CareDx(CDNA) - 2019 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION This section provides CareDx, Inc.'s unaudited condensed consolidated financial statements and management's analysis of financial performance ITEM 1. Unaudited Condensed Consolidated Financial Statements This section presents CareDx, Inc.'s unaudited condensed consolidated financial statements, including balance sheets, statements of operations, comprehensive loss, stockholders' equity, and cash flows, along with detailed notes explaining the company's organization, accounting policies, and specific financial components Condensed Consolidated Balance Sheets This section provides a snapshot of CareDx, Inc.'s financial position, detailing assets, liabilities, and equity at specific dates Condensed Consolidated Balance Sheets (in thousands) | Metric | Sep 30, 2019 | Dec 31, 2018 | | :-------------------------- | :----------- | :----------- | | Total Assets | $144,833 | $130,697 | | Total Liabilities | $47,290 | $34,769 | | Total Stockholders' Equity | $97,543 | $95,928 | | Cash and Cash Equivalents | $40,927 | $64,616 | | Accounts Receivable | $19,169 | $9,760 | | Intangible Assets, net | $45,781 | $33,252 | | Goodwill | $23,777 | $12,005 | | Total Current Liabilities | $30,971 | $19,504 | Condensed Consolidated Statements of Operations This section details CareDx, Inc.'s financial performance, including revenue, gross profit, and net loss for specified periods Condensed Consolidated Statements of Operations (Three Months Ended Sep 30, in thousands) | Metric | Sep 30, 2019 | Sep 30, 2018 | Change (YoY) | | :---------------------------------------------------------------- | :----------- | :----------- | :----------- | | Total Revenue | $33,811 | $21,184 | +60% | | Gross Profit | $22,317 | $12,297 | +81% | | Loss from Operations | $(6,747) | $(2,719) | -148% | | Change in fair value of common stock warrant liability | $4,346 | $(17,093) | +125% | | Net Loss attributable to CareDx, Inc. | $(1,813) | $(19,970) | +91% | | Basic Net Loss Per Share | $(0.04) | $(0.54) | +92.6% | Condensed Consolidated Statements of Operations (Nine Months Ended Sep 30, in thousands) | Metric | Sep 30, 2019 | Sep 30, 2018 | Change (YoY) | | :---------------------------------------------------------------- | :----------- | :----------- | :----------- | | Total Revenue | $91,247 | $53,060 | +72% | | Gross Profit | $58,508 | $30,582 | +91% | | Loss from Operations | $(18,987) | $(13,163) | -44% | | Change in fair value of common stock warrant liability | $(14) | $(24,540) | +100% | | Net Loss attributable to CareDx, Inc. | $(17,191) | $(43,001) | +60% | | Basic Net Loss Per Share | $(0.41) | $(1.26) | +67.5% | Condensed Consolidated Statements of Comprehensive Loss This section presents CareDx, Inc.'s net loss and other comprehensive income/loss components for the reporting periods Condensed Consolidated Statements of Comprehensive Loss (Three Months Ended Sep 30, in thousands) | Metric | Sep 30, 2019 | Sep 30, 2018 | Change (YoY) | | :------------------------------------------------ | :----------- | :----------- | :----------- | | Net Loss | $(1,813) | $(19,970) | +91% | | Foreign currency translation adjustments, net of tax | $(863) | $120 | -819% | | Net Comprehensive Loss | $(2,676) | $(19,850) | +86.5% | Condensed Consolidated Statements of Comprehensive Loss (Nine Months Ended Sep 30, in thousands) | Metric | Sep 30, 2019 | Sep 30, 2018 | Change (YoY) | | :------------------------------------------------ | :----------- | :----------- | :----------- | | Net Loss | $(17,191) | $(43,026) | +60% | | Foreign currency translation adjustments, net of tax | $(1,656) | $(1,642) | -0.85% | | Net Comprehensive Loss | $(18,847) | $(44,668) | +57.8% | Condensed Consolidated Statements of Stockholders' Equity This section outlines changes in CareDx, Inc.'s equity, including capital contributions and accumulated deficit, over the reporting period Stockholders' Equity Changes (Nine Months Ended Sep 30, 2019, in thousands) | Metric | Dec 31, 2018 | Sep 30, 2019 | Change | | :-------------------------- | :----------- | :----------- | :----- | | Total Stockholders' Equity | $95,928 | $97,543 | +$1,615 | | Additional Paid-In Capital | $412,010 | $432,471 | +$20,461 | | Accumulated Deficit | $(311,845) | $(329,036) | -$17,191 | | Common Shares Outstanding | 41,384,960 | 42,421,115 | +1,036,155 | - Key drivers for the increase in Additional Paid-In Capital include share-based compensation expense ($6,001 thousand, $4,938 thousand, $5,912 thousand for Q1, Q2, Q3 2019 respectively) and proceeds from stock option and warrant