Medicare coverage through Noridian provides for reimbursement for
tests performed for qualifying Medicare patients throughout the U.S. so long as the tests are performed in our
California laboratory. We cannot predict whether Noridian or any future MAC will continue to provide
reimbursement for AlloMap at the same payment amount or with the same breadth of coverage in the future, if at all.
Additional changes in the MAC processing Medicare claims for AlloMap could impact the coverage or payment
amount for our test and our ability to obtain Medicare coverage for any products we may launch in the future.
Any decision by CMS or its local contractors to reduce or deny coverage for our test could have a significant
adverse effect on our revenue and results of operations. Any such decision could also cause affected clinicians
treating Medicare covered patients to reduce or discontinue the use of our test.
41
Billing complexities associated with obtaining payment or reimbursement for our current and future solutions
may negatively affect our revenue, cash flows and profitability.
Billing for clinical laboratory testing services is complex. In cases where we do not have a contract in place
requiring the payment of a fixed fee per test, we perform tests in advance of payment and without certainty as to the
outcome of the billing process. In cases where we do receive a fixed fee per test, we may still have disputes over
pricing and billing. We receive payment from individual recipients and from a variety of payers, such as commercial
insurance carriers and governmental programs, primarily Medicare. Each payer typically has different billing
requirements. Among the factors complicating our billing of third-party payers are:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
disputes among payers regarding which party is responsible for payment;
disparity in coverage among various payers;
different process, information and billing requirements among payers; and
incorrect or missing billing information, which is required to be provided by the prescribing clinician.
Additionally, from time to time, payers change processes that may affect timely payment. These changes may result
in uneven cash flow or impact the timing of revenue recognized with these payers. With respect to payments
received from governmental programs, factors such as a prolonged government shutdown could cause significant
regulatory delays or could result in attempts to reduce payments made to us by federal government healthcare
programs. These billing complexities, and the related uncertainty in obtaining payment for AlloMap and future
solutions, could negatively affect our revenue, cash flows and profitability.
Our transition from an outsourced billings and collections vendor to an in-house staff may negatively affect our
cash collection cycle, communications with insurers, application of cash and proper revenue recognition.
During 2015, we transitioned our billing and collections functions for our AlloMap testing from on outside vendor
to an in-house staff. On July 1, 2015, these functions began being performed by in-house staff recruited and hired by
us directly. During this process, we also transitioned from the vendor’s software, which was familiar and compatible
with our accounting system and procedures, to a new software system designed for use by in-house departments in
billing and collections of medical diagnostic tests. Despite hiring experienced personnel, there is risk that this billing
and collections transition will not be smooth until the new procedures become routine, including that payments may
not be collected as quickly, communication errors with insurers regarding specifics of the insurance claims may
occur, payments may not be properly applied to outstanding receivables, and revenue may not be recorded as
accurately as in the past. There is a risk that the combination of a software system changeover, the hiring of new
personnel with lack of experience with the specific nature of our billing procedures with insurers, payments being
directed to a new lockbox, new reports with changes to our billing and cash collections data and other changes to the
process will result in reduced collections or otherwise have an adverse effect on our operations and revenue.
Healthcare reform measures could hinder or prevent the commercial success of AlloMap.
The pricing and reimbursement environment may change in the future and become more challenging as a result of
any of several possible regulatory developments, including policies advanced by the U.S. government, new
healthcare legislation or fiscal challenges faced by government health administration authorities. Specifically, there
have been a number of legislative and regulatory proposals and initiatives to change the healthcare system in ways
that could affect our ability to profitably sell any diagnostic products we may develop and commercialize. Some of
these proposed and implemented reforms could result in reduced reimbursement rates for our diagnostic products
from governmental agencies or other third-party payers, which would adversely affect our business strategy,
operations and financial results. For example, as a result of the Patient Protection and Affordable Care Act of 2010
(as amended by the Health Care and Education Reconciliation Act of 2010), or the Affordable Care Act, substantial
changes could be made to the current system for paying for healthcare in the U.S., including changes made in order
to extend medical benefits to those who currently lack insurance coverage. The Affordable Care Act also provides
that payments under the Medicare Clinical Laboratory Fee Schedule are to receive a negative 1.75% annual
adjustment through 2015. Although we have not been subject to such adjustment in the past, we cannot assure you
that the claims administrators will not attempt to apply this adjustment in the future.
42
Among other things, the Affordable Care Act includes payment reductions to Medicare Advantage plans. These cuts
have been mitigated in part by a CMS demonstration program set to expire in 2015. We cannot be assured that
future cuts would be mitigated by CMS. Any reductions in payment to Medicare Advantage plans could materially
impact coverage and reimbursement for AlloMap.
In addition to the Affordable Care Act, various healthcare reform proposals have also emerged from federal and
state governments. For example, in February 2012, Congress passed the “Middle Class Tax Relief and Job Creation
Act of 2012” which in part reduced the potential future cost-based increases to the Medicare Clinical Laboratory Fee
Schedule, or CLFS, by 2%. The Protecting Access to Medicare Act of 2014 introduced a multi-year pricing program
for services paid under the CLFS. Under the program, beginning in 2016 laboratories will report to CMS the
payment rates paid to the laboratories by commercial third-party payers including Medicare and Medicaid managed
care plans, for each test and the volume of each test performed. CMS will use the reported data to set new payment
rates under the CLFS in the future. For newly developed tests that are considered to be “advanced diagnostic lab
tests,” the Medicare payment rate will be the actual list price offered to third-party payers for the first three quarters
that the tests are offered, subject to later adjustment. CMS will establish subsequent payment rates using the
commercial third-party payer data reported for those tests.
Regardless of the impact of the Affordable Care Act on us, the government has shown significant interest in
pursuing healthcare reform and reducing healthcare costs. Any government-adopted reform measures could decrease
the amount of reimbursement available from governmental and other third-party payers. Additionally, annual federal
budget negotiations frequently include healthcare payment reform measures impacting clinical laboratory payments.
On April 1, 2013, cuts to the federal budget resulting from sequestration were implemented, requiring a 2% cut in
Medicare payment for all services, including AlloMap. Federal budgetary limitations and changes in healthcare
policy, such as the creation of broad limits for diagnostic products or requirements that Medicare patients pay for
portions of clinical laboratory tests or services received, could substantially diminish the sale, or inhibit the
utilization, of AlloMap and our future diagnostic solutions, increase costs, divert management’s attention and
adversely affect our ability to generate revenue and achieve profitability.
Healthcare Regulatory Risks
In order to operate our laboratory, we have to comply with the Clinical Laboratory Improvement Amendments of
1988, or CLIA, and state laws governing clinical laboratories.
We are subject to CLIA, a federal law that regulates clinical laboratories that perform testing on specimens taken
from humans for the purpose of providing information for the diagnosis, prevention or treatment of disease. If our
laboratory is out of compliance with CLIA requirements, we may be subject to sanctions such as suspension,
limitation or revocation of our CLIA certificate, as well as a direct plan of correction, state on-site monitoring, civil
money penalties, civil injunctive suit or criminal penalties. We must maintain CLIA compliance and certification to
be eligible to bill for services provided to Medicare beneficiaries. If we were to be found to be out of compliance
with CLIA program requirements and subjected to sanction, our business could be materially harmed.
In addition to federal certification requirements of laboratories under CLIA, licensure is required and maintained for
our laboratory under California law. We are required to maintain a license to conduct testing in California.
California laws establish standards for day-to-day operation of our clinical laboratory, including the training and
skills required of personnel and quality control. Moreover, several states, including New York, require that we hold
licenses to test specimens from patients residing in those states. Other states have similar requirements or may adopt
similar requirements in the future. In addition to our California certifications, we currently hold licenses in Florida,
Maryland, New York, and Pennsylvania. The loss of any of these state certifications would impact our ability to
provide services in those states, which could negatively affect our business. Finally, we may be subject to regulation
in foreign jurisdictions where we offer our test. Failure to maintain certification in those states or countries where it
is required could prevent us from testing samples from those states or countries, could lead to the suspension or loss
of licenses, certificates or authorizations, and could have an adverse effect on our business.
43
We were inspected and recertified under CLIA in February 2014 and we expect the next regular inspection under
CLIA to occur in 2016. If we were to lose our CLIA accreditation or California license, whether as a result of a
revocation, suspension or limitation, we would no longer be able to perform AlloMap, which would limit our
revenues and materially harm our business. If we were to lose our license in other states where we are required to
hold licenses, we would not be able to test specimens from those states, which could also have a material adverse
effect on our business.
If the FDA’s recently published draft guidance setting forth a comprehensive regulatory scheme for LDTs
becomes final, we would incur substantial costs and delays associated with trying to obtain premarket clearance
or approval for those solutions.
Clinical laboratory tests that are developed and validated by a laboratory for its own use are called laboratory-
developed tests, or LDTs. The laws and regulations governing the marketing of diagnostic products for use as LDTs
are extremely complex, and in many instances, there are no significant regulatory or judicial interpretations of these
laws. For instance, while the FDA maintains that LDTs are subject to the FDA’s authority as diagnostic medical
devices under the Federal Food, Drug, and Cosmetic Act, or FFDCA, the FDA has in the past generally exercised
enforcement discretion with respect to most LDTs performed by CLIA-certified laboratories.
The FDA has traditionally chosen not to exercise its authority to regulate LDTs because it regulates the primary
components in most laboratory-developed tests and because it believes that laboratories certified as high complexity
under CLIA, such as ours, have demonstrated expertise and ability in test procedures and analysis. However,
beginning in September 2006, the FDA issued draft guidance on a subset of LDTs known as “in vitro diagnostic
multivariate index assays,” or IVDMIAs. According to the draft guidance, IVDMIAs do not fall within the scope of
LDTs over which FDA has exercised enforcement discretion because such tests incorporate complex and unique
interpretation functions which require clinical validation. We believed that AlloMap met the definition of IVDMIA
set forth in the draft guidance document. As a result, we applied for and obtained, in August 2008, 510(k) clearance
for AlloMap for marketing and sale as a test to aid in the identification of recipients with a low probability of
moderate or severe rejection. A 501(k) submission is a premarketing submission made to the FDA. Clearance may
be granted by the FDA if it finds the device or test provides satisfactory evidence pertaining to the claimed intended
uses and indications for the device or test.
On July 31, 2014, the FDA notified Congress (as required by the Food and Drug Administration Safety and
Innovation Act of 2012) of its intent to publish a proposed and comprehensive risk-based framework for the
regulation of LDTs. The notice to Congress provides the anticipated details and proposed timing of the
implementation of the draft guidance and regulatory framework, including the requirement for premarket review and
approval for higher-risk LDTs, such as our planned cell-free DNA solutions for heart, kidney and other organs. Such
guidance, if and when finalized, will significantly impact the timing, availability and reimbursement of our future
products, and will require us to modify our business model in order to maintain compliance with these new laws. For
our cell-free DNA test and all similar testing solutions, we will be required to conduct additional clinical trials to
clinically validate our test, and submit to the FDA a pre-market approval application, (PMA), or 510(k) clearance
application and obtain approval or clearance for the test. We cannot predict the ultimate timing or form of any FDA
final guidance or regulation of LDTs, or when we must obtain regulatory approval or clearance for our LDT
solutions. There can be no assurance that any of our solutions or additional uses of solutions for which we will seek
clearance or approval in the future will be cleared or approved on a timely basis, or at all, nor can there be any
assurance that labeling claims will be consistent with our current claims or adequate to support continued adoption
of and reimbursement for our current and future solutions. Moreover, any new FDA requirements could conflict
with CLIA requirements and thereby complicate our compliance efforts.
While we believe that we are currently in material compliance with applicable laws and regulations relating to our
LDTs, we cannot assure you that the FDA or other regulatory agencies would agree with our determination. A
determination that we have violated these laws, or a public announcement that we are being investigated for possible
violation of these laws, could hurt our business and our reputation.
44
If we were required to conduct additional clinical trials prior to marketing our solutions under development,
those trials could lead to delays or a failure to obtain necessary regulatory approvals and harm our ability to be
profitable.
If the FDA decides to regulate our solutions under development as medical devices, it could require extensive
premarket clinical testing prior to submitting a regulatory application for commercial sales. Conducting clinical
trials generally entails a long, expensive and uncertain process that is subject to delays and failure at any stage. If we
are required to conduct premarket clinical trials, whether using prospectively acquired samples or archival samples,
delays in the commencement or completion of clinical testing could significantly increase our development costs
and delay test commercialization. Many of the factors that may cause or lead to a delay in the commencement or
completion of clinical trials may also ultimately lead to delay or denial of regulatory clearance or approval. The
commencement of clinical trials may be delayed due to insufficient blood or tissue samples or insufficient data
regarding the associated clinical outcomes. We may find it necessary to engage contract research organizations to
perform data collection and analysis and other aspects of our clinical trials, which might increase the cost and
complexity of our trials and reduce our control over such activities. If these parties do not successfully carry out
their contractual duties or obligations or meet expected deadlines, or if the quality, completeness or accuracy of the
clinical data they obtain is compromised due to the failure to adhere to our clinical protocols, applicable regulatory
requirements, or for other reasons, our clinical trials may have to be extended, delayed or terminated. Our reliance
on third parties that we do not control would not relieve us of any applicable requirement to ensure compliance with
various procedures required under good clinical practices. We may not be able to enter into replacement
arrangements without undue delays or considerable expenditures. If there are delays in testing or approvals as a
result of the failure to perform by third parties, our research and development costs would increase, and we may not
be able to obtain regulatory clearance or approval for our solutions under development. In addition, we may not be
able to establish or maintain relationships with these parties on favorable terms, if at all. Each of these outcomes
would harm our ability to market our solutions under development and our ability to be profitable.
Any test for which we obtain regulatory clearance will be subject to extensive ongoing regulatory requirements,
and we may be subject to penalties if we or our contractors or commercial partners fail to comply with regulatory
requirements or if we experience unanticipated problems with our products.
AlloMap and our solutions under development, along with the manufacturing processes, packaging, labeling,
distribution, import, export, and advertising and promotional activities for such solutions or devices, are or will be
subject to continual requirements of, and review by, CMS, state licensing agencies, the FDA and comparable
regulatory authorities. These requirements include submissions of safety and other post-marketing information and
reports, registration and listing requirements, requirements relating to quality control, quality assurance and
corresponding maintenance of records and documents, requirements relating to product labeling, advertising,
promotion, recordkeeping and adverse event reporting. Regulatory clearance of a test or device may be subject to
limitations by the regulatory body as to the indicated uses for which the product may be marketed or to other
conditions of approval. For example, we are exploring utilization of AlloMap in areas that could be considered
outside the scope of our current labeling. Broader uses would require FDA approval as well as changes to the
labeling. In addition, approval may contain requirements for costly post-marketing testing and surveillance to
monitor the safety or efficacy of the test or device. Discovery of previously-unknown problems with our current or
future solutions, or failure to comply with regulatory requirements, may result in actions such as:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
restrictions on operations of our laboratory;
restrictions on manufacturing processes;
restrictions on marketing of a test;
warning or untitled letters;
withdrawal of the test from the market;
refusal to approve applications or supplements to approved applications that we may submit;
fines, restitution or disgorgement of profits or revenue;
suspension, limitation or withdrawal of regulatory clearances;
45
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
exclusion from participation in U.S. federal or state healthcare programs, such as Medicare and
Medicaid;
refusal to permit the import or export of our products;
product seizure;
injunctions; and
imposition of civil or criminal penalties.
We are subject to numerous fraud and abuse and other laws and regulations pertaining to our business, the
violation of any one of which could harm our business.
The clinical laboratory testing industry is highly regulated, and there can be no assurance that the regulatory
environment in which we operate will not change significantly and adversely in the future. Our arrangements with
customers may expose us to broadly applicable fraud and abuse and other laws and regulations that may restrict the
financial arrangements and relationships through which we market, sell and distribute our products. Our employees,
consultants, principal investigators and commercial partners may engage in misconduct or other improper activities,
including non-compliance with regulatory standards and requirements. In addition to CLIA regulation, other federal
and state healthcare laws and regulations that may affect our ability to conduct business, include, without limitation:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
federal and state laws and regulations regarding billing and claims payment applicable to clinical
laboratories and/or regulatory agencies enforcing those laws and regulations;
federal civil and criminal false claims laws and civil monetary penalty laws, which prohibit, among
other things, individuals or entities from knowingly presenting, or causing to be presented to the
government, claims for payment from Medicare, Medicaid or other third-party payers that are false or
fraudulent, or making a false statement material to a false or fraudulent claim;
the federal anti-kickback statute, which constrains our marketing practices, educational programs,
pricing policies, and relationships with healthcare providers or other entities, by prohibiting, among
other things, knowingly and willfully soliciting, receiving, offering or paying remuneration, directly or
indirectly, to induce or reward, or in return for, either the referral of an individual or the purchase or
recommendation of an item or service reimbursable under a federal healthcare program, such as the
Medicare and Medicaid programs;
the federal physician self-referral law, commonly known as the Stark Law, which prohibits a physician
from making a referral to an entity for certain designated health services, including clinical laboratory
services, reimbursed by Medicare if the physician (or a member of the physician’s family) has a
financial relationship with the entity, and which also prohibits the submission of any claims for
reimbursement for designated health services furnished pursuant to a prohibited referral;
HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act of
2009, or HITECH, and its implementing regulations, which imposes certain requirements relating to the
privacy, security and transmission of individually identifiable health information; HIPAA also created
criminal liability for knowingly and willfully falsifying or concealing a material fact or making a
materially false statement in connection with the delivery of or payment for healthcare benefits, items or
services;
state laws regarding prohibitions on fee-splitting;
the federal healthcare program exclusion statute; and
state and foreign law equivalents of each of the above federal laws and regulations, such as anti-
kickback, false claims, and self-referral laws, which may apply to items or services reimbursed by any
third-party payer, including commercial insurers, and state and foreign laws governing the privacy and
security of health information in certain circumstances, many of which differ from each other in
significant ways and often are not preempted by HIPAA, thus complicating compliance efforts.
46
Because of the breadth of these laws and the narrowness of available statutory and regulatory exemptions, it is
possible that some of our business activities could be subject to challenge under one or more of such laws. Any
action brought against us for violation of these laws or regulations, even if we successfully defend against it, could
cause us to incur significant legal expenses and divert our management’s attention from the operation of our
business. We may be subject to private “qui tam” actions brought by individual whistleblowers on behalf of the
federal or state governments, with potential liability under the federal False Claims Act including mandatory treble
damages and significant per-claim penalties, currently set at $5,500 to $11,000 per false claim. If our operations are
found to be in violation of any of the federal, state and foreign laws described above or any other current or future
fraud and abuse or other healthcare laws and regulations that apply to us, we may be subject to penalties, including
significant criminal, civil, and administrative penalties, damages, fines, imprisonment for individuals, exclusion
from participation in government programs, such as Medicare and Medicaid, injunctions, recall or seizure of
products, total or partial suspension of production, denial or withdrawal of pre-marketing product approvals, and the
curtailment or restructuring of our operations, any of which could adversely affect our ability to operate our business
and our results of operations. Any of the foregoing consequences could seriously harm our business and our
financial results.
Foreign governments may impose reimbursement standards, which may adversely affect our future profitability.
When we market AlloMap and our solutions under development in foreign jurisdictions, we are subject to rules and
regulations in those jurisdictions relating to our testing. In some foreign countries, including countries in the
European Union, the reimbursement of our current and future solutions is subject to governmental control. In these
countries, reimbursement negotiations with governmental authorities can take considerable time after the receipt of
marketing approval for a test candidate. If reimbursement of our future solutions in any jurisdiction is unavailable or
limited in scope or amount, or if reimbursement rates are set at unsatisfactory levels, we may be unable to, or decide
not to, market our test in that jurisdiction.
Changes in healthcare policy could increase our costs and subject us to additional regulatory requirements that
may interrupt commercialization of our current and future solutions.
Changes in healthcare policy could increase our costs, decrease our revenues and impact sales of and reimbursement
for our current and future solutions. In March 2010, the Patient Protection and Affordable Care Act, as amended by
the Health Care and Education Affordability Reconciliation Act, or the Affordable Care Act, became law. This law
substantially changes the way healthcare is financed by both governmental and private insurers, and significantly
impacts our industry. The Affordable Care Act contains a number of provisions that are expected to impact our
business and operations, some of which in ways we cannot currently predict, including those governing enrollment
in federal healthcare programs, reimbursement changes and fraud and abuse, which will impact existing government
healthcare programs and will result in the development of new programs.
In addition to the Affordable Care Act, there will continue to be proposals by legislators at both the federal and state
levels, regulators and third-party payers to reduce costs while expanding individual healthcare benefits. Certain of
these changes could impose additional limitations on the prices we will be able to charge for our current and future
solutions or the amounts of reimbursement available for our current and future solutions from governmental
agencies or third-party payers. While in general it is too early to predict specifically what effect the Affordable Care
Act and its implementation or any future healthcare reform legislation or policies will have on our business, current
and future healthcare reform legislation and policies could have a material adverse effect on our business and
financial condition.
Risks Relating to Our Intellectual Property
Our competitive position depends on maintaining intellectual property protection.
Our ability to compete and to achieve and maintain profitability depends on our ability to protect our proprietary
discoveries and technologies. We currently rely on a combination of patents, copyrights, trademarks, trade secrets,
confidentiality agreements and license agreements to protect our intellectual property rights.
47
Our patent position for AlloMap is based on issued patents and patent applications disclosing identification of genes
differentially expressed between activated and resting leukocytes and demonstration of correlation between gene
expression patterns and specific clinical states and outcomes. Our strategy is to continue to broaden our intellectual
property estate for AlloMap through the discovery and protection of gene expression patterns and their correlation
with specific clinical states and outcomes, as well as the algorithms needed for clinical assessment.
As of December 31, 2015, we had 16 issued U.S. patents, and one pending patent application outside the United
States related to autoimmunity and transplant rejection. We have five issued U.S. patents covering methods of
diagnosing transplant rejection using all 11 informative genes measured in AlloMap. The expiration dates of these
patents range from 2021 to 2024. In the area of dd-cfDNA-based transplant diagnostics, we have filed a patent
application to cover our research and development work in this field. In connection with our June 2014 acquisition
of ImmuMetrix, we obtained an exclusive license from Stanford University to a patent relating to the diagnosis of
rejection in organ transplant recipients using dd-cfDNA. This patent has an expiration date of November 5, 2030.
We have six issued U.S. patents covering a method of diagnosing or monitoring autoimmune or chronic
inflammatory disease, such as lupus, by detecting specific genes. While we have clinical samples and patents
covering lupus diagnostics, we do not intend to actively pursue the lupus test opportunity. In dd-cfDNA-based
transplant diagnostics, we have submitted a provisional patent application to cover some of our initial research and
development work in this field. There is no guarantee that the U.S. Patent and Trademark Office, or PTO, will
approve this provisional application. We do not know what claims, if any, will be granted in our existing and future
applications. Our patents and patents that we exclusively license from others address fields that are rapidly evolving,
and, particularly with respect to dd-cfDNA-based transplant diagnostics, it is possible that other patents have and
will be granted to others that affect our ability to develop and commercialize our current and future solutions. If the
reviewers of our patent applications at the PTO refuse our claims, we may not be able to sufficiently protect our
intellectual property. Further, recent and future changes in the patent laws and regulations of the United States and
other jurisdictions may require us to modify our patent strategy and could restrict our ability to obtain additional
patents for our technology.
Our patents and the patents we exclusively license from others may be successfully challenged by third parties as
being invalid or unenforceable. Third parties may independently develop similar or competing technology that
avoids the patents we own or exclusively license. We cannot be certain that the steps we have taken will prevent the
misappropriation and use of our intellectual property, particularly in foreign countries where the laws may not
protect our proprietary rights as fully as in the United States.
The extent to which the patent rights of life sciences companies effectively protect their products and technologies is
often highly uncertain and involves complex legal and factual questions for which important legal principles remain
unresolved. No consistent policy regarding the proper scope of allowable claims of patents held by such companies
has emerged to date in the United States. Various courts, including the United States Supreme Court, have rendered
decisions that impact the scope of patentability of certain inventions or discoveries relating to diagnostic solutions or
genomic diagnostics. A recent decision in the Ariosa Diagnostics, Inc. v. Sequenom, Inc. (Fed. Cir. 2015) case
decided that a dd-cfDNA product for fetal testing was not eligible for patent protection. These decisions generally
stand for the proposition that inventions that recite laws of nature are not themselves patentable unless they have
sufficient additional features that provide practical assurance that the processes are genuine inventive applications of
those laws rather than patent drafting efforts designed to monopolize a law of nature itself. What constitutes a
“sufficient” additional feature for this purpose is uncertain. This evolving case law in the United States may
adversely impact our ability to obtain new patents and may facilitate third-party challenges to our existing owned
and exclusively licensed patents.
Changes in either the patent laws or in interpretations of patent laws in the United States or other countries may
diminish the value of our intellectual property rights. In particular, in September 2011, the United States Congress
passed the Leahy-Smith America Invents Act, or the AIA, which became effective in March 2013. The AIA reforms
United States patent law in part by changing the standard for patent approval for certain patents from a “first to
invent” standard to a “first to file” standard and developing a post-grant review system. It is too early to determine
what the effect or impact the AIA will have on the operation of our business and the protection and enforcement of
our intellectual property. However, the AIA and its implementation could increase the uncertainties and costs
surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents, all of
48
which could have a material adverse effect on our business and financial condition. Patent applications in the United
States and many foreign jurisdictions are not published until at least eighteen months after filing, and it is possible
for a patent application filed in the United States to be maintained in secrecy until a patent is issued on the
application. In addition, publications in the scientific literature often lag behind actual discoveries. We therefore
cannot be certain that others have not filed patent applications that cover inventions that are the subject of pending
applications that we own or exclusively license or that we or our licensors, as applicable, were the first to invent the
technology (pre-AIA) or first to file (post-AIA). Our competitors may have filed, and may in the future file, patent
applications covering technology that is similar to or the same as our technology. Any such patent application may
have priority over patent applications that we own or exclusively license and, if a patent issues on such patent
application, we could be required to obtain a license to such patent in order to carry on our business. If another party
has filed a United States patent application covering an invention that is similar to, or the same as, an invention that
we own or license, we or our licensors may have to participate in an interference or other proceeding in the PTO or a
court to determine priority of invention in the United States, for pre-AIA applications and patents. For post-AIA
applications and patents, we or our licensors may have to participate in a derivation proceeding to resolve disputes
relating to inventorship. The costs of these proceedings could be substantial, and it is possible that such efforts
would be unsuccessful, resulting in our inability to obtain or retain any United States patent rights with respect to
such invention.
We may face intellectual property infringement claims that could be time-consuming and costly to defend and
could result in our loss of significant rights and the assessment of treble damages.
We may in the future receive offers to license patents or notices of claims of infringement, misappropriation or
misuse of other parties’ proprietary rights. We may also initiate claims to defend our intellectual property.
Intellectual property litigation, regardless of outcome, is unpredictable, expensive and time-consuming, could divert
management’s attention from our business and have a material negative effect on our business, operating results or
financial condition. If there is a successful claim of infringement against us, we may be required to pay substantial
damages (including treble damages if we were to be found to have willfully infringed a third party’s patent) to the
party claiming infringement, develop non-infringing technology, stop selling our test or using technology that
contains the allegedly infringing intellectual property or enter into royalty or license agreements that may not be
available on acceptable or commercially practical terms, if at all. Our failure to develop non-infringing technologies
or license the proprietary rights on a timely basis could harm our business. In addition, revising our current or future
solutions to exclude any infringing technologies would require us to re-validate the test, which would be costly and
time consuming. Also, we may be unaware of pending patent applications that relate to our current or future
solutions. Parties making infringement claims on future issued patents may be able to obtain an injunction that
would prevent us from selling our current or future solutions or using technology that contains the allegedly
infringing intellectual property, which could harm our business.
