The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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 diagnostic testing services, the Company offers AlloMap®, which is a gene expression solution for heart transplant patients and AlloSure®, which is a donor-derived cell free DNA (“dd-cfDNA”) solution initially used for kidney transplant patients. The Company also 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 (“HLA”) alleles, based on the sequence specific primer (“SSP”) technology. Olerup SBT
TM
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.
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 $288.1 million at June 30, 2018. As of June 30, 2018, the Company had cash and cash
equivalents of $16.2 million, and $13.3 million
of debt outstanding, net of debt discount, under its debt obligations, of which none is current.
On April 17, 2018, the Company entered into a credit agreement with Perceptive Credit Holdings II, LP (“Perceptive
”)
for an initial term loan of $15.0 million (“the Perceptive Credit Agreement”) and repaid the outstanding indebtedness of the promissory notes previously issued to FastPartner AB and Mohammed Al Amoudi 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 10 for additional details.
7
The Company may req
uire additional financing in the future to fund working capital and pay its obligations as they come due. Additional financing might include issuance of equity securities, debt, cash from collaboration agreements or a combination of these. 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 its existing cash balance and expected revenues will be sufficie
nt 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 Securities and Exchange Commission (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 and six months ended June 30, 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 “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 six months ended June 30, 2018 and 2017, approximately 45% 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 June 30, 2018 and December 31, 2017, approximately 24% and 16%, respectively, of accounts receivable was due from Medicare. No other payer or customer represented more than 10% of accounts receivable on either June 30, 2018 or December 31, 2017.
Restricted Cash
A restricted cash balance of $9.4 million was released upon the full conversion of the debt obligation to JGB Collateral LLC and certain of its affiliates (“JGB”) (refer to Note 10) during the three months ended March 31, 2018 and is no longer classified as restricted cash.
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
use
d 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”) 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.
The Company determined that the common stock warrants issued to JGB (the “JGB Warrants”) meet equity classification criteria under the new standard and reclassified $6.6 million (the fair value of the JGB warrants as of January 1, 2018) from warrant liability to equity (additional paid in capital). The warrant issued to Perceptive (the “Perceptive Tranche A Warrant”), on April 17, 2018, also met the equity classification as noted in Note 13.The new standard did not impact the classification of the other warrants included in the warrant liability balance as these financial instruments have other than down-round anti-dilution adjustments features.
Derivative Liability
The convertible debt financing with JGB (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.
On April 17, 2018, the Company entered into the Perceptive Credit Agreement, which included an embedded derivative that required bifurcation related to early repayment provision.
This embedded derivative fair value of $0.2 million was recorded as debt issuance discount. Refer to Note 10 for additional details. The derivative is remeasured at the end of each reporting period if debt remains outstanding with changes 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 Services 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 CareDx provides 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 Accounting Standards Codifications (“ASC”) Topic 606, 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.
9
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.
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 constrains variable consideration, such as milestones, if it is probable that a significant portion of revenue would be reversed. The Company’s deferred revenue relates to one performance obligation, which should be recognized over time.
The Company did not recognize any revenue connected with milestones during the three or six months ended June 30, 2018 or 2017.
Cost of Testing Services
Cost of testing services 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, the Company recorded costs of testing associated with performing tests (except royalties) in the period when tests were performed without consideration of whether 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 services 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 payments 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 or 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 June 30, 2018 (in thousands):
|
|
Balance as Reported
|
|
|
Balance without the adoption of ASC 606
|
|
|
Impact of Adoption of ASC 606
|
|
Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts Receivable
|
|
$
|
8,072
|
|
|
$
|
4,564
|
|
|
$
|
3,508
|
|
The following table summarizes the impact to the statement of operations in accordance with the new revenue standard requirements for the three and six months ended June 30, 2018 (in thousands):
10
|
|
Three Months Ended June 30, 2018
|
|
|
|
Balance As Reported
|
|
|
Balance without the adoption of ASC 606
|
|
|
Revenue Impact of adoption of ASC 606
|
|
Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Testing revenue
|
|
$
|
13,997
|
|
|
$
|
13,484
|
|
|
$
|
513
|
|
Product revenue
|
|
|
3,550
|
|
|
|
3,550
|
|
|
|
—
|
|
License and other revenue
|
|
|
276
|
|
|
|
276
|
|
|
|
—
|
|
|
|
$
|
17,823
|
|
|
$
|
17,310
|
|
|
$
|
513
|
|
|
|
Six Months Ended June 30, 2018
|
|
|
|
Balance As Reported
|
|
|
Balance without the adoption of ASC 606
|
|
|
Revenue Impact of adoption of ASC 606
|
|
Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Testing revenue
|
|
$
|
24,601
|
|
|
$
|
24,076
|
|
|
$
|
525
|
|
Product revenue
|
|
|
6,857
|
|
|
|
6,857
|
|
|
|
—
|
|
License and other revenue
|
|
|
418
|
|
|
|
418
|
|
|
|
—
|
|
|
|
$
|
31,876
|
|
|
$
|
31,351
|
|
|
$
|
525
|
|
In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-02,
Leases (Topic 842),
which, for operating leases, requires the lessee to recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments, in its balance sheet. The guidance also requires a lessee to recognize single lease costs, calculated so that the cost of the lease is allocated over the lease term, generally on a straight-line basis. In July 2018, the FASB issued ASU No. 2018-10,
Codification Improvements to Topic 842, Leases.
