0001564590-18-013045.txt : 20180510 0001564590-18-013045.hdr.sgml : 20180510 20180510171000 ACCESSION NUMBER: 0001564590-18-013045 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 95 CONFORMED PERIOD OF REPORT: 20180331 FILED AS OF DATE: 20180510 DATE AS OF CHANGE: 20180510 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CareDx, Inc. CENTRAL INDEX KEY: 0001217234 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MEDICAL LABORATORIES [8071] IRS NUMBER: 943316839 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-36536 FILM NUMBER: 18823946 BUSINESS ADDRESS: STREET 1: 3260 BAYSHORE BOULEVARD CITY: BRISBANE STATE: CA ZIP: 94005 BUSINESS PHONE: 415-287-2300 MAIL ADDRESS: STREET 1: 3260 BAYSHORE BOULEVARD CITY: BRISBANE STATE: CA ZIP: 94005 FORMER COMPANY: FORMER CONFORMED NAME: XDx, Inc. DATE OF NAME CHANGE: 20071010 FORMER COMPANY: FORMER CONFORMED NAME: EXPRESSION DIAGNOSTICS INC DATE OF NAME CHANGE: 20030203 10-Q 1 cdna-10q_20180331.htm 10-Q cdna-10q_20180331.htm

 

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2018

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

 

94-3316839

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

 

3260 Bayshore Boulevard

Brisbane, California 94005

(Address of principal executive offices and zip code)

(415) 287-2300

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

 

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

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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes   No

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.

 

Large accelerated filer

 

 

Accelerated filer

 

 

 

 

 

 

 

 

Non-accelerated filer

 

(Do not check if a smaller reporting company)

 

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   No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

There were 35,283,152 shares of the registrant’s Common Stock issued and outstanding as of May 8, 2018.

 

 

 

 

 

 


 

CareDx, Inc.

TABLE OF CONTENTS

 

 

 

Page No.

PART I. FINANCIAL INFORMATION

 

3

Item 1. Unaudited Condensed Consolidated Financial Statements

 

3

Condensed Consolidated Balance Sheets as of March 31, 2018 and December 31, 2017

 

3

Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2018 and 2017

 

4

Condensed Consolidated Statements of Comprehensive Loss for the Three Months Ended March 31, 2018 and 2017

 

5

Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2018 and 2017

 

6

Notes to Unaudited Condensed Consolidated Financial Statements

 

7

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

31

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

42

Item 4. Controls and Procedures

 

43

 

 

 

PART II. OTHER INFORMATION

 

44

Item 1. Legal Proceedings

 

44

Item 1A. Risk Factors

 

44

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

44

Item 3. Defaults Upon Senior Securities

 

45

Item 5. Other Information

 

45

Item 6. Exhibits

 

45

Signatures

 

47

 

 

 

 

2


 

PART I. FINANCIAL INFORMATION

ITEM 1.

UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CareDx, Inc.

Condensed Consolidated Balance Sheets

(Unaudited)

(In thousands, except share data)

 

 

March 31, 2018

 

 

December 31, 2017

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

18,695

 

 

$

16,895

 

Accounts receivable

 

 

6,536

 

 

 

2,991

 

Inventory

 

 

5,011

 

 

 

5,529

 

Prepaid and other assets

 

 

2,455

 

 

 

1,352

 

Total current assets

 

 

32,697

 

 

 

26,767

 

Property and equipment, net

 

 

2,055

 

 

 

2,075

 

Intangible assets, net

 

 

31,989

 

 

 

33,139

 

Goodwill

 

 

12,005

 

 

 

12,005

 

Restricted cash

 

 

206

 

 

 

9,579

 

Total assets

 

$

78,952

 

 

$

83,565

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

4,269

 

 

$

3,391

 

Accrued payroll liabilities

 

 

3,707

 

 

 

5,013

 

Accrued and other liabilities

 

 

4,392

 

 

 

3,735

 

Deferred revenue

 

 

39

 

 

 

39

 

Deferred purchase consideration

 

 

577

 

 

 

407

 

Derivative liability

 

 

 

 

 

14,600

 

Current debt

 

 

461

 

 

 

15,721

 

Total current liabilities

 

 

13,445

 

 

 

42,906

 

Deferred rent, net of current portion

 

 

802

 

 

 

913

 

Deferred revenue, net of current portion

 

 

721

 

 

 

730

 

Deferred tax liability

 

 

4,415

 

 

 

4,933

 

Long-term debt, net of current portion

 

 

9,729

 

 

 

18,338

 

Contingent consideration

 

 

1,816

 

 

 

1,672

 

Common stock warrant liability

 

 

13,247

 

 

 

18,712

 

Other liabilities

 

 

1,384

 

 

 

1,315

 

Total liabilities

 

 