If we are unable to protect or enforce our intellectual property rights effectively in all major markets, our
business would be harmed.
Filing, prosecuting, defending and enforcing patents on all of our technologies and solutions throughout the world
would be prohibitively expensive. As a result, we seek to protect our proprietary position by filing patent
applications in the U.S. and in select foreign jurisdictions and cannot guarantee that we will obtain the patent
protection necessary to protect our competitive position in all major markets. Competitors may use our technologies
or solutions in jurisdictions where we have not obtained patent protection to develop their own products and, further,
may export infringing products to territories where we have patent protection but where enforcement is not as strong
as that in the U.S. These products may compete with our current and future products in jurisdictions where we do
not have any issued patents, and our patent claims or other intellectual property rights may not be effective or
sufficient to prevent them from so competing.
Many companies have encountered significant problems in protecting and defending intellectual property rights in
foreign jurisdictions. The legal systems of certain countries, particularly certain developing countries, do not favor
the enforcement of patents and other intellectual property protection, which could make it difficult for us to stop the
infringement of our patents or the marketing of competing products in violation of our proprietary rights generally.
The legal systems of certain countries make it difficult or impossible to obtain patent protection for diagnostic
solutions. Proceedings to enforce our patent rights in foreign jurisdictions could result in substantial costs and could
divert our efforts and attention from other aspects of our business.
49
If we are unable to protect the confidentiality of our trade secrets, our business and competitive position would be
harmed.
In addition to seeking patents for some of our technologies and solutions, we also rely on trade secrets, including
unpatented know-how, technology and other proprietary information, to maintain our competitive position. We seek
to protect these trade secrets, in part, by entering into non-disclosure and confidentiality agreements with parties
who have access to them, such as our employees, corporate collaborators, outside scientific collaborators, contract
manufacturers, consultants, advisors and other third parties. We also enter into confidentiality and invention or
patent assignment agreements with our employees and consultants that obligate them to assign to us any inventions
developed in the course of their work for us. However, we cannot guarantee that we have executed these agreements
with each party that may have or have had access to our trade secrets or that the agreements we have executed will
provide adequate protection. Despite these efforts, any of these parties may breach the agreements and disclose our
proprietary information, including our trade secrets, and we may not be able to obtain adequate remedies for such
breaches. Monitoring unauthorized disclosure is difficult and we do not know whether the procedures we have
followed to prevent such disclosure are, or will be adequate. Enforcing a claim that a party illegally disclosed or
misappropriated a trade secret is difficult, expensive and time-consuming, and the outcome is unpredictable. In
addition, some courts inside and outside the U.S. may be less willing or unwilling to protect trade secrets. If any of
the technology or information that we protect as trade secrets were to be lawfully obtained or independently
developed by a competitor, we would have no right to prevent them from using that technology or information to
compete with us. If any of our trade secrets were to be disclosed to, or independently developed by, a competitor,
our competitive position would be harmed.
If our trademarks and trade names are not adequately protected, we may not be able to build name recognition in
our markets of interest, and our business may be adversely affected.
AlloMap and CareDx are registered trademarks of our company in the United States. Our registered or unregistered
trademarks or trade names may be challenged, infringed, circumvented, declared generic or determined to be
infringing on other marks. As a means to enforce our trademark rights and prevent infringement, we may be
required to file trademark claims against third parties or initiate trademark opposition proceedings. This can be
expensive, particularly for a company of our size, and time-consuming. In addition, in an infringement proceeding, a
court may decide that a trademark of ours is not valid or is unenforceable, or may refuse to stop the other party from
using the trademark at issue. We may not be able to protect our rights to these and other trademarks and trade names
which we need to build name recognition by potential partners or customers in our markets of interest. Over the
long-term, if we are unable to establish name recognition based on our trademarks and trade names, then we may not
be able to compete effectively and our business may be adversely affected.
We may be subject to claims by third parties that we or our employees have wrongfully used or disclosed alleged
trade secrets or misappropriated intellectual property, or claiming ownership of what we view as our own
intellectual property.
As is commonplace in our industry, we employ individuals who were previously employed at other diagnostics,
medical device, life sciences or pharmaceutical companies, including our competitors or potential competitors.
Although we try to ensure that our employees do not use the proprietary information of others in the course of their
work for us and no claims against us are currently pending, we may be subject to claims that these employees have
inadvertently or otherwise used or disclosed trade secrets or other proprietary information of their former employers.
Litigation may be necessary to defend against these claims. We may also be forced to bring claims against third
parties or defend against third-party claims in order to determine the ownership of our intellectual property. An
adverse result in the prosecution or defense of any such claims could require us to pay substantial monetary damages
and could result in the loss of valuable intellectual property rights or personnel. Even if we are successful in
prosecuting or defending against these claims, litigation could result in substantial costs and be a distraction to
management.
50
Our business is dependent on licenses from third parties.
We license from third parties technology necessary to develop and commercialize our products. Our most significant
license covers PCR technology used in AlloMap and may be required for future solutions we develop. We license
this technology from Roche Molecular Systems, Inc. In connection with our acquisition of ImmuMetrix, Inc., we
obtained an exclusive license from Stanford University to a patent relating to the diagnosis of rejection in organ
transplant recipients using dd-cfDNA. Our rights to use these and other licensed technologies, data and materials
and to employ the inventions claimed in licensed patents are subject to the continuation of and our compliance with
the terms of the applicable licenses. We are obligated under these licenses to, among other things, pay certain
royalties upon commercial sales of our products. These licenses generally last until the expiration of the last to
expire of the patents included within the licenses that cover our use within our products, but the licenses may be
terminated earlier in certain circumstances. Termination of any of these licenses could prevent us from producing or
selling some or all of our products, and a failure of the licensors to abide by the terms of the licenses or to prevent
infringement by third parties could harm our business and negatively impact our market position. Failure of a
licensor to abide by the terms of a license or to prevent infringement by third parties could also harm our business
and negatively impact our market position.
Risks Related to Our Common Stock
Our operating results may fluctuate, which could cause our stock price to decrease.
Fluctuations in our operating results may lead to fluctuations, including declines, in our share price. Our operating
results and our share price may fluctuate from period to period due to a variety of factors, including:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
demand by clinicians and recipients for our current and future solutions, if any;
coverage and reimbursement decisions by third-party payers and announcements of those decisions;
clinical trial results and publication of results in peer-reviewed journals or the presentation at medical
conferences;
the inclusion or exclusion of our current and future solutions in large clinical trials conducted by others;
new or less expensive tests and services or new technology introduced or offered by our competitors or
us;
the level of our development activity conducted for new solutions, and our success in commercializing
these developments;
our ability to integrate the business of new acquisitions, such as Allenex, with our business efficiently;
the level of our spending on test commercialization efforts, licensing and acquisition initiatives, clinical
trials, and internal research and development;
changes in the regulatory environment, including any announcement from the FDA regarding its
decisions in regulating our activities;
changes in recommendations of securities analysts or lack of analyst coverage;
failure to meet analyst expectations regarding our operating results;
additions or departures of key personnel; and
general market conditions.
Variations in the timing of our future revenues and expenses could also cause significant fluctuations in our
operating results from period to period and may result in unanticipated earning shortfalls or losses. In addition,
national stock exchanges in general, and the market for life science companies in particular, have experienced
significant price and volume fluctuations that have often been unrelated or disproportionate to the operating
performance of those companies. In addition, we may be subject to additional securities class action litigation as a
result of volatility in the price of our common stock, which could result in substantial costs and diversion of
management’s attention and resources and could harm our stock price, business, prospects, results of operations and
financial condition.
51
The market price of our common stock has been and will likely continue to be volatile, and you could lose all or
part of your investment.
Prior to our initial public offering in July 2014, there had been no public market for our shares of common stock.
Our stock is currently traded on the NASDAQ Global Market, but we can provide no assurances that there will be
active trading on that market or on any other market in the future. If there is no active market or if the volume of
trading is limited, holders of our common stock may have difficulty selling their shares. The market price of our
common stock has been and may continue to be subject to wide fluctuations in response to various factors, some of
which are beyond our control. In addition to the factors discussed in this “Risk Factors” section and elsewhere in the
Annual Report on Form 10-K, factors that could cause fluctuations in the market price of our common stock include
the following:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
price and volume fluctuations in the overall stock market from time to time;
volatility in the market prices and trading volumes of life sciences stocks;
changes in operating performance and stock market valuations of other life sciences companies
generally, or those in our industry in particular;
sales of shares of our common stock by us or our stockholders;
failure of securities analysts to maintain coverage of us, changes in financial estimates by securities
analysts who follow our company, or our failure to meet these estimates or the expectations of investors;
the financial projections we may provide to the public, any changes in those projections or failure to
meet those projections;
announcements by us or our competitors of new products or services;
the public’s reaction to our press releases, other public announcements and filings with the SEC;
rumors and market speculation involving us or other companies in our industry;
actual or anticipated changes in our operating results or fluctuations in our operating results;
actual or anticipated developments in our business, our competitors’ businesses or the competitive
landscape generally;
litigation involving us, our industry or both, or investigations by regulators into our operations or those
of our competitors;
developments or disputes concerning our intellectual property or other proprietary rights;
announced or completed acquisitions of businesses or technologies by us or our competitors;
new laws or regulations or new interpretations of existing laws or regulations applicable to our business;
changes in accounting standards, policies, guidelines, interpretations or principles;
any significant change in our management; and
general economic conditions and slow or negative growth of our markets.
If our principal stockholders, executive officers and directors choose to act together, they may be able to control
our management and operations, which may prevent us from taking actions that may be favorable to you.
Our executive officers, directors and holders of 5% or more of our outstanding common stock, and entities affiliated
with them, beneficially own in the aggregate approximately 50.0% of our common stock as of December 31, 2015.
This significant concentration of share ownership may adversely affect the trading price of our common stock
because investors often perceive disadvantages in owning stock in companies with controlling stockholders. These
stockholders, acting together, will have the ability to exert substantial influence over all matters requiring approval
by our stockholders, including the election and removal of directors and any proposed merger, consolidation or sale
of all or substantially all of our assets. In addition, they could dictate the management of our business and affairs.
This concentration of ownership could have the effect of delaying, deferring or preventing a change in control of us
or impeding a merger or consolidation, takeover or other business combination that could be favorable to you.
52
Sales of substantial amounts of our common stock in the public markets, or sales of our common stock by our
executive officers and directors under Rule 10b5-1 plans, could adversely affect the market price of our common
stock.
Sales of a substantial number of shares of our common stock in the public market, or the perception that such sales
could occur, could adversely affect the market price of our common stock and may make it more difficult for you to
sell your common stock at a time and price that you deem appropriate. In addition, our executive officers and
directors may adopt written plans, known as “Rule 10b5-1 Plans,” under which they will contract with a broker to
sell shares of our common stock on a periodic basis to diversify their assets and investments. Sales made by our
executive officers and directors pursuant to Rule 10b5-1, regardless of the amount of such sales, could adversely
affect the market price of our common stock.
We incur costs and demands upon management as a result of complying with the laws and regulations affecting
public companies in the U.S., which may adversely affect our operating results.
As a public company listed in the U.S., we incur significant additional legal, accounting and other expenses. In
addition, changing laws, regulations and standards relating to corporate governance and public disclosure, including
regulations implemented by the SEC and the NASDAQ Global Market exchange may increase legal and financial
compliance costs and make some activities more time-consuming. These laws, regulations and standards are subject
to varying interpretations, and as a result, their application in practice may evolve over time as new guidance is
provided by regulatory and governing bodies. We invest resources to comply with evolving laws, regulations and
standards, and this investment may result in increased general and administrative expenses and a diversion of
management’s time and attention from revenue-generating activities to compliance activities. If, notwithstanding our
efforts to comply with new laws, regulations and standards, we fail to comply, regulatory authorities may initiate
legal proceedings against us, and our business may be harmed.
Further, failure to comply with these laws, regulations and standards might also make it more difficult for us to
obtain certain types of insurance, including director and officer liability insurance, and we might be forced to accept
reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. The
impact of these events could also make it more difficult for us to attract and retain qualified persons to serve on our
board of directors, on committees of our board of directors or as members of senior management.
If equity research analysts do not publish research or reports about our business, or if they issue unfavorable
commentary or downgrade our common stock, the price of our common stock could decline.
The trading market for our common stock relies in part on the research and reports that equity research analysts
publish about us and our business. We do not control these analysts or the content and opinions included in their
reports. Securities analysts may elect not to provide research coverage of our common stock and such a lack of
research coverage may adversely affect the market price of our common stock. The price of our stock could decline
if one or more equity research analysts downgrade our stock or if those analysts issue other unfavorable commentary
or cease publishing reports about us or our business. If one or more equity research analysts ceases coverage of our
company, we could lose visibility in the market, which in turn could cause our stock price to decline.
We do not expect to pay dividends in the foreseeable future. As a result, you must rely on stock appreciation for
any return on your investment.
We do not anticipate paying cash dividends on our common stock in the foreseeable future. Any payment of cash
dividends will also depend on our financial condition, results of operations, capital requirements and other factors
and will be at the discretion of our board of directors. Accordingly, you will have to rely on capital appreciation, if
any, to earn a return on your investment in our common stock. Furthermore, we may in the future become subject to
contractual restrictions on, or prohibitions against, the payment of dividends.
53
If we are unable to substantially utilize our net operating loss carryforwards, our financial results could be
harmed.
As of December 31, 2015, our net operating loss, or NOL, carryforward amounts for U.S. federal income and
California tax purposes were $174.3 million and $113.6 million, respectively. Under Section 382 of the Internal
Revenue Code, a corporation that undergoes an “ownership change” may be subject to limitations on its ability to
utilize its pre-change NOLs to offset future taxable income. Ownership changes beyond these limits, as determined
by the IRS, may limit our ability to utilize our NOLs in the future. Limitations imposed on our ability to utilize
NOLs could cause U.S. federal and state income taxes to be paid earlier than would be paid if such limitations were
not in effect and could cause such NOLs to expire unused, in each case reducing or eliminating the benefit of such
NOLs. Furthermore, we may not be able to generate sufficient taxable income to utilize our NOLs before they
expire. If any of these events occur, we may not derive some or all of the expected benefits from our NOLs.
Our financial controls and procedures may not be sufficient to ensure timely and reliable reporting of financial
information, which, as a public company, could materially harm our stock price and exchange listing.
As a public reporting company, we are required to comply with the Sarbanes-Oxley Act of 2002 and the related
rules and regulations of the Securities and Exchange Commission, including expanded disclosures and accelerated
reporting requirements and more complex accounting rules. Compliance with Section 404 of the Sarbanes-Oxley
Act and other requirements will increase our costs and require additional management resources. We recently have
been upgrading our finance and accounting systems, procedures and controls and will need to continue to implement
additional finance and accounting systems, procedures and controls as we grow our business and organization and to
satisfy new reporting requirements. If we are unable to complete the required Section 404 assessment as to the
adequacy of our internal control over financial reporting, if we fail to maintain or implement adequate controls, or if
our independent registered public accounting firm is unable to provide us with an unqualified report as to the
effectiveness of our internal control over financial reporting as of the date of our first Form 10-K for which
compliance is required, our ability to obtain additional financing could be impaired. We previously identified a
material weakness in our internal control over financial reporting related to an entity acquired in 2014, which was
remedied, but as we continue to expand our team there is no guarantee that new or similar issues may not arise.
As a public company, we will require greater financial resources than we have had as a private company. We cannot
provide you with assurance that our finance department has or will maintain adequate resources to ensure that we
will not have any future material weaknesses in our system of internal controls, including with respect to business
combinations processes. The effectiveness of our controls and procedures may in the future be limited by a variety
of factors, including:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
faulty human judgment and simple errors, omissions or mistakes;
fraudulent action of an individual or collusion of two or more people;
inappropriate management override of procedures; and
the possibility that any enhancements to controls and procedures may still not be adequate to assure
timely and accurate financial information.
If we fail to have effective controls and procedures for financial reporting in place, we could be unable to provide
timely and accurate financial information and may be subject to NASDAQ Global Market delisting, SEC
investigation and civil or criminal sanctions.
Our organizational documents and Delaware law make a takeover of our company more difficult, which may
prevent certain changes in control and limit the market price of our common stock.
Our certificate of incorporation and bylaws and Section 203 of the Delaware General Corporation Law contain
provisions that may have the effect of deterring or delaying attempts by our stockholders to remove or replace
management, engage in proxy contests and effect changes in control. These provisions include:
(cid:120)
our board of directors will be authorized, without prior stockholder approval, to create and issue
preferred stock which could be used to implement anti-takeover devices;
54
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
advance notice will be required for director nominations or for proposals that can be acted upon at
stockholder meetings;
our board of directors will be classified such that not all members of our board are elected at one time,
which may make it more difficult for a person who acquires control of a majority of our outstanding
voting stock to replace all or a majority of our directors;
stockholder action by written consent will be prohibited;
special meetings of the stockholders will be permitted to be called only by the chairman of our board of
directors, a majority of our board of directors or by our chief executive officer or president (if at such
time we have no chief executive officer);
stockholders will not be permitted to cumulate their votes for the election of directors; and
stockholders will be permitted to amend our bylaws and certain provisions of our certificate of
incorporation only upon receiving at least 66 2/3% of the votes entitled to be cast by holders of all
outstanding shares then entitled to vote generally in the election of directors, voting together as a single
class.
In addition, as a Delaware corporation, we are subject to Delaware law, including Section 203 of the Delaware
General Corporation Law. In general, Section 203 prohibits a Delaware corporation from engaging in any business
combination with any interested stockholder for a period of three years following the date that the stockholder
became an interested stockholder unless certain specific requirements are met as set forth in Section 203. These
provisions, alone or together, could have the effect of deterring or delaying changes in incumbent management,
proxy contests or changes in control.
These provisions also could discourage proxy contests and make it more difficult for you and other stockholders to
elect directors and take other corporate actions. The existence of these provisions could limit the price that investors
might be willing to pay in the future for shares of our common stock. Some provisions in our certificate
of incorporation and bylaws may deter third parties from acquiring us, which may limit the market price of our
common stock.
We are an “emerging growth company,” and, if we decide to comply only with reduced disclosure requirements
applicable to emerging growth companies, our common stock could be less attractive to investors.
We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act, or JOBS Act,
enacted in April 2012, and for as long as we continue to be an “emerging growth company,” we may choose to take
advantage of exemptions from various reporting requirements applicable to other public companies but not to
“emerging growth companies,” including, but not limited to, not being required to comply with the auditor
attestation requirements of Section 404, reduced disclosure obligations regarding executive compensation in our
periodic reports and proxy statements and exemptions from the requirements of holding a nonbinding advisory vote
on executive compensation and shareholder approval of any golden parachute payments not previously approved.
We will continue to be an “emerging growth company” until the earlier of (1) the last day of the fiscal year
(a) following the fifth anniversary of the completion of our initial public offering, (b) in which we have total annual
gross revenue of at least $1.0 billion, or (c) in which we are deemed to be a large accelerated filer, which means the
market value of our common stock that is held by non-affiliates exceeds $700 million as of the prior June 30th, and
(2) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year
period. We cannot predict if investors will find our common stock less attractive if we choose to rely on these
exemptions. If some investors find our common stock less attractive as a result of any choices to reduce future
disclosure, there may be a less active trading market for our common stock, and our stock price may be more
volatile.
Under the JOBS Act, emerging growth companies that become public can delay adopting new or revised accounting
standards until such time as those standards apply to private companies. We have irrevocably elected not to avail
ourselves of this exemption from new or revised accounting standards, and therefore, we will be subject to the same
new or revised accounting standards as other public companies that are not emerging growth companies.
55
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Our headquarters in Brisbane, California comprise approximately 46,000 square feet of leased space, which includes
office space, our clinical laboratory and our research and development laboratories. The lease agreement for the
Brisbane facility expires on December 31, 2020. We do not own any real property. We believe that our leased
facilities are adequate to meet our current needs and that additional facilities are available for lease to meet future
needs.
ITEM 3. LEGAL PROCEEDINGS
We are not currently a party to any material legal proceedings that we believe are material to our business, financial
condition or results of operations. We may from time to time become involved in legal proceedings arising in the
ordinary course of business.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
56
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our common stock is traded on The NASDAQ Global Market under the symbol “CDNA” since July 22, 2014. Prior
to that date, there was no public trading market for our common stock.
Holders of Record
As of February 29, 2016, there were approximately 163 holders of record of our common stock. Because many of
our shares of common stock are held by brokers and other institutions on behalf of stockholders, we are unable to
estimate the total number of stockholders represented by these record holders.
Price Range of Our Common Stock
The following table sets forth the high and low sales price per share of our common stock as reported on The
NASDAQ Global Market for the period indicated:
Year Ended December 31, 2014
Fourth Quarter.............................................................. $
High
Low
10.89 $
5.40
Year Ended December 31, 2015
First Quarter ................................................................. $
Second Quarter ............................................................ $
Third Quarter ............................................................... $
Fourth Quarter.............................................................. $
High
Low
7.54 $
6.92 $
7.67 $
6.68 $
5.54
4.61
4.11
4.23
57
Stock Performance Graph
The following information is not deemed to be “soliciting material” or to be “filed” with the Securities and
Exchange Commission for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (Exchange
Act) or otherwise subject to the liabilities under that Section , and will not be deemed to be incorporated by
reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent we
specifically incorporate it by reference into such a filing.
The graph and table below shows the cumulative total stockholder return on our common stock (change in stock
price plus reinvested dividends) relative to the total returns of the NASDAQ Composite Index, and the NASDAQ
Biotechnology Index. An investment of $100 is assumed to have been made in our common stock and in each index
on July 22, 2014 (the date our common stock began trading following our initial public offering) and its relative
performance is tracked through December 31, 2015. The comparison is based on historical results and is not
intended to forecast or be indicative of future performance of our common stock.
COMPARISON OF 13 MONTH CUMULATIVE TOTAL RETURN
Assumes Initial Investment of $100
Among CareDx, Inc., Nasdaq Composite Index, and Nasdaq Biotech
s
r
a
l
l
o
D
S
U
0
6
1
$
0
4
1
$
0
2
1
$
0
0
1
$
0
8
$
0
6
$
0
4
$
0
2
$
-
$
CareDx
Nasdaq Composite
Nasdaq Biotech
7/22/2014
9/30/2014
12/31/2014
3/31/2015
6/30/2015
9/30/2015
12/31/2015
Trade Date
12/31/2015 ........................................................ $
9/30/2015 .......................................................... $
6/30/2015 .......................................................... $
3/31/2015 .......................................................... $
12/31/2014 ........................................................ $
9/30/2014 .......................................................... $
7/22/2014 .......................................................... $
CareDx, Inc. Nasdaq Composite(cid:3)(cid:3)(cid:3) Nasdaq Biotech
133.52
119.52
145.75
135.66
119.83
107.82
100.00
112.37 $
103.68 $
111.91 $
109.98 $
106.28 $
100.84 $
100.00 $
64.00 $
41.70 $
65.00 $
55.45 $
72.50 $
70.00 $
100.00 $
Dividend Policy
We have never declared or paid any cash dividend on our capital stock. We currently intend to retain any future
earnings and do not expect to pay any dividends in the foreseeable future. Our loan and security agreement restricts
our ability to pay cash dividends on our common stock, and we may also enter into credit agreements or other
borrowing arrangements in the future that will further restrict our ability to declare or pay cash dividends on our
common stock. Any determination to declare or pay dividends in the future will be at the discretion of our board of
directors and will depend on a number of factors, including our financial condition, operating results, capital
requirements, contractual restrictions, general business conditions and other factors that our board of directors may
deem relevant.
58
Sales of Unregistered Securities
On December 16, 2015, we entered into Purchase Agreements to acquire approximately 78% of the outstanding
shares of Allenex from its three principal shareholders. On February 8, 2016, the parties entered into amendments to
such Purchase Agreements to adjust the shares of our common stock issuable per share of Allenex, and change the
timing of distribution of cash consideration. On March 7, 2016, we have launched a tender offer for the remaining
22% of the shares of Allenex. Refer to “Management’s Discussion and Analysis of Results of Operations and
Financial Condition—Overview—Recent Developments—Allenex Tender Offer” included in Part II, Item 7 of this
Annual Report on Form 10-K for additional information.
The shares issued pursuant to the Purchase Agreements and the tender offer will not be registered under the
Securities Act or the securities laws of any state of the United States, and will be issued in reliance upon an
exemption from the registration requirements of the Securities Act provided by Rule 802 thereunder.
Securities Authorized for Issuance Under Equity Compensation Plans
See Item 12 of Part III of this Annual Report on Form 10-K regarding information about securities authorized for
issuance under our equity compensation plans.
Issuer Purchases of Equity Securities
There were no repurchases of equity securities by us during the fourth quarter of 2015.
59
ITEM 6. SELECTED FINANCIAL DATA
The following selected historical financial data should be read in conjunction with “Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and related
notes included elsewhere in this Annual Report on Form 10-K. The selected balance sheet data at December 31,
2015 and 2014 and the selected statements of operations data for each of the years ended December 31, 2015, 2014
and 2013 have been derived from our audited financial statements that are included elsewhere in this Annual Report
on Form 10-K. The financial data included in this report are historical and are not necessarily indicative of results to
be expected in any future period.
Statements of Operations Data:
Revenue:
Testing revenue .......................................................... $
Collaboration and license revenue ..............................
Total revenue ...................................................................
Operating expenses:
Cost of testing.............................................................
Research and development .........................................
Sales and marketing ...................................................
General and administrative .........................................
Change in estimated fair value of contingent
consideration ...........................................................
Total operating expenses .................................................
(Loss) income from operations ........................................
Interest expense, net .........................................................
Other (expense) income, net ............................................
Loss before income taxes .................................................
Income tax benefit ...........................................................
Net (loss) income ............................................................. $
Net (loss) income per share:
2015
Year Ended December 31,
2014
2013
2012
(In thousands, except share and per share data)
27,881 $
263
28,144
25,842 $
1,464
27,306
21,672 $
426
22,098
19,730
721
20,451
10,273
9,333
8,349
12,247
(126)
40,076
(11,932)
(1,587)
(188)
(13,707)
—
(13,707) $
8,541
3,846
6,472
8,436
(1,239)
26,056
1,250
(2,116)
147
(719)
1,500
781 $
9,078
3,176
5,892
4,809
—
22,955
(857 )
(2,149 )
(536 )
(3,542 )
—
(3,542 ) $
7,930
4,752
5,417
4,694
—
22,793
(2,342)
(2,703)
(14)
(5,059)
—
(5,059)
Basic ........................................................................... $
Diluted ........................................................................ $
(1.16) $
(1.16) $
0.13 $
0.10 $
(3.50 ) $
(3.50 ) $
(5.01)
(5.01)
Shares used to compute net (loss) income per share:
Basic ........................................................................... 11,860,885 5,815,928 1,010,795 1,009,236
Diluted ........................................................................ 11,860,885 9,283,001 1,010,795 1,009,236
Balance Sheet Data:
As of December 31,
2015
2014
(In thousands)
Cash and cash equivalents ......................................................... $
Working capital .........................................................................
Total assets ................................................................................
Total debt ..................................................................................
Accumulated deficit ..................................................................
Total stockholders’ equity .........................................................