Additionally, the FASB issued ASU, No. 2018-11,
Leases (Topic 842): Targeted Improvements
, which offers a practical expedient for transitioning at the adoption date. These ASUs will be effective for the Company on January 1, 2019 and the Company has chosen to use the practical expedient and recognize a cumulative-effect adjustment to the opening balance of the retained earnings. The Company has created an implementation plan and is in the early stages of assessing the impact of the 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 2017-11 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, and the adoption resulted in the JGB common stock warrant liability balance being reclassified to additional paid in capital (Refer to Note 13).
11
In February 2018, the FASB issued ASU No. 2
018-02,
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 comp
rehensive 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 e
ffective 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.
In June 2018, the FASB issued ASU No. 2018-07,
Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share Based Payment Accounting
(“ASU 2018-07”). ASU 2018-07 is effective for all interim and annual reporting periods beginning on or after December 15, 2018. The Company will adopt ASU 2018-07 on January 1, 2019 and does not expect the adoption to have a material impact to the condensed consolidated financial statements.
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 June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to CareDx, Inc. used to compute basic
and diluted net loss per share
|
|
$
|
(14,062
|
)
|
|
$
|
(3,968
|
)
|
|
$
|
(23,031
|
)
|
|
$
|
(9,530
|
)
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares used to compute basic and diluted
net loss per share attributable to CareDx, Inc.
|
|
|
35,549,837
|
|
|
|
21,412,480
|
|
|
|
32,599,032
|
|
|
|
21,378,321
|
|
Net loss per share attributable to CareDx, Inc.:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(0.40
|
)
|
|
$
|
(0.19
|
)
|
|
$
|
(0.71
|
)
|
|
$
|
(0.45
|
)
|
The following potentially dilutive securities have been excluded from diluted net loss per share, because their effect would be antidilutive:
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Shares of common stock subject to outstanding options
|
|
|
2,561,458
|
|
|
|
1,898,389
|
|
|
|
2,561,458
|
|
|
|
1,898,389
|
|
Shares of common stock subject to outstanding common
stock warrants
|
|
|
3,328,089
|
|
|
|
4,509,926
|
|
|
|
3,328,089
|
|
|
|
4,509,926
|
|
Shares of common stock subject to convertible notes
|
|
|
—
|
|
|
|
6,092,105
|
|
|
|
—
|
|
|
|
6,092,105
|
|
Shares of common stock subject to contingent consideration
|
|
|
—
|
|
|
|
227,845
|
|
|
|
—
|
|
|
|
227,845
|
|
Restricted stock units
|
|
|
896,904
|
|
|
|
353,807
|
|
|
|
896,904
|
|
|
|
353,807
|
|
Total common stock equivalents
|
|
|
6,786,451
|
|
|
|
13,082,072
|
|
|
|
6,786,451
|
|
|
|
13,082,072
|
|
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. In the three months ended June 30, 2018, the Company achieved the milestone of performing 2,500 commercial AlloSure tests; therefore, the Company issued 227,845 shares of common stock to the former owners of ImmuMetrix, Inc. (“IMX”) that was previously considered contingent consideration.
The Perceptive Credit Agreement includes a Tranche B loan of $10.0 million
available at the Company’s option at any time from April 17, 2018 to April 17, 2019 (the “Tranche B Term Loan”). If the Tranche B Term Loan is funded, the Company will issue to Perceptive an additional warrant to purchase up to 93,333 shares of common stock.
12
4. FAIR VALUE MEASUREMENTS
The Company records its financial assets and liabilities at fair value except for its debt, which was 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 June 30, 2018 and December 31, 2017 (in thousands):
|
|
June 30, 2018
|
|
|
|
Fair Value Measured Using
|
|
|
|
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Total
Balance
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
12,958
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
12,958
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock warrant liability
|
|
|
—
|
|
|
|
—
|
|
|
|
16,800
|
|
|
|
16,800
|
|
Perceptive derivative liability
|
|
|
—
|
|
|
|
—
|
|
|
|
235
|
|
|
|
235
|
|
Total liabilities
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
17,035
|
|
|
$
|
17,035
|
|
|
|
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
|
|
JGB 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
|
|
|
JGB Derivative
Liability
|
|
|
Perceptive 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
|
)
|
Issuance of Perceptive derivative liability
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
235
|
|
|
|
235
|
|
Change in estimated fair value
|
|
|
(1,672
|
)
|
|
|
4,765
|
|
|
|
(2,534
|
)
|
|
|
—
|
|
|
|
559
|
|
Balance as of June 30, 2018
|
|
$
|
-
|
|
|
$
|
16,800
|
|
|
$
|
—
|
|
|
$
|
235
|
|
|
$
|
17,035
|
|
13
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 June 30, 2018 and December 31, 2017, money market funds were included on the balance sheets in cash and cash equivalents.