45,559

 

 

 

89,519

 

Commitments and contingencies (Note 8)

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Preferred stock: $0.001 par value; 10,000,000 shares authorized at March 31, 2018

   and December 31, 2017; no shares issued and outstanding at March 31, 2018

   and December 31, 2017

 

 

 

 

 

 

Common stock: $0.001 par value; 100,000,000 shares authorized at March 31, 2018

   and December 31, 2017; 35,240,782 shares and 28,825,019 shares issued and

   outstanding at March 31, 2018 and December 31, 2017, respectively

 

 

35

 

 

 

29

 

Additional paid-in capital

 

 

309,898

 

 

 

264,204

 

Accumulated other comprehensive loss

 

 

(2,482

)

 

 

(2,345

)

Accumulated deficit

 

 

(274,058

)

 

 

(268,022

)

Total CareDx, Inc. stockholders' equity (deficit)

 

 

33,393

 

 

 

(6,134

)

Noncontrolling interest

 

 

 

 

 

180

 

Total stockholders’ equity (deficit)

 

 

33,393

 

 

 

(5,954

)

Total liabilities and stockholders’ equity

 

$

78,952

 

 

$

83,565

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

3


 

CareDx, Inc.

Condensed Consolidated Statements of Operations

(Unaudited)

(In thousands, except share and per share data)

 

 

 

Three Months Ended March 31,

 

 

 

2018

 

 

2017

 

Revenue:

 

 

 

 

 

 

 

 

Testing revenue

 

$

10,604

 

 

$

7,902

 

Product revenue

 

 

3,307

 

 

 

3,667

 

License and other revenue

 

 

142

 

 

 

15

 

Total revenue

 

 

14,053

 

 

 

11,584

 

Operating expenses:

 

 

 

 

 

 

 

 

Cost of testing

 

 

4,112

 

 

 

3,057

 

Cost of product

 

 

2,272

 

 

 

2,327

 

Research and development

 

 

3,368

 

 

 

3,283

 

Sales and marketing

 

 

4,085

 

 

 

3,222

 

General and administrative

 

 

5,307

 

 

 

6,502

 

Goodwill impairment

 

 

 

 

 

1,958

 

Change in estimated fair value of contingent consideration

 

 

144

 

 

 

(221

)

Total operating expenses

 

 

19,288

 

 

 

20,128

 

Loss from operations

 

 

(5,235

)

 

 

(8,544

)

Interest expense

 

 

(2,695

)

 

 

(790

)

Other expense, net

 

 

(2,809

)

 

 

(686

)

Change in estimated fair value of common stock warrant liability and derivative liability

 

 

1,321

 

 

 

4,128

 

Loss before income taxes

 

 

(9,418

)

 

 

(5,892

)

Income tax benefit

 

 

424

 

 

 

283

 

Net loss

 

 

(8,994

)

 

 

(5,609

)

Net loss attributable to noncontrolling interest

 

 

(25

)

 

 

(47

)

Net loss attributable to CareDx, Inc.

 

$

(8,969

)

 

$

(5,562

)

Net loss per share attributable to CareDx, Inc. (Note 3):

 

 

 

 

 

 

 

 

Basic

 

$

(0.30

)

 

$

(0.26

)

Diluted

 

$

(0.30

)

 

$

(0.26

)

Weighted average shares used to compute net loss per share attributable to CareDx, Inc.:

 

 

 

 

 

 

 

 

Basic

 

 

29,615,441

 

 

 

21,343,782

 

Diluted

 

 

29,615,441

 

 

 

21,343,782

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

4


 

CareDx, Inc.

Condensed Consolidated Statements of Comprehensive Loss

(Unaudited)

(In thousands)

 

 

 

 

Three Months Ended March 31,

 

 

 

2018

 

 

2017

 

Net loss

 

$

(8,994

)

 

$

(5,609

)

Other comprehensive (loss) income:

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

(137

)

 

 

264

 

Net comprehensive loss

 

 

(9,131

)

 

 

(5,345

)

Comprehensive loss attributable to noncontrolling interest, net of tax

 

 

(25

)

 

 

(52

)

Comprehensive loss attributable to CareDx, Inc.