29,888 $
24,210
55,638
15,753
(173,082)
29,494
36,431
29,211
61,141
11,412
(159,375 )
41,297
60
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion of our financial condition and results of operations should be read in conjunction with our
financial statements and related notes included elsewhere in this Annual Report on Form 10-K. This discussion
contains certain forward-looking statements that involve risk and uncertainties. Our actual results may differ
materially from those discussed below. Factors that could cause or contribute to such differences include, but are
not limited to, those identified below and those set forth under the Section entitled “Risk Factors” in Item 1A, and
other documents we file with the Securities and Exchange Commission. Historical results are not necessarily
indicative of future results.
Business Overview
We are a molecular diagnostics company focused on the discovery, development and commercialization of clinically
differentiated, high-value diagnostic surveillance solutions for transplant patients. Our first commercialized testing
solution, the AlloMap heart transplant molecular test, or AlloMap, is a gene expression test that helps clinicians
monitor and identify heart transplant recipients with stable graft function who have a low probability of
moderate/severe acute cellular rejection. Since 2008, we have sought to expand the adoption and utilization of our
AlloMap solution through ongoing studies to substantiate the clinical utility and actionability of AlloMap, secure
positive reimbursement decisions for AlloMap from large private and public payers, develop and enhance our
relationships with key members of the transplant community, including opinion leaders at major transplant centers,
and explore opportunities and technologies for the development of additional solutions for post-transplant
surveillance. We believe the use of AlloMap, in conjunction with other clinical indicators, can help healthcare
providers and their patients better manage long-term care following a heart transplant. In particular, we believe
AlloMap can improve patient care by helping healthcare providers to avoid the use of unnecessary, invasive
surveillance biopsies and to determine the appropriate dosage levels of immunosuppressants. We are also pursuing
the development of additional products for transplant monitoring using a variety of technologies, including
AlloSure, our next-generation sequencing-based test to detect donor-derived cell-free DNA, or dd-cfDNA after
transplantation.
Since the launch of AlloMap in January 2005 we have performed more than 81,000 commercial AlloMap tests,
including 13,000 tests in 2015, in our Brisbane, California laboratory. In 2015, the test was used in 120 of the
approximately 130 heart transplant management centers in the U.S. We believe that there is an opportunity for
AlloMap outside of the U.S. and through recent partnerships we have expanded the AlloMap offering to Europe. We
believe that we are not currently capacity constrained and that our current facility can support a substantial increase
in AlloMap testing volume.
Reimbursement for AlloMap tests comes primarily from Medicare, private third party payers such as insurance
companies and managed care organizations, hospitals and state Medicaid programs. Tests performed on patients
covered by Medicare represented 36%, 37% and 39% of all AlloMap tests in 2015, 2014 and 2013, respectively. A
number of payers have adopted coverage policies approving AlloMap tests for reimbursement. Such policies often
approve reimbursement for tests performed from six months or one year post-transplant through five years post-
transplant. For tests performed outside the scope of the payer’s policy, and for tests performed where the payer has
not adopted a coverage policy, we pursue reimbursement on a case-by-case basis. If a reimbursement claim is
denied, we generally pursue the appeals process for the particular payer.
Since our inception, we have generated significant net losses. As of December 31, 2015, we had an accumulated
deficit of $173.1 million. For the year ended December 31, 2015, we recognized a net loss of $13.7 million. For the
year ended December 31, 2014, we recognized net income of $0.8 million and for the year ended 2013, we incurred
a net loss of $3.5 million.
61
Recent Developments
Allenex Tender Offer
On December 16, 2015, we entered into Conditional Share Purchase Agreements, or Purchase Agreements, to
acquire, subject to certain conditions, approximately 78% of the outstanding shares of Allenex AB, or Allenex, from
its three principal shareholders in exchange for a combination of cash and shares of our common stock. On February
8, 2016, the parties entered into amendments to such Purchase Agreements to adjust the shares of our common stock
issuable per share of Allenex, and change the timing of distribution of cash consideration. On March 7, 2016, we
launched a tender offer, or the Offer, through the issuance of an Offer Document to acquire the remaining 22% of
the shares of Allenex. Additionally, if in the Offer we acquire more than 90%, but less than 100%, of the shares of
Allenex, which is necessary to initiate compulsory acquisition proceedings under Swedish laws, we intend to
purchase the remaining shares in Allenex for cash, pursuant to such compulsory acquisition proceedings.
Our tender offer to the shareholders of Allenex permits such shareholders to elect either an all cash payment or a
mix of cash consideration and shares of our common stock. Under the all cash alternative, the shareholders of
Allenex may exchange their shares of Allenex for approximately $0.30 per share. Under the mixed consideration
alternative, the shareholders of Allenex may exchange their shares of Allenex for a combination of (i) $0.20 per
share and (ii) 0.01458 shares of our common stock per share. We anticipate completing the tender offer in April
2016. If we acquire all Allenex shares, the total purchase price for Allenex will be approximately $35.0 million,
payable in a combination of cash and equity. If the Allenex minority shareholders accept the all cash alternative,
together with the cash component payable to the three principal shareholders, we will distribute approximately $27.0
million in cash, excluding financial advisory, legal and accounting fees (which must be paid whether or not the
acquisition is completed). If the Allenex minority shareholders elect to receive both shares and a cash payment, we
will distribute approximately $24.6 million in cash, excluding financial advisory, legal and accounting fees (which
must be paid whether or not the acquisition is completed).
Allenex is a transplant diagnostics company based in Stockholm, Sweden that develops, manufactures, markets and
sells products that help match donor organs with potential recipients prior to transplantation. The acquisition of
Allenex will create an international transplantation diagnostics company with product offerings along the pre- and
post-transplant continuum. The Olerup SSP line, which addresses Human Leukocyte Antigen, or HLA, testing, and
AlloMap are foundational diagnostics which are well recognized by the transplant community. The combined
company will have a presence and direct distribution channels in the US and Europe.
The acquisition will require us to refinance or amend our existing $16.0 million debt loan with our existing lender.
To fund a portion of the proposed acquisition and to refinance our existing loan, on December 15, 2015, we entered
into a commitment letter and fee letter, or Commitment Letter, with Oberland Capital SA Davos LLC, collectively
with its affiliates and assignees, Oberland Capital, which Commitment Letter was also amended and restated on
February 8, 2016. The Commitment Letter sets forth the binding commitment, subject to the satisfaction of the
conditions set forth therein, by Oberland Capital to provide a short-term bridge loan of $18.0 million, to be
borrowed in connection with the closing of the acquisition. The bridge loan will mature on the date that is six
months from the closing date of the bridge loan. Approximately $16.0 million of the proceeds from the bridge loan
will be used to repay our outstanding loan agreement with East West Bank. Fees incurred with Oberland Capital and
third parties in connection with the bridge loan are estimated to be approximately $1.6 million and $0.4 million,
respectively. The loan will be secured by substantially all of our assets. The loan will bear interest at the rate of 20%
per annum, and prepayments of the loan will be subject to a prepayment premium of 5% for prepayments during the
first month after the closing date for the loan, decreasing by 1% each month thereafter. The loan agreement for the
bridge loan will contain customary affirmative and negative covenants, financial covenants and events of default.
Even with the Oberland Capital bridge loan, the acquisition will consume a significant portion of our current cash
and cash equivalents. We will require additional financing to fund our working capital and, within six months
following entry into the bridge loan, to refinance the Oberland Capital bridge loan. We are pursuing financing
opportunities in both the private and public debt and equity markets through sales of equity or debt securities. On
August 10, 2015, we filed a registration statement on Form S-3 with the Securities and Exchange Commission
pursuant to which we are allowed to sell equity and debt securities. We cannot initiate sales under the Form S-3
until mid-2016.
62
Absent additional funding and assuming completion of the acquisition and entry into the bridge loan, we will
exhaust our cash and cash equivalents in July 2016 unless we substantially reduce costs and operations, including
research and development and other operating costs. Such costs reductions would significantly impair our ability to
operate our business effectively, and raises substantial doubt about our ability to continue as a going concern.
Financial Overview
Testing Revenue
Our testing revenue is derived from AlloMap tests which represented 99%, 95% and 98% of our total revenue in
2015, 2014 and 2013, respectively. Our testing revenue depends on a number of factors, including (i) the number of
tests performed; (ii) establishment of coverage policies by third-party insurers and government payers; (iii) our
ability to collect from payers with whom we do not have positive coverage determination, which often requires that
we pursue a case-by-case appeals process; (iv) our ability to recognize revenues on tests billed prior to the
establishment of reimbursement policies, contracts or payment histories; (v) our ability to expand into markets
outside of the United States; and (vi) how quickly we can successfully commercialize new product offerings.
We currently market AlloMap to healthcare providers through our direct sales force that targets transplant centers
and their physicians, coordinators and nurse practitioners. The healthcare providers that order the tests and on whose
behalf we provide our testing services are generally not responsible for the payment of these services. As of
December 31, 2015, the list price of AlloMap was $3,600 per test. However, amounts actually received by us vary
from payer to payer based on each payer’s internal coverage practices and policies. We generally bill third-party
payers upon delivery of an AlloMap score report to the ordering physician. As such, we take the assignment of
benefits and the risk of collection from the third-party payer and individual patients.
As of December 31, 2015 and 2014, the number of tests for which results were delivered and billed, but for which
the associated revenue had not been recognized because our revenue recognition criteria were not met, and taking
into account claim status and possibility of collection, was approximately 4,023 and 3,500, respectively. We cannot
provide any assurance as to when, if ever, or to what extent any of these amounts will be collected.
AlloSure, our development-stage transplant surveillance solution which applies proprietary next generation
sequencing to detect and quantitate genetic differences between dd-cfDNA in the blood stream emanating from the
donor heart and dd-cfDNA emanating from the transplant recipient, has not yet been commercialized and we do not
yet receive any testing revenue from these tests.
Collaboration and License Revenue
Revenue from our collaboration and license agreements was not more than 5% of total revenue for each period
presented. Collaboration and license agreements may include non-refundable upfront payments, partial or complete
reimbursement of research and development costs, contingent payments based on the occurrence of specified events
under the agreements, license fees and royalties on sales of products or product candidates if they are successfully
commercialized. Note 8 to our audited financial statements included elsewhere in this Annual Report includes
descriptions of these agreements. Our performance obligations under the collaboration and license agreements may
include the transfer of intellectual property rights in the form of licenses, obligations to provide research and
development services and obligations to participate on certain development committees with the collaboration
partners. We make judgments that affect the periods over which we recognize revenue. We periodically review our
estimated periods of performance based on the progress under each arrangement and account for the impact of any
change in estimated periods of performance on a prospective basis.
63
Cost of Testing
Cost of testing reflects the aggregate costs incurred in delivering our AlloMap test results to clinicians. The
components of our cost of testing are materials and service costs, direct labor costs, including stock-
based compensation, equipment and infrastructure expenses associated with testing samples, shipping, logistics and
specimen processing charges to collect and transport samples and allocated overhead including rent, information
technology, equipment depreciation and utilities and royalties. Costs associated with performing tests (except
royalties) are recorded as the test is processed regardless of whether and when revenue is recognized with respect to
that test. Royalties incurred for licensed technology, calculated as a percentage of test revenues, are recorded as
license fees in cost of testing at the time the test revenues are recognized.
Royalties included in cost of testing are associated with a license from Roche Molecular Systems, Inc., or Roche. In
February 2014, we received a demand for arbitration from Roche regarding our claim that the royalty rate being
assessed under the Roche license should be reduced. In September 2014, we entered into a settlement and mutual
release agreement with Roche whereby (i) for the period beginning July 1, 2011 through June 30, 2014, we agreed
to pay the amount of $2.8 million in settlement of past royalties due; (ii) for the period beginning July 1, 2014
through September 30, 2014, we agreed to pay royalties based on the same combination services percentage used to
determine the past royalties due; (iii) for the period beginning October 1, 2014 through September 30, 2017, we
agreed to a downward adjustment of the combination services percentage used to determine the portion of the
AlloMap service that is royalty bearing under the terms of the license; (iv) we agreed to report and pay quarterly
royalties within 45 days of the end of each calendar quarter; (v) Roche agreed that, subject to our timely payment of
all applicable royalties through such date, no further royalties will be payable by us for periods after September 30,
2017; and (vi) mutual releases by us and Roche of all claims under the license agreement through the settlement
date, and (vii) Roche agreed to dismiss the arbitration claims. For all time periods, the contractual royalty rate in the
license agreement was or will be applied to the applicable combination services percentage to determine the
royalties’ payable for the AlloMap service
We expect cost of testing to increase, in absolute dollars, as the number of tests we perform increases. However, due
to the fixed nature of expenses associated with direct labor, equipment and infrastructure, we expect the cost per test
will decrease over time as volume increases.
Research and Development Expenses
Research and development expenses represent costs incurred to develop new surveillance solutions such as
AlloSure, as well as continued efforts related to our AlloMap test. These expenses include payroll and related
expenses, consulting expenses, laboratory supplies, and certain allocated expenses as well as amounts incurred under
certain collaborative agreements. Research and development costs are expensed as incurred. We record accruals for
estimated study costs comprised of work performed by contract research organizations under contract terms. We
expect our research and development expenses will increase in absolute dollars in future periods as we invest in
research and discovery work to validate the clinical utility of AlloSure, develop new surveillance solutions and
clinical outcomes studies for AlloMap.
Sales and Marketing Expenses
Sales and marketing expenses represent costs incurred to sell, promote and increase awareness of our AlloMap test
to both clinicians and payers, including education of patients, clinicians and payers. Sales and marketing expenses
include payroll and related expenses, educational and promotional expenses, and infrastructure expenses, including
allocated facility and overhead costs. Compensation related to sales and marketing includes annual salaries and
eligibility for quarterly or semi-annual commissions or bonuses based on the achievement of predetermined sales
goals or other management objectives.
64
General and Administrative Expenses
General and administrative expenses include costs for our executive, finance, accounting and human resources
functions. Costs consist primarily of payroll and related expenses, professional service fees related to billing and
collection, accounting, legal and other contract and administrative services and related infrastructure expenses,
including allocated facility and overhead costs. We expect to incur additional expenses as a result of operating as a
public company, including expenses related to compliance with the rules and regulations of the Securities and
Exchange Commission and The NASDAQ Global Market, additional insurance expenses, investor relations
activities and other administrative and professional services. We also expect our general and administrative expenses
will increase in absolute dollars related to anticipated testing volume and collections growth. Upon completion of
our proposed acquisition of Allenex, we also expect our general and administrative expenses will increase as we
operate as a global public company.
Interest Expense, Net
Interest expense, net is associated with borrowings under our loan agreements.
Other (Expense) Income, Net
In 2013 and 2014, Other (expense) income, net is primarily associated with the remeasurement of the estimated fair
value of warrants to purchase shares of our convertible preferred stock and changes in the estimated fair value of a
derivative associated with our subordinated convertible debt in 2014. Convertible preferred stock warrants and the
subordinated convertible debt were converted to common stock warrants and common stock, respectively, upon the
closing of our initial public offering on July 22, 2014.
In 2015, other (expense) income, net is primarily state franchise taxes.
Critical Accounting Policies and Significant Judgments and Estimates
Our management’s discussion and analysis of our financial condition and results of operations is based on our
financial statements, which have been prepared in accordance with United States generally accepted accounting
principles or U.S. GAAP. The preparation of financial statements in conformity with U.S. GAAP requires
management to make estimates and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of
revenue and expenses during the reporting period. Items subject to estimates based on judgments include, but are not
limited to: revenue recognition, the valuation of warrants to purchase convertible preferred stock, the determination
of the valuation allowance associated with deferred tax assets, the determination of the accruals for clinical studies,
the determination of estimated refunds to be requested from third-party payers, any impairment of long-lived assets
and legal contingencies. Actual results could differ from these estimates and such differences could affect the results
of operations in future periods.
Our significant accounting policies are described in Note 2 to our audited financial statements included elsewhere in
this Annual Report. Some of these accounting policies require us to make difficult and subjective judgments, often
as a result of the need to make estimates of matters that are inherently uncertain. We believe that the following
critical accounting policies reflect the more significant estimates and assumptions used in the preparation of our
financial statements.
Revenue Recognition
Testing Revenue
We recognize revenues for tests delivered when the following criteria are met: (i) persuasive evidence that an
arrangement exists, which may include a contract or a coverage policy; (ii) delivery has occurred or services
rendered; (iii) the fee is fixed or determinable; and (iv) collectability is reasonably assured.
65
The first criterion is satisfied when a third-party payer makes a coverage decision or enters into a contractual
arrangement with us for the test. The second criterion is satisfied when we perform the test and deliver the test result
to the ordering physician. The third criterion is satisfied if the third-party payer’s coverage decision or
reimbursement contract specifies a price for the test. The fourth criterion is satisfied based on management’s
judgments regarding the collectability of the fees charged under the arrangement.
Such judgments include review of past payment history. AlloMap testing may be considered investigational by some
payers and not covered under their reimbursement policies. Others may cover the test, but not pay a set or
determinable amount. As a result, in the absence of a reimbursement agreement or sufficient payment history,
collectability cannot reasonably be assured so revenue is not recognized at the time the test is delivered.
If all criteria set forth above are met, revenue is recognized when the test results are delivered. When the first, third
or fourth criteria are not met but third-party payers make a payment to us for tests performed, we recognize revenue
on a cash basis in the period in which the payment is received.
Revenue is recognized on an accrual basis, net of adjustments for differences between amounts billed and the
estimated receipts from payers. The amount we expect to collect may be lower than the agreed upon amount due to
several factors, such as the amount of patient co-payments, the existence of secondary payers and claim denials.
Estimated receipts are based upon historical payment practices of payers. Differences between estimated and actual
cash receipts are recorded as an adjustment to revenue, which have been immaterial to date.
For tests performed where an agreed upon reimbursement rate and a predictable history of collection exists, such as
in the case of Medicare, we recognize revenue upon delivery of a score report to the ordering physician based on the
established billing rate less contractual and other adjustments to arrive at the amount that we expect to collect. We
determine the amount we expect to collect based on a per payer, per contract or agreement basis, after analyzing
historical payment trends. The expected amount is typically lower than the agreed upon reimbursement amount due
to several factors, such as the amount of patient co-payments and claim denials. In all other situations, where we do
not have sufficient history of collection and are unable to determine a predictable pattern of payment, we recognize
revenue upon the receipt of cash. In 2015, 2014 and 2013, approximately 68%, 64% and 64%, respectively, of our
testing revenue was recognized on the accrual basis.
Occasionally, we may receive requests from third-party payers for refunds for previously paid-for tests. We maintain
a liability for actual overpayments and estimated future refund claims based on historical experience. Accruals for
overpayments and refunds are recorded as a reduction of revenue. The approximate number of delivered AlloMap
tests and AlloMap tests for which we recognized revenue in accordance with our revenue recognition policies
discussed above, were as follows:
AlloMap tests delivered ..............................................
AlloMap tests for which revenue was recognized .......
AlloMap tests for which revenue was recognized,
delivered prior to the period presented .....................
Year Ended December 31,
2014
11,930
9,786
2015
13,059
9,155
2013
10,100
8,400
1,324
1,172
1,100
We did not recognize revenue for the remaining tests because either there was no contract, no coverage policy in
place, insufficient payment history or we had not received payment for those tests from a payer. We will continue to
make requests for payment from payers and patients and/or appeal payment decisions made by third-party payers.
As a result, we may receive payment for a portion of these tests. However, a portion of our requests for payments
could be denied or only partially satisfied. If third-party payers agree to pay us for these tests in the future, we will
recognize revenue for such tests in the period in which our revenue recognition criteria are met. This will continue to
affect the comparability of our revenues from period to period. We regularly review to determine if payers meet our
revenue recognition criteria and account for the impact of any change on a prospective basis.
66
The process for determining the appropriate amount expected to be collected involves judgment, and considers such
factors as, historical payment trends, current economic conditions and regulatory changes. The ultimate amounts of
collections could be different from the amounts we estimate.
Collaboration and License Revenue
Revenue from our collaboration and license agreements was not more than 5% of total revenue for each period
presented. Collaboration and license agreements may include non-refundable upfront payments, partial or complete
reimbursement of research and development costs, contingent payments based on the occurrence of specified events
under the agreements, license fees and royalties on sales of products or product candidates if they are successfully
commercialized.
We recognize collaboration and license revenue based upon the relative-selling–price method which is used to
allocate arrangement consideration to all of the units of accounting in an arrangement. We evaluate our collaboration
and license agreements to identify the deliverables, determine if the deliverables have stand-alone value, to identify
the units of accounting and to allocate arrangement consideration to each unit of accounting based on relative best
estimate selling price.
Business Combinations
In accordance with ASC 805, Business Combinations, we determine and allocate the purchase price of an acquired
business to the tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated
fair values as of the business combination date, including identifiable intangible assets which either arise from a
contractual or legal right or are separable from goodwill. We base the estimated fair value of identifiable intangible
assets acquired in a business combination on independent valuations that use information and assumptions provided
by management, which consider management’s best estimates of inputs and assumptions that a market participant
would use.
We allocate any excess purchase price over the estimated fair value assigned to the net tangible and identifiable
intangible assets acquired and liabilities assumed to goodwill. The use of alternative valuation assumptions,
including estimated revenue projections, growth rates, royalty rates, cash flows, discount rates, estimated useful
lives and probabilities surrounding the achievement of contingent milestones, could result in different purchase price
allocations and amortization expense in current and future periods.
In those circumstances where an acquisition involves a contingent consideration arrangement that meets the
definition of a liability under ASC 480, Distinguishing Liabilities from Equity, we recognize a liability equal to the
fair value of the contingent payments we expect to make as of the acquisition date. We remeasure this liability each
reporting period and record changes in the fair value as a component of operating expenses.
Transaction costs associated with acquisitions are expensed as incurred in general and administrative expenses.
Results of operations and cash flows of acquired companies are included in our operating results from the date of
acquisition.
Purchased Intangible Assets
Acquired intangible assets with indefinite useful lives are related to purchased in-process research and development,
or IPR&D, projects and are measured at their respective fair values as of the acquisition date. We do not amortize
goodwill and intangible assets with indefinite useful lives. Intangible assets related to IPR&D projects are
considered to be indefinite-lived until the completion or abandonment of the associated R&D efforts. If and when
development is complete, which generally occurs if and when regulatory approval to market a product is obtained,
the associated assets would be deemed finite-lived and would then be amortized based on their respective estimated
useful lives at that point in time.
67
We test IPR&D for impairment on an annual basis and in between annual tests if we become aware of any events or
changes that would indicate that it is more likely than not that the fair values of the assets are below their carrying
amounts. The IPR&D annual impairment test is performed as of December 1 of each year. If the fair value exceeds
the carrying value, then there is no impairment. Impairment losses on indefinite-lived intangible assets are
recognized based solely on a comparison of the fair value of the asset to its carrying value, without consideration of
any recoverability test. We have not identified any such impairment losses to date.
Impairment of Long-lived Assets
We evaluate our long-lived assets for indicators of possible impairment when events or changes in circumstances
indicate the carrying amount of an asset may not be recoverable. We then compare the carrying amounts of the
assets with the future net undiscounted cash flows expected to be generated by such asset. Should an impairment
exist, the impairment loss would be measured based on the excess carrying value of the asset over the asset’s fair
value determined using discounted estimates of future cash flows. We have not identified any such impairment
losses to date.
Goodwill
Goodwill represents the excess of the cost of an acquisition over the sum of the amounts assigned to tangible and
identifiable intangible assets acquired, less liabilities assumed. Goodwill is not subject to amortization, but is tested
for impairment on an annual basis and whenever events or changes in circumstances indicate the carrying amount of
these assets may not be recoverable. We perform our annual goodwill impairment test as of December 1 of each
year.
We first conduct an assessment of qualitative factors to determine whether it is more likely than not that the fair
value of our reporting unit is less than its carrying amount. If we determine that it is more likely than not that the fair
value of our reporting unit is less than its carrying amount, we then conduct a two-step test for impairment of
goodwill. In the first step, we compare the fair value of our reporting unit to its carrying value. If the fair value of
our reporting unit exceeds its carrying value, goodwill is not considered impaired and no further analysis is required.
If the carrying values of the reporting unit exceed its fair value, then the second step of the impairment test must be
performed in order to determine the implied fair value of the goodwill. If the carrying value of the goodwill exceeds
its implied fair value, then an impairment loss equal to the difference would be recorded.
Warrants
In 2015, we issued warrants to purchase shares of our common stock in connection with a debt financing. We
account for these warrants as equity based on the estimated fair value on the issuance date. The fair value of the
outstanding warrants is estimated using the Black-Scholes valuation model. The Black-Scholes valuation model
requires inputs such as the expected term of the warrants, expected volatility and risk-free interest rate. Certain of
these inputs are subjective and require significant analysis and judgment to develop. For the estimate of the expected
term, we use the full remaining contractual term of the warrant.
Stock–Based Compensation
We recognize stock-based compensation cost for only those shares underlying stock options that we expect to vest
on a straight-line basis over the requisite service period of the award. We estimate the fair value of stock options
using a Black-Scholes valuation model, which requires the input of highly subjective assumptions, including the
option’s expected term and stock price volatility. In addition, judgment is also required in estimating the number of
stock-based awards that are expected to be forfeited. Forfeitures are estimated based on historical experience at the
time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The
assumptions used in calculating the fair value of share-based payment awards represent management’s best
estimates, but these estimates involve inherent uncertainties and the application of management’s judgment. As a
result, if factors change and we use different assumptions, our stock-based compensation expense could be
materially different in the future.
68
Factors Affecting Our Performance
The Number of AlloMap Tests We Receive and Report
The growth of our business is tied to the number of AlloMap tests we receive and report. Historically, less than 2%
of tests received are not reported due to improper sampling or damage in transit or other causes. We incur costs of
collecting and shipping all samples and a portion of the costs where we cannot ultimately issue a score report. As a
result, the number of samples received largely directly correlates to the number of score reports.
How We Recognize Revenue
Medicare and certain other payers with agreed upon reimbursement rates and a predictable history of collections
allows us to recognize the related revenue on an accrual basis. In 2015, 2014 and 2013, 32%, 36% and 36%,
respectively, of our revenue was recognized when cash was received. Until we achieve our revenue recognition
criteria for a larger number of payers, we will continue to recognize a large portion of our revenue when cash is
received. Because we often need to appeal prior to being paid for certain tests, it can take over a year for a test to
result in revenue being recorded, and for a portion of our tests, we may never realize revenue.
Additionally, as we commercialize new products, we will need to achieve our revenue recognition criteria for each
payer for each new product prior to being able to recognize the related revenue on an accrual basis. Because the
timing and amount of cash payments received from payers is difficult to predict, we expect our revenue may
fluctuate significantly in any given quarter. In addition, even if we begin to accrue larger amounts of revenue related
to AlloMap, when we introduce new products, we do not expect we will be able to recognize revenue from new
products on an accrual basis for some period of time.
Continued Adoption of and Reimbursement for AlloMap
Our reimbursement rate has steadily increased over time since the launch of AlloMap, as payers adopt coverage
policies and fewer payers consider AlloMap as experimental and investigational. The rate at which our tests are
covered and reimbursed has and is expected to continue to vary by payer. As of December 31, 2015, we had been
reimbursed for approximately 79% of AlloMap results delivered in the twelve months ended June 30, 2015.
Reimbursement performance is reviewed using a lagging metric of six months as any period less than this is
considered not to be reflective of future performance, as the reimbursement process can take six months or more to
complete depending on the payer. Revenue growth depends on our ability to achieve broader reimbursement from
third party payers, to expand the number of tests per patient and the base of ordering physicians.