|
|
•
|
Perceptive Credit Agreement -
The Company has recorded its debt with Perceptive at carrying value. The fair value is consistent with its carry value of $13.3 million as of June 30, 2018.
|
|
•
|
Contingent consideration liability
- As of 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 IMX in conjunction with its acquisition of IMX in June 2014. The shares were issuable upon the Company completing 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 was a significant input in the Level 3 measurement and was 100% in presented periods. Increases (decreases) in the estimation of the probability percentage resulted in a directionally similar impact to the fair value of the contingent consideration liability. The Company achieved the contingent consideration milestone of 2,500 commercial tests and issued the 227,845 shares in the three months ended June 30, 2018. There is no contingent consideration outstanding at June 30, 2018.
|
|
•
|
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.
|
|
•
|
JGB Debt 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 six months ended June 30, 2017 and from January 1, 2018 to March 27, 2018, the Company recorded the changes in fair value of the derivative liability of $1.3 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).
|
|
•
|
Perceptive Credit Agreement derivative liability –
The Company used a net present value analysis to estimate the fair value of the embedded derivative liability recorded in connection with the
Perceptive Credit Agreement. The assumptions used in the analysis were the discount rate, the probability of early repayment during the term of the Credit Agreement and the expected term of the derivative. An increase in the discount rate will result in a decrease in liability and an increase in the probability of early repayment will result in an increase in liability.
The assumptions used in this analysis will be reviewed on a quarterly basis and adjusted, as needed. For the three months ended June 30, 2018, the Company recorded the changes in fair value of the derivative liability of less than $0.1 million income in the change in estimated value of common stock warrant liability and derivative liability in its condensed consolidated statements of operations.
|
14
Common Stock Warrant Liability and Derivative Liability Valuation Assumptions
|
|
June 30, 2018
|
|
|
|
December 31, 2017
|
|
|
Private Placement Common Stock Warrant Liability
|
|
|
|
|
|
|
|
|
|
|
Stock Price
|
|
$
|
12.24
|
|
|
|
$
|
7.34
|
|
|
Exercise Price
|
|
$
|
1.12
|
|
|
|
$
|
1.12
|
|
|
Remaining term (in years)
|
|
|
4.79
|
|
|
|
|
5.29
|
|
|
Volatility
|
|
|
75.00
|
|
%
|
|
|
66.00
|
|
%
|
Risk-free interest rate
|
|
|
2.68
|
|
%
|
|
|
2.21
|
|
%
|
Subsequent Financing Common Stock Warrant Liability
|
|
|
|
|
|
|
|
|
|
|
Stock Price
|
|
$
|
12.24
|
|
|
|
$
|
7.34
|
|
|
Exercise Price
|
|
$
|
4.00
|
|
|
|
$
|
4.00
|
|
|
Remaining term (in years)
|
|
4.96
|
|
|
|
|
5.46
|
|
|
Volatility
|
|
|
75.00
|
|
%
|
|
|
65.00
|
|
%
|
Risk-free interest rate
|
|
|
2.69
|
|
%
|
|
|
2.21
|
|
%
|
Placement Agent Common Stock Warrant Liability
|
|
|
|
|
|
|
|
|
|
|
Stock Price
|
|
$
|
12.24
|
|
|
|
$
|
7.34
|
|
|
Exercise Price
|
|
$
|
1.12
|
|
|
|
$
|
1.12
|
|
|
Remaining term (in years)
|
|
2.79
|
|
|
|
|
3.29
|
|
|
Volatility
|
|
|
87.00
|
|
%
|
|
|
82.00
|
|
%
|
Risk-free interest rate
|
|
|
2.57
|
|
%
|
|
|
1.99
|
|
%
|
Perceptive Derivative Liability
|
|
|
|
|
|
|
|
|
|
|
Remaining term (in years)
|
|
|
4.80
|
|
|
|
|
—
|
|
|
Discount rate
|
|
|
7.50
|
|
%
|
|
|
—
|
|
%
|
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
|
|
%
|
JGB Derivative Liability
|
|
|
|
|
|
|
|
|
|
|
Stock Price
|
|
|
—
|
|
|
|
$
|
7.34
|
|
|
Remaining term (in years)
|
|
|
—
|
|
|
|
|
2.16
|
|
|
Volatility
|
|
|
—
|
|
%
|
|
|
69.00
|
|
%
|
Risk-free interest rate
|
|
|
—
|
|
%
|
|
|
2.14
|
|
%
|
5. BUSINESS COMBINATIONS AND ASSET ACQUISITIONS
Business Combinations
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. Upon the completion of such private placement, certain contingencies in the Conditional Share Purchase Agreements were waived. On June 8, 2016, the Company delisted Allenex’s common stock from Nasdaq Stockholm.