exercises[16] Condensed Consolidated Statements of Cash Flows This section details CareDx, Inc.'s cash inflows and outflows from operating, investing, and financing activities Condensed Consolidated Statements of Cash Flows (Nine Months Ended Sep 30, in thousands) | Metric | Sep 30, 2019 | Sep 30, 2018 | Change | | :---------------------------------------------------------------- | :----------- | :----------- | :----- | | Net Cash Used in Operating Activities | $(1,686) | $(6,005) | +$4,319 | | Net Cash Used in Investing Activities | $(21,237) | $(6,969) | -$14,268 | | Net Cash (Used in) Provided by Financing Activities | $(214) | $12,956 | -$13,170 | | Net Decrease in Cash, Cash Equivalents and Restricted Cash | $(23,630) | $(80) | -$23,550 | | Cash, Cash Equivalents, and Restricted Cash at End of Period | $41,178 | $26,394 | +$14,784 | - Investing activities in 2019 included $18.1 million for business acquisitions (Ottr and XynManagement) and $1.1 million for intangible assets[22] - Financing activities in 2019 were impacted by $4.0 million in taxes paid for RSU settlements, partially offset by $3.2 million from stock option exercises and $0.8 million from ESPP[22] Notes to Unaudited Condensed Consolidated Financial Statements This section provides detailed explanations and disclosures supporting the unaudited condensed consolidated financial statements 1. ORGANIZATION AND DESCRIPTION OF BUSINESS CareDx, Inc. is a precision medicine company focused on the discovery, development, and commercialization of high-value healthcare solutions for transplant patients. The company offers a range of testing services, products, and digital solutions, expanding its portfolio through recent acquisitions of Ottr and XynManagement - CareDx is a precision medicine company specializing in high-value healthcare solutions for transplant patients[24] - Key testing services include AlloMap Heart (gene expression for heart transplant), AlloSure Kidney (dd-cfDNA for kidney transplant), and emerging solutions like AlloSure Lung, HeartCare, and KidneyCare[25][28][30] - Product offerings include HLA typing solutions (Olerup SSP, Olerup SBT, QTYPE, TruSight HLA) and NGS-based kitted solutions (AlloSeq Tx, AlloSeq cfDNA, AlloSeq HCT)[32][33] - Recent acquisitions of Ottr (May 2019) and XynManagement (August 2019) expanded the Digital Solutions portfolio, providing transplant patient tracking software and quality/waitlist management tools[26][35] 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES This section outlines the significant accounting policies, including the basis of presentation (U.S. GAAP, SEC interim reporting), reclassifications, and the use of estimates. It highlights the adoption of ASC 842 (Leases) effective January 1, 2019, which resulted in the recognition of ROU assets and lease liabilities, and discusses other recent accounting pronouncements - Financial statements are prepared in conformity with U.S. GAAP and SEC interim reporting requirements, with certain notes and information condensed or omitted[39] - Effective January 1, 2019, the company adopted ASC 842 (Leases), recognizing a Right-of-Use (ROU) asset of approximately $3.0 million and a lease liability of approximately $3.8 million[48][52] - Reclassifications in prior period amounts were made for consistent presentation, including separate presentation of debt extinguishment expenses, combined digital and other revenue, and combined cost of revenue, with no effect on reported results[41] 3. NET LOSS PER SHARE Basic and diluted net loss per share are computed by dividing net loss by the weighted-average common shares outstanding, without considering common share equivalents due to their antidilutive effect. For the three months ended September 30, 2019, basic and diluted net loss per share was $(0.04), a significant improvement from $(0.54) in the prior year. For the nine months, it was $(0.41) compared to $(1.26) in 2018 Net Loss Per Share (Three and Nine Months Ended Sep 30, in thousands) | Metric | Three Months Sep 30, 2019 | Three Months Sep 30, 2018 | Nine Months Sep 30, 2019 | Nine Months Sep 30, 2018 | | :---------------------------------------------------------------------------------------------------------------- | :------------------------ | :------------------------ | :----------------------- | :----------------------- | | Net Loss attributable to CareDx, Inc. | $(1,813) | $(19,970) | $(17,191) | $(43,001) | | Weighted-average shares used to compute basic and diluted net loss per share | 42,393,550 | 37,154,293 | 42,048,647 | 34,134,138 | | Basic and Diluted Net Loss Per Share | $(0.04) | $(0.54) | $(0.41) | $(1.26) | - Common