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May 8, 2019, 5:16 p.m. EDT

10-Q: CAREDX, INC.

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(EDGAR Online via COMTEX) -- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read together with the unaudited condensed consolidated financial statements and related notes included elsewhere in Item 1 of Part I of this Quarterly Report on Form 10-Q and with the audited financial statements and the related notes included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, filed with the Securities and Exchange Commission, or the SEC, on March 6, 2019.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and

These forward-looking statements may include, but are not limited to, statements concerning the following:

our ability to generate revenue from sales of AlloMap, AlloSure and future testing services, if any, and our ability to increase the commercial success of these testing services;

our ability to obtain, maintain and expand reimbursement coverage from payers for AlloMap, AlloSure and other future testing services, if any;

our ability to generate revenue from sales of Olerup SSP, Olerup SBT, QTYPE, TruSight HLA and future products, if any, and our ability to increase the commercial success of these products;

our ability to generate revenue from the license and commercialization agreement, or (the "License Agreement") with Illumina, Inc., or ("Illumina");

our plans and ability to develop and commercialize new solutions for the surveillance of heart, kidney and other solid organ transplant recipients;

our plans and ability to continue updating our products, services and technology to maintain our leading position in transplantations;

the outcome or success of our clinical trial collaborations and registry studies;

the favorable review of our testing services and product offerings, and our future solutions, if any, in peer-reviewed publications;

our ability to obtain additional financing on terms favorable to us, or at all;

our anticipated cash needs and our anticipated uses of our funds, including our estimates regarding operating expenses and capital requirements;

anticipated trends and challenges in our business and the markets in which we operate;

our dependence on certain of our suppliers, service providers and other distribution partners;

disruptions to our business, including disruptions at our laboratories and manufacturing facilities;

our ability to retain key members of our management team;

our ability to make successful acquisitions or investments and to manage the integration of such acquisitions or investments;

our ability to expand internationally;

our compliance with federal, state and foreign regulatory requirements;

our ability to protect and enforce our intellectual property rights, our strategies regarding filing additional patent applications to strengthen our intellectual property rights and our ability to defend against intellectual property claims that may be brought against us;

our ability to successfully assert or defend against, or settle, any litigation brought by or against us or other legal matters or disputes; and

our ability to comply with the requirements of being a public company.

These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in the section entitled "Risk Factors" in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, filed with the SEC on March 6, 2019. Moreover, we operate in a very competitive and rapidly changing environment, and new risks emerge from time to time. It is not possible for us to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially and adversely from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this report may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.

You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance or events and circumstances reflected in the forward-looking statements will be achieved or occur. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements. Except as required by law, we undertake no obligation to update publicly any forward-looking statements for any reason after the date of this report to conform these statements to actual results or to changes in our expectations.

You should read this report and the documents that we reference in this report and have filed with the SEC as exhibits with the understanding that our actual future results, levels of activity, performance and events and circumstances may be materially different from what we expect. We qualify all forward-looking statements by these cautionary statements.

Overview and Recent Highlights

We are a global transplant diagnostics company with product and service offerings along the pre- and post-transplant continuum. We focus on discovery, development and commercialization of clinically differentiated, high-value diagnostic solutions for transplant patients. We also offer high quality products that increase the chance of successful transplants by facilitating a better match between a donor and a recipient of stem cells and organs.

Testing Services

AlloMap

Our first commercialized testing solution, the AlloMap heart transplant molecular test, or AlloMap, is a gene expression test that helps clinicians monitor and identify heart transplant recipients with stable graft function who have a low probability of moderate-to-severe acute cellular rejection. Since 2008, we have sought to expand the adoption and utilization of our AlloMap solution through ongoing studies to substantiate the clinical utility and actionability of AlloMap, secure positive reimbursement decisions for AlloMap from large private and public payers, develop and enhance our relationships with key members of the transplant community, including opinion leaders at major transplant centers, and explore opportunities and technologies for the development of additional solutions for post-transplant surveillance. We believe the use of AlloMap, in conjunction with other clinical indicators, can help healthcare providers and their patients better manage long-term care following a heart transplant. In particular, we believe AlloMap can improve patient care by helping healthcare providers avoid the use of unnecessary, invasive surveillance biopsies and determine the appropriate dosage levels of immunosuppressants. In 2008, AlloMap received 510(k) clearance from the U.S. Food and Drug Administration, or FDA, for marketing and sale as a test to aid in the identification of recipients with a low probability of moderate or severe acute cellular rejection.

