2017 Annual Report
Dear Stockholders,
CareDx continues to be at the forefront of precision medicine for transplant patients.
In 2017, our company experienced significant growth and our revenues increased to
$48.3 million.
Last year was a banner year for the CareDx team, with Medicare reimbursement for
AlloSure and subsequent commercial
launch in the fourth quarter. Based on the
insights we have generated over the years working in the transplant field, we have
developed the AlloSure Routine Testing Schedule to meet the surveillance needs of
kidney transplant patients and have outlined with the KOAR trial a unique way to
potentially increase standardization in post-transplant care.
In 2017, we provided the 100,000th AlloMap patient result. AlloMap has become a
standard in many transplant centers in the United States and is a great foundational
product for CareDx. We also have made great progress with the integration of the
pre-transplant business. With our pre-transplantation revenues growing to
$14.6 million, the acquisition of sequence based typing technology and the launch of
Olerup QTYPE, we look forward to increasing our global presence in transplant
centers.
As you can see when reading through the attached annual report, we have also made
great strides in simplifying our balance sheet.
Thank you to all the employees and stockholders of CareDx. I look forward to your
continued partnership as we drive profitable growth along the pre-transplant and post-
transplant patient journey.
With Best Wishes,
Peter Maag
President & CEO
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
⌧ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2017
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OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
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 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:5) No ⌧
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:5) No ⌧
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 ⌧ No (cid:4)
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 ⌧ No (cid:4)
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:5)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an
emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth
company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer (cid:4)
Non-accelerated filer (cid:4) (Do not check if a smaller reporting company)
Accelerated filer
(cid:4)
Smaller reporting company⌧
Emerging growth company⌧
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new
or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ⌧
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes (cid:5) No ⌧
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, 2017 as reported by the Nasdaq Global Market on such date was approximately $19,496,286. 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 March 16, 2018 was 29,074,603.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s Proxy Statement relating to the 2018 Annual Meeting of Stockholders, are incorporated by reference into Part III of this Annual
Report on Form 10-K where indicated. Such Proxy Statement, or an amendment to this Annual Report on Form 10-K, will be filed with the Securities and
Exchange Commission within 120 days after the end of the registrant’s fiscal year ended December 31, 2017.
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 .................................................................................................
Item 16. Form 10-K Summary ...............................................................................................................................
Exhibit Index ..........................................................................................................................................................
Signatures ...............................................................................................................................................................
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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:
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our ability to generate revenue from sales of AlloMap®, AlloSure® and future post-transplant
solutions, if any, and our ability to increase the commercial success of these post-transplant solutions;
our ability to generate revenue from sales of Olerup SSP®, Olerup SBTTM, QTYPETM, XM-ONE®, and
future pre-transplant products, if any, and our ability to increase the commercial success of these pre-
transplant products;
our plans and ability to develop and commercialize new solutions for the surveillance of heart, kidney,
and other solid organ transplant recipients;
our plans and ability to continue updating our sequence specific primer products and technology to
maintain our leading position in the SSP market;
our plans and ability to develop, commercialize, and/or distribute new Human Leukocyte Antigen
typing, and possibly Next Generation Sequencing technology and pre-transplant solutions;
our ability to obtain additional financing on terms favorable to us, or at all;
our ability to regain eligibility to use Registration Statements on Form S-3 for capital-raising
transactions;
our ability to obtain, maintain and expand reimbursement coverage from payers for AlloMap, AlloSure
and other future solutions, if any;
the clinical adoption and use of AlloSure, if at all; as well as the establishment of a protocol for regular
AlloSure testing, if at all;
the outcome or success of our clinical trial collaborations and observational studies;
our dependence on certain of our suppliers, service providers and other distribution partners;
our compliance with federal, state and foreign regulatory requirements;
the favorable review of our pre- and post-transplant offerings, 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;
our ability to meet our obligations under our equity financing agreements, debt agreements and deferred
purchase price commitments;
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 team;
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our ability to make successful acquisitions or investments and to manage the integration of such
acquisitions or investments;
our ability to successfully defend against or settle any litigation brought against us or other legal matters
or disputes;
our ability to expand internationally;
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.
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 Securities and Exchange Commission, or 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.
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ITEM 1. BUSINESS
Company Overview
PART I
We are a global transplant diagnostics company with product offerings along the pre- and post-transplant
continuum. We focus on discovery, development and commercialization of clinically differentiated, high-value
diagnostic surveillance solutions for transplant patients. In post-transplant diagnostics, we offer AlloMap®, which
is a heart transplant molecular test, and in October 2017 we launched AlloSure®, which is a donor-derived cell free
DNA, or “dd-cfDNA” test initially used for kidney transplant patients. In pre-transplant diagnostics, we offer high
quality products that increase the chance of successful transplants by facilitating a better match between a donor and
a recipient of stem cells and organs.
AlloMap
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-to-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 avoid the use of unnecessary, invasive surveillance biopsies and determine the appropriate dosage levels
of immunosuppressants. 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.
AlloMap has received positive coverage decisions for reimbursement from Medicare. The 2017 reimbursement rate
for AlloMap was $2,841. Effective January 1, 2018, the reimbursement rate for AlloMap is $3,240, which
represents a 14% increase over the 2017 reimbursement rate. AlloMap has also received positive coverage decisions
from many of the largest U.S. private payers, including Aetna, Anthem, Cigna, Health Care Services Corporation
(HCSC), Humana, Kaiser Foundation Health Plan, Inc. and TRICARE.
Since the launch of AlloMap in January 2005, we have performed more than 107,000 commercial AlloMap tests,
including 15,312 tests during 2017, in our Brisbane, California laboratory. Since the commercial launch of AlloMap
through December 31, 2017, we have received net proceeds of approximately $219.6 million from AlloMap testing
revenues.
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 (Deng, M. et al., Am J Transplantation 2006), 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.
AlloSure
AlloSure, our recently launched commercial transplant surveillance solution for kidney transplant recipients, applies
proprietary next generation sequencing to measure dd-cfDNA in the blood stream emanating from the donor kidney.
We believe AlloSure may help clinicians determine rejection-specific activity manifested as cell damage in the
transplanted organ. We also believe the use of AlloSure, in conjunction with other clinical indicators, can help
healthcare providers and their patients better manage long-term care following a kidney transplant. In particular, we
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believe AlloSure can improve patient care by helping healthcare providers to reduce the use of invasive biopsies and
determine the appropriate dosage levels of immunosuppressants. Effective October 9, 2017, AlloSure became
available for commercial testing with Medicare coverage and reimbursement. The Medicare reimbursement rate for
AlloSure is $2,841. AlloSure has also received payment from private payers on a case-by-case basis, but no positive
coverage decisions have been made.
Prior to the commercialization of AlloSure, we generated a strong body of clinical evidence. In late 2015, we
announced the completion of analytical validation of AlloSure. Samples used in the analytical validation included
donor recipient pairs with unrelated donors, as well as closely related family members. A report describing the
analytical validation of AlloSure including clinical validation information for heart transplant, appeared in the
November 2016 issue of The Journal of Molecular Diagnostics.
In May 2015, we initiated the dd-cfDNA in Blood for Diagnosing Acute Rejection in Kidney Transplant Recipients,
or DART, trial. The first publication of results from the DART trial in March 2017 described the validation of
clinical performance characteristics of dd-cfDNA in detecting rejection in kidney allograft recipients. DART is a
multicenter observational study of kidney transplant recipients where blood specimens are drawn during surveillance
follow-up visits periodically after transplant and also at the time of clinically suspected acute rejection. Patients will
be followed in DART for up to 24 months. We completed the first analysis of the data from DART in June 2016.
By the time of the first analysis, over 400 patients had enrolled in DART in 14 centers and we had collected
specimens from over 1,260 patient visits. As of December 2017, we had approximately 2,100 patient visits. The
data analyses demonstrated that increased levels of dd-cfDNA, determined by the AlloSure assay, discriminated
active rejection more effectively than serum creatinine values. In collaboration with clinical investigators, we
published these findings in the scientific peer-reviewed Journal of the American Society of Nephrology and the
Journal Applied Laboratory Medicine in March 2017.
In late 2017, we established the Kidney Allograft Outcomes AlloSure Registry, or KOAR, study to develop further
data on the clinical utility of AlloSure for surveillance of kidney transplant recipients. We will invite 35 centers to
join KOAR, and anticipate staggered activation of these study centers throughout 2018.
Pre-Transplant Diagnostics
With the acquisition of CareDx International AB, formerly Allenex AB, or Allenex, on April 14, 2016, we develop,
manufacture, market and sell products that increase the chance of successful transplants by facilitating a better
match between a donor and a recipient of stem cells and organs. Olerup SSP is used to type Human Leukocyte
Antigen, or HLA alleles based on sequence-specific primer, or SSP technology. With the acquisition of the business
assets of Conexio Genomics Pty Ltd, or Conexio, on January 20, 2017, we now offer a complete product range for
sequence-based typing, or SBT, of HLA alleles. Olerup SBT is a test kit for sequence based HLA typing, while
Assign SBTTM is the companion software for sequence analysis. In 2014, Allenex began active development of a
new HLA typing product, Olerup QTYPE, which uses real-time polymerase chain reaction or, PCR, methodology.
QTYPE was commercially launched at the end of September 2016. We also offer XM-ONE®, a standardized test
that identifies a patient’s antigens against HLA Class I or Class II, as well as antibodies against a donor’s
endothelium. This cross-match test is primarily used prior to kidney transplants.
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., and 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 most recently 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 IMX, a privately held development-stage company focused 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 IMX included
an exclusive license from Board of Trustees of the Leland Stanford Junior University, or Stanford, to a patent
relating to the diagnosis of rejection in organ transplant recipients using dd-cfDNA.
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On April 14, 2016, we acquired 98.3% of the outstanding common stock of Allenex. Our combination with Allenex
created an international transplant diagnostics company with product offerings along the pre and post-transplant
continuum. As a result of the acquisition we now have a presence and direct distribution channels in the U.S. and
Europe, with additional third party distributors in Europe and other markets around the world. On March 15, 2018,
we purchased the remaining 1.7% of outstanding common stock of Allenex.
On January 20, 2017, we acquired the business assets of Conexio to offer a complete product range for SBT of HLA
alleles.
As of December 31, 2017, substantially all of our testing and product revenues came from the United States and
Europe, and substantially all of our assets and operations were located in the United States, Sweden and Australia.
We are organized and operate in two reportable segments: Post-Transplant Diagnostics and Pre-Transplant
Diagnostics. Sales and other financial information by geographic area is provided in Note 16 of the consolidated
financial statements included elsewhere in this Annual Report on Form 10-K.
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. The estimated U.S. average 2017 charges
for a heart transplant is $1.38 million and for a kidney transplant is $0.41 million for the period 30 days before the
transplant and 180 days after the transplant. The lifetime cost for transplant recipients varies significantly depending
on each individual patients circumstances. Unsuccessful treatment of rejection can result in an additional transplant.
In the case of a kidney transplant, the median annual Medicare cost of care for a recipient whose kidney fails and is
on dialysis is 500% more than the median annual cost of care for a recipient with a functioning transplant.
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 in the recipient’s neck and threaded into the right ventricle of the heart. Four pieces of tissue are cut from
the wall of the heart and sent to the laboratory for examination by a pathologist who uses a microscope to look for
evidence of cellular rejection. Limitations of biopsies include: (i) the pathologist evaluations, which are subjective and
dependent upon visual assessment and qualitative interpretation, (ii) tissue sampling errors, and (iii) the potential for
procedure related complications such as damage to the valve structures in the heart. The typical schedule of biopsy
surveillance may involve eight to ten biopsies within the first six months after transplant and up to fifteen biopsies
within the first year post-transplant. Because repeated biopsies can cause cumulative risk and trauma to the heart, the
frequency of biopsy surveillance after one year is 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 similarly limited due to the costs and risks
associated with the invasive procedure. Therefore, the main clinical test of transplanted kidney surveillance is
serum creatinine levels. An increase in serum creatinine levels is an indicator of diminished kidney function, and
although this test is widely used, changes in serum are nonspecific as to cause and not sensitive, as serum creatinine
may only be detected after significant and irreversible renal function loss has occurred.
The prevention and treatment 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 procedural
risks, discomfort, inconvenience, expense and the low rate of finding silent 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 immune status of the
individual recipient often causes clinicians to adopt 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
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rate of rejection in the transplant population as a whole, many individuals may receive more intense
immunosuppressants than they actually need.
The Need for a Better Surveillance Solution
Improved post-transplant diagnostics are necessary to achieve further gains in the long-term care and health
outcomes of heart, kidney and other organ transplant recipients. 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:
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highly accurate and quantitative results differentiating rejection from non-rejection status;
non-invasive procedure that do not create risks to the recipient;
ease of implementation;
earlier detection of rejection; and
the ability to provide results with timing and at a frequency that allows for informed and effective
treatment decisions.
Our Products and Services
Post-Transplant
We develop and provide a diagnostic surveillance testing solution for heart and kidney transplant recipients.
Our initial test, AlloMap, is designed to help health care providers and their patients to better manage long-term
care, avoid the use of invasive surveillance biopsies and determine the appropriate dosage levels of
immumosuppressants. The AlloMap test uses a sample of the patient’s blood. 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 we aim to return AlloMap results to the clinician within three business days after the blood
draw.
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 of 20 genes, as measured by specific RNA levels. Of the 20 genes, 11 are informative
and 9 are for quality control. The algorithm 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 International Society for Heart & Lung Transplantation, or 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 that we have sponsored, the results of which have been published
in leading peer-reviewed medical journals.
Through December 31, 2017, we have performed more than 107,000 total commercial AlloMap tests. We estimate
that there are approximately 141 centers performing heart transplants in the United States. In 2017, 125 of these
centers used AlloMap.
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When 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 service we offer 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 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 reduced
immunosuppression. A high AMV may indicate a higher risk of future events, which suggests 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, or CARGO II, study included data which demonstrated that AMV may be useful in estimating the
probability of future adverse events, such as death, re-transplantation or graft failure in heart transplant recipients
who were undergoing surveillance with AlloMap testing more than 315 days following transplantation.
AlloSure, our recently launched commercial transplant surveillance solution, applies proprietary next generation
sequencing to measure dd-cfDNA in the blood stream emanating from the donor kidney or heart. We believe
AlloSure may help clinicians determine rejection-specific activity manifested as cell damage in the transplanted
heart, kidney and other solid organs. We also believe the use of AlloSure, in conjunction with other clinical
indicators, can help healthcare providers and their patients better manage long-term care following a kidney
transplant. In particular, we believe AlloSure can improve patient care by helping healthcare providers to reduce the
use of invasive biopsies and to determine the appropriate dosage levels of immunosuppressants.
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 are 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. In addition to preserving blood samples and clinical data from these two trials, we have
sponsored a multi-year, 34 multicenter-registry, which focuses on long-term outcomes of patients. We expect these
samples and data to enable further discovery and product development of new biomarkers of organ rejection
activity, and new diagnostic solutions. These repositories contain over 37,000 samples obtained from individual
recipients who were typically followed for 10 serial visits and over one year or more, and who in many cases have
associated biopsy-based rejection grades and other clinical outcome endpoints. We believe this extensive
biorepository and database will be useful for new product development derived from analyses, correlative studies
and validation efforts.
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 reports of retrospective analyses from IMAGE and CARGO II trials that demonstrate
that the variability in AlloMap scores over time in an individual patient may be useful in predicting the risk for the
patient of a future event of rejection and graft dysfunction.
In March 2017, the Journal of the American Society of Nephrology published the article Cell-Free DNA and Active
Rejection in Kidney Allografts. The article reports that increased levels of dd-cfDNA detected using AlloSure are
associated with active rejection of the kidney allograft. The DART study evidence suggests that AlloSure, a non-
invasive blood test, may enable more frequent, quantitative, and safer assessment of allograft rejection and injury.
As part of a surveillance strategy, AlloSure could help identify patients with ongoing organ injury. In the DART
study, to investigate the use of AlloSure as a surveillance tool, the investigators prospectively collected blood
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specimens from renal transplant patients at scheduled intervals and at the time of clinically indicated biopsies. Key
findings of the study were as follows:
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AlloSure provides clear stratification of patients for probability of rejection;
Active rejection patients showed median AlloSure levels at 1.6%;
Antibody- mediated rejection, or ABMR, patients showed median AlloSure levels at 2.9%;
Non-rejection patients showed median AlloSure levels of 0.21%; and
AlloSure was superior to serum creatinine in identifying which patients had active rejection.
This is the first report to establish clinical performance characteristics for dd-cfDNA in renal transplant patients with
an analytically validated assay of dd-cfDNA in the largest (N =398 patients) prospective, multicenter observational
study of dd-cfDNA. Elevations in AlloSure were found to be strongly correlated with active rejection, especially
ABMR. ABMR is increasingly recognized as the form of immune-mediated injury causing long-term graft loss.
This progress was made possible by collaboration with 14 major renal transplant centers and their patients who
volunteered to participate in the study.
A publication in the Journal of Applied Laboratory Medicine in March 2017 described the biological variation and
clinical reference intervals of dd-cfDNA in stable healthy renal transplant recipients.
The AlloSure test has been approved for Medicare coverage for clinical use when a physician determines there is a
need to assess the probability of allograft rejection in kidney transplant recipients. The DART study suggests that
AlloSure can be used to discriminate active rejection in a renal transplant recipient. Use of the test may reduce
invasive percutaneous renal biopsy procedures among patients with a suspicion of rejection.
Publications based on the analyses of the accumulated DART database results were used as a guide to design
KOAR. KOAR is a multicenter, non-blinded, prospective observational cohort study of approximately 1,000
AlloSure patients to create a testing registry, including 300 patients at centers with planned renal surveillance
biopsies at 12 months post-transplantation. The other 700 patients will be from centers that do not perform protocol
surveillance biopsies. Outcomes in this sub-cohort, which represents the majority of the intended use population in
the U.S., will be compared to the outcomes of the test and control cohorts.
A matched control cohort of 300 patients will be retrospectively selected from the subset of centers providing the
test cohort patients who have planned surveillance biopsies at 12 months post-transplantation. The primary safety
endpoint of this study is the amount of kidney tissue scarring and atrophy at one-year post-transplant, quantified by
biopsy-based histopathology grade(s). The primary efficacy endpoint is the number of renal allograft biopsies
performed during the first year. Outcomes will include patient survival, graft survival, serum creatinine and
estimated glomerular filtration rate, evaluated at years 1, 2 and 3 post-transplantation.
Pre-Transplant
Through the Allenex acquisition, we also develop, manufacture, market and sell products that increase the chance of
successful transplants by facilitating a better match between a donor and a recipient of stem cells and organs. The
Olerup branded pre-transplant products, include SSP, QTYPE, Gamma-Type, and SBT for HLA typing, and our
cross-match test XM-ONE. The HLA genes are encoded on chromosome 6 and are involved in self- versus non-self-
recognition. The SSP product line is used to type HLA alleles. These products are among the market leaders, and
have long been a well-established brand name.
The SSP product line comprises products for low to high-resolution HLA typing. The product line includes close to
400 different typing products, covering the approximately 17,331 different HLA alleles (gene variants) that have
been identified to date. New HLA alleles are identified frequently and the typing kits are routinely updated for new
alleles. SCORE6, our custom developed software simplifies interpretation and documentation of laboratory results.
We offer one of the most up-to-date and comprehensive libraries of HLA typing kits based on SSP technology.
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In 2014, Allenex began active development of a new HLA typing product, QTYPE. QTYPE was commercially
launched at the end of September 2016 for use on a limited range of instrument platforms, and will be available on a
broader range of instrument platforms during 2018. QTYPE uses real time PCR methodology, and is based on SSP
technology.
QTYPE will primarily focus on low- to intermediate resolution typing where high-resolution typing is not a
requirement but even more rapid typing results are required, such as for deceased donor typing. When transplanting
organs from deceased donors it is of great importance to be able to expediently carry out HLA typing to find an
appropriate recipient. Typing with QTYPE requires approximately one hour compared to the up to 2-3 hours that it
takes to do traditional SSP typing and the 5-7 hours that it takes with sequence-specific oligonucleotides, or SSO.
QTYPE comes with custom software, SCORE6. Clinical trials for CE marking of the pre-transplant QTYPE
product are expected to commence in 2018.
SBT is a sequence-based typing product for HLA alleles that uses specifically designed software, Assign SBT, a
sequence analysis software program that provides high resolution HLA typing.
GammaType types an additional region in the HLA locus and provides additional resolution beyond other HLA
typing kits, particularly for hematopoietic stem cell transplantation.
XM-ONE is the first standardized test that quickly identifies a patient’s antibodies against HLA Class I or Class II,
as well as antibodies against a donor’s endothelium. This cross-match test has primarily been used prior to kidney
transplants, and more recent clinical trials have further demonstrated its value as a complement to traditional
antibody testing prior to other types of transplants. The cross-match test XM-ONE is primarily used prior to kidney
transplantation to detect non-HLA antibodies against the donor’s endothelia, the lining of the organ’s cavities. Prior
studies indicate that XM-ONE is a good complement to traditional antibody testing prior to kidney transplantation.
Research and Development
Our research and development activities focus on developing cutting edge organ transplant surveillance solutions,
further expanding on our pre-transplant matching solutions and seeking to continuously explore and develop new
clinically-relevant approaches to our products. Clinical operations dedicated to the design and implementation of
high quality studies and registries for data collection to develop evidence to address unmet clinical needs of
transplant recipients are included in research and development. Our ongoing efforts include:
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defining the clinical utility and protocol of AlloSure for kidney transplant patients;
increased understanding of biological processes of transplant rejection through analysis of
genes/metagenes of archived clinical trials, OAR registry and commercial laboratory testing to further
improve clinical utility of AlloMap and AMV;
validation studies of AlloSure for other organs such as heart, lung and liver;
technology platform and procedure optimization as well as further advances of laboratory information
management to increase efficiency and lower costs in our testing and laboratory operations;
technology platform development to increase efficiency and lower costs in our testing and laboratory
operations;
updating SSP and QTYPE products for newly identified HLA alleles;
further development of QTYPE to expand its addressable market;
demonstrating QTYPE performance on additional real time PCR instruments;
investigating genetic alterations associated with the development of cancer in transplant patients who
are at increased risk for malignancies because of chronic immunosuppression;
merging and analyzing internal and public clinical data sets to better understand factors that impact
short and long term outcomes;
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designing a multi-stakeholder transplant innovation ecosystem to accelerate improved patient
management; and
integrating real world data to confirm and extend results from other clinical data sets.
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, study design and data integration in developing future solutions.
Our research and development expenses for the years ended December 31, 2017, 2016 and 2015 were $12.4 million,
$12.4 million and $9.3 million, respectively.
dd-cfDNA for Kidney Transplants
Our recently completed DART clinical study has established the clinical validity of a dd-cfDNA-based solution for
kidney transplant patients, AlloSure. This is the first report to establish clinical performance characteristics for this
emerging molecular biomarker in renal transplant patients with a now validated assay of dd-cfDNA in the largest (N
=398 patients) prospective, multicenter observational study of dd-cfDNA. The study population is representative of
the spectrum renal transplant recipients in the United States. Elevations in AlloSure were found to be strongly
correlated with active rejection, especially with ABMR. ABMR is increasingly recognized as the form of immune-
mediated injury causing long-term graft loss.
KOAR is the next step planned in the further development of data to support the clinical utility of AlloSure. The
CMS Medicare Administrative Contractor (MAC), Palmetto (MolDX), in October 2017, recommended Medicare
Coverage for AlloSure which is contingent on this further data development. The KOAR study commenced in
January 2018. KOAR is a 1, 2 and 3 year post-transplant clinical outcomes study in patients managed with AlloSure
surveillance compared to another 300 patients who will serve as a comparative control group managed without
AlloSure.
dd-cfDNA for Heart Transplants
We believe that the AlloSure dd-cfDNA-based solution could provide additional value to AlloMap testing for
clinicians caring for heart transplant patients, particularly in situations where a recipient’s AlloMap score suggests a
probability of acute rejection. Studies have reported that a higher percentage of dd-cfDNA in the blood stream of
patients is found with moderate or severe heart rejection compared to patients without rejection. We believe a dd-
cfDNA solution such as AlloSure for the heart could help clinicians identify recipients with a higher probability of
rejection and help determine which patients warrant a subsequent biopsy, because the likelihood of detecting
rejection in the biopsy specimen would be substantially enhanced.
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 an LDT for a limited number of heart transplant centers
and physicians as part of our Utility of Donor-Derived Cell-Free DNA in Association with Gene-Expression
profiling (AlloMap) in Heart Transplant Recipients, or D-OAR, 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
and supporting an investigator-initiated study in heart patients at risk for ABMR.
Pre-Transplant Product Advancement and Development
Ongoing research and development in the pre-transplant arena encompasses four areas. First, the last decade of next
generation sequencing has unveiled significant additional sequence diversity in the HLA region on chromosome 6 of
the human genome. While the clinical impact of some of the sequence diversity is unclear, many newly identified
HLA alleles need to be integrated into ongoing updates of the Olerup SSP and QTYPE kits. We have been updating,
and intend to continue to update, our HLA typing kits with newly identified alleles. SSP and QTYPE use technology
platforms that can readily accommodate this increase in HLA allele assays.
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Second, depending on the specific indication, different levels of HLA typing resolution and follow up confirmatory
testing are required. SSP and QTYPE flexible platforms are complemented with SBT, and our research and
development staff weave together the three typing product offerings to effectively address laboratory needs.
Third, the complexity of the HLA region benefits significantly from interpretive software solutions for the
laboratories. We are committed to ongoing upgrades to our software solutions to further simplify the use of the
various HLA kits.
Finally, our research and development staff in pre- and post-transplant settings is working closely together to
advance the synergies of products across the pre- and post-transplant continuum.
Reimbursement
We have been successful in achieving reimbursement for our post-transplant solutions. The reimbursement process
can take six months or more to complete depending on the payer.
Reimbursement for AlloMap comes primarily from Medicare, private third party payers such as insurance
companies and managed care organizations, Medicaid and hospitals. Reimbursement for AlloSure comes primarily
from Medicare. 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 payment through the particular payer’s appeal process.
Following the assignment of a Category 1 Current Procedural Terminology, or CPT code, for AlloMap in September
2015, CMS, issued a proposed Clinical Laboratory Fee Schedule, or CLFS, Preliminary Determinations for calendar
year 2016. In October 2016, CMS reversed its preliminary gapfill determination for the 2017 CLFS and restored the
final pricing determinations for AlloMap in the 2017 CLFS to $2,821. The Protecting Access to Medicare Act of
2014, or PAMA, includes a substantial new payment system for clinical laboratory tests under the CLFS. Under
PAMA, laboratories that receive the majority of their Medicare revenues from payments made under the CLFS
would report initially and then on a subsequent three-year basis thereafter (or annually for advanced diagnostic
laboratory tests, or ADLTs), private payer payment rates and volumes for their tests. CMS will use the rates and
volumes reported by laboratories to develop Medicare payment rates for the tests equal to the volume-weighted
median of the private payer payment rates for the tests. On November 20, 2017, Medicare released the final 2018
CLFS. Effective January 1, 2018, Medicare reimburses $3,240 for AlloMap testing of Medicare beneficiaries,
which represents a 14% increase over the 2017 reimbursement rate. Effective October 9, 2017, AlloSure is
reimbursed for kidney transplant patients covered by Medicare. The Medicare reimbursement rate for AlloSure is
$2,841.
Medicare
We are reimbursed by Medicare for AlloMap and AlloSure tests performed on patients covered by Medicare. Tests
performed on patients covered by Medicare represented 30%, 34% and 36% of all tests in 2017, 2016 and 2015,
respectively. Approximately 27%, 44% and 50% of all testing revenue was derived from Medicare for the years
ended December 31, 2017, 2016 and 2015, respectively.
Private Payers and Medicaid Payers
We are reimbursed for a substantial portion of the AlloMap tests we perform on patients covered by private payers.
Coverage policies approving AlloMap for reimbursement have been adopted by many of the largest private payers,
including Aetna, Anthem, Cigna, Health Care Services (HCSC), Humana, Kaiser Foundation Health Plan, Inc., and
TRICARE. Many other payers have positive coverage policies for AlloMap. With private payers and Medicaid
payers that have not yet adopted positive coverage policies for AlloMap, we obtain reimbursement from those
payers on a case-by-case basis for a significant portion of claims.
As of yet, no private payers or Medicaid payers have adopted positive coverage policies for AlloSure. As a result,
we obtain reimbursement from those payers on a case-by-case basis.
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International
Our pre-transplant products have a broad international presence. We sell directly to customers in the United States,
Germany, the Nordic Region, Benelux, Austria, Slovenia and Australia. We also sell through third-party
distributors and sub-distributors throughout the rest of Europe, Asia, Africa, Canada and Central and South America.
In 2013, we initiated a commercial agreement with Diaxonhit, a leader in specialty in-vitro diagnostics for
transplantation, infectious diseases and cancer. The agreement carries a 10-year term and grants Diaxonhit exclusive
rights to promote AlloMap in Europe. 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 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 Diaxonhit, and second, through royalties on Diaxonhit’s net earnings from sales of AlloMap.
Diaxonhit pays royalties to us as a percentage of the net earnings from 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 ($408,000) and Diaxonhit’s publicly traded common stock with a value at the time of €387,000 following
execution of the agreement. Through Diaxonhit, we have also secured a dedicated laboratory, the Strasbourg
University Hospital Central Immunology Laboratory, or HUS, in France.
Testing and Laboratory Operations
Our laboratory operations are headquartered at our Brisbane, California laboratory, which is certified under the
Clinical Laboratory Improvement Amendments of 1988, or CLIA, and where we perform all AlloMap and AlloSure
laboratory testing. We believe that our laboratory capacity will be adequate to meet demand for AlloMap and
AlloSure for the next few years.
When a clinician orders AlloMap, 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 is tested in triplicate and results are reported to the ordering clinician by fax or electronically via
WebPortal within two 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.
When AlloSure is ordered by a clinician, a blood samples is drawn and sent overnight at ambient temperature to our
laboratory. Cell-free DNA is purified from the plasma and the amount derived from the organ transplant is
determined as an overall percentage of dd-cfDNA. Results are reported to the ordering clinician by fax or
electronically within WebPortal within three days of receipt of the sample.
We rely solely on certain suppliers to provide some of the laboratory instruments and key reagents that we use to
perform AlloMap and AlloSure testing. These sole source suppliers include Thermo Fisher Scientific, which
supplies us with instruments, laboratory reagents, a master mix formula and consumables; Fluidigm, which supplies
us with instruments, laboratory reagents and consumables; Illumina, which supplies us with instruments, laboratory
reagents and consumables; Becton, Dickinson, and Streck which supplies us with cell preparation tubes; and
Therapak, which supplies us with a proprietary buffer reagent. One of the reagents supplied to us by Therapak is, in
turn, obtained by Therapak from Qiagen N.V. and is a proprietary formulation of Qiagen N.V.
Through our European commercial partner, Diaxonhit, 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. We completed the technology transfer in January 2016, and patient samples can now
be tested at HUS.
Manufacturing
We have historically purchased many of the components and raw materials used in our pre-transplant test kits from
numerous suppliers worldwide. For reasons of quality assurance, sole source availability or cost effectiveness,
certain components and critical raw materials used in the manufacture of our products are available only from one
supplier. We have worked closely with our suppliers to develop alternate backup plans to assure continuity of supply
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while maintaining high quality and reliability, and in some cases, we have established long-term supply contracts
with our suppliers. Due to the high standards and FDA requirements applicable to the manufacturing of our
products, we may not be able to quickly establish additional or replacement sources for certain components or
materials. In the event that we are unable to obtain sufficient quantities of raw materials or components on
commercially reasonable terms or in a timely manner, our ability to manufacture our products on a timely and cost-
competitive basis may be compromised, which may have a material adverse effect on our business, financial
condition and results of operations.
Our manufacturing facility at our principal European executive offices located in Stadshagen, Stockholm, Sweden is
used to support the production, packaging and labeling of our proprietary Olerup brand test kits: Olerup SSP, XM-
One, and QTYPE. The facility is certified to Quality Management System, or QMS, to standards ISO 9001:2008,
ISO 13485: 2012 and the Canadian Medical Devices Conformity Assessment System, or CMDCAS, for Medical
Devices. These standards include a special set of requirements specifically related to the supply of medical devices
and related services. ISO is an internationally recognized standard for QMSx. Recertification is required every three
years and we have been successfully recertified since obtaining our original ISO certification. Additionally, we seek
to manufacture to current Good Manufacturing Practice requirements and our QMS is implemented in accordance
with FDA Quality System Regulations.
Our manufacturing facility in Fremantle, Australia, is used to support the production, packaging and labeling of our
proprietary Olerup SBT brand kits. SBT is manufactured and sold within Australia and transferred to Stockholm for
further distribution to Europe, Asia, Africa and the Americas.
Sales and Marketing
Post-Transplant Sales and Marketing Team
CareDx has a direct field team in the United States that interacts with all aspects of the post-transplantation channel,
including sales, marketing, medical science liaison, managed care, and patient care management representatives. As
of December 31, 2017, our sales and marketing team consisted of 27 employees.
Our marketing strategy focuses on the clinical benefits of AlloMap and AlloSure, and the scientific validation that
supports our tests. Our strategy includes education to clinicians and the care team at transplant centers, assistance
with scheduling ordered tests for patients, and working with centers to adopt formal protocols.
Pre-Transplant Sales and Marketing Team
The pre-transplant business has sales offices in Vienna, Austria; Stockholm, Sweden; West Chester Pennsylvania,
United States; and Fremantle, Australia, which manage direct sales to customers and sales through third-party
distributors. As of December 31, 2017, the sales and marketing team consisted of 21 employees, including sales,
marketing, brand managers, and customer service representatives.
Competition
Because of our comprehensive portfolio of pre-transplant HLA typing products and post-transplant surveillance
diagnostic test services, we face many different types of competition.
Post-Transplant
Our competition principally includes clinical reference labs and hospital labs using existing and routine clinical
chemistry tests. We believe the principal competitive factors in our target markets include:
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quality and strength of clinical and analytical validation data;
confidence in diagnostic results;
technical performance and innovation to deliver new products that provide clinically actionable results;
reputation among customers as a provider of high value diagnostic tests and diagnostic test services;
the extent of reimbursement;
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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, while existing diagnostic methods 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 tests 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.
We 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 that may directly
or indirectly compete with AlloMap, AlloSure or our development pipeline. In addition, companies that have not
historically focused on transplantation, but have knowledge of dd-cfDNA technology, have indicated they are
considering this market.
Pre-Transplant
Our competitors within the pre-transplant HLA tissue typing markets comprise a diverse range of manufacturers
servicing hospital and commercial reference testing laboratories. The market leader in HLA typing and third party
distributors is Thermo Fisher through its acquisition of transplant-focused companies One Lambda and Life
Technologies. In certain HLA tissue typing markets that incorporate a wide variety of technology test platforms,
such as SSP, SBT, SSO and emerging next generation sequencing, competitors include Illumina, Protrans, GenDx,
Bio-Rad Laboratories, and Immucor. We also face competition from hospital and commercial reference labs that
develop their own in-house testing solutions known in the diagnostics industry as “home brews”. We believe that
our Olerup brand product line competes favorably with One Lambda and Life Technologies as a leading supplier of
HLA test kits based on performance, reputation and service.
Overall Competition
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. Other competitors may
develop products with prices lower than ours that could be viewed by clinicians and payers as functionally
equivalent to our solution, offer solutions that may be more accurate or effective than our solutions 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 agreements 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 data science discovery and protection of gene expression patterns
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and their correlation with specific clinical states and outcomes, as well as the algorithms needed for clinical
assessment.
As of December 31, 2017, we had 23 issued U.S. patents related to transplant rejection and autoimmunity. We have
five issued U.S. patents covering methods of diagnosing transplant rejection that use all 11 informative genes
measured in AlloMap. The expiration dates of these patents range from 2021 to 2024. We have five additional
patents covering additional genes or gene variants for diagnosing transplant rejection. 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 IMX, we obtained an exclusive license from Stanford 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. A second patent included in the license from Stanford was issued in December
2017 and further covers the use of dd-cfDNA to diagnose and predict transplant status or outcome. As part of our
April 2016 acquisition of Allenex, we obtained an additional five U.S. patents on donor matching technology and
treatment for antibody mediated transplant rejection. We have six issued U.S. 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.