stock equivalents (options, warrants, RSUs) totaling 4,576,094 shares for the nine months ended September 30, 2019, were excluded from diluted EPS calculation as their effect would be antidilutive[61] 4. FAIR VALUE MEASUREMENTS The company measures financial assets and liabilities at fair value using a three-tiered hierarchy. Money market funds are classified as Level 1. The common stock warrant liability is classified as Level 3 and valued using a Monte Carlo Simulation Model, which requires complex assumptions. The fair value of the common stock warrant liability decreased from $10.0 million at Dec 31, 2018, to $6.9 million at Sep 30, 2019 - Financial assets and liabilities are measured at fair value using a three-tiered hierarchy (Level 1: quoted prices in active markets; Level 2: observable inputs; Level 3: unobservable inputs)[62] Financial Assets and Liabilities Measured at Fair Value (in thousands) | Metric | Sep 30, 2019 (Level 1) | Sep 30, 2019 (Level 3) | Sep 30, 2019 (Total) | Dec 31, 2018 (Level 1) | Dec 31, 2018 (Level 3) | Dec 31, 2018 (Total) | | :------------------------- | :--------------------- | :--------------------- | :------------------- | :--------------------- | :--------------------- | :------------------- | | Money market funds | $33,691 | — | $33,691 | $59,471 | — | $59,471 | | Common stock warrant liability | — | $6,940 | $6,940 | — | $10,003 | $10,003 | - The common stock warrant liability is a Level 3 measurement, valued using a Monte Carlo Simulation Model, which considers stock price, expected life, volatility, and risk-free rates[66] 5. BUSINESS COMBINATIONS CareDx completed two business acquisitions in 2019: Ottr Complete Transplant Management on May 7, 2019, for $16.1 million, and XynManagement, Inc. on August 26, 2019, for $2.0 million cash plus $1.4 million in contingent consideration. These acquisitions expanded CareDx's digital solutions portfolio, adding transplant patient tracking software and quality/waitlist management tools. Goodwill of $10.0 million and $1.7 million was recognized for Ottr and XynManagement, respectively, primarily for synergies - Acquired Ottr Complete Transplant Management on May 7, 2019, for $16.1 million (or $16,148 thousand) adding transplant patient tracking software used in over 60 U.S. transplant centers[26][71][72] - Acquired XynManagement, Inc. on August 26, 2019, for $2.0 million cash and $1.4 million in contingent consideration, adding XynQAPI software for quality tracking and Waitlist Management solutions[26][84] Ottr Acquisition Summary (in thousands) | Metric | Amount | | :---------------------------------------------------------------- | :----- | | Total Consideration (Cash + Accrued purchase consideration) | $16,148 | | Identifiable Intangible Assets (Customer relationships, developed technology, trademark) | $6,600 | | Goodwill | $10,044 | 6. GOODWILL AND INTANGIBLE ASSETS Goodwill increased from $12.0 million at January 1, 2019, to $23.8 million at September 30, 2019, primarily due to $11.8 million acquired from business combinations (Ottr and XynManagement). Total intangible assets increased to $45.8 million, including acquired and developed technology, customer relationships, commercialization rights, and trademarks. The company also detailed the acquisition of intangible assets through the Illumina License and Commercialization Agreement and the Cibiltech License and Commercialization Agreement Goodwill (in thousands) | Metric | Amount | | :-------------------- | :----- | | Balance as of Jan 1, 2019 | $12,005 | | Goodwill acquired | $11,772 | | Balance as of Sep 30, 2019 | $23,777 | Intangible Assets with Finite Lives (Sep 30, 2019, in thousands) | Asset Type | Net Carrying Amount | Weighted Average Remaining Useful Life (Years) | | :-------------------------------- | :------------------ | :--------------------------------------------- | | Acquired and developed technology | $18,199 | 8.4 | | Customer relationships | $13,199 | 10.7 | | Commercialization rights | $8,049 | 9.9 | | Trademarks and tradenames | $1,512 | 8.6 | | Total intangible assets with finite lives | $40,959 | | | Acquired in-process technology | $4,822 | — | | Total intangible assets | $45,781 | | - Acquired intangible assets include those from the Illumina License Agreement (TruSight HLA, AlloSeq Tx, AlloSeq HCT) and the Cibiltech Agreement (commercialization rights for KidneyCare iBox)[89][98] 7. BALANCE SHEET COMPONENTS Inventory increased from $4.9 million at December 31, 2018, to $5.9 million at September 30, 2019, with increases across finished goods, work in progress, and raw materials. Accrued