AlloMap has received positive coverage decisions for reimbursement from Medicare. The Medicare reimbursement rate for AlloMap was set as $3,240 on January 1, 2018, which remains applicable for 2019. AlloMap has also received positive coverage decisions for reimbursement from many of the largest U.S. private payers, including Aetna, Anthem, Cigna, Health Care Services Corporation (HCSC), Humana, Kaiser Foundation Health Plan, Inc., TRICARE and UnitedHealthcare.

We have also successfully completed a number of landmark clinical trials in the transplant field demonstrating the clinical utility of AlloMap for surveillance of heart transplant recipients. We initially established the analytical and clinical validity of AlloMap on the basis of our Cardiac Allograft Rejection Gene Expression Observational (Deng, M. et al., Am J Transplantation 2006), or CARGO, study, which was published in the American Journal of Transplantation. A subsequent clinical utility trial, Invasive Monitoring Attenuation through Gene Expression (Pham MX et al., N. Eng. J. Med., 2010), or IMAGE, published in The New England Journal of Medicine, demonstrated that clinical outcomes in recipients managed with AlloMap surveillance were equivalent (non-inferior) to

outcomes in recipients managed with biopsies. The results of our clinical trials have also been presented at major medical society congresses.

During the first three months of 2019, there were 4,280 AlloMap patient test results provided to 115 of the approximately 127 heart transplant management centers in the United States.

AlloSure

AlloSure, our transplant surveillance solution which was commercially launched in October 2017, applies proprietary next generation sequencing technology to measure donor-derived cell-free DNA, or dd-cfDNA, in the blood stream emanating from the donor kidney. We believe AlloSure may help clinicians determine rejection-specific activity manifested as cell damage in the transplanted heart, kidney, or other solid organ, irrespective of the type of organ transplanted. We also believe the use of AlloSure, in conjunction with other clinical indicators, can help healthcare providers and their patients better manage long-term care following a kidney transplant. In particular, we believe AlloSure can improve patient care by helping healthcare providers to reduce the use of invasive biopsies and determine the appropriate dosage levels of immunosuppressants. Effective October 9, 2017, AlloSure became available for commercial testing with Medicare coverage and reimbursement. The Medicare reimbursement rate for AlloSure is $2,841. AlloSure has also received payment from private payers on a case-by-case basis, but no positive coverage decisions have been made to the date of this filing.

Prior to the commercialization of AlloSure, we generated a strong body of clinical evidence. In late 2015, we announced the completion of analytical validation of AlloSure. A report describing the analytical validation of AlloSure including clinical validation detailing the quality, reality and consistency of analytical results information for heart transplant, appeared in the November 2016 issue of The Journal of Molecular Diagnostics. The Circulating Donor-Derived Cell-Free DNA in Blood for Diagnosing Acute Rejection in Kidney Transplant Recipients, or DART, trial, sponsored by us, was conducted between April 2015 and January 2018. DART is a 14 center observational study of kidney transplant recipients where blood specimens are drawn periodically after transplant during follow up visits and also after treatment for acute rejection. By the time of completion of the first analysis, 384 patients were followed in DART for up to 24 months. The results demonstrated that increased levels of dd-cfDNA, determined by the AlloSure assay, discriminated active rejection of a kidney transplant more effectively than serum creatinine values. In collaboration with clinical investigators, we published these findings in the scientific peer-reviewed Journal of the American Society of Nephrology and the Journal Applied Laboratory Medicine in March 2017. A total of 2,109 patient visits had been accrued in DART by January 2019. We plan to analyze and report on additional findings from this dataset in 2019 and into the future.

In 2018, we initiated the Kidney Allograft Outcomes AlloSure Registry, or K-OAR study, to develop further data on the clinical utility of AlloSure for surveillance of kidney transplant recipients. As of March 31, 2019, 50 centers have been initiated as K-OAR study sites.

During the first three months of 2019, there were 5,710 AlloSure patient test results provided. In the first quarter of 2019, AlloSure was ordered by 101 kidney transplant centers in the United States.

HeartCare

In September 2018, we initiated the Surveillance HeartCare Outcomes Registry, or SHORE. SHORE is a prospective, multi-center, observational, registry of patients receiving HeartCare for surveillance.