 

$

(9,106

)

 

$

(5,293

)

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

5


 

CareDx, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)

 

 

 

Three Months Ended March 31,

 

 

 

2018

 

 

2017

 

Operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(8,994

)

 

$

(5,609

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

1,039

 

 

 

934

 

Amortization of inventory fair market value adjustment

 

 

164

 

 

 

32

 

Loss on conversion of JGB debt to shares of common stock

 

 

2,806

 

 

 

 

Amortization of debt discount and noncash interest expense

 

 

2,084

 

 

 

627

 

Revaluation of common stock warrant liability and derivative liability to estimated fair value

 

 

(1,321

)

 

 

(4,128

)

Stock-based compensation

 

 

706

 

 

 

391

 

Revaluation of contingent consideration to estimated fair value

 

 

144

 

 

 

(221

)

Non-cash goodwill impairment

 

 

 

 

 

1,958

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(606

)

 

 

(576

)

Inventory

 

 

196

 

 

 

470

 

Prepaid and other assets

 

 

(510

)

 

 

(245

)

Accounts payable

 

 

835

 

 

 

382

 

Accrued payroll liabilities

 

 

(1,358

)

 

 

(865

)

Accrued and other liabilities

 

 

654

 

 

 

382

 

Change in deferred revenue

 

 

(10

)

 

 

(2

)

Change in deferred taxes

 

 

(347

)

 

 

(271

)

Net cash used in operating activities

 

 

(4,518

)

 

 

(6,741

)

Investing activities:

 

 

 

 

 

 

 

 

Acquisition of Allenex AB

 

 

(692

)

 

 

 

Purchase of property and equipment

 

 

(62

)

 

 

(68

)

Net cash used in investing activities

 

 

(754

)

 

 

(68

)

Financing activities:

 

 

 

 

 

 

 

 

Proceeds from debt, net of issuance costs

 

 

 

 

 

24,002

 

Perceptive term loan issuance costs

 

 

(584

)

 

 

 

Proceeds from issuance of common stock under employee stock purchase plan

 

 

32

 

 

 

44

 

Principal payments on debt and capital lease obligations

 

 

(1,633

)

 

 

(12,915

)

Acquisition of Conexio Genomics Pty Ltd.

 

 

(13

)

 

 

 

Change in short term credit facility

 

 

(225

)

 

 

 

Proceeds from exercise of warrants

 

 

25

 

 

 

 

Proceeds from exercise of stock options

 

 

80

 

 

 

 

Net cash (used in) provided by financing activities

 

 

(2,318

)

 

 

11,131

 

Effect of exchange rate changes on cash and cash equivalents

 

 

17

 

 

 

17

 

Net increase (decrease) in cash, cash equivalents and restricted cash

 

 

(7,573

)

 

 

4,339

 

Cash, cash equivalents, and restricted cash at beginning of period

 

 

26,474

 

 

 

17,401

 

Cash, cash equivalents, and restricted cash at end of period

 

$

18,901

 

 

$

21,740

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Deferred purchase consideration

 

$

 

 

$

1,018

 

 

 

 

 

 

 

 

 

 

Cash, Cash Equivalents and Restricted Cash as of:

 

March 31, 2018

 

 

December 31, 2017

 

Cash and cash equivalents

 

$

18,695

 

 

$

16,895

 

Restricted cash

 

 

206

 

 

 

9,579

 

Total cash, cash equivalents and restricted cash at the end of period

 

$

18,901

 

 

$

26,474

 

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

6


 

CareDx, Inc.

Notes to Unaudited Condensed 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 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 of AlloMap, secure positive reimbursement decisions for AlloMap 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 sale as a test to aid in the identification of recipients with a low probability of moderate or severe acute cellular rejection.  A 510(k) submission is a premarketing submission made to the FDA. Clearance may be granted by the FDA if it finds the device or test provides satisfactory evidence pertaining to the claimed intended uses and indications for the device or test.

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.

The Company also develops, manufactures, markets and sells 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 the sequence specific primer, or SSP technology.  Olerup SBTTM is a complete product range for sequence-based typing, of HLA alleles. Olerup QTYPE® enables speed and precision in HLA typing at a low to intermediate resolution for samples that require a fast turn-around-time and uses real-time polymerase chain reaction, or PCR methodology. QTYPE received CE mark certification on April 10, 2018.  

On May 4, 2018, the Company entered into a License and Commercialization Agreement with Illumina, Inc. (“Illumina”), which provides the Company with worldwide distribution, development and commercialization rights to Illumina’s next generation sequencing (“NGS”) product line for use in transplantation diagnostic testing. See Note 17 for further details.

The Company’s headquarters are in Brisbane, California; primary operations are in Brisbane, U.S. and Stockholm, Sweden; and the Company operates in two reportable segments.

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 $274.1 million at March 31, 2018. As of March 31, 2018, the Company had cash and cash equivalents of $18.7 million, and $10.2 million of debt outstanding under its debt obligations, of which $0.5 million is current.

On April 17, 2018, the Company entered into a new credit agreement with Perceptive Credit Holdings II, LP (“Perceptive”) for an initial term loan of $15.0 million and repaid the outstanding indebtedness of the promissory notes issued by Allenex AB (“Allenex”) to FastPartner AB and Mohammed Al Moudi and the term loan and credit facility with Danske Bank A/S (“Danske”).  A second tranche of $10.0 million will be available at the Company’s option subject to the satisfaction of customary conditions. Refer to Note 17 for additional details.