Development of Additional Products
We rely on sales of AlloMap to generate the majority of our revenue. Our product development pipeline includes
other surveillance solutions for organ transplant recipients to help clinicians make personalized treatment decisions
throughout a transplant patient’s lifetime. Accordingly, we expect to invest in research and development in order to
develop additional products. Our success in developing or acquiring new products will be important in our efforts to
grow our business by expanding the potential market for our products and diversifying our sources of revenue.
Timing of Research and Development Expenses
Our spending on experiments may vary substantially from quarter to quarter. We also spend to secure clinical
samples that can be used in discovery, product development, clinical validation, utility and outcome studies. The
timing of these research and development activities is difficult to predict. If a substantial number of clinical samples
are acquired in a given quarter or if a high-cost experiment is conducted in one quarter versus the next, the timing of
these expenses can affect our financial results. We conduct clinical studies to validate our new products as well as
on-going clinical and outcome studies to further the published evidence to support our commercialized AlloMap
test. Spending on research and development for both experiments and clinical studies may vary significantly by
quarter.
69
Results of Operations
Comparison of the Years Ended December 31, 2015 and 2014
(In thousands except for AlloMap results)
Year Ended December 31,
AlloMap results delivered ...........................................
2015
13,059
Change
2014
11,930
1,129
Revenue:
Testing revenue ...................................................... $
Collaboration and license revenue .........................
Total revenue ...............................................................
27,881 $
263
28,144
25,842 $
1,464
27,306
2,039
(1,201 )
838
Operating expenses:
Cost of testing ........................................................
Research and development ....................................
Sales and marketing ...............................................
General and administrative ....................................
Change in estimated fair value of contingent
consideration .......................................................
Total operating expenses .............................................
(Loss) income from operations ...................................
10,273
9,333
8,349
12,247
8,541
3,846
6,472
8,436
1,732
5,487
1,877
3,811
(126)
40,076
(11,932)
(1,239 )
26,056
1,250
1,113
14,020
(13,182 )
Interest expense, net ....................................................
Other (expense) income, net........................................
Loss before income taxes ............................................
Income tax benefit .......................................................
Net (loss) income ........................................................ $ (13,707) $
(1,587)
(188)
(13,707)
—
(2,116 )
147
(719 )
1,500
529
(335 )
(12,988 )
(1,500 )
781 $ (14,488 )
Testing Revenue
AlloMap test results delivered increased by approximately 1,100 or 9% in 2015 compared to 2014. Testing revenue
increased by $2.0 million or 8% in 2015 compared to 2014 due to increased test volume of approximately $1.5
million, of which Medicare accounted for $0.7 million of the increase, and due to an increased number of payers for
whom we recognize revenue on an accrual basis of approximately $0.8 million, partially offset by lower cash
collections of approximately $0.4 million from payers from which we recognize revenue on a cash basis. Pricing
remained stable in 2015.
Collaboration and License Revenue
Collaboration and license revenue decreased by approximately $1.2 million, or 82% in 2015 compared to 2014
primarily due to the termination of our Collaboration and License Agreement with Laboratory Corporation of
America Holdings in September 2014.
Cost of Testing
Cost of testing increased by approximately $1.7 million, or 20% in 2015 compared to 2014 primarily due to higher
headcount related expenses of $0.7 million, laboratory material costs of $0.5 million to support testing volume
growth, and higher royalties paid to Roche of $0.4 million.
Research and Development
Research and development expenses increased $5.5 million or 143% in 2015 compared to 2014 primarily due to
higher headcount related expenses of $2.2 million and increased expenditure of $1.9 million to support the launch of
dd-cfDNA clinical trials. In addition, there was an increase in depreciation and facilities-related expenses of $0.9
million due to the expansion of our lab space and consulting of $0.2 million.
70
Sales and Marketing
Sales and marketing expenses increased by approximately $1.9 million, or 29% in 2015 compared to 2014. The
increase primarily reflects higher headcount related expenses of $0.9 million, recruiting and consulting expenses of
$0.4 million, higher travel and conference expenses of $0.4 million as we ramped up our commercialization efforts,
and an additional $0.2 million incurred in marketing programs such as physician forums, speaker programs and
advertising.
General and Administrative
General and administrative expenses increased approximately $3.8 million, or 45% in 2015 compared to 2014 due to
a $1.6 million increase in headcount related expenses driven primarily by the hiring of accounting personnel to
operate and comply with the regulations for a publicly traded company and the in-sourcing of our billing and
collections function, transaction related fees and expenses of $1.3 million associated with the acquisition of Allenex,
and an increase in professional fees of $0.8 million primarily associated with the filing of a registration statement on
Form S-3 with the SEC, which allow us to sell equity and debt securities commencing in mid-2016.
Change in Fair Value of Contingent Consideration
The consideration for our business combination with ImmuMetrix, Inc. includes a future payment that is contingent
upon the achievement of a specified milestone. We recorded a contingent consideration liability at its fair value in
September 2014, at the acquisition date. We revalue our contingent consideration obligation each reporting period.
The change in the fair value of our contingent consideration is approximately $1.1 million in 2015 as compared to
2014, and is recognized as a component of operating expense within our statements of operations.
Interest Expense, Net
Interest expense, net decreased by $0.5 million, or 25% in 2015 compared to 2014 primarily due to lower interest
rates on the new term loan, the conversion of the $5.0 million Illumina subordinated convertible note into common
stock in connection with our IPO and the pay-off of our previous term loan with higher interest rates in January
2015.
Other (Expense) Income, Net
Other expense, net was $0.2 million in 2015 compared to $0.1 million in other income, net in 2014. Other expense,
net for 2015 primarily consisted of state franchise taxes. Other income, net of $0.1 million in 2014 was primarily
related to the remeasurement of the convertible preferred stock warrants and the derivative associated with the
Illumina subordinated convertible note.
Income Tax Benefit
In conjunction with the acquisition of ImmuMetrix, a tax benefit of $1.5 million was recognized in 2014. This
benefit resulted from the expectation that amortization of the in-process technology acquired, when completed and
placed in service, is not expected to be deductible for tax purposes, as the transaction was structured as a tax-free
reorganization. Accordingly, a deferred tax liability was recorded at the acquisition date for the difference between
the financial reporting and tax basis of the acquired in-process technology. While the in-process technology is
considered an indefinite lived intangible asset, this asset is expected to be amortized or impaired prior to the
expiration of net operating loss carryforwards available to us.
71
Comparison of the Years Ended December 31, 2014 and 2013
(In thousands except for AlloMap results)
Year Ended December 31,
AlloMap results delivered ...........................................
Revenue:
Testing revenue ...................................................... $
Collaboration and license revenue .........................
Total revenue ...............................................................
Operating expenses:
Cost of testing ........................................................
Research and development ....................................
Sales and marketing ...............................................
General and administrative ....................................
Change in estimated fair value of contingent
consideration .......................................................
Total operating expenses .............................................
Income (loss) from operations.....................................
Interest expense, net ....................................................
Other income (expense), net........................................
Loss before income taxes ............................................
Income tax benefit .......................................................
Net income (loss) ........................................................ $
2014
11,930
2013
10,100
Change
25,842 $
1,464
27,306
21,672
426
22,098
8,541
3,846
6,472
8,436
9,078
3,176
5,892
4,809
(1,239)
26,056
1,250
(2,116)
147
(719)
1,500
781 $
—
22,955
(857 )
(2,149 )
(536 )
(3,542 )
—
(3,542 ) $
1,830
4,170
1,038
5,208
(537 )
670
580
3,627
(1,239 )
3,101
2,107
33
683
2,823
1,500
4,323
Testing Revenue
AlloMap test results delivered increased by approximately 1,800 or 18% in 2014 compared to 2013. Testing revenue
increased by $4.2 million or 19% in 2014 compared to 2013 primarily due to increased test volume and secondarily
to an increased number of payers for whom we recognize revenue on an accrual basis of approximately $2.6 million,
of which Medicare accounted for $1.3 million of the increase, and additional cash collections of approximately $1.6
million from payers from which we recognize revenue on a cash basis.
Collaboration and License Revenue
Collaboration and license revenue increased by approximately $1.0 million, or 244% in 2014 compared to 2013
primarily due to our recognition of the termination fee of $0.5 million paid to us in connection with the termination
of our Collaboration and License Agreement with Laboratory Corporation of America Holdings, and amortization of
the remaining deferred revenue balance under that agreement of $0.6 million.
Cost of Testing
Cost of testing decreased by approximately $0.5 million, or 6% in 2014 compared to 2013 primarily due to our
royalty settlement with Roche, which resulted in a one-time reduction to royalty expense in 2014 of approximately
$0.5 million.
Research and Development
Research and development expenses increased $0.7 million or 21% in 2014 compared to 2013 primarily due to
increased expenditure of $0.3 million in the area of dd-cfDNA technology, an increase in headcount related
expenses of $0.2 million, and increased expenditures of $0.2 million for AlloMap activities.
72
Sales and Marketing
Sales and marketing expenses increased by approximately $0.6 million, or 10% in 2014 compared to 2013. The
increase primarily reflects increased salaries of $0.3 million, and increased travel and conference expenses of $0.3
million as we increased our commercialization efforts.
General and Administrative
General and administrative expenses increased approximately $3.6 million, or 75% in 2014 compared to 2013 due to
increased employee costs of $1.1 million driven by additional hiring in preparation for our IPO, increased tax, audit
and professional fees of $0.8 million as a result of our acquisition of ImmuMetrix and increased compliance costs of
being a public company, $0.4 million of increased consulting fees, increased legal costs of $0.8 million largely as a
result of our acquisition of ImmuMetrix and arbitration with Roche, $0.3 million associated with recruiting expenses
of key employees and $0.2 million in general expenses. We anticipate our general and administrative expenses will
increase as we operate as a public company.
Interest Expense, Net
Interest expense, net was flat from 2013 to 2014. There was an increase of $0.4 million associated with the $5.0
million Illumina subordinated convertible note issued in April 2014 with an interest rate of 8% which converted to
common stock upon our IPO in July 2014, which was offset by a one-time reduction in interest expense of
approximately $0.1 million due to the Roche settlement and a $0.3 million decrease in interest under our debt
obligations due to principal payments.
Other Income (Expense), Net
Other income, net was $0.1 million in 2014 compared to $0.5 million in other expense, net in 2013. Other income,
net for 2014 was primarily due to the remeasurement of the derivative associated with the Illumina subordinated
convertible note. The subordinated convertible note was converted to common stock in July 2014 in connection with
our IPO. Other expense, net for 2013 was primarily due to the remeasurement of the estimated fair value of the
warrants to purchase shares of our convertible preferred stock. The warrants to purchase our convertible preferred
stock were converted to warrants to purchase common stock in July 2014 in connection with our IPO and were
reclassified to additional paid-in-capital on the IPO date at which point we ceased to record any further related
periodic fair value adjustments.
Income Tax Benefit
In conjunction with the acquisition of ImmuMetrix, a tax benefit of $1.5 million was recognized in 2014. This
benefit resulted from the expectation that amortization of the in-process technology acquired, when completed and
placed in service, is not expected to be deductible for tax purposes, as the transaction was structured as a tax-free
reorganization. Accordingly, a deferred tax liability was recorded at the acquisition date for the difference between
the financial reporting and tax basis of the acquired in-process technology. While the in-process technology is
considered an indefinite lived intangible asset, this asset is expected to be amortized or impaired prior to the
expiration of net operating loss carryforwards available to us.
Liquidity and Capital Resources
Since our inception, substantially all of our operations have been financed through the issuance of our convertible
preferred stock, the issuance of common stock in our July 2014 initial public offering, the incurrence of debt, and
cash received from AlloMap testing revenues. Through December 31, 2015, we have received net proceeds of
approximately $174 million from AlloMap testing revenues, $151 million from the issuances of preferred stock,
including preferred stock issued on conversion of promissory notes, $35.5 million from our IPO, and $35.3 million
in net proceeds from debt issuances, including $5.0 million from a subordinated convertible note. As of December,
2015, we had cash and cash equivalents of $29.9 million and $15.8 million of debt outstanding under our debt and
capital lease obligations, net of debt discount and issuance costs. We currently anticipate that our cash and cash
equivalents, projected cash receipts from AlloMap sales to customers and existing term loan from a financial
institution will not be sufficient to fund our operations for at least the next 12 months.
73
On December 16, 2015, we entered into Purchase Agreements to acquire, subject to certain conditions,
approximately 78% of the outstanding shares of Allenex from its three principal shareholders in exchange for a
combination of cash and shares of our common stock. If we acquire all Allenex shares, the total purchase price for
Allenex will be approximately $35.0 million, payable in a combination of cash and equity. If the Allenex minority
shareholders accept the all cash alternative, together with the cash component payable to the three principal
shareholders, we will distribute approximately $27.0 million in cash, excluding financial advisory, legal and
accounting fees (which must be paid whether or not the acquisition is completed). If the Allenex minority
shareholders elect to receive both shares and a cash payment, we will distribute approximately $24.6 million in cash,
excluding financial advisory, legal and accounting fees (which must be paid whether or not the acquisition is
completed). Additionally, if in the tender offer we acquire more than 90%, but less than 100%, of the shares of
Allenex, we intend to initiate compulsory acquisition proceedings under Swedish laws and to purchase the
remaining shares in Allenex for cash. The actual price per share purchased pursuant to such compulsory acquisition
proceedings will be determined by an arbitrational tribunal. As a result of the compulsory acquisition proceedings
under Swedish law, we may ultimately have to pay, in the aggregate, a higher price per share in order to purchase
the remaining Allenex shares, further depleting our cash reserves. Refer to “Management Discussion and Analysis
of Results of Operations and Financial Condition(cid:650)Overview(cid:650)Recent Developments(cid:650)Allenex Tender Offer”
included in Part II, Item 7 of this Annual Report on Form 10-K for additional information.
The acquisition will require us to refinance or amend our existing $16.0 million debt loan with our existing lender,
and we also expect to incur costs as we integrate Allenex’s business and operations with ours. To fund a portion of
the proposed acquisition and to refinance our existing loan, on December 15, 2015, we entered into a commitment
letter and fee letter, or Commitment Letter, with Oberland Capital SA Davos LLC, collectively with its affiliates and
assignees, Oberland Capital, for a six-month bridge loan of $18.0 million, to be borrowed in connection with the
closing of the acquisition. Fees incurred with Oberland Capital and third parties in connection with the bridge loan
are estimated to be approximately $1.6 million and $0.4 million, respectively. The loan will be secured by
substantially all of our assets. The loan will bear interest at the rate of 20% per annum, and prepayments of the loan
will be subject to a prepayment premium of 5% for prepayments during the first month after the closing date for the
loan, decreasing by 1% each month thereafter. The loan agreement for the bridge loan will contain customary
affirmative and negative covenants, financial covenants and events of default.
Even with the Oberland Capital bridge loan, the acquisition will consume a significant portion of our current cash
and cash equivalents. We will require additional financing to fund our working capital and, within six months
following entry into the bridge loan, to refinance the Oberland Capital bridge loan. We are pursuing financing
opportunities in both the private and public debt and equity markets through sales of equity or debt securities. On
August 10, 2015, we filed a registration statement on Form S-3 with the Securities and Exchange Commission
pursuant to which we are allowed to sell equity and debt securities. We cannot initiate sales under the Form S-3
until mid-2016.
Absent additional funding and assuming completion of the acquisition and entry into the bridge loan, we will
exhaust our cash and cash equivalents in July 2016 unless we substantially reduce costs and operations, including
research and development and other operating costs. As a result of our obligations and lack of current available
financial resources, there is uncertainty regarding our ability to maintain liquidity sufficient to operate our business
effectively, which raises substantial doubt about our ability to continue as a going concern. If we are unsuccessful in
our efforts to raise outside capital in the near term, we will be required to significantly reduce or cease operations.
If we do not perform our obligation to complete the acquisition, we may be subject to fines and penalties under
Swedish law, in addition to stockholder claims. Nasdaq Stockholm Takeover Rules authorize the institution to
impose a special fine ranging between SEK 50,000 (approximately $6,000) and SEK 100 million (approximately
$12.0 million). If we fail to perform our obligation to close the acquisition, we may also be subject to stockholder
claims for damages under the purchase agreements and under the Swedish Takeover Rules. Such penalties, fines and
contract damages claims may also trigger a default under our current loan agreement, and could have other
unforeseen consequences that could negatively affect our business and the price of our common stock.
74
We cannot be certain that any of our development of new transplant surveillance solutions such as AlloSure will be
successful or that we will be able to raise sufficient additional funds to see these programs through to a successful
result. Our forecast of the period of time through which our financial resources will be adequate to support our
operations is a forward-looking statement and involves risk and uncertainties, and actual results could vary as a
result of a number of factors. We have based this estimate on assumptions that may prove to be wrong, and we could
utilize our available capital resources sooner than we currently expect.
The following table summarizes our cash flows for the years ended December 31, 2015, 2014 and 2013:
2015
Year Ended December 31,
2014
(in thousands)
2013
Net cash (used in) provided by:
Operating activities ............................................ $
Investing activities .............................................
Financing activities ............................................
(9,752) $
(1,199)
4,408
(3,350) $
(1,333)
35,986
(546 )
(98 )
(58 )
Net increase (decrease) in cash and cash
equivalents ...........................................................
$
(6,543) $
31,303 $
(702 )
Cash Flows from Operating Activities
Net cash provided by or used in operating activities consists of net income or loss, adjusted for certain non-cash
items in the statements of operations and changes in operating assets and liabilities.
Net cash used in operating activities for the year ended December 31, 2015 was $9.8 million. Net loss of $13.7
million included $2.1 million of net non-cash expenses. These net noncash expenses included stock-based
compensation expense of $1.3 million, depreciation and amortization expense of $0.8 million, and $0.2 million for
the amortization of debt issuance costs associated with new debt, and a loss on extinguishment from previous debt.
These non-cash expenses were partially offset by a non-cash revaluation gain of $0.1 million on a contingent
consideration liability related to our acquisition of ImmuMetrix, Inc. in June 2014. This revaluation gain was driven
by a decrease in our stock price.
In addition to net non-cash expenses, our net operating assets decreased which generated $1.8 million in operating
cash flow. The decrease in net operating assets was primarily driven by a decrease in accounts receivable of $0.3
million, increases in accounts payable and accrued and other liabilities of $1.7 million as we strengthened our cash
management processes, an increase in accrued payroll liabilities of $0.7 million as a result of accrued employee
bonuses, partially offset by increases in inventory, prepaid expenses and other assets of $0.9 million.
Net cash used in operating activities for the year ended December 31, 2014 was $3.4 million. The net income of
$0.8 million reflects a non-cash income tax benefit of $1.5 million related to our acquisition of ImmuMetrix, the
recognition of $0.7 million in collaboration revenue primarily from the termination of the LabCorp agreement, a
$1.5 million decrease in the fair value of contingent consideration related to the ImmuMetrix acquisition and an
embedded derivative as a result of mark-to-market adjustments, partially offset by an increase in debt discount
accretion and other non-cash interest expense of $0.8 million, depreciation and amortization of $0.5 million and
stock-based compensation expense of $0.5 million, and an increase in net operating assets of $2.3 million. The
increase in net operating assets primarily comprised of a decrease in accrued royalties of $2.6 million, an increase in
accounts receivable of $0.4 million and an increase in inventory of $0.2 million as a result of an increase in our
testing revenue, and an increase in prepaid expenses and other assets of $0.3 million primarily due to our purchase
of a directors and officers insurance policy when we became a public company in July 2014, partially offset by an
increase in accounts payable of $0.5 million and an increase in accrued and other liabilities of $0.4 million as our
expenditures increased in line with the growth of our core business, and an increase in payroll-related liabilities of
$0.3 million due to an increase in headcount. The decrease in accrued royalties was the result of a $2.8 million
payment of past due royalties to Roche in September 2014 upon settlement of our dispute with Roche (for more
information, see Note 7 of our financial statements included elsewhere in this Annual Report).
75
Net cash used in operating activities for the year ended December 31, 2013 was $0.5 million and reflected (i) a net
loss of $3.5 million, (ii) net non-cash items of $1.6 million, consisting primarily of depreciation and amortization of
$0.7 million, amortization of debt discount and non-cash interest expense of $0.6 million and revaluation of warrants
to estimated fair value of $0.5 million, and (iii) a net cash inflow from changes in balances of operating assets and
liabilities of $1.4 million. The significant items comprising the changes in balances of operating assets and liabilities
were a higher balance of accrued royalties of $1.3 million and a higher deferred revenue balance of $1.1 million,
partially offset by an increased accounts receivable balance of $1.3 million. The increased accounts receivable
balance was due to increased volume of approximately $0.7 million, the change in our Medicare contractor effective
October 2013, resulting in slower payments for Medicare tests of approximately $0.3 million, and more payers
meeting our revenue recognition criteria of approximately $0.3 million. Our experience with Medicare contractor
changes in the past has shown initially slower payments, which accelerate after the new contractor is in place for
some period.
Cash Flows from Investing Activities
For the year ended December 31, 2015, net cash used in investing activities was $1.2 million for purchases of
property and equipment.
For the year ended December 31, 2014, net cash used in investing activities was $1.3 million consisting $0.6 million
in cash used to purchase ImmuMetrix and $0.7 million in purchases of property and equipment.
For the year ended December 31, 2013, net cash used in investing activities was $0.1 million and consisted of
purchases of property and equipment.
We expect capital expenditures to increase dramatically in 2016 and beyond due to the entry into the Commitment
Letter with Oberland Capital, the acquisition of Allenex and becoming a global company. We also plan to continue
to expand our research and discovery work to develop new transplant surveillance solutions.
Cash Flows from Financing Activities
Net cash provided by financing activities for the year ended December 31, 2015 of $4.4 million consisted primarily
of $15.6 million in net proceeds received from a new term loan in January 2015, and proceeds of $0.2 million from
the issuance of common stock as part of our employee stock purchase plan and the exercise of stock options,
partially offset by the payoff of a previous term loan and capital leases of $11.5 million.
Net cash provided by financing activities for the year ended December 31, 2014 of $35.9 million was primarily from
the receipt of $35.5 million in net proceeds from our July 2014 initial public offering, net of underwriters’ discounts
and issuance costs, and the receipt of $5.0 million in net proceeds from borrowing in connection with our April 2014
subordinated convertible note, partially offset by net payments of $4.5 million on our existing debt.
Net cash used in financing activities for the year ended December 31, 2013 was $0.1 million and primarily consisted
of principal payments on capital lease obligations.
76
Contractual Obligations
The following table summarizes certain contractual obligations as of December 31, 2015, and excludes the
obligations related to our proposed acquisition of Allenex entry into the Oberland Capital bridge loan, and the
acceleration of our current loan agreement with East West Bank due to entry into the new debt facility with
Oberland Capital:
Total
Less Than
1 year
Payments Due by Period
1 to 3
Years
(in thousands)
3 to 5
Years
More Than
5 Years
Debt obligations ........................................................ $ 16,000 $
Operating lease obligations .......................................
Capital lease obligations ...........................................
Total .......................................................................... $ 23,002 $
6,851
151
3,021 $ 12,979 $
2,724
1,291
71
75
4,387 $ 15,774 $
— $
2,836
5
2,841 $
—
—
—
—
In 2015, there was a material increase in our contractual obligations and commitments. On January 30, 2015, we
entered into a Loan and Security Agreement (the “Loan Agreement”), which provides a secured term loan facility in
an aggregate principal amount of up to $20.0 million. We borrowed the first and only advance of $16.0 million
(“Draw A”) on January 30, 2015. Draw A was used to pay-off our existing term debt of $11.3 million. Draw A bears
interest at a daily floating rate equal to 2.00%, over the greater of (i) 3.25% or (ii) the prime rate published by the
lender.
The maturity date of the loan is December 1, 2018. Principal pay-down of the loan begins on January 1, 2016 with
the loan being payable in 36 equal monthly installments. The principal pay-down of the loan may be delayed to July
1, 2016 with the loan being payable in 30 equal monthly installments, if on December 31, 2015, we have achieved
certain net product revenue milestones as described in the Loan Agreement. As of December 31, 2015, we were in
compliance with the net product revenue milestones, which allowed us to pay only the interest incurred on a
monthly basis until June 30, 2016 and begin the principal pay-down on July 1, 2016.
Our cancelable operating lease obligations consist of the lease for our laboratory and office facility in Brisbane,
California expiring in December 2020. Our capital lease obligations consist of equipment financing arrangements
with vendors. The contractual obligations table above includes three new capital leases entered into in 2015.
Off-balance Sheet Arrangements
We have not entered into any off-balance sheet arrangements.
JOBS Act Accounting Election
We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS
Act. Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards
issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies.
We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards and,
therefore, will be subject to the same new or revised accounting standards as other public companies that are not
emerging growth companies.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update
No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”), which amends the existing
accounting standards for revenue recognition. ASU 2014-09 is based on principles that govern the recognition of
revenue at an amount an entity expects to be entitled when products are transferred to customers. ASU 2014-09 will
be effective for us beginning in the first quarter of 2018. Early adoption is permitted in 2017. The new revenue
standard may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect
recognized as of the date of adoption. We are currently evaluating the impact of adopting the new revenue standard
on our financial statements.
77
In August 2014, the FASB issued Accounting Standards Update No. 2014-15, Presentation of Financial
Statements(cid:650)Going Concern (Subtopic 205-40), Disclosure of Uncertainties about an Entity’s Ability to Continue as
a Going Concern (“ASU 2014-15”). This ASU requires us to evaluate whether there are conditions and events that
raise substantial doubt about the entity’s ability to continue as a going concern within one year after the financial
statements are issued, and if there is substantial doubt about our ability to continue as a going concern, the disclosure
of such is required. We are required to make this evaluation for both annual and interim reporting periods, if
applicable. We also are required to evaluate and disclose whether our plans alleviate that doubt. This guidance is
effective for annual periods beginning after December 15, 2016, and interim periods within those fiscal years. Early
adoption is permitted but we have not elected to early adopt this guidance.
In April 2015, the FASB issued ASU 2015-03, Interest—Imputation of Interest (Subtopic 835-30): Simplifying the
Presentation of Debt Issuance Costs (“ASU 2015-03”). This ASU requires that debt issuance costs related to a
recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that
debt liability, consistent with debt discounts. This guidance is applicable to us beginning January 1, 2016. However,
early adoption of ASU 2015-03 is permitted and we adopted ASU 2015-03 as of January 1, 2015 using the
retrospective method as required. Debt discount and issuance costs, current, as of December 31, 2015 and 2014 were
$155,000 and $170,000, respectively. Debt discount and issuance costs, non-current, as of December 31, 2015
and 2014 were $149,000 and $177,000, respectively.
In April 2015, the FASB issued ASU 2015-05, Intangibles—Goodwill and Other—Internal Use Software (Subtopic
350-40) (“ASU 2015-05”). This ASU provides guidance to customers about whether a cloud
computing arrangement includes a software license. If a cloud computing arrangement includes a software license,
then the customer should account for the software license element of the arrangement consistent with the acquisition
of other software licenses. If a cloud computing arrangement does not include a software license, the customer
should account for the arrangement as a service contract. This ASU will be effective for reporting periods, including
interim periods beginning after December 15, 2015. Early adoption is permitted. An entity can elect to adopt the
amendments either (1) prospectively to all arrangements entered into or materially modified after the effective date
or (2) retrospectively. For prospective transition, the only disclosure requirements at transition are the nature of and
reason for the change in accounting principle, the transition method, and a qualitative description of the financial
statement line items affected by the change. For retrospective transition, the disclosure requirements at transition
include the requirements for prospective transition and quantitative information about the effects of the accounting
change. We do not believe that the adoption of this guidance will have a material impact on our financial statements.