15
The date by which the deferred purchase consideration was due to the Former Majority Shareholders was subsequently extended to July 1, 2017. In addition, i
nterest began accruing on the Company’s obligations to the Former Majority Shareholders (th
e “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 Defer
red 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 De
ferred 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 remain
ing 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.
Conexio
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 SBT
TM
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 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 SBT products up to an aggregate total of $0.7 million. During each of the six months ended June 30, 2018, and June 30, 2017, the Company paid less than $0.1 million. The Company accounted for this transaction as a business combination.
Asset Acquisition
Illumina License and Commercialization Agreement
On May 4, 2018, the Company entered into a License and Commercialization Agreement (the “License Agreement”) with Illumina, which provides the Company with certain worldwide distribution, development and commercialization rights to Illumina’s NGS product line for use in the field of bone marrow and solid organ transplantation diagnostic testing (the “Field”).
As a result,
from June 1, 2018, the Company is the exclusive worldwide distributor of Illumina’s TruSight HLA v1 and v2 product line. In addition, the Company was also granted the exclusive right to develop and commercialize other NGS product lines for use in the Field.
The License Agreement required the Company to make a $5.0 million initial cash payment to Illumina and further requires the Company to
pay royalties in the mid-single to low-double digits on sales of future commercialized products. Pursuant to the License Agreement, the Company is obligated to complete timely development and commercialization of other NGS product lines for use in the Field, and has agreed to minimum purchase commitments of finished products and raw materials from Illumina through 2023.
As the License Agreement did not meet the definition of a business combination under FASB ASC Topic 805,
Business Combinations,
the Company accounted for the transaction as an asset acquisition. In an asset acquisition goodwill is not recognized, but rather any excess consideration transferred over the fair value of the net assets acquired is allocated on a relative fair value basis to the identifiable assets acquired.
Costs relating to the assets acquired were $5.2 million, comprising of the cash consideration of $5.0 million and associated transaction costs of $0.2 million.
A deferred tax balance was not required to be established on the License Agreement date as the book and tax basis of the intangible assets was equivalent to the amount paid.
The allocation of the purchase price to identified intangible assets acquired was based on the Company's best estimate of the fair value of such assets as of the acquisition date.
Significant assumptions utilized in the valuation of identified intangible assets were based on company specific information and projections, which are not observable in the market and are thus considered Level 3 measurements
16
as defined by U.S. GAAP.
The Company determined the estimated fair values using Level 3 inputs after review and consideration of relevant information, including discounted cash flows, quoted market prices and estimates made by management.
Customer relationships represent the fair value of future projected revenue that is expected to be derived from sales of TruSight HLA products to existing customers of Illumina. The customer contracts and related relationships value has been estimated utilizing a multi-period excess earnings method under income approach, which reflects the present value of the projected cash flows that are expected to be generated by the customer relationships less charges representing the contribution of other assets to those cash flows that use projected cash flows with and without the intangible asset in place. The economic useful life was determined based on the life of the products, assuming that the existing customers will remain with the Company until the products becomes obsolete. The Company utilized a discount rate of 18% in estimating the fair value of the customer relationships.
The acquired in-process technology represents the fair value of products in development that have not reached commercial production at the date of acquisition. The fair value of the products was also determined using the multi-period excess earnings method under income approach. A rate of 30% and 40% for the AlloSeq HLA acquired in-process technology and the AlloSeq BMT acquired in-process technology, respectively, was utilized to discount the cash flows to the present value. The acquired in-process technology will not be amortized until completion of the related products, which is determined by when the products commence commercial production. Upon completion, each acquired in-process technology product will be amortized over its estimated useful life.
The following table summarizes the fair values of the intangible assets acquired as of the closing date (in thousands):
|
|
Estimated Fair Value
|
|
|
Estimated Useful Lives (Years)
|
|
Customer relationships: TruSight HLA
|
|
$
|
380
|
|
|
2.6
|
|
Acquired in-process technology: AlloSeq HLA
|
|
|
2,719
|
|
|
|
—
|
|
Acquired in-process technology: AlloSeq BMT
|
|
|
2,103
|
|
|
|
—
|
|
Total
|
|
$
|
5,202
|
|
|
|
|
|
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 as of each of June 30, 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 and six months ended June 30, 2018.