We have developed trade secrets and know-how since our inception. These trade secrets and know-how are found
particularly in technical areas such as optimized systems for making precise and reproducible quantitative
polymerase chain reaction, or q-PCR, measurements, and in the analysis of genomic data and algorithm
development.
AlloMap, AlloSure, Olerup SSP, XM-ONE and CareDx are registered trademarks of ours in the United States.
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 and AlloSure tests 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, as amended
from time to time, the Roche License. The Roche License grants us the right to use PCR and q-PCR for use in
clinical laboratory services. The Roche License is a non-exclusive license agreement in the United States covering
the claims in multiple Roche patents. Under the terms of the Roche License, we were 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 30, 2017, pursuant to a
Settlement Agreement and Mutual Release, dated September 11, 2014. Effective September 30, 2017, no royalties
are incurred by us under the Roche License.
In June 2014, we entered into an amended and restated license agreement with 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 Stanford license, 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. The
license maintenance fee may be offset against earned royalty payments due on net sales in that year.
Regulation
Clinical Laboratory Improvement Amendments of 1988
Having a clinical laboratory in California, we are required to hold certain federal, state and local licenses,
certifications and permits to conduct our business. Under the 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
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administration, quality systems, proficiency testing and performance. Almost all clinical laboratories are subject to
regulation under the CLIA, which is designed to ensure that laboratory testing services performed on materials
derived from the human body are accurate and reliable.
We have a certificate of accreditation under the 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. We were inspected as part of the
customary College of American Pathologists audit in 2016 and recertified under the CLIA as a result of passing that
inspection.
California Laboratory Licensing
In addition to federal certification requirements of laboratories under the 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 in California.
Other States’ Laboratory Testing
Other states require out-of-state laboratories that accept specimens for testing 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 FDA 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. These regulations apply to all of our products sold in the United States, as well as our facilities in
Stockholm, Sweden used to produce some of our products. The FDA has also asserted that it has the authority to
regulate 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 the CLIA, such as ours, have demonstrated expertise and ability in test procedures and analysis. 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 AlloSure and other 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 subsequent to commercialization. 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, and there can be no 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, or HHS, has issued regulations to protect the privacy and security of protected health
information and standardize data content, codes and formats used in healthcare transactions and the standardized
identifiers used by healthcare providers, such as us, and health plans.
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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, or 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 the Stark Law and PORA. However, we cannot be certain that regulators would find these
arrangements to be in compliance with the Stark Law, PORA or similar state laws.
Sanctions for a violation of the Stark Law include the following:
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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
prohibitions.
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, or collectively, the Affordable Care
Act, was enacted in the United States. 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.
There have been recent public announcements by members of the U.S. Congress and President Trump and his
administration regarding their plans to repeal and replace the Affordable Care Act. We cannot predict the ultimate
form or timing of any repeal or replacement of the Affordable Care Act or the effect such repeal or replacement
would have on our business.
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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.
Federal False Claims Act
The False Claims Act’s “whistleblower” or “qui tam” provisions 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 laws 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.
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, off-label promotion of products, 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. Our
future activities relating to billing, compliance with the 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.
Foreign Jurisdictions
Laws and regulations outside of the United States also apply to our products. The number and scope of these
requirements continues to grow, and there can be no assurance that we will be able to maintain any approvals that
may be required to market our pre-transplant line of products outside the United States. Further, there may be
significant expense and effort required to comply with these approvals for new products as they become ready for
the commercial marketplace or for our existing products that we wish to sell abroad.
We currently produce products, which are CE labeled and subject to the In Vitro Diagnostic Medical Devices
Directive (98/79/EC), or IVDD, a European Union, or EU, Directive. Some of our products are currently labeled by
self-declaration based on their intended use or certified by a Notified Body for Compliance of the IVDD
requirements. A product that is not CE marked is automatically considered to be non-compliant. Appointed national
enforcement agencies monitor the market for violations and imported products are checked for compliance at
customs offices.
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No in vitro device or accessory may be placed on the market or put into service unless it satisfies the essential
requirements set forth in the IVDD. Devices considered to meet the essential requirements must bear the CE
marking of conformity, placed by the manufacturer, when introduced on the market. A manufacturer placing devices
on the market in its name must notify its national competent authorities.
Our pre-transplant products also comply with the CMDCAS, which is a system designed to implement Canadian
regulations requiring some medical devices be designed and manufactured under a registered QMS. The SCC and
Health Canada's Therapeutic Products Directorate developed this system. CMDCAS came into effect January 1,
2003.
Employees
At December 31, 2017, we had 179 employees, of which 169 were full-time employees. We had 60 employees in
manufacturing operations and support, 34 in research and development; 48 in sales and marketing and 37 in general
and administrative positions. As of December 31, 2017, 118 employees were located in the United States and 61
were located outside of the United States.
From time to time, we also employ independent contractors, consultants and temporary employees to support our
operations. Currently, none of our employees are represented by a union or 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, or 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. In addition, we could 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 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 on official business days during the hours of 10 a.m. to 3 p.m. 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.
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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 may continue to incur additional losses for the
next several years. For the year ended December 31, 2017, our net loss was $55.5 million. As of December 31,
2017, we had an accumulated deficit of $268.0 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:
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researching, developing, validating and commercializing potential new diagnostic solutions, including
additional expenses in connection with our continuing development and commercialization of AlloSure
and other future solutions;
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 fully integrating acquired companies and operations 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 our existing and future solutions;
employment of additional clinical, quality control, scientific, customer service, laboratory, billing and
reimbursement and management personnel;
compliance with existing and changing laws, regulations and standards, including those relating to
corporate governance and public disclosure and regulations implemented by the SEC and The Nasdaq
Stock Market LLC;
employment of operational, financial, accounting and information systems personnel, consistent with
expanding our operations and our status as a public company; and
failure to achieve expected operating results may cause a future impairment of goodwill or other assets.
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 or even continue to
operate. 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 may require additional financing.
As of December 31, 2017, we had cash and cash equivalents of $16.9 million and an accumulated deficit of $268.0
million. On March 1, 2018, we signed a binding commitment letter, or the Commitment Letter, with Perceptive
Credit Holdings II, LP, or Perceptive, pursuant to which, subject to the conditions set forth therein, Perceptive
committed to provide the Company with a term loan of up to $35.0 million, subject to funding in two tranches, or
the New Term Loan. Refer to Note 18 of the notes to the consolidated financial statements included in Part II, Item
8 of this Annual Report on Form 10K for additional details on the New Term Loan.
Following this funding, we believe our existing cash and cash equivalents, and expected revenues, will be sufficient
to meet our anticipated cash requirements for at least the next 12 months.
Even with the completion of the New Term Loan, we may require future additional financing to fund working
capital, repay or restructure debt and pay our obligations as they come due. Additional financing might include one
or more offerings and one or more of a combination of equity securities, debt arrangements or collaborations.
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However, there can be no assurance that we will be successful in acquiring additional funding at levels sufficient to
fund our operations or on terms favorable to us. 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, restrictions on the issuance
of securities under the regulations implemented by the SEC and The Nasdaq Stock Market LLC and current stock
valuation. 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 stockholders. 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, or require us to incur significant transaction fees, 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 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.
As a result of our failure to timely file our Annual Report on Form 10-K for the year ended December 31, 2016
and our Quarterly Report on Form 10-Q for the quarter ended March 31, 2017, we are currently ineligible to file
new short form registration statements on Form S-3, and we are unable to access our existing Registration
Statement on Form S-3 for sales of securities by us, which may impair our ability to raise capital on terms
favorable to us, in a timely manner or at all.
Form S-3 permits eligible issuers to conduct registered offerings using a short form registration statement that
allows the issuer to incorporate by reference its past and future filings and reports made under the Securities
Exchange Act of 1934, as amended, or the Exchange Act. In addition, Form S-3 enables eligible issuers to conduct
primary offerings “off the shelf” under Rule 415 of the Securities Act of 1933, as amended, or the Securities Act.
The shelf registration process, combined with the ability to forward incorporate information, allows issuers to avoid
delays and interruptions in the offering process and to access the capital markets in a more expeditious and efficient
manner than raising capital in a standard registered offering pursuant to a Registration Statement on Form S-1. The
ability to register securities for resale may also be limited as a result of the loss of Form S-3 eligibility.
As a result of our failure to timely file our Annual Report on Form 10-K for year ended December 31, 2016, and our
Quarterly Report on Form 10-Q for the quarter ended March 31, 2017, we are currently ineligible to file new short
form registration statements on Form S-3 and we are unable to conduct “off the shelf” offerings under Rule 415 of
the Securities Act using our currently effective Registration Statement on Form S-3 (File No. 333-206277). In
addition, if we seek to access the capital markets through a registered offering during the period of time that we are
unable to use Form S-3, we may be required to publicly disclose the proposed offering and the material terms
thereof before the offering commences, we may experience delays in the offering process due to SEC review of a
Form S-1 registration statement and we may incur increased offering and transaction costs and other considerations.
Disclosing a public offering prior to the formal commencement of an offering may result in downward pressure on
our stock price. In addition, our inability to conduct an offering “off the shelf” may require us to offer terms that
may not be advantageous (or may be less advantageous) to us or may generally reduce our ability to raise capital in a
registered offering. If we are unable to raise capital through a registered offering, we would be required to conduct
our financing transactions on a private placement basis, which may be subject to pricing, size and other limitations
imposed under the rules of The Nasdaq Stock Market LLC.
Assuming we continue to timely file our required Exchange Act reports, the earliest we would regain the ability to
use Form S-3 is June 1, 2018.
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We receive a substantial portion of our revenues from Medicare, and the loss of, or a significant reduction in,
reimbursement from Medicare would severely and adversely affect our financial performance.
For the year ended December 31, 2017, revenue from Medicare for AlloMap and AlloSure represented 40% of post-
transplant testing revenue. 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.
On June 10, 2016, CMS announced the proposed changes in reimbursement for a number of established molecular
diagnostic tests, including AlloMap. Under the gapfill reimbursement rate for 2017, AlloMap reimbursement for
patients covered by Medicare would have been reduced from $2,821 to $1,921, effective January 1, 2017. This
reimbursement rate, determined by gapfill submissions from the Medicare contractors, was open to reconsideration
until October 31, 2016. We submitted a request for reconsideration of the reimbursement rate determined by the
MACs and in November 2016 CMS released the final 2017 Clinical Laboratory Fee Schedule, or CLFS, reflecting
the rate of reimbursement for AlloMap at $2,841, an increase of $20 compared to the 2016 fee schedule.
The Protecting Access to Medicare Act of 2014, or PAMA includes a substantial new payment system for clinical
laboratory tests under the CLFS. Under PAMA, laboratories that receive the majority of their Medicare revenues
from payments made under the CLFS would report initially and then on a subsequent three-year basis thereafter (or
annually for advanced diagnostic laboratory tests, or ADLTs), private payer payment rates and volumes for their
tests. The final PAMA ruling was issued June 17, 2016 indicating that data for reporting for the new PAMA process
will begin in 2017, and the new market based rates will take effect January 1, 2018. CMS will use the rates and
volumes reported by laboratories to develop Medicare payment rates for the tests equal to the volume-weighted
median of the private payer payment rates for the tests. Effective January 1, 2018, under PAMA, the reimbursement
rate for AlloMap is $3,240 for Medicare beneficiaries, which represents a 14% increase over the 2017
reimbursement rate.
On September 26, 2017, we announced that the Molecular Diagnostic Services, or MolDx, Program developed by
Palmetto GBA has set AlloSure reimbursement at $2,841. AlloSure began to be reimbursed for kidney transplants
covered by Medicare across the United States on October 9, 2017, the effective date of the Palmetto local coverage
determination, or LCD.
However, if an AlloMap or AlloSure reimbursement rate that is significantly lower than the current rate is published
in the CLFS in the future, it could cause us to discontinue AlloMap or AlloSure testing for Medicare patients
because providing tests at a substantially lowered reimbursement rate may not be economically viable. Given the
significant portion of payments represented by Medicare, our remaining test revenue may be insufficient to sustain
our operations.
If future reimbursement levels are less than the current price, our revenues and our ability to achieve profitability
could be impaired, and the market price of our common stock could decline. We may also not be able to maintain or
increase the portion of our tests reimbursed by Medicare for a variety of other reasons, including changes in
reimbursement practices and general policy shifts.
On a five-year rotational basis, Medicare requests bids for its regional MAC services. 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 or AlloSure 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 and AlloSure could
impact the coverage or payment amount for our tests 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 tests would have a significant
adverse effect on our revenue and results of operations and ability to operate and raise capital. Any such decision
could also cause affected clinicians treating Medicare covered patients to reduce or discontinue the use of our tests.
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Our financial results currently are largely dependent on sales of post-transplant tests, AlloMap and AlloSure,
and Olerup products for pre-transplant matching, and we will need to generate sufficient revenues from these
and other solutions and tests we develop to grow our business.
We expect that sales of AlloMap, AlloSure and Olerup products will account for a substantial portion of our revenue
for at least the next two years. If we are unable to increase sales of AlloMap, AlloSure, or Olerup products or
successfully develop and commercialize other solutions, tests or enhancements, our revenues and ability to achieve
profitability would be impaired, and the market price of our common stock could decline.
We could become subject to legal proceedings that could be time consuming, result in costly litigation and
settlements/judgments, require significant amounts of management attention and result in the diversion of
significant operational resources, which could adversely affect our business, financial condition and results of
operations.
We have in the past been, and from time to time in the future may become, involved in lawsuits, claims and
proceedings incident to the ordinary course of or otherwise in connection with our business. Litigation is inherently
unpredictable. It is possible that an adverse result in one or more of these possible future events could have a
material adverse effect on us including increased expenses to defend, settle or resolve such litigation.
The development and commercialization of additional diagnostic solutions are key to our growth strategy. New
test or product 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. We cannot be sure that we will be able to successfully complete development of or commercialize any of
our planned future or recently launched 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:
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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;
gain acceptance from ordering laboratories associated with 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:
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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.
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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.
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
be certain 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.
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 that could make AlloMap, AlloSure, Olerup products
and our solutions in development outdated. We must continually innovate and expand our test offerings to address
unmet needs in monitoring transplant related conditions and in pre-transplant testing. AlloMap, AlloSure, Olerup
products and our solutions in 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,
AlloSure, Olerup products and future diagnostic solutions and tests, if any, compared to new methodologies and
technologies, then sales of our solutions and tests could decline, which would harm our business and financial
results.
If clinicians, hospital administrators, medical centers and laboratories 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, administrators and laboratory directors
about AlloMap, AlloSure, the Olerup product line and, subject to their development, our other solutions, and
demonstrate the clinical and diagnostic benefits of these solutions and products. We believe that clinicians,
transplant centers and laboratories may not use our solutions unless they determine, based on published peer-
reviewed journal articles, the experience of other clinicians or laboratory verification, that our solutions provide
accurate, reliable and cost-effective information that is useful in pre-transplant matching and monitoring their post-
transplant recipients.
We estimate that there are approximately 141 centers managing heart transplant recipients in the United States. In
2017, AlloMap was used in 125 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
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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.
We estimate that there are approximately 265 centers managing kidney transplant recipients in the United States.
After the commercial launch of AlloSure on October 9, 2017, AlloSure was used in 32 of these centers during the
remainder of 2017. In order for AlloSure sales to grow, we must continue on our plan to market and educate
clinicians and administrators at the treatment centers that have used our test to spread awareness of its effectiveness
in creating better long-term care plans for kidney transplant patients.
Our pre-transplant tests are sold to hundreds of laboratories mainly in Europe and the U.S. Laboratories order pre-
transplant testing products based on the accuracy, speed and cost of the test together with the cost and availability of
equipment on which to run the test. Switching to or adopting our Olerup product often requires the purchase of new
and costly testing equipment. To attract new laboratory customers, the performance of our Olerup products must
provide an accuracy, speed and/or cost advantage over similar products sold by our competitors.
If clinicians, hospital administrators and laboratories do not adopt and continue to use AlloMap, AlloSure, Olerup
products or our future solutions and tests, our business and financial results will suffer.
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:
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our ability to successfully market and sell AlloMap, AlloSure and Olerup SSP products;
our ability to successfully commercialize new diagnostic solutions and tests such as AlloSure, which
was commercially launched on October 9, 2017, and QTYPE, which was commercially launched at the
end of September 2016;
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, 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 or that otherwise may affect our intellectual property position;
announcements by our competitors of new or competitive products;
regulatory or legal 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.
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If the use of AlloMap, AlloSure or any of our other solutions is not supported by studies published in peer-
reviewed scientific and medical publications, and then periodically supplemented with additional support in peer-
reviewed journals, 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 studies involving AlloMap and AlloSure 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 solutions or the technology underlying
AlloMap, AlloSure or our other solutions are very important to the commercial success of our 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, AlloSure 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.
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 and AlloSure, additional peer-reviewed publications regarding AlloSure
and 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, AlloSure 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.
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, especially the KOAR registry study, that provides evidence of the utility
of dd-cfDNA and validate AlloSure as a solution.
Transplant centers may not adopt AlloMap, AlloSure or our other 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 AlloMap 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. While biopsies are less common for
monitoring kidney transplant patients, there are transplant centers that manage patients with protocol biopsies, which
could impact AlloSure revenue. 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
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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 pre-transplant typing and post-transplant surveillance to increase as there are
numerous established and startup companies in the process of developing products and services for the transplant
market which may directly or indirectly compete with our existing pre- and post-transplant solutions, or our
development pipeline. We acquired from Allenex a well-established business with products in the field of HLA
typing. However, competition from other companies, especially those with an eye toward transitioning to more
automated typing processes, could impact our ability to maintain market share and its current margins. For example,
we launched QTYPE in September 2016 and QTYPE competes with other q-PCR products including products
offered by Thermo Fisher Scientific, Inc., or Thermo Fisher, as well as alternatives to PCR such as NGS products
offered by Illumina. In addition to businesses focused on pre-transplantation such as Thermo Fisher’s One Lambda
and Immucor, Inc.’s LIFECODES, companies who that not historically focused on transplantation, but that
possesses existing knowledge of dd-cfDNA technology have indicated they are considering this market.
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 AlloMap and
AlloSure tests, 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, AlloSure 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.
If we are unable to successfully and continually update our pre-transplant products on a timely basis, our ability
to attract and retain customers could be impaired and our competitive position could be harmed.
We operate in an environment characterized by rapid development and continuing innovation. We will need to
continue to maintain the value of our pre-transplantation offering. To compete successfully, we must continually
update our product range and produce continually updated HLA test kits. The failure to maintain the quality of our
products or inability to keep pace with this innovation could render our existing or future solutions obsolete or less
attractive to patients. Any failure to anticipate or develop new or enhanced solutions in a timely manner could result
in decreased revenue and harm to our business and prospects. If we fail to introduce new or enhanced solutions that
meet the needs of our customers, we will lose market share and our business, operating results and prospects will be
adversely affected.
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 may 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 future
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initiatives will be successful in obtaining and validating additional samples. Additionally, the process of negotiating
access to new and archived donor and 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 donor and
recipient data and tissue 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 such as
AlloSure will be limited or delayed.
If we cannot maintain existing clinical collaborations and enter into new ones, our efforts to commercialize and
develop products could be delayed.
In the past, we have entered into clinical 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 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 that 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.
If we are unable to successfully manage our growth and support demand for our tests, our business may suffer.
As the volume of the tests that we perform 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 be certain
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 and AlloSure depends, in large part, on our ability to perform AlloMap and AlloSure tests 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 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, AlloSure 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.
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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 past testing revenue growth rates may not be indicative of future growth, and we may not grow at all, and
revenue may decline.
From 2016 to 2017, our testing revenue grew from $29.7 million to $33.1 million, which represents annual growth
of 12%. In the future, our revenue may not grow at all and it may decline. We believe that our future revenue will
depend on, among other factors:
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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 AlloSure 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.
If our laboratory facility in the U.S. becomes inoperable, we will be unable to perform AlloMap, AlloSure and
future testing 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. We do not
have redundant laboratory facilities. Brisbane, California is situated on or near earthquake fault lines. Our facility
and the equipment we use to perform AlloMap and AlloSure 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, we do not
have earthquake insurance and thus coverage 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 Clinical Laboratory
Improvement Amendments of 1988, or 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
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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, AlloSure, or
future solutions following validation and other required procedures. We cannot be certain that we would be able to
find another CLIA-certified facility willing or able to adopt AlloMap, AlloSure 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.
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 patient 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.
Our ability to commercialize our post-transplant testing 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 and partially process the patient blood samples that are
analyzed in our Brisbane, California laboratory. Our business will suffer if these service providers do not support
AlloMap, AlloSure or the other solutions that we may develop. For example, these laboratories may determine that
processing the samples for our solutions requires 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:
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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, AlloSure and our pre-transplant tests or
enhancements to those tests;
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:
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the level of research and development investment required to develop our new solutions ;
costs of filing, prosecuting, defending and enforcing patent claims and other intellectual property rights;
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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 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. In the event
we become re-eligible to use a Registration Statement on Form S-3 to raise capital, any shares of common stock
issued in the at-the-market offering will result in dilution to the existing stockholders. 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.
Our debt agreements contain restrictive and financial covenants that may limit our operating flexibility.
Our existing debt agreements with JGB Collateral LLC and certain of its affiliates, or JGB, and Danske Bank A/S,
or Danske, contain certain restrictive covenants that limit our ability to merge with other companies or consummate
certain changes of control, acquire other companies, engage in new lines of business, make certain investments, pay
dividends, transfer or dispose of assets, amend certain material agreements, incur additional indebtedness or enter
into various specified transactions. We therefore may not be able to engage in any of the foregoing transactions
unless we obtain the consent of the lender or terminate our existing debt agreements. Our debt agreements also
contain certain financial covenants, including maintaining a minimum cash amount at all times, achieving
commercialization of AlloSure by a certain date, achieving certain gross profit targets for sales of our AlloMap
product, maintaining a minimum cash flow to debt service ratio and maximum leverage and solvency ratios and are
secured by substantially all of our assets. There is no guarantee that we will be able to generate sufficient cash flow
or sales to meet the financial covenants or pay the principal and interest under our debt agreements or to satisfy all
of the financial covenants. For example, as a result of our failure to file our Annual Report on Form 10-K for the
year ended December 31, 2016 by April 17, 2017, we breached our obligation under our purchase agreement with
JGB to make all required Exchange Act filings with the SEC on a timely basis. In addition, we did not file a
registration statement with the SEC registering for resale the common stock underlying the securities issued to JGB
in the financing by April 17, 2017 as required under our purchase agreement with JGB. On May 3, 2017, JGB
waived any claim under our purchase agreement with JGB with the respect to the late filing of our Annual Report on
Form 10-K for the year ended December 31, 2016 and any claim or right to receive liquidated damages for the late
filing of the registration statement. Additionally as a result of our failure to file our Quarterly Report on Form 10-Q
for the quarter ended March 31, 2017 by May 22, 2017, we again breached our obligation under our purchase
agreement with JGB to make all required Exchange Act filings with the SEC on a timely basis. Under the terms of
our agreement with JGB, an event of default shall be deemed to have occurred if there is a material breach under the
Stock Purchase Agreement with JGB, which is not cured, if possible to cure, within 15 trading days following notice
of a breach sent by JGB to us.
A quarterly debt covenant in the Term Loan Facility with Danske was violated on June 30, 2016 and September 30,
2016. We obtained waivers for these violations. We were in compliance with all debt covenants at December 31,
2016. We were not in compliance with certain covenants at March 31, 2017, June 30, 2017 and September 30,
2017. We obtained a waiver for these violations. The waiver was conditional upon, among other things, us making a
principal repayment of SEK 6,000,000 (approximately $0.7 million) by October 31, 2017. This amount was paid on
October 31, 2017. We were not in compliance at December 31, 2017. On March 1, 2018, we signed a binding
Commitment Letter with Perceptive, pursuant to which, subject to the conditions set forth therein, Perceptive
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committed to provide the Company with a term loan of up to $35.0 million, subject to funding in two tranches. The
term loan with Perceptive will also include restrictive and financial covenants that may limit our operating
flexibility. Refer to Note 18 of the notes to the consolidated financial statements included in Part II, Item 8 of this
Annual Report on Form 10-K for additional details on the New Term Loan.
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, AlloSure 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, harm our financial condition and
operating results, dilute your ownership of us and 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 to expand our existing know-how, expertise and intellectual property in other
fields, including for the development of other commercial tests. 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. 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 recent
acquisition of assets from Conexio, include:
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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;
expectations for acquired technology or research and development that prove unsuccessful;
retention of key personnel from the acquired company;
financial reporting, revenue recognition or other financial control deficiencies of or arising from the
acquired company that we do not adequately address and that cause our reported results to be incorrect
or delayed;
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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., or IMX, 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 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. Additionally, the timing of the recent acquisition of Allenex
may cause a heightened risk of any or all of the above factors, particularly in the near-term as we attempt to fully
integrate the acquired operations. 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 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 2016 we acquired 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 divert resources and management attention from other areas of our business.
Additional unanticipated costs or delays 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.
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.
Undetected errors or defects in our products could result in voluntary corrective actions or agency enforcement
actions, including recall of our products, as well as harm our reputation, decrease market acceptance of our
products and expose us to product liability or professional liability claims, which could exceed our resources.
Our products may contain undetected errors or defects that are not identified until after the products are first
introduced. Disruptions or other performance problems with our products, or the perception of disruption or
performance problems with our products, may require us to initiate a product recall, such as occurred in April 2016
with respect to one of the Olerup products, and may damage our customers’ businesses and harm our reputation. We
may also be subject to warranty and liability claims for damages related to errors or defects in our products. A
material liability claim, product recall or similar occurrence may cause us to incur significant expense, decrease
market acceptance of our products and adversely impact our business and operating results.
In addition, the marketing, sale and use of AlloMap, AlloSure and our other solutions, or activities related to our
research and clinical studies could lead to the filing of product liability claims if someone were to allege that one of
our products contained a design or manufacturing defect which resulted in the failure to adequately perform the
35
analysis for which 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 to defend, either of which could materially
harm our business or financial condition. We cannot provide assurance that our product liability insurance would
adequately protect our assets from the financial impact of defending product liability or professional liability claims
or any judgments, fines or settlement costs arising out of any such claims. In addition, any product liability claim
brought against us, with or without merit, could increase our product liability insurance rates and prevent us from
securing insurance coverage in the future at reasonable coverage levels, or at all. 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 for our post-transplant business and kits for our pre-transplant business.
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 products and 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 provide test kits and perform reliable services.
We rely solely on certain suppliers to supply some of the laboratory instruments and key reagents that we use in the
production of our products and/or in the performance of our tests. These sole source suppliers include Thermo
Fisher, which supplies us with instruments, laboratory reagents and consumables, Fluidigm Corporation, which
supplies us with instruments, laboratory reagents and consumables; Illumina, which supplies us with instruments,
laboratory reagents, 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 no relationship with or control over, Qiagen N.V. We do not have guaranteed
supply agreements with Thermo Fisher, 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 has committed to provide service and support of this instrument through 2020. We believe that there
are relatively few suppliers other than Thermo Fisher, Fluidigm Corporation, Illumina, Becton, Dickinson and
Company and Qiagen N.V. that are currently capable of supplying the instruments, reagents and other supplies
necessary for our current products and services. 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, 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, supplies or instruments that we require for our current products
and services 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 and customers who order our current products and
services rely on the continued and timely availability of our products and services. If we are unable to provide
results within a timely manner, clinicians may elect not to use our products or services in the future and our business
and operating results could be harmed.
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.
We 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-
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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 work with a 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. A data breach or loss of
data could have a material adverse effect on our operations, including the potential for material fines and business
interruption.
We face four primary risks relative to protecting 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 our 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, any of which could damage our reputation and 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.
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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 by
our acquisitions of Allenex and the Conexio business assets.
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. CareDx International currently distributes its
products direct in Germany, Austria, Slovenia, Benelux, and in the Nordic countries. CareDx International also sells,
via sub-distributors, in Canada and in significant markets in Europe such as France, Italy, UK and Turkey. We are
also distributing via sub-distributors to certain countries in Asia, the Middle East, and 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:
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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:
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uncertain or changing regulatory registration and approval processes associated with AlloMap, AlloSure
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 that 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;
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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 operating results may be adversely affected by unfavorable economic and market conditions.
Many of the countries in which we operate, including the U.S. and several of the members of the European Union,
have experienced and continue to experience uncertain economic conditions resulting from global as well as local
factors.
Our business or financial results may be adversely impacted by these uncertain economic conditions, including:
adverse changes in interest rates, foreign currency exchange rates, tax laws or tax rates; inflation; contraction in the
availability of credit in the marketplace due to legislation or other economic conditions, which may potentially
impair our ability to access the capital markets on terms acceptable to us or at all; and the effects of government
initiatives to manage economic conditions. In addition, we cannot predict how future economic conditions will
affect our critical customers, suppliers and distributors and any negative impact on our critical customers, suppliers
or distributors may also have an adverse impact on our results of operations or financial condition.
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On December 22, 2017, the Tax Cuts and Jobs Act of 2017, the Tax Act, was signed into law making significant
changes to the Internal Revenue Code. Changes include, but are not limited to, a corporate tax rate decrease from
35% to 21% effective for tax years beginning after December 31, 2017. We have calculated the impact of the Tax
Act in our year end income tax provision in accordance with our understanding of the Tax Act and guidance
available as of the date of this filing, which did not result in any additional income tax expense in the fourth quarter
of 2017. In December 2017, Staff Accounting Bulletin No. 118, or SAB 118, was issued to address the application
of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or
analyzed in reasonable detail to complete the accounting for certain income tax effects of the Tax Act. In
accordance with SAB 118, additional work may be necessary for a more detailed analysis of our deferred tax assets
and liabilities. Any subsequent adjustment to the provisional amounts will be recorded in 2018 when the analysis is
complete.
Under ASC Topic 740, Accounting for Income Taxes, the enactment of the Tax Act also requires companies to
recognize the effects of changes in tax laws and rates on deferred tax assets and liabilities and the retroactive effects
of changes in tax laws in the period in which the new legislation is enacted. Consequently, we accounted for a
provisional estimated reduction of the US deferred tax assets from $72.5 million to approximately $45.9 million,
with a corresponding decrease of $27.0 million to our valuation allowance. We expect the new law to significantly
reduce our tax rate in future periods, and our tax footnote reflects the effects of a federal tax rate reduction net of its
valuation allowance. See Note 14 of the notes to the consolidated financial statements included in Part II, Item 8 of
this Annual Report on Form 10-K for additional information. Certain provisions of the Tax Act continue to be
refined and interpreted and we will continue to assess the overall impact that the Tax Act may have on our results of
operations or financial condition. In addition, the Company is still evaluating the realizability of certain deferred tax
assets.
Beginnin in 2018, companies may be subject to global intangible low tax income (“GILTI”) which is a tax on
foreign income in excess of a deemed return on tangible assets of foreign corporations as well as the new base
erosion anti-abuse tax (“BEAT”) under the Tax Act. GILTI will be effectively taxed at a tax rate of 10.5%. Due to
the complexity of the GILTI tax rules, companies are allowed to make an accounting policy choice of either (1)
treating taxes due on future U.S. inclusions in taxable income related to GILTI as a current-period expense when
incurred or (2) factoring such amounts into a company’s measurement of its deferred taxes under the SAB 118. We
have not made an election with respect to GILTI. We will continue to review the GILTI and BEAT rules to
determine their applicability to us, and the impact that the rules may have on our results of operations of financial
condition, as the rules become effective.
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.
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.
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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. 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. In addition, the preparation
of our financial statements requires us to make estimates and assumptions that affect the reported amounts of assets
and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as
the reported revenue generated and expenses incurred during the reporting periods. Any changes or modifications to
the methodology used for determining our estimates, assumptions and forecasts could have a material adverse effect
on our business, financial condition and results of operations. Further, we were required to adopt Financial
Accounting Standards Board Accounting Standards Updates related to revenue recognition in January 2018, which
could have a material adverse effect on our financial condition and results of operations.
Risks Related to Acquisitions
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 U.S. and Europe. Allenex’s products are used to evaluate organ
transplant patients prior to their transplant procedure with 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, a 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.
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Additionally, the results from the acquisition of Allenex will be dependent on the performance of Allenex’s new
product candidate QTYPE, which was commercially launched at the end of September 2016. The development and
commercialization of QTYPE may fail for many reasons, including:
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insufficient 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;
inability for tests to perform on instruments already installed in HLA testing laboratories;
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 also may not realize the anticipated benefits of this acquisition.
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.
Charges to earnings resulting from acquisition and integration costs may materially adversely affect the market
value of our common stock following the completion of the acquisition.
As part of the acquisition of Allenex, we paid a substantial amount of cash and assumed Allenex’s debt. The
assumed indebtedness subjects us to increased fixed obligations, increased interest expense, and included 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 and the assets acquired from Conexio that were not identified
in advance, which may result in significant unanticipated costs.
Intangibles, including goodwill, acquired in connection with acquisitions may subsequently be impaired and, if
so, could increase our net accumulated deficit.
We are accounting for the business combination with Allenex under the acquisition method of accounting in
accordance with United States generally accepted accounting principles, or U.S. GAAP. The purchase price of
Allenex was allocated to the fair value of the identifiable tangible and intangible assets and liabilities that were
acquired from Allenex. The excess of the purchase price over Allenex’s net assets and intangibles was allocated to
goodwill when acquired. We determined that the decrease in our market capitalization constituted an indicator of
impairment and therefore a goodwill impairment test was completed as of March 31, 2017. Accordingly, we
recorded a goodwill impairment charge of $2.0 million as of March 31, 2017, which represented the remaining
goodwill balance in Allenex. For information about this $2.0 million charge, see Note 6 of the notes to the
consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K. We are also
accounting for the business combination with IMX in 2014 under the acquisition method of accounting. We have
$12.0 million of goodwill on our balance sheet generated in connection with our acquisition of IMX.
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Under U.S. GAAP, we are required to evaluate our goodwill and indefinite-lived intangibles for impairment when
events or changes in circumstances indicate the carrying value may not be recoverable; specifically, we are required
to evaluate whether the intangible assets and goodwill as a result of the acquisition of IMX continues to have a fair
value that meets or exceeds the amounts recorded on our balance sheet. We test goodwill and indefinite-lived
intangibles for impairment at least annually and more frequently if impairment indicators are present. 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. In connection with our annual goodwill assessment on December 1,
2017, we performed a qualitative assessment and determined that it is not likely that the fair value of the Post-
Transplant reporting unit is less than the carrying value and therefore a quantitative test to assess potential goodwill
was not necessary.
Under U.S. GAAP, we are also required to evaluate finite-lived intangible assets, which are long-lived assets, for
indicators of possible impairment at least annually and more frequently when events or changes in circumstances
indicate the carrying amount of the intangible asset may not be recoverable. Finite-lived intangible assets are
intangible assets that we are amortizing over their estimated useful lives. If recoverability is in question, we would
then compare the carrying amounts of the intangible 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 intangible asset over the asset’s fair value determined using discounted estimates of future cash
flows.
Lower than expected revenue growth, a trend of weaker than anticipated financial performance, a decline in our
market capitalization for a sustained period of time, unfavorable changes in market or economic and industry
conditions all could significantly impact our impairment analysis. If we determine an impairment exists, we may be
required to recognize further impairment charges that, if incurred, could have a material adverse effect on our
financial condition and results of operations.
Our acquisition of the assets of Conexio may not result in material benefits to our business and our development
efforts.
Through the acquisition of Conexio’s business assets, we expect to expand our sales of the SBT product line. We
purchased rights to many of the assets, such as machinery, facilities leases, know-how and the opportunity to retain
key Conexio employees to continue producing and selling the SBT line of products.
In addition, we are required to make quarterly payments to Conexio of 20% of the gross revenue from the sale of the
SBT line of products using the purchased assets up to an aggregate total of $0.7 million. We also assumed all
obligations under the lease of the Conexio facilities, and any liabilities for product warranty claims related to the
sale of these products up to $35,000.