In July 2015, the FASB issued ASU 2015-11, Simplifying the Measurement of Inventory (“ASU 2015-11”). ASU
2015-11 simplifies the subsequent measurement of inventory by replacing the lower of cost or market with a lower
of cost and net realizable value test. The guidance applies only to inventories for which cost is determined by
methods other than last-in first-out (“LIFO”) and the retail inventory method (“RIM”). Entities that use LIFO and
RIM will continue to use existing impairment models. The guidance is effective for public entities for fiscal years
beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption is permitted. The
new guidance must be applied prospectively after the date of adoption. We do not expect to early adopt this
guidance and do not believe that the adoption of this guidance will have a material impact on our financial
statements.
In November 2015, the FASB issued ASU 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of
Deferred Taxes, which simplifies the presentation of deferred income taxes by requiring deferred tax assets and
liabilities be classified as noncurrent on the balance sheet. The guidance is effective for us beginning on January 1,
2017 with early adoption permitted as of the beginning of any interim or annual reporting period. We do not expect
to early adopt this guidance and do not believe that the adoption of this guidance will have a material impact on our
financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases, which, for operating leases, requires the lessee to
recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments, in its
balance sheet. The guidance also requires a lessee to recognize single lease costs, calculated so that the cost of the
lease is allocated over the lease term, on a generally straight-line basis. This guidance will be effective for the
Company in fiscal year 2019 and must be adopted using a modified retrospective transition approach. Early adoption
is permitted. The Company is currently assessing the impact of this guidance.
78
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Currency Risk
Since 2014, our AlloMap test has been offered in Europe through our agreement with Diaxonhit. From 2014 to
August 2015, our AlloMap test was offered in Canada through our agreement with LifeLabs Medical Laboratory
Services. Payments to us under these agreements are denominated in U.S. dollars. Expenses we incur in currencies
other than U.S. dollars are not material. We do not believe that our foreign currency exchange rate fluctuation risk is
significant and we do not believe that a hypothetical 10% change in foreign currency exchange rates would have a
significant effect on our financial condition, operating results or cash flows.
Interest Rate Risk
We are exposed to market risks in the ordinary course of our business. These risks primarily relate to interest rates.
We had cash and cash equivalents of $29.9 million and $36.4 million as of December 31, 2015 and 2014,
respectively, which consist of bank deposits and money market funds. Additionally, we had debt of $15.7 million
and $11.3 million as of December 31, 2015 and 2014, respectively. Our current debt arrangement bears a daily
floating rate. Such interest-bearing instruments carry a degree of risk; however, we have not been exposed to, nor do
we anticipate being exposed to, material risks due to changes in interest rates. A hypothetical 10% change in interest
rates during any of the periods presented would have had a material impact on our audited financial statements.
79
CareDx, Inc.
Index to Financial Statements
Report of Independent Registered Public Accounting Firm .......................................................................
Balance Sheets ............................................................................................................................................
Statements of Operations ............................................................................................................................
Statements of Convertible Preferred Stock and Stockholders’ (Deficit) Equity ........................................
Statements of Cash Flows ..........................................................................................................................
Notes to Financial Statements ....................................................................................................................
Page No.
81
82
83
84
85
86
80
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of
CareDx, Inc.
We have audited the accompanying balance sheets of CareDx, Inc. as of December 31, 2015 and 2014, and the
related statements of operations, convertible preferred stock and stockholders’ (deficit) equity and cash flows for
each of the three years in the period ended December 31, 2015. These financial statements are the responsibility of
the Company’s management. Our responsibility is to express an opinion on these financial statements based on our
audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the
Company’s internal control over financial reporting. Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the
purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position
of CareDx, Inc. at December 31, 2015 and 2014, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 2015, in conformity with U.S. generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that the Company will continue as a going
concern. As discussed in Note 1 to the financial statements, the Company’s recurring losses from operations and its
need for additional capital raise substantial doubt about its ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ Ernst & Young LLP
Redwood City, California
March 28, 2016
81
CareDx, Inc.
Balance Sheets
(In thousands, except share and per share data)
Assets
Current assets:
Cash and cash equivalents .......................................................................................... $
Accounts receivable ...................................................................................................
Inventory ....................................................................................................................
Prepaid and other assets .............................................................................................
Total current assets ..........................................................................................................
Property and equipment, net ............................................................................................
Intangible assets, net ........................................................................................................
Goodwill ..........................................................................................................................
Restricted cash .................................................................................................................
Other noncurrent assets ....................................................................................................
Total assets ....................................................................................................................... $
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable ....................................................................................................... $
Accrued payroll liabilities ..........................................................................................
Accrued and other liabilities ......................................................................................
Accrued royalties .......................................................................................................
Deferred revenue ........................................................................................................
Current portion of long-term debt ..............................................................................
Total current liabilities .....................................................................................................
Deferred rent, net of current portion ................................................................................
Deferred revenue, net of current portion ..........................................................................
Long-term debt, net of current portion .............................................................................
Contingent consideration .................................................................................................
Other liabilities ................................................................................................................
Total liabilities .................................................................................................................
Commitments and contingencies (Note 7)
Stockholders’ equity:
Preferred stock: $0.001 par value; 10,000,000 shares authorized at December 31,
2015 and 2014; no shares issued and outstanding at December 31, 2015
and 2014 ..................................................................................................................
Common stock: $0.001 par value; 100,000,000 shares authorized at December 31,
2015 and 2014; 11,902,363 and 11,803,970 shares issued and outstanding
at December 31, 2015 and 2014, respectively ........................................................
Additional paid-in capital...........................................................................................
Accumulated deficit ...................................................................................................
Total stockholders’ equity ................................................................................................
Total liabilities and stockholders’ equity ......................................................................... $
As of December 31,
2015
2014
29,888 $
2,367
766
1,341
34,362
2,425
6,650
12,005
147
49
55,638 $
1,644 $
2,366
2,892
242
142
2,866
10,152
1,426
703
12,887
948
28
26,144
36,431
2,687
686
542
40,346
1,968
6,650
12,005
147
25
61,141
1,128
1,684
1,616
241
505
5,961
11,135
1,684
471
5,451
1,074
28
19,843
—
—
12
202,564
(173,082 )
29,494
55,638 $
12
200,661
(159,375)
41,298
61,141
The accompanying notes are an integral part of these financial statements.
82
CareDx, Inc.
Statements of Operations
(In thousands, except share and per share data)
Revenue:
Testing revenue ........................................................................... $
Collaboration and license revenue ...............................................
Total revenue ....................................................................................
Operating expenses:
Cost of testing..............................................................................
Research and development ..........................................................
Sales and marketing ....................................................................
General and administrative ..........................................................
Change in estimated fair value of contingent consideration ........
Total operating expenses ..................................................................
(Loss) income from operations .........................................................
Interest expense, net ..........................................................................
Other (expense) income, net .............................................................
Loss before income taxes ..................................................................
Income tax benefit ............................................................................
Net (loss) income .............................................................................. $
Net (loss) income per share (Note 4):
Year Ended December 31,
2014
2015
2013
27,881 $
263
28,144
10,273
9,333
8,349
12,247
(126)
40,076
(11,932)
(1,587)
(188)
(13,707)
—
(13,707) $
25,842 $
1,464
27,306
8,541
3,846
6,472
8,436
(1,239 )
26,056
1,250
(2,116 )
147
(719 )
1,500
781 $
21,672
426
22,098
9,078
3,176
5,892
4,809
—
22,955
(857)
(2,149)
(536)
(3,542)
—
(3,542)
Basic ............................................................................................ $
Diluted ......................................................................................... $
(1.16) $
(1.16) $
0.13 $
0.10 $
(3.50)
(3.50)
Shares used to compute net (loss) income per share:
Basic ............................................................................................ 11,860,885
Diluted ......................................................................................... 11,860,885
5,815,928
9,283,001
1,010,795
1,010,795
The accompanying notes are an integral part of these financial statements.
83
CareDx, Inc.
Statements of Convertible Preferred Stock and Stockholders’ (Deficit) Equity
(In thousands, except share data)
Convertible
Additional
Total
Balance at December 31, 2012 ............................... 5,155,673 $ 135,202 1,010,499 $
1 $
9,410 $
Preferred Stock
Shares
Amount
Common Stock
Paid-In
Shares Amount Capital
Accumulated Stockholders’
(Deficit) Equity
Deficit
(147,203)
(156,614 ) $
—
—
212
—
—
—
Issuance of common stock for cash upon
exercise of stock options ...............................
Employee share-based compensation
expense .........................................................
Net loss ............................................................
—
—
Balance at December 31, 2013 ............................... 5,155,673 135,202 1,010,711
—
—
—
—
—
—
—
—
—
—
14,242
510,777
Convertible preferred stock Series G issued
for the acquisition of ImmuMetrix, Inc. ........ 888,135
Conversion of convertible preferred stock to
common stock upon initial public offering ... (6,043,808) (149,444) 6,048,220
Conversion of subordinated convertible note
to common stock upon initial public
offering .........................................................
Conversion of convertible preferred stock
warrants to common stock warrants upon
initial public offering ....................................
Issuance of common stock upon initial public
offering, net of offering costs ........................
Issuance of common stock for services ............
Issuance of common stock for cash upon
exercise of stock options ...............................
Employee and non-employee share-based
compensation expense ..................................
Net income.......................................................
Balance at December 31, 2014 ...............................
Issuance of common stock for services ............
Issuance of common stock for cash upon
exercise of stock options ...............................
Issuance of common stock under employee
stock purchase plan .......................................
Employee and non-employee share-based
compensation expense ..................................
Issuance of warrants to purchase common
stock in exchange for debt financing .............
Net loss ............................................................
Balance at December 31, 2015 ...............................
—
—
—
—
— 11,803,970
38,121
—
—
—
—
—
— 11,902,363 $
— 4,220,000
4,899
—
—
—
—
—
—
—
— $
—
—
36,696
23,576
9,363
—
—
—
—
—
—
—
—
—
—
—
—
1
—
—
4
—
—
—
—
12
—
—
—
72
—
9,482
—
—
(3,542 )
(160,156 )
72
(3,542)
(150,673)
—
—
—
149,444
6
149,438
1
5,107
—
5,108
539
35,507
34
19
—
—
—
—
535
—
200,661
223
—
781
(159,375 )
—
46
203
—
1,341
—
—
—
90
—
—
—
12 $ 202,564 $
—
(13,707 )
(173,082 ) $
539
35,511
34
19
535
781
41,298
223
46
203
1,341
90
(13,707)
29,494
The accompanying notes are an integral part of these financial statements.
84
CareDx, Inc.
Statements of Cash Flows
(In thousands)
Operating activities:
Net (loss) income ................................................................................................. $
Adjustments to reconcile net (loss) income to net cash used in operating
activities:
Depreciation and amortization ......................................................................
Gain on disposal of property and equipment .................................................
Stock-based compensation ............................................................................
Amortization of deferred revenue .................................................................
Amortization of debt discount and noncash interest expense ........................
Revaluation of contingent consideration to estimated fair value ...................
Revaluation of warrants and derivatives to estimated fair value ....................
Non-cash income tax benefit in connection with business acquisition ..........
Changes in operating assets and liabilities:
Accounts receivable ...............................................................................
Inventory ................................................................................................
Prepaid and other assets...........................................................................
Accounts payable ....................................................................................
Accrued payroll liabilities .......................................................................
Accrued royalties.....................................................................................
Deferred revenue .....................................................................................
Accrued and other liabilities ....................................................................
Net cash used in operating activities .................................................
Investing activities:
Purchase of property and equipment .....................................................................
Payment for acquisitions, net of cash acquired .....................................................
Net cash used in investing activities .................................................
Financing activities:
Proceeds from initial public offering, net of underwriters’ discount .....................
Payments of initial public offering costs ...............................................................
Proceeds from subordinated convertible debt, net of issuance costs .....................
Proceeds from debt, net of issuance costs .............................................................
Proceeds from exercise of stock options ...............................................................
Proceeds from issuances of common stock under employee stock
purchase plan .....................................................................................................
Principal payments on debt and capital lease obligations ......................................
Net cash provided by (used in) financing activities ..........................
Net (decrease) increase in cash and cash equivalents ..................................................
Cash and cash equivalents at beginning of period .......................................................
Cash and cash equivalents at end of period ................................................................. $
Supplemental disclosures of cash information
Cash paid for interest ................................................................................................... $
Supplemental disclosures of noncash investing and financing activities
Property and equipment purchased under capital leases .............................................. $
Common stock issued for acquisition ..........................................................................
Conversion of convertible preferred stock to common stock upon initial
public offering ..........................................................................................................
Conversion of convertible preferred stock warrants to common stock
warrants upon initial public offering .........................................................................
Conversion of convertible preferred stock to common stock upon initial
public offering ..........................................................................................................
Common stock issued in lieu of services .....................................................................
Common stock warrants issued upon debt financing ...................................................
2015
Year Ended December 31,
2014
2013
(13,707) $
781 $
(3,542)
796
(2)
1,341
(130)
247
(126)
—
—
320
(80)
(823)
489
682
1
—
1,240
(9,752)
(1,199)
—
(1,199)
—
—
—
15,625
46
203
(11,466)
4,408
(6,543)
36,431
29,888 $
512
—
535
(727 )
799
(1,239 )
(225 )
(1,500 )
(417 )
(168 )
(310 )
510
298
(2,563 )
—
364
(3,350 )
(733 )
(600 )
(1,333 )
39,246
(3,733 )
4,982
—
19
—
(4,528 )
35,986
31,303
5,128
36,431 $
663
—
72
(193)
553
—
525
—
(1,318)
58
(4)
(19)
408
1,259
1,083
(91)
(546)
(98)
—
(98)
—
—
—
—
—
—
(58)
(58)
(702)
5,830
5,128
1,364 $
1,207 $
1,506
25 $
—
193 $
14,242
—
149,444
—
—
223
90
539
5,108
34
—
—
—
—
—
—
—
—
The accompanying notes are an integral part of these financial statements.
85
CareDx, Inc.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
CareDx, Inc., (“CareDx” or the “Company”) is a molecular diagnostics company focused on the discovery,
development and commercialization of clinically differentiated, high-value diagnostic surveillance solutions for
transplant patients. The Company’s first commercialized testing solution, the AlloMap heart transplant molecular
test (“AlloMap”), an FDA-cleared test, is a gene expression test that helps clinicians monitor and identify heart
transplant recipients with stable graft function who have a low probability of moderate/severe acute cellular
rejection. The Company is also pursuing the development of additional products for transplant monitoring using a
variety of technologies, including AlloSure, its next-generation sequencing-based test to detect donor-derived cell-
free DNA (“dd-cfDNA”) after transplantation.
The Company was incorporated in Delaware in December 1998, as Hippocratic Engineering, Inc. In April 1999, the
Company changed its name to BioCardia, Inc., in June 2002 to Expression Diagnostics, Inc., in July 2007 to XDx,
Inc. and in March 2014 to CareDx, Inc. The Company’s operations are based in Brisbane, California and it operates
in one segment.
Reverse Stock Split, and Increase in Authorized Shares
On July 1, 2014, the Company’s Board of Directors approved an amendment to the Company’s Certificate of
Incorporation to reflect a 1 for 6.85 reverse stock split (the “Reverse Stock Split”) of the Company’s outstanding
common stock and convertible preferred stock and increase the authorized common stock to 10,000,000 shares, after
giving effect to the Reverse Stock Split. The Reverse Stock Split became effective July 14, 2014. The par value per
share was not adjusted as a result of the Reverse Stock Split. Effective July 22, 2014, the Company’s certificate of
incorporation was amended and restated to provide for 100,000,000 authorized shares of common stock with a par
value of $0.001 per share, and 10,000,000 authorized shares of preferred stock with a par value of $0.001 per share.
All authorized, issued and outstanding shares of common stock, convertible preferred stock, options and warrants to
purchase common or preferred stock and related per share amounts contained in the financial statements have been
retroactively adjusted to reflect the Reverse Stock Split for all periods presented.
Initial Public Offering
On July 22, 2014, the Company closed its initial public offering (“IPO”) of 4,000,000 shares of its common stock,
and issued an additional 220,000 shares of common stock on August 13, 2014 pursuant to the exercise of the over-
allotment option granted to its underwriters. The public offering price of the shares sold in the offering was $10.00
per share. The total proceeds from the offering to the Company, net of underwriting discounts and commissions of
$3.0 million, were $39.2 million. After deducting offering expenses payable by the Company of $3.7 million, net
proceeds to the Company were $35.5 million. Upon the closing of the IPO, all shares of convertible preferred stock
then outstanding converted into 6,048,220 shares of common stock, and a subordinated convertible note previously
issued by the Company in the principal amount of $5.0 million converted into 510,777 shares of common stock. In
addition, all of the Company’s convertible preferred stock warrants were converted into warrants to purchase
common stock.
Liquidity and Going Concern
The Company has incurred losses and negative cash flows from operations since its inception. As of December 31,
2015, the Company had cash and cash equivalents of approximately $29.9 million, and $15.8 million of debt
outstanding under its debt and capital lease obligations, net of debt discount and issuance costs.
86
On December 16, 2015, the Company entered into purchase agreements to acquire, subject to certain conditions,
approximately 78% of the total outstanding shares of Allenex AB (“Allenex”), from its three principal shareholders
in exchange for a combination of cash and the Company’s common stock. If the Company acquires all Allenex
shares, the total purchase price of Allenex will be approximately $35.0 million, consisting of a combination of the
Company’s cash and equity. If the Allenex minority shareholders accept the all cash alternative, together with the
cash component payable to the three principal shareholders, the Company will distribute approximately $27.0
million in cash, excluding financial advisory, legal and accounting fees (which must be paid whether or not the
acquisition is completed). If the Allenex minority shareholders elect to receive both shares and a cash payment, the
Company will distribute approximately $24.6 million in cash, excluding financial advisory, legal and accounting
fees (which must be paid whether or not the acquisition is completed). Additionally, if in the tender offer the
Company acquires more than 90%, but less than 100%, of the shares of Allenex, the Company intends to initiate
compulsory acquisition proceedings under Swedish laws and to purchase the remaining shares in Allenex for cash.
The actual price per share purchased pursuant to such compulsory acquisition proceedings will be determined by an
arbitrational tribunal. As a result of the compulsory acquisition proceedings under Swedish law, the Company may
ultimately have to pay, in the aggregate, a higher price per share in order to purchase the remaining Allenex shares,
further depleting its cash reserves. See Note 3 for more information on the acquisition.
The acquisition will require the Company to refinance or amend its existing $16.0 million debt loan with its existing
lender, and the Company also expects to incur costs as the Company integrates Allenex’s business and operations
with its own. To fund a portion of the proposed acquisition and to refinance its existing loan, on December 15,
2015, the Company entered into a commitment letter and fee letter (“Commitment Letter”) with Oberland Capital
SA Davos LLC (collectively with its affiliates and assignees, “Oberland Capital”) for a six-month bridge loan of
$18.0 million, to be borrowed in connection with the closing of the acquisition. Fees incurred with Oberland Capital
and third parties in connection with the bridge loan are estimated to be approximately $1.6 million and $0.4 million,
respectively. The loan will be secured by substantially all of the Company’s assets. The loan will bear interest at the
rate of 20% per annum, and prepayments of the loan will be subject to a prepayment premium of 5% for
prepayments during the first month after the closing date for the loan, decreasing by 1% each month thereafter. The
loan agreement for the bridge loan will contain customary affirmative and negative covenants, financial covenants
and events of default.
Even with the Oberland Capital bridge loan, the acquisition will consume a significant portion of the Company’s
current cash and cash equivalents. The Company will require additional financing to fund working capital and,
within six months following entry into the bridge loan, to refinance the Oberland Capital bridge loan. The Company
is pursuing financing opportunities in both the private and public debt and equity markets through sales of equity or
debt securities. On August 10, 2015, the Company filed a registration statement on Form S-3 with the Securities and
Exchange Commission pursuant to which it is allowed to sell equity and debt securities, subject to limitations on
amount. The Company cannot initiate sales under the Form S-3 until mid-2016.
Absent additional funding and assuming completion of the acquisition and entry into the bridge loan, the Company
will exhaust its cash and cash equivalents in July 2016 unless the Company substantially reduces its costs and
operations, including research and development and other operating costs. As a result of the Company’s obligations
and lack of current available financial resources, there is uncertainty regarding the Company’s ability to maintain
liquidity sufficient to operate its business effectively, which raises substantial doubt about the Company’s ability to
continue as a going concern. If the Company is unsuccessful in its efforts to raise outside capital in the near term,
the Company will be required to significantly reduce or cease operations.
The accompanying financial statements have been prepared assuming that the Company will continue as a going
concern for a period of one year December 31, 2015, which contemplates the realization of assets and the settlement
of liabilities and commitments in the normal course of business. The financial statements do not reflect any
adjustments relating to the recoverability and reclassification of assets and liabilities that might be necessary if the
Company is unable to continue as a going concern.
87
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The Company’s financial statements have been prepared in conformity with accounting principles generally
accepted in the United States of America (“U.S. GAAP”). Subsequent to its acquisition in 2014, the financial
statements of ImmuMetrix, Inc., which was the Company’s wholly-owned subsidiary and was merged into the
Company, were included in the financial statements of the Company.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities and the reported amounts of revenues and expenses in the financial statements and accompanying notes.
On an ongoing basis, management evaluates its estimates, including those related to (i) revenue recognition, (ii) the
differences between amounts billed and estimated receipts from payers, (iii) the determination of the accruals for
clinical studies, (iv) the determination of refunds to be requested by third-party payers, (v) the fair value of assets
and liabilities, (vi) the valuation of warrants to purchase convertible preferred stock, (vii) the determination of fair
value of the Company’s common stock, (viii) the contingent consideration in a business acquisition, (ix) the fair
value of the embedded derivative associated with the subordinated convertible note, (x) the determination of the
valuation allowance and estimated tax benefit associated with deferred tax assets and net deferred tax liability,
(xi) any impairment of long-lived assets including in-process technology and goodwill and (xii) legal contingencies.
Actual results could differ from those estimates.
Concentrations of Credit Risk and Other Risks and Uncertainties
Financial instruments that potentially subject the Company to credit risk consist of cash and cash equivalents and
accounts receivable. The Company’s policy is to invest its cash and cash equivalents in money market funds,
obligations of U.S. government agencies and government-sponsored entities, commercial paper, and various bank
deposit accounts. These financial instruments were held in Company accounts at two financial institutions. The
counterparties to the agreements relating to the Company’s investments consist of financial institutions of high
credit standing. The Company is exposed to credit risk in the event of default by the financial institutions to the
extent of amounts recorded on the balance sheets which may be in excess of insured limits.
The Company is also subject to credit risk from its accounts receivable which are derived from revenue earned from
AlloMap tests provided for patients located in the U.S. and billed to various third-party payers. The Company has
not experienced any significant credit losses and does not generally require collateral on receivables. For the years
ended December 31, 2015, 2014 and 2013, approximately 50%, 51% and 53%, respectively, of testing revenue was
paid for by Medicare. No other payers represented more than 10% of testing revenue for these periods. At
December 31, 2015 and 2014, approximately 35% and 78%, respectively, of accounts receivable was due from
Medicare. At December 31, 2015, approximately 21% of accounts receivable was due from Aetna. No other payer
represented more than 10% of accounts receivable at December 31, 2015 or 2014.
Cash Equivalents
Cash equivalents consist of short-term, highly liquid investments with original maturities of three months or less
from the date of purchase. Cash equivalents consist primarily of amounts invested in money market funds.
Restricted Cash
Under lease agreements for certain facilities and an agreement with the State of Florida Medicaid, the Company
must maintain letters of credit, minimum collateral requirements, and a surety bond. These agreements are
collateralized by cash. The cash which will continue long-term to support these arrangements is classified as
restricted cash on the accompanying balance sheets.
88
Inventory
Inventory is finished goods and raw materials which consist of AlloMap reagent plates, laboratory supplies and
reagents. Inventories are used in connection with tests performed and may also be used for research and product
development efforts. Laboratory supplies subsequently designated for research and product development use are
expensed. Obsolete or damaged inventories are written off and excluded from the physical inventory. Inventories are
stated at the lower of actual purchased cost determined on a first-in, first-out basis, or net realizable value.
Property and Equipment, net
Property and equipment are stated at cost, less accumulated depreciation. Property and equipment are depreciated
using the straight-line method over the estimated useful lives of the assets, generally three years for laboratory,
computer, and office equipment, and generally seven years for furniture and fixtures. Leasehold improvements are
amortized over the shorter of their estimated useful lives or the remaining lease term.
Assets held under capital leases are recorded at the lower of the net present value of the minimum lease payments or
the fair market value of the leased asset at the inception of the lease. Amortization expense is computed using the
straight-line method over the shorter of the estimated useful lives of the assets or the period of the related lease.
The Company capitalizes certain costs incurred for software developed or obtained for internal use. These costs
include software licenses, consulting services, and direct materials, as well as employee payroll and payroll-related
costs. Capitalized internal-use software costs are depreciated over three years.
Purchased Intangible Assets
Acquired intangible assets with indefinite useful lives are related to purchased in-process research and development,
or IPR&D, projects and are measured at their respective fair values as of the acquisition date. The Company does
not amortize goodwill and intangible assets with indefinite useful lives. Intangible assets related to IPR&D projects
are considered to be indefinite-lived until the completion or abandonment of the associated R&D efforts. If and
when development is complete, which generally occurs if and when regulatory approval to market a product is
obtained, the associated assets would be deemed finite-lived and would then be amortized based on their respective
estimated useful lives at that point in time.
The Company tests IPR&D for impairment on an annual basis and in between annual tests if it becomes aware of
any events or changes that would indicate that it is more likely than not that the fair value of the assets is below their
carrying amounts. The IPR&D annual impairment test is performed as of December 1 of each fiscal year. If the fair
value exceeds the carrying value, then there is no impairment. Impairment losses on indefinite-lived intangible
assets are recognized based solely on a comparison of the fair value of the asset to its carrying value, without
consideration of any recoverability test. The Company has not identified any such impairment losses to date.
Impairment of Long-lived Assets
The Company evaluates its long-lived assets for indicators of possible impairment when events or changes in
circumstances indicate the carrying amount of an asset may not be recoverable. The Company then compares the
carrying amounts of the assets with the future net undiscounted cash flows expected to be generated by such asset.
Should an impairment exist, the impairment loss would be measured based on the excess carrying value of the asset
over the asset’s fair value determined using discounted estimates of future cash flows. The Company has not
identified any such impairment losses to date.
Goodwill
Goodwill represents the excess of the cost of an acquisition over the sum of the amounts assigned to tangible and
identifiable intangible assets acquired, less liabilities assumed. Goodwill is not subject to amortization, but is tested
for impairment on an annual basis and whenever events or changes in circumstances indicate the carrying amount of
these assets may not be recoverable.
89
The Company has determined that it operates in a single segment and has a single reporting unit associated with the
development and commercialization of diagnostic products. In the event that the Company determines that it is more
likely than not that the carrying value of the reporting unit is higher than its fair value, quantitative testing is
performed comparing recorded values to estimated fair values. If impairment is present, it is measured as the excess
of recorded goodwill over its implied fair value. The Company performs its annual evaluation of goodwill on
December 1 of each fiscal year. There have been no impairments recorded to date.
Fair Value of Financial Instruments
Fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date. When determining fair value, the
Company considers the principal or most advantageous market in which the Company would transact, and it takes
into consideration the assumptions that market participants would use when pricing the asset or liability. The
Company’s assessment of the significance of a particular input to the fair value measurement of an asset or liability
requires management to make judgments and to consider specific characteristics of that asset or liability.