7


 

The Company may require additional financing in the future 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. The Company believes that the net proceeds from the Perceptive 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.

 

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The significant accounting policies and estimates used in preparation of the unaudited condensed consolidated financial statements are described in the Company’s audited consolidated financial statements as of and for the year ended December 31, 2017, and the notes thereto, which are included in the Company’s Annual Report on Form 10-K. Material changes to the significant accounting policies previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 are reflected below.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”), and follow the requirements of the SEC for interim reporting.  As permitted under those rules, certain footnotes or other financial information that are normally required by U.S. GAAP can be condensed or omitted.  These financial statements have been prepared on the same basis as the Company’s annual financial statements and, in the opinion of management, reflect all adjustments, consisting only of normal recurring adjustments that are necessary for a fair statement of the Company’s financial information.  The condensed consolidated balance sheet as of December 31, 2017 has been derived from audited financial statements as of that date but does not include all of the financial information required by U.S. GAAP for complete financial statements.  Operating results for the three months ended March 31, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018.

The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its subsidiaries. Intercompany transactions have been eliminated.  The Company acquired CareDx International AB, formerly Allenex AB, or Allenex, on April 14, 2016.  Since the acquisition of Allenex through March 15, 2018, the Company owned less than 100% of the shares of Allenex and recorded a net loss attributable to noncontrolling interest in its condensed consolidated statements of operations equal to the percentage of the economic or ownership interest retained by the respective noncontrolling parties in such entities.  On March 15, 2018, the Company acquired the remaining noncontrolling interest in Allenex and has not reported any noncontrolling interest balances since this date.

Use of Estimates

The preparation of unaudited condensed 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 unaudited condensed consolidated financial statements and accompanying notes.  On an ongoing basis, management evaluates its estimates, including those related to (i) variable transaction price consideration related to contracts with customers, (ii) the determination of the accruals for clinical studies, (iii) the fair value of assets and liabilities acquired in business combinations, including contingent consideration, (iv) inventory valuation, (v) the valuation of common stock warrant liability,  (vi) the fair value of embedded derivatives, (vii) measurement of stock-based compensation expense, (viii) the determination of the valuation allowance and estimated tax benefit associated with deferred tax assets and net deferred tax liability, (ix) any impairment of long-lived assets, including in-process technology and goodwill, and (x) legal contingencies.  Actual results could differ from those estimates.

Concentrations of Credit Risk and Other Risks and Uncertainties

For the three months ended March 31, 2018 and 2017, approximately 42% and 28%, respectively, of total revenue was derived from Medicare. No other payers or customers represented more than 10% of total revenue for these periods

At March 31, 2018 and December 31, 2017, approximately 19% and 16%, respectively, of accounts receivable was due from Medicare.  No other payer or customer represented more than 10% of accounts receivable on either March 31, 2018 or December 31, 2017.

Restricted Cash

A restricted cash balance of $9.4 million was released and is no longer classified as restricted cash as of March 31, 2018, upon the full conversion of the debt obligation to JGB Collateral LLC and certain of its affiliates (“JGB”) (refer to Note 10).

As a condition of the 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

8


 

used to support these arrangements is classified as long-term restricted cash on the accompanying condensed consolidated balance sheets.

Common Stock Warrant Liability and Derivative Liability

Common Stock Warrant Liability

On January 1, 2018, the Company adopted Accounting Standard Update (“ASU”) 2017-11, Accounting for Certain Financial Instruments with Down Round Features and Replacement of the Indefinite Deferral of Mandatorily Redeemable Financial Instruments of Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception.  The Company determined that the common stock warrants issued to JGB meet equity classification criteria under the new standard and reclassified $6.6 million (fair value of JGB warrants as of January 1, 2018) from warrant liability to equity (additional paid in capital). The new standard did not impact the classification of other warrants included in the warrant liability balance as these financial instruments have other down-round anti-dilution adjustments features.

Derivative Liability

The JGB Debt included certain embedded derivatives that required bifurcation, including settlement and penalty provisions.  The combined embedded derivative was remeasured at each reporting period with changes recorded in change in estimated fair value of common stock warrant liability and derivative liability in the condensed consolidated statements of operations.  As of March 27, 2018, the JGB Debt was fully converted to shares of the Company’s common stock.  The change in the fair market value of the derivative liability through March 27, 2018 was recorded in change in estimated fair value of common stock warrant liability and derivative liability in the condensed consolidated statements of operations.  

Revenue

The Company recognizes revenue from testing services, products, and license and other revenue in the amount that reflects the consideration which it expects to be entitled in exchange for goods or services as it transfers control to its customers.  Revenue is recorded considering a five-step model that includes identifying the contract with a customer, identifying the performance obligations in the contract, determining the transaction price, allocating the transaction price to the performance obligations, and recognizing revenue when, or as, an entity satisfies a performance obligation.