Risks Related to Billing and Reimbursement
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:
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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.
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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. In addition, payers may refuse to ultimately make payment if their processes and requirements have not
been met on a timely basis. These billing complexities, and the resulting uncertainty in obtaining payment for
AlloMap, AlloSure and future solutions, could negatively affect our revenue, cash flows and profitability.
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 and AlloSure 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. Throughout
2017, we did not recognize revenue for test results delivered without a contract for reimbursement, or an established
coverage policy and a history of payment. These revenue recognition criteria for cash basis payers will change
effective January 1, 2018 under Accounting Standards Codification, or ASC, Topic 606, Revenue from Contracts
with Customers, or ASC 606. Revenue for AlloMap and AlloSure tests is recognized on a cash basis if the
conditions for recognizing revenue on an accrual basis are not met. For the years ended December 31, 2017 and
2016, approximately 37% of our testing revenue was recognized on a cash basis.
For new diagnostic solutions such as AlloSure, 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.
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:
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not experimental or investigational;
medically necessary;
lead to improved patient outcomes;
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 and/or sell the results of their assessments 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, AlloSure and future solutions could be limited. Payment for diagnostic
tests furnished to Medicare beneficiaries is typically made based on a fee schedule set by 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. See the risk factor above titled “We
receive a substantial portion of our revenues from Medicare, and the loss of, or a significant reduction in,
reimbursement from Medicare would severely and adversely affect our financial performance”.
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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 be certain that adequate coverage
and reimbursement for AlloMap, AlloSure 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. Coverage policies approving AlloMap have been adopted by
many of the largest private payers, including Aetna, Anthem, Cigna, Health Care Services Corporation (HCSC),
Humana, Kaiser Foundation Health Plan, Inc., and TRICARE. 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 expand and 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 and AlloSure 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 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.
Until 2016, AlloMap was billed using an unlisted CPT code, but in 2016 a new CPT Category 1 Multianalyte
Assays with Algorithmic Analyses, or MAAA, code was added that specifically describes the test. Further, pursuant
to MolDX billing requirements, the AlloMap test also has been assigned a McKesson Diagnostics Z codeTM which is
included on all Medicare claims. If in the future CMS makes a determination not to pay for this code, or for any
MAAA codes, this 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.
Healthcare reform measures could hinder or prevent the commercial success of AlloMap and AlloSure.
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 collectively, the Affordable Care
Act, substantial changes have been made and may continue to 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 provided that payments under the Medicare CLFS were to receive
a negative 1.75% annual adjustment through 2015. Although we have not been subject to such adjustment in the
past, we cannot be certain that the claims administrators will not attempt to apply this adjustment in the future.
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 that expired 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.
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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 CLFS by 2%. The
Protecting Access to Medicare Act of 2014 introduced a multi-year phase in of a new payment system for services
paid under the CLFS. Under this new system, beginning in 2017 laboratories began reporting 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 began using the reported data to set new payment
rates under the CLFS in 2018. For most tests, rates will only be adjusted every three years. 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.
There have been recent public announcements by members of the U.S. Congress and President Trump and his
administration regarding their plans to repeal and replace the Affordable Care Act. We cannot predict the ultimate
form or timing of any repeal or replacement of the Affordable Care Act or the effect such repeal or replacement
would have on our business. Regardless of the impact of any or repeal or replacement 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. 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 and AlloSure. 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, AlloSure and our future diagnostic solutions,
increase costs, divert management’s attention and adversely affect our ability to generate revenue and achieve
profitability.
Risks Related to the Healthcare Regulatory Environment
In order to operate our laboratory, we have to comply with the 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.
Licensure is also required for our laboratory under California law in order to conduct testing. 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, Pennsylvania and Rhode Island. 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.
We were inspected as part of the customary College of American Pathologists audit and recertified in 2016 and
February 2018 as a result of passing that inspection. We expect the next regular inspection under CLIA to occur in
2020. 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 or AlloSure, 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,
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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 laboratory-
developed tests, or LDTs, becomes final, we would incur substantial costs and delays associated with trying to
obtain premarket clearance or approval for those solutions.
The FDA has traditionally chosen not to exercise its authority to regulate LDTs 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 the 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 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.
While we believe that we are currently in material compliance with applicable laws and regulations relating to our
LDTs, we cannot be certain 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.
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 AlloSure and other future solutions under development as medical devices, it could
require extensive premarket clinical testing subsequent to commercialization in the case of AlloSure and/or prior to
submitting a regulatory application for commercial sales for future products not yet developed. 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. We may not be able to enter into
replacement arrangements without undue delays or considerable expenditures. 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, AlloSure and our other solutions, 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,
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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 clearance as well as changes to the
labeling. In addition, clearance 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:
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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;
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:
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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;
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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.
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. 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 Affordable Care Act became law. This law substantially
changed the way healthcare is financed by both governmental and private insurers, and contained a number of
provisions that have impacted our business and operations, including those governing enrollment in federal
healthcare programs, reimbursement changes and fraud and abuse enforcement. Further, our combination with
Allenex will also change how these provisions could impact our business.
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PAMA, includes a substantial new payment system for clinical laboratory tests under the CLFS. Under PAMA,
laboratories that receive the majority of their Medicare revenues from payments made under the CLFS would report
initially and then on a subsequent three-year basis thereafter (or annually for advanced diagnostic laboratory tests, or
ADLTs), private payer payment rates and volumes for their tests. The final PAMA ruling was issued June 17, 2016,
indicating that data for reporting for the new PAMA process will begin in 2017, and the new market based rates took
effect January 1, 2018. CMS will use the rates and volumes reported by laboratories to develop Medicare payment
rates for the tests equal to the volume-weighted median of the private payer payment rates for the tests.
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 difficult to predict specifically what effects the Affordable Care
Act 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 Related 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.
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, 2017, we had 23 issued U.S. patents related to transplant rejection and autoimmunity. 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. We have five additional
patents covering additional genes or gene variants for diagnosing transplant rejection. 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 IMX, we obtained an exclusive license from Stanford to a
U.S. patent relating to the diagnosis of rejection in organ transplant recipients using dd-cfDNA. This patent has an
expiration date of November 5, 2030. A second patent included in the license from Stanford was issued in
December 2017 and further covers the use of dd-cfDNA to diagnose and predict transplant status or outcome. As
part of our April 2016 acquisition of Allenex, we obtained an additional five U.S. patents on donor matching
technology treatment for antibody mediated transplant rejection. 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 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 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.
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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. In the Ariosa Diagnostics, Inc. v. Sequenom, Inc. (Fed. Cir. 2015) case, a federal court
recently determined 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. This has not yet had a material impact
on the operation of our business and the protection and enforcement of our intellectual property, but it may in the
future. The AIA and its implementation could still increase the uncertainties and costs surrounding the prosecution of
our patent applications and the enforcement or defense of our issued patents, all of 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
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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.
Further, 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.
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 be certain 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, AlloSure, Olerup SSP, Olerup XM-ONE, Olerup SBT, QTYPE 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
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trademark rights and prevent infringement, we may be required to file trademark claims against third parties or
initiate trademark opposition proceedings. This process 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.
Our business is dependent on licenses from third parties.
We license technology from third parties necessary to develop and commercialize our products. One of our most
significant licenses 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 IMX, we
obtained another significant license. This one is an exclusive license from Stanford University to a patent relating to
the diagnosis of rejection in organ transplant recipients using dd-cfDNA. This technology is critical to AlloSure, our
newest dd-cfDNA-based solution for solid organ recipients. 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 the share price for our common
stock. In 2017 our stock price ranged from $0.76 to $7.98 per share. Our operating results and our share price may
fluctuate from period to period due to a variety of factors, including:
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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;
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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 efficiently integrate the business of new acquisitions, such as the assets we acquired from
Conexio;
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, and in particular the market for life science companies, have experienced significant price
and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those
companies. Moreover, 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.
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.
Our common 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 this Annual Report on Form 10-K, factors that could cause fluctuations in the market price of our
common stock include the following:
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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;
entering into financing or other arrangements with rights or terms senior to the interests of common
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;
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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 16% of our common stock as of December 31, 2017.
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.
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.
We currently have an effective registration statement registering an aggregate of 8,534,261 shares of our common
stock for resale, and such shares are currently freely tradable in the public market. We have also filed an additional
registration statement registering an aggregate of 2,814,299 shares of our common stock for resale and such shares
will become freely tradable once the registration statement is declared effective. 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 Stock Market LLC 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
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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, if we fail to comply with these laws, regulations and standards, it might also be 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 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 cease 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, our Debentures and related documents
with JGB and our term loan facility with Danske prohibit us from paying dividends without the respective lender’s
prior consent, and we may in the future become subject to additional contractual restrictions on, or prohibitions
against, the payment of dividends. Our proposed term loan with Perceptive would impose similar restrictions on the
payment of dividends.
If we are unable to substantially utilize our net operating loss carryforwards, our financial results could be
harmed.
Section 382 of the U.S. Internal Revenue Code of 1986, as amended, generally limits the ability of a corporation that
undergoes an “ownership change” to utilize its net operating loss carry-forwards, or NOLs, and certain other tax
attributes against any taxable income in taxable periods after the ownership change. The amount of taxable income
in each taxable year after the ownership change that may be offset by pre-change NOLs and certain other pre-change
tax attributes is generally equal to the product of (a) the fair market value of the corporation’s outstanding shares (or,
in the case of a foreign corporation, the fair market value of items treated as connected with the conduct of a trade or
business in the United States) immediately prior to the ownership change and (b) the long-term tax exempt rate (i.e.,
a rate of interest established by the U.S. Internal Revenue Service, or IRS, that fluctuates from month to month). In
general, an “ownership change” occurs whenever the percentage of the shares of a corporation owned, directly or
indirectly, by “5-percent shareholders” (within the meaning of Section 382 of the Internal Revenue Code) increases
by more than 50 percentage points over the lowest percentage of the shares of such corporation owned, directly or
indirectly, by such “5-percent shareholders” at any time over the preceding three years.
Based on a preliminary review of our equity transactions since inception, we believe a portion of our NOLs may be
limited due to the frequent equity financings that we have completed. Utilization of our NOLs may be subject to a
substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code of
1986, as amended, and similar state provisions. 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
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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 could materially harm our stock price, exchange listing and our ability to finance our
operations.
We are required to comply with the Sarbanes-Oxley Act of 2002 and the related rules and regulations of the SEC,
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 enhanced our U.S. finance and accounting systems, procedures and controls
at the beginning of 2016 and acquired Allenex on April 14, 2016. We are continuing to implement new finance and
accounting systems as we grow our business and organization and to satisfy internal control and reporting
requirements. However, as of December 31, 2016, we identified the following four material weaknesses in our
internal control over financial reporting relating to: (i) certain areas of our financial statement close process,
specifically with respect to an incorrect classification of the deferred consideration payable to the former majority
shareholders of Allenex within our statement of cash flows following the Allenex acquisition, ensuring that our
bonus accrual and contingent liability balances were accurate, ensuring the proper application of foreign exchange
rates in our consolidation process, and ensuring the proper review of terms and conditions of a debt agreement, (ii) a
failure to design and implement transaction level or management review controls for the oversight, integration and
consolidation of the acquired entities or controls to assess the completeness and accuracy of information, including
key inputs and assumptions used by third party specialists, used in estimating the fair value of assets acquired and
liabilities assumed, (iii) a failure to properly apply the revenue recognition criteria to certain contractual
arrangements with payers, specifically with respect to controls over the proper analysis and review of the terms and
conditions of contractual arrangements and controls over the review of our aged accounts receivables, and (iv) a
failure in the design and implementation of controls over our accounting for inventory overhead absorption. We
remediated these material weaknesses as of December 31, 2017. We cannot be certain that the measures we have
taken to date or any measures we may take in response to these material weaknesses in the future will be sufficient
to remediate such material weaknesses or to avoid potential future material weaknesses. Even if we develop
effective controls, these new controls may become inadequate because of changes in conditions or the degree of
compliance with these policies or procedures may deteriorate.
The effectiveness of our controls and procedures may in the future be limited by a variety of factors, including:
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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 are unable to complete the required Section 404 assessment as to the adequacy of our internal control over
financial reporting or otherwise fail to maintain or implement effective controls and procedures for financial
reporting, we could be unable to accurately and timely report our financial position, results of operations, and cash
flows or key operating metrics, which could result in late filings of our annual and quarterly reports under the
Exchange Act, restatements of our consolidated financial statements or other corrective disclosures, a decline in our
stock price, suspension or delisting of our common stock from the Nasdaq Global Market, SEC investigations, civil
or criminal sanctions, an inability to access the capital and commercial lending markets, defaults under our debt and
other agreements or other material adverse effects on our business, reputation, results of operations, financial
condition or liquidity.
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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 General Corporation Law of the State of
Delaware 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:
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our board of directors is authorized, without prior stockholder approval, to create and issue preferred
stock which could be used to implement anti-takeover devices;
advance notice is required for director nominations or for proposals that can be acted upon at
stockholder meetings;
our board of directors is 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 is prohibited;
special meetings of the stockholders may 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 are not permitted to cumulate their votes for the election of directors; and
stockholders may 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 General
Corporation Law of the State of Delaware. 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, because we are complying with certain 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 continue to
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 stockholder approval of any golden parachute payments not previously approved.
We will continue to be an “emerging growth company” until the earlier of (i) 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
September 30th, and (ii) 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 as a result of our
reliance on these exemptions. If some investors find our common stock less attractive as a result of any choices to
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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 irrevocably elected not to avail
ourselves of this exemption from new or revised accounting standards, and therefore, we are subject to the same new
or revised accounting standards as other public companies that are not emerging growth companies.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Our headquarters are located in Brisbane, California. We lease facilities in North America, Europe, and Australia.
The following is a summary of the locations, functions and approximate square footage of those facilities as of
December 31, 2017:
Location
United States
Brisbane, California .... Corporate headquarters, research and development and clinical
Function
laboratory
West Chester,
Pennsylvania................ Sales office and distribution
Europe
Stockholm, Sweden..... European administration, research and development and clinical
laboratory
Vienna, Austria............ Sales office and distribution
Australia
Fremantle..................... Sales office and distribution, research and development and
clinical laboratory
Square Footage
46,000
6,336
23,874
1,744
2,721
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
From time to time, we may become subject to legal proceedings and claims that arise in the ordinary course of
business. Although we do not believe that any matters presently pending will have a material adverse effect,
individually or in the aggregate, on our financial position, results of operations or liquidity, legal matters and
proceedings are inherently unpredictable and subject to significant uncertainties, some of which are beyond our
control. As such, there can be no assurance that the final outcome of these matters will not materially and adversely
affect our financial position, results of operations or liquidity.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
59
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 March 2, 2018, there were approximately 132 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, 2016
First Quarter .................................................................. $
Second Quarter.............................................................. $
Third Quarter................................................................. $
Fourth Quarter............................................................... $
High
Low
6.84 $
6.08 $
5.06 $
4.08 $
4.07
4.01
3.28
2.50
Year Ended December 31, 2017
First Quarter .................................................................. $
Second Quarter.............................................................. $
Third Quarter................................................................. $
Fourth Quarter............................................................... $
High
Low
2.90 $
1.66 $
4.59 $
7.98 $
1.35
0.76
1.05
3.65
Stock Performance Graph
We are a smaller reporting company, as defined by Rule 12b-2 of the Securities Exchange Act of 1934, as amended,
and are not required to provide a performance graph.
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 outstanding debentures issued in
March 2017 restrict 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. In addition, our proposed term loan with Perceptive would impose similar
restrictions on the payment of dividends. 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.
Sales of Unregistered Securities
There were no sales of unregistered securities by us during the fourth quarter of 2017.
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.
60
Issuer Purchases of Equity Securities
There were no repurchases of equity securities by us during the fourth quarter of 2017.
ITEM 6. SELECTED CONSOLIDATED 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,
2017 and 2016 and the selected statements of operations data for each of the years ended December 31, 2017, 2016
and 2015 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 ............................................
Product revenue............................................
Collaboration and license revenue ...............
Total revenue .....................................................
Operating expenses:
$
Cost of testing ..............................................
Cost of product.............................................
Research and development...........................
Sales and marketing .....................................
General and administrative ..........................
Goodwill impairment ...................................
Change in estimated fair value of contingent
consideration .............................................
Total operating expenses ...................................
Gain (loss) from operations ...............................
Interest expense, net ..........................................
Other expense, net .............................................
Change in estimated fair value of common stock
warrant and derivative liabilities ....................
Loss before income taxes ..................................
Income tax benefit .............................................
Net income (loss)...............................................
Net loss attributable to noncontrolling
interest ............................................................
Net income (loss) attributable to CareDx, Inc. ..
Net (loss) income per share:
$
Year Ended December 31,
2017
2016
2015
2014
2013
(In thousands, except share and per share data)
33,106 $
14,634 $
584 $
48,324
12,345
9,026
12,388
12,808
18,913
1,958
1,180
68,618
(20,294)
(5,863)
(1,490)
(29,622)
(57,269)
1,709
(55,560)
29,680 $
10,715
236
40,631
10,882
10,240
12,385
11,166
20,725
13,021
(456)
77,963
(37,332)
(1,860)
(1,920)
(250)
(41,362)
1,606
(39,756)
27,881 $
—
263
28,144
25,842 $
—
1,464
27,306
21,672
—
426
22,098
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)
(78)
225
(719)
1,500
781
9,078
—
3,176
5,892
4,809
—
—
22,955
(857)
(2,149)
(13)
(523)
(3,542)
—
(3,542)
(91)
(55,469) $
(287)
(39,469) $
—
(13,707) $
—
781 $
—
(3,542)
Basic.............................................................
Diluted..........................................................
$
$
(2.38) $
(2.38) $
(2.39) $
(2.39) $
(1.16) $
(1.16) $
0.13 $
0.10 $
(3.50)
(3.50)
Shares used to compute net (loss) income per
share:
Basic.............................................................
Diluted..........................................................
23,332,503 16,496,911 11,860,885 5,815,928 1,010,795
23,332,503 16,496,911 11,860,885 9,283,001 1,010,795
61
Balance Sheet Data:
As of December 31,
2016
2017
(In thousands)
Cash and cash equivalents........................................... $
Working capital...........................................................
Total assets ..................................................................
Total debt ....................................................................
Accumulated deficit ....................................................
Total CareDx, Inc. stockholders’ (deficit) equity .......
16,895 $
(16,139)
83,565
34,059
(268,022)
(6,134)
17,258
(14,159)
76,730
23,944
(212,553)
19,482
62
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.
Overview and Recent Developments
We are a global transplant diagnostics company with product offerings along the pre- and post-transplant
continuum. We focus on discovery, development and commercialization of clinically differentiated, high-value
diagnostic surveillance solutions for transplant patients.
AlloMap
Our first commercialized post-transplant 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-to-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 avoid the use
of unnecessary, invasive surveillance biopsies and determine the appropriate dosage levels of immunosuppressants.
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.
AlloMap has received positive coverage decisions for reimbursement from Medicare. The 2017 Medicare
reimbursement rate for AlloMap was $2,841. Effective January 1, 2018, Medicare reimburses us $3,240 for
AlloMap testing of Medicare beneficiaries, which represents a 14% increase over the 2017 reimbursement rate.
AlloMap has also received positive coverage decisions for reimbursement from many of the largest U.S. private
payers, including Aetna, Anthem, Cigna, Health Care Services Corporation (HCSC), Humana, Kaiser Foundation
Health Plan, Inc., and TRICARE.
We have 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 (Deng, M. et al., Am. J. Transplantation 2006), 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.
Since the launch of AlloMap in January 2005, we have performed more than 107,000 commercial AlloMap tests,
including 15,312 tests during 2017, and we have received net proceeds of approximately $219.6 million from
AlloMap testing revenues. During the year ended December 31, 2017, AlloMap was used in 125 of the
approximately 141 heart transplant centers in the United States.
63
AlloSure
AlloSure, our recently launched commercial transplant surveillance solution for kidney transplant recipients, applies
proprietary next generation sequencing to measure dd-cfDNA in the blood stream emanating from the donor kidney.
We believe AlloSure may help clinicians determine rejection-specific activity manifested as cell damage in the
transplanted organ. We also believe the use of AlloSure, in conjunction with other clinical indicators, can help
healthcare providers and their patients better manage long-term care following a kidney transplant. In particular, we
believe AlloSure can improve patient care by helping healthcare providers to reduce the use of invasive biopsies and
determine the appropriate dosage levels of immunosuppressants. Effective October 9, 2017, AlloSure became
available for commercial testing with Medicare coverage and reimbursement. The Medicare reimbursement rate for
AlloSure is $2,841. AlloSure has also received payment from private payers on a case-by-case basis, but no positive
coverage decisions have been made.
Prior to the commercialization of AlloSure, we generated a strong body of clinical evidence. In late 2015, we
announced the completion of analytical validation of AlloSure. Samples used in the analytical validation included
donor recipient pairs with unrelated donors, as well as closely related family members. A report describing the
analytical validation of AlloSure, including clinical validation information for heart transplants, appeared in the
November 2016 issue of The Journal of Molecular Diagnostics.
In May 2015, we initiated the dd-cfDNA in Blood for Diagnosing Acute Rejection in Kidney Transplant Recipients,
or DART, trial. The first publication of results from the DART trial in March 2017 described the validation of
clinical performance characteristics of dd-cfDNA in detecting rejection in kidney allograft recipients. DART is a
multicenter observational study of kidney transplant recipients where blood specimens are drawn during surveillance
follow-up visits periodically after transplant and also at the time of clinically suspected acute rejection. Patients in
DART will be followed for up to 24 months. We completed the first analysis of the data from DART in June 2016.
By the time of the first analysis, over 400 patients had enrolled in DART in 14 centers and we had collected
specimens from over 1,260 patient visits. As of December 2017, we had approximately 2,100 patient visits. The
data analyses demonstrated that increased levels of dd-cfDNA, determined by the AlloSure assay, discriminated
active rejection more effectively than serum creatinine values. In collaboration with clinical investigators, we
published these findings in the scientific peer-reviewed Journal of the American Society of Nephrology and the
Journal Applied Laboratory Medicine in March 2017.
In late 2017, we established the Kidney Allograft Outcomes AlloSure Registry, or KOAR, study to develop further
data on the clinical utility of AlloSure for surveillance of kidney transplant recipients. We will invite 35 centers to
join KOAR, and we anticipate staggered activation of these study centers throughout 2018.
Pre-Transplant Diagnostics
With the acquisition of CareDx International AB, formerly Allenex AB or Allenex, on April 14, 2016, we develop,
manufacture, market and sell products that increase the chance of successful transplants by facilitating a better
match between a donor and a recipient of stem cells and organs. Olerup SSP is used to type Human Leukocyte
Antigen, or HLA alleles based on sequence-specific primer, or SSP, technology. With the acquisition of the
business assets of Conexio Genomics Pty Ltd, or Conexio, on January 20, 2017, we now offer a complete product
range for sequence-based typing, or SBT, of HLA alleles. Olerup SBT is a test kit for sequence based HLA typing,
while Assign SBTTM is the companion software for sequence analysis. In 2014, Allenex began active development
of a new HLA typing product, Olerup QTYPE, which uses real-time polymerase chain reaction, or PCR,
methodology. QTYPE was commercially launched at the end of September 2016. We also offer XM-ONE, a
standardized test that identifies a patient’s antigens against HLA Class I or Class II, as well as antibodies against a
donor’s endothelium. This cross-match test is primarily used prior to kidney transplants.
Financial Operations Overview
Testing Revenue
Our testing revenue is derived from AlloMap and AlloSure tests, which represented 69%, 73% and 99% of our total
revenues for the years ended December 31, 2017, 2016 and 2015, 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
64
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 and AlloSure 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. Amounts 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 or AlloSure test result 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.
Product Revenue
We began recognizing product revenue following the acquisition of Allenex in the second quarter of 2016. Our
product revenue is derived primarily from sales of pre-transplant Olerup products and other related product lines.
Product revenue represented 30% and 26% of total revenue for the years ended December 31, 2017 and 2016. We
recognize product revenue from the sale of products to end-users, distributors and strategic partners when persuasive
evidence of a sale exists, the product is complete and tested and has been shipped, which coincides with transfer of
title and risk of loss, the sales price is fixed and determinable, collection of the resulting receivable is reasonably
assured, there are no material contingencies and we do not have significant obligations for future performance.
When collectability is not reasonably assured, we defer the revenue over the cash collection period. Provisions for
estimated future product returns and allowances are recorded in the period of the sale based on the historical and
anticipated future rate of returns. Revenue is recorded net of any discounts given to the buyer.
Collaboration, License and Other Revenue
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. 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.
Cost of Testing
Cost of testing reflects the aggregate costs incurred in delivering our 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 on-site, logistics and specimen processing charges to
collect and transport samples and allocated overhead including rent, information technology, equipment
depreciation, utilities and royalties. Due to the significant fixed costs of testing, cost per test and gross margin are
sensitive to changes in test volume. 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, our cost of
testing as a percentage of revenue may vary significantly from period to period because we do 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.
65
Cost of Product
Cost of product reflects the aggregate costs incurred in delivering our products to customers. The components of
cost of product are material costs, manufacturing and kit assembly costs, direct labor costs, including equipment and
infrastructure expenses associated with preparing kitted products for shipment, shipping, distributorship agreements
and allocated overhead, including rent, information technology, equipment depreciation and utilities. Cost of product
also includes amortization of acquired developed technology and adjustments to inventory values, including write-
down of impaired, slow moving or obsolete inventory.
Research and Development Expenses
Research and development expenses, including clinical operations, represent costs incurred to develop new pre- and
post-transplant diagnostic solutions, high quality evidence in support of test use, as well as continued efforts related
to improving our existing product lines. These expenses include payroll and related expenses, consulting expenses,
laboratory supplies, clinical studies 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.
Sales and Marketing Expenses
Sales and marketing expenses represent costs incurred to sell, promote and increase awareness of our existing
product lines to clinicians, hospital laboratories and payers. These efforts also include education of patients,
clinicians, payers, and other relevant decision makers. 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 periodic
commissions or bonuses based on the achievement of predetermined sales goals or other management objectives.
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 audit and
accounting, certain financing transaction expenses, and legal and other contract and administrative services. We
will continue to incur expenses as a result of operating as a public company.
Goodwill Impairment
We test goodwill and indefinite-lived intangibles for impairment at least annually and more frequently if impairment
indicators are present. On January 1, 2017, we adopted Accounting Standards Update, or ASU, No. 2017-04,
Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, or ASU 2017-04,
which eliminated the Step 2 requirement of the goodwill impairment test. Instead, the goodwill impairment test is
performed by comparing the fair value of a reporting unit with our carrying amount. We have determined that we
operate in two reportable segments associated with the delivery of diagnostic tests and the development and
commercialization of diagnostic products. The reporting unit’s carrying value is compared to its fair value. The
estimated fair values of the reporting units are determined using either the market approach, income approach or a
combination of the market and income approach. Goodwill is considered impaired if the carrying value of the
reporting unit exceeds its estimated fair value. The income approach uses expected future operating results and
failure to achieve these expected results may cause a future impairment of goodwill at the reporting unit. If the
carrying value of the reporting unit exceeds its estimated fair value, an impairment charge is recognized for the
amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss should not exceed
the total amount of goodwill allocated to the reporting unit. In the three months ended March 31, 2017, we
determined that the decrease in our market capitalization constituted an indicator of impairment and therefore a
goodwill impairment test was completed as of March 31, 2017, and identified an impairment of $2.0 million related
to the goodwill allocated to the Pre-Transplant reporting unit. See Note 6 of the notes in Part II, Item 8 of this
Annual Report on Form 10-K for additional discussion regarding the impairment charge recorded.
In connection with our annual goodwill assessment on December 1, 2017, we performed a qualitative assessment
and determined that it is not likely that the fair value of the Post-Transplant reporting unit is less than the carrying
value and therefore a quantitative test to assess potential goodwill was not necessary. In 2016, the fair value of the
Pre-Transplant reporting unit was $1.7 million, which was lower than its carrying value. Based on our analysis, the
66
implied fair value of the goodwill was lower than the carrying value of the Pre-Transplant reporting unit, resulting in
a goodwill impairment charge of $13.0 million for the period ended December 31, 2016.
Change in Estimated Fair Value of Contingent Consideration
The consideration for our business combination with ImmuMetrix, Inc., or IMX, which occurred in June 2014,
includes a future issuance of 227,845 shares of our common stock that is contingent upon the achievement of a
specified milestone. We recorded a contingent consideration liability at its fair value at the acquisition date in June
2014. We revalue our contingent consideration obligation each reporting period. Changes in the fair value of our
contingent consideration obligation are recognized as a component of operating expense within our consolidated
statements of operations.
Interest Expense
Interest expense is associated with borrowings under our loan agreements.
Other Expense
For the year ended December 31, 2017, other expense primarily consisted of debt advisory fees, debt extinguishment
charges related to our prior debt facility with East West Bank and foreign currency translation adjustments. For the
year ended December 31, 2016, other expense primarily consisted of expenses related to a potential financing that
did not eventuate.
Change in Estimated Fair Value of Common Stock Warrant and Derivative Liabilities
The freestanding warrants issued in connection with the Private Placement, Subsequent Financing and warrants
issued to the placement agents in connection with the Private Placement are recorded at their estimated fair value.
We determined that the debentures and the warrants issued in connection with the JGB Debt were also free standing
instruments.
The terms of the warrants include price-based anti-dilution adjustment provisions, which preclude us from
classifying the warrants in equity. As such, the warrants are classified as liabilities on the consolidated balance
sheet. The full fair value of the warrants was allocated on day one to the common stock warrant liability and, in the
case of JGB warrants, the residual value, after allocation of the fair value of the derivative liability discussed below,
was ascribed to the debentures.
The JGB debentures are classified as liabilities on the consolidated balance sheet and include certain embedded
derivatives that required bifurcation, including settlement and penalty provisions. The warrants and embedded
derivative will be remeasured at each reporting period with changes recorded in change in estimated fair value of
common stock warrant and derivative liabilities on the consolidated statements of operations.
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
consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of
these consolidated financial statements requires us to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated
financial statements, as well as the reported revenue generated and expenses incurred during the reporting periods.
Our estimates are based on our historical experience and on various other factors that we believe are reasonable
under the circumstances, the results of which form the basis for making judgments about the carrying value of assets
and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under
different assumptions or conditions.
Our significant accounting policies are described in Note 2 of the consolidated financial statements included
elsewhere in this Annual Report on Form 10-K for additional information. 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
67
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.
On January 1, 2017, we adopted ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of
a Business, or ASU 2017-01, which clarifies the definition of a business with the objective of adding guidance to
assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or
businesses. We adopted ASU 2017-01 on a prospective basis and the adoption of ASU 2017-01 did not have a
material impact on our consolidated financial statements.
On January 1, 2017, we adopted ASU 2017-04, which eliminated the Step 2 requirement of the goodwill impairment
test. Instead, the goodwill impairment test is performed by comparing the fair value of a reporting unit with its
carrying amount. Our adoption of ASU 2017-04 did not have a material impact on our consolidated 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.
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.
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.
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 on an accrual basis upon delivery of a patient result 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. 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.
In 2017, 2016 and 2015, approximately 62%, 64% and 68%, respectively, of our testing revenue was recognized on
the accrual basis.
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......................
68
Year Ended December 31,
2016
14,148
9,677
2017
15,312
10,316
2015
13,059
9,155
1,336
1,442
1,324
Since the launch of AlloSure on October 9, 2017 through December 31, 2017, we delivered 282 patient test results.
We recognized revenue of approximately $0.5 million in accordance with our revenue recognition policies discussed
above.
We did not recognize revenue for the remaining AlloMap or AlloSure 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.
Effective January 1, 2018, under Accounting Standards Codification, or ASC, Topic 606, Revenue from Contracts
with Customers, or ASC 606, we will begin to recognize revenue for tests in the period in which results are
delivered for those payers for which we historically waited until cash was received to record revenue. This will
affect the comparability of our revenues from period to period. We will present the impact of ASC 606 on our
revenue recognition in our Quarterly Reports on Form 10Q. We will continue to regularly review payer data for
revenue recognition criteria and account for any changes on a prospective basis.
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.
Product Revenue
We recognize product revenue from the sale of products to end-users, distributors and strategic partners when
persuasive evidence of an arrangement exists, the product is complete and tested and has been shipped or delivered,
as required to transfer title and risk of loss, the sales price is fixed and determinable, collection of the resulting
receivable is reasonably assured, there are no material contingencies and we do not have significant obligations for
future performance. When collectability is not reasonably assured, we defer the revenue until the cash is received.
Provisions for estimated future product returns and allowances are recorded in the period of the sale based on the
historical and anticipated future rate of returns. Revenue is recorded net of any discounts given to the buyer.
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.
Business Combinations
In accordance with ASC Topic 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 that 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 Topic 480, Distinguishing Liabilities from Equity, we recognize a liability equal
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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.
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.
In September 2017, we performed a qualitative assessment on the in-process research and development asset and
determined that the fair value of the asset was not below its carrying value and therefore no impairment charge was
recorded. The IPR&D balance was reclassified as an intangible asset with a finite life on September 30, 2017 based
on confirmation of the Medicare reimbursement rate for AlloSure, the Company’s dd-cfDNA solution, which was
commercially launched on October 9, 2017.
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 have determined that we operate in two reportable segments: Post-Transplant (associated with the delivery of
diagnostic tests), and Pre-Transplant (associated with the development and commercialization of diagnostic
products). Each reporting unit’s carrying value is compared to its fair value. We estimated fair values of the
reporting units using either the market approach, income approach or a combination of the market and income
approach. Goodwill is considered impaired if the carrying value of the reporting unit exceeds its estimated fair
value. The income approach uses expected future operating results, and failure to achieve these expected results may
cause a future impairment of goodwill at the reporting unit. If the carrying value of the reporting unit exceeds its
estimated fair value, the second step of the goodwill impairment test is performed by comparing the carrying value
of the goodwill in the reporting unit to its implied fair value. The implied fair value is calculated by allocating all of
the assets and liabilities of the reporting unit, including any unrecognized intangible assets, in a hypothetical
analysis that calculates the implied fair value of goodwill in the same manner as if the reporting unit was being
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acquired in a business combination. An impairment charge is recognized for the excess of the carrying value of
goodwill over its implied estimated fair value. See Note 6—“Goodwill and Intangible Assets” to the consolidated
financial statements included elsewhere in this Annual Report on Form 10-K for the results of our goodwill
impairment test.
Finite-lived Intangible Assets
Our finite-lived intangible assets resulted from the acquisition of Allenex and Conexio. We amortize finite-lived
intangible assets using the straight-line method, over their estimated useful lives. The estimated useful lives range
from two years to fifteen years and are based on management's estimate of the extent of the economic benefit
resulting from these assets. We test for impairment on an annual basis and in between annual tests if we become
aware of 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.
Other
Warrants
On April 14, 2016 and June 15, 2016, we completed the Private Placement and Subsequent Financing, respectively,
which included the issuance of freestanding warrants to certain accredited investors and placement agents to
purchase shares of our common stock. On March 15, 2017, we entered into a Securities Purchase Agreement with
JGB, pursuant to which we issued the JGB Debt and 1,250,000 warrants. We determined that the warrants were free
standing instruments. The full fair value of the warrants was allocated on day one to the common stock warrant
liability and the residual value, after allocation of the fair value of the derivative liability discussed below, was
ascribed to the debentures.
The terms of our outstanding warrants include price-based anti-dilution adjustment provisions, which preclude the
Company from classifying the warrants in equity. Our outstanding warrants are therefore classified as liabilities on
the consolidated balance sheet and recorded at their estimated fair value. The warrants are remeasured each
reporting period with changes recorded in change in estimated fair value of common stock warrant and derivative
liabilities on the consolidated statements of operations. We utilize a Monte Carlo simulation model to estimate the
fair value of our outstanding warrants. The Monte Carlo simulation model uses multiple input variables to estimate
the probability that market conditions will be achieved. These variables include our stock price, the expected term of
the warrants, the volatility of our stock prices and our peers’ stock prices over such expected term, and the risk-free
interest rate for the expected term of the warrants. The variables used in this simulation model are reviewed on a
quarterly basis and adjusted, as needed. If we issue common stock at a price lower than the exercise price or issue
stock options or other securities (other than securities issued pursuant to our stock or option plans or employment
agreements, securities issued or issuable upon exercise or exchange of convertible securities outstanding as of the
date the warrants were issued or securities issued pursuant to acquisitions or strategic transactions approved by a
majority of the disinterested directors) with an exercise price that is lower than the current exercise price of the
warrants, the exercise price of the warrants shall be adjusted to be equal to such lower price.