The carrying amounts of certain of the Company’s financial instruments, including cash equivalents, accounts
receivable, accounts payable, and accrued liabilities, approximate fair value due to their short maturities. The
carrying amounts of the convertible preferred stock warrant liability and contingent consideration liability also
represents their fair values.
Warrants
The Company had freestanding warrants enabling counterparties to purchase shares of its convertible preferred stock
as of December 31, 2013, which were converted to warrants to purchase common stock on the Company’s IPO date.
Freestanding warrants for convertible preferred stock that were contingently redeemable were classified as liabilities
on the balance sheet and recorded at their estimated fair value. These warrants were remeasured at each balance
sheet date and any change in estimated fair value was recognized in other (expense) income, net on the statements of
operations.
Upon the completion of the Company’s IPO in July 2014, preferred stock warrants were converted into warrants to
purchase common stock, and, accordingly, the liability was reclassified to equity and became no longer subject to
remeasurement.
In 2015, the Company issued warrants to purchase shares of its common stock in connection with a debt financing
(see Note 9). The Company accounts for these warrants as equity based on the estimated fair value of the warrants
on the issuance date. The fair value of the outstanding warrants is estimated using the Black-Scholes Model. The
Black-Scholes Model requires inputs such as the expected term of the warrants, expected volatility and risk-free
interest rate. Certain of these inputs are subjective and require significant analysis and judgment to develop. For the
estimate of the expected term, the Company uses the full remaining contractual term of the warrant.
Testing Revenue
The Company recognizes revenues for tests delivered when the following criteria are met: (i) persuasive evidence
that an arrangement exists; (ii) delivery has occurred or services rendered; (iii) the fee is fixed or determinable; and
(iv) collectability is reasonably assured.
90
The first criterion is satisfied when a third-party payer makes a coverage decision or enters into a contractual
arrangement with the Company for the test. The second criterion is satisfied when the Company performs the test
and delivers the test result to the ordering physician. The third criterion is satisfied if the third-party payer’s
coverage decision or reimbursement contract specifies a price for the test. The fourth criterion is satisfied based on
management’s judgments regarding the collectability of the fees charged under the arrangement. Such judgments
include review of past payment history. AlloMap testing may be considered investigational by some payers and not
covered under their reimbursement policies. Others may cover the test, but not pay a set or determinable amount. As
a result, in the absence of a reimbursement agreement or sufficient payment history, collectability cannot reasonably
be assured so revenue is not recognized at the time the test is delivered.
If all criteria set forth above are met, revenue is recognized. When the first, third or fourth criteria are not met but
third-party payers make a payment to the Company for tests performed, the Company recognizes revenue on the
cash basis in the period in which the payment is received.
Revenue is recognized on the accrual basis net of adjustments for differences between amounts billed and the
estimated receipts from payers. The amount the Company expects to collect may be lower than the agreed upon
amount due to several factors, such as the amount of patient co-payments, the existence of secondary payers and
claim denials. Estimated receipts are based upon historical payment practices of payers. Differences between
estimated and actual cash receipts are recorded as an adjustment to revenue, which have been immaterial to date.
Taxes assessed by governmental authorities on revenue, including sales and value added taxes, are excluded from
revenue in the statements of operations.
Collaboration and License Revenue
The Company generates revenue from collaboration and license agreements. Collaboration and license agreements
may include non-refundable upfront payments, partial or complete reimbursement of research and development
costs, contingent payments based on the occurrence of specified events under the agreements, license fees and
royalties on sales of products or product candidates if they are successfully commercialized. The Company’s
performance obligations under the collaborations may include the transfer of intellectual property rights in the form
of licenses, obligations to provide research and development services and obligations to participate on certain
development committees with the collaboration partners. The Company makes judgments that affect the periods
over which it recognizes revenue. The Company periodically reviews its estimated periods of performance based on
the progress under each arrangement and accounts for the impact of any change in estimated periods of performance
on a prospective basis.
The Company recognizes contingent consideration received from the achievement of a substantive milestone in its
entirety in the period in which the milestone is achieved, which the Company believes is more consistent with the
substance of its performance under its various license and collaboration agreements. The Company did not
recognize any milestones during the years ended December 31, 2015, 2014 or 2013.
Cost of Testing
Cost of testing reflects the aggregate costs incurred in delivering the Company’s AlloMap test results to clinicians.
The components of cost of testing are materials and service costs, direct labor costs, including stock-based
compensation, equipment and infrastructure expenses associated with testing samples, shipping, logistics and
specimen processing charges to collect and transport samples and allocated overhead including rent, information
technology, equipment depreciation and utilities and royalties. Costs associated with performing tests (except
royalties) are recorded as the test is processed regardless of whether and when revenue is recognized with respect to
that test. As a result, the Company’s cost of testing as a percentage of revenue may vary significantly from period to
period because the Company does not recognize all revenue in the period in which the associated costs are incurred.
Royalties for licensed technology, calculated as a percentage of test revenues, are recorded as license fees in cost of
testing at the time the test revenues are recognized.
91
Business Combinations
The Company determines and allocates the purchase price of an acquired business to the tangible and identifiable
intangible assets acquired and liabilities assumed based on their estimated fair values as of the business combination
date, including identifiable intangible assets which either arise from a contractual or legal right or are separable from
goodwill. The Company bases the estimated fair value of identifiable intangible assets acquired in a business
combination on independent valuations that use information and assumptions provided by management, which
consider management’s best estimates of inputs and assumptions that a market participant would use. The Company
allocates any excess purchase price over the estimated fair value assigned to the net tangible and identifiable
intangible assets acquired and liabilities assumed to goodwill. The use of alternative valuation assumptions,
including estimated revenue projections, growth rates, royalty rates, cash flows, discount rates, estimated useful
lives and probabilities surrounding the achievement of contingent milestones could result in different purchase price
allocations and amortization expense in current and future periods.
In those circumstances where an acquisition involves a contingent consideration arrangement that meets the
definition of a liability under ASC 480, Distinguishing Liabilities from Equity, the Company recognizes a liability
equal to the fair value of the contingent payments the Company expects to make as of the acquisition date. The
Company remeasures this liability each reporting period and records changes in the fair value as a component of
operating expenses.
Transaction costs associated with these acquisitions are expensed as incurred in general and administrative expenses.
Results of operations and cash flows of acquired companies are included in the Company’s operating results from
the date of acquisition.
Research and Development Expenses
Research and development expenses represent costs incurred to develop new surveillance solutions as well as
continued development of the Company’s AlloMap test. These expenses include payroll and related expenses,
consulting expenses, laboratory supplies, and certain allocated expenses as well as amounts incurred under certain
collaboration and license agreements. Research and development costs are expensed as incurred. The Company
records accruals for estimated study costs comprised of work performed by contract research organizations under
contract terms.
Advertising Expenses
All advertising costs are expensed as incurred. Advertising expenses were insignificant during all of the periods
presented.
Stock-based Compensation
The Company uses the Black-Scholes valuation model, which requires the use of estimates such as stock price
volatility and expected option lives, to value employee stock options. The Company estimates the expected option
lives using historical data, volatility using data of similar companies in the diagnostics industry, and risk-free rates
based on the implied yield currently available in the U.S. Treasury zero-coupon issues with a remaining term equal
to the expected option lives, and dividend yield based on the Company’s historical data.
The Company uses the straight-line attribution method for recognizing compensation expense. Compensation
expense is recognized on awards ultimately expected to vest and reduced for forfeitures that are estimated at the
time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
Forfeitures are estimated based on the Company’s historical experience.
Compensation expense for stock options issued to nonemployees is calculated using the Black-Scholes option
pricing model and is recorded over the service performance period. Options subject to vesting are required to be
periodically remeasured over their service performance period, which is generally the same as the vesting period.
92
Income Taxes
The Company accounts for income taxes under the liability method. Under this method, deferred tax assets and
liabilities are determined based on the difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the differences are expected to affect taxable income.
Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be
realized.
The Company assesses all material positions taken in any income tax return, including all significant uncertain
positions, in all tax years that are still subject to assessment or challenge by relevant taxing authorities. The
Company’s assessment of an uncertain tax position begins with the initial determination of the position’s
sustainability and is measured at the largest amount of benefit that is greater than 50 percent likely of being realized
upon ultimate settlement. As of each balance sheet date, unresolved uncertain tax positions must be reassessed, and
the Company will determine whether (i) the factors underlying the sustainability assertion have changed and (ii) the
amount of the recognized tax benefit is still appropriate. The recognition and measurement of tax benefits requires
significant judgment. Judgments concerning the recognition and measurement of a tax benefit may change as new
information becomes available.
Comprehensive (Loss) Income
Net (loss) income and comprehensive (loss) income are the same for all periods presented.
Recent Accounting Pronouncements
In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers
(Topic 606) (“ASU 2014-09”), which amends the existing accounting standards for revenue recognition. ASU 2014-
09 is based on principles that govern the recognition of revenue at an amount an entity expects to be entitled to when
products are transferred to customers. ASU 2014-09 will be effective for the Company beginning in its first quarter
of 2018. Early adoption is permitted in 2017. The new revenue standard may be applied retrospectively to each prior
period presented or retrospectively with the cumulative effect recognized as of the date of adoption. The Company is
currently evaluating the impact of adopting the new revenue standard on its financial statements.
In August 2014, the FASB issued Accounting Standards Update No. 2014-15, Presentation of Financial
Statements(cid:650)Going Concern (Subtopic 205-40), Disclosure of Uncertainties about an Entity’s Ability to Continue as
a Going Concern (“ASU 2014-15”). This ASU requires the Company to evaluate whether there are conditions and
events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the
financial statements are issued, and if there is substantial doubt about the Company’s ability to continue as a going
concern, the disclosure of such is required. The Company is required to make this evaluation for both annual and
interim reporting periods, if applicable. The Company also is required to evaluate and disclose whether its plans
alleviate that doubt. This guidance is effective for annual periods beginning after December 15, 2016, and interim
periods within those fiscal years. Early adoption is permitted but the Company has not elected to early adopt this
guidance.
In April 2015, the FASB issued ASU 2015-03, Interest—Imputation of Interest (Subtopic 835-30): Simplifying the
Presentation of Debt Issuance Costs (“ASU 2015-03”). This ASU requires that debt issuance costs related to a
recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that
debt liability, consistent with debt discounts. This guidance is applicable to the Company beginning January 1, 2016.
However, early adoption of ASU 2015-03 is permitted and the Company adopted ASU 2015-03 as of January 1,
2015 using the retrospective method as required. Debt discount and issuance costs, current, as of December 31, 2015
and 2014 were $155,000 and $76,000, respectively. Debt discount and issuance costs, non-current, as of December
31, 2015 and 2014 were $149,000 and $11,000, respectively.
93
In April 2015, the FASB issued ASU 2015-05, Intangibles—Goodwill and Other—Internal Use Software (Subtopic
350-40) (“ASU 2015-05”). This ASU provides guidance to customers about whether a cloud computing
arrangement includes a software license. If a cloud computing arrangement includes a software license, then the
customer should account for the software license element of the arrangement consistent with the acquisition of other
software licenses. If a cloud computing arrangement does not include a software license, the customer should
account for the arrangement as a service contract. This ASU will be effective for reporting periods, including interim
periods beginning after December 15, 2015. Early adoption is permitted. An entity can elect to adopt the
amendments either (1) prospectively to all arrangements entered into materially modified after the effective date or
(2) retrospectively. For prospective transition, the only disclosure requirements at transition are the nature of and
reason for the change in accounting principle, the transition method, and a qualitative description of the financial
statement line items affected by the change. For retrospective transition, the disclosure requirements at transition
include the requirements for prospective transition and quantitative information about the effects of the accounting
change. The Company does not believe that the adoption of this guidance will have a material impact on its financial
statements.
In November 2015, the FASB issued ASU 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of
Deferred Taxes, which simplifies the presentation of deferred income taxes by requiring deferred tax assets and
liabilities be classified as noncurrent on the balance sheet. The guidance is effective for the Company beginning on
January 1, 2017 with early adoption permitted as of the beginning of any interim or annual reporting period. The
Company does not expect to early adopt this guidance and does not believe that the adoption of this guidance will
have a material impact on its financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases, which, for operating leases, requires the lessee to
recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments, in its
balance sheet. The guidance also requires a lessee to recognize single lease costs, calculated so that the cost of the
lease is allocated over the lease term, on a generally straight-line basis. This guidance will be effective for the
Company in fiscal year 2019 and must be adopted using a modified retrospective transition approach. Early adoption
is permitted. The Company is currently assessing the impact of this guidance.
3. PROPOSED BUSINESS COMBINATION
On December 16, 2015, the Company entered into Conditional Share Purchase Agreements (“Purchase
Agreements”), to acquire, subject to certain conditions approximately 78% of the outstanding shares of Allenex
from its three principal shareholders in exchange for a combination of cash and CareDx common stock. On February
8, 2016, the parties entered into amendments to such Purchase Agreements to adjust the shares of CareDx common
stock issuable per share of Allenex, and change the timing of distribution of cash consideration. On March 7, 2016,
the Company launched a tender offer (the “Offer”), through the issuance of an Offer Document to acquire the
remaining 22% of the shares of Allenex. Additionally, if CareDx acquires more than 90%, but less than 100%, of the
shares of Allenex, which is necessary to initiate compulsory acquisition proceedings under Swedish laws, CareDx
intends to purchase the remaining shares in Allenex for cash, pursuant to such compulsory acquisition proceedings.
The Company’s Offer to the shareholders of Allenex permits such shareholders to elect either an all cash payment or
a mix of cash consideration and shares of the Company’s common stock. Under the all cash alternative, the
shareholders of Allenex may exchange their shares of Allenex for approximately $0.30 per share. Under the mixed
consideration alternative, the shareholders of Allenex may exchange their shares of Allenex for a combination of (i)
$0.20 per share and (ii) 0.01458 shares of the Company’s common stock per share. The Company anticipates
completing the Offer in April 2016. If the Company acquires all Allenex shares, the total purchase price of Allenex
will be approximately $35.0 million, payable in a combination of cash and CareDx common stock. If the Allenex
minority shareholders accept the all cash alternative, together with the cash component payable to the three principal
shareholders, the Company will distribute approximately $27.0 million in cash, excluding financial advisory, legal
and accounting fees (which must be paid whether or not the acquisition is completed). If the Allenex minority
shareholders elect to receive both shares and a cash payment, the Company will distribute approximately $24.6
million in cash, excluding financial advisory, legal and accounting fees (which must be paid whether or not the
acquisition is completed).
94
Allenex is a transplant diagnostics company based in Stockholm, Sweden that develops, manufactures, markets and
sells products that match donor organs with potential recipients prior to transplantation. The acquisition of Allenex
will create an international transplantation diagnostics company with product offerings along the pre- and post-
transplant continuum. The Olerup SSP line, which addresses Human Leukocyte Antigen (“HLA”) testing, and
AlloMap are foundational diagnostics which are well recognized by the transplant community. The combined
company will have a presence and direct distribution channels in the US and Europe. This transaction will be
accounted for as a business combination.
The acquisition will require the Company to refinance or amend its existing $16.0 million debt loan with its existing
lender, and the Company also expects to incur costs as it integrates Allenex’s business and operations with its own.
To fund a portion of the proposed acquisition and to refinance the Company’s existing loan, in connection with the
proposed acquisition, on December 15, 2015, the Companywe entered into a commitment letter and fee letter, or
Commitment Letter, with Oberland Capital SA Davos LLC, collectively with its affiliates and assignees, Oberland
Capital, which Commitment Letter was also amended and restated on February 8, 2016. The Commitment Letter
sets forth the binding commitment, subject to the satisfaction of the conditions set forth therein, by Oberland Capital
to provide a six-month bridge loan of $18.0 million, to be borrowed in connection with the closing of the
acquisition. The bridge loan will mature on the date that is six months from the closing date of the bridge loan.
Approximately $16.0 million of the proceeds from the bridge loan will be used to repay the Company’s outstanding
loan agreement with East West Bank. Fees incurred with Oberland Capital and third parties in connection with the
bridge loan are estimated to be approximately $1 million and $0 million, respectively. The loan wouldwill be
secured by substantially all of the Company’s assets. The loan will bear interest at the rate of 20% per annum, and
prepayments of the loan will be subject to a prepayment premium of 5% for prepayments during the first month after
the closing date for the loan, decreasing by 1% each month thereafter. The loan agreement for the bridge loan
wouldwill contain customary affirmative and negative covenants, financial covenants and events of default.
If the Company does not perform its obligation to complete the acquisition, it may be subject to fines and penalties
under Swedish law. If the Company fails to perform its obligation to close the acquisition, it may also be subject to
stockholder claims for damages under the purchase agreements and under the Swedish Takeover Rules. Such
penalties, fines and contract damages claims could be material and may also trigger a default under the Company’s
current loan agreement, and could have other unforeseen consequences that could negatively affect its business and
the price of its common stock.
4. NET (LOSS) INCOME PER SHARE
Basic net (loss) income per share has been computed by dividing the net (loss) income by the weighted-average
number of common shares outstanding during the period, without consideration for common share equivalents.
Diluted net (loss) income per share has been computed by dividing the net (loss) income by the sum of the
weighted-average number of common shares and common share equivalents outstanding during the period, to the
extent that such common share equivalents are dilutive.
For the years ended December 31, 2015 and 2013, all common share equivalents have been excluded from the
calculation of diluted net loss per share, as the effect would be antidilutive.
For the year ended December 31, 2014, certain common share equivalents have been included in diluted net income
per share, as their effect is dilutive. For the year ended December 31, 2014, common share equivalents include:
(i) options and warrants to purchase common stock; (ii) options and warrants to purchase convertible preferred stock
prior to their conversion into options and warrants to purchase common stock upon the IPO; and (iii) convertible
preferred stock and the subordinated convertible note prior to their conversion into common stock upon the IPO.
Common share equivalents for convertible preferred stock and the subordinated convertible note are determined
using the if-converted method. Common share equivalents for options and warrants are determined using the
treasury-stock method.
95
The following tables set forth the computation of the Company’s basic and diluted net (loss) income per share (in
thousands, except shares and per share data):
Year Ended December 31,
2014
2015
2013
781 $
—
(13,707) $
Numerator:
Net (loss) income ....................................................... $
Add: interest expense related to subordinated
convertible note .......................................................
Less: gain on change in fair value of derivative
related to subordinated convertible note .................
Less: gain on extinguishment of derivative related
to subordinated convertible note .............................
Net (loss) income attributable to common
stockholders ............................................................ $
Denominator:
Weighted-average shares used to compute basic
net (loss) income per share attributable to
common stockholders .............................................. 11,860,885 5,815,928
Effect of potentially dilutive securities:
(13,707) $
907
364
—
—
(120 )
(118 )
(3,542 )
—
—
—
$
(3,542 )
1,010,795
Convertible preferred stock ..................................
Subordinated convertible note ..............................
Employee stock options ........................................
— 2,972,051
134,341
—
360,681
—
—
—
—
Weighted-average shares used to compute diluted
net (loss) income per share attributable to
common stockholders .............................................. 11,860,885 9,283,001
Net (loss) income per share attributable to
common stockholders:
Basic ........................................................................... $
Diluted ........................................................................ $
(1.16) $
(1.16) $
0.13 $
0.10 $
1,010,795
(3.50 )
(3.50 )
The following potentially dilutive securities have been excluded from diluted net (loss) income per share, because
their effect would be antidilutive:
Year Ended December 31,
2014
2013
2015
Shares of common stock subject to outstanding
options ......................................................................
Shares of common stock subject to outstanding
1,577,317
539,645
466,965
common stock warrants ..........................................
301,069
213,677
82,190
Shares of common stock subject to conversion
from preferred stock .................................................
Shares of common stock subject to conversion from
541,613
preferred stock warrants ...........................................
Restricted stock units .................................................. 106,200
—
Total common stock equivalents ................................. 1,984,586 753,322 6,250,853
—
—
5,160,085
—
—
—
96
5. FAIR VALUE MEASUREMENTS
The Company records its financial assets and liabilities at fair value except for its debt, which is recorded at
amortized cost. The carrying amounts of certain financial instruments of the Company, including cash and cash
equivalents, prepaid expenses and other current assets, accounts payable and accrued liabilities, approximate fair
value due to their relatively short maturities. The accounting guidance for fair value provides a framework for
measuring fair value, clarifies the definition of fair value, and expands disclosures regarding fair value
measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability
(an exit price) in an orderly transaction between market participants at the reporting date. The accounting guidance
establishes a three-tiered hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring
fair value as follows:
(cid:120)
(cid:120)
(cid:120)
Level 1: Inputs which include quoted prices in active markets for identical assets and liabilities.
Level 2: Inputs other than Level I that are observable, either directly or indirectly, such as quoted prices
for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are
observable or can be corroborated by observable market data for substantially the full term of the assets
or liabilities.
Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to
the fair value of the assets or liabilities.
The following table sets forth the fair value of the Company’s financial assets and liabilities measured on a recurring
basis, as of December 31, 2015 and 2014 (in thousands):
December 31, 2015
Fair Value Measured Using
(Level 2)
(Level 1)
(Level 3)
Total Balance
Assets
Money market funds .................................................. $
Liabilities
Contingent consideration ........................................... $
28,774 $
— $
— $
28,774
— $
— $
948 $
948
December 31, 2014
Fair Value Measured Using
(Level 2)
(Level 1)
(Level 3)
Total Balance
Assets
Money market funds .................................................. $
Liabilities
Contingent consideration ........................................... $
36,779 $
— $
— $
36,779
— $
— $
1,074 $
1,074
97
The following table presents the issuances, changes in fair value and reclassifications of the Company’s Level 3
financial instruments that are measured at fair value on a recurring basis (in thousands):
(Level 3)
Warrants to
Purchase
Convertible
Preferred
Stock
Derivative
Liability
Related to
Subordinated
Convertible
Note
Contingent
Consideration
Liability
Balance as of December 31, 2013 ............................. $
Issuance of financial instruments ..............................
Change in estimated fair value ..................................
Reclassification to stockholders' equity .....................
Balance as of December 31, 2014 .............................
Change in estimated fair value ..................................
Balance as of December 31, 2015 ............................. $
— $
2,313
(1,239)
—
1,074
(126)
948 $
525 $
—
14
(539)
—
— $
239
(239 )
—
— $
— $
Total
525
2,552
(1,464)
(539)
1,074
(126)
948
The Company recognizes transfers between levels of the fair value hierarchy as of the end of the reporting period.
There were no transfers between Level 1, Level 2 and Level 3 categories during the periods presented.
In determining fair value, the Company uses various valuation approaches within the fair value measurement
framework. The valuation methodologies used for the Company’s instruments measured at fair value and their
classification in the valuation hierarchy are summarized below:
(cid:120)
(cid:120)
(cid:120)
Money market funds—Investments in money market funds are classified within Level 1. At
December 31, 2015 and 2014, money market funds were included on the balance sheets in cash and
cash equivalents.
Contingent consideration—As of December 31, 2015, the Company had a contingent obligation to issue
227,845 shares of the Company’s common stock to the former owners of ImmuMetrix, Inc. in
conjunction with the Company’s acquisition of ImmuMetrix, Inc. (see Note 14). The issuance will occur
if the Company completes 2,500 commercial tests involving the measurement of dd-cfDNA in organ
transplant recipients in the United States by June 10, 2020. The Company recorded its estimate of the
fair value of the contingent consideration based on its evaluation of the probability of the achievement
of the contractual conditions that would result in the payment of the contingent consideration. The fair
value of the contingent consideration was estimated using the fair value of the shares to be paid if the
contingency is met multiplied by management’s 65% estimate at December 31, 2015 and 2014 of the
probability of success. The significant input in the Level 3 measurement not supported by market
activity is the Company’s probability assessment of the milestone being met. The value of the liability is
subsequently remeasured to fair value each reporting date, and the change in estimated fair value is
recorded to the operating expense item captioned “change in estimated fair value of contingent
consideration” until the milestone contingency is paid, expires or is no longer achievable. Increases
(decreases) in the estimation of the probability percentage result in a directionally similar impact to the
fair value measurement of the contingent consideration liability.
Warrants to purchase convertible preferred stock—Prior to the Company’s IPO, its warrants to
purchase convertible preferred stock were classified as Level 3 because they were valued based on
unobservable inputs and management’s judgment due to the absence of quoted market prices, inherent
lack of liquidity and the long-term nature of such financial instruments. These assumptions are
inherently subjective and involve significant management judgment. The significant unobservable input
used in the fair value measurement of the warrant liability was the fair value of the underlying
convertible preferred stock at the valuation remeasurement date. Generally, increases (decreases) in the
fair value of the underlying stock would result in a directionally similar impact to the fair value
measurement of the preferred stock warrants. Any change in estimated fair value is recognized in other
expense (income), net on the statements of operations. Upon the Company’s IPO in July 2014, certain
warrants to purchase convertible preferred stock were converted into warrants to purchase common
stock and were reclassified to equity, while other warrants to purchase preferred stock expired pursuant
to their terms.
98
(cid:120)
Derivative liability related to subordinated convertible note—On April 17, 2014, the Company issued a
$5.0 million subordinated convertible promissory note to Illumina, Inc. that had some features that
constituted embedded derivatives. The Company determined that the optional conversion or repayment
upon a change in control is an equity call option with a potentially variable value to be received and
meets the definition of a derivative which would be required to be bifurcated. The estimated fair value
of this embedded derivative was affected by the estimated probability assigned to the various scenarios
for the host instrument. As of April 17, 2014, management estimated repayment upon a change in
control within the loan term at a 10% probability. The estimated fair value of the embedded derivative
liability of $239,000 as of April 17, 2014 was included in accrued and other liabilities. Upon the
Company’s IPO in July 2014, the subordinated convertible note was converted into common stock, and
so the embedded conversion option was extinguished. Accordingly, the fair value of the derivative
became $0, and a gain of $239,000 was recorded in other (expense) income, net. The significant
unobservable input used in the fair value measurement of the derivative liability was the probability
assigned to the various scenarios. Generally, increases (decreases) in the probability of the factors
primarily impacting the valuation would result in a directionally similar impact to the fair value
measurement of the derivative liability. Changes in estimated fair value were recognized in other
(expense) income, net on the statements of operations.
The Company’s liabilities classified as Level 3 were valued based on unobservable inputs and management’s
judgment due to the absence of quoted market prices, inherent lack of liquidity and the long-term nature of the
financial instruments.
The carrying values of the Company’s debt approximate their fair values at December 31, 2015 and 2014 as the
market rates currently available to the Company and other assumptions have not changed significantly.
6. BALANCE SHEET COMPONENTS
Inventory
Inventory consisted of the following (in thousands):
Finished goods .............................................................. $
Raw materials ...............................................................
Total inventory .............................................................. $
237 $
529
766 $
277
409
686
December 31,
2015
2014
Property and Equipment, Net
Property and equipment consisted of the following (in thousands):
Laboratory equipment .................................................. $
Leasehold improvements .............................................
Furniture and fixtures ...................................................
Computer and office equipment ...................................
Construction-in-process ...............................................
Less: Accumulated depreciation and amortization ......
Property and equipment, net ........................................ $
December 31,
2015
5,022 $
4,326
825
4,125
—(cid:3)
14,298
(11,873)
2,425 $
2014
4,392
4,040
825
3,775
28
13,060
(11,092 )
1,968
Depreciation and amortization expense was $0.8 million, $0.5 million and $0.7 million for the years ended
December 31, 2015, 2014 and 2013, respectively.