and other liabilities significantly increased from $5.6 million to $15.0 million, primarily driven by deferred revenue, deferred payments for intangible assets, and short-term lease liabilities Inventory (in thousands) | Metric | Sep 30, 2019 | Dec 31, 2018 | | :---------------- | :----------- | :----------- | | Finished goods | $2,549 | $2,506 | | Work in progress | $1,009 | $651 | | Raw materials | $2,344 | $1,786 | | Total inventory | $5,902 | $4,943 | Accrued and Other Liabilities (in thousands) | Metric | Sep 30, 2019 | Dec 31, 2018 | | :-------------------------------- | :----------- | :----------- | | Deferred revenue | $3,190 | $39 | | Clinical studies | $2,545 | $1,815 | | Deferred payments for intangible assets | $2,077 | — | | Short-term lease liability | $2,033 | — | | Total accrued and other liabilities | $15,002 | $5,637 | 8. COMMITMENTS The company has various commitments, including operating and finance leases for facilities, with total future minimum lease payments of $3.5 million as of September 30, 2019. Royalty commitments exist under the Stanford License and Illumina License Agreement, and a revenue-sharing agreement with Cibiltech for KidneyCare iBox. Other commitments include minimum purchase commitments from Illumina and potential liabilities from litigation Future Minimum Lease Commitments (in thousands) | Year Ending December 31, | Finance Leases | Operating Leases | Total | | :----------------------- | :------------- | :--------------- | :---- | | Remainder of 2019 | $52 | $564 | $616 | | 2020 | $209 | $2,287 | $2,496 | | 2021 | $71 | $215 | $286 | | 2022 | — | $93 | $93 | | Total future minimum lease payments | $332 | $3,159 | $3,491 | - Royalty commitments include low single-digit royalties on net sales under the Stanford License and mid-single to low-double digits on future commercialized products under the Illumina License Agreement[111][112] - The company has agreed to share an agreed-upon percentage of revenue with Cibiltech if revenues are generated from KidneyCare iBox[114] 9. DEBT CareDx had no outstanding debt as of September 30, 2019, or December 31, 2018. Previous debt, including the Perceptive Credit Agreement and JGB Debt, was extinguished in 2018 - No outstanding debt as of September 30, 2019, or December 31, 2018[118] - The Perceptive Credit Agreement was paid off and terminated in November 2018, resulting in a $3.0 million debt extinguishment loss[119] - The JGB Debt was converted into common stock in Q1 2018, leading to a $2.8 million loss on debt extinguishment[120] 10. 401(K) PLAN The company sponsors a 401(k) defined contribution plan for U.S. employees, with contributions starting January 1, 2018. Expenses related to 401(k) contributions were $0.1 million for each of the three months ended September 30, 2019 and 2018, and $0.5 million and $0.2 million for the nine months ended September 30, 2019 and 2018, respectively 401(k) Plan Contributions (in thousands) | Period | 2019 | 2018 | | :-------------------------------- | :--- | :--- | | Three Months Ended September 30 | $100 | $100 | | Nine Months Ended September 30 | $500 | $200 | 11. WARRANTS Warrants are classified as either equity or liability based on their terms. Liability-classified warrants are remeasured at fair value each period using the Monte Carlo Simulation Model. For the nine months ended September 30, 2019, warrants to purchase 94,000 shares were exercised for cash ($0.1 million), and 207,400 warrants were exercised on a cashless basis - Warrants are classified as equity or liability; liability warrants are remeasured at fair value using the Monte Carlo Simulation Model[124] Warrant Exercises (Nine Months Ended Sep 30) | Period | Cash Payments (in thousands) | Cashless Exercises (shares) | Shares Issued (cashless) | | :-------------------------------- | :--------------------------- | :-------------------------- | :----------------------- | | Nine Months Ended Sep 30, 2019 | $100 | 207,400 | 49,000 | | Nine Months Ended Sep 30, 2018 | $11,000 | N/A | N/A | Outstanding Warrants as of September 30, 2019 | Classification | Original Term | Exercise Price | Number of Shares Underlying Warrants | | :------------- | :------------ | :------------- | :----------------------------------- | | Equity | 5 years | $6.96 | 34,483 | | Liability | 7 years | $1.12 | 320,757 | | Total | | | 355,240 | 12. STOCK INCENTIVE PLANS The company operates stock option and Restricted Stock Unit (RSU) plans. As of September 30, 2019, there were 2,668,388 stock options outstanding and 1,552,466 RSUs outstanding. Unrecognized compensation costs for RSUs were $27.2 million (expected over 3.04 years) and for stock options were $19.2 million (expected over 3.23 years). The company also has an Employee Stock Purchase Plan (ESPP) Stock Options and RSU Activity (Dec 31, 2018 to Sep 30, 2019) | Metric | Stock Options Outstanding | Number of RSU Shares | | :-------------------------------- | :------------------------ | :------------------- | | Balance—December 31, 2018 | 2,501,057 | 968,364 | | Options granted | 946,030 | — | | RSUs granted | — | 1,222,488 | | Options exercised | (573,054) | — | | RSUs vested | — | (493,179) | | Balance—September 30, 2019 | 2,668,388 | 1,552,466 | - Total intrinsic value of options exercised was $14.3 million for the nine months ended September 30, 2019[130] - Unrecognized compensation costs: $27.2 million for RSUs (weighted-average period of 3.04 years) and $19.2 million for stock options (weighted-average period of 3.23 years)[130][132] Stock-based Compensation Expense (in thousands) | Expense Category | Three Months Sep 30, 2019 | Three Months Sep 30, 2018 | Nine Months Sep 30, 2019 | Nine Months Sep 30, 2018 | | :----------------------- | :------------------------ | :------------------------ | :----------------------- | :----------------------- | | Cost of revenue | $425 | $123 | $1,705 | $375 | | Research and development | $954 | $763 | $3,227 | $1,438 | | Sales and marketing | $1,125 | $199 | $2,796 | $729 | | General and administrative | $3,460 | $775 | $9,282 | $2,536 | | Total | $5,964 | $1,860 | $17,010 | $5,078 | 13. INCOME TAXES The company recorded an income tax benefit of $0.9 million for the three months and $1.8 million for the nine months ended September 30, 2019, primarily due to deferred tax assets from foreign losses and acquired deferred tax liabilities. A full valuation allowance offsets U.S. net deferred tax assets due to a history of U.S. losses Income Tax Benefit (in thousands) | Period | 2019 | 2018 | | :-------------------------------- | :--- | :--- | | Three Months Ended September 30 | $949 | $290 | | Nine Months Ended September 30 | $1,775 | $1,095 | - The income tax benefit is mainly from deferred tax assets from foreign losses and acquired deferred tax liabilities[140] - A full valuation allowance is recognized against U.S. net deferred tax assets due to the company's history of U.S. losses[140] 14. SEGMENT REPORTING CareDx operates in a single reportable segment, with its Chief Executive Officer identified as the Chief Operating Decision Maker (CODM). Revenue is disaggregated by geographic region and type (testing services, product, digital and other). The United States is the largest revenue contributor across all categories - The company operates in a single reportable segment, with the CEO as the CODM[142] Total Revenue by Geographic Region (in thousands) | Region | Three Months Sep 30, 2019 | Nine Months Sep 30, 2019 | | :---------------------- | :------------------------ | :----------------------- | | Total United States | $31,064 | $83,079 | | Total Europe | $1,994 | $5,902 | | Total Rest of the World | $753 | $2,266 | | Total | $33,811 | $91,247 | Revenue by Type and Geographic Region (Nine Months Ended Sep 30, 2019, in thousands) | Revenue Type | United States | Europe | Rest of the World | Total | | :---------------------- | :------------ | :----- | :---------------- | :---- | | Testing services revenue | $75,011 | — | $410 | $75,421 | | Product revenue | $5,606 | $5,812 | $1,808 | $13,226 | | Digital and other revenue | $2,462 | $90 | $48 | $2,600 | ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial condition and results of operations, highlighting revenue drivers, expense trends, recent achievements, and factors affecting performance. It includes a comparison of financial results for the three and nine months ended September 30, 2019 and 2018, and discusses liquidity, capital resources, and critical accounting policies Overview and Recent Highlights This section provides an overview of CareDx's business, key testing services, and significant financial and operational achievements for the recent quarter - CareDx is a global transplant diagnostics company focused on high-value diagnostic solutions for transplant patients[153] - Key testing services include AlloMap Heart (Medicare reimbursement $3,240) and AlloSure Kidney (Medicare reimbursement $2,841), with ongoing clinical studies (SHORE, K-OAR, OKRA) to support utility[157][160][162][166][168] - Recent highlights for Q3 2019 include: - Total revenue of $33.8 million, up 60% YoY - 8,524 AlloSure Kidney patient results and 4,726 AlloMap Heart patient results (up 16% YoY) - Launch of AlloSeq Tx 17 and AlloSeq