Embedded Derivatives
The JGB Debt includes certain embedded derivatives that require bifurcation, including settlement and penalty
provisions. We utilize a Monte Carlo simulation model to estimate the fair value of our embedded derivative
liability. The Monte Carlo simulation model uses multiple input assumptions to simulate the likelihood that market
conditions will be achieved through 100,000 random trials. These assumptions include the expected term of the
embedded derivative, the volatility of our stock prices and our peers’ stock prices over such expected term,
likelihood, timing, and amount of future equity financing rounds, the likelihood of any prepayment or default events,
the likelihood of monthly redemptions by the JGB debt holders, and the likelihood and ability of JGB to convert the
debt into equity. In each iteration of the simulations, these assumptions were used to simulate our stock price
drawing from a risk neutral distribution, the occurrence of a conversion event, the occurrence of a prepayment event,
the occurrence of a default event, and any resulting payoff from such event. The average present value over all
iterations of the simulation was then calculated. The assumptions used in this simulation model are reviewed on a
quarterly basis and adjusted, as needed.
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The embedded derivative liability is remeasured each reporting period with changes recorded in change in estimated
fair value of common stock warrant and derivative liabilities on the consolidated statements of operations.
Segment Information
We use the management approach for segment disclosure, which designates our internal organization used by our
management for making operating decisions and assessing performance as the source of our reportable segments.
We manage our business on the basis of two reportable segments as Post-Transplant, a segment focused on
discovery, development and commercialization of clinically differentiated, high-value diagnostic solutions for
transplant patients, and Pre-Transplant, a segment that develops, manufactures, markets and sells high quality
products that increase the chance of successful transplants by facilitating a better match between a donor and a
recipient of stem cells and organs.
Factors Affecting Our Performance
The Number of AlloMap and AlloSure Tests We Receive and Report
The growth of our post-transplant business is tied to the number of AlloMap and AlloSure tests we receive and
report. Historically, less than two percent of AlloMap tests received are not reported due to improper sampling,
damage in transit or other causes. We incur costs in connection with collecting and shipping all samples and a
portion of the costs when we cannot ultimately issue a score report. As a result, the number of samples received
largely correlates directly to the number of patient result reports.
The Number of Pre-Transplant Diagnostic Products We Sell
The growth of our pre-transplant business is tied to the sales of the Olerup SSP, Olerup QTYPE, Olerup SBT and
Olerup XM-ONE product lines. The pre-transplant sales organization is located in Stockholm, Sweden, Vienna,
Austria, Fremantle, Australia and West Chester, Pennsylvania. Pre-transplant products are sold directly to customers
in 12 countries. The pre-transplant business also uses distributors to sell products in approximately 60 countries.
How We Recognize Revenue
We recognize revenues for tests and products 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.
For testing revenue, 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 our judgments
regarding the collectability of the fees charged under the arrangement. Such judgments include review of past
payment history. AlloMap and AlloSure tests 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 of the criteria set forth above are met, revenue is recognized on an accrual basis in the period 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 for tests performed is recognized on the 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.
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Following the criteria above, Medicare and certain other payers with agreed upon reimbursement rates and a
predictable history of collections allow us to recognize the related revenue on an accrual basis under U.S. GAAP.
For the years ended December 31, 2017, 2016 and 2015, 37%, 36% and 32%, respectively, of our testing revenue
was recognized when cash was 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. Under ASC 606, revenue recognition criteria will change to recognize revenue based on the expected
reimbursement rate when test results are delivered.
We will need to monitor payments for each payer to determine an expected amount of reimbursement under ASC
606 starting January 1, 2018. Because the timing and amount of cash payments received from payers are difficult to
predict, we expect our revenue will fluctuate in any given quarter. In addition, when we introduce new products, we
do not expect we will be able to recognize revenue from new products on an estimated reimbursement basis for
some period of time.
Pre-transplant products are sold in the form of manufactured lab kits either directly to labs involved in pre-transplant
testing or to distributors who sell to labs. Revenue from the sale of these products is recognized on an accrual basis
when the risk and benefits of owning the kits are transferred to the customer and this occurs either upon shipment or
receipt as determined by the contractual terms with customers that cover the transfer of ownership.
Continued Adoption of and Reimbursement for AlloMap
AlloMap test volume and the corresponding reimbursement revenue has generally increased over time since the
launch of AlloMap, as Medicare provided reimbursement and payers adopt coverage policies and fewer payers
consider AlloMap to be experimental and investigational. The rate at which our tests are covered and reimbursed
has, and is expected to continue to vary by payer. Revenue growth depends on our ability to maintain Medicare
reimbursement, achieve broader reimbursement from third party payers and to expand the number of tests per
patient and the base of ordering physicians.
On June 10, 2016, Centers for Medicare & Medicaid Services, or CMS, announced proposed changes in
reimbursement for a number of established molecular diagnostic tests, including AlloMap. Under the gapfill
reimbursement rate for 2017, AlloMap reimbursement for patients covered by Medicare would have been reduced
from $2,821 to $1,921, effective January 1, 2017. This reimbursement rate, determined by gapfill submissions from
the MACs, was open to reconsideration submissions until October 31, 2016. We submitted a request for
reconsideration of the reimbursement rate determined by the MACs and in November 2016 CMS released the 2017
Clinical Laboratory Fee Schedule reflecting the final rate of reimbursement at $2,841, an increase of $20 compared
to the 2016 fee schedule.
The Protecting Access to Medicare Act of 2014, or PAMA, includes a substantial new payment system for clinical
laboratory tests under the CLFS. Under PAMA, laboratories that receive the majority of their Medicare revenues
from payments made under the CLFS would report initially and then on a subsequent three-year basis thereafter (or
annually for advanced diagnostic laboratory tests, or ADLTs), private payer payment rates and volumes for their
tests. The final PAMA ruling was issued June 17, 2016, indicating that data for reporting for the new PAMA process
will begin in 2017 and the new market based rates will take effect January 1, 2018. On November 20, 2017,
Medicare released the preliminary 2018 Clinical Laboratory Fee Schedule. Effective January 1, 2018, Medicare
plans to reimburse us $3,240 for AlloMap testing of Medicare beneficiaries, which represents a 14% increase over
the 2017 reimbursement rate.
Reimbursement for AlloSure
On September 26, 2017 we announced that the Molecular Diagnostics Services, or MolDX, Program developed by
Palmetto GBA has set AlloSure reimbursement at $2,841. Effective October 9, 2017, AlloSure was made available
for commercial testing with Medicare coverage and reimbursement. We believe the use of AlloSure, in conjunction
with other clinical indicators, can help healthcare providers and their patients better manage long-term care
following a kidney transplant. In particular, we believe AlloSure can improve patient care by helping healthcare
providers to reduce the use of invasive biopsies and determine the appropriate dosage levels of immunosuppressants.
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Acquisition of Allenex and Conexio Assets
With the acquisition of Allenex, on April 14, 2016, we develop, manufacture, market and sell products that increase
the chance of successful transplants by facilitating a better match between a donor and a recipient of stem cells and
organs. Olerup SSP is used to type HLA alleles based on SSP technology. With the acquisition of the business
assets of Conexio on January 20, 2017, we now offer a complete product range for SBT of HLA alleles. Olerup SBT
is a test kit for sequence based HLA typing, while Assign SBTTM is the companion software for sequence analysis.
In 2014, Allenex began active development of a new HLA typing product, Olerup QTYPE, which uses real-time
PCR methodology. QTYPE was commercially launched at the end of September 2016. We also offer XM-ONE, a
standardized test that identifies a patient’s antigens against HLA Class I or Class II, as well as antibodies against a
donor’s endothelium. This cross-match test is primarily used prior to kidney transplants.
Development of Additional Products
We rely on sales of AlloMap, Olerup SSP, Olerup SBT and XM-ONE to generate the majority of our revenue. Our
product development pipeline includes other transplant diagnostic solutions to help clinicians and transplant centers
make personalized treatment decisions throughout a transplant patient’s lifetime. Currently, our product
development pipeline includes new products such as AlloSure, which was commercially launched on October 9,
2017, and Olerup QTYPE, which was commercially launched at the end of September 2016 with ongoing
commitment to including additional instrument testing platforms. We expect to invest in research and development
in order to develop additional products. Our success in developing 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 and clinical studies may vary substantially from quarter to quarter. We also expend
funds 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 obtained in a given quarter or if a high-cost experiment is conducted in one quarter
versus the next, the timing of these expenses will 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 and AlloSure tests. Spending on research and development for both experiments and
studies may vary significantly by quarter depending on the timing of these various expenses.
74
Results of Operations
Comparison of the Years Ended December 31, 2017 and 2016
(In thousands)
Revenue:
Year Ended December 31,
2017
2016
Change
Testing revenue ...................................................... $
Product revenue ......................................................
Collaboration and license revenue .........................
Total revenue ...............................................................
33,106 $
14,634
584
48,324
29,680 $
10,715
236
40,631
3,426
3,919
348
7,693
1,463
(1,214)
3
1,642
(1,812)
(11,063)
12,345
9,026
12,388
12,808
18,913
1,958
10,882
10,240
12,385
11,166
20,725
13,021
Operating expenses:
Cost of testing.........................................................
Cost of product .......................................................
Research and development .....................................
Sales and marketing................................................
General and administrative.....................................
Goodwill impairment charge..................................
Change in estimated fair value of contingent
consideration .......................................................
Total operating expenses..............................................
Loss from operations....................................................
Interest expense, net.....................................................
Other expense, net........................................................
Change in estimated fair value of common stock
(29,372)
warrant and derivative liabilities...............................
103
Income tax benefit........................................................
(15,804)
Net loss.........................................................................
Net loss attributable to noncontrolling interest............
196
Net loss attributable to CareDx, Inc............................. $ (55,469) $ (39,469) $ (16,000)
(456)
77,963
(37,332)
(1,860)
(1,920)
1,180
68,618
(20,294)
(5,863)
(1,490)
(29,622)
1,709
(55,560)
(91)
(250)
1,606
(39,756)
(287)
1,636
(9,345)
17,038
(4,003)
430
Testing Revenue
Testing revenue increased by $3.4 million, or 12%, in 2017 compared to the same period in 2016 mainly due to the
increase in AlloMap test volume representing $1.8 million, as well as increased AlloMap cash collections of $1.1
million. AlloMap tests results delivered increased by 1,164, or 8%, in 2017 compared to 2016.
AlloSure was launched in October 2017 and contributed $0.5 million of testing revenue.
Product Revenue
Product revenue increased by $3.9 million, or 37%, in 2017, compared to 2016. The increase in product revenue
mainly reflects product revenue not being comparatively included in the year ended December 31, 2016, as the
Allenex acquisition occurred on April 14, 2016.
Collaboration and License Revenue
Collaboration and license revenue increased by $0.3 million in 2017, compared to 2016, reflecting additional royalty
payments received under our services agreement with CardioDx, Inc.
Cost of Testing
Cost of testing increased by approximately $1.5 million, or 13%, in 2017 compared to 2016 primarily due to higher
headcount related expenses of $1.1 million and laboratory material costs of $0.6 million. These increases were
partially offset by a decrease in royalty payments to Roche of $0.2 million, as from September 30, 2017, no further
royalties were due.
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Cost of Product
Cost of product decreased $1.2 million or 12%, in 2017 compared to 2016. The decrease primarily relates to a net
$3.6 million decrease in the charge recorded for the amortization of acquisition-related mark-up in the value of
inventory. In 2016, a charge of $4.0 million was recorded related to inventory purchased in the Allenex acquisition.
In 2017, a charge of $0.4 million was recorded related to the inventory purchased in the Conexio asset acquisition.
This decrease was partially offset by the effect of the cost of product not being comparatively included. The cost of
product related to the Allenex and Conexio acquisitions are not comparatively included because the Allenex
acquisition occurred on April 14, 2016 and the Conexio acquisition occurred on January 20, 2017.
Research and Development
Research and development expenses increased less than $0.1 million, or 1%, in 2017 compared to 2016. This
increase is primarily due to a $1.0 million increase for pre-transplant development costs, which are not
comparatively included in the twelve months ended December 31, 2016, as the Allenex acquisition occurred on
April 14, 2016, partially offset by a decrease of $0.9 million of AlloSure development expenditures.
Sales and Marketing
Sales and marketing expenses increased by approximately $1.6 million, or 15%, in 2017 compared to 2016. The
increase primarily reflects an increase of $0.9 million in the pre-transplant sales and marketing payroll related
expenses, due mainly to pre-transplant results not being comparatively included in the twelve months ended
December 31, 2016. We incurred an additional $0.6 million related to headcount increases for customer service and
sales operations personnel.
General and Administrative
General and administrative expenses decreased by approximately $1.8 million, or 9%, in 2017 compared to 2016.
The decrease primarily reflects a reduction in audit, tax and other professional and consulting fees incurred in 2016,
primarily in connection with our acquisition of Allenex.
Goodwill impairment
On January 1, 2017, we adopted ASU 2017-04, which eliminated the Step 2 requirement of the goodwill impairment
test. Instead, the goodwill impairment test is performed by comparing the fair value of a reporting unit with its
carrying amount. In the three months ended March 31, 2017, we determined that the decrease in our market
capitalization constituted an indicator of impairment and therefore a goodwill impairment test was completed as of
March 31, 2017. The goodwill impairment test determined that the fair value of the Pre-transplant reporting unit was
$3.5 million, which was lower than its carrying value. Accordingly, we recorded a goodwill impairment charge of
$2.0 million for the three months ended March 31, 2017, which represented the remaining goodwill balance in the
Pre-transplant entity. No additional goodwill impairment was recorded in the year ended December 31, 2017.
Change in Estimated Fair Value of Contingent Consideration
We revalued the contingent consideration liability for the years ended December 31, 2017 and 2016 and recognized
a non-cash loss of $1.2 million and a non-cash gain of $0.5 million, respectively, as a result of management’s
estimate of the probability meeting the milestone under our business combination agreement with ImmuMetrix, Inc.
increasing to 100% at December 31, 2017, and our common stock price increasing by $4.67 and decreasing by $3.70
for the years ended December 31, 2017 and 2016, respectively.
Interest Expense, Net
Interest expense increased by $4.0 million for the year ended December 31, 2017 compared to the same period in
2016. The increase primarily consists of:
(cid:129)
$1.6 million of interest expense due to the higher principal balance and interest rate of the JGB debt, which
was outstanding from March 15, 2017 to December 31, 2017 as compared to the East West Bank debt
which was outstanding for all of 2016 and from January 1, 2017 to March 15, 2017;
76
(cid:129)
(cid:129)
(cid:129)
$1.8 million in increased debt discount amortization due to the higher debt discount applicable to the JGB
debt as compared to the debt discount applicable to the East West Bank debt;
$0.4 million in increased interest expense on Danske Bank debt and the Allenex Promissory Notes recorded
in 2017, but not comparatively included in 2016 due to the acquisition of Allenex that occurred on April
14, 2016; and
$0.2 million in increased interest expense due to the commencement of interest accruing from January 1,
2017 on the deferred purchase consideration payable related to the Allenex acquisition.
Other Expense, Net
Other expense decreased $0.4 million, or 22%, in 2017 compared to 2016. The decrease reflects a net $2.1 million
charge in 2016 to expense financing costs associated with a proposed six-month bridge loan that did not materialize.
This decrease was primarily offset by an increase in foreign exchange translation losses of $0.9 million, a $0.3
million loss on a $1.25 million conversion of JGB debt, $0.3 million debt extinguishment fees on East West Bank
debt, and $0.1 million in JGB Debt issuance costs.
Change in Estimated Fair Value of Common Stock Warrant and Derivative Liabilities
The change in the estimated fair value of common stock warrant and derivative liabilities was due to a $29.6 million
expense in 2017 compared to a $0.3 million expense in 2016.
For the twelve months ended December 31, 2017, the $29.6 million charge comprised common stock warrant
liability expenses of $16.9 million and $12.7 million of expense related to the JGB Debt embedded derivative
liability.
The $16.9 million expense related to our common stock warrant liability was due to:
(cid:129)
(cid:129)
(cid:129)
Changes in the valuation of warrants due to the change in the share price of our common stock during the
year. The price of our common stock increased from $2.70 on December 30, 2016 to $7.34 on December
29, 2017;
The adjustment in the exercise price of the Private Placement and Placement Agent warrants from $4.00
and $3.99 per share, respectively, to $1.12 per share, effective July 3, 2017, as a result of the issuance of
1,022,544 shares at a price of $1.12 pursuant to amendments to the Conditional Share Purchase
Agreements (as discussed below);
In connection with the issuance of the JGB Debt, on March 15, 2017, we issued warrants to JGB to
purchase up to an aggregate of 1,250,000 shares of our common stock; and
(cid:129) Adjustments to the quantity and exercise price of the JGB warrants as a result of the issuance of 1,022,544
shares at a price of $1.12 pursuant to the Conditional Share Purchase Agreements. The shares issuable
upon the exercise of the warrants increased from 1,250,000 shares to 1,296,679 shares and the exercise
price of the warrants decreased from $5.00 to $4.82 per share, effective July 3, 2017. In addition, as a
result of the 2017 Public Offering, the shares issuable upon exercise of the warrants increased to 1,338,326
shares and the exercise price decreased to $4.67 per share, effective October 10, 2017.
The JGB Debt includes certain embedded derivatives that require bifurcation, including settlement and penalty
provisions. The $12.7 million expense related to the JGB debt embedded derivative reflects the change in the fair
value of the derivative liability from the JGB Debt issuance date of March 15, 2017 to December 31, 2017. We
utilized the Monte Carlo simulation model to estimate the fair value of the embedded derivative liability for the
measurement at issuance and subsequent remeasurement at December 31, 2017.
The $12.7 million increase in the fair value of the derivative liability mainly reflects the increase in the price of our
common stock from $2.15 on March 15, 2017 to $7.34 on December 31, 2017 and the increase in the derivative
liability related to the conversion of the JGB Debt into shares of our common stock during the term of the debt.
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Income Tax Benefit
For the year ended December 31, 2017, we recorded an income tax benefit of $1.7 million on a loss before income
taxes of $57.3 million. The effective tax rate for the twelve months ended December 31, 2017 differs from the
federal statutory tax rate as a result of the income tax expense and benefit related to the warrant revaluation expense
and re-measurement of the deferred tax asset, partially offset by valuation allowance.
Comparison of the Years Ended December 31, 2016 and 2015
(In thousands)
Year Ended December 31,
2016
2015
Change
Revenue:
Testing revenue ................................................... $
Product revenue...................................................
Collaboration and license revenue ......................
Total revenue ............................................................
Operating expenses:
Cost of testing .....................................................
Cost of product ....................................................
Research and development..................................
Sales and marketing ............................................
General and administrative..................................
Goodwill impairment charge...............................
Change in estimated fair value of contingent
consideration ....................................................
Total operating expenses ..........................................
Loss from operations ................................................
Interest expense, net..................................................
Other expense, net ....................................................
Change in estimated fair value of common stock
warrant and derivative liabilities ...........................
Income tax benefit ....................................................
Net loss .....................................................................
Net loss attributable to noncontrolling interest.........
Net loss attributable to CareDx, Inc. ........................ $
29,680 $
10,715
236
40,631
27,881 $
—
263
28,144
10,882
10,240
12,385
11,166
20,725
13,021
10,273
—
9,333
8,349
12,247
—
(456)
77,963
(37,332)
(1,860)
(1,920)
(126)
40,076
(11,932)
(1,587)
(188)
(250)
1,606
(39,756)
(287)
(39,469) $
—
—
(13,707)
—
(13,707) $
1,799
10,715
(27)
12,487
609
10,240
3,052
2,817
8,478
13,021
(330)
37,887
(25,400)
(273)
(1,732)
(250)
1,606
(26,049)
(287)
(25,762)
Testing Revenue
The number of AlloMap test results delivered increased by 1,089; or 8%; in 2016 compared to 2015. Testing
revenue increased by $1.8 million, or 6%, in 2016 compared to 2015 due to the increase in test volume, partially
offset by a mix shift from reimbursement from Medicare to commercial insurance, including cash basis payers with
whom achieving revenue recognition takes more time.
Product Revenue
Product revenue reported for the year ended December 31, 2016 was $10.7 million related to the sales or our pre-
transplant products. The Allenex acquisition occurred on April 14, 2016 and therefore 2016 is not comparable to
2015.
Collaboration and License Revenue
Collaboration and license revenue decreased slightly in 2016 compared to 2015 primarily due to a decrease in
royalties received under our services agreement with CardioDx, Inc.
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Cost of Testing
Cost of testing increased by approximately $0.6 million, or 6%, in 2016 compared to 2015 primarily due to higher
headcount related expenses of $0.2 million and laboratory material costs of $0.3 million to support testing volume
growth. The increase also reflects higher royalties paid to Roche of $0.1 million resulting from the increase in
testing revenue on which the royalty is based.
Cost of Product
Cost of product reported for the year ended December 31, 2016 of $10.2 million was incurred by us as a result of the
acquisition of Allenex on April 14, 2016, and represents cost of product from our sales of pre-transplant products.
Cost of product includes $4.0 million of amortization of the acquisition-related mark-up in the value of inventory
and $1.0 million of acquisition-related amortization of intangible assets.
Research and Development
Research and development expenses increased $3.1 million, or 33%, in 2016 compared to 2015. The increase
reflects a $1.6 million increase in headcount related expenses; $1.0 million of expense incurred due to our
acquisition of Allenex on April 14, 2016, primarily for the development of Olerup QTYPE; and an increase in
clinical trial expenditures to support the clinical validity and utility of AlloSure.
Sales and Marketing
Sales and marketing expenses increased by approximately $2.8 million, or 34%, in 2016 compared to 2015. The
increase reflects our acquisition of Allenex on April 14, 2016. We incurred approximately $3.4 million of sales and
marketing expense related to the pre-transplant business, including costs for trade shows and marketing efforts for
the commercial launch of QTYPE at the end of September 2016 and includes $0.7 million of acquisition-related
amortization of purchased intangible assets. This increase was partly offset by reduced spending on discretionary
marketing activities related to AlloMap.
General and Administrative
General and administrative expenses increased by approximately $8.5 million, or 69%, in 2016 compared to 2015.
This increase reflects approximately $2.0 million of general and administrative expenses incurred by the pre-
transplant business subsequent to the acquisition. The increase also reflects $5.6 million of audit, legal, tax, and
other professional and consulting fees incurred primarily in connection with our acquisition of Allenex. The
remaining increase reflects employee related costs, fees for consulting, and professional service fees and financial
advice related to the first corporate consolidation of the pre-transplant business, enhancing our internal controls,
financing activities and legal defense.
Goodwill impairment
We tested goodwill for impairment as of December 1, 2016. We performed step one of our annual goodwill
impairment test and determined that the fair value of the Pre-Transplant reporting unit was $1.7 million, which was
lower than its carrying value. A reduction in our forecasted revenue and operating results for the Pre-Transplant
reporting unit was the primary cause of the reduction in fair value as compared with our forecast as of the
acquisition of Allenex in April 2016. Our forecasted revenues and operating results were adversely impacted by an
earlier-than-expected market adoption of NGS and/or q-PCR technology and increased competition from other
companies that compete with or will compete with our pre-transplant products. We then were required to perform
the second step of the two-step process for the Pre-Transplant reporting unit. The second step of the analysis
included allocating the calculated fair value of the reporting unit to its assets and liabilities, using a present value
analysis, in order to determine an implied fair value of goodwill. Based on the Company’s analysis, the implied fair
value of the goodwill was lower than the carrying value of the Pre-Transplant reporting unit. Accordingly, we
recorded a goodwill impairment charge of $13.0 million on December 1, 2016.
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Change in Fair Value of Contingent Consideration
We revalued the contingent consideration liability for the years ended December 31, 2016 and 2015 and recognized
non-cash gains of $0.5 million and $0.1 million, respectively, within our consolidated statement of operations as a
result of changes in the market value of our common stock during those periods.
Interest Expense, Net
Interest expense increased by $0.3 million, or 17%, in 2016 compared to 2015. In connection with our acquisition of
Allenex on April 14, 2016, we assumed its existing debt and incurred interest expense of $0.5 million on the
assumed debt following the acquisition. In 2015, we incurred a loss on extinguishment of debt of $0.6 million
resulting from our pay-off of a term loan in January 2015.
Other Expense, Net
Other expense increased $1.7 million in 2016 compared to 2015. The increase reflects a $2.1 million expense related
to a potential financing that did not eventuate. These charges were partially offset by $0.4 million of foreign
currency transactions gains.
Change in Estimated Fair Value of Common Stock Warrant and Derivative Liabilities
The freestanding warrants issued in connection with the Private Placement, Subsequent Financing and warrants
issued to the placement agents in connection with the Private Placement are recorded at their estimated fair value.
The warrants were remeasured on December 31, 2016 and a remeasurement charge of $0.3 million was recognized.
Income Tax Benefit
In conjunction with the acquisition of acquisition of Allenex, a tax benefit of $1.6 million was recognized in 2016.
This benefit primarily resulted from the expectation that amortization of the various intangible assets acquired, when
completed and placed in service, is not expected to be deductible for tax purposes. Accordingly, a deferred tax
liability was recorded at the acquisition date for the difference between the financial reporting and tax basis of the
intangible assets.
Liquidity and Capital Resources
We have incurred significant losses and negative cash flows from operations since our inception and had an
accumulated deficit of $268.0 million at December 31, 2017. As of December 31, 2017, we had cash and
cash equivalents of $16.9 million, and $34.1 million of debt outstanding under our debt and capital lease obligations,
net of debt discount, of which $15.7 million is current.
Deferred Purchase Consideration
On April 14, 2016, we acquired 98.3% of the outstanding common stock of Allenex for an aggregate purchase
consideration of approximately $34.1 million which consisted of (i) $26.9 million of cash, of which $6.2 million
(which represented SEK 50,620,000 as of the Allenex acquisition date), and which was recorded at its fair value of
$5.7 million, was deferred purchase consideration originally payable to Midroc Invest AB, FastPartner AB and
Xenella Holding AB, or the Former Majority Shareholders, by no later than March 31, 2017, subject to certain
contingencies being met, and (ii) the issuance of 1,375,029 shares of our common stock valued at $7.2 million. The
date by which the deferred purchase consideration was due to the Former Majority Shareholders was subsequently
extended to July 1, 2017. In addition, interest began accruing on our obligations to the Former Majority
Shareholders at a rate of 10.0% per year commencing on January 1, 2017 and was scheduled to continue to accrue
until the date the obligations were paid in full. Of the total cash consideration, $8.0 million of cash payable to the
Former Majority Shareholders was deposited into an escrow account by us and subsequently invested in us by the
Former Majority Shareholders through a purchase of our equity securities in the Subsequent Financing, which was
completed on June 15, 2016. Upon the completion of the Subsequent Financing, certain contingencies in the
conditional share purchase agreements entered into with the Former Majority Shareholders, or the Conditional Share
Purchase Agreements, were waived, and the deferred purchase consideration was due to the Former Majority
Shareholders by no later than July 1, 2017. Our deferred purchase consideration obligations are secured by a pledge
of shares of Allenex. We determined at the date of the acquisition that the contingencies would be waived. We
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intend to complete compulsory acquisition proceedings under Swedish law to purchase the remaining shares of
Allenex. We will do so in accordance with all applicable Swedish law, and concluded this process in March 2018.
On June 8, 2016, we delisted Allenex’s common stock from Nasdaq OMX Stockholm AB.
On July 1, 2017, we entered into amendments to the Conditional Share Purchase Agreements with the Former
Majority Shareholders, pursuant to which, among other things, we agreed (i) to immediately convert approximately
$1.1 million of the $6.3 million deferred purchase consideration owed by us to the Former Majority Shareholders
under the Conditional Share Purchase Agreements, or the Deferred Obligation, into 1,022,544 shares of our common
stock at a per share price equal to $1.12; (ii) to make an immediate cash payment of $0.5 million; (iii) to extend the
maturity date of a portion of the obligations, totaling approximately $2.9 million, under the Conditional Share
Purchase Agreements to March 31, 2019, and (iv) that approximately $2.1 million of the Deferred Obligation would
become payable on December 31, 2017, unless earlier converted into 1,791,762 shares of common stock prior to that
date, of which issuance of shares is subject to approval by our stockholders.
On November 14, 2017, we entered into amendments to the Conditional Share Purchase Agreement with the Former
Majority Shareholders, whereby we immediately repaid the total remaining deferred purchase consideration of $4.7
million, plus accrued interest.
Allenex Notes
On June 28, 2013, Allenex issued promissory notes, or the Allenex Notes, to FastPartner and Mohammed Al
Amoudi in an aggregate amount of SEK 9,400,000 and SEK 10,600,000, approximately $1.1 million and $1.3
million, respectively. An additional SEK 2,000,000 and SEK 4,000,000 were issued to FastPartner in 2015 and
2016, totaling approximately $4.1 million, including accrued interest to be due on July 1, 2017. On July 1, 2017,
Allenex entered into new note agreements with each of FastPartner and Mohammed Al Amoudi, pursuant to which,
the parties agreed to defer repayment of the amounts owed under the Allenex Notes until March 31, 2019. Refer to
Note 18 of the consolidated financial statements included elsewhere in this Annual Report on Form 10-K for details
regarding our requirement to repay the Allenex Notes using the proceeds from the Perceptive Term Loan.
Danske Bank Term Loan
On June 25, 2013, Allenex entered into a Term Loan Facility Agreement with Danske Bank A/S, or Danske, which
had an outstanding principal amount of SEK 50,000,000 (approximately $6.1 million) on December 31, 2017. A
quarterly debt covenant, was violated on June 30, 2016 and September 30, 2016. We obtained waivers for these
violations. We were not in compliance with certain covenants at March 31, 2017, June 30, 2017 or September 30,
2017. We obtained a waiver for these violations. The waiver was conditional upon, among other things, us making a
principal repayment of SEK 6,000,000 (approximately $0.7 million) by October 31, 2017. This amount was paid on
October 31, 2017. We are not in compliance with the quarterly covenants on December 31, 2017. Refer to Note 18 of
the consolidated financial statements included elsewhere in this Annual Report on Form 10-K for details regarding
our requirement to repay the Danske Bank Term Loan Facility using the proceeds from the Perceptive Term Loan.
JGB Debt
On March 15, 2017, we completed a convertible debt financing with JGB for net proceeds of $24.0 million. The
proceeds from the convertible debt facility were used to pay off our $11.2 million debt facility with East West Bank.
In addition, the debt agreement requires us to maintain a minimum of $9.4 million of cash at a named financial
institution. These funds are restricted as to withdrawal and are not available to us to fund our operations or repay
indebtedness. Refer to Note 18 of the consolidated financial statements included elsewhere in this Annual Report on
Form 10-K for details regarding our requirement to repay the JGB Debt using the proceeds from the Perceptive
Term Loan.
Going Concern
As of December 31, 2017, we had cash and cash equivalents of $16.9 million and an accumulated deficit of $268.0
million. On March 1, 2018, we entered into a binding commitment letter with Perceptive, pursuant to which
Perceptive committed to provide us with a term loan of up to $35.0 million, subject to funding in two tranches. We
are required to use the proceeds from the Perceptive Term Loan, in part, to repay the JGB Debt, the Allenex Notes
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and the Danske Bank term loan. We believe that our existing cash balance and expected revenue along with the net
proceeds from our debt financing, will be sufficient to meet our anticipated cash requirements for a period of at least
12 months from the issuance of our consolidated financial statements.
We may require future additional financing to fund working capital and pay our obligations as they come due.
Additional financing might include one or more offerings and one or more of a combination of equity securities,
debt arrangements or collaborations. However, there can be no assurance that we will be successful in acquiring
additional funding at levels sufficient to fund our operations or on terms favorable to us.
Our financial statements have been prepared assuming we will continue as a going concern through twelve months
from the filing date of our Annual Report on Form 10-K for the year ended December 31, 2017, 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 reclassifications of assets and
liabilities that might be necessary if we can no longer continue as a going concern.
The following table summarizes our cash flows for the years ended December 31, 2017, 2016 and 2015:
2017
Year Ended December 31,
2016
(in thousands)
2015
Net cash (used in) provided by:
Operating activities ................................................ $
Investing activities .................................................
Financing activities ................................................
Effect of exchange rate on cash and cash equivalents...
Net decrease in cash and cash equivalents .................. $
(14,307) $
(6,164)
20,004
104
(363) $
(16,523) $
(21,117)
24,927
83
(12,630) $
(9,752)
(1,199)
4,408
—
(6,543)
Cash Flows from Operating Activities
Net cash used in operating activities consists of our net 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, 2017 was $14.3 million. Our net loss of $55.5
million was our primary use of cash in operating activities and included a number of noncash items, including: a
$29.6 million loss on the revaluation of warrants and derivative liabilities to estimated fair value, $3.8 million of
depreciation and amortization, a $3.5 million amortization of debt discount and noncash interest expense, $2.0
million of goodwill impairment, and a $1.2 million loss related to the revaluation of the contingent consideration.
Net operating assets and liabilities decreased by $1.1 million.
Net cash used in operating activities for the year ended December 31, 2016 was $16.5 million. Our net loss of $39.8
million was our primary use of cash in operating activities and included our spending on research and development
with total costs of $12.4 million in the year ended December 31, 2016, and our $8.5 million of increased general and
administrative cost mostly related to our acquisition of Allenex. Our net loss also included a number of noncash
items including $13.0 million of goodwill impairment related to our purchase of Allenex, $4.2 million of
amortization of inventory fair market value adjustment, $2.9 million of depreciation and amortization, $2.0 million
of stock based compensation expense, and $0.5 million on a revaluation gain on a contingent consideration liability
related to our acquisition of IMX in June 2014.
Net cash used in operating activities for the year ended December 31, 2015 was $9.8 million. Our 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 IMX, in June 2014. This revaluation gain was driven by a
decrease in our stock price.
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Cash Flows from Investing Activities
For the year ended December 31, 2017, net cash used in investing activities was $6.2 million, which was primarily
due to the $5.4 million repayment of the deferred purchase obligation related to the Allenex acquisition and $0.5
million related to the acquisition of the assets of Conexio.
For the year ended December 31, 2016, net cash used in investing activities was $21.1 million, which was mainly
the cash paid to acquire Allenex of $20.6 million, net of cash acquired of $0.6 million.
For the year ended December 31, 2015, net cash used in investing activities was $1.2 million for purchases of
property and equipment.
Cash Flows from Financing Activities
Net cash provided by financing activities for the year ended December 31, 2017 was $20.0 million, which primarily
reflected the proceeds from the 2017 Public Offering of $18.3 million, the JGB debt proceeds of $24.0 million and
$1.0 million related to the exercise of warrants. These amounts were offset by $12.8 million of East West Bank
extinguishments, $1.5 million principal payments on Danske debt, $0.1 million of capital lease obligations and the
restriction of $9.4 million of cash related to our JGB debt.
Net cash provided by financing activities for the year ended December 31, 2016 of $24.9 million consisted primarily
of $20.6 million from the issuance of equity securities in private financing transactions, $7.9 million in proceeds
received from the Public Offering, net of issuance costs, and $0.3 million from the issuance of common stock under
the employee stock purchase plan and the exercise of stock options, partly offset by $3.9 million of principal
payments on debt and capital lease obligations.
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.
Contractual Obligations
We are a smaller reporting company, as defined by Rule 12b-2 of the Securities Exchange Act of 1934, as amended,
or the Exchange Act, and are not required to provide the information required under this item.
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.
Foreign Operations
The accompanying balance sheets contain certain recorded assets and liabilities in foreign countries, primarily
Sweden, Australia and Austria. Although these countries are considered economically stable and we have
experienced no notable burden from foreign exchange transactions, export duties or government regulations,
unanticipated events in foreign countries could have a material adverse effect on our operations.