17
Intangible Assets
The following tables present details of the Company’s intangible assets as of June 30, 2018 (in thousands):
|
|
June 30, 2018
|
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Foreign
Currency
Translation
|
|
|
Net
Carrying
Amount
|
|
|
Remaining
Useful
Life
(In
Years)
|
|
Intangible assets with finite lives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships: Allenex
|
|
$
|
12,650
|
|
|
$
|
(1,810
|
)
|
|
$
|
(1,117
|
)
|
|
$
|
9,723
|
|
|
|
12.5
|
|
Customer relationships: Conexio
|
|
|
28
|
|
|
|
(5
|
)
|
|
|
(1
|
)
|
|
|
22
|
|
|
|
7.6
|
|
Customer relationships: TruSight HLA
|
|
|
380
|
|
|
|
(12
|
)
|
|
|
—
|
|
|
|
368
|
|
|
|
2.5
|
|
Developed technology: Olerup SSP
|
|
|
11,650
|
|
|
|
(2,524
|
)
|
|
|
(987
|
)
|
|
|
8,139
|
|
|
|
7.5
|
|
Acquired technology: Olerup QTYPE
|
|
|
4,510
|
|
|
|
(528
|
)
|
|
|
(402
|
)
|
|
|
3,580
|
|
|
|
12.5
|
|
Acquired technology: Olerup SBT
|
|
|
127
|
|
|
|
(21
|
)
|
|
|
(6
|
)
|
|
|
100
|
|
|
|
7.6
|
|
Acquired technology: dd-cfDNA
|
|
|
6,650
|
|
|
|
(381
|
)
|
|
|
—
|
|
|
|
6,269
|
|
|
|
12.3
|
|
Trademarks
|
|
|
2,260
|
|
|
|
(384
|
)
|
|
|
(139
|
)
|
|
|
1,737
|
|
|
|
12.5
|
|
Total intangible assets with finite lives
|
|
$
|
38,255
|
|
|
$
|
(5,665
|
)
|
|
$
|
(2,652
|
)
|
|
$
|
29,938
|
|
|
|
|
|
Acquired in-process technology: AlloSeq HLA
|
|
|
2,719
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,719
|
|
|
|
—
|
|
Acquired in-process technology: AlloSeq BMT
|
|
|
2,103
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,103
|
|
|
|
—
|
|
Total intangible assets
|
|
$
|
43,077
|
|
|
$
|
(5,665
|
)
|
|
$
|
(2,652
|
)
|
|
$
|
34,760
|
|
|
|
|
|
The following tables present details of the Company’s intangible assets as of December 31, 2017 (in thousands):
|
|
December 31, 2017
|
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Foreign
Currency
Translation
|
|
|
Net
Carrying
Amount
|
|
|
Remaining
Useful
Life
(In
Years)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships: Allenex
|
|
$
|
12,650
|
|
|
$
|
(1,394
|
)
|
|
$
|
(250
|
)
|
|
$
|
11,006
|
|
|
|
13.0
|
|
Customer relationships: Conexio
|
|
|
28
|
|
|
|
(3
|
)
|
|
|
1
|
|
|
|
26
|
|
|
|
8.1
|
|
Developed technology: Olerup SSP
|
|
|
11,650
|
|
|
|
(1,942
|
)
|
|
|
(258
|
)
|
|
|
9,450
|
|
|
|
8.0
|
|
Acquired technology: Olerup QTYPE
|
|
|
4,510
|
|
|
|
(376
|
)
|
|
|
(84
|
)
|
|
|
4,050
|
|
|
|
13.0
|
|
Acquired technology: Olerup SBT
|
|
|
127
|
|
|
|
(14
|
)
|
|
|
5
|
|
|
|
118
|
|
|
|
8.1
|
|
Acquired technology: dd-cfDNA
|
|
|
6,650
|
|
|
|
(127
|
)
|
|
|
—
|
|
|
|
6,523
|
|
|
|
12.9
|
|
Trademarks
|
|
|
2,260
|
|
|
|
(310
|
)
|
|
|
16
|
|
|
|
1,966
|
|
|
|
13.0
|
|
Total intangible assets
|
|
$
|
37,875
|
|
|
$
|
(4,166
|
)
|
|
$
|
(570
|
)
|
|
$
|
33,139
|
|
|
|
|
|
Amortization expense was $0.6 million and $0.6 million for the three months ended June 30, 2018 and 2017, respectively. For the three months ended June 30, 2018, expenses of $0.4 million and $0.2 million were amortized to cost of product and sales and marketing expense, respectively. For the three months ended June 30, 2017, expenses of $0.4 million and $0.2 million were amortized to cost of product and sales and marketing expense, respectively. Amortization expense was $1.2 million for each of the six months ended June 30, 2018 and 2017. For the six months ended June 30, 2018, expenses of $0.7 million and $0.5 million were amortized to cost of product and sales and marketing, expense, respectively. For the six months ended June 30, 2017, expenses of $0.7 million and $0.5 million were amortized to cost of product and sales and marketing expense, respectively.