cfDNA globally - Initiation of the OKRA study - GAAP net loss of $1.8 million, non-GAAP net income of $0.9 million, and positive adjusted EBITDA of $0.8 million[179] Financial Operations Overview This section outlines CareDx's primary revenue streams from testing services, product sales, and digital solutions, and factors driving their growth - Revenue streams include testing services (AlloMap Heart, AlloSure Kidney), product sales (Olerup SSP, QTYPE, Olerup SBT, TruSight HLA), and digital and other revenue (Ottr software, XynQAPI licenses, other licensing)[180][181][184][185] Revenue Contribution by Type (Q3 and 9M Ended Sep 30, 2019) | Revenue Type | Q3 2019 (% of Total) | 9M 2019 (% of Total) | | :---------------------- | :------------------- | :------------------- | | Testing Services Revenue | 83% | 83% | | Product Revenue | 12% | 14% | | Digital and Other Revenue | 4% | 3% | - Testing services revenue growth is driven by test volume, establishment of coverage policies, collection from payers, and expansion into new markets[181] Critical Accounting Policies and Significant Judgments and Estimates This section details CareDx's critical accounting policies and the significant judgments and estimates involved in financial reporting - Critical accounting policies involve significant judgments and estimates, including revenue recognition, business combinations, acquired intangible assets, impairment of goodwill and long-lived assets, common stock warrant liability, and derivative liability[188] - No material changes in critical accounting estimates during the period, except for the determination of the leases incremental borrowing rate estimate due to ASC 842 adoption[189] Recently Issued Accounting Standards This section refers to Note 2 for details on recently issued accounting pronouncements and their estimated financial impacts - Refer to Note 2 for details on recently issued accounting pronouncements, adoption dates, and estimated financial impacts[190] Comparison of the Three Months Ended September 30, 2019 and 2018 This section compares CareDx's financial performance for the three months ended September 30, 2019, against the prior year, detailing revenue and expense changes Revenue Performance (Three Months Ended Sep 30, in thousands) | Revenue Type | 2019 | 2018 | Change ($) | Change (%) | | :---------------------- | :--- | :--- | :--------- | :--------- | | Testing services revenue | $28,226 | $16,847 | $11,379 | 68% | | Product revenue | $4,200 | $4,223 | $(23) | -1% | | Digital and other revenue | $1,385 | $114 | $1,271 | 1115% | | Total revenue | $33,811 | $21,184 | $12,627 | 60% | - Testing services revenue growth was driven by increased AlloSure Kidney patient results (8,524 in 2019 vs. 3,708 in 2018) and AlloMap Heart patient results (4,726 in 2019 vs. 4,080 in 2018)[194] Expense and Profit Performance (Three Months Ended Sep 30, in thousands) | Metric | 2019 | 2018 | Change ($) | Change (%) | | :---------------------------------------------------------------- | :--- | :--- | :--------- | :--------- | | Gross profit | $22,317 | $12,297 | $10,020 | 81% | | Research and development expenses | $8,521 | $3,868 | $4,653 | 120% | | Sales and marketing expenses | $11,058 | $5,971 | $5,087 | 85% | | General and administrative expenses | $9,485 | $5,177 | $4,308 | 83% | | Change in fair value of common stock warrant liability | $4,346 | $(17,093) | $21,439 | 125% | | Net loss attributable to CareDx, Inc. | $(1,813) | $(19,970) | $18,157 | 91% | Comparison of Nine Months Ended September 30, 2019 and 2018 This section compares CareDx's financial performance for the nine months ended September 30, 2019, against the prior year, detailing revenue and expense changes Revenue Performance (Nine Months Ended Sep 30, in thousands) | Revenue Type | 2019 | 2018 | Change ($) | Change (%) | | :---------------------- | :--- | :--- | :--------- | :--------- | | Testing services revenue | $75,421 | $41,448 | $33,973 | 82% | | Product revenue | $13,226 | $11,080 | $2,146 | 19% | | Digital and other revenue | $2,600 | $532 | $2,068 | 389% | | Total revenue | $91,247 | $53,060 | $38,187 | 72% | - Testing services revenue growth was primarily driven by AlloSure Kidney patient results (21,589 in 2019 vs. 7,059 in 2018) and AlloMap Heart patient results (13,578 in 2019 vs. 12,059 in 2018)[208] Expense and Profit Performance (Nine Months Ended Sep 30, in thousands) | Metric | 2019 | 2018 | Change ($) | Change (%) | | :---------------------------------------------------------------- | :--- | :--- | :--------- | :--------- | | Gross profit | $58,508 | $30,582 | $27,926 | 91% | | Research