83
Recent Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board, or FASB, issued ASU No. 2016-02, Leases (Topic
842), 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 us in fiscal year 2019 and must be adopted using a modified
retrospective transition approach. Early adoption is permitted. We are currently assessing the impact of this guidance
will have on its consolidated financial statements.
In March 2016, the FASB issued ASU No 2016-09, Compensation - Stock Compensation (Topic 718) -
Improvements to Employee Share-Based Payment Accounting, or ASU 2016-09. This ASU simplifies the
accounting for share-based payment transactions, including the income tax consequences, classification of awards as
either equity or liabilities, and classification on the statement of cash flows. In addition, the guidance allows for a
policy election to account for forfeitures as they occur rather than on an estimated basis. This ASU will be effective
for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption is
permitted. We are currently assessing the potential effects of this ASU on our consolidated financial statements.
In April 2016, the FASB issued ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606):
Identifying Performance Obligations and Licensing, or ASU 2016-10. In March 2016, the FASB issued ASU No.
2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting
Revenue Gross versus Net), or ASU 2016-08. These amendments provide additional clarification and
implementation guidance on the previously issued ASU No. 2014-09, Revenue from Contracts with Customers
(Topic 606), or ASU 2014-09, which 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. The amendments in ASU 2016-10
provide clarifying guidance on materiality of performance obligations; evaluating distinct performance obligations;
treatment of shipping and handling costs; and determining whether an entity’s promise to grant a license provides a
customer with either a right to use an entity’s intellectual property or a right to access an entity’s intellectual
property. The amendments in ASU 2016-08 clarify how an entity should identify the specified good or service for
the principal versus agent evaluation and how it should apply the control principle to certain types of arrangements.
In May 2016, the FASB issued ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-
Scope Improvements and Practical Expedients, which addresses certain issues on assessing collectability,
presentation of sales taxes, noncash consideration, and completed contracts and contract modifications at transition.
In December 2016, the FASB issued ASU No. 2016-20, Technical Corrections and Improvements to Topic 606,
Revenue from Contracts with Customers, which makes technical corrections and improvements to the new revenue
standard. These ASUs will be effective for us in the first quarter of fiscal year 2018.
The guidance may be applied (i) retrospectively to each prior period presented, or (ii) retrospectively with the
cumulative effect recognized as of the date of adoption. We have selected the modified retrospective approach with
the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of
retained earnings. We have substantially completed an evaluation of the impact of adopting this guidance will have
on our consolidated financial statements and disclosures. We currently anticipate that we will record a cumulative
adjustment to retained earnings and accounts receivable of approximately $2.0 million to $3.0 million, as of January
1, 2018 to reflect the adoption of Topic 606. The adjustment is primarily related to the change in revenue
recognition for cash basis tests which will be recognized when the results have been delivered as opposed to in the
period in which cash is received. The adoption of ASU 2014-09 will create additional disclosures for us.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of
Certain Cash Receipts and Cash Payments, to reduce the diversity in practice with respect to the presentation of
certain cash flows. The ASU is effective for interim and annual periods beginning after December 15, 2017, with
early adoption permitted. Adoption of the ASU is retrospective. We do not expect the adoption of ASU 2016-15 to
have a material impact on its condensed consolidated financial statements.
In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (a
consensus of the FASB Emerging Issues Task Force), or ASU 2016-18. This guidance requires that a statement of
cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally
84
described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash
and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-
of-period and end-of-period total amounts shown on the statement of cash flows. ASU 2016-18 is effective for all
interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted. We do not
expect the adoption of ASU 2016-18 to have a material impact on our consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition
of a Business, or ASU 2017-01. In an effort to clarify the definition of a business with the objective of adding
guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals)
of assets or businesses. The amendments of ASU 2017-01 are effective for fiscal years beginning after December
15, 2017 and interim periods within those fiscal years. We adopted ASU 2017-01 on a prospective basis and the
adoption of ASU 2017-01 did not have a material impact on our consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the
Test for Goodwill Impairment (“ASU 2017-04”). This guidance eliminates Step 2 from the goodwill impairment
test. Instead, under the amendments in ASU 2017-04, an entity should perform its annual, or interim, goodwill
impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize
an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however,
the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an
entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting
unit when measuring the goodwill impairment loss, if applicable. ASU 2017-04 is effective for all interim and
annual reporting periods beginning after December 15, 2019. We adopted ASU No. 2017-04 on January 1, 2017 on
a prospective basis.
In February 2017, the FASB issued ASU No. 2017-05, Other Income—Gains and Losses from the Derecognition of
Nonfinancial Assets (Subtopic 610-20) Clarifying the Scope of Asset Derecognition Guidance and Accounting for
Partial Sales of Nonfinancial Assets, or ASU 2017-05. ASU 2017-05 clarifies the scope of derecognition of assets,
defines in substance nonfinancial asset, adds guidance for partial sales of nonfinancial assets and clarifies the
recognition of gains and losses from the transfer of nonfinancial assets in contracts with noncustomers. ASU 2017-
05 will become effective for all interim and annual reporting periods beginning after December 15, 2018 and may be
adopted using a full retrospective or a modified retrospective approach. We are required to adopt the amendments in
ASU 2017-05 at the same time it adopts the amendments in ASU 2014-09. We do not expect the adoption of ASU
2017-05 to have a material impact on its consolidated financial statements.
In May 2017, the FASB issued ASU No. 2017-09, Compensation—Stock Compensation (Topic 718): Scope of
Modification Accounting, or ASU 2017-09. The amendments provide guidance about how to account for changes to
terms or conditions of a share-based payment award required under modification accounting. ASU 2017-09 is
effective for all interim and annual reporting periods beginning after December 15, 2017. Early adoption is
permitted. Any updates will be applied prospectively. We do not currently have modifications of share based
payments.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Currency Exchange Risk
Our pre-transplant business has operations in Sweden, Austria, Australia and sells to countries throughout the world.
As a result, we are subject to significant foreign currency exposures, including transacting in foreign currencies,
investment in a foreign entity, as well as assets and debts denominated in foreign currencies. Our testing revenue is
primarily denominated in U.S. dollars. Our product revenue is denominated primarily in Euro, Swedish Krona,
Australian dollars and U.S. dollars. Consequently, our revenue denominated in foreign currency is subject to foreign
currency exchange risk. A portion of our operating expenses are incurred outside of the U.S. and are denominated in
Euro, Swedish Krona and the Australian dollar, which are also subject to fluctuations due to changes in foreign
currency exchange rates. An unfavorable 10% change in foreign currency exchange rates for our assets and
liabilities denominated in foreign currencies at December 31, 2017 would have negatively impacted our annual
financial results by $1.0 million and our product revenue by $1.0 million. Currently, we do not have any near-term
plans to enter into a formal hedging program to mitigate the effects of foreign currency volatility. We will continue
to reassess our approach to managing our risk relating to fluctuations in foreign currency exchange rates.
85
Interest Rate Risk
We are exposed to market risks in the ordinary course of our business, including interest rate risk. We had cash and
cash equivalents of $16.9 million and $17.3 million at December 31, 2017 and 2016, respectively, which consisted
of bank deposits and money market funds. Additionally, we had debt of $34.1 million as of December 31, 2017, of
which $6.8 million was subject to variable interest rates.
Such variable 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 50 basis point increase or
decrease in interest rates during any of the periods presented would have an approximate impact of less than $0.1
million on our consolidated financial statements.
86
CareDx, Inc.
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm............................................................................
Consolidated Balance Sheets ...........................................................................................................................
Consolidated Statements of Operations ...........................................................................................................
Consolidated Statements of Comprehensive Loss...........................................................................................
Consolidated Statements of Convertible Preferred Stock and Stockholders’ (Deficit) Equity .......................
Consolidated Statements of Cash Flows..........................................................................................................
Notes to Consolidated Financial Statements....................................................................................................
Page No.
88
89
90
91
92
93
94
87
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors of CareDx, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of CareDx, Inc. (the Company) as of December 31,
2017 and 2016, the related consolidated statements of operations, comprehensive income (loss), convertible
preferred stock and stockholders’ (deficit) equity and cash flows for each of the three years in the period ended
December 31, 2017, and the related notes (collectively referred to as the “consolidated financial statements”). In our
opinion, the consolidated financial statements referred to above present fairly, in all material respects, the
consolidated financial position of the Company at December 31, 2017 and 2016, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended December 31, 2017, in conformity with
U.S. generally accepted accounting principles.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with
the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with
respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations
of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform,
an audit of its internal control over financial reporting. As part of our audits we are required to obtain an
understanding of internal control over financial reporting 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.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements,
whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included
examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits
also included evaluating the accounting principles used and significant estimates made by management, as well as
evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis
for our opinion.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2009.
Redwood City, California
March 22, 2018
88
CareDx, Inc.
Consolidated Balance Sheets
(In thousands, except share and per share data)
As of December 31,
2017
2016
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’ (deficit) equity
Current liabilities:
$
Accounts payable ........................................................................................................
Accrued payroll liabilities ...........................................................................................
Accrued and other liabilities........................................................................................
Accrued royalties.........................................................................................................
Deferred revenue .........................................................................................................
Deferred purchase consideration .................................................................................
Derivative liability.......................................................................................................
Current portion of long-term debt ...............................................................................
Total current liabilities ......................................................................................................
Deferred rent, net of current portion..................................................................................
Deferred revenue, net of current portion ...........................................................................
Deferred tax liability..........................................................................................................
Long-term debt, net of current portion ..............................................................................
Contingent consideration...................................................................................................
Common stock warrant liability ........................................................................................
Other liabilities ..................................................................................................................
Total liabilities...................................................................................................................
Commitments and contingencies (Note 8)
Stockholders’ equity:
Preferred stock: $0.001 par value; 10,000,000 shares authorized at December 31,
2017 and 2016; no shares issued and outstanding at December 31, 2017 and 2016......
Common stock: $0.001 par value; 100,000,000 shares authorized at December 31,
2017 and 2016; 28,825,019 and 21,278,373 shares issued and outstanding
at December 31, 2017 and 2016, respectively..........................................................
Additional paid-in capital............................................................................................
Accumulated other comprehensive loss ......................................................................
Accumulated deficit ....................................................................................................
Total CareDx, Inc. stockholders’ (deficit) equity..............................................................
Noncontrolling interest................................................................................................
Total stockholders’ (deficit) equity ...................................................................................
Total liabilities and stockholders’ (deficit) equity............................................................. $
16,895 $
2,991
5,529
1,352
26,767
2,075
33,139
12,005
9,579
—
83,565 $
3,391 $
5,013
3,735
-
39
407
14,600
15,721
42,906
913
730
4,933
18,338
1,672
18,712
1,315
89,519
17,258
2,768
5,461
1,186
26,673
2,931
33,124
13,839
143
20
76,730
3,065
3,851
5,320
263
42
5,445
—
22,846
40,832
1,301
759
6,057
1,098
492
5,208
1,222
56,969
—
—
29
264,204
(2,345)
(268,022)
(6,134)
180
(5,954)
83,565 $
21
235,673
(3,659)
(212,553)
19,482
279
19,761
76,730
The accompanying notes are an integral part of these financial statements.
89
CareDx, Inc.
Consolidated Statements of Operations
(In thousands, except share and per share data)
Revenue:
Testing revenue ............................................................................ $
Product revenue............................................................................
Collaboration and license revenue ...............................................
Total revenue .....................................................................................
Operating expenses:
Cost of testing ..............................................................................
Cost of product.............................................................................
Research and development...........................................................
Sales and marketing .....................................................................
General and administrative ..........................................................
Goodwill impairment ...................................................................
Change in estimated fair value of contingent consideration ........
Total operating expenses ...................................................................
Loss from operations .........................................................................
Interest expense, net ..........................................................................
Other expense, net .............................................................................
Change in estimated fair value of common stock warrant and
derivative liabilities ........................................................................
Loss before income taxes ..................................................................
Income tax benefit .............................................................................
Net loss ..............................................................................................
Net loss attributable to noncontrolling interest .................................
Net loss attributable to CareDx, Inc. ................................................. $
Net loss per share attributable to CareDx, Inc. (Note 3):
Year Ended December 31,
2016
2015
2017
33,106 $
14,634
584
48,324
12,345
9,026
12,388
12,808
18,913
1,958
1,180
68,618
(20,294)
(5,863)
(1,490)
(29,622)
(57,269)
1,709
(55,560)
(91)
(55,469) $
29,680 $
10,715
236
40,631
10,882
10,240
12,385
11,166
20,725
13,021
(456)
77,963
(37,332)
(1,860)
(1,920)
(250)
(41,362)
1,606
(39,756)
(287)
(39,469) $
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)
—
(13,707)
Basic............................................................................................. $
Diluted.......................................................................................... $
(2.38) $
(2.38) $
(2.39) $
(2.39) $
(1.16)
(1.16)
Weighted average shares used to compute net loss per share
attributable to CareDx, Inc.:
Basic............................................................................................. 23,332,503 16,496,911 11,860,885
Diluted.......................................................................................... 23,332,503 16,496,911 11,860,885
The accompanying notes are an integral part of these financial statements.
90
CareDx, Inc.
Consolidated Statements of Comprehensive Loss
(In thousands)
Net loss ................................................................................. $
Other comprehensive loss:
Foreign currency translation adjustments .......................
Net Comprehensive loss .......................................................
Comprehensive loss attributable to noncontrolling interest,
net of tax ........................................................................
Comprehensive loss attributable to CareDx, Inc. ................. $
Year ended December 31,
2016
(39,756) $
2017
(55,560) $
2015
(13,707)
1,306
(54,254)
(3,727)
(43,483)
—
(13,707)
(99)
(54,155) $
(355)
(43,128) $
—
(13,707)
The accompanying notes are an integral part of these consolidated financial statements.
91
CareDx, Inc.
Consolidated Statements of Convertible Preferred Stock and Stockholders’ (Deficit) Equity
(In thousands, except share data)
Convertible
Preferred Stock
Shares
Amount Shares
Common Stock
Accumulated
Other
Additional
Paid-In Comprehensive Accumulated Noncontrolling
Total
Stockholders’
(Deficit)
Equity
— 11,803,970
Amount Capital
12
200,661
Income
Deficit
Interest
—
(159,377 )
Balance at December 31, 2014 ................................
—
—
—
—
—
—
—
—
—
Issuance of common stock for Board of
Director services...........................................
Issuance of common stock for cash upon
exercise of stock options ..............................
Issuance of common stock under equity
incentive plans..............................................
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 ................................
Issuance of common stock in connection
with business acquisition..............................
Issuance of preferred stock through private
placement and subsequent financing........... 4,630,145
Conversion of convertible private placement
and subsequent financing preferred stock
to common stock .......................................... (4,630,145 )
Issuance of common stock through private
placement and subsequent financing...........
Issuance of common stock through public
offering .........................................................
Issuance of common stock under equity
incentive plans..............................................
Issuance of common stock for Board of
Director services...........................................
Issuance of common stock for cash upon
exercise of stock options ..............................
Employee and non-employee share-based
compensation expense..................................
Noncontrolling interest upon acquisition ........
Components of other comprehensive loss:
Foreign currency translation adjustment .........
Net loss ............................................................
Balance at December 31, 2016 ................................
—
—
—
—
—
—
—
—
—
— $
—
38,121
—
223
—
23,576
—
46
—
36,696
—
203
—
—
—
1,343
—
—
—
—
— 11,902,363
—
—
12
90
—
202,566
— 1,375,029
1
7,204
5
—
—
13,064
(5 ) 4,630,145
—
926,029
— 2,283,392
5
1
2
—
2,595
7,923
—
93,806
—
304
—
61,921
—
304
—
5,688
—
19
—
—
—
—
—
—
1,694
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(13,707 )
(173,084 )
—
—
—
—
—
—
—
—
—
—
—
—
—
—
— 21,278,373 $
—
—
—
—
21 $ 235,673 $
(3,659 )
—
(3,659 ) $
—
(39,469 )
(212,553 ) $
Issuance of common stock in connection
with public offering ......................................
Issuance of common stock in connection
with business acquisition..............................
Conversion of convertible debt
to common stock ..........................................
Issuance of common stock under employee
benefit plans .................................................
Issuance of common stock for Board of
Director services..............................................
Issuance of common stock for cash upon
exercise of stock options ..............................
Issuance of common stock for cash upon
exercise of warrants......................................
Issuance of common stock upon exercise of
warrants ...........................................................
Employee and non-employee share-based
compensation expense..................................
Components of other comprehensive loss:
Foreign currency translation adjustment .........
Net loss ............................................................
Total comprehensive loss ................................
Balance at December 31, 2017 ................................
—
— 4,992,840
6
18,323
—
— 1,022,544
2
1,144
—
—
288,022
—
1,676
—
—
166,067
—
94
—
—
115,948
—
245
—
—
70,809
—
262
—
—
890,416
—
989
—
—
—
—
4,306
—
—
—
—
1,492
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
— 28,825,019 $
—
—
—
—
—
—
29 $ 264,204 $
1,314
—
—
(2,345 ) $
(55,469 )
—
(268,022 ) $
The accompanying notes are an integral part of these financial statements.
92
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
634
(68 )
(287 )
279 $
—
—
—
—
—
—
—
—
—
(8 )
(91 )
—
180 $
41,296
223
46
203
1,343
90
(13,707 )
29,494
7,205
13,064
5
2,596
7,925
304
304
19
1,694
634
(3,727 )
(39,756 )
19,761
18,329
1,146
1,676
94
245
262
989
4,306
1,492
1,306
(55,560 )
(54,254 )
(5,954 )
CareDx, Inc.
Consolidated Statements of Cash Flows
(In thousands)
Operating activities:
Net loss ............................................................................................................ $
Adjustments to reconcile net (loss) income to net cash used in operating
activities:
Depreciation and amortization .................................................................
Amortization of inventory fair market value adjustment.........................
Loss (gain) on disposal of property and equipment.................................
Stock-based compensation.......................................................................
Amortization of deferred revenue ............................................................
Revaluation of warrants and derivative liabilities to estimated fair
value ......................................................................................................
Revaluation of contingent consideration to estimated fair value.............
Amortization of debt discount and noncash interest expense ..................
Non-cash goodwill impairment................................................................
Loss on conversion of debt to equity .......................................................
Changes in operating assets and liabilities:
Accounts receivable .........................................................................
Inventory ..........................................................................................
Prepaid and other assets ...................................................................
Accounts payable .............................................................................
Accrued payroll liabilities ................................................................
Accrued royalties .............................................................................
Accrued and other liabilities ............................................................
Change in deferred taxes..................................................................
Net cash used in operating activities ........................................
Investing activities:
Purchase of property and equipment ...............................................................
Acquisition of Allenex AB, net of cash acquired ............................................
Acquisition of assets of Conexio Genomics Pty Ltd. ......................................
Restricted cash on operating leases .................................................................
Net cash used in investing activities.........................................
Financing activities:
Proceeds from issuance of common stock, net of issuance costs ....................
Proceeds from debt, net of issuance costs........................................................
Principal payments on debt and capital lease obligations................................
Restricted cash collateral for debt....................................................................
Proceeds from private placement and subsequent financing, net of issuance
costs ..............................................................................................................
Proceeds from exercise of warrants .................................................................
Proceeds from exercise of stock options..........................................................
Proceeds from issuances of common stock under equity incentive plans .......
Change in bank overdraft obligation ...............................................................
Net cash provided by financing activities ................................
Effect of exchange rate changes on cash and cash equivalents ...............................
Net decrease 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
Shares issued in lieu of cash payment ..................................................................... $
Deferred purchase consideration ............................................................................. $
Accrued interest capitalized to debt principal ......................................................... $
Property and equipment purchased under capital leases ......................................... $
Common stock issued for acquisition...................................................................... $
Debt assumed as part of acquisition ........................................................................ $
Conversion of convertible private placement and subsequent financing
preferred stock to common stock.......................................................................... $
Common stock warrants issued upon debt financing .............................................. $
2017
Year Ended December 31,
2016
2015
(55,560 ) $
(39,756 ) $
(13,707 )
3,759
418
10
1,744
(32 )
29,622
1,180
3,452
1,958
274
(109 )
1,025
(84 )
292
1,065
(263 )
(970 )
(2,088 )
(14,307 )
(186 )
(5,404 )
(515 )
(59 )
(6,164 )
18,328
24,002
(14,359 )
(9,375 )
—
989
262
94
63
20,004
104
(363 )
17,258
16,895 $
3,270 $
1,145 $
—
984 $
— $
— $
— $
— $
— $
2,920
4,175
—
1,998
(45 )
250
(456 )
(101 )
13,021
—
1,047
492
999
(620 )
977
21
(105 )
(1,340 )
(16,523 )
(549 )
(20,568 )
—
—
(21,117 )
7,926
—
(3,944 )
—
20,622
—
19
304
—
24,927
83
(12,630 )
29,888
17,258 $
867 $
— $
5,700 $
— $
— $
7,205 $
13,421 $
13,064 $
— $
796
—
(2 )
1,341
(130 )
—
(126 )
247
—
—
320
(80 )
(823 )
489
682
1
1,240
—
(9,752 )
(1,199 )
—
—
—
(1,199 )
—
15,625
(11,466 )
—
—
—
46
203
—
4,408
—
(6,543 )
36,431
29,888
1,364
—
—
—
25
—
—
—
90
The accompanying notes are an integral part of these financial statements.
93
CareDx, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
CareDx, Inc. (“CareDx” or the “Company”) together with its subsidiaries, is a global transplant diagnostics
company with product offerings along the pre- and post-transplant continuum. The Company focuses on discovery,
development and commercialization of clinically differentiated, high-value diagnostic surveillance solutions for
transplant patients. In post-transplant diagnostics, the Company offers AlloMap, which is a heart transplant
molecular test and in October 2017 launched AlloSure, which is a donor-derived cell free DNA (“dd-cfDNA”) test
initially used for kidney transplant patients. In pre-transplant diagnostics, the Company offers high quality products
that increase the chance of successful transplants by facilitating a better match between a donor and a recipient of
stem cells and organs.
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 to severe acute cellular rejection. Since 2008, the Company
has sought to expand the adoption and utilization of its AlloMap solution through ongoing studies to substantiate the
clinical utility and actionability; secure positive reimbursement decisions from large private and public payers,
develop and enhance its 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. The Company believes 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, the Company believes AlloMap can improve patient care by helping healthcare providers
avoid the use of unnecessary, invasive surveillance biopsies and determine the appropriate dosage levels of
immunosuppressants. AlloMap has received 510(k) clearance from the U.S. Food and Drug Administration (the
“FDA”) for marketing and sales 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.
On October 9, 2017, the Company commercially launched AlloSure, its proprietary next-generation sequencing-
based test to measure dd-cfDNA after transplantation. The Company believes the use of AlloSure, in conjunction
with other clinical indicators, can help healthcare providers and their patients better manage long-term care
following a kidney transplant. In particular, the Company believes AlloSure can improve patient care by helping
healthcare providers to reduce the use of invasive biopsies and determine the appropriate dosage levels of
immunosuppressants.
With the acquisition of CareDx International AB, formerly Allenex AB, or Allenex, on April 14, 2016, the
Company develops, manufacture, market and sell products that increase the chance of successful transplants by
facilitating a better match between a donor and a recipient of stem cells and organs. Olerup SSP is used to type
Human Leukocyte Antigen, or HLA alleles based on sequence-specific primer, or SSP technology. With the
acquisition of the business assets of Conexio Genomics Pty Ltd, or Conexio on January 20, 2017, the Company now
offers a complete product range for sequence-based typing, or SBT, of HLA alleles. Olerup SBT is a test kit for
sequence based HLA typing, while Assign SBTTM is the companion software for sequence analysis. In 2014,
Allenex began active development of a new HLA typing product, Olerup QTYPE, which uses real-time polymerase
chain reaction or PCR methodology. QTYPE was commercially launched at the end of September 2016. The
Company also offers XM-ONE®, a standardized test that identifies a patient’s antigens against HLA Class I or
Class II, as well as antibodies against a donor’s endothelium. This cross-match test is primarily used prior to kidney
transplants.
The Company’s headquarters are in Brisbane, California; its primary operations are in Brisbane, U.S. and
Stockholm, Sweden; and it operates in two reportable segments.
94
Liquidity and Going Concern
The Company has incurred significant losses and negative cash flows from operations since its inception and had an
accumulated deficit of $268.0 million at December 31, 2017. As of December 31, 2017, the Company had cash and
cash equivalents of $16.9 million, and $34.1 million of debt outstanding under its debt obligations, net of debt
discount, of which $15.7 million is current.
In March 2017, the Company received net proceeds of $24.0 million in connection with the issuance of a debt (the
“JGB Debt”) obligation to JGB Collateral LLC and certain of its affiliates or JGB of which $11.2 million was used
to repay the Company’s outstanding debt obligations to East West Bank. In addition, the debt agreement requires
the Company to maintain a minimum of $9.4 million of cash at a named financial institution. These funds are
restricted as to withdrawal and are not available to the Company to fund its operations or repay indebtedness. In
accordance with the Company’s convertible debt financing agreements, the Company filed a registration statement
with the Securities and Exchange Commission (the “SEC”) registering for resale the shares underlying the securities
issued or issuable to JGB in the financing.
A quarterly debt covenant in the Company’s Term Loan Facility Agreement (the “Term Loan Facility”) with Danske
Bank A/S (“Danske”) was violated on June 30, 2016 and September 30, 2016. The Company obtained waivers for
these violations. The Company was in compliance with all debt covenants at December 31, 2016. Due to liquidity
concerns, the Danske debt was classified as a current liability in the consolidated balance sheet as of December 31,
2016.The Company was not in compliance with certain covenants at March 31, 2017, June 30, 2017, and September
30, 2017. The Company obtained a waiver for these violations, which was conditional upon, among other things, the
Company making a principal repayment of SEK 6,000,000 (approximately $0.7 million) by October 31, 2017. This
amount was paid on October 31, 2017. The Company was not in compliance with certain covenants at December 31,
2017.
In connection with the acquisition of Allenex, the Company entered into Conditional Share Purchase Agreements
with each of Midroc Invest AB, FastPartner AB (“FastPartner”) and Xenella Holding AB, the former majority
shareholders of Allenex (collectively, the “Former Majority Shareholders”), on December 16, 2015, as amended (the
“Conditional Share Purchase Agreements”). Pursuant to the Conditional Share Purchase Agreements, as of June 30,
2017, the Company owed deferred purchase consideration to the Former Majority Shareholders of approximately
$6.3 million, including accrued interest, which was due on July 1, 2017. On July 1, 2017, the Company entered into
amendments to the Conditional Share Purchase Agreements with the Former Majority Shareholders, pursuant to
which, among other things, (i) required the Company to immediately convert approximately $1.1 million of the $6.3
million deferred purchase consideration owed by the Company to the Former Majority Shareholders under the
Conditional Share Purchase Agreements (the “Deferred Obligation”) into 1,022,544 shares of the Company’s
common stock at a per share price of $1.12; (ii) required that the Company make an immediate cash repayment of
$0.5 million; (iii) extended the maturity date of a portion of the obligations, totaling approximately $2.9 million to
March 31, 2019; and (iv) provided that approximately $2.1 million of the Deferred Obligation would become
payable on December 31, 2017, unless earlier converted into 1,791,763 shares of common stock, which issuance of
shares was subject to approval by the Company’s stockholders.
On November 14, 2017, the Company further amended the Conditional Share Purchase Agreements and paid the
total remaining Deferred Obligation of $4.7 million, plus accrued interest, immediately.
Promissory notes issued by Allenex to FastPartner and Mohammed Al Amoudi in an aggregate amount of
approximately $4.1 million, including accrued interest (the “Allenex Notes”), were due on July 1, 2017. On July 1,
2017, Allenex entered into new note agreements with each of FastPartner and Mohammed Al Amoudi, pursuant to
which the parties agreed to defer repayment of the amounts owed under the Allenex Notes until March 31, 2019.
On March 1, 2018, the Company entered into a binding commitment letter with Perceptive Credit Holdings II, LP
(“Perceptive”), pursuant to which Perceptive committed to provide the Company with a term loan of up to $35.0
million, subject to funding in two tranches. The Company is required to use the proceeds from the Perceptive term
loan, in part, to repay the JGB Debt, the Allenex Notes and the Danske Bank Term Loan. The Company believes
that its net proceeds from the proposed refinancing, as well as its existing cash balance and expected revenues, will
be sufficient to meet its anticipated cash requirements for at least the next 12 months.
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The Company may require additional financing to fund working capital and pay its obligations as they come due.
Additional financing might include one or more offerings and one or more of a combination of equity securities,
debt arrangements or collaborations. However, there can be no assurance that the Company will be successful in
acquiring additional funding at levels sufficient to fund its operations or on terms favorable to the Company.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements have been prepared in conformity with accounting principles
generally accepted in the United States of America (“U.S. GAAP”) and include the accounts of the Company and its
subsidiaries. Intercompany transactions have been eliminated. As of December 31, 2017, the Company owns less
than 100% of the shares of Allenex, the Company records net loss attributable to noncontrolling interest in its
consolidated statements of operations equal to the percentage of the economic or ownership interest retained in such
entities by the respective noncontrolling parties.
Use of Estimates
The preparation of consolidated 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 consolidated 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, including from acquisitions; (vi) inventory valuation; (vii) the
valuation of warrants, Series A Preferred, and common stock issued in the Private Placement and Subsequent
Financing (as described in Note 11); (viii) the fair value of contingent consideration in a business acquisition; (ix)
the fair value of embedded derivatives; (x) measurement of stock-based compensation expense; (xi) the
determination of the valuation allowance and estimated tax benefit associated with deferred tax assets and net
deferred tax liability; (xii) any impairment of long-lived assets, including in-process technology and goodwill; and
(xiii) 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, 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 eight 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 that 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 and AlloSure tests provided for patients located in the U.S. and billed to various third-party payers, and
from sales of pre-transplant products to distributors, strategic partners and end customers in Europe, the Middle
East, and Africa, the U.S., Latin America and other geographic regions. The Company has not experienced any
significant credit losses and does not generally require collateral on receivables. For the years ended December 31,
2017, 2016 and 2015, approximately 27%, 44% and 50%, respectively, of testing revenue was billed to Medicare.
No other payers represented more than 10% of testing revenue for these periods and no payers represented more
than 10% of product revenue for the years ended December 31, 2017 and 2016.
As of December 31, 2017 and 2016, approximately 16% and 27%, respectively, of accounts receivable was due
from Medicare. No other payer represented more than 10% of accounts receivable at either December 31, 2017 or
2016.
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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 the Company’s convertible debt financing agreements with JGB, the Company is required to maintain
restricted cash of $9.4 million. These funds are restricted as to withdrawal and are not available to the Company to
fund its operations or repay indebtedness. 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 used to support these arrangements is classified as long-term restricted cash on the accompanying balance
sheets.
Inventory
Inventory is finished goods, work in progress, and raw materials and consists of reagent plates, testing devices,
laboratory supplies, reagents and finished goods kits. Inventories are used in connection with tests performed, and
kits produced 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 at the Company’s Stockholm, Sweden, and Fremantle,
Australia locations are stated at the lower of purchased cost, determined on an average cost basis, or net realizable
value. Inventories at the Company’s other locations 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. The estimated useful life is generally
three years for laboratory, computer and office equipment, and 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
Amortizable intangible assets include customer relationships, developed technology, trademarks, contracts and in-
process research and development (“IPR&D”) identified intangible assets acquired as part of a business
combination. Intangible assets subject to amortization are amortized over their estimated useful lives. Acquired
intangible assets with indefinite useful lives are related to IPR&D projects and are measured at their respective fair
values as of the acquisition date. The Company does not amortize 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 research and development 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
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
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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 an 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 that 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. If an impairment exists, the Company measures the impairment 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.
The Company has determined that it operates in two reportable segments associated with the delivery of post-
transplant diagnostic tests and the development and commercialization of pre-transplant diagnostic products. The
reporting unit’s carrying value is compared to its fair value. The estimated fair values of the reporting units are
determined using either the market approach, income approach or a combination of the market and income
approach. Goodwill is considered impaired if the carrying value of the reporting unit exceeds its estimated fair
value. The income approach uses expected future operating results and failure to achieve these expected results may
cause a future impairment of goodwill in that reporting unit. The Company tested its goodwill for impairment as of
December 1, 2016, and determined that the fair value of the Pre-Transplant reporting unit was lower than its
carrying value, resulting in a goodwill impairment charge of $13.0 million for the period ended December 31, 2016.
The Company conducted a goodwill impairment test as of March 31, 2017 and identified an impairment of $2.0
million related to the goodwill recorded in its pre-transplant reportable segment. In connection with our annual
goodwill assessment on December 1, 2017, we performed a qualitative assessment and determined that it is not
likely that the fair value of the Post-Transplant reporting unit is less than the carrying value and therefore a
quantitative test to assess potential goodwill was not necessary. See Note 6 for additional discussion regarding the
impairment charge recorded.
Fair Value of Financial Instruments
Fair value is defined as the price that would be received from selling an asset or the price 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 financial instruments of the Company, 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.
Common Stock Warrant Liability and Derivative Liabilities
On April 14, 2016 and June 15, 2016, the Company completed the Private Placement and Subsequent Financing,
respectively (as described in Note 11), which included the issuance of freestanding warrants to certain accredited
investors and placement agents to purchase shares of the Company’s common stock.
The freestanding warrants are contingently redeemable and are classified as liabilities on the consolidated balance
sheet and recorded at their estimated fair value. The warrants are remeasured at each balance sheet date with
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changes recorded in change in estimated fair value of common stock warrant and derivative liabilities on the
consolidated statements of operations.
On March 15, 2017, the Company entered into a Securities Purchase Agreement with JGB, pursuant to which the
Company issued Senior Secured Debentures (the “JGB Debt”) and warrants (the “JGB Warrants”) (as described in
Note 11). The Company determined that the debentures and the warrants were free standing instruments. The terms
of the warrants include price-based anti-dilution adjustment provisions, which preclude the Company from
classifying the warrants in equity. As such, the warrants are classified as liabilities on the consolidated balance
sheet. The full fair value of the warrants was allocated on day one to the common stock warrant liability and the
residual value, after allocation of the fair value of the derivative liability discussed below, was ascribed to the
debentures. The debentures are classified as liabilities on the consolidated balance sheet and include certain
embedded derivatives that required bifurcation, including settlement and penalty provisions. The warrants and
embedded derivative are remeasured at each reporting period with changes recorded in change in estimated fair
value of common stock warrant and derivative liabilities on the consolidated statements of operations.
Testing Revenue
The Company recognizes revenues for tests delivered when the following criteria are met: (i) there is persuasive
evidence that an arrangement exists; (ii) delivery has occurred or services rendered; (iii) the fee is fixed or
determinable; and (iv) collectability of the fee is reasonably assured.
For testing revenue, 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 and AlloSure 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 on an accrual basis in the period the test is performed.
When the first, third or fourth criteria are not met but third-party payers make a payment to the Company for the
tests performed, the Company recognizes revenue on a cash basis in the period in which the payment is received.
Revenue for tests performed 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. These adjustments 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.
Product Revenue
Product revenue is recognized from the sale of products to end-users, distributors and strategic partners when (i)
persuasive evidence of an arrangement exists, (ii) the product is complete and tested and has been shipped or
delivered, as required to transfer title and risk of loss, (iii) the sales price is fixed and determinable, (iv) collection of
the resulting receivable is reasonably assured, (v) there are no material contingencies and (vi) the Company does not
have significant obligations for future performance. When collectability of the receivable is not reasonably assured,
the Company defers the revenue until the cash is received. Provisions for estimated future product returns and
allowances are recorded in the period of the sale based on the historical and anticipated future rate of returns.
Revenue is recorded net of any discounts given to the buyer.
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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. The Company believes this approach is consistent with the
substance of its performance under its various license and collaboration agreements. The Company did not
recognize any revenue connected with milestones during the years ended December 31, 2017, 2016 or 2015.
Cost of Testing
Cost of testing reflects the aggregate costs incurred in delivering the Company’s AlloMap and AlloSure test results
to clinicians. The components of cost of testing are materials and service costs, direct labor costs, 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, utilities and royalties. Costs associated with performing tests (except royalties)
are recorded as the test is processed regardless of whether and when the testing 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 the cost
of testing at the time the test revenues are recognized.