99
Assets purchased under capital leases, included above in laboratory equipment, computer and office equipment,
were $1.7 million and $1.6 million at December 31, 2015 and 2014, respectively. Accumulated amortization was
$1.5 million at December 31, 2015 and 2014. Related amortization expense, included in depreciation and
amortization expense, was $79,000, $59,000 and $26,000 for the years ended December 31, 2015, 2014 and 2013,
respectively.
Accrued and Other Liabilities
Accrued and other liabilities consisted of the following (in thousands):
December 31,
2015
2014
Professional fees ........................................................... $
Test sample processing fees ..........................................
Accrued overpayments and refunds ..............................
Clinical studies ..............................................................
Deferred rent – current portion .....................................
Capital leases – current portion .....................................
Other accrued expenses .................................................
Total accrued and other liabilities ................................. $
880 $
426
163
756
258
71
338
2,892 $
273
318
146
144
202
70
463
1,616
7. COMMITMENTS AND CONTINGENCIES
Leases
The Company leases its laboratory and office facility in Brisbane, California, under a non-cancelable operating lease
agreement expiring in December 2020. The terms of the facility lease provide for rental payments on a graduated
scale. The Company recognizes rent expense on a straight-line basis over the lease period and has accrued for rent
expense incurred but not paid. In addition, incentives were granted, including allowances to fund leasehold
improvements and rent holidays. As such, these allowances have been recorded as deferred rent, and these items are
being recognized as reductions to rental expense on a straight-line basis over the term of the lease.
During 2013, the Company had leases for blood draw centers under non-cancelable operating leases. Although the
Company had subleased some of the blood draw center properties, it remained obligated under the original operating
leases. The final lease payment related to the blood draw centers was made in August 2013.
Rent expense under the non-cancelable operating leases was $1.0 million in 2015, 2014 and 2013. Future minimum
lease commitments under these operating and capital leases at December 31, 2015, are as follows (in thousands):
Years ending December 31,
2016 ............................................................................. $
2017 .............................................................................
2018 .............................................................................
2019 .............................................................................
2020 and thereafter ......................................................
Total minimum lease payments ...................................
Less: amounts representing interest .............................
Present value of minimum lease payments ..................
Less: current portion of obligations under capital
leases .........................................................................
Long-term portion of obligations under capital
leases .........................................................................
$
Capital
Leases
Operating
leases
1,291
1,348
1,376
1,404
1,432
6,851
75 $
55
16
5
—
151 $
(23)
128
(71)
57
100
The current portion of obligations under capital leases is included in accrued and other liabilities on the balance
sheets. The long-term portion is included in long-term debt, net of current portion on the balance sheets.
See Note 9 for the aggregate annual payment schedule for the Company’s outstanding venture debt.
Royalty Commitments
In November 2004, the Company entered into a license agreement with Roche Molecular Systems, Inc., or Roche,
that grants the Company the right to use certain Roche technology relating to polymerase chain reaction, or PCR,
and quantitative real-time PCR, in clinical laboratory services, including in connection with AlloMap. This is a non-
exclusive license agreement in the United States covering claims in multiple Roche patents. The Company had
disputed the combination services percentage Roche sought to apply under the agreement. The combination service
percentage is a multiplier used to calculate royalties where licensed services are sold in combination with other
services. From July 2011 through September 2014, the Company withheld payment of such royalties pending
resolution of the matter. On February 11, 2014, Roche filed a demand for arbitration with the American Arbitration
Association seeking a declaration that the Company had materially breached the Roche license agreement by failing
to report and pay royalties owing to Roche in respect of licensed services performed by the Company after July 1,
2011. Since July 1, 2011, the Company fully accrued the unpaid royalties on the balance sheets, and the amount of
the unpaid royalties has been reflected as an expense in the Company’s income statements in the periods to which
the royalties relate.
In September 2014, the Company entered into a settlement and mutual release agreement with Roche whereby:
(i) for the period beginning July 1, 2011 through June 30, 2014, the Company agreed to pay the amount of
$2,827,220 in settlement of past royalties due; (ii) for the period beginning July 1, 2014 through September 30,
2014, the Company agreed to pay royalties based on the same combination services percentage used to determine
the past royalties due; (iii) for the period beginning October 1, 2014 through September 30, 2017, Roche and the
Company agreed to a downward adjustment of the combination services percentage used to determine the portion of
the AlloMap testing revenue that is royalty bearing under the terms of the license; (iv) the Company agreed to report
and pay quarterly royalties within 45 days of the end of each calendar quarter; (v) Roche agreed that, subject to the
Company’s timely payment of all applicable royalties through such date, no further royalties will be payable by the
Company for periods after September 30, 2017; (vi) the Company and Roche agreed to mutually release all claims
under the license agreement through the settlement date; and (vii) Roche agreed to dismiss the arbitration claims.
For all time periods, the contractual royalty rate in the license agreement was or will be applied to the applicable
combination services percentage to determine the royalties payable for the AlloMap service.
Under the license agreement, the Company incurs royalty expenses as a percentage of combination services revenue
and classifies those expenses as a component of cost of testing in the statements of operations. As a result of the
Company’s September 2014 settlement and payment to Roche of $2.8 million as payment in full of all royalties
under the license agreement from July 1, 2011 through June 30, 2014, the Company recorded a reduction of $0.6
million to cost of testing and $0.1 million to interest expense in the statements of operations for the year ended
December 31, 2014. Of the $2.8 million paid by the Company under the terms of the settlement agreement, $0.4
million represented royalties on AlloMap revenue for the six months ended December 31, 2011, $0.9 million
represented royalties on AlloMap revenue for the year ended December 31, 2012, $1.0 million represented royalties
on AlloMap revenue for the year ended December 31, 2013, and $0.6 million represented royalties on AlloMap
revenue for the year ended December 31, 2014.
For the years ended December 31, 2015, 2014 and 2013, royalty expenses in connection with the Roche agreement
were $1.0 million, $0.7 million and $1.2 million, respectively.
Contingencies
The Company is subject to claims and assessments from time to time in the ordinary course of business. The
Company’s management does not believe that any such matters, individually or in the aggregate, will have a
material adverse effect on the Company’s business, financial condition, or results of operations.
101
8. COLLABORATION AND LICENSING AGREEMENTS
Laboratory Corporation of America Holdings (“LabCorp”)
In April 2012, CareDx and LabCorp entered into a collaboration and license agreement (“2012 Agreement”) to
develop a lupus flare predictor test. The agreement provided for CareDx to license technology to LabCorp. Of the
total arrangement consideration, the fair value of the license was assessed to be $1.0 million. The license term in the
2012 Agreement was the later of 10 years from the date of the agreement or the expiration of the last-to-expire
patents and patent applications included in the CareDx technology licensed to LabCorp, unless the license were
terminated by mutual agreement. The agreement provided that CareDx and LabCorp would share equally the costs
of developing the lupus flare predictor test; however LabCorp’s share of the development cost was subject to certain
limits at each stage of the arrangement.
Under the agreement, in 2012 LabCorp paid the Company a nonrefundable and non-creditable upfront license fee
payment of $1,000,000, and a nonrefundable and non-creditable payment of $250,000 for certain lupus samples. The
Company was to receive royalties in the high single digits from LabCorp on net sales of the commercialized flare
predictor test or other tests developed using the samples sold.
Phase 1 of the project was completed in the first quarter of 2014.
On September 18, 2014, CareDx and LabCorp terminated the 2012 agreement. The termination agreement provides
that:
(cid:120)
(cid:120)
(cid:120)
CareDx transfer and assign to LabCorp, 300 “SAGE I” clinical samples and related clinical data and
documentation that CareDx obtained from patients during the discovery phase of the collaboration;
CareDx grant a perpetual, non-exclusive worldwide, fully paid, sublicensable, royalty-free license to use
any collaboration intellectual property and data for any and all purposes; and
LabCorp pay $500,000 to CareDx within 30 days of CareDx’s delivery of the clinical samples and
clinical data and documentation. No further royalties, milestone fees or other fees will be payable by
LabCorp after the termination date.
During the three months ended December 31, 2014, the Company delivered the clinical samples and the related
clinical data and documentation to LabCorp, and accordingly recognized the $500,000 termination fee and the
remaining $611,000 previously unrecognized license fee.
During the years ended December 31, 2014 and 2013, the Company recognized $1.1 million and $328,000,
respectively, in revenue under this arrangement, which consisted of amortization of the upfront license fee of
$626,000 and $187,000, respectively, reimbursement of research and development expenses of $16,000 and
$141,000, respectively, and a collaboration termination fee of $500,000 and $0, respectively. Such revenues are
included in collaboration and license revenue on the statements of operations. No revenues were recognized during
the year ended December 31, 2015.
Included in research and development expenses were $32,000 and $282,000 for the years ended December 31, 2014
and 2013, respectively, for development costs associated with the 2012 Agreement. No research and development
expenses were recorded for the year ended December 31, 2015.
Diaxonhit (“DHT”)
In June 2013, the Company entered into an exclusive Distribution and Licensing Agreement with DHT, a French
public company, whereby DHT will have the AlloMap test performed in a European laboratory and commercialize
the test in the European Economic Area (“EEA”). The agreement will expire at the later of the last-to-expire patent
in the EEA or ten years from the first commercial sale of the test in the EEA, which occurred in 2014.
102
Consideration under the agreement includes an upfront cash payment of approximately €387,500 ($503,000) that is
designated to offset royalties earned by the Company in the first three years following the first commercial sale. The
Company is entitled to receive royalties from DHT as a percent of net sales, as defined in the agreement, of
AlloMap tests in the mid to high teens. Approximately €250,000 ($344,000) of the upfront payments is refundable
under certain circumstances. Upon confirmation that the CE mark was in place, the Company also received an
equity payment of DHT common stock with a value of €387,500 ($503,000). The CE mark is a
mandatory conformity marking for certain products sold within the EEA. These shares were promptly sold by the
Company in July 2013 for total consideration of $467,000.
Other consideration that may be earned by the Company includes agreed-upon per unit pricing for the supply of
AlloMap products, and additional royalties that are payable upon the achievement of various sales milestones by
DHT. In this arrangement, there is one combined unit of accounting.
Commercial sales began in the EEA in June 2014. Total revenue recognized from this arrangement for the years
ended December 31, 2015 and 2014 was $46,000 and $36,000, respectively.
CardioDx, Inc. (“CDX”)
In 2005, the Company entered into a services agreement with what at the time was a related party, CDX, whereby
the Company provided CDX with biological samples and related data and performed laboratory services on behalf
of CDX. Each company granted the other a worldwide license under certain of its intellectual property rights.
Pursuant to this agreement, CDX pays royalties to the Company of a low single-digit percentage of the cash
collected from sales of CDX licensed products. In 2009, CDX terminated the services portion of this agreement,
however, the royalty obligation from CDX continues until the tenth anniversary of the first commercial sale of a
CDX licensed product. The first commercial sale of such product by CDX occurred in 2009, therefore the royalty
obligation to the Company continues until 2019. Royalty revenues, recorded when earned, were $179,000, $221,000
and $94,000 for the years ended December 31, 2015, 2014 and 2013, respectively, and are included in collaboration
and license revenue on the statements of operations. Starting in the fourth quarter of 2015, the Company changed its
accounting for royalty revenues from CDX from accrual basis to cash basis. The Company had receivable balances
from CDX of $0 and $54,000 at December 31, 2015 and 2014, respectively.
9. DEBT
Venture Debt
In August 2012, the Company entered into a $15,000,000 loan and security agreement (the “2012 Loan”), and repaid
a loan entered into in 2010 (the “2010 Loan”) including principal of $10,333,833, a termination fee of $875,000, and
other costs associated with the payoff. Prepayment penalties and write-off of the remaining unamortized costs
associated with the 2010 Loan resulted in a charge to interest expense of approximately $628,000 during the year
ended December 31, 2012. These transactions generated net cash proceeds to the Company of $3,432,260.
In August 2013, the Company amended the 2012 Loan to defer the beginning of repaying principal for six months,
to March 1, 2014. To obtain this deferral, there was an additional fee of $150,000 due at the end of the loan term.
The 2012 Loan, as amended, provided for interest-only payments for 18 months followed by 30 equal monthly
principal and interest payments of $566,822 at an annual interest rate of 9.95%. In addition, a final payment of
$1,275,000 was to be due at the end of the loan term. The 2012 Loan also included a facility fee of $75,000.
In connection with the 2012 Loan, the Company issued to the lenders warrants to purchase 167,182 shares of Series
G convertible preferred stock or Next Round Stock at $21.78 per share. The warrants are exercisable until 2019. The
estimated fair value of warrants on the date of issuance was negligible. The estimated fair value of the warrants at
December 31, 2013, including the methodology and input assumptions used in the valuation, is discussed in Note 9.
On July 22, 2014, upon the completion of the Company’s IPO, the warrants converted into warrants to purchase
common stock.
The 2012 Loan was collateralized by a security interest in all of the Company’s assets except intellectual property
on which there is a negative pledge, and the loan agreement contained covenants, including a revenue covenant, and
restrictions on the Company’s ability to pay cash dividends. At December 31, 2014, the Company was in
compliance with all loan covenants.
103
In connection with the 2010 Loan, the Company issued to the lenders warrants to purchase 17,215 shares of Series G
convertible preferred stock at $21.78 per share. The warrants were exercisable until 2017. The estimated fair value
of the warrants on the date of issuance of $8,000 was recorded as a debt discount liability which was being
amortized to interest expense over the term of the loan. On July 22, 2014, upon the completion of the Company’s
IPO, the warrants converted into warrants to purchase common stock.
The $11.3 million outstanding balance of the 2012 Loan was paid off with proceeds from the secured term loan
facility that the Company entered into on January 30, 2015.
Subordinated Convertible Note
On April 17, 2014, the Company issued a $5.0 million Subordinated Convertible Promissory Note to Illumina, Inc.
(the “2014 Note”) which provided for interest at an annual rate of 8.0%. The 2014 Note was to mature one year
following its issuance with principal and unpaid interest due at that time unless the Note were converted into equity
prior to the maturity date. As described below, conversion was mandatory in the event of a Qualified Initial Public
Offering. Upon the closing of the IPO on July 22, 2014, the 2014 Note converted into 510,777 shares of common
stock in accordance with its terms.
The original estimated fair value of a certain embedded derivative was accounted for as a debt discount to the
subordinated convertible note payable on the balance sheet. The estimated fair value of the embedded derivative
liability was included in accrued and other liabilities on the balance sheets. Amortization of the debt discount was
$256,000 for the period from April 17, 2014 to July 22, 2014, when the 2014 Note was converted into common
stock. Extinguishment of the embedded derivative liability at July 22, 2014 resulted in other income of $120,000.
Secured Term Loan Facility
On January 30, 2015, the Company entered into a Loan and Security Agreement (the “Loan Agreement”) which
provides a secured term loan facility in an aggregate principal amount of up to $20.0 million. The Company
borrowed the first and only advance of $16.0 million (“Draw A”) on January 30, 2015. Draw A was used to pay-off
the Company’s existing term debt of $11.3 million. A loss on extinguishment of $0.6 million from the pay-off of the
existing term loan was recognized as interest expense for the year ended December 31, 2015. Draw A bears interest
at a daily floating rate equal to 2.00%, plus the greater of (i) 3.25% or (ii) the prime rate published by the lender.
The maturity date of the loan is December 1, 2018. Principal pay-down of the loan begins on January 1, 2016 with
the loan being payable in 36 equal installments. The principal pay-down of the loan may be delayed to July 1, 2016
with the loan being payable in 30 equal monthly installments, if on December 31, 2015, the Company has achieved
certain net product revenue milestones as described in the Loan Agreement. As of December 31, 2015, the Company
was in compliance with its net product revenue milestones, which allows the Company to pay only the interest
incurred on a monthly basis until June 30, 2016 and begin the principal pay-down on July 1, 2016.
A fully non-refundable commitment fee of $160,000 was paid on January 30, 2015 when Draw A for $16.0 million
was received. The loan has no prepayment penalty. Commitment fees are included in debt issuance costs which are
amortized to interest expense using the effective interest method over the term of the loan. Debt discount and
issuance costs, current, as of December 31, 2015 and 2014 were $155,000 and $76,000, respectively. Debt discount
and issuance costs, non-current, as of December 31, 2015 and 2014 were $149,000 and $11,000, respectively. The
debt discount and issuance costs are reported in the balance sheet as a direct reduction from the carrying amount of
the debt liability.
104
In connection with the Loan Agreement, the Company agreed to issue to the lender a detachable warrant to purchase
shares of the Company’s common stock upon the drawdown of each advance in an amount equal to 1.5% of the
amount drawn, divided by the exercise price per share for that tranche. The fair value of the warrant is reflected as a
discount to the debt. As a result of Draw A, the Company issued to the lender a warrant to purchase an aggregate of
34,483 shares of the Company’s common stock, at an exercise price of $6.96 per share. The fair value of the warrant
was estimated to be approximately $90,000 on January 30, 2015, using the Black-Scholes Model with the following
assumptions: expected volatility of 39.83%, a contractual term of 5 years, risk-free interest rate of 1.18%, underlying
common stock price of $7.06, and dividend yield of 0%. The warrant is included in stockholders’ equity with the
offset to debt discount that is amortized over the term of the loan using the effective interest method. The warrant is
not subject to remeasurement.
The Loan Agreement requires collateral by a security interest in all of the Company’s assets except intellectual
property and contains customary affirmative and negative covenants including financial maintenance covenants, and
also includes standard events of default, including payment defaults. Upon the occurrence of an event of default, a
default interest rate of an additional 5% may be applied to the outstanding loan balances, and the lender may declare
all outstanding obligations immediately due and payable and take such other actions as set forth in the Loan
Agreement. At December 31, 2015, the Company was in compliance with all loan covenants.
Aggregate annual payments, net of interest, at December 31, 2015 due on the Loan Agreement are as follows (in
thousands):
Year ending December 31:
2016 ................................................................................ $
2017 ................................................................................
2018 ................................................................................
Less: debt discount and issuance costs ...........................
Less: current portion, net of debt discount
and issuance costs ........................................................
Long-term portion, net of debt discount
and issuance costs ........................................................ $
Annual
Payments
3,021
6,309
6,670
16,000
(304 )
15,696
(2,866 )
12,830
10. WARRANTS
At December 31, 2015, outstanding common stock warrants consisted of:
Original
Term
Exercise
Price
Number of
Shares
Underlying
Warrants
Original issue date:
July 2006................................................................
November 2006 .....................................................
February 2008 ........................................................
August 2009 ...........................................................
July 2010................................................................
January 2015 ..........................................................
10 years $
10 years $
10 years $
10 years $
9 years $
5 years $
31.72
31.72
35.07
21.78
21.78
6.96
17,656
1,576
22,792
33,472
6,694
34,483
116,673
105
11. STOCK INCENTIVE PLANS
Stock Option Plans
Prior to its IPO in July 2014, the Company had one active stock option plan, the 2008 Equity Incentive Plan (“2008
Plan”), one assumed stock option plan (the ImmuMetrix 2013 Equity Incentive Plan) and one terminated stock
option plan, the 1998 Stock Plan.
Upon its IPO, the Company reserved 838,695 shares of common stock for issuance under a new 2014 Equity
Incentive Plan (“2014 Plan”). The shares reserved for issuance under the 2014 Plan also include shares returned to
the 2008 Plan as the result of expiration or termination of options, provided that the maximum number of shares that
may be added to the 2014 Plan thereby is limited to a maximum of 865,252 shares. The number of shares available
for issuance under the 2014 Plan will also include an annual increase on the first day of each year beginning in 2014,
equal to the least of:
(cid:120)
(cid:120)
(cid:120)
357,075 shares;
4.0% of the outstanding shares of common stock as of the last day of the immediately preceding year; or
such other number of shares as the Company’s board of directors may determine.
Stock Options
The following table summarizes option activity under the plans, and related information:
Shares
Available
for Grant
Stock
Options
Outstanding
619,906 $
Balance—December 31, 2012..................................... 180,266
4,081
(4,081)
Granted ........................................................................
(212 )
—
Exercised .....................................................................
(7,247 )
7,247
Forfeited ......................................................................
(149,563 )
Expired ........................................................................ 149,563
466,965
Balance—December 31, 2013..................................... 332,995
Additional options authorized ..................................... 940,884
—
Granted ........................................................................ (585,345) 585,345
—
23,229
Assumed in business combination ..............................
—
Exercised .....................................................................
(9,363 )
(20,591 )
20,591
Forfeited ......................................................................
(13,781 )
13,781
Expired ........................................................................
1,031,804
Balance—December 31, 2014..................................... 722,906
Additional options authorized ..................................... 357,075
—
Granted ........................................................................ (652,078) 652,078
—
(23,576 )
Exercised .....................................................................
(77,660 )
77,660
Forfeited ......................................................................
Expired ........................................................................
(5,329 )
5,329
1,577,317
Balance—December 31, 2015..................................... 510,892
Weighted-
average
Exercise
Price
2.67
0.48
0.55
2.33
4.73
1.99
—
11.76
2.06
2.14
10.36
2.74
7.36
—
6.09
1.94
8.13
10.36
6.87
The total intrinsic value of options exercised was approximately $89,000 during 2015.
106
Outstanding, exercisable and vested stock options as of December 31, 2015 are summarized as follows:
Options Outstanding & Exercisable at December 31, 2015 (cid:3) Options Vested at December 31, 2015
Range of(cid:3)
Exercise Prices
$0.27 - 0.56 .............................
$2.05 - 3.06 .............................
$3.36 - 6.98 .............................
$7.03 - 12.44 ...........................
Number of
Options
Outstanding
193,581
135,656
716,157
531,923
1,577,317
Weighted
Average
Remaining
Contractual
Life (Years)
Weighted
Average
Exercise
Price
Number of
Options
Weighted
Average
Exercise
Price
$
6.80
5.88
8.28
8.38
7.92
0.55
2.83
5.68
11.80
6.87
166,699 $
135,656
127,859
249,779
679,993
0.55
2.83
3.84
11.79
5.75
Options outstanding that have vested and are expected to vest at December 31, 2015 are as follows:
Vested ........................................................................ 679,993 $
Expected to Vest ........................................................ 897,324
Total .......................................................................... 1,577,317
5.75
7.71
6.87
Weighted
Average
Exercise
Price
Number of
Shares
Weighted(cid:3)
Average
Remaining
Contractual Life
(cid:3)(cid:3)
(Years)
6.58 $
8.95 $
7.92 $
Aggregate(cid:3)
Intrinsic
Value
(In thousands)
1,788
435
2,223
The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying stock
options and the fair value of the Company’s common stock at December 31, 2015 for stock options that were in-the-
money. The fair market value of the Company’s common stock as of December 31, 2015 was $6.40 per share.
The weighted average grant-date fair value of options to purchase common stock granted for the years ended
December 31, 2015, 2014 and 2013 using the Black-Sholes valuation model was $2.53, $4.81 and $0.21,
respectively.
The Company uses the grant date fair value of its common stock to value both employee and non-employee options
when granted. The Company revalues non-employee options each reporting period using the fair market value of the
Company’s common stock as of the last day of each reporting period.
The total fair value of options that vested during 2015 was $1.1 million. As of December 31, 2015, there was
approximately $10.2 million of unrecognized stock-based compensation, net of estimated forfeitures, related to non-
vested stock options that will be recognized on a straight-line basis over the remaining average vesting period of 2.8
years.
2014 Employee Stock Purchase Plan
The Company’s board of directors adopted its 2014 Employee Stock Purchase Plan (the “ESPP”) in March 2014 and
its stock holders approved the ESPP in July 2014. However, the Company’s ESPP was not made available to its
employees until January 1, 2015. The first offering period of the ESPP began on January 1, 2015 and ended June 30,
2015. Under the first offering period, 36,696 shares were purchased. The second offering period began July 1, 2015
and ended December 31, 2015. Under the second offering period, 32,232 shares were purchased. At December 31,
2015, the proceeds from the issuance of shares were $0.4 million and a total of 186,473 shares of the Company’s
common stock is available for sale under the ESPP.
The option price per share of common stock to be paid by a participant upon exercise of the participant’s option on
the applicable exercise date for an offering period shall be equal to 85% of the lesser of the fair market value of a
share of common stock on (a) the applicable grant date or (b) the applicable exercise date.
107
Valuation Assumptions
The Company’s board of directors determines the estimated fair value of the Company’s common stock based on
assistance from an independent third party valuation firm. The fair value of employee stock options and ESPP was
estimated using the Black-Scholes option-pricing model using the following weighted-average assumptions.
Employee Stock Options
Expected term (in years) ..........................................
Expected volatility ...................................................
Risk-free interest rate ...............................................
Expected dividend yield ...........................................
Employee Stock Purchase Plan
Expected term (in years) ..........................................
Expected volatility ...................................................
Risk-free interest rate ...............................................
Expected dividend yield ...........................................
Year Ended December 31,
2015
2014
2013
6.0
41.17%
1.84%
—%
0.5
39.10 –
44.15%
0.11%
—%
5.1
42.18 %
1.69 %
— %
6.0
45.25%
1.21%
—%
—
—
—
— %
—
—
—
—%
Risk-free Interest Rate: The Company based the risk-free interest rate over the expected term of the award based on
the constant maturity rate of U. S. Treasury securities with similar maturities as of the date of grant.
Volatility: The Company used an average historical stock price volatility of comparable public companies that were
deemed to be representative of future stock price trends as the Company does not have sufficient trading history for
its common stock.
Expected Term: The expected term represents the period for which the Company’s stock-based awards are expected
to be outstanding and is based on analyzing the vesting and contractual terms of the awards and the holders’
historical exercise patterns and termination behavior.
Expected Dividends: The Company has not paid and does not anticipate paying any dividends in the near future.
Restricted Stock Units
The Company’s 2014 Plan allows restricted stock units (“RSUs”) to be granted in addition to stock options. The
RSUs vest annually over four years in equal increments. RSUs were granted by the Company for the first time in
March 2015.
Unvested RSU activity for the year ended December 31, 2015 is summarized below:
Number of
Shares
Unvested balance at December 31, 2014.....................
Granted ........................................................................ 114,400
Vested ..........................................................................
Forfeited ......................................................................
(8,200)
Unvested balance at December 31, 2015..................... 106,200
—
—
$
Weighted-
Average
Grant Date
Fair Value
—
6.49
—
6.49
6.49
As of December 31, 2015, there was approximately $2.4 million of unrecognized stock-based compensation, net of
estimated forfeitures, related to non-vested RSUs that will be recognized on a straight-line basis over the remaining
average vesting period of 3.0 years.
108
The following table summarizes stock-based compensation expense relating to employee and nonemployee stock
options, RSUs, and ESPP for the years ended December 31, 2015, 2014 and 2013, included in the statements of
operations as follows (in thousands):
Cost of testing ............................................................. $
Research and development ..........................................
Sales and marketing ....................................................
General and administrative..........................................
$
Year Ended December 31,
2014
2013
2015
109 $
247
173
812
1,341 $
28 $
88
29
390
535 $
3
7
3
59
72
No tax benefit was recognized related to share-based compensation expense since the Company has never reported
taxable income and has established a full valuation allowance to offset all of the potential tax benefits associated
with its deferred tax assets. In addition, no amounts of share-based compensation costs were capitalized for the
periods presented.
Non-Employee Director Equity-based Compensation
For the years ended December 31, 2015 and 2014, the Company paid a portion of its non-employee directors’
compensation through the award of common shares. The stock awards are classified as equity, and compensation
expense was recognized upon the issuance of the shares. As of December 31, 2015, there was a total of 57,543
shares issued to non-employee directors, for a total fair value of $349,000. Expense associated with the awards was
$255,000 and $94,000 for the years ended December 31, 2015 and 2014, respectively, which was included in
general and administrative expense in the statements of operations.