Testing Revenue

AlloMap and AlloSure patient tests are ordered by healthcare providers.  The Company receives a test requisition form with payer information along with a collected patient blood sample. The Company considers the patient to be its customer and the test requisition form a contract. Testing services are performed in the Company’s laboratory. Testing services represent one performance obligation in a contract and are performed when results of the test are provided to the healthcare provider, at a point of time.

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.  The first and second revenue recognition criteria are satisfied when the Company receives a test requisition form with payer information from the healthcare provider.  Generally, the Company bills third-party payers upon delivery of an AlloMap or AlloSure test result to the healthcare provider. Amounts received may vary amongst payers based on coverage practices and policies of the payer.  The Company has used the portfolio approach, a practical expedient under the new standard, to identify financial classes of payers. Transaction prices are determined for each financial class using history of reimbursements, including analysis of an average reimbursement per test and a percentage of tests reimbursed. The Company estimates revenue for non-contracted payers and self-payers using this methodology.  The estimate requires significant judgment. Revenue recognized for Medicare and other contracted payers is based on the agreed current reimbursement rate per test, adjusted for historical collection trends where applicable.

The Company monitors revenue estimates at each reporting period based on actual cash collections in order to assess whether a revision to the estimate is required. Changes in transaction price estimates are updated quarterly based on actual cash collected or changes made to contracted rates.

Product Revenue

Product revenue is recognized from the sale of products to end-users, distributors and strategic partners when all revenue recognition criteria are satisfied.  The Company generally has a contract or a purchase order from a customer with the specified required terms of order including the number of products ordered. Transaction prices are determinable and products are delivered and risk of loss passed to the customer upon either shipping or delivery, as per the terms of the agreement. There are no further performance obligations related to a contract and revenue is recognized at the point of delivery consistent with the terms of the contract or purchase order.

9


 

License and Other Revenue

The Company generates revenue from license agreements.  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 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.  The Company makes judgments to determine if performance obligations are distinct or should be combined and the transaction price allocated to each performance obligation, which affect the periods over which revenue is recognized.  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’s deferred revenue relates to one performance obligation which should be recognized over time.

The Company might constrain a variable consideration such as milestones, if it is probable that a significant portion of revenue would be reversed.  The Company did not recognize any revenue connected with milestones during the three months ended March 31, 2018 or 2017.

Cost of Testing

Cost of testing reflects the aggregate costs incurred in delivering the Company’s testing services.  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.  Prior to adoption of the new revenue guidance, we recorded costs of testing associated with performing tests (except royalties) in the period when tests were performed without consideration if revenue was recognized in the same period.  With the adoption of the new revenue standard on January 1, 2018, revenue and cost of testing for tests performed are recognized in the same period. 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.

Recent Accounting Pronouncements

On January 1, 2018, the Company adopted the new revenue accounting standard Revenue from Contracts with Customers (Topic 606) ("ASC 606") using the modified retrospective method. The adoption of ASC 606 resulted in a one-time adjustment of $2.9 million to accounts receivable and retained earnings on January 1, 2018.  The adjustment reflects the estimated payment to be received for tests where the result had been delivered at December 31, 2017, but associated revenue had not been recognized by December 31, 2017, because payment had not been received. The new standard did not impact the Company’s product revenue and license and other revenue nor did it impact contract assets or contract liabilities.

The following table summarizes the impact of the ASC 606 adoption on accounts receivable as of March 31, 2018 (in thousands):

 

 

Balance as Reported

 

 

Balance without the adoption of ASC 606

 

 

Impact of Adoption of ASC 606

 

Balance Sheets

 

 

 

 

 

 

 

 

 

 

 

 

Accounts Receivable

 

$

6,536

 

 

$

3,546

 

 

$

2,990

 

The following table summarizes the impact to the statement of operations in accordance with the new revenue standard requirements for the three months ended March 31, 2018 (in thousands):

 

 

Balance As Reported

 

 

Balance without the adoption of ASC 606

 

 

Revenue Impact of adoption of ASC 606

 

Statements of Operations

 

 

 

 

 

 

 

 

 

 

 

 

Testing revenue

 

$

10,604

 

 

$

10,592

 

 

$

12

 

Product revenue

 

 

3,307

 

 

 

3,307

 

 

 

 

License and other revenue

 

 

142

 

 

 

142

 

 

 

 

 

 

$

14,053

 

 

$

14,041

 

 

$

12

 

In February 2016, the FASB issued Accounting Standards Update, 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, generally on a straight-line basis.  This guidance will be effective for the Company on January 1,

10


 

2019 and may be adopted using a modified retrospective transition approach. Early adoption is permitted.  The Company is currently assessing the impact of that guidance on its consolidated financial statements.  