HeartCare combines the gene expression profiling technology of AlloMap with the dd-cfDNA analysis of AlloSure-Heart in one surveillance solution. An approach to surveillance using HeartCare provides information from two complementary measures: (i) AlloMap - a measure of immune activity, and (ii) AlloSure-Heart - monitors graft injury. HeartCare provides robust information about distinct biological processes, such as immune quiescence, active injury, Acute Cellular Rejection ("ACR") and Antibody Mediated Rejection ("AMR"). We have not yet made any applications to payers for reimbursement coverage of AlloSure-Heart.

AlloSure-Lung

In February 2019, AlloSure-Lung became available for lung transplant patients through a compassionate use program while the test is undergoing further studies. AlloSure-Lung applies proprietary next generation sequencing, or NGS, technology to measure dd-cfDNA in the blood stream emanating from the donor lung to monitor graft injury. AlloSure-Lung has not received positive coverage decisions from Medicare or other private payers yet. We have not yet made any applications to payers for reimbursement coverage of AlloSure-Lung.

Products

We develop, manufacture, market and sell products that increase the chance of successful transplants by facilitating a better match

between a donor and a recipient of stem cells and organs. We also help clinicians manage transplant patients after the transplant has occurred.

QTYPE enables speed and precision in Human Leukocyte Antigen, or 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. Olerup SSP is used to type HLA alleles based on the sequence specific primer, or SSP technology. Olerup SBT is a complete product range for sequence-based typing of HLA alleles.

On May 4, 2018, we entered into the License Agreement with Illumina, which provides us with worldwide distribution, development and commercialization rights to Illumina's NGS product line for use in transplantation diagnostic testing.

As a result, on June 1, 2018, we became the exclusive worldwide distributor of Illumina's TruSight HLA product line. TruSight HLA is a high resolution solution that uses NGS methodology. In addition, we were granted the exclusive right to develop and commercialize other NGS product lines. These products include:

Recent Highlights

Accelerated leadership position in transplantation diagnostics in the first quarter of 2019

- Performed 5,710 AlloSure tests for approximately 4,300 kidney transplant patients

- Continued progress in AlloSure Registry (K-OAR) enrollment, with 50 centers initiated and 1,006 patients enrolled as of March 31, 2019

- Provided 4,280 AlloMap patient results, increasing 11% year-over-year

Achieved total revenue of $26.0 million for the first quarter of 2019, increasing 85% year-over-year

- Testing services revenue of $21.5 million, growth of 103% compared to prior year period

- Product revenue of $4.4 million, increase of 34% year-over-year

Generated GAAP net loss of $7.5 million, adjusted net income of $2.2 million and positive adjusted EBITDA of $1.8 million

Acquired OTTR Complete Transplant Management, enabling direct integration into transplant center EMR systems

Financial Operations Overview

Revenue

We derive our revenue from testing services, products sales and license and other revenues. On January 1, 2018, we adopted the new revenue accounting standard Revenue from Contracts with Customers (Topic 606), or ASC 606, using the modified retrospective method. Under ASC 606, 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. The adoption of ASC 606 resulted in a one-time adjustment of $2.9 million to accounts receivable and accumulated deficit. The adoption of ASC 606 did not have any impact on product and license and other revenue recognized in prior periods.

Testing Services Revenue

Our testing services revenue is derived from AlloMap and AlloSure tests, which represented 83% and 75% of our total revenues for the three months ended March 31, 2019 and 2018, respectively. Our testing services revenue depends on a number of factors, including (i) the number of tests performed;

We currently market testing services to healthcare providers through our direct sales force that targets transplant centers and their physicians, coordinators and nurse practitioners. The healthcare providers that order the tests and on whose behalf we provide our testing services are generally not responsible for the payment of these services. Amounts received by us vary from payer to payer based on each payer's internal coverage practices and policies. We generally bill third-party payers upon delivery of a test result

report to the ordering physician. As such, we take the assignment of benefits and the risk of collection from the third-party payer and individual patients.

During the three months ended March 31, 2019, we performed 4,280 commercial AlloMap tests and 5,710 AlloSure tests that are included in our estimated testing services revenue. All tests for both AlloMap and AlloSure were performed from our Brisbane, California laboratory.

Product Revenue

Our product revenue is derived primarily from sales of Olerup SSP, QTYPE, Olerup SBT and TruSight products. Product revenue represented 17% and 24% of total revenue for the three months ended March 31, 2019 and 2018, respectively. We recognize product revenue from the sale of products to end-users, distributors and strategic partners when all revenue recognition criteria are satisfied. We generally have 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.