18
The following table summarizes the Company’s estimated future amortization expense of intangible assets with finite lives as of June 30, 2018 (in thousands):
Years Ending December 31,
|
|
Cost of
Product
|
|
|
Sales and
Marketing
|
|
|
Total
|
|
Remainder of 2018
|
|
$
|
949
|
|
|
$
|
533
|
|
|
$
|
1,482
|
|
2019
|
|
|
1,893
|
|
|
|
1,067
|
|
|
|
2,960
|
|
2020
|
|
|
1,893
|
|
|
|
1,067
|
|
|
|
2,960
|
|
2021
|
|
|
1,893
|
|
|
|
920
|
|
|
|
2,813
|
|
2022
|
|
|
1,893
|
|
|
|
920
|
|
|
|
2,813
|
|
2023
|
|
|
1,893
|
|
|
|
920
|
|
|
|
2,813
|
|
Thereafter
|
|
|
7,673
|
|
|
|
6,424
|
|
|
|
14,097
|
|
Total future amortization expense
|
|
$
|
18,087
|
|
|
$
|
11,851
|
|
|
$
|
29,938
|
|
The Company evaluates the carrying value of the intangible assets, not subject to amortization, related to in‑process research and development (“IPR&D”) assets, which are considered to be indefinite‑lived until the completion or abandonment of the associated research and development efforts. Accordingly, amortization of the IPR&D assets will not occur until the products reach commercialization. During the period the assets are considered indefinite‑lived, they are tested for impairment on an annual basis, as well as between annual tests if the Company becomes aware of any events occurring or changes in circumstances that would indicate that the fair values of the IPR&D assets are less than their carrying amounts. An impairment loss would be recorded when the fair value of an IPR&D asset is less than its carrying value. If and when development is complete, which generally occurs when the products are made commercially available, the associated IPR&D asset will be deemed definite‑lived and will then be amortized based on its estimated useful life.
7. BALANCE SHEET COMPONENTS
Inventory
Inventory consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30,
2018
|
|
|
December 31,
2017
|
|
Finished goods
|
|
$
|
1,379
|
|
|
$
|
2,569
|
|
Work in progress
|
|
|
1,548
|
|
|
|
1,471
|
|
Raw materials
|
|
|
1,739
|
|
|
|
1,489
|
|
Total inventory
|
|
$
|
4,666
|
|
|
$
|
5,529
|
|
Accrued and other liabilities
Accrued and other liabilities consisted of the following (in thousands):
|
|
June 30,
2018
|
|
|
December
31,
2017
|
|
Clinical studies
|
|
$
|
1,580
|
|
|
$
|
1,115
|
|
Test sample processing fees
|
|
|
614
|
|
|
|
633
|
|
Shares withheld in lieu of taxes
|
|
|
557
|
|
|
|
—
|
|
Deferred rent – current portion
|
|
|
419
|
|
|
|
419
|
|
Professional fees
|
|
|
398
|
|
|
|
475
|
|
Customer overpayments and refunds due
|
|
|
259
|
|
|
|
270
|
|
Capital leases – current portion
|
|
|
139
|
|
|
|
13
|
|
Accrued royalty
|
|
|
159
|
|
|
|
—
|
|
Software implementation costs
|
|
|
50
|
|
|
|
94
|
|
Accrued interest payable
|
|
|
37
|
|
|
|
81
|
|
Other accrued expenses
|
|
|
491
|
|
|
|
635
|
|
Total accrued and other liabilities
|
|
$
|
4,703
|
|
|
$
|
3,735
|
|
19
8. COMMITMENTS AND CONTINGENCIES
Leases
The Company leases its operating and office facilities for various terms under long-term, non-cancelable operating lease agreements in Brisbane, California; West Chester, Pennsylvania; Fremantle, Australia; and Stockholm, Sweden. The lease for the Company’s facility in Vienna, Austria is on a month-to-month basis. The facility leases expire at various dates through 2020. In the normal course of business, it is expected that these leases will be renewed or replaced by leases on other properties.
Rent expense under the non-cancelable operating leases was $0.4 million for each of the three months ended June 30, 2018 and 2017. Rent expense under the non-cancelable operating leases was $0.9 million for each of the six months ended June 30, 2018 and 2017. Future minimum lease commitments under these operating and capital leases on June 30, 2018, are as follows (in thousands):
Years Ending December 31,
|
|
Capital
Leases
|
|
|
Operating
Leases
|
|
Remainder of 2018
|
|
$
|
85
|
|
|
$
|
1,111
|
|
2019
|
|
|
162
|
|
|
|
2,133
|
|
2020
|
|
|
157
|
|
|
|
2,046
|
|
2021
|
|
|
45
|
|
|
|
10
|
|
2022
|
|
|
—
|
|
|
|
7
|
|
Total future minimum lease payments
|
|
$
|
449
|
|
|
$
|
5,307
|
|
The current portion of obligations under capital leases is included in accrued and other liabilities on the balance sheets. The long-term portion is included in other liabilities on the balance sheets.