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force) (“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.  The Company adopted ASU 2016-15 on January 1, 2018 on a retrospective basis.  The adoption of ASU 2016-15 did not have a material impact on the Company’s 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) (“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.  The Company adopted ASU 2016-18 on January 1, 2018 on a retrospective basis and included restricted cash together with cash and cash equivalents in its condensed consolidated statements of cash flows.

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. The Company adopted ASU 2017-09 on January 1, 2018 on a prospective basis and the adoption of ASU 2017-09 did not have a material impact to the condensed consolidated financial statements.

In July 2017, the FASB issued ASU No. 2017-11, Accounting for Certain Financial Instruments with Down Round Features and Replacement of the Indefinite Deferral of Mandatorily Redeemable Financial Instruments of Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception (“ASU 2017-11”). ASU 2017 is effective for all interim and annual reporting periods beginning on or after December 15, 2018 with early adoption permitted.  The Company adopted ASU 2017-11 on January 1, 2018 the adoption resulted in the JGB common stock warrant liability balance being reclassified to additional paid in capital (Refer to Note 13).  

In February 2018, the FASB issued ASU No. 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220):  Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (“ASU 2018-02”).  The amendments in ASU 2018-02 allow a reclassification from accumulated other comprehensive income to retained earnings for certain tax effects resulting from the Tax Cuts and Jobs Act (the “Tax Act”).  The Company is still reviewing the Tax Act and its impact to the condensed consolidated financial statements. ASU 2018-02 will become effective for all interim and annual reporting periods beginning after December 15, 2018 and may be applied retrospectively or as of the beginning of the period of adoption.    

 

 

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 of common share equivalents as their effect would have been 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):

 

 

 

Three Months Ended March 31,

 

 

 

2018

 

 

2017

 

Numerator:

 

 

 

 

 

 

 

 

Net loss attributable to CareDx, Inc. used to compute basic

  and diluted net loss per share

 

$

(8,969

)

 

$

(5,562

)

Denominator:

 

 

 

 

 

 

 

 

Weighted-average shares used to compute basic and diluted

   net loss per share attributable to CareDx, Inc.

 

 

29,615,441

 

 

 

21,343,782

 

Net loss per share attributable to CareDx, Inc.:

 

 

 

 

 

 

 

 

Basic and diluted

 

$

(0.30

)

 

$

(0.26

)

11


 

The following potentially dilutive securities have been excluded from diluted net loss per share, because their effect would be antidilutive:

 

 

 

March 31,

 

 

 

2018

 

 

2017

 

Shares of common stock subject to outstanding options

 

 

1,940,010

 

 

 

1,881,416

 

Shares of common stock subject to outstanding common

   stock warrants

 

 

3,633,565

 

 

 

4,509,926

 

Shares of common stock subject to convertible notes

 

 

 

 

 

6,092,105

 

Shares of common stock subject to contingent consideration

 

 

227,845

 

 

 

227,845

 

Restricted stock units

 

 

441,804

 

 

 

440,910

 

Total common stock equivalents

 

 

6,243,224

 

 

 

13,152,202

 

 

On October 10, 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.  During 2017 and the three months ended March 31, 2018, 6,415,039 shares of common stock subject to convertible notes were issued due to the conversion of the JGB debt.  

 

 

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.  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:

 

Level 1: Inputs which 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 Company’s financial assets and liabilities measured at fair value on a recurring basis, as of March 31, 2018 and December 31, 2017 (in thousands):

 

 

 

March 31, 2018

 

 

 

Fair Value Measured Using

 

 

 

 

 

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

 

Total

Balance

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

17,494

 

 

$

 

 

$

 

 

$

17,494

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contingent consideration

 

$

 

 

$

 

 

$

1,816

 

 

$

1,816

 

Common stock warrant liability

 

 

 

 

 

 

 

 

13,247

 

 

 

13,247

 

Derivative liability

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities

 

$

 

 

$

 

 

$

15,063

 

 

$

15,063

 

 

12


 

 

 

December 31, 2017

 

 

 

Fair Value Measured Using

 

 

 

 

 

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

 

Total

Balance

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

13,097

 

 

$

 

 

$

 

 

$

13,097

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contingent consideration

 

$

 

 

$

 

 

$

1,672

 

 

$

1,672

 

Common stock warrant liability

 

 

 

 

 

 

 

 

18,712

 

 

 

18,712

 

Derivative liability

 

 

 

 

 

 

 

 

14,600

 

 

 

14,600

 

Total liabilities

 

$

 

 

$

 

 

$

34,984

 

 

$

34,984

 