Cost of Product
Cost of product reflects the aggregate costs incurred in delivering the Company’s products to customers. The
components of cost of product are materials costs, manufacturing and kit assembly costs, direct labor costs,
equipment and infrastructure expenses associated with preparing kitted products for shipment, shipping, and
allocated overhead including rent, information technology, equipment depreciation and utilities. Cost of product
also includes amortization of acquired developed technology and adjustments to inventory values, including write-
downs of impaired, slow moving or obsolete inventory.
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 FASB ASC, Topic 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
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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 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 existing solutions. 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 are 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 the periods
presented.
Stock-based Compensation
The Company uses the Black-Scholes 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 its own historical stock prices and stock prices of peer companies in the diagnostics
industry, risk-free rates using 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 using the Company’s expectations and
historical data. The fair value of each restricted stock unit is calculated based upon the closing price of the
Company’s common stock on the date of the grant.
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 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.
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.
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Foreign Currency Translation
The functional currency of the Company’s foreign subsidiaries is the local currency for each entity, including the
Swedish Krona, Australian dollar and the Euro. The revenue and expenses of such subsidiaries have been translated
into U.S. dollars at average exchange rates prevailing during the period. Assets and liabilities have been translated
at the rates of exchange on the balance sheet date. The resulting cumulative translation adjustments are reported in
other comprehensive loss. Foreign currency translation gains and losses on revenue and expenses are recognized in
current operations.
Comprehensive Loss
Comprehensive loss consists of net loss and other losses affecting stockholders’ (deficit) equity that, under U.S.
GAAP, are excluded from net income or loss. For the Company, such items consist of foreign currency losses on
the translation of foreign assets and liabilities.
Recent Accounting Pronouncements
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), 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 that this guidance will have
on its consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation (Topic 718) -
Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”). This ASU simplifies the
accounting for share-based payment transactions, including the income tax consequences, classification of awards as
either equity or liabilities, and classification on the statement of cash flows. In addition, the guidance allows for a
policy election to account for forfeitures as they occur rather than on an estimated basis. The Company adopted
ASU 2016-09 effective January 1, 2017 on a prospective basis, and has elected to continue to account for forfeitures
on an estimated basis. The adoption of this ASU did not have a material impact on the Company’s consolidated
financial position, results of operations or cash flows.
In April 2016, the FASB issued ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606):
Identifying Performance Obligations and Licensing (“ASU 2016-10”). In March 2016, the FASB issued ASU No.
2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting
Revenue Gross versus Net) (“ASU 2016-08”). These amendments provide additional clarification and
implementation guidance on the previously issued ASU No. 2014-09, Revenue from Contracts with Customers
(Topic 606) (“ASU 2014-09”), which 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. The amendments in ASU 2016-10
provide clarifying guidance on materiality of performance obligations; evaluating distinct performance obligations;
the treatment of shipping and handling costs; and determining whether an entity’s promise to grant a license
provides a customer with either a right to use an entity’s intellectual property or a right to access an entity’s
intellectual property. The amendments in ASU 2016-08 clarify how an entity should identify the specified good or
service for the principal versus agent evaluation and how it should apply the control principle to certain types of
arrangements. In May 2016, the FASB issued ASU No. 2016-12, Revenue from Contracts with Customers (Topic
606): Narrow-Scope Improvements and Practical Expedients, which addresses certain issues on assessing
collectability, presentation of sales taxes, noncash consideration, and completed contracts and contract modifications
at transition. In December 2016, the FASB issued ASU No. 2016-20, Technical Corrections and Improvements to
Topic 606, Revenue from Contracts with Customers, which makes technical corrections and improvements to the
new revenue standard. These ASUs will be effective for the Company in the first quarter of fiscal year 2018.
The guidance may be applied (i) retrospectively to each prior period presented or (ii) retrospectively with the
cumulative effect recognized as of the date of adoption. The Company has selected the modified retrospective
approach with the cumulative effect recorded in the period of initial application for the adoption of this standard.
We have substantially completed an evaluation of the impact of adopting this guidance will have on our
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consolidated financial statements and disclosures. The Company anticipates that it will record a cumulative
adjustment to retained earnings and accounts receivable of approximately $2.0 million to $3.0 million, as of January
1, 2018 to reflect the adoption of ASC Topic 606. The adjustment is primarily related to the change in revenue
recognition for cash basis tests which will be recognized when the results have been delivered as opposed to in the
period in which cash is received. The adoption of ASU 2014-09 will also result in additional disclosures.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of
Certain Cash Receipts and Cash Payments (“ASU 2016-15”), to reduce the diversity in practice with respect to the
presentation of certain cash flows. The ASU is effective for interim and annual periods beginning after
December 15, 2017. Adoption of the ASU is retrospective. The Company does not expect the adoption of ASU
2016-15 to have a material impact on its consolidated financial statements.
In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (a
consensus of the FASB Emerging Issues Task Force) (“ASU 2016-18”). This guidance requires that a statement of
cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally
described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash
and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-
of-period and end-of-period total amounts shown on the statement of cash flows. ASU 2016-18 is effective for all
interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted. The
Company does not expect the adoption of ASU 2016-18 to have a material impact on its consolidated financial
statements.
In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition
of a Business (“ASU 2017-01”). In an effort to clarify the definition of a business with the objective of adding
guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals)
of assets or businesses. The amendments of ASU 2017-01 are effective for fiscal years beginning after December
15, 2017 and interim periods within those fiscal years. The Company adopted ASU 2017-01 on a prospective basis
and the adoption of ASU 2017-01 did not have a material impact on our consolidated financial statements. In
January 2017, the FASB issued ASU No. 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the
Test for Goodwill Impairment (“ASU 2017-04”). This guidance eliminates Step 2 from the goodwill impairment
test. Instead, under the amendments in ASU 2017-04, an entity should perform its annual, or interim, goodwill
impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize
an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however,
the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an
entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting
unit when measuring the goodwill impairment loss, if applicable. ASU 2017-04 is effective for all interim and
annual reporting periods beginning after December 15, 2019. ASU 2017-04 is effective for all interim and annual
reporting periods beginning after December 15, 2019. The Company adopted ASU No. 2017-04 on January 1, 2017
on a prospective basis.
In February 2017, the FASB issued ASU No. 2017-05, Other Income—Gains and Losses from the Derecognition of
Nonfinancial Assets (Subtopic 610-20) Clarifying the Scope of Asset Derecognition Guidance and Accounting for
Partial Sales of Nonfinancial Assets (“ASU 2017-05”). ASU 2017-05 clarifies the scope of derecognition of assets,
defines in substance nonfinancial asset, adds guidance for partial sales of nonfinancial assets and clarifies the
recognition of gains and losses from the transfer of nonfinancial assets in contracts with noncustomers. ASU 2017-
05 will become effective for all interim and annual reporting periods beginning after December 15, 2018 and may be
adopted using a full retrospective or a modified retrospective approach. The Company is required to adopt the
amendments in ASU 2017-05 at the same time it adopts the amendments in ASU 2014-09. The Company does not
expect the adoption of ASU 2017-05 to have a material impact on its consolidated financial statements.
In May 2017, the FASB issued ASU No. 2017-09, Compensation—Stock Compensation (Topic 718): Scope of
Modification Accounting (“ASU 2017-09”). The amendments provide guidance about how to account for changes
to terms or conditions of a share-based payment award required under modification accounting. ASU 2017-09 is
effective for all interim and annual reporting periods beginning after December 15, 2017. Early adoption is
permitted. Any updates will be applied prospectively. The Company does not currently have modifications of share
based payments.
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3. NET LOSS PER SHARE
Basic and diluted net loss per share have been computed by dividing the net loss by the weighted-average number of
common shares outstanding during the period, without consideration for common share equivalents as their effect
would have been antidilutive.
For the years ended December 31, 2017, 2016 and 2015, all common share equivalents have been excluded from the
calculation of diluted net loss per share, as their effect would be antidilutive.
The following tables set forth the computation of the Company’s basic and diluted net loss per share (in thousands,
except shares and per share data):
$
Numerator:
Net loss attributable to CareDx, Inc. used to compute
basic net loss per share .........................................................
Net loss attributable to CareDx, Inc. used to compute
diluted net loss per share ......................................................
Denominator:
Weighted-average shares used to compute basic
net loss per share attributable to CareDx, Inc.....................
Weighted-average shares used to compute diluted
net loss per share attributable to CareDx, Inc.....................
Net loss per share attributable to CareDx, Inc.:
Basic ...................................................................................... $
Diluted ................................................................................... $
$
Year Ended December 31,
2016
2015
2017
(55,469)
$
(39,469)
$
(13,707)
(55,469)
$
(39,469)
$
(13,707)
23,332,503
23,332,503
16,496,911
11,860,885
16,496,911
11,860,885
(2.38) $
(2.38) $
(2.39) $
(2.39) $
(1.16)
(1.16)
The following potentially dilutive securities have been excluded from diluted net loss per share, because their effect
would be antidilutive:
Year Ended December 31,
2016
2017
2015
Shares of common stock subject to outstanding
options...............................................................................
Shares of common stock subject to outstanding
common stock warrants ....................................................
Shares of common stock subject to convertible notes ......... 6,127,021
Shares of common stock subject to contingent
227,845
consideration .....................................................................
Restricted stock units ...........................................................
106,200
Total common stock equivalents ......................................... 12,411,471 5,551,325 2,212,431
227,845
436,176
227,845
306,245
301,069
—
1,941,472
3,678,957
1,757,309
1,577,317
3,259,926
—
The Company issued 4,630,145 shares of preferred stock pursuant to the Private Placement and Subsequent
Financing (as described in Note 11), which were completed on April 14, 2016 and June 15, 2016, respectively. All
of the preferred stock was converted to common stock upon receipt of the approval of the Private Placement by the
Company’s stockholders (the “Requisite Stockholder Approval”) on June 16, 2016. As of December 31, 2017, there
was no preferred stock outstanding. On September 26, 2016, the Company completed the Public Offering (the
“2016 Public Offering”), pursuant to which the Company issued and sold an aggregate of 2,250,000 shares of
common stock. On October 4, 2017, the Company completed an underwritten public offering (the “2017 Public
Offering”), pursuant to which the Company issued and sold an aggregate of 4,992,840 shares.
104
4. 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:129)
(cid:129)
(cid:129)
Level 1: Inputs that include quoted prices in active markets for identical assets and liabilities.
Level 2: Inputs other than Level 1 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, 2017 and 2016 (in thousands):
Assets
Money market funds............................................... $
Liabilities
Contingent consideration........................................ $
Common stock warrant liability .............................
Derivative Liability ................................................
Total liabilities........................................................ $
Assets
Money market funds............................................... $
Liabilities
Contingent consideration........................................ $
Warrants to purchase common stock .....................
Total liabilities........................................................ $
December 31, 2017
Fair Value Measured Using
(Level 1)
(Level 2)
(Level 3)
Total
Balance
13,097
$
—
$
—
$
13,097
—
—
—
—
$
$
—
—
—
—
$
$
1,672
18,712
14,600
34,984
$
$
$
1,672
18,712
14,600
34,984
December 31, 2016
Fair Value Measured Using
(Level 1)
(Level 2)
(Level 3)
Total
Balance
14,497
$
—
$
—
$
14,497
—
—
—
$
$
—
—
—
$
$
492
5,208
5,700
$
$
492
5,208
5,700
105
The following table presents the issuances, changes in fair value and classifications of the Company’s Level 3
financial instruments that are measured at fair value on a recurring basis (in thousands):
(Level 3)
Contingent
Consideration
Liability
Common
Stock
Warrant
Liability
Derivative
Liability
Total
Balance as of December 31, 2015 ............................ $
Warrants issued in conjunction with Private
Placement and Subsequent Financing on
April 14, 2016 and June 15, 2016, respectively,
and Placement Agent Warrants .............................
Change in estimated fair value .................................
Balance as of December 31, 2016 ............................
Issuance of JGB Debt and warrants .........................
Exercise of warrants .................................................
Conversion of JGB Debt ..........................................
Change in estimated fair value .................................
Balance as of December 31, 2017 ............................ $
948 $
— $
— $
948
4,958
—
—
(456)
492
—
—
—
250
5,208
900
(4,306)
—
1,180 16,910
1,672 $ 18,712 $
—
2,290
—
(402)
12,712
14,600 $
4,958
(206)
5,700
3,190
(4,306)
(402)
30,802
34,984
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:129)
(cid:129)
Money market funds—Investments in money market funds are classified within Level 1. At
December 31, 2017 and 2016, money market funds were included on the balance sheets in cash and
cash equivalents.
Contingent consideration—As of December 31, 2017, 2016 and 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. (“IMX”) in conjunction with the Company’s acquisition of IMX in June 2014. 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 “IMX Milestone”). 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 estimate at
December 31, 2017 and 2016 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 IMX
Milestone being met. The value of the liability is subsequently remeasured to fair value at each
reporting date, and the change in estimated fair value is recorded to a component of operating expenses
item captioned “change in estimated fair value of contingent consideration” until the IMX 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. The carrying amount of the contingent consideration liability
represents its fair value.
The fair value of the contingent consideration increased by $1.2 million in the twelve month period
ended December 31, 2017, as a result of the increase in the Company’s common stock price during the
period, and management’s estimate of the probability of meeting the IMX Milestone increasing to 100%
at December 31, 2017 from 80% at December 31, 2016.
106
(cid:129)
Common stock warrant liability—As of December 31, 2017, the Company had warrants to purchase
2,076,007 shares of common stock outstanding that it issued to certain accredited investors and its
placement agents following the closing of the Private Placement on April 14, 2016 and Subsequent
Financing on June 15, 2016 (as described in Note 11). In addition, as of December 31, 2017, the
Company had warrants to purchase 1,338,326 shares of common stock outstanding that it issued to JGB
related to the convertible debt agreement on March 15, 2017 (as described in Note 10). The common
stock warrants are classified as liabilities within Level 3. The Company utilized a binomial-lattice
pricing model (the “Monte Carlo simulation model”) that involved a market condition to estimate the
fair value of the warrants. The application of the Monte Carlo simulation model required the use of a
number of complex assumptions including the Company’s stock price, expected life of the warrants,
stock price volatility determined from the Company’s historical stock prices and stock prices of peer
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 life of the warrants.
The estimated fair value of the warrants was subsequently remeasured at December 31, 2017, and the
change in estimated fair value of common stock warrant liability was recorded on the Company’s
consolidated statements of operations.
(cid:129) Derivative liability— The JGB Debt (as described in Note 10) includes certain embedded derivatives
that require bifurcation, including settlement and penalty provisions. The Company utilizes the Monte
Carlo simulation model to estimate the fair value of the embedded derivative liability for the
measurement at issuance and subsequent remeasurement at December 31, 2017. The Monte Carlo
simulation model uses multiple input assumptions to simulate the likelihood that market conditions will
be achieved through 100,000 random trials. These assumptions include the expected term of the
embedded derivative, the volatility of the Company’s stock prices and its peers’ stock prices over such
expected term, likelihood, timing, and amount of future equity financing rounds, the likelihood of any
prepayment or default events, the likelihood of monthly redemptions by the JGB debt holders, and the
likelihood and ability of JGB to convert the debt into equity. In each iteration of the simulations these
assumptions were used to simulate the Company’s stock price drawing from a risk neutral distribution,
the occurrence of a conversion event, the occurrence of a prepayment event, the occurrence of a default
event, and any resulting payoff from such event. The average present value over all iterations of the
simulation was then calculated. The assumptions used in this simulation model are reviewed on a
quarterly basis and adjusted, as needed.
107
(cid:129)
Common Stock Warrant and Derivative Liabilities Assumptions:
December 31, 2017
December 31, 2016
Private Placement Warrant Common Stock
Warrants
Stock Price .............................................................
Exercise Price ........................................................
Remaining term (in years) .....................................
Volatility ................................................................
Risk-free interest rate.............................................
Subsequent Financing Common Stock Warrant
Liability
Stock Price .............................................................
Exercise Price ........................................................
Remaining term (in years) .....................................
Volatility ................................................................
Risk-free interest rate.............................................
Placement Agent Common Stock Warrant
Liability
Stock Price .............................................................
Exercise Price ........................................................
Remaining term (in years) .....................................
Volatility ................................................................
Risk-free interest rate.............................................
$
$
$
$
$
$
7.34 $
1.12 $
5.29
66.00 %
2.21 %
7.34 $
4.00 $
5.46
65.00 %
2.21 %
7.34 $
1.12 $
3.29
82.00 %
1.99 %
2.70
4.00
6.29
51.40 %
2.14 %
2.70
4.00
6.29
51.40 %
2.14 %
2.70
3.99
4.29
56.10 %
1.77 %
December 31, 2017
March 15, 2017
JGB Common Stock Warrant Liability
Stock Price................................................................
Exercise Price ...........................................................
Remaining term (in years) ........................................
Volatility...................................................................
Risk-free interest rate................................................
Derivative Liability
Stock Price................................................................
Remaining term (in years) ........................................
Volatility...................................................................
Risk-free interest rate................................................
$
$
$
7.34 $
4.67 $
4.71
30.00 %
1.89 %
7.34 $
2.16
69.00 %
2.14 %
2.15
5.00
5.50
54.00 %
2.06 %
2.15
2.96
54.00 %
1.72 %
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 Company has determined that debt at similar interest rates and terms to its current debt is not currently available
to the Company and therefore the Company is unable to calculate the fair value of its debt at December 31, 2017.
5. BUSINESS COMBINATIONS
Allenex
On April 14, 2016, the Company acquired 98.3% of the outstanding common stock of Allenex. Allenex is a
transplant diagnostic 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 creates an
international transplant diagnostics company with product offerings along the pre- and post-transplant continuum.
108
The combined company has a presence and direct distribution channels in the United States and Europe, with
additional third party distributors in Europe and other markets around the world.
Under the terms of the Conditional Share Purchase Agreements entered into on December 16, 2015, as amended,
and the tender offer prospectus dated March 7, 2016, the aggregate purchase consideration paid by the Company
was approximately $34.1 million as a result of the tender offer. The aggregate purchase consideration consisted of
(i) $26.9 million of cash, of which $6.3 million (which represents SEK 50,620,000 as of the acquisition date), and
which was recorded at its fair value of $5.7 million, was deferred purchase consideration originally payable to the
Former Majority Shareholders by no later than March 31, 2017, subject to certain contingencies being met, and (ii)
the issuance of 1,375,029 shares of the Company’s common stock valued at $7.2 million. The cash portion of the
acquisition purchase price was paid from the Company’s general working capital.
Of the total cash consideration, $8.0 million of cash payable to the Former Majority Shareholders was deposited into
an escrow account by the Company and subsequently invested in the Company by the Former Majority Shareholders
through a purchase of the Company’s equity securities in the Subsequent Financing (as described in Note 11). Upon
the completion of the Subsequent Financing, certain contingencies in the Conditional Share Purchase Agreements
were waived. The Company intends to complete compulsory acquisition proceedings under Swedish law to
purchase the remaining shares of Allenex. On June 8, 2016, the Company delisted Allenex’s common stock from
OMX Stockholm AB (“Nasdaq Stockholm”).
The date by which the deferred purchase consideration was due to the Former Majority Shareholders was
subsequently extended to July 1, 2017. In addition, interest began accruing on the Company’s obligations to the
Former Majority Shareholders at a rate of 10.0% per year commencing on January 1, 2017. On July 1, 2017, the
Deferred Obligation, including accrued interest, totaled $6.3 million. On July 1, 2017, the Conditional Share
Purchase Agreements were amended in order to, among other things: (i) convert approximately $1.1 million of the
Deferred Obligation into 1,022,544 shares of the Company’s common stock at a per share price equal to $1.12; (ii)
require that the Company make an immediate cash payment of $0.5 million thereby reducing the Deferred
Obligation by $0.5 million; (iii) extend the maturity date of a portion of the obligations, totaling approximately $2.9
million, under the Conditional Share Purchase Agreements to March 31, 2019; and (iv) provide that approximately
$2.1 million of the Deferred Obligation become payable on December 31, 2017 unless converted into shares of the
Company’s common stock prior to that date, which issuance of shares was subject to approval by the Company’s
stockholders. Interest began to accrue on the Deferred Obligation at a rate of 10% per annum commencing on July
1, 2017. On November 14, 2017, the Company further amended the Conditional Share Purchase Agreement with
the Former Majority Shareholders, and as a result, the Company paid the total remaining deferred purchase
consideration of $4.7 million, plus accrued interest.
The Company has accounted for the Allenex transaction as a business combination in exchange for total
consideration of approximately $34.1 million. Under business combination accounting, the total purchase price was
allocated to Allenex’s net tangible and identifiable intangible assets based on their estimated fair values as of April
14, 2016.
The fair value of the remaining 1.7% of noncontrolling interest in Allenex was estimated to be approximately SEK
5,100,000, or $0.6 million, as of April 14, 2016. The fair value of the noncontrolling interest was determined based
on the number of outstanding shares comprising the noncontrolling interest and Allenex’s stock price of SEK 2.48
per share as of the acquisition date. The noncontrolling interest is presented as a component of stockholders’ equity
on the Company’s consolidated balance sheets. On March 15, 2018 the Company purchased the remaining minority
interest, therefore eliminating noncontrolling interest from the consolidated balance sheets. The total consideration
paid for the remaining minority interest was $0.7 million and was based on the redemption price of the shares, as
well as legal and administrative costs.
109
Noncontrolling interest as of December 31, 2017 was as follows (in thousands):
Noncontrolling interest at January 1, 2017...................... $
Foreign currency effect....................................................
Loss attributable to noncontrolling interest.....................
Noncontrolling interest at December 31, 2017................ $
Total
279
(8)
(91)
180
Pro Forma Impact of the Acquisition of Allenex (unaudited)
The following table presents pro forma results of operations and gives effect to the Allenex transaction as if the
transaction had been consummated on January 1, 2015. 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 (in thousands).
Years Ended December 31,
2016
2015
Revenue:
Testing revenue........................................................ $
Product revenue .......................................................
Other revenue ..........................................................
Total revenue................................................................. $
Net loss.......................................................................... $
29,680 $
15,101
407
45,188 $
(32,319) $
27,881
15,957
578
44,416
(17,050)
The unaudited pro forma financial information for the years ended December 31, 2016 and 2015 is prepared using
the acquisition method of accounting and 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 pro forma adjustments directly attributable to the acquisition exclude acquisition-related
expenses of $4.3 million and $2.1 million of expenses related to a potential financing that did not eventuate.
The total revenue of Allenex for the period from April 14, 2016 through December 31, 2016 was $10.7 million and
the net loss for this period was $17.9 million, of which $13.0 million was a goodwill impairment charge.
Acquisition of Assets of Conexio Genomics Pty. Ltd
On January 20, 2017, the Company acquired Conexio’s business assets that the Company required in order to
continue selling the SBT product line. The Company was the exclusive distributor of the Conexio SBTTM product
line for all countries excluding Australia. The Company purchased rights to many of the assets, such as machinery,
facilities leases, know-how and the opportunity to retain key Conexio employees to continue producing and selling
the SBT line of products. For the year ended December 31, 2017, the Company paid $0.4 million for finished and
unfinished goods purchased from Conexio. In addition, the Company will make quarterly payments of 20% of the
gross revenue from the sale of the SBT line of products up to an aggregate total of $0.7 million. During the year
ended December 31, 2017, the Company paid an aggregate of $0.1 million, representing March, June and September
quarterly payments. The Company also assumed all obligations under the lease of the Conexio facilities, and any
liabilities for product warranty claims up to $35,000. The Company accounted for this transaction as a business
combination.
110
The following table summarizes the fair values of the assets acquired and liabilities assumed as of the acquisition
date (in thousands):
Inventory ....................................................................................... $
Property, plant and equipment ......................................................
Intangible assets ............................................................................
Goodwill........................................................................................
Assumed liabilities ........................................................................
Total acquisition consideration ..................................................... $
Total
1,040
97
155
85
(82)
1,295
The following table presents details of the identified intangible assets acquired at the acquisition date (in thousands):
Completed technology......................................... $
Customer relationships ........................................
Total .................................................................... $
127
28
155
Estimated Fair
Value
Estimated
Useful Life
(Years)
9
9
Goodwill recorded from the acquisition of the Conexio business assets is primarily related to expected synergies.
The goodwill resulting from the acquisition is not deductible for tax purposes. The post-acquisition results of
operations of the Conexio business assets for the period from January 20, 2017 through December 31, 2017 are
included in the Company’s consolidated statements of operations.
6. GOODWILL AND INTANGIBLE ASSETS
Goodwill
Goodwill is recorded when the purchase price of an acquisition exceeds the fair value of the net tangible and
identified intangible assets acquired.
The following table presents details of the Company’s goodwill for the year ended December 31, 2017 (in
thousands):
Post-
Pre-
Transplant
Transplant
Balance as of December 31, 2016................................ $
Goodwill acquired........................................................
Goodwill impairment ...................................................
Foreign currency translation adjustments ....................
Balance as of December 31, 2017................................ $
12,005 $
—
—
—
12,005 $
1,834 $
85
(1,958)
39
—
Total
13,839
85
(1,958)
39
12,005
The gross carrying amount of goodwill may change due to the effects of foreign currency fluctuations as a result of
acquiring an entity with a functional currency other than the U.S. dollar.
Goodwill is tested annually for impairment at the reporting unit level during the fourth quarter or earlier upon the
occurrence of certain events or substantive changes in circumstances. A reporting unit is either the “operating
segment level” or one level below, which is referred to as a “component.” The level at which the impairment test is
performed requires judgment as to whether the operations below the operating segment constitute a self-sustaining
business or whether the operations are similar such that they should be aggregated for purposes of the impairment
test. The Company has concluded that it has two reporting units: Post-Transplant (associated with the delivery of
diagnostic tests) and Pre-Transplant (the development and commercialization of diagnostic products).
The Company tested its goodwill for impairments as of December 1, 2016 and estimated the fair value of the Pre-
Transplant reporting unit was $1.7 million, which was lower than its carrying value. Based on our analysis, the
111
implied fair value of the goodwill was lower than the carrying value of the Pre-Transplant reporting unit, resulting in
a goodwill impairment charge of $13.0 million for the period ended December 31, 2016. The significant
assumptions utilized in the 2016 discounted cash flow analysis for the Pre-Transplant reporting unit was a discount
rate of 16.8%, a terminal growth rate of 3.2%, and a capitalization multiple of 7.37.
On January 1, 2017, the Company adopted ASU 2017-04, which eliminated the Step 2 requirement of the goodwill
impairment test. Instead, the goodwill impairment test is performed by comparing the fair value of a reporting unit
with its carrying amount. The new standard simplifies how an entity is required to test goodwill for impairment and
reduces the cost and complexity of evaluating goodwill for impairment. The Company determined that the decrease
in its market capitalization constituted an indicator of impairment and therefore a goodwill impairment test was
completed as of March 31, 2017. The goodwill impairment test determined that the fair value of the Pre-Transplant
reporting unit was $3.5 million, which was lower than its carrying value. Accordingly, the Company recorded a
goodwill impairment charge of $2.0 million as of March 31, 2017, which represented the remaining goodwill
balance in the Pre-Transplant reporting unit. The significant assumptions utilized in the March 31, 2017 discounted
cash flow analysis for the Pre-Transplant reporting unit were a discount rate of 16.6%, a terminal growth rate of
3.2% and a capitalization multiple of 7.48.
The Company completed its annual test for goodwill impairment as of December 1, 2017. The Company
determined that the fair value of the reporting units exceeded the respective carrying values. Therefore, no
additional impairment charge occurred.
Intangible Assets
The following tables present details of the Company’s intangible assets as of December 31, 2017 (in thousands):
December 31, 2017
Acquisition
Cost
Accumulated
Amortization
Foreign
Currency
Translation
Net
Carrying
Amount
Weighted
Average
Remaining
Useful Life
(In Years)
Intangible assets with finite lives:
Customer relationships: Olerup ................................. $ 12,650 $
28 $
Customer relationships: Conexio...............................
11,650
Developed technology: SSP.......................................
4,510
Acquired technology: QTYPE...................................
127
Acquired technology: SBT ........................................
6,650
Acquired technology―dd-cfDNA (a) .......................
Trademarks ................................................................
2,260
Total intangible assets with finite lives...................... $ 37,875 $
(1,394) $
(3) $
(1,942)
(376)
(14)
(127)
(310)
(4,166) $
1 $
(258)
(84)
5
—
16
(250) $ 11,006
26
9,450
4,050
118
6,523
1,966
(570) $ 33,139
13.0
8.1
8.0
13.0
8.1
12.9
13.0
(a)
The dd-cfDNA balance was initially classified as acquired in-process technology upon the acquisition of IMX in 2014, but was
reclassified as an intangible asset with a finite life on September 30, 2017 based on confirmation of the Medicare reimbursement rate for
AlloSure, the Company’s dd-cfDNA solution, which was commercially launched on October 9, 2017.
The net carrying amount of intangible assets and the related amortization expense of intangible assets may change
due to the effects of foreign currency fluctuations as a result of acquiring an entity with a functional currency other
than the U.S. dollar. Amortization expense was $2.6 million for the year ended December 31, 2017, of which $1.5
million, $1.0 million, and $0.1 million were amortized to cost of product, sales and marketing and cost of testing,
respectively. Amortization expense was $1.7 million for the year ended December 31, 2016, of which $1.0 million
and $0.7 million were amortized to cost of product and sales and marketing, respectively. There was no
amortization recorded for the year ended December 31, 2015, as the Company only had an intangible asset related to
acquired in-process technology with an indefinite useful live in that period.
Intangible assets are carried at cost less accumulated amortization. Amortization expenses are recorded to cost of
product and sales and marketing. The acquired in process technology of $6.7 million achieved technological
feasibility in the fourth quarter of 2017, with the launch of AlloSure.
112
The following table summarizes the Company’s estimated future amortization expense of intangible assets with
finite lives as of December 31, 2017 (in thousands):
Years Ending December 31,
2018.............................................................................. $
2019..............................................................................
2020..............................................................................
2021..............................................................................
2022..............................................................................
Thereafter.....................................................................
Total future amortization expense ............................... $
Cost of
Product
Sales and
Marketing
Total
2,016 $
2,016
2,016
2,016
2,016
10,062
20,142 $
1,001 $
1,001
1,001
1,001
1,001
7,992
12,997 $
3,017
3,017
3,017
3,017
3,017
18,054
33,139
7. BALANCE SHEET COMPONENTS
Inventory
Inventory consisted of the following (in thousands):
Finished goods............................................................... $
Work in progress ...........................................................
Raw materials ................................................................
Total inventory .............................................................. $
2,569 $
1,471
1,489
5,529 $
4,199
159
1,103
5,461
December 31,
2017
2016
Property and Equipment, Net
Property and equipment consisted of the following (in thousands):
Laboratory equipment ................................................... $
Leasehold improvements...............................................
Furniture and fixtures ....................................................
Computer and office equipment ....................................
Machinery and equipment .............................................
$
Less: Accumulated depreciation and amortization........
Property and equipment, net.......................................... $
December 31,
2017
5,188 $
5,194
825
4,734
1,618
17,559 $
(15,484)
2,075 $
2016
5,065
5,111
825
4,661
1,424
17,086
(14,155)
2,931
Depreciation expense was $1.2 million, $1.2 million and $0.8 million for the years ended December 31, 2017, 2016
and 2015, respectively.
Assets purchased under capital leases, included above in laboratory equipment, computer and office equipment,
were $1.4 million and $2.5 million at December 31, 2017 and 2016, respectively. Accumulated amortization was
$1.3 million and $2.3 million at December 31, 2017 and 2016, respectively. Related amortization expense, included
in depreciation and amortization expense, was $135,000, $204,000 and $79,000 for the years ended December 31,
2017, 2016 and 2015, respectively.
113
Accrued and Other Liabilities
Accrued and other liabilities consisted of the following (in thousands):
Clinical studies .............................................................. $
Professional fees............................................................
Test sample processing fees ..........................................
Deferred rent – current portion......................................
Uninvoiced receipts .......................................................
Accrued overpayments and refunds ..............................
Software implementation costs......................................
Accrued interest payable ...............................................
Capital leases – current portion .....................................
Debt financing fees........................................................
Other accrued expenses .................................................
Total accrued and other liabilities ................................. $
December 31,
2017
2016
1,115 $
475
633
419
253
270
94
81
13
—
382
3,735 $
1,375
620
524
374
—
281
176
862
68
600
440
5,320
8. COMMITMENTS AND CONTINGENCIES
Leases
The Company leases its operating and office facilities for various terms under long-term, non-cancelable operating
lease agreements in California, Pennsylvania, Fremantle, Australia and Stockholm, Sweden. The leases expire at
various dates through 2020. In the normal course of business, it is expected that these leases will be renewed or
replaced by leases on other properties. The lease for the Company’s facility in Vienna, Austria is on a month-to-
month basis.
Rent expense under the non-cancelable operating leases were $1.7 million, $1.5 million and $1.0 million in 2017,
2016 and 2015, respectively. Future minimum lease commitments under these operating and capital leases at
December 31, 2017, are as follows (in thousands):
Years ending December 31,
2018 .......................................................................................... $
2019 ..........................................................................................
2020 ..........................................................................................
2021 ..........................................................................................
2022 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
2,209
2,149
2,104
10
8
6,480
25 $
5
—
—
—
30 $
(3)
27
(13)
14
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 10 for the aggregate annual payment schedule for the Company’s outstanding debt.
114
Royalty Commitments
Roche Molecular Systems, Inc. (“Roche”)
In November 2004, the Company entered into a license agreement with Roche that grants the Company the right to
use certain Roche technology relating to 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.
For the years ended December 31, 2017, 2016 and 2015, royalty expenses in connection with the Roche agreement
were $0.9 million, $1.1 million and $1.0 million, respectively and are recorded as a component of cost of testing in
the statement of operations. Effective September 30, 2017, no future royalties are payable by the Company under
the Roche license agreement.
The Board of Trustees of the Leland Stanford Junior University (“Stanford”)
In June 2014, the Company entered into a license agreement with Stanford, or the Stanford License, which granted
the Company an exclusive license to a patent relating to the diagnosis of rejection in organ transplant recipients
using dd-cfDNA. Under the terms of the Stanford License, the Company is required to pay an annual license
maintenance fee, six milestone payment amounts and royalties in the low single digits of net sales of products
incorporating the licensed technology. The license maintenance fee may be offset against earned royalty payments
due on net sales in that year.
In 2017, the Company paid Stanford $0.1 million in aggregate for license maintenance fees and for the completion
of the Company’s first commercial sale. Commercial sales of AlloSure, which incorporates the licensed technology
from Stanford, began in October 2017.
Conexio
On January 20, 2017, the Company acquired the business assets of Conexio as the Company expects to expand its
sales of the SBT product line. The Company purchased rights to many of the assets, such as machinery, facilities
leases, know-how and the opportunity to retain key Conexio employees to continue producing and selling the SBT
line of products. The Company makes quarterly payments to Conexio of 20% of the gross revenue from the sale of
the SBT line of products using the purchased assets up to an aggregate total of $0.7 million. As of December 31,
2017, the Company has paid $0.4 million and the remaining balance is expected to be paid in 2018.
Litigation
On April 25, 2016, Oberland filed a breach of contract claim against the Company in the Supreme Court of the State
of New York, County of New York (the “Complaint”). Oberland alleged, among other things, that the Company
breached certain provisions of the amended and restated commitment letter and the restated fee letter that it entered
into with Oberland on February 8, 2016. Pursuant to the Complaint, Oberland sought damages against the Company
in the amount of at least $1.4 million, plus costs and expenses, including the fees and expenses of Oberland’s
attorneys. As a result, the Company accrued the amount being claimed by Oberland of $1.4 million. On July 15,
2016, the Company filed an answer and made counterclaims against Oberland (the “Answer”), generally denying the
claims asserted by Oberland in the Complaint and asserting fraudulent inducement and breach of contract
counterclaims against Oberland. Pursuant to the Answer, the Company sought dismissal of the Complaint in its
entirety, rescission of all agreements with Oberland and damages of not less than $1.3 million, together with interest
and punitive damages, if deemed appropriate under applicable law, and costs and disbursements of the action,
including reasonable attorneys’ fees.