12. INCOME TAXES
The Company generated pretax net losses of $13.7 million, $0.7 million and $3.5 million for the years ended
December 31, 2015, 2014 and 2013, respectively. The Company recorded no benefit for income taxes for 2015. For
2014, the Company recorded a federal and state deferred tax benefit of $1.5 million and $0, respectively, and no
benefit for income taxes was recorded for 2013. A reconciliation of the difference between the benefit for income
taxes and income taxes at the statutory U.S. federal income tax rate is as follows:
Year Ended December, 31,
2014
2013
2015
Federal tax at statutory rate ........................................
Stock-based compensation .........................................
Change in valuation allowance ..................................
Change in unrecognized tax benefits..........................
Preferred stock warrant revaluation ...........................
Interest expense..........................................................
Contingent liability for IMX acquisition....................
Acquisition costs ........................................................
Other ..........................................................................
Effective income tax rate ......................................
34.0%
-1.9%
-31.1%
0.0%
0.0%
0.0%
0.0%
-3.2%
2.2%
0.0%
34.0 %
-9.5 %
190.6 %
0.0 %
-0.7 %
-5.8 %
38.2 %
-36.7 %
-1.3 %
208.8 %
34.0 %
-11.4 %
-8.6 %
-8.4 %
-5.0 %
0.0 %
0.0 %
0.0 %
-0.6 %
0.0 %
In connection with the Company’s June 2014 acquisition of ImmuMetrix, Inc. (“IMX”), a tax benefit of $1.5 million
was recognized during the year ended December 31, 2014. This benefit resulted from the expectation that
amortization of the in-process technology acquired, when completed and placed in service, is not expected to be
deductible for tax purposes, as the transaction was structured as a tax-free reorganization. Accordingly, a deferred
tax liability was recorded at the acquisition date for the difference between the financial reporting and tax basis of
the acquired in-process technology. While the in-process technology is considered an indefinite lived intangible
asset, this asset is expected to be amortized or impaired prior to the expiration of net operating loss carryforwards
available to the Company. As a result of recording this deferred tax liability the company’s valuation allowance was
reduced by an equal amount.
109
The tax effects of temporary differences and carryforwards that give rise to significant deferred tax assets and
liabilities are as follows (in thousands):
As of December 31,
2014
2015
Deferred tax assets:
Net operating loss carryforwards ............................ $
Tax credit carryforwards ........................................
Accruals ..................................................................
Other .......................................................................
Gross deferred tax assets ..............................................
Deferred tax liabilities:
Property and equipment ..........................................
Purchased intangibles .............................................
Total deferred tax liabilities .........................................
Valuation allowance.....................................................
Net deferred tax assets ............................................ $
65,957 $
4,533
1,125
698
72,313
63,116
4,065
942
551
68,674
95
(2,355)
(2,260)
(70,053)
— $
(8 )
(2,349 )
(2,357 )
(66,317 )
—
The Company has recorded pretax net losses from operations since its inception. The Company believes that based
on the history of such losses and other factors, the weight of available evidence indicates that it is more likely than
not that it will not be able to realize its net deferred tax assets. Accordingly, the net deferred tax assets have been
offset by a full valuation allowance. The valuation allowance increased by $3.7 million and decreased by $1.9
million during the years ended December 31, 2015 and 2014, respectively.
As of December 31, 2015, the Company had net operating loss carryforwards of approximately $174.3 million and
$115.9 million available to reduce future taxable income, if any, for federal and state income tax purposes,
respectively. The U.S. federal net operating loss carryforwards will begin to expire in 2018 while for state purposes,
the net operating losses will begin to expire in 2016.
As of December 31, 2015, the Company had credit carryforwards of approximately $3.6 million and $4.4 million
available to reduce future taxable income, if any, for federal and California state income tax purposes, respectively.
The Federal credit carryforwards begin to expire in 2021. California credits have no expiration date.
Utilization of the Company’s net operating loss carryforwards and credits may be subject to a substantial annual
limitation due to the ownership change limitations provided by the Tax Reform Act of 1986, as amended and similar
state provisions. The annual limitation may result in the expiration of net operating losses and credits before
utilization. Based on a preliminary review of the Company’s equity transactions since inception, the Company
believes a portion of its net operating loss carryforwards may be limited due to equity financings which occurred in
2000, 2004, 2007 and 2014.
A reconciliation of the Company’s unrecognized tax benefits is as follows (in thousands):
Year Ended December 31,
2014
2015
2013
Balance at beginning of year ............................................... $ 2,054 $ 2,196 $ 1,159
Additions based on tax positions related to current
year ...................................................................................
Additions (reductions) based on tax positions
related to prior years .........................................................
860
Balance at end of year ......................................................... $ 2,431 $ 2,054 $ 2,196
(225 )
372
83
177
5
110
The unrecognized tax benefits, if recognized and in the absence of a full valuation allowance, would impact the
income tax provision by $2.0 million and $1.6 million as of December 31, 2015 and 2014, respectively. Given the
Company’s valuation allowance, the uncertain tax positions would not impact the effective tax rate.
The Company has elected to include interest and penalties as a component of tax expense. During the years ended
December 31, 2015, 2014 and 2013, the Company did not recognize accrued interest and penalties related to
unrecognized tax benefits. The Company does not anticipate a significant change in the unrecognized tax benefits
over the next twelve months.
Because the Company has not utilized any of its net operating loss carryforwards, its federal and state income tax
returns are subject to tax authority examination from inception.
13. 401(K) PLAN
The Company sponsors a 401(k) defined contribution plan covering all employees. To date, there have been no
employer contributions to the plan.
14. BUSINESS COMBINATION
On June 10, 2014, in accordance with an agreement and plan of merger, the Company acquired ImmuMetrix, Inc.
(“IMX”), a privately held development stage company working in new technologies using donor derived cell-free
donor DNA (“dd-cfDNA”) technology for the diagnosis, treatment and management of transplant rejection, immune
disorders and diseases, including the development of a new, non-invasive test designed to detect the early stages of
solid organ transplant rejection. The Company acquired all ImmunMetrix, Inc. assets associated with transplant
diagnostics, including related immune repertoire and infectious diseases. An ImmunMetrix, Inc. successor company
retained the limited assets not associated with transplant diagnostics. The acquisition was structured as a tax-free
reorganization.
The Company acquired all of the issued and outstanding capital stock of ImmuMetrix, Inc. for the total estimated
purchase price of $17.2 million consisting of $600,000 in cash; 911,364 shares of the Company’s Series G
convertible preferred stock with an estimated fair value of $14.2 million, including 23,229 shares of the Company’s
Series G convertible preferred stock with an estimated fair value of $369,000 as a result of the Company’s
assumption of ImmuMextrix, Inc. outstanding stock options; and an additional payment of 227,845 shares of
CareDx Series G convertible preferred stock if a future milestone is achieved. The Agreement provides that the
milestone will be achieved if the Company completes 2,500 commercial tests involving the measurement of dd-
cfDNA in organ transplant recipients in the United States no later than six years after the closing date of the
acquisition. All shares of Series G Preferred Stock and options to acquire Series G Preferred Stock converted into
common stock and options to acquire common stock immediately prior to the closing of the Company’s initial
public offering. The additional shares to be paid for the achievement of the milestone will also be issued in common
stock. The fair value of this contingent consideration was $2.3 million at the acquisition date and subjected to
remeasurement at the end of each reporting period. As of December 31, 2015 and 2014, the contingent consideration
fair value was $0.9 million and $1.1 million, respectively.
The intellectual property acquired includes an exclusive license from Stanford University to a patent relating to the
diagnosis of rejection in organ transplant recipients using dd-cfDNA. The license provides for the Company to pay
royalties to Stanford University on sales of the Company’s dd-cfDNA tests.
Assets acquired in the business combination consist of In-Process Technology, for which the estimated fair value
was $6.7 million at the date of acquisition, and goodwill, for which the estimated fair value was $12.0 million at the
date of acquisition.
111
The in-process technology is recorded as an indefinite-life intangible asset until it reaches technological feasibility
and will be tested for impairment in accordance with ASC 350, Intangibles-Goodwill and Other. Amortization into
earnings will begin once the research and development activities are complete and the technology is proven to work,
at which time technological feasibility will have been achieved. The Company expects that will occur at
approximately the time when revenue is first generated in the marketplace, currently estimated to be during 2017.
Amortization will be based on the estimated remaining useful life of the patent when the product is proven feasible,
estimated to be 15 years. Amortization will be recorded using the straight line method. Accordingly, at
December 31, 2014 and 2015, accumulated amortization of the in-process technology intangible asset was $0. Given
that amortization has not yet begun and technological feasibility has not yet occurred, we cannot currently estimate
amortization of the in-process technology asset during each of the next five years.
The goodwill recorded from the acquisition of ImmuMetrix, Inc. is primarily related to expected synergies.
Substantially all of the goodwill recognized is not deductible for tax purposes.
ImmuMetrix, Inc.’s post-acquisition results of operations for the period from June 11, 2014 through December 31,
2014 and for 2015 are included in the Company’s statements of operations.
Pro Forma Impact of the Acquisition of IMX
The following table presents pro forma results of operations and gives effect to the IMX transaction as if the
transaction had been consummated on January 1, 2013. The unaudited pro forma results of operations have been
prepared for comparative purposes only and are not necessarily indicative of what would have occurred had the
business combination been completed at the beginning of the period or of the results that may occur in the future.
Furthermore, the pro forma financial information does not reflect the impact of any reorganization or operating
efficiencies resulting from combining the two companies.
Year Ended December 31,
(in thousands, except per share data).
Net revenue .................................................................. $
Net loss ........................................................................ $
Net loss per common share - basic ............................... $
Net loss per common share - diluted ............................ $
2014
27,306 $
(1,080) $
(0.19) $
(0.19) $
2013
22,098
(3,768 )
(3.73 )
(3.73 )
The unaudited pro forma consolidated financial information was prepared using the acquisition method of
accounting and is based on the historical financial information of the Company and ImmuMetrix, Inc., reflecting the
Company’s and ImmuMextrix, Inc.’s results of operations for the years ended December 31, 2014 and 2013. The
historical financial information has been adjusted to give effect to the pro forma events that are: (i) directly
attributable to the acquisition, (ii) factually supportable and (iii) expected to have a continuing impact on the
combined results. The unaudited pro forma consolidated financial information reflects: (a) the removal of
acquisition-related costs of $1.7 million incurred by both CareDx and ImmuMetrix, Inc. for the year ended
December 31, 2014 including the removal of $0.2 million of ImmuMetrix, Inc. stock-based compensation expense
that resulted from modifications to options in anticipation of the acquisition; (b) the removal of a $1.5 million tax
benefit for the year ended December 31, 2014 that resulted from the acquisition; (c) the addition of salaries, benefits
and fees for ImmuMetrix, Inc. employees and consultants retained after the acquisition; and (d) the addition of the
$1.5 million acquisition-related tax benefit for the year ended December 31, 2013, as if the acquisition had occurred
on January 1, 2013 and the benefit had been recognized during the year ended December 31, 2013. Acquisition
related expenses are primarily included in general and administrative expenses.
112
15. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table presents selected unaudited consolidated financial data for each of the eight quarters in the two-
year period ended December 31, 2015. The Company believes this information reflects all recurring adjustments
necessary to fairly present this information when read in conjunction with the Company’s financial statements and
the related notes. Net (loss) income per share, basic and diluted, for the four quarters of each fiscal year may not
sum to the total for the fiscal year because of the different number of shares outstanding during each period. The
results of operations for any quarter are not necessarily indicative of the results to be expected for any future period.
Quarter Ended:
March 31
June 30
September 30 December 31
(In thousands, except share and per share data)
7,216 $
(2,272) $
(0.19) $
(0.19) $
7,151 $
(3,489 ) $
(0.29 ) $
(0.29 ) $
7,129 $
(3,185) $
(0.27) $
(0.27) $
2015
Total revenue ...................................................................... $
Net loss ............................................................................... $
Net loss per common share, basic ....................................... $
Net loss per common share, diluted .................................... $
Shares used in calculation of net loss per
share, basic ....................................................................... 11,814,467 11,835,405 11,890,057 11,902,325
Shares used in calculation of net income loss per
share, diluted .................................................................... 11,814,467 11,835,405 11,890,057 11,902,325
2014
Total revenue ...................................................................... $
Net (loss) income ................................................................ $
Net (loss) income per common share, basic ....................... $
Net (loss) income per common share, diluted ..................... $
Shares used in calculation of net (loss) income per
share, basic ....................................................................... 1,011,980 1,013,128 9,279,649 11,802,241
Shares used in calculation of net (loss) income per
share, diluted .................................................................... 1,011,980 6,939,568 11,219,377 11,802,241
5,924 $
(1,304) $
(1.29) $
(1.29) $
6,776 $
877 $
0.87 $
0.13 $
6,654 $
1,213 $
0.13 $
0.12 $
6,648
(4,761)
(0.40)
(0.40)
7,952
(5)
—
—
113
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the
effectiveness of our disclosure controls and procedures as of December 31, 2015. The term “disclosure controls and
procedures,” as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (Exchange Act)
means controls and other procedures of a company that are designed to ensure that information required to be
disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and
reported within the time periods specified in Securities and Exchange Commission rules and forms. Disclosure
controls and procedures include, without limitation, controls and procedures designed to ensure that information
required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated
and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required disclosure. Based on this evaluation, our Chief Executive
Officer and Chief Financial Officer concluded that, as of December 31, 2015, our disclosure controls and procedures
were effective as of the end of the period covered by this report.
Management’s Report on Internal Control over Financial Reporting
Management, including our Chief Executive Officer and Chief Financial Officer, is responsible for establishing and
maintaining adequate internal control over financial reporting (as such term is defined in Exchange Act Rules 13a-
159f). Our internal control system was designed to provide reasonable assurance to our management and board of
directors regarding the preparation and fair presentation of published financial statements in accordance with
accounting principles generally accepted in the United States.
Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2015. In
making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of
the Treadway Commission (“COSO”) in Internal Control—Integrated Framework (2013 Framework). Based on our
assessment we believe that, as of December 31, 2015, our internal control over financial reporting is effective based
on those criteria.
Changes in Internal Control over Financial Reporting
There were no changes to our internal control over financial reporting identified in connection with the evaluation
required by rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the quarter ended December 31,
2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial
reporting.
ITEM 9B. OTHER INFORMATION
None.
114
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this item is incorporated by reference to our Proxy Statement for our 2016 Annual
Meeting of Stockholders to be filed with the Securities and Exchange Commission within 120 days after the end of
the fiscal year ended December 31, 2015.
We have adopted a Code of Business Conduct and Ethics that applies to all of our officers and employees (including
our principal executive officer, principal financial officer, principal accounting officer or controller and other
employees who perform financial or accounting functions), agents and representatives, including our independent
directors and consultants, who are not employees of ours, with regard to their CareDx-related activities. Our code of
business conduct and ethics is available on our website at www.caredx.com under the heading “Compliance” under
the section titled “Company”. We will post on this section of our website any amendment to our code of business
conduct and ethics, as well as any waivers of our code of business conduct and ethics, that are required to be
disclosed by the rules of the SEC or the NASDAQ Stock Market.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to our Proxy Statement for our 2016 Annual
Meeting of Stockholders to be filed with the Securities and Exchange Commission within 120 days after the end of
the fiscal year ended December 31, 2015.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required by this item is incorporated by reference to our Proxy Statement for our 2016 Annual
Meeting of Stockholders to be filed with the Securities and Exchange Commission within 120 days after the end of
the fiscal year ended December 31, 2015.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE
The information required by this item is incorporated by reference to our Proxy Statement for our 2016 Annual
Meeting of Stockholders to be filed with the Securities and Exchange Commission within 120 days after the end of
the fiscal year ended December 31, 2015.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item is incorporated by reference to our Proxy Statement for our 2016 Annual
Meeting of Stockholders to be filed with the Securities and Exchange Commission within 120 days after the end of
the fiscal year ended December 31, 2015.
115
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Documents filed as part of this report are as follows:
1.
Financial Statements:
Our Financial Statements are listed in the “Index to Financial Statements” of CareDx, Inc. in Part II, Item 8 of this
Annual Report on Form 10-K.
2.
Financial Statement Schedules
All financial statement schedules have been omitted because they are not required, not applicable, or the required
information is included in the financial statements or notes thereto included in this Annual Report on Form 10-K.
3.
Exhibits
The documents listed in the Exhibit Index of this Annual Report on Form 10-K are incorporated by reference or are
filed with this report, in each case as indicated therein (numbered in accordance with Item 601 of Regulation S-K).
116
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
CAREDX, INC.
By:
/s/ PETER MAAG
Peter Maag
President and Chief Executive Officer
Date: March 28, 2016
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and
appoints Peter Maag and Ken Ludlum, and each of them, his true and lawful attorneys-in-fact, each with full power
of substitution, for him or her in any and all capacities, to sign any amendments to this Annual Report on Form 10-K
and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact or their substitute or
substitutes may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the
following persons, on behalf of the registrant on the dates and the capacities indicated.
Signature
/s/ PETER MAAG
Peter Maag
/s/ KEN LUDLUM
Ken Ludlum
Title
Chief Executive Officer, President
and Director
(Principal Executive Officer)
Date
March 28, 2016
Chief Financial Officer
(Principal Financial and Accounting Officer)
March 28, 2016
/s/ MICHAEL GOLDBERG
Michael Goldberg
/s/ GEORGE W. BICKERSTAFF
George W. Bickerstaff
/s/ BROOK BYERS
Brook Byers
/s/ FRED E. COHEN
Fred E. Cohen
/s/ RALPH SNYDERMAN
Ralph Snyderman
/s/ WILLIAM HAGSTROM
William Hagstrom
Director
Director
Director
Director
Director
Director
March 28, 2016
March 28, 2016
March 28, 2016
March 28, 2016
March 28, 2016
March 28, 2016
117
Exhibit
Number
2.1†
2.2
3.1
3.2
4.1
4.2
4.3#
4.4#
4.5#
4.6#
EXHIBIT INDEX
Description
Agreement and Plan of Merger, dated May 17, 2014,
by and between Registrant, Monitor Acquisition
Corporation, ImmuMetrix, Inc. and Mattias Westman,
as Holders’ Agent.
Amendment No. 1 to Agreement and Plan of Merger,
dated June 9, 2014, by and between the Registrant,
Monitor Acquisition Corporation, ImmuMetrix, Inc.
and Mattias Westman, as Holders’ Agent.
Amended and Restated Certificate of Incorporation of
the Registrant.
Form
Incorporated by Reference
File No.
Exhibit
Filing Date
S-1/A 333-196494 2.1
07/15/2015
S-1/A 333-196494 2.2
06/25/2014
10-Q
001-36536 3.1
08/28/2014
Amended and Restated Bylaws of the Registrant.
10-Q
001-36536 3.4
08/28/2014
Form of Registrant’s common stock certificate.
10-K
001-36536 4.1
03/31/2015
Sixth Amended and Restated Investors Rights
Agreement, dated July 1, 2009, as amended on March
29, 2012, June 10, 2014, and July 14, 2014, between
the Registrant and certain holders of the Registrant’s
capital stock named therein.
1998 Equity Incentive Plan and forms of agreements
thereunder.
2008 Equity Incentive Plan and forms of agreements
thereunder.
2014 Equity Incentive Plan and forms of agreements
thereunder.
2014 Employee Stock Purchase Plan and forms of
agreements thereunder.
4.7#
ImmuMetrix, Inc. 2013 Equity Incentive Plan
10.1#
10.2#
10.3#
10.4#
10.5#
10.6#
Chief Executive Employment Agreement, dated
September 19, 2012, by and between the Registrant
and Peter Maag.
Offer Letter, dated July 31, 2006, by and between the
Registrant and James Yee.
Offer Letter, dated July 19, 2010, by and between the
Registrant and Matthew Meyer.
Offer Letter, dated March 18, 2014, by and between
the Registrant and Ken Ludlum.
Offer Letter, dated November 21, 2006, by and
between the Registrant and Mitchell Nelles.
Form of Change of Control and Severance Agreement
between the Registrant and each of its executive
officers.
118
10-K
001-36536 4.2
03/31/2015
S-1
333-196494 10.2
06/03/2014
S-1
333-196494 10.3
06/03/2014
S-8
333-197493 4.4
07/18/2014
S-8
333-197493 4.5
07/18/2014
S-1
S-1
333-196494 10.19
06/03/2014
333-196494 10.6
06/03/2014
S-1
333-196494 10.7
06/03/2014
S-1
333-196494 10.8
06/03/2014
S-1
333-196494 10.9
06/03/2014
S-1
333-196494 10.10
06/03/2014
S-1
333-196494 10.11
06/03/2014
Exhibit
Number
10.7#
10.8
10.9†
10.10†
10.11†
10.12†
10.13
10.14#
10.15#
10.16#
10.17#
Description
Form
Incorporated by Reference
File No.
Exhibit
Filing Date
Form of Indemnification Agreement between the
Registrant and each of its directors and executive
officers.
Lease, dated April 27, 2006, as amended on November
10, 2010, by and between the Registrant and BMR-
Bayshore Boulevard LLC, for office and laboratory
space located at 3260 Bayshore Boulevard, Brisbane,
California 94005.
PCR Patent License Agreement, dated November 16,
2004, by and between the Registrant and Roche
Molecular Systems, Inc., and amendments thereto.
Distribution and Licensing Agreement, dated June 20,
2013, by and between the Registrant and Diaxonhit
SA.
Amended and Restated Exclusive Agreement, dated
January 27, 2014, by and between the Board of
Trustees of the Leland Stanford Junior University and
ImmuMetrix, Inc.
Settlement Agreement and Mutual Release, dated
September 11, 2014, by and between the Registrant
and Roche Molecular Systems, Inc.
Loan and Security Agreement, dated as of January 30,
2015, by and between CareDx, Inc. and East West
Bank.
Offer Letter, dated April 8, 2014, by and between the
Registrant and George Bickerstaff.
Offer Letter, dated October 18, 2011, by and between
the Registrant and Michael Goldberg.
Offer Letter, dated December 3, 2014, by and between
the Registrant and John Sninsky.
Offer Letter, dated March 11, 2015 by and between the
Registrant and Josh DeFonzo.
S-1
333-196494 10.1
06/03/2014
S-1
333-196494 10.12
06/03/2014
S-1
333-196494 10.14
06/03/2014
S-1/A 333-196494 10.15
06/25/2014
S-1/A 333-196494 10.17
07/15/2014
10-Q
001-36536 10.14.1
11/14/2014
8-K
001-36536 10.1
02/04/2015
10-K
001-36536 10.14
03/31/2015
10-K
001-36536 4.1
03/31/2015
10-K
001-36536 4.1
03/31/2015
10-K
001-36536 4.1
03/31/2015
10.18#
Outside Director Compensation Policy.
10-K
001-36536 4.1
03/31/2015
10.19#
Executive Incentive Compensation Plan.
10-K
001-36536 4.1
03/31/2015
10.20
10.21
10.22
Controlled Equity Offering Sales Agreement, dated
August 10, 2015, by and between the registrant and
Cantor Fitzgerald & Co.
Conditional Share Purchase Agreement between
CareDx and Midroc Invest AB, dated as of December
16, 2015.
Conditional Share Purchase Agreement between
CareDx and FastPartner AB, dated as of December 16,
2015.
S-3
333-206277 1.2
08/10/2015
8-K
001-36536 99.1
12/22/2015
8-K
001-36536 99.2
12/22/2015
119
Exhibit
Number
10.23
10.24
10.25
10.26
23.1*
24.1*
31.1*
31.2*
Description
Form
Incorporated by Reference
File No.
Exhibit
Filing Date
8-K
001-36536 99.3
12/22/2015
8-K
001-36536 99.1
02/12/2016
8-K
001-36536 99.2
02/12/2016
8-K
001-36536 99.3
02/12/2016
Conditional Share Purchase Agreement between
CareDx and Xenella Holding AB, dated as of
December 16, 2015.
Amendment to Conditional Share Purchase Agreement
between CareDx and Midroc Invest AB, dated as of
February 8, 2016.
Amendment to Conditional Share Purchase Agreement
between CareDx and FastPartner AB, dated as of
February 8, 2016.
Principal Executive Officer’s Certifications Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
Consent of Independent Registered Public Accounting
Firm
Power of Attorney (see page 117 of this Annual Report
on Form 10-K).
Principal Executive Officer’s Certifications Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
Principal Financial Officer’s Certifications Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1**
Certification Pursuant to 18 U.S.C. § 1350
(Section 906 of Sarbanes-Oxley Act of 2002).
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema
101.CAL
XBRL Taxonomy Extension Calculation Linkbase
101.DEF
XBRL Taxonomy Extension Definition Linkbase
101.LAB
XBRL Taxonomy Extension Label Linkbase
101.PRE
XBRL Taxonomy Extension Presentation Linkbase
†
#
*
**
Confidential treatment has been granted with respect to certain portions of this Exhibit.
Indicates management contract or compensatory plan or arrangement.
Filed herewith.
Furnished herewith.
120
CORPORATE INFORMATION
Executive Team
Peter Maag, PhD
Chief Executive Officer and President
James Yee, MD
Executive Vice President and
Chief Medical Officer
Matthew J. Meyer, JD
Chief Business Officer
Mitchell J. Nelles, PhD
Chief Operating Officer
Charles Constanti
Chief Financial Officer
John J. Sninsky, PhD
Chief Scientific Officer
Todd Whitson
Chief Commercial Officer
Anders Karlsson, MBA
Chief International Business Officer
Board of Directors
Peter Maag, PhD
Chief Executive Officer and President
CareDx, Inc.
Michael Goldberg, MBA
Chairman of the Board
CareDx, Inc.
Audit Committee*,
Compensation Committee
Brook Byers, MBA
Partner, Kleiner Perkins Caufield & Byers
Compensation Committee*, Nominating/
Corporate Governance Committee
Fred E. Cohen, MD, DPhil
Managing Director
TPG Ventures
Compensation Committee,
Audit Committee
Ralph Snyderman, MD
Chancellor Emeritus & James B. Duke
Professor of Medicine
Duke University
Nominating/Corporate Governance
Committee*
George W. Bickerstaff, III
Manager Director
MM Dillon & Co.
William A. Hagstrom
CEO, Octave Bioscience
Audit Committee
*Indicates Chair Person on the Committee
Annual Shareholders Meeting
June 16, 2016 at 10AM PST
3260 Bayshore Blvd,
Brisbane, CA 94005
Exchange
NASDAQ
Ticker Symbol CDNA
Transfer Agent
Computershare
PO Box 30170
College Station, TX 77842
Legal Counsel
Wilson Sonsini Goodrich & Rosati
650 Page Mill Road
Palo Alto, CA 94025
Independent Accountants
Ernst & Young, LLP
275 Shoreline Drive, Suite 600
Redwood City, CA 94065
Investor Relations
Westwicke Partners, LLC
50 California Street
San Francisco, CA 94111
Note on Forward-Looking Statements
This annual report contains forward-looking
statements within the meaning of the
federal securities laws. Results could differ
materially. Further information on factors
that could affect results is included in
the 2015 Form 10-K included in this
annual report.
CareDx, Inc
3260 Bayshore Blvd
Brisbane, CA 94005
Tel 415.287.2300
Fax 415.287.2450
WWW.CAREDX.COM
SKU: 001CSN20B8
2015 Annual Report