The following table presents the issuances, changes in fair value and reclassifications of the Company’s Level 3 financial instruments that are measured at fair value on a recurring basis (in thousands):

 

 

 

(Level 3)

 

 

 

Contingent

Consideration

Liability

 

 

Common Stock Warrant Liability

 

 

Derivative

Liability

 

 

Total

 

Balance as of December 31, 2017

 

$

1,672

 

 

$

18,712

 

 

$

14,600

 

 

$

34,984

 

Exercise of warrants

 

 

 

 

 

(127

)

 

 

 

 

 

(127

)

Conversion of JGB debt to common stock (Note 10)

 

 

 

 

 

 

 

 

(12,066

)

 

 

(12,066

)

Reclassification to equity (Note 2)

 

 

 

 

 

(6,550

)

 

 

 

 

 

(6,550

)

Change in estimated fair value

 

 

144

 

 

 

1,212

 

 

 

(2,534

)

 

 

(1,178

)

Balance as of March 31, 2018

 

$

1,816

 

 

$

13,247

 

 

$

 

 

$

15,063

 

 

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:

 

Money market funds - Investments in money market funds are classified within Level 1.  At March 31, 2018 and December 31, 2017, money market funds were included on the balance sheets in cash and cash equivalents.

 

Contingent consideration liability - As of March 31, 2018 and December 31, 2017, the Company had a contingent obligation to issue 227,845 shares of the Company’s common stock to the former owners of ImmuMetrix, Inc., or IMX, in conjunction with its acquisition of IMX in June 2014. The issuance of shares 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 fair value of the contingent consideration is estimated using the closing market price of the common stock multiplied by management’s estimate of the probability of achievement of the contingency condition disclosed above, as of each period end.  The probability of achievement of a contingency condition is a significant input in the Level 3 measurement and ranged from 80% to 100% in presented periods. The changes in the fair value of $0.1 million and $(0.2) million were recorded as a change in estimated fair value of contingent consideration within the operating expenses during the three months ended March 31, 2018 and 2017, respectively. Increases (decreases) in the estimation of the probability percentage result in a directionally similar impact to the fair value of the contingent consideration liability.  

 

Common stock warrant liability – The Company utilizes a binomial-lattice pricing model (the Monte Carlo Simulation Model) that involves a market condition simulation to estimate the fair value of the warrants.  The application of the Monte Carlo Simulation Model requires 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.  Increases (decreases) in the assumptions discussed above result in a directionally similar impact to the fair value of the common stock warrant liability.  

13


 

 

Derivative liability –The Company utilized the Monte Carlo Simulation Model to estimate the fair value of the compound derivative liability recorded in connection with the JGB Debt.  The Monte Carlo Simulation Model used multiple input assumptions to simulate the likelihood that market conditions will be achieved through 100,000 random trials. These assumptions included 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.  Increases (decreases) in the assumptions discussed above result in a directionally similar impact to the fair value of the derivative liability.  The assumptions used in this simulation model were reviewed on a quarterly basis and adjusted, as needed.  For the three months ended March 31, 2017 and from January 1, 2018 to March 27, 2018, the Company recorded the changes in fair value of the derivative liability of $0.8 million income and of $2.5 million income, respectively, in the change in estimated value of common stock warrant liability and derivative liability in its condensed consolidated statements of operations.  The derivative liability was re-measured and fully extinguished upon the final JGB Debt conversion on March 27, 2018 (see Note 10).    

Common Stock Warrant Liability and Derivative Liability Valuation Assumptions

 

 

 

March 31, 2018

 

 

 

December 31, 2017

 

 

Private Placement Common Stock Warrant Liability

 

 

 

 

 

 

 

 

 

 

Stock Price

 

$

7.97

 

 

 

$

7.34

 

 

Exercise Price

 

$

1.12

 

 

 

$

1.12

 

 

Remaining term (in years)

 

 

5.04

 

 

 

 

5.29

 

 

Volatility

 

 

68.00

 

%

 

 

66.00

 

%

Risk-free interest rate

 

 

2.53

 

%

 

 

2.21

 

%

Subsequent Financing Common Stock Warrant Liability

 

 

 

 

 

 

 

 

 

 

Stock Price

 

$

7.97

 

 

 

$

7.34

 

 

Exercise Price

 

$

4.00

 

 

 

$

4.00

 

 

Remaining term (in years)

 

5.21

 

 

 

 

5.46

 

 

Volatility

 

 

67.00

 

%

 

 

65.00

 

%

Risk-free interest rate

 

 

2.54

 

%

 

 

2.21

 

%

Placement Agent Common Stock Warrant Liability

 

 

 

 

 

 

 

 

 

 

Stock Price

 

$

7.97

 

 

 

$

7.34

 

 

Exercise Price

 

$

1.12

 

 

 