Effective as of March 2, 2017, the Company and Oberland settled the matters covered by the Complaint and the
Answer (the “Settlement”). Pursuant to the Settlement, in 2017, the Company paid Oberland $0.6 million and each
party agreed to release claims asserted in the Complaint and the Answer. The Company reported an accrual of $0.6
million as of December 31, 2016.
115
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, would have a
material adverse effect on the Company’s business, financial condition, or results of operations.
9. COLLABORATION AND LICENSING AGREEMENTS
Diaxonhit
In June 2013, the Company entered into an exclusive Distribution and Licensing Agreement with Diaxonhit, SA
(“Diaxonhit”), a French public company, whereby Diaxonhit agreed to 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.
Consideration under the agreement included an upfront cash payment of approximately €387,500 ($408,000) 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 Diaxonhit as a percent of net sales, as defined in the agreement, of
AlloMap tests in the mid to high teens. Approximately €250,000 ($263,000) 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 Diaxonhit common stock with a value of €387,500 ($408,000). The CE mark is a
mandatory conformity marking for certain products sold within the EEA.
The Company sold the shares of common stock 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
Diaxonhit. In this arrangement, there is one combined unit of accounting.
In June 2014, commercial sales began in the EEA. Total revenue recognized from this arrangement for the years
ended December 31, 2017, 2016 and 2015 was $39,000, $2,000 and $46,000, respectively.
CardioDx, Inc.
In 2005, the Company entered into a services agreement with what at the time was a related party, CardioDx, Inc.
(“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 in an amount equal to 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. Initially, the Company recognized
royalty revenues when earned. Commencing with the fourth quarter of 2015, the Company recognizes royalty
revenues when payments are received as it was assessed that collection was not reasonably assured prior to receipt
of payment. Royalty revenues were $0.5 million, $0.2 million and $0.2 million for the years ended December 31,
2017, 2016 and 2015, respectively, and are included in collaboration and license revenue on the consolidated
statements of operations. The Company had no receivable balances from CDX at December 31, 2017 and 2016.
116
10. DEBT
Debt consisted of the following (in thousands):
JGB Debt ............................................................. $
East West Bank Loan ..........................................
Danske Bank Term Loan & Credit Facility ........
FastPartner Subordinated Promissory Notes .......
Al Amoudi Subordinated Promissory Notes .......
SSP Primers Loan................................................
Current portion of long-term debt..................... $
JGB Debt ............................................................. $
FastPartner Subordinated Promissory Notes .......
Al Amoudi Subordinated Promissory Notes .......
SSP Primers Loan................................................
Long-term debt, net of current portion ............. $
December 31,
2017
2016
7,743
—
6,763
—
—
1,215
15,721
14,168
2,400
1,770
—
18,338
$
$
$
$
—
12,614
7,376
1,692
1,164
—
22,846
—
—
—
1,098
1,098
Total interest accrued on debt as of December 31, 2017 and December 31, 2016 was $0.3 million and $0.9 million,
respectively. The current and long-term accrued interest balances at December 31, 2017 were $0.1 million and $0.2
million, respectively, and were recorded in accrued and other liabilities and in other liabilities, respectively, in the
consolidated balance sheets. The December 31, 2016 accrued interest balance was recorded in accrued and other
liabilities in the consolidated balance sheets.
As of December 31, 2017, future debt maturities were as follows (in thousands):
Years Ending December 31,
2018 ............................................................................................................. $
2019 .............................................................................................................
2020 .............................................................................................................
Total debt maturities....................................................................................
Less: debt discount and issuance costs........................................................
Total debt maturities, net of debt discount and issuance costs....................
Less: current portion, of long-term debt......................................................
Long-term debt, net of current portion ........................................................ $
Amount
17,353
15,420
5,905
38,678
(4,619)
34,059
(15,721)
18,338
JGB Debt
On March 15, 2017, the Company entered into a Securities Purchase Agreement with JGB pursuant to which the
Company issued Senior Secured Debentures with an aggregate principal amount of $27.8 million (the “JGB Debt”)
and the JGB Warrants for net proceeds of $24.0 million (the “Financing”). The Company used $11.2 million of the
net proceeds from the Financing to repay its existing indebtedness under the Loan Agreement with East West Bank
and is required to maintain restricted cash of $9.4 million.
The Debentures mature on February 28, 2020, accrue interest at 9.5% per year and were originally convertible into
an aggregate of approximately 6,092,105 shares of the Company’s common stock at a price of $4.56 per share (the
“Conversion Price”), which is subject to adjustment for accrued and unpaid interest and upon the occurrence of
certain transactions, at the holder’s option.
Additionally, after September 1, 2017, upon the satisfaction of certain conditions, including the volume weighted
average price of the Company’s common stock exceeding 250% of the Conversion Price for twenty consecutive
trading days, the Company can require that the Debentures be converted into shares of the Company’s common
stock, subject to certain limitations. Commencing on March 1, 2018, each of the holders of the Debentures shall
117
have the right, at its option, to require the Company to redeem up to $937,500 of the outstanding principal amount of
its Debenture per month. The Company will be required to promptly, but in any event no more than one trading day
after the holder delivers a redemption notice to the Company, pay the applicable redemption amount in cash or, at
the Company’s election and subject to certain conditions, in shares of the Company’s common stock. If the
Company elects to pay the redemption amount in shares of the Company’s common stock, then the shares will be
delivered based on a price equal to the lowest of (a) 88% of the average of the three lowest volume weighted
average prices of the Company’s common stock over the prior 20 trading days, (b) 88% of the prior trading day’s
volume weighted average price, or (c) the Conversion Price.
After either a change of control transaction, as defined in the Debentures, or February 28, 2018, subject to the
satisfaction of certain conditions, the Company may redeem all of the then outstanding principal amount of the
Debentures for cash by paying the outstanding principal balance, accrued and unpaid interest, and a payment
premium. The payment premium will be calculated by multiplying the outstanding balance and the following
percentage: (i) 15% if the Debentures are prepaid on or prior to March 1, 2018, (ii) 8% if the Debentures are prepaid
after March 1, 2018 but prior to March 1, 2019, and (iii) 5% if the Debentures are prepaid on or after March 1, 2019.
The Company’s obligations under the Debentures can be accelerated upon the occurrence of certain events of
default as specified in the agreement. In the event of default and acceleration of the Company’s obligations, the
Company would be required to pay (i) 115% of all amounts of principal and interest then outstanding under the
Debentures in cash if the Debenture is accelerated prior to March 1, 2018, (ii) 108% of all amounts of principal and
interest then outstanding under the Debentures in cash if the Debenture is accelerated after March 1, 2018, but prior
to March 1, 2019, and (iii) 105% of all amounts of principal and interest then outstanding under the Debentures in
cash if the Debenture is accelerated after March 1, 2019. The Company’s obligations under the Debentures are
secured under a Security Agreement by a senior lien on all of the Company’s assets, other than its interest in CareDx
International AB (formerly known as Allenex), which is subject to a negative pledge prohibiting the incurrence of
additional or replacement debt.
The Debentures contain customary affirmative and restrictive covenants and representations and warranties,
including financial reporting obligations, a restriction on the Company’s ability to pay cash dividends on its
common stock and limitations on indebtedness, liens, investments, distributions, transfers, corporate changes,
deposit accounts and subsidiaries. The Company must also maintain a minimum cash amount at all times, achieve
commercialization of AlloSure by a certain date and achieve certain gross profit targets for sales of its AlloMap
product.
In connection with the Financing, on March 15, 2017, the Company and the Purchasers entered into a Registration
Rights Agreement (the “Registration Rights Agreement”) pursuant to which, among other things, the Company
agreed to prepare and file one or more registration statements with the SEC for the purpose of registering for resale
any shares of Common Stock that may be issued by the Company upon the conversion or redemption of the
Debentures or the exercise of the JGB Warrants.
The Debentures include certain embedded derivatives that require bifurcation, including settlement and penalty
provisions. The embedded derivative will be re-measured at each reporting period and the change in fair value will
be recognized in the consolidated statements of operations. See also Note 4, “Fair Value Measurements”.
The following table summarizes the Company’s carrying value of the JGB Debt (in thousands) on the March 15,
2017 issuance date:
Debt Principal.............................................................................................. $
Less: Issuance cost ......................................................................................
Original issue discount ...........................................................................
Original warrant valuation......................................................................
Embedded Derivative Liability ..............................................................
Total debt discount ......................................................................................
Carrying Value ............................................................................................ $
March 15, 2017
27,780
(998)
(2,780)
(900)
(2,290)
(6,968)
20,812
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As a result of the issuance of 1,022,544 shares of the Company’s common stock issued at a price per share equal to
$1.12 pursuant to the amendments to the Conditional Share Purchase Agreements, the conversion price of the
Debentures decreased from $4.56 per share to $4.40 per share, effective July 3, 2017, as described in Note 13.
As a result of the 2017 Public Offering in accordance with the anti-dilution provisions in the JGB Warrants and the
Debentures, effective October 5, 2017, the conversion price of the Debentures decreased from $4.40 per share to
$4.34 per share.
On October 5, 2017, JGB elected to convert $1.25 million of outstanding principal under the Debentures into shares
of common stock. Accordingly, the Company issued 288,022 shares of common stock to JGB at a price per share of
$4.34.
As a result of the sale of the 651,240 shares of common stock pursuant to the Underwriters’ full exercise of their
option to purchase additional shares in accordance with the anti-dilution provisions in the JGB Warrants and the
Debentures, effective October 10, 2017, the conversion price of the Debentures was decreased from $4.34 per share
to $4.33 per share.
Refer to Note 18 for details regarding the Company’s requirement to repay the JGB Debt using the proceeds from
the Perceptive Term Loan.
East West Bank Loan
On January 30, 2015, the Company entered into the Loan Agreement with East West Bank as the lender (“the
Lender”), which provided the Company with a secured term loan facility in an aggregate principal amount of up to
$20.0 million. The balance at December 31, 2017 and December 31, 2016 was zero and $12.6 million, respectively.
In March 2017, the Company repaid the amounts outstanding under the loan agreement of $11.2 million.
The loan had no prepayment penalty. Commitment fees were included in debt issuance costs, which were netted
against the debt outstanding and are amortized to interest expense using the effective interest method over the term
of the loan. Debt extinguishment charges of $0.2 million were recorded in other expense on the Company’s
condensed consolidated statements of operations in the nine months ended September 30, 2017 upon the repayment
of outstanding amounts in March 2017.
Danske Bank Term Loan and Credit Facility
On June 25, 2013, Allenex entered into the Term Loan Facility with Danske in an aggregate principal amount of up
to SEK 71,000,000 (approximately $7.8 million in U.S. dollars). The Term Loan Facility is available for utilization
in advances of a minimum of SEK 5,000,000 (approximately $0.5 million in U.S. dollars) and if more, integral
multiples of SEK 1,000,000 (approximately $0.1 million in U.S. dollars). The interest rate applicable to each
advance shall be the percentage rate per annum calculated as the aggregate of (i) Stockholm Interbank Offered Rate
(“STIBOR”) (as defined in the Term Loan Facility) and (ii) the Margin (as described in the Term Loan Facility) at
3% conditional on the fulfillment of certain criteria. In March 2015, Allenex entered into a first amendment to the
Term Loan Facility, pursuant to which additional loans were granted. In August 2015, Allenex entered into a
second amendment to the Term Loan Facility, pursuant to which the term of the Term Loan Facility was extended.
In December 2015, Allenex entered into a waiver and amendment agreement relating to the Term Loan Facility,
pursuant to which the change of control provision was waived and amended. In March 2016, Allenex entered into
another amendment to the Term Loan Facility, which modified the repayment schedule for advances under the Term
Loan Facility. Under this Term Loan Facility, SEK 50,000,000, or approximately $6.1 million in U.S. dollars, was
outstanding as of December 31, 2017, and this will be paid through a final quarterly payment of SEK 3,000,000, or
$0.4 million in U.S. dollars in March 2018. The remaining balance of SEK 47,000,000, or approximately $5.7
million in U.S. dollars, is due in June 2018.
On June 18, 2015, Allenex also entered into a short term credit facility with Danske with total available credit of
SEK 8,000,000 (approximately $0.9 million in U.S. dollars). As of August 4, 2016, the available credit under the
short term credit facility with Danske was increased to SEK 10,000,000 (approximately $1.2 million in U.S.
dollars). As of December 31, 2017, the total outstanding balance due to Danske under the short term credit facility
119
was approximately SEK 5,676,000 (approximately $0.7 million in U.S. dollars), and pursuant to a quarterly roll-over
provision is due on March 31, 2018.
A quarterly debt covenant in the Term Loan Facility was violated on June 30, 2016 and September 30, 2016. The
Company obtained waivers for these violations. The Company was in compliance with all debt covenants at December
31, 2016. Due to liquidity concerns, the long-term debt due to Danske was classified as a current liability in the
consolidated balance sheet as of December 31, 2016. The Company was not in compliance with certain covenants at
March 31, 2017, June 30, 2017, and September 30, 2017. The Company obtained a waiver for these violations. The
waiver was conditional upon, among other things, the Company making a principal repayment of SEK 6,000,000
(approximately $0.7 million) by October 31, 2017. This amount was paid on October 31, 2017. The Company was not
in compliance at December 31, 2017 with any of the debt covenants.
Refer to Note 18 for details regarding the Company’s requirement to repay the Danske Term Loan and Credit
Facility using the proceeds from the Perceptive Term Loan.
FastPartner Subordinated Promissory Notes
On June 28, 2013, Allenex issued a SEK 9,400,000 (approximately $1.0 million in U.S. dollars) subordinated
promissory note to FastPartner, which had an interest rate of 10.00%. On December 29, 2015, Allenex issued a
SEK 2,000,000 (approximately $0.2 million in U.S. dollars) subordinated promissory note to FastPartner which has
an annual interest rate of 10%. On March 7, 2016, Allenex issued a SEK 4,000,000 (approximately $0.4 million in
U.S. dollars) subordinated promissory note to FastPartner, which has an annual interest rate of 10%.
Pursuant to an intercreditor agreement, until the Term Loan Facility with Danske is repaid, FastPartner may not
demand or receive payment of its subordinated promissory note, or foreclose on any collateral securing Allenex’s
obligations under the subordinated promissory note, without Danske’s prior written consent. Allenex’s obligations
under the promissory note are secured by a pledge of Allenex shares to FastPartner. The full amount of the
subordinated promissory note was outstanding as of December 31, 2016 and was due July 1, 2017.
On July 1, 2017, the Company entered into a note agreement with FastPartner (the “FastPartner Note Agreement”)
pursuant to which, among other things, the Company and FastPartner agreed that all amounts owed under the above
subordinated promissory notes would be governed by the FastPartner Note Agreement and to defer repayment of the
principal outstanding amount of SEK 15,400,000 (approximately $1.9 million) plus accrued interest of $0.5 million
until March 31, 2019. Interest began accruing on such amount at a rate of 10% per annum, and in the event the
Company makes any cash amortization repayments to JGB of the JGB Debt, or any replacement debt, the Company
will repay in cash a portion of the amount outstanding under the FastPartner Note Agreement equal to 8% of any
such cash amortization repayment.
Refer to Note 18 for details regarding the Company’s requirement to repay the FastPartner Note Agreement using
the proceeds from the Perceptive Term Loan.
Al Amoudi Subordinated Promissory Note
On June 28, 2013, Allenex issued a SEK 10,600,000 (approximately $1.2 million in U.S. dollars) subordinated
promissory note to Mohammed Al Amoudi, which provides for an annual interest rate of 10.00%.
Pursuant to an intercreditor agreement, until the Term Loan Facility with Danske is repaid, Mohammed Al Amoudi
may not demand or receive payment of its subordinated promissory note, or foreclose on any collateral securing
Allenex’s obligations under the subordinated promissory note, without Danske’s prior written consent. Allenex’s
obligations under the promissory note are secured by a pledge of Allenex shares to Mohammed Al Amoudi. The
full amount of the subordinated promissory note was outstanding as of December 31, 2016 and was due July 1,
2017.
On July 1, 2017, the Company entered into a note agreement with Mohammed Al Amoudi (the “Al Amoudi Note
Agreement”) pursuant to which, among other things, Allenex and Mohammed Al Amoudi agreed to defer repayment
of the principal outstanding amount of SEK 10,600,000 (approximately $1.3 million) plus accrued interest of $0.5
million until March 31, 2019. Interest began accruing on such amount at a rate of 10% per annum, and in the event
120
the Company makes any cash amortization repayments to JGB of the JGB Debt, or any replacement debt, Allenex
will repay in cash a portion of the amount outstanding under the Al Amoudi Note Agreement equal to 6% of any
such cash amortization repayment.
Refer to Note 18 for details regarding the Company’s requirement to repay the Al Amoudi Note Agreement using
the proceeds from the Perceptive Term Loan.
SSP Primers Loan
On February 25, 2015, Allenex entered into a SEK 14,000,000 (approximately $1.5 million in U.S. dollars) loan
agreement with SSP Primers Aktieboulag, pursuant to which SEK 4,000,000 (approximately $0.4 million in U.S.
dollars) was paid on March 7, 2016. The loan amount outstanding as of December 31, 2017 was SEK 10,000,000
(approximately $1.2 million in U.S. dollars) had an annual interest rate of 3% and was due on February 26, 2018.
The outstanding principal of SEK 10,000,000 (approximately $1.2 million in U.S. dollars) plus accrued interest of
SEK 650,000, or $0.1 million was paid on February 26, 2018.
11. STOCKHOLDERS’ EQUITY
Private Placement Transaction and Subsequent Financing
On April 14, 2016, the Company completed a Private Placement transaction for the offering of 591,860 units
(“Units”) to certain accredited investors (the “Private Placement”). Each Unit was comprised of: (i) one share of
common stock, (ii) five shares of Series A Preferred, and (iii) three warrants, each to purchase one share of common
stock. The purchase price was $23.94 per Unit (the equivalent of $3.99 per share of common stock, assuming
conversion of the Series A Preferred). The aggregate gross proceeds to the Company from the Private Placement
were approximately $14.2 million, of which $1.8 million was paid in satisfaction of placement agents, escrow agent,
legal fees as well as other direct issuance costs. The Company and certain stockholders representing a majority of
the Company’s outstanding shares of common stock entered into voting agreements on April 14, 2016, pursuant to
which each stockholder agreed to vote certain of its shares of the Company’s common stock in favor of granting the
Company the Requisite Stockholder Approval.
The proceeds from the Private Placement were allocated between the common stock, preferred stock and warrants
issued based on their relative fair values. The estimated fair values of the common stock, preferred stock and
warrants were $1.9 million, $9.3 million and $3.0 million, respectively, as of the transaction date. The warrants
were recorded as a liability and are subject to ongoing remeasurement. The shares of Series A Preferred were
initially recorded as temporary equity upon the closing of the Private Placement and subsequently reclassified to
common stock after their conversion to common stock on June 16, 2016. See Note 12 for a description of the
accounting of for the warrants.
Concurrent to the Private Placement, the Company also entered into Commitment Letters pursuant to which the
Former Majority Shareholders agreed to purchase the Company’s equity securities in the Subsequent Financing,
which investment was completed on June 15, 2016. In the Subsequent Financing, the Company issued to the
Former Majority Shareholders 334,169 Units, which consisted of (i) an aggregate of 334,169 shares of common
stock, (ii) an aggregate of 1,670,845 shares of Series A Preferred that were all converted into shares of the
Company’s common stock upon obtaining the Requisite Stockholder Approval on June 16, 2016, and (iii) 1,002,507
warrants, each of which is exercisable for one share of the Company’s common stock. The aggregate gross
proceeds to the Company from the Subsequent Financing were $8.0 million.
The proceeds from the Subsequent Financing were allocated between the common stock, preferred stock and
warrants issued based on their relative fair values. The estimated fair values of the common stock, preferred stock
and warrants were $1.0 million, $5.3 million and $1.7 million, respectively, as of the transaction date. The warrants
were recorded as a liability and are subject to ongoing remeasurement. The shares of Series A Preferred were
initially recorded as temporary equity upon the closing of the Subsequent Financing and subsequently reclassified to
common stock after their conversion to common stock on June 16, 2016.
121
Following the closing of the Private Placement, the Company agreed to a number of requirements, including
submitting the Private Placement to the Company’s stockholders for approval, which was obtained on June 16,
2016, and granting certain registration rights, including the registration of shares sold in the Private Placement on a
registration statement on Form S-3. On May 27, 2016, the Company filed a registration statement on Form S-3 with
the SEC to register for resale the shares of common stock issued or issuable upon conversion of the Series A
Preferred and upon exercise of the warrants sold in the Private Placement. The registration statement on Form S-3
was declared effective by the SEC on July 12, 2016.
Upon obtaining the Requisite Stockholder Approval on June 16, 2016, each share of Series A Preferred was
converted into one share of the Company’s common stock. In addition to the warrants issued to certain accredited
investors in the Private Placement, on April 14, 2016, the Company issued warrants to purchase an aggregate of
200,000 shares of common stock to certain of its placement agents (the “Placement Agent Warrants”). All of the
warrants issued in the Private Placement and the Placement Agent Warrants became exercisable once the Company
obtained the Requisite Stockholder Approval on June 16, 2016.
The Company engaged M.M. Dillon & Co. Group (“M.M. Dillon”), an investment banking firm, to act as one of its
financial advisors and placement agents in connection with the Private Placement and Subsequent Financing of the
Company’s common stock and the consummation of any private placement of its securities that the Company may
choose to pursue. A member of the Company’s board of directors is a managing director of M.M. Dillon, and as
such, the Company considered M.M. Dillon to be a related party. As a result of the Private Placement and
Subsequent Financing, the Company paid approximately $1.1 million in placement fees to its placement agents, of
which $0.2 million pertained to fees paid to M.M. Dillon. Additionally, M.M. Dillon also received Placement Agent
Warrants to purchase 100,000 shares of the Company’s common stock.
2016 Public Offering
On September 26, 2016, the Company completed a public offering (“the 2016 Public Offering”) pursuant to which
the Company issued and sold an aggregate of 2,250,000 shares of common stock at a public offering price of $4.00
per share. The aggregate gross proceeds were $9.0 million, and $7.8 million net of issuance costs.
2017 Public Offering
On October 4, 2017, the Company entered into the Underwriting Agreement with the Underwriters, relating to the
2017 Public Offering of 4,341,600 shares of its common stock at a public offering price of $4.00 per share. Under
the terms of the Underwriting Agreement, the Company also granted to the Underwriters an option, exercisable in
whole or in part at any time for a period of 30 days from the date of the closing of the Offering, to purchase up to an
additional 651,240 shares of common stock. On October 10, 2017, pursuant to the Underwriting Agreement, the
Company sold an aggregate of 4,992,840 shares of its common stock, including 651,240 shares sold pursuant to the
Underwriters’ full exercise of their option to purchase additional shares to cover over-allotments, at a public offering
price of $4.00 per share.
Net proceeds from the 2017 Public Offering were $18.3 million, after deducting underwriting discounts and
commissions and estimated offering expenses payable by the Company.
JGB Debt
On October 5, 2017, JGB elected to convert $1.25 million of outstanding principal under the Debentures into shares
of common stock. Accordingly, the Company issued 288,022 shares of common stock to the respective entities at a
price per share of $4.34.
12. WARRANTS
Private Placement, Placement Agent and Subsequent Financing Warrants
The warrants issued in the Private Placement and the Placement Agent Warrants (as described in Note 11) are
considered freestanding instruments that are contingently redeemable and classified as liabilities on the Company’s
consolidated balance sheet as of December 31, 2017. The warrants became exercisable to purchase common stock
122
after the Company obtained the Requisite Stockholder Approval on June 16, 2016. Upon the closing of the Private
Placement on April 14, 2016, the Company recorded an estimated fair value of $3.3 million relating to warrants to
purchase 1,975,580 shares of common stock that were issued in the Private Placement. The warrants were
comprised of warrants to purchase 1,775,580 shares of common stock that were issued to certain accredited
investors measured at an estimated fair value of $3.0 million, and Placement Agent Warrants to purchase 200,000
shares of common stock measured at an estimated fair value of $0.3 million. The Placement Agent Warrants were
issued for services performed by placement agents as part of the Private Placement and were treated as equity
issuance costs and were recorded in stockholders’ equity on the Company’s consolidated balance sheets to offset the
Private Placement proceeds allocated to the Series A Preferred and common stock.
Additional warrants were issued on June 15, 2016 to the Former Majority Shareholders upon the closing of the
Subsequent Financing (as described in Note 11). The warrants issued in the Subsequent Financing were also
considered freestanding instruments being accounted for using the same methodology as described above. On June
15, 2016, the Company recorded an estimated fair value of $1.7 million for warrants to purchase an aggregate of
1,002,507 shares of common stock issued in the Subsequent Financing.
The initial total estimated fair value of the warrant liability was $5.0 million following the closings of the Private
Placement, the issuance of Placement Agent Warrants and the Subsequent Financing on April 14, 2016. As of
December 31, 2017 and December 31, 2016, the total estimated fair value of the warrant liability was $12.2 million
and $5.2 million, respectively, and the corresponding remeasurement charge of $11.3 million for the year ended
December 31, 2017, was recorded in change in estimated fair value of common stock warrant and derivative
liabilities on the Company’s consolidated statement of operations.
In connection with the 2016 Public Offering, in accordance with the anti-dilution provisions in the warrants issued
in connection with the Private Placement and the Subsequent Financing, the exercise price of the 1,775,580 and
1,002,507 Private Placement and Subsequent Financing warrants, respectively, was adjusted from $4.98 per share to
$4.00 per share, which was the price paid by investors in the 2016 Public Offering.
In connection with the issuance of 1,022,544 shares of the Company’s common stock at $1.12 in connection with
the amendments to the Conditional Share Purchase Agreement, the exercise prices of the warrants issued in the
Private Placement and Placement Agent Warrants were adjusted from $4.00 and $3.99 per share, respectively, to
$1.12 per share.
JGB Warrants
In connection with the issuance of the JGB Debt (as described in Note 11), the Company issued the 1,250,000
warrants (the “JGB Warrants”). The exercise price of the JGB Warrants was $5.00 per share, and the JGB Warrants
are exercisable from September 16, 2017 through September 15, 2022. The initial estimated fair value of the
common stock warrant liability was $0.9 million. As of December 31, 2017, the estimated fair value of the common
stock warrant liability was $6.6 million. The corresponding remeasurement expense for the three and twelve month
periods ended December 31, 2017 was $4.0 million and $5.7 million, respectively, and was recorded in change in
estimated fair value of common stock warrant and derivative liabilities on the Company’s consolidated statements of
operations.
The Company determined that the warrants and the debentures were free standing instruments for accounting
purposes. The terms of the warrants include a price-based anti-dilution adjustment provision, which precludes the
Company from classifying the warrants in equity. As such, the warrants are classified as a liability and allocated
their full fair value on day one and the residual value, after allocation of the fair value of the derivative is ascribed to
the Debentures. In addition, the warrants will be re-measured at each reporting period and change in fair value will
be recognized in the consolidated statements of operations.
Pursuant to an agreement with the Former Majority Shareholders, the aggregate number of shares of common stock
issuable upon exercise of the JGB Warrants increased from 1,250,000 shares to 1,296,679 shares and the exercise
price of the JGB Warrants decreased from $5.00 to $4.82 per share, effective July 3, 2017.
123
As a result of the 2017 Public Offering, effective October 5, 2017, the aggregate number of shares of common stock
issuable upon exercise of the JGB Warrants increased from 1,296,679 shares to 1,332,620 shares and the exercise
price of the JGB Warrants decreased from $4.82 to $4.69 per share. As a result of the sale of the 651,240 shares of
common stock pursuant to the Underwriters’ full exercise of their option to purchase additional shares to cover over-
allotments in the 2017 Public Offering, effective October 10, 2017, the aggregate number of shares of common
stock issuable upon exercise of the JGB Warrants increased from 1,332,620 shares to 1,338,326 shares and the
exercise price of the JGB Warrants decreased from $4.69 to $4.67 per share.
Warrant Valuation
The Company utilizes a Monte Carlo simulation model to estimate the fair value of its warrants. The Monte Carlo
simulation model uses multiple input variables to estimate the probability that market conditions will be achieved.
These variables include the Company’s stock price, the expected term of the warrants, the volatility of the
Company’s and its peers’ stock prices over such expected term and the risk-free interest rate for the expected term of
the warrants. The variables used in this simulation model are reviewed on a quarterly basis and adjusted, as needed.
If the Company issues common stock at a price lower than the exercise price or issues stock options or other
securities (other than securities issued pursuant to the Company’s stock or option plans or employment agreements,
securities issued or issuable upon exercise or exchange of convertible securities outstanding as of the date the
warrants were issued or securities issued pursuant to acquisitions or strategic transactions approved by a majority of
the disinterested directors of the Company) with an exercise price that is lower than the current exercise price of the
warrants, the exercise price of the warrants shall be adjusted to be equal to such lower price.
As of December 31, 2017, outstanding warrants to purchase Common Stock were:
Original
Term
Exercise
Price
Number of
Shares
Underlying
Warrants
Original issue date:
February 2008.........................................................
August 2009 ...........................................................
July 2010 ................................................................
August 2012 ...........................................................
January 2015...........................................................
April 2016 (a) .........................................................
April 2016 (b) .........................................................
June 2016 (c) ..........................................................
March 2017 (d) .......................................................
10 years $
10 years $
9 years $
7 years $
5 years $
7 years $
5 years $
7 years $
5 years $
22,792
35.10
33,473
21.78
21.78
6,694
21.78 167,182
6.96
34,483
1.12 904,800
1.12 168,700
4.00 1,002,507
4.67 1,338,326
3,678,957
(a)
(b)
(c)
(d)
Issued on April 14, 2016 in connection with the Private Placement to certain accredited investors. The exercise price was
reset from $4.98 to $4.00 as a result of the 2016 Public Offering that closed on September 26, 2016. As a result of the
issuance of 1,022,544 shares of the Company’s common stock at $1.12 in connection with the amendments to the
Conditional Share Purchase Agreement, the exercise price was adjusted from $4.00 to $1.12, effective July 3, 2017.
Issued on April 14, 2016 in connection with the Private Placement to placement agents. As a result of the issuance of
1,022,544 shares of the Company’s common stock at $1.12 in connection with the amendments to the Conditional Share
Purchase Agreements, the exercise price was adjusted from $3.99 to $1.12, effective July 3, 2017.
Issued on June 15, 2016 in connection with the Subsequent Financing. The exercise price was reset from $4.98 to $4.00 as
a result of the Public Offering that closed on September 26, 2016. The exercise price remained at $4.00 as the anti-
dilution provision was waived for the issuance of shares related to the July 3, 2017 amendment to the Conditional Share
Purchase Agreements.
Issued on March 15, 2017 in connection with the JGB Debt. As a result of the issuance of 1,022,544 shares of the
Company’s common stock at $1.12 in connection with the amendments to the Conditional Share Purchase Agreement, the
number of shares issuable pursuant to the JGB Warrants increased from 1,250,000 to 1,296,679 and the exercise price of
the JGB Warrants was adjusted from $5.00 to $4.82, effective July 3, 2017. As a result of the 2017 Public Offering,
effective October 5, 2017, the aggregate number of shares of common stock issuable upon exercise of the JGB Warrants
increased from 1,296,679 to 1,338,326 shares and the exercise price of the JGB warrants decreased from $4.82 to $4.67
per share.
124
13. STOCK INCENTIVE PLANS
2014 Equity Incentive Plan
Upon its initial public offering, 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 Company’s 2008 Equity Incentive 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:129)
(cid:129)
(cid:129)
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.
The 2014 Plan allows restricted stock units (“RSUs”) to be granted in addition to stock options. The RSUs generally
vest annually over four years in equal increments. The Company began granting RSUs under the 2014 Plan in
March 2015.
2016 Inducement Plan
On April 21, 2016, the Company’s Board of Directors, including its independent directors, adopted the Company’s
2016 Inducement Equity Incentive Plan (the “Inducement Plan”), pursuant to which the Company may grant stock
awards of up to a total of 155,500 shares of common stock to new employees of the Company. The Inducement Plan
was adopted to accommodate a reserve of additional shares of common stock for issuance to new employees hired
by the Company from Allenex. The terms in the Inducement Plan are substantially similar to the Company’s 2014
Plan.
The Inducement Plan allows RSUs to be granted in addition to stock options. The RSUs vest annually over four
years in equal increments. The Company began granting RSUs pursuant to the Inducement Plan starting June 2016.
125
Stock Options and Restricted Stock Units (“RSUs”)
The following table summarizes option and unvested RSU activity under the plans and related information:
$
—
(23,576)
(77,660)
(5,329)
Shares
Stock
Available
Options
for Grant
Outstanding
Balance—December 31, 2014 ................................... 718,007
1,031,804
Additional options authorized.................................... 357,075
—
Restricted stock grants ...............................................
(38,121)
—
—
RSUs granted ............................................................. (114,400)
Options granted.......................................................... (652,078) 652,078
—
Options exercised.......................................................
8,200
RSUs forfeited ...........................................................
77,660
Options forfeited ........................................................
Options expired..........................................................
5,329
Balance—December 31, 2015 ................................... 361,672
Additional options authorized.................................... 512,575
(61,921)
Restricted stock grants ...............................................
RSUs granted ............................................................. (287,900)
Options granted.......................................................... (597,470) 597,470
(5,688)
Options exercised.......................................................
—
RSUs forfeited ...........................................................
RSUs vested ...............................................................
—
Options forfeited ........................................................ 269,212 (269,212)
Options expired.......................................................... 107,601 (107,601)
Balance—December 31, 2016 ................................... 365,074 1,792,286
—
Additional options authorized.................................... 357,075
—
Restricted stock grants ............................................... (115,948)
RSUs granted ............................................................. (309,500)
—
Options granted.......................................................... (909,913) 909,913
(71,976)
Options exercised.......................................................
—
RSUs forfeited ...........................................................
RSUs vested ...............................................................
—
Options forfeited ........................................................ 522,826 (522,826)
Options expired.......................................................... 165,924 (165,924)
Balance—December 31, 2017 ................................... 156,429 1,941,473 $
1,577,317
—
—
—
—
80,891
—
—
61,305
—
Weighted-
Average
Exercise
Price
Number of
RSU
Shares
Weighted-
Average
Grant Date
Fair Value
—
—
—
6.49
—
—
6.49
—
—
6.49
—
—
5.50
—
—
5.81
6.49
—
—
5.69
—
—
3.40
—
—
4.14
5.60
—
—
4.39
6.09
1.94
—
8.13
10.36
—
7.36
—
—
—
—
— 114,400
—
—
(8,200)
—
—
6.87 106,200
—
—
—
—
— 287,900
—
—
—
4.91
—
3.29
(61,305)
—
(26,550)
—
—
6.64
8.88
—
6.15 306,245
—
—
309,500
—
3.39
—
3.64
(80,891)
—
(94,928)
—
—
9
5.81
—
4.21 439,926 $
The total intrinsic value of options exercised was approximately $0.2 million during 2017.
As of December 31, 2017, the total intrinsic value of RSUs was approximately $0.6 million and there were $1.4
million of unrecognized compensation costs related to RSUs, which are expected to be recognized over a weighted-
average period of 1.93 years.
126
Options outstanding and options vested as of December 31, 2017 are summarized as follows:
Options Outstanding
Weighted
Average
Remaining
Contractual
Life (Years)
Options Vested
Weighted
Average
Exercise
Price
Number of
Options
Vested
Weighted
Average
Exercise
Price
Number of
Options
Outstanding
Range of
Exercise Prices
$0.27 - 3.98 ................................................................ 859,315
$4.37 - 4.60 ................................................................
67,344
$4.95 - 5.85 ................................................................ 639,214
$6.49 - 7.03 ................................................................ 325,648
49,951
$10.00 - 12.44 ............................................................
1,941,472
7.51 $
8.13
8.18
7.19
6.40
1.91 368,752 $
4.56
28,384
5.47 260,093
6.64 236,687
48,614
11.34
942,530
1.58
4.56
5.28
6.63
11.32
Options outstanding that have vested and are expected to vest at December 31, 2017 are as follows:
Vested ......................................................................