Royalty Commitments
Roche Molecular Systems, Inc. (“Roche”)
In November 2004, the Company entered into a license agreement with Roche pursuant to which Roche granted the Company the right to use certain Roche technology relating to PCR, and quantitative real-time PCR in clinical laboratory services, including in connection with AlloMap. This is a non-exclusive license agreement in the United States covering claims in multiple Roche patents.
Under the license agreement, the Company incurred royalty expenses as a percentage of combination services revenue and classifies those expenses as a component of cost of testing in the condensed consolidated statements of operations. Royalty expenses in connection with the Roche agreement were $0.3 million and $0.6 million for the three and six months ended June 30, 2017, respectively. Effective September 30, 2017, no future royalties are payable by the Company under the Roche agreement.
The Board of Trustees of the Leland Stanford Junior University (“Stanford”)
In June 2014, the Company entered into a license agreement with Stanford, or the Stanford License, which granted the Company an exclusive license to a patent relating to the diagnosis of rejection in organ transplant recipients using dd-cfDNA. Under the terms of the Stanford License, the Company is required to pay an annual license maintenance fee, six milestone payment amounts and royalties in the low single digits of net sales of products incorporating the licensed technology. The license maintenance fee may be offset against earned royalty payments due on net sales in that year.
Commercial sales of AlloSure, which incorporates the licensed technology from Stanford, began in October 2017. In each of the three and six months ended June 30, 2018, the Company incurred royalties of $0.2 million to Stanford.
Conexio
On January 20, 2017, the Company acquired the business assets of Conexio, which included machinery, facilities leases, know-how and the opportunity to retain key Conexio employees to continue producing and selling the SBT line of products. The Company makes quarterly payments to Conexio of 20% of the gross revenue from the sale of the SBT products using the purchased assets up to an aggregate total of $0.7 million. During the three months ended June 30, 2018 and June 30, 2017, the Company paid less than $0.1 million and nil, respectively. During each of the six months ended June 30, 2018 and June 30, 2017, the Company paid less than $0.1 million.
20
Illumina
On May 4, 2018, the Company entered into the License Agreement with Illumina. The License Agreement requires the Company to
pay royalties in the mid-single to low-double digits on sales of future commercialized products. In the three months ended June 30, 2018, the Company paid no royalties to Illumina.
Other Commitments
Pursuant to the License Agreement with Illumina, the Company is obligated to complete timely development and commercialization of other NGS product line for use in the Field, and has agreed to minimum purchase commitments of finished products and raw materials from Illumina through 2023.
Litigation
From time to time, the Company may become involved in litigation and other legal actions. The Company estimates the range of liability related to any pending litigation where the amount and range of loss can be estimated. The Company records its best estimate of a loss when the loss is considered probable. Where a liability is probable and there is a range of estimated loss with no best estimate in the range, the Company records a charge equal to at least the minimum estimated liability for a loss contingency when both of the following conditions are met: (i) information available prior to issuance of the financial statements indicates that it is probable that a liability had been incurred at the date of the financial statements and (ii) the range of loss can be reasonably estimated.
In the normal course of business, the Company enters into contracts and agreements that contain a variety of representations and warranties and provide for indemnification for certain liabilities. The exposure under these agreements is unknown because it involves claims that may be made against the Company in the future but have not yet been made. To date, the Company has not paid any claims or been required to defend any action related to its indemnification obligations. However, the Company may record charges in the future as a result of these indemnification obligations. The Company also has indemnification obligations to its directors and executive officers for specified events or occurrences, subject to some limits, while they are serving at the Company’s request in such capacities. There have been no claims to date and the Company believes the fair value of these indemnification agreements is minimal. Accordingly, the Company has not recorded any liabilities for these agreements as of June 30, 2018 and as of December 31, 2017.
9. LICENSE AND OTHER REVENUE
Diaxonhit
In June 2013, the Company entered into an exclusive Distribution and Licensing Agreement with Diaxonhit, SA (“Diaxonhit”) a French public company, whereby Diaxonhit agreed to have the AlloMap test performed in a European laboratory and commercialize the test in the European Economic Area (“EEA”). The agreement will expire at the later of the last-to-expire patent in the EEA or ten years from the first commercial sale of the test in the EEA, which occurred in 2014.
Consideration under the agreement included an upfront cash payment of approximately €387,500 ($408,000) that is designated to offset royalties earned by the Company. The Company is entitled to receive royalties from Diaxonhit as a percentage of net sales, as defined in the agreement, of AlloMap tests in the mid to high teens. Upon confirmation that the CE mark was in place, the Company also received an equity payment of Diaxonhit common stock with a value of €387,500 ($476,000). The Company sold the shares of common stock in July 2013 for total consideration of $467,000. The CE mark is a mandatory conformity marking for certain products sold within the EEA.