$

1.12

 

 

Remaining term (in years)

 

3.04

 

 

 

 

3.29

 

 

Volatility

 

 

84.00

 

%

 

 

82.00

 

%

Risk-free interest rate

 

 

2.37

 

%

 

 

1.99

 

%

JGB Common Stock Warrant Liability

 

 

 

 

 

 

 

 

 

 

Stock Price

 

 

 

 

 

$

7.34

 

 

Exercise Price

 

 

 

 

 

$

4.67

 

 

Remaining term (in years)

 

 

 

 

 

 

4.71

 

 

Volatility

 

 

 

%

 

 

69.00

 

%

Risk-free interest rate

 

 

 

%

 

 

1.89

 

%

Derivative Liability (final re-measurement at March 27, 2018)

 

 

 

 

 

 

 

 

 

 

Stock Price

 

$

7.79

 

 

 

$

7.34

 

 

Remaining term (in years)

 

 

0.04

 

 

 

 

2.16

 

 

Volatility

 

 

45.00

 

%

 

 

69.00

 

%

Risk-free interest rate

 

 

1.70

 

%

 

 

2.14

 

%

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 March 31, 2018.

 

 

14


 

5. BUSINESS COMBINATION

Acquisition of Allenex

On April 14, 2016, the Company acquired 98.3% of the outstanding common stock of Allenex, a transplant diagnostic company based in Stockholm, Sweden that developed, manufactured, and sold products that help match donor organs with potential recipients prior to transplantation.  Allenex had 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, and as a result of the tender offer, the aggregate purchase consideration paid by the Company was approximately $34.1 million and consisted of (i) $26.9 million of cash, of which $5.7 million (which represents SEK 50,620,000 as of the acquisition date) was deferred purchase consideration originally payable to Midroc Invest AB, FastPartner AB and Xenella Holding AB, the former majority shareholders of Allenex (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.

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 a private placement.  On June 8, 2016, the Company delisted Allenex’s common stock from 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 (the “Deferred Obligation”) at a rate of 10.0% per year commencing on January 1, 2017.  On July 1, 2017, the Deferred Obligation 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 would 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 Agreements 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 purchased on March 15, 2018.  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 was presented as a component of stockholders’ equity on the Company’s condensed consolidated balance sheets at December 31, 2017.

Acquisition of assets of Conexio Genomics Pty. Ltd

On January 20, 2017, the Company acquired the business assets of Conexio Genomics Pty. Ltd (“Conexio”).  Prior to the acquisition, 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 products.  The Company paid $0.4 million in cash and will make quarterly payments of 20% of the gross revenue from the sale of the SBT products up to an aggregate total of $0.7 million.  During the three months ended March 31, 2018, and March 31, 2017, respectively, the Company paid less than $0.1 million and nil, respectively.  The Company accounted for this transaction as a business combination.

15


 

The following table summarizes the fair values of the assets acquired and liabilities assumed as of the acquisition date (in thousands):

 

 

 

Total

 

Inventory

 

$

1,040

 

Property, plant and equipment

 

 

97

 

Intangible assets

 

 

155

 

Goodwill

 

 

85

 

Assumed liabilities

 

 

(82

)

Total acquisition consideration

 

$

1,295

 

 

The following table presents details of the identified intangible assets acquired at the acquisition date (in thousands):

 

 

 

Estimated

Fair Value

 

 

Estimated Useful

Life (Years)

 

Completed technology

 

$

127

 

 

 

9

 

Customer relationships

 

 

28

 

 

 

9

 

Total

 

$

155

 

 

 

 

 

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 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 Company reported $12.0 million of goodwill on the condensed consolidated balance sheet recorded in the Post-Transplant reporting unit as of March 31, 2018 and December 31, 2017.

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.  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 Company determined that the decrease in its market capitalization in the first quarter of 2017 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.  

There were no indicators of impairment in the three months ended March 31, 2018.

16


 

Intangible Assets

The following tables present details of the Company’s intangible assets as of March 31, 2018 (in thousands):

 

 

 

March 31, 2018

 

 

 

Gross

Carrying

Amount

 

 

Accumulated

Amortization

 

 

Foreign

Currency

Translation

 

 

Net Carrying

Amount

 

 

Remaining

Useful Life

(In Years)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer relationships: Allenex

 

$

12,650

 

 

$

(1,609

)

 

$

(411

)

 

$

10,630

 

 

 

12.8

 

Customer relationships: Conexio

 

 

28

 

 

 

(4

)

 

 

 

 

 

24

 

 

 

7.8

 

Developed technology: Olerup SSP

 

 

11,650

 

 

 

(2,244

)

 

 

(392

)

 

 

9,014

 

 

 

7.8

 

Acquired technology: Olerup QTYPE

 

 

4,510