Critical Accounting Policies and Significant Judgments and Estimates

Our management's discussion and analysis of our financial condition and results of operations is based on our unaudited condensed consolidated financial statements, which have been prepared in accordance with United States generally accepted accounting principles. The preparation of these unaudited condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the unaudited condensed consolidated financial statements, as well as the reported revenue generated and expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We believe that the following critical accounting policies reflect the more significant estimates and assumptions used in the preparation of our financial statements. We believe the following critical accounting policies are affected by significant judgments and estimates used in the preparation of our Condensed Consolidated Financial Statements:

Revenue recognition - estimation of variable consideration

Determination of the accruals for clinical studies

Inventory valuation

Determination of incremental borrowing rate for lease liabilities

Valuation of common stock warrant liability

Valuation and impairment of goodwill, intangible assets and other long-lived assets

Goodwill and acquired intangible assets

Share-based compensation; and

Accounting for income taxes.

There were no material changes in the matters for which we make critical accounting estimates in the preparation of our Condensed Consolidated Financial Statements during the three months ended March 31, 2019 as compared to those disclosed in Management's Discussion and Analysis of Financial Condition and Results of Operations included in our annual report on Form 10-K for the year ended December 31, 2018, except as discussed in Note 2, Summary of Significant Accounting Policies, in the unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

Recently Issued Accounting Standards

Refer to Note 2, Summary of Significant Accounting Policies - Recent Accounting Pronouncements, of the Notes to Condensed Consolidated Financial Statements in this quarterly report for a description of recently issued accounting pronouncements, including the expected dates of adoption and estimated effects on our results of operations, financial position and cash flows.







        Results of Operations
        Comparison of the Three Months Ended March 31, 2019 and 2018
        (In thousands)
                                                            Three Months Ended March 31,
                                                              2019                 2018            Change
        Revenue:
        Testing services revenue                         $       21,518       $       10,604     $   10,914
        Product revenue                                           4,433                3,307          1,126
        License and other revenue                                    31                  142           (111 )
        Total revenue                                            25,982               14,053         11,929
        Operating expenses:
        Cost of testing services                                  6,838                4,112          2,726
        Cost of product                                           2,895                2,272            623
        Research and development                                  5,614                3,368          2,246
        Sales and marketing                                       6,925                4,085          2,840
        General and administrative                                9,106                5,307          3,799
        Change in estimated fair value of contingent
        consideration                                                 -                  144           (144 )
        Total operating expenses                                 31,378               19,288         12,090
        Loss from operations                                     (5,396 )             (5,235 )         (161 )
        Other income (expense):
        Interest income (expense), net                              342               (2,695 )        3,037
        Debt extinguishment expenses                                  -               (2,806 )        2,806
        Change in estimated fair value of common stock
        warrant liability and derivative liability               (3,009 )              1,321         (4,330 )
        Other expense, net                                          (74 )                 (3 )          (71 )
        Total other income (expense)                             (2,741 )             (4,183 )        1,442
        Income tax benefit                                          606                  424            182
        Net loss                                                 (7,531 )             (8,994 )        2,905
        Net loss attributable to noncontrolling
        interest                                                      -                  (25 )           25
        Net loss attributable to CareDx, Inc.            $       (7,531 )     $       (8,969 )   $    2,880
        


Testing Services Revenue

Testing services revenue increased by $10.9 million, or 103%, for the three months ended March 31, 2019 as compared to the same period in 2018. This increase is mainly due to the 5,710 AlloSure test results provided in the three months ended March 31, 2019, compared to 1,051 in the same period. Additionally, AlloMap test results increased to 4,280 in the three months ended March 31, 2019, compared to 3,847 in the same period in 2018.

Product Revenue

Product revenue increased by $1.1 million, or 34%, for the three months ended March 31, 2019, compared to the same period in 2018. The increase is mainly due to sales of the TruSight HLA products related to the License Agreement with Illumina, which was signed in May 2018, and increased sales of QTYPE, partially offset by decreased sales of Olerup SSP products.

Cost of Testing Services

Cost of testing services increased by approximately $2.7 million, or 66%, for the three months ended March 31, 2019, compared to the same period in 2018, primarily due to the increase in test results provided for AlloSure and AlloMap compared to the same period in 2018.

Cost of Product

Cost of product increased by $0.6 million, or 27%, for the three months ended March 31, 2019, compared to the same period in 2018, primarily due to the increase in Product Revenue.

Research and Development

Research and development expenses increased by $2.2 million, or 67%, for the three months ended March 31, 2019, compared to the same period in 2018, . . .

May 08, 2019

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