and development expenses | $21,765 | $10,732 | $11,033 | 103% | | Sales and marketing expenses | $28,627 | $15,916 | $12,711 | 80% | | General and administrative expenses | $27,103 | $16,080 | $11,023 | 69% | | Change in fair value of common stock warrant liability | $(14) | $(24,540) | $24,526 | 100% | | Net loss attributable to CareDx, Inc. | $(17,191) | $(43,001) | $25,810 | 60% | Cash Flows for the Nine Months Ended September 30, 2019 and 2018 This section analyzes CareDx's cash flow activities for the nine months ended September 30, 2019 and 2018, across operating, investing, and financing categories Cash Flow Summary (Nine Months Ended Sep 30, in thousands) | Activity | 2019 | 2018 | Change ($) | | :---------------------------------------------------------------- | :--- | :--- | :--------- | | Net cash used in operating activities | $(1,686) | $(6,005) | $4,319 | | Net cash used in investing activities | $(21,237) | $(6,969) | $(14,268) | | Net cash (used in) provided by financing activities | $(214) | $12,956 | $(13,170) | | Net decrease in cash, cash equivalents and restricted cash | $(23,630) | $(80) | $(23,550) | - Investing activities in 2019 included $18.1 million for business acquisitions (Ottr and XynManagement) and $1.1 million for intangible assets[230] - Financing activities in 2019 were primarily impacted by $4.0 million in taxes paid for RSU settlements, partially offset by $3.2 million from stock option exercises[232] Liquidity and Capital Resources This section assesses CareDx's ability to meet its financial obligations, detailing its cash position, accumulated deficit, and future financing needs - Accumulated deficit of $329.0 million as of September 30, 2019[236] - Cash and cash equivalents of $40.9 million as of September 30, 2019, with no outstanding debt[236] - Believes existing cash and expected revenues are sufficient for the next 12 months, but may require additional financing[37] Factors Affecting Our Performance This section identifies key internal and external factors influencing CareDx's financial and operational performance, including test volumes, product sales, and R&D investments - Performance is tied to the number of AlloMap Heart and AlloSure Kidney tests received and reported[237] - Product revenue growth depends on sales of Olerup SSP, QTYPE, Olerup SBT, and TruSight HLA product lines[238] - Continued adoption and reimbursement for AlloMap Heart (Medicare rate $3,240) and AlloSure Kidney (Medicare rate $2,841) are crucial for revenue growth[239][241] - Growth of digital revenues is linked to the successful implementation and support of Ottr and XynQAPI software businesses[245] - Investment in R&D for new products (HeartCare, KidneyCare) and the timing of R&D expenses (clinical samples, high-cost experiments) are significant factors[246][247] Contractual Obligations CareDx, as a smaller reporting company, is exempt from providing detailed contractual obligations information in this report - As a smaller reporting company, CareDx is exempt from providing detailed contractual obligations information[248] Off-Balance Sheet Arrangements CareDx reported no off-balance sheet arrangements as of September 30, 2019 - No off-balance sheet arrangements as of September 30, 2019[249] JOBS Act Accounting Election CareDx, an emerging growth company, has irrevocably elected not to use the extended transition period for new accounting standards - CareDx, an emerging growth company, has irrevocably elected not to use the extended transition period for new accounting standards, applying the same standards as other public companies[250] Foreign Operations CareDx conducts foreign operations in Sweden, Austria, and Australia, exposing it to foreign currency risks and geopolitical events - Foreign operations are located in Sweden, Austria, and Australia, with global product sales[251] - Exposed to foreign currency risks (transactions, investments, assets/debts in foreign currencies) and potential adverse effects from unanticipated foreign events[251][254] ITEM 3. Quantitative and Qualitative Disclosures About Market Risk CareDx is exposed to interest rate risk on its cash and cash equivalents, but does not anticipate material risks from changes in interest rates. The company is also subject to foreign currency exchange risk due to operations and sales in multiple countries, with an unfavorable 10% change potentially impacting financial results by $0.1 million and product revenue by $0.6 million for the nine months ended September 30, 2019. No formal hedging program is currently in place - Exposed to interest rate risk on cash and cash