Expected to Vest ......................................................
Total .........................................................................
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual Life
(Years)
Number of
Shares
942,530 $
998,942
1,941,472
4.46
3.96
Aggregate
Intrinsic
Value
(In thousands)
2,591
876
3,467
6.53 $
8.75
$
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, 2017 for stock options that were in-the-
money. The fair market value of the Company’s common stock as of December 31, 2017 was $7.34 per share.
The weighted average grant-date fair value of options to purchase common stock granted for the years ended
December 31, 2017, 2016 and 2015 using the Black-Scholes Model was $1.60, $2.05 and $2.53., 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 2017 was $0.7 million. As of December 31, 2017, there were
approximately $1.4 million of unrecognized compensation costs related to stock options, which are expected to be
recognized over a weighted-average period of 2.7 years.
The Company’s 2014 Plan and Inducement Plan allow RSUs to be granted in addition to stock options. The RSUs
vest annually over four years in equal increments. The Company began granting RSUs under the 2014 Plan in
March 2015 and under the Inducement Plan in June 2016.
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 stockholders approved the ESPP in July 2014.
During the offering period in 2017 that ended on June 30, 2017, 52,612 shares were purchased for aggregate
proceeds of $0.1 million from the issuance of shares, which occurred on July 5, 2017. The Company issued 71,639
shares and 67,256 shares of common stock during the years ended December 31, 2017 and December 31, 2016,
respectively, pursuant to the ESPP. The Company received proceeds of $0.1 million and $0.3 million from the
purchases of shares during the years ended December 31, 2017 and 2016, respectively. As of December 31, 2017,
the Company had 315,378 shares available for issuance under the ESPP.
127
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.
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 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
Year Ended December 31,
2017
2016
2015
5.9
57.34 %
2.01 %
— %
5.9
42.10 %
1.52 %
— %
6.0
41.17 %
1.84 %
— %
Expected term (in years).....................
Expected volatility..............................
0.5
0.5
Risk-free interest rate .........................
Expected dividend yield .....................
62.27 – 98.58 % 77.05 – 90.81 %
0.37 – 0.49 %
— %
0.65 – 1.13 %
— %
0.5
39.10 –
44.15
0.11
— %
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.
Stock-Based Compensation Expense
The following table summarizes stock-based compensation expense relating to employee and nonemployee stock
options, RSUs, and ESPP for the years ended December 31, 2017, 2016 and 2015, included in the statements of
operations as follows (in thousands):
Year Ended December 31,
2016
2015
2017
Cost of testing .............................................................. $
Research and development ..........................................
Sales and marketing .....................................................
General and administrative ..........................................
$
188 $
405
157
994
1,744 $
144 $
449
156
1,249
1,998 $
109
247
173
812
1,341
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.
128
Non-Employee Director Equity-based Compensation
For the years ended December 31, 2017, 2016 and 2015, 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, 2017, there were a total of 220,889
shares issued to non-employee directors, for a total fair value of $0.8 million. Expense associated with the awards
was $0.2 million, $0.3 million and $0.3 million for the years ended December 31, 2017, 2016 and 2015,
respectively, which was included in general and administrative expense in the statements of operations.
14. INCOME TAXES
Loss before income taxes for the years ended December 31, 2017, 2016 and 2015 is summarized as follows (in
thousands):
United States..................................................... $
Foreign..............................................................
$
2017
Year Ended December 31,
2016
(21,753) $
(19,609)
(41,362) $
(50,132) $
(7,137)
(57,269) $
2015
(13,707)
—
(13,707)
The components of the provision for (benefit from) income taxes are summarized as follows (in thousands):
As of December 31,
2016
2015
2017
Current
Federal ......................................................................
State ..........................................................................
Foreign......................................................................
Total Current..................................................................
Deferred
Federal ......................................................................
State ..........................................................................
Foreign......................................................................
Total Deferred................................................................
Provision for (benefit from) income taxes .....................
$
$
74 $
(4)
68
138
49
11
32
92
42
1
(1,890)
(1,847)
(1,709) $
(251)
(49)
(1,398)
(1,698)
(1,606)
$
$
—
—
—
—
—
—
—
—
—
The Company’s actual provision for tax differed from the amounts computed by applying the U.S. federal income
tax rate of 34% to pretax income as a result of the following:
2017
Year Ended December, 31,
2016
2015
Federal tax at statutory rate ..........................
Stock-based compensation ...........................
Change in valuation allowance ....................
Foreign rate differential................................
Warrant revaluation......................................
Interest expense ............................................
Acquisition costs ..........................................
Goodwill impairment ...................................
Impact of 2017 Tax Cuts and Jobs Act on
change in deferred tax assets .....................
Other.............................................................
Effective income tax rate ........................
34.0%
-0.2%
38.0%
-1.1%
-17.5%
-1.8%
0.0%
-1.2%
-46.5%
-0.7%
3.0%
34.0%
-0.5%
-16.8%
-1.3%
-0.2%
0.0%
-1.2%
-10.8%
—
0.7%
3.9%
34.0%
-1.9%
-31.1%
0.0%
0.0%
0.0%
-3.2%
0.0%
—
2.2%
0.0%
129
Deferred income tax assets and liabilities consist of the following: (in thousands):
Deferred tax assets:
Net operating loss carryforwards ............. $
Tax credit carryforwards ..........................
Accruals....................................................
Property and equipment............................
Other .........................................................
Gross deferred tax assets................................
Valuation allowance .................................
Total deferred tax assets.................................
Deferred tax liabilities:
Purchased intangibles ...............................
Other .........................................................
Total deferred tax liabilities ...........................
Net deferred tax liabilities.............................. $
As of December 31,
2017
2016
49,374 $
5,798
583
1,184
633
57,572
(54,934)
2,638
(7,554)
(17)
(7,571)
(4,933) $
71,925
4,947
1,274
195
1,088
79,429
(76,295)
3,134
(8,979)
(212)
(9,191)
(6,057)
Accounting standards provide for the recognition of deferred tax assets if realization of such assets is more likely
than not. Based upon the weight of available evidence, which includes the Company’s sources of taxable income
including historical operating performance, the Company has provided a valuation allowance on the deferred tax
asset that is not realizable. The valuation allowance decreased by $21.4 million and increased by $6.2 million during
the years ended December 31, 2017 and 2016, respectively.
On December 22, 2017, the Tax Cuts and Jobs Act of 2017, the Tax Act, was signed into law making significant
changes to the Internal Revenue Code. Changes include, but are not limited to, a corporate tax rate decrease from
35% to 21% effective for tax years beginning after December 31, 2017. The Company has calculated the impact of
the Tax Act in its year end income tax provision in accordance with its understanding of the Tax Act and guidance
available as of the date of this filing which did not result in any additional income tax expense in the fourth quarter
of 2017. In December 2017, Staff Accounting Bulletin No. 118, or SAB 118, was issued to address the application
of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or
analyzed in reasonable detail to complete the accounting for certain income tax effects of the Tax Act. In accordance
with SAB 118, additional work may be necessary for a more detailed analysis of the Company's deferred tax assets
and liabilities. Any subsequent adjustment to the provisional amounts will be recorded in 2018 when the analysis is
complete.
Under ASC Topic 740, Accounting for Income Taxes, the enactment of the Tax Act also requires companies to
recognize the effects of changes in tax laws and rates on deferred tax assets and liabilities and the retroactive effects
of changes in tax laws in the period in which the new legislation is enacted. Consequently, the Company accounted
for a provisional estimated reduction of the U.S. deferred tax assets from $72.5 million to approximately $45.9
million with a corresponding decrease of $27.0 million to the Company’s valuation allowance. The Company
expects the new law to significantly reduce its tax rate in future periods, and its tax footnote reflects the effects of a
federal tax rate reduction net of its valuation allowance. In addition, the Company is still evaluating the realizability
of certain deferred tax assets.
Beginning in 2018, companies may be subject to global intangible low tax income (“GILTI”), which is a tax on
foreign income in excess of a deemed return on tangible assets of foreign corporations as well as the new base
erosion anti-abuse tax (“BEAT”) under the Tax Act. GILTI will be effectively taxed at a tax rate of 10.5%. Due to
the complexity of the GILTI tax rules, companies are allowed to make an accounting policy choice of either (1)
treating taxes due on future U.S. inclusions in taxable income related to GILTI as a current-period expense when
incurred or (2) factoring such amounts into a company’s measurement of its deferred taxes under the SAB 118. The
Company has not yet made an election with respect to GILTI. The Company will continue to review the GILTI and
BEAT rules to determine their applicability to the company as the rules become effective.
130
As of December 31, 2017, the Company had domestic federal net operating loss carryforwards of $204.2 million,
domestic state net operating loss carryforwards of $75.9 million, and foreign net operating loss carryforwards of
$5.3 million that can reduce future taxable income. The domestic federal and state net operating loss carryforwards
will begin to expire in 2018 and 2028, respectively. The foreign net operating loss carryforwards can be carried
forward indefinitely.
As of December 31, 2017, the Company had credit carryforwards of approximately $4.3 million and $5.3 million
available to reduce future taxable income, if any, for domestic federal and California state income tax purposes,
respectively. The domestic federal credit carryforwards begin to expire in 2021. California credits have no
expiration date.
Utilization of the Company's net operating loss and credit carryforwards may be subject to a substantial annual
limitation due to the ownership change limitations provided by the Internal Revenue Code of 1986, as amended and
similar state provisions. Based on a preliminary review of the Company's equity transactions since inception, the
Company believes a portion of its net operating loss carryforwards and credit carryforwards may be limited due to
equity financings which occurred in 2000, 2004, 2007, 2014 and through the current period.
A reconciliation of the Company’s unrecognized tax benefits is as follows (in thousands):
Balance at beginning of year ............................................. $
Additions based on tax positions related to current year...
Additions (decreases) based on tax positions related
to prior years...................................................................
Balance at end of year ....................................................... $
5,252 $
186
2,431 $
332
(2,274)
3,164 $
2,489
5,252 $
2,054
372
5
2,431
Year Ended December 31,
2016
2015
2017
Approximately $0.5 million of the $3.2 million of net unrecognized tax benefit as of December 31, 2017, if
recognized, would impact the Company's effective tax rate. During the year ended December 31, 2016, given the
Company's valuation allowance, the uncertain tax benefits would not have impacted the effective tax rate.
The Company recognizes interest and penalties related to unrecognized tax benefits as a component of income tax
expense. As of December 31, 2017 and December 31, 2016, the Company has $0.3 million and $0.3 million,
respectively, of cumulative interest and penalties related to unrecognized tax benefits. There were no accruals of
interest expense during the year ended December 31, 2015. The Company does not anticipate a significant change in
the unrecognized tax benefits over the next twelve months.
The Company files U.S., state and foreign income tax returns in jurisdictions with varying statutes of limitations.
Due to net operating loss and credit carryovers, the domestic federal and state income tax returns are subject to tax
authority examination from inception. In jurisdictions where the Company files income tax returns, the statutes of
limitations with respect to these jurisdictions vary from jurisdiction to jurisdiction and range from 3 to 6 years.
15. 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.
16. SEGMENT REPORTING
Operating segments are defined as components of an enterprise about which separate financial information is
available that is evaluated regularly by the Chief Operating Decision Maker (“CODM”), or decision making group,
whose function is to allocate resources to and assess the performance of the operating segments. The Company has
identified its chief executive officer as the CODM. In determining its reportable segments, the Company considered
the markets and types of customers served and the products or services provided in those markets.
131
Prior to the acquisition of Allenex, the Company operated as a single reportable segment. Subsequent to the
acquisition of Allenex, the Company has identified the following two reportable segments, which are the same as its
operating segments:
(cid:129)
(cid:129)
Post-Transplant: This segment focuses on discovery, development and commercialization of clinically
differentiated, high-value diagnostic solutions for transplant patients. Its first commercialized testing
solution, 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. On October 9, 2017, AlloSure became commercially available with Medicare reimbursement.
AlloSure is the first and only non-invasive test that assesses organ health by directly measuring allograft
injury.
Pre-Transplant: This segment develops, manufactures, markets and sells high quality products that
increase the chance of successful transplants by facilitating a better match between a donor and a
recipient of stem cells and organs. The pre-transplant product lines include Olerup branded products
SSP, SBT, QTYPE, SBT and XM-ONE.
There were no intersegment sales for the years ended December 31, 2017. The following table summarizes the
operating results of the Company’s reportable segments (in thousands):
Years Ended December 31,
2016
2015
2017
Total segments
Net revenues........................................................... $
Operating loss ........................................................
Depreciation and amortization ...............................
48,324 $
(20,294)
3,759
40,631 $
(37,332)
2,920
28,144
(11,932)
796
Post-Transplant
Net revenues........................................................... $
Operating loss ........................................................
Depreciation and amortization ...............................
33,690 $
(14,331)
1,041
29,916 $
(18,374)
982
28,144
(11,932)
796
Pre-Transplant
Net revenues........................................................... $
Operating loss ........................................................
Depreciation and amortization ...............................
14,634 $
(5,963)
2,718
10,715 $
(18,958)
1,938
—
—
—
Assets:
Post-Transplant...........................................
Pre-Transplant ............................................
Total assets.......................................................
$
$
48,734 $
34,831
83,565 $
41,169
35,561
76,730
December 31, 2017 December 31, 2016
Revenues by geographic regions are based upon the customers’ ship-to address for pre-transplant revenues and the
region of testing for post-transplant revenues. The following table summarizes reportable revenues by geographic
regions (in thousands):
Years Ended December 31,
2016
2015
2017
Revenues:
North America........................................................ $
Europe ....................................................................
Australia .................................................................
Rest of the World ...................................................
Total............................................................................. $
38,204 $
7,980
411
1,729
48,324 $
33,215 $
6,270
—
1,146
40,631 $
28,144
—
—
—
28,144
132
The following table summarizes long-lived assets, consisting of property and equipment, net, by geographic regions
(in thousands):
December 31, 2017 December 31, 2016
Long-lived assets:
North America ............................................
Europe.........................................................
Australia .....................................................
Total .................................................................
$
$
1,206 $
776
93
2,075 $
2,052
879
—
2,931
17. RELATED PARTY TRANSACTIONS
A member of the Company’s Board of Directors is a managing director of M.M. Dillon, and as such, the Company
considered M.M. Dillon to be a related party. M.M. Dillon acted as one of the Company’s financial advisors and
placement agents in connection with the Private Placement and Subsequent Financing in 2016 (as described in Note
11).
18. SUBSEQUENT EVENTS
JGB Repayment Notice
On March 1, 2018, the Company notified JGB of its intent to prepay on April 13, 2018 (the “Prepayment Date”) in
full the outstanding principal and interest under the Debentures. Pursuant to the terms of the Debentures, on the
Prepayment Date, the Company is obligated to pay the full amount of the outstanding principal balance of the
Debentures, plus accrued and unpaid interest thereon and a prepayment premium equal to 8% of the outstanding
principal balance in cash.
From January 1, 2018 through March 22, 2018, the Company has received notices of conversion from JGB for an
aggregate of $20.8 million of principal and accrued interest of the JGB Debt to be converted into an aggregate of
4,800,530 shares of the Company’s common stock, reducing the outstanding principal of the JGB debt to $5.9
million, as of March 22, 2018.
Commitment to Term Loan
On March 1, 2018, the Company entered into a binding commitment letter (the “Commitment Letter”) with
Perceptive Credit Holdings II, LP (“Perceptive”), pursuant to which, subject to the conditions set forth therein,
Perceptive committed to provide the Company with a loan of up to $35.0 million, subject to funding in two tranches
(the “New Term Loan”). The funding of the New Term Loan is expected to be on the Prepayment Date, at which
time the Company may request to draw up to $35 million in two tranches subject to the satisfaction of several
customary conditions. The Commitment Letter contemplates that the New Term Loan will mature on the fifth
anniversary of the Prepayment Date, will have an interest rate of 9% plus the greater of the one-month LIBOR or
1.5%, will require interest only payments for the first three years, and may be prepaid by the Company in whole or
in part at any time, subject to a prepayment fee. The Commitment Letter provides that the Term Loan will be
secured by substantially all of the Company’s assets and a pledge of 65% of the equity interests of CareDx
International AB.
Under the terms of the Commitment Letter, the Company is required to repay the Company’s total outstanding
indebtedness and expect to use the remaining funds for general corporate purposes. Upon repayment to JGB, $9.4
million of the Company’s restricted cash will become available for use.
133
19. 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, 2017 and 2016. 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 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.
The acquisition of Allenex in the June 30, 2016 quarter affects the comparability of the financial data presented
below.
Quarter Ended:
March 31
June 30
September 30 December 31
(In thousands, except share and per share data)
2017
Consolidated Statement of Operations Data:
$
Total revenue .....................................................
Net loss attributable to CareDx, Inc.
used to compute basic net loss per share ........
Net loss per common share
attributable to CareDx, Inc., basic ..................
Net loss per common share
attributable to CareDx, Inc., diluted ...............
Shares used in calculation of net loss per
share attributable to CareDx, Inc., basic.........
Shares used in calculation of net income loss
per share attributable to CareDx, Inc., diluted ....
$
$
$
11,584 $
12,046 $
12,191 $
12,503
(5,562) $
(3,968) $
(14,268) $
(31,671)
(0.26) $
(0.19) $
(0.63) $
(1.13)
(0.26) $
(0.19) $
(0.63) $
(1.13)
21,343,782 21,412,480 22,526,615 27,983,033
21,343,782 21,412,480 22,526,615 27,983,033
Consolidated Balance Sheet Data:
Total assets ........................................................
Long-term debt, net of current portion ..............
$
$
80,322 $
- $
77,738 $
- $
75,093 $
21,174 $
83,565
18,338
2016
Consolidated Statement of Operations Data:
Total revenue .....................................................
$
Net loss attributable to CareDx, Inc.
used to compute basic net loss per share ........
Net loss per common share
attributable to CareDx, Inc., basic ..................
Net loss per common share
attributable to CareDx, Inc., diluted ...............
Shares used in calculation of net loss per
share attributable to CareDx, Inc., basic.........
Shares used in calculation of net income loss
per share attributable to CareDx, Inc., diluted ....
$
$
$
6,562 $
10,735 $
12,475 $
10,859
(9,752) $
(10,470) $
(3,764) $
(15,483)
(0.81) $
(0.77) $
(0.20) $
(0.73)
(0.81) $
(0.77) $
(0.26) $
(0.73)
11,969,714 13,568,120 19,098,626 21,270,151
11,969,714 13,568,120 19,481,424 21,270,151
Consolidated Balance Sheet Data:
Total assets ........................................................
Long-term debt, net of current portion ..............
$
$
48,834 $
11,368 $
100,453 $
10,072 $
102,092 $
8,496 $
76,730
1,098
134
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
Management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of its
disclosure controls and procedures, as such terms are defined in Rules 13a-15(b) and 15d-15(e) promulgated under
the Exchange Act, as of December 31, 2017. In designing and evaluating the disclosure controls and procedures,
management recognizes that any controls and procedures, no matter how well designed and operated, can provide
only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls
and procedures must reflect the fact that there are resource constraints and that management is required to apply its
judgment in evaluating the benefits of possible controls and procedures relative to their costs. Based on such
evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2017, our
disclosure controls and procedures were effective at the reasonable assurance level and are effective to provide
reasonable assurance that information required to be disclosed in the reports we file and submit under the Exchange
Act, is (i) recorded, processed, summarized and reported as and when required and (ii) accumulated and
communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as
appropriate to allow timely discussion regarding required disclosure.
Management’s Annual 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. 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, 2017. In
making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of
the Treadway Commission, or COSO, in the 2013 Internal Control-Integrated Framework. Based on our
assessment, management has concluded its internal controls over financial reporting were effective as of December
31, 2017.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting,
such that there is a reasonable possibility that a material misstatement of our annual or interim consolidated financial
statements will not be prevented or detected and corrected on a timely basis.
Management identified the following four material weaknesses in our internal control over financial reporting as of
December 31, 2016:
(cid:129)
Certain areas of our financial statement close process:
o
o
o
o
The operating effectiveness of our controls were inadequate to identify an incorrect classification
of the deferred consideration payable to the Former Majority Shareholders within our
consolidated statement of cash flows following the Allenex acquisition;
The operating effectiveness of our controls were inadequate to ensure our bonus accrual and
deferred purchase consideration balances were accurate;
The operating effectiveness of our controls were inadequate to ensure the proper application of
foreign exchange rates in our consolidation process; and
A failure in the design and implementation of controls over the review of the terms and conditions
of a contractual debt agreement, which resulted in an incorrect classification of our short-term and
long-term debt.
135
(cid:129)
(cid:129)
(cid:129)
A failure in the design and implementation of controls over our accounting for business combinations:
o We did not design and implement transaction level or management review controls for the
oversight, integration and consolidation of the acquired Allenex entities or controls to assess the
completeness and accuracy of information, including key inputs and assumptions used by third
party specialists, used in estimating the fair value of assets acquired and liabilities assumed. These
control deficiencies resulted in the incorrect valuation of inventories and certain intangible assets
acquired.
A failure to properly apply the revenue recognition criteria to certain contractual arrangements with
payers:
o We did not design our controls to ensure the proper analysis and review of the terms and
conditions of contractual arrangements, which affected the timing and amount of revenue
recognized; and
o We did not design our controls over the review of our aged accounts receivables to identify
transactions that were improperly included in accounts receivable.
A failure in the design and implementation of controls over our accounting for inventory valuation:
o We did not design and implement transaction level or management review controls to ensure the
proper valuation of inventories at the acquired Allenex entities.
Despite the existence of these previously identified material weaknesses, management believes that the consolidated
financial statements included in this Annual Report on Form 10-K accurately present, in all material respects, our
financial position, results of operations, comprehensive loss and cash flows for the periods in conformity with U.S.
GAAP.
Remediation Efforts to Address Material Weaknesses
During fiscal year 2017, we prepared and implemented a remediation plan to address the underlying causes of the
material weaknesses described above. The following steps were taken to remediate the material weaknesses:
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
Hired additional personnel in our accounting, billing and collection departments with an appropriate
level of knowledge and experience to effectively execute our processes and procedures;
Reassessed the design and operation of internal controls over our financial statement close process,
including evaluating and implementing additional policies, improved processes and documented
procedures;
Designed internal controls related to business combinations, including management’s review of the
completeness and accuracy of information and key inputs and assumptions used to estimate the fair
value of assets acquired and liabilities assumed for both the quarter of acquisition and subsequent
periods of integration;
Developed improved processes and controls for the review of contracts we enter into with third-party
payers and the identification and evaluation of key contract terms and conditions that impact the timing
and amounts of revenues to be recognized;
Improved the design and operation of internal controls over the review of our aged accounts receivables;
and
Designed and implemented effective internal controls related to the valuation of inventories at the
acquired Olerup entities, including both transaction level controls performed by the accounting
personnel at Olerup and management review controls performed by CareDx management.
We have tested the controls mentioned above and believes we are operating effectively and therefore we believe we
have remediated the material weakness. We cannot assure you that the measures taken in response to these material
weaknesses will be sufficient to avoid potential future material weaknesses.
136
Changes in Internal Control over Financial Reporting
There were key 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 year ended December 31,
2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial
reporting. These changes are discussed above in our remediation efforts.
ITEM 9B. OTHER INFORMATION
None.
137
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this item is incorporated by reference from the information contained in our Definitive
Proxy Statement to be filed with the SEC within 120 days after the end of the fiscal year ended December 31, 2017
in connection with the Annual Meeting of Stockholders to be held in 2018, or the 2018 Proxy Statement. To the
extent that we do not file the 2018 Proxy Statement by such date, we will file an amendment to this Annual Report
on Form 10-K that includes the information required by this Item 10.
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
Company’s Code of Business Conduct and Ethics is available on its 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 LLC.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from the information contained in the Company’s
2018 Proxy Statement. The 2018 Proxy Statement will be filed with the SEC within 120 days after the end of the
fiscal year ended December 31, 2017. To the extent that we do not file the 2018 Proxy Statement by such date, we
will file an amendment to this Annual Report on Form 10-K that includes the information required by this Item 11.
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 from the information contained in the 2018
Proxy Statement. The 2018 Proxy Statement will be filed with the SEC within 120 days after the end of the fiscal
year ended December 31, 2017. To the extent that we do not file our 2018 Proxy Statement by such date, we will file
an amendment to this Annual Report on Form 10-K that includes the information required by this Item 12.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE
The information required by this item is incorporated by reference to from the information contained in our 2018
Proxy Statement. The 2018 Proxy Statement will be filed with the SEC within 120 days after the end of the fiscal
year ended December 31, 2017. To the extent that we do not file the 2018 Proxy Statement by such date, we will file
an amendment to this Annual Report on Form 10-K that includes the information required by this Item 13.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item is incorporated by reference from the information contained in the 2018 Proxy
Statement. The 2018 Proxy Statement will be filed with the SEC within 120 days after the end of the fiscal year
ended December 31, 2017. To the extent that we do not file the 2018 Proxy Statement by such date, we will file an
amendment to this Annual Report on Form 10-K that includes the information required by this Item 14.
138
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. 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).
ITEM 16. FORM 10-K SUMMARY
None.
139
Exhibit
Number
2.1†
2.2
3.1
3.2
4.1
4.2
4.3#
4.4#
4.5#
4.6#
4.7#
EXHIBIT INDEX
Form
S-1/A
Incorporated by Reference
File No.
Exhibit
Filing Date
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
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.
Amended and Restated Bylaws
of the Registrant.
10-Q
10-K
10-K
Form of Registrant’s common
stock certificate.
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.
ImmuMetrix, Inc. 2013 Equity
Incentive Plan
2014 Equity Incentive Plan and
forms of agreements
thereunder.
S-1
S-1
S-1
S-8
001-36536
001-36536
001-36536
3.4
4.1
4.2
08/28/2014
03/31/2015
03/31/2015
333-196494
10.2
06/03/2014
333-196494
10.3
06/03/2014
333-196494
10.19
06/03/2014
333-197493
4.4
07/18/2014
Form of Option Agreement
under the 2014 Equity Incentive
Plan for New Options.
SC TO-I
005-88252
99(d)(3)
10/12/2017
140
Description
Form
File No.
Exhibit
Filing Date
Incorporated by Reference
Exhibit
Number
4.8#
2014 Employee Stock Purchase
Plan and forms of agreements
thereunder.
S-8
S-8
8-K
8-K
8-K
4.9#
2016 Inducement Equity
Incentive Plan.
4.10#
Form of Warrant.
4.11
4.12
10.1#
10.2#
10.3#
10.4#
10.5#
Form of Common Stock
Purchase Warrant issued to the
Purchasers on March 15, 2017.
Form of 9.5% Original Issue
Discount Senior Secured
Debenture issued to the
Purchasers on March 15, 2017.
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 November
21, 2006, by and between the
Registrant and Mitchell Nelles.
Offer Letter, dated October 18,
2011, by and between the
Registrant and Michael D.
Goldberg.
Offer Letter, dated April 8,
2014, by and between the
Registrant and George
Bickerstaff, III.
333-197493
4.5
7/18/2014
333-211538
4.1
5/23/2016
001-36536
001-36536
10.3
4.2
4/14/2016
3/15/2017
001-36536
4.1
03/15/2017
S-1
333-196494
10.6
06/03/2014
S-1
S-1
S-1
333-196494
10.7
06/03/2014
333-196494
10.10
06/03/2014
001-36536
4.1
03/31/2015
10-K
001-36536
10.14
03/31/2015
10.6#* Offer Letter, between the
10-K
3/22/2018
10.7#
10.8#
10.9#
Registrant and Sasha King,
dated October 20, 2017.
Offer Letter, between the
Registrant and Michael Bell,
dated as of April 21, 2017.
Form of Change of Control and
Severance Agreement between
the Registrant and each of its
executive officers.
Form of Indemnification
Agreement between the
Registrant and each of its
directors and executive officers.
10-K
001-36536
10.43
04/21/2017
S-1
333-196494
10.11
06/03/2014
S-1
333-196494
10.1
06/03/2014
141
Exhibit
Number
10.10#
Description
Executive Incentive
Compensation Plan.
Form
10-K
Incorporated by Reference
File No.
Exhibit
Filing Date
001-36536
4.1
03/31/2015
10.11 # Outside Director Compensation
10-K
001-36536
10.1
07/19/2016
10.12
10.13†
Policy.
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.
10.14† Distribution and Licensing
Agreement, dated June 20,
2013, by and between the
Registrant and Diaxonhit SA.
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
10.15† Amended and Restated Exclusive
S-1/A
333-196494
10.17
07/15/2014
10.16†
10.17
10.18
10.19
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.
Conditional Share Purchase
Agreement between the
Registrant and Midroc Invest
AB, dated as of December 16,
2015.
Amendment to Conditional
Share Purchase Agreement
between the Registrant and
Midroc Invest AB, dated as of
February 8, 2016.
Second Amendment to
Conditional Share Purchase
Agreement, between the
Registrant and Midroc Invest
AB, effective as of December
31, 2016.
10-Q
001-36536
10.14.1
11/14/2014
8-K
001-36536
99.1
12/22/2015
8-K
001-36536
99.1
2/12/2016
8-K
001-36536
10.1
01/23/2017
142
Exhibit
Number
10.20
10.21
10.22
10.23
10.24
10.25
10.26
10.27
10.28
Description
Third Amendment to Conditional
Share Purchase Agreement and
Conversion Agreement, dated
July 1, 2017, between the
Registrant and Midroc Invest AB.
Fourth Amendment to
Conditional Share Purchase
Agreement and Conversion
Agreement, dated November 14,
2017, between the Registrant and
Midroc Invest AB.
Conditional Share Purchase
Agreement between the
Registrant and FastPartner AB,
dated as of December 16, 2015.
Amendment to Conditional
Share Purchase Agreement
between the Registrant and
FastPartner AB, dated as of
February 8, 2016.
Second Amendment to
Conditional Share Purchase
Agreement, between the
Registrant and FastPartner AB,
effective as of December 31,
2016.
Third Amendment to Conditional
Share Purchase Agreement and
Conversion Agreement dated
July 1, 2017, between the
Registrant and FastPartner AB.
Fourth Amendment to
Conditional Share Purchase
Agreement and Conversion
Agreement, dated November 14,
2017, between the Registrant and
FastPartner AB.
Conditional Share Purchase
Agreement between the
Registrant and Xenella Holding
AB, dated as of December 16,
2015.
Amendment to Conditional
Share Purchase Agreement
between the Registrant and
Xenella Holding AB, dated as
of February 8, 2016.
Form
10-Q
Incorporated by Reference
File No.
Exhibit
Filing Date
001-36536
10.1
08/11/2017
8-K
001-36536
10.1
11/15/2017
8-K
001-36536
99.2
12/22/2015
8-K
001-36536
99.2
02/12/2016
8-K
001-36536
10.2
01/23/2017
10-Q
001-36536
10.2
8/11/2017
8-K
001-36536
10.2
11/15/2017
8-K
001-36536
99.3
12/22/2015
8-K
001-36536
99.3
02/12/2016
143
Exhibit
Number
10.29
10.30
10.31
10.32
10.33
10.34
10.35
10.36
10.37
10.38
Description
Form
File No.
Exhibit
Filing Date
Incorporated by Reference
8-K
001-36536
10.3
01/23/2017
10-Q
011-36536
10.3
8/11/2017
8-K
001-36536
10.1
11/15/2017
8-K
001-36536
10.1
04/14/2016
8-K
001-36536
10.1
06/15/2016
8-K
001-36536
10.1
03/15/2017
8-K
001-36536
10.2
03/15/2017
8-K
001-36536
10.2
04/14/2016
8-K
011-36536
4.3
3/15/2017
8-K
011-36536
4.1
11/14/2017
Second Amendment to
Conditional Share Purchase
Agreement, between the
Registrant and Xenella Holding
AB, effective as of December
31, 2016
Third Amendment to Conditional
Share Purchase Agreement and
Conversion Agreement, dated
July 1, 2017, between the
Registrant and Xenella Holding
AB.
Fourth Amendment to
Conditional Share Purchase
Agreement and Conversion
Agreement, dated November 14,
2017, between the Registrant and
Xenella Holding AB.
Securities Purchase Agreement,
among the Registrant and the
investors named therein, dated
as of April 12, 2016.
Securities Purchase Agreement,
among the Registrant and the
investors named therein, dated
as of June 15, 2016.
Securities Purchase Agreement
dated March 15, 2017 between
the Registrant and the
Purchasers.
Security Agreement dated
March 15, 2017 between the
Registrant and JGB Collateral
LLC.
Voting Agreement, among the
Registrant and the investors
named therein, dated as of April
12, 2016.
Registration Rights Agreement
dated March 15, 2017 between
the Registrant and the
Purchasers.
Registration Rights Agreement
dated July 3, 2017 among the
Registrant, FastPartner AB,
Midroc Invest AB and Xenella
Holding AB.
144
Form
8-K
Incorporated by Reference
File No.
Exhibit
Filing Date
011-36536
4.1
11/14/2017
10-Q
011-36536
10.6
6/9/2017
Exhibit
Number
10.39
Description
Amendment No. 1 to
Registration Rights Agreement,
dated November 14, 2017,
among the Registrant,
FastPartner AB, Midroc Invest
AB and Xenella Holding AB.
10.40
Business Sale Agreement,
between CareDx Pty Ltd and
Conexio Genomics Pty Ltd.,
dated as of January 12, 2017.
21.1*
Subsidiaries of the Registrant.
23.1*
24.1*
31.1*
31.2*
Consent of Independent
Registered Public Accounting
Firm.
Power of Attorney (see
page 146 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. Omitted portions have
been filed separately with the SEC.
Indicates management contract or compensatory plan or arrangement.
Filed herewith.
Furnished herewith.
145
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 22, 2018
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and
appoints Peter Maag and Michael Bell, 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
Title
President, Chief Executive Officer
and Director
(Principal Executive Officer)
Date
March 22, 2018
/s/ MICHAEL BELL
Michael Bell
Chief Financial Officer
(Principal Financial and Accounting Officer)
March 22, 2018
/s/ MICHAEL D. GOLDBERG
Michael D. Goldberg
/s/ GEORGE W. BICKERSTAFF, III
George W. Bickerstaff, III
/s/ FRED E. COHEN
Fred E. Cohen
/s/ RALPH SNYDERMAN
Ralph Snyderman
/s/ WILLIAM HAGSTROM
William Hagstrom
Director
Director
Director
Director
Director
March 22, 2018
March 22, 2018
March 22, 2018
March 22, 2018
March 22, 2018
146
CORPORATE INFORMATION
Executive Team
Peter Maag, PhD
Chief Executive Officer and President
James Yee, MD
Executive Vice President and
Chief Medical Officer
Mitchell J. Nelles, PhD
Chief Operating Officer
Michael Bell
Chief Financial Officer
Sasha King
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,
Nominating/Corporate Governance
Fred E. Cohen, MD, DPhil
Senior Managing Director
Vida Ventures
Compensation Committee*,
Science and Technology Committee
Ralph Snyderman, MD
Chancellor Emeritus & James B. Duke
Professor of Medicine
Duke University
Nominating/Corporate Governance
Committee*,
Science and Technology Committee*
George W. Bickerstaff, III
Managing Director
MM Dillon & Co.
Audit Committee*
William A. Hagstrom
CEO, Octave Bioscience
Audit Committee,
Compensation Committee
*Indicates Chairperson of the Committee
Annual Stockholders Meeting
June 20, 2018 at 10AM PST
3260 Bayshore Blvd,
Brisbane, CA 94005
Exchange
Nasdaq Global Market
Ticker Symbol CDNA
Transfer Agent
Computershare Trust Company, N.A.
PO Box 30170
College Station, TX 77842
Legal Counsel
Paul Hastings LLP
1117 S. California Avenue
Palo Alto, CA 94034
Independent Registered
Public Accounting Firm
Deloitte
225 West Santa Clara Street, Suite 600
San Jose, CA 95113
Investor Relations
Integrated Corporate Relations, Inc.
685 Third Ave 2nd Floor
New York, NY 10017
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 2017 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: 001CSN33B9
2017 Annual Report