equivalents, but no material risks anticipated[253] - Significant foreign currency exchange risk due to operations in Sweden, Austria, Australia, and global sales, with product revenue primarily denominated in Euro and U.S. dollars[254] - An unfavorable 10% change in foreign currency exchange rates would have negatively impacted financial results by $0.1 million and product revenue by $0.6 million for the nine months ended September 30, 2019[254] ITEM 4. Controls and Procedures Management, including the CEO and CFO, evaluated the effectiveness of disclosure controls and procedures as of September 30, 2019, and concluded they were effective at a reasonable assurance level. There were no material changes in internal control over financial reporting during the nine months ended September 30, 2019 - Disclosure controls and procedures were evaluated and deemed effective at a reasonable assurance level as of September 30, 2019[255] - No material changes in internal control over financial reporting occurred during the nine months ended September 30, 2019[256] PART II. OTHER INFORMATION This section provides additional information, including legal proceedings, risk factors, equity security sales, and other disclosures not covered in the financial statements ITEM 1. Legal Proceedings CareDx may be involved in legal proceedings and claims in the ordinary course of business. While no currently pending matters are believed to have a material adverse effect, legal matters are inherently unpredictable. The company estimates liability when probable and estimable, and has not paid claims related to indemnification obligations to date - The company may face legal proceedings and claims in the ordinary course of business, which are inherently unpredictable[258] - No currently pending matters are believed to have a material adverse effect on financial position, results of operations, or liquidity[258] - No claims paid or actions defended related to indemnification obligations to date[258] ITEM 1A. Risk Factors This section refers to the Annual Report on Form 10-K for a comprehensive list of risk factors. It highlights new or updated risks related to the integration of Ottr and XynManagement acquisitions, including the potential inability to realize anticipated strategic benefits and cross-selling opportunities. Additionally, risks associated with the Cibiltech Agreement are noted, specifically the failure to obtain reimbursement coverage for KidneyCare iBox - Refers to the Annual Report on Form 10-K for a comprehensive list of risk factors[259] - New risks include challenges in successfully integrating Ottr and XynManagement acquisitions and realizing anticipated strategic benefits and cross-selling opportunities[260] - Risks related to the Cibiltech Agreement include the potential failure to obtain reimbursement coverage from payers for KidneyCare iBox, which could impact revenue recognition[261] ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds The company satisfies tax withholding obligations upon RSU vesting by automatically withholding common stock shares. For September 2019, 1,335 shares were withheld for tax payments at an average price of $21.78 per share - The company withholds common stock shares to satisfy tax withholding obligations upon RSU vesting[262] Issuer Purchases of Equity Securities (September 2019) | Period | Total Number of Shares Purchased | Average Price Paid per Share | | :-------------------------------- | :------------------------------- | :--------------------------- | | September 1, 2019 - September 30, 2019 | 1,335 | $21.78 | ITEM 3. Defaults Upon Senior Securities No defaults upon senior securities were reported - No defaults upon senior securities[265] ITEM 4. Mine Safety Disclosures Not applicable to the company - Not applicable[266] ITEM 5. Other Information No other information was reported under this item - None[267] ITEM 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including various corporate documents, equity incentive plans, certifications, and XBRL taxonomy documents - Lists various corporate documents (e.g., Certificate of Incorporation, Bylaws), equity incentive plans, warrant forms, and certifications (CEO/CFO certifications under Sarbanes-Oxley Act)[269] - Includes XBRL Instance Document and Taxonomy Extension Schema, Calculation, Definition, Label, and Presentation Linkbase Documents[269] Signatures The report is signed by Peter Maag, Chief Executive Officer, and Michael Bell, Chief Financial Officer, on October 31, 2019, certifying its submission - Report signed by Peter Maag (CEO) and Michael Bell (CFO) on October 31, 2019[273]