Other performance obligations for which the Company may recognize revenue includes agreed-upon per unit pricing for the supply of AlloMap products, and additional royalties that are payable upon the achievement of various sales milestones by Diaxonhit. Commercial sales of the AlloMap test began in the EEA in June 2014. Total revenues and royalties recognized from this arrangement for each of the three months ended June 30, 2018 and 2017 were $10,000. Total revenue and royalties recognized from this arrangement for each of the six months ended June 30, 2018 and 2017 were $19,000.
CardioDx, Inc.
In 2005, the Company entered into a services agreement with what at the time was a related party, CardioDx, Inc. (“CDX”), whereby the Company provided CDX with biological samples and related data and performed laboratory services on behalf of CDX. Each company granted the other a worldwide license to certain of its intellectual property rights. Pursuant to this agreement, CDX pays royalties to the Company in an amount equal to a low single-digit percentage of the cash collected from sales of CDX licensed products. The royalty obligation to the Company continues until 2019. The Company recognizes royalty revenues when payments are received as it was assessed that collection was not able to be estimated. Royalty revenues for each of the three months ended June 30, 2018 and 2017 were $0.2 million. Royalty revenues for the six months ended June 30, 2018 and 2017 were $0.3 million and $0.2
21
million, respectively. Royalty revenues are included in license revenue on the condensed consolidated statements of oper
ations. The Company had no receivable balance from CDX as of June 30, 2018 and December 31, 2017.
10. DEBT
Debt consisted of the following (in thousands):
|
|
June 30, 2018
|
|
|
December
31,
2017
|
|
JGB Debt
|
|
$
|
—
|
|
|
$
|
7,743
|
|
Danske Bank Credit Facility
|
|
|
—
|
|
|
|
6,763
|
|
SSP Primers Loan
|
|
|
—
|
|
|
|
1,215
|
|
Current portion of long-term debt
|
|
$
|
—
|
|
|
$
|
15,721
|
|
|
|
|
|
|
|
|
|
|
Perceptive Credit Agreement
|
|
$
|
13,337
|
|
|
$
|
—
|
|
JGB Debt
|
|
|
—
|
|
|
|
14,168
|
|
Danske Bank Term Loan
|
|
|
—
|
|
|
|
—
|
|
FastPartner Subordinated Promissory Notes
|
|
|
—
|
|
|
|
2,400
|
|
Al Amoudi Subordinated Promissory Notes
|
|
|
—
|
|
|
|
1,770
|
|
Long-term debt, net of current portion
|
|
$
|
13,337
|
|
|
$
|
18,338
|
|
Unamortized debt discount and issuance costs as of June 30, 2018 and December 31, 2017 were $1.7 million and $4.6 million, respectively. Total interest accrued on debt as of June 30, 2018 and December 31, 2017 was nil and $0.3 million, respectively. The current accrued interest balance of $0.1 million and long-term accrued interest balance of $0.2 million as of December 31, 2017, were recorded in accrued and other liabilities and in other liabilities long-term, respectively, in the condensed consolidated balance sheets.
As of June 30, 2018, future debt maturities were as follows (in thousands):
Years Ending December 31,
|
|
Amount
|
|
2021
|
|
$
|
2,025
|
|
2022
|
|
|
2,700
|
|
2023
|
|
|
10,275
|
|
Total debt maturities
|
|
|
15,000
|
|
Less: debt discount and issuance costs
|
|
|
(1,663
|
)
|
Long-term debt, net carrying value
|
|
|
13,337
|
|
Perceptive Credit Agreement
On April 17, 2018, the Company entered into a credit agreement with Perceptive
for an initial term loan of $15.0 million (“Tranche A Term Loan”) with a second tranche of $10.0 million available at the Company’s option, subject to the satisfaction of customary conditions (the “Tranche B Term Loan” and, together with the “Tranche A Term Loan”, the “Term Loam”). Approximately $11.1 million of the proceeds of the Tranche A Term Loan were used to fully repay the Company’s outstanding indebtedness, including accrued interest, with FastPartner AB, Mohammed Al Amoudi and Danske on April 17, 2018
. The remainder of the proceeds will be used for general corporate purposes.
In connection with the Perceptive Credit Agreement, the Company entered into a Security Agreement with Perceptive, as administrative agent. The Security Agreement provides that the Term Loan is secured by substantially all of the Company’s assets and a pledge of 65% of the equity interests of CareDx International AB. The Term Loan accrues interest per annum at 9.00% (the “Applicable Margin”) plus the greater of the one-month LIBOR or 1.5%. Payments under the Perceptive Credit Agreement are interest-only until the first principal payment is due on April 30, 2021, followed by monthly payments of principal and interest through the scheduled maturity date on April 17, 2023. The Term Loan may be prepaid by the Company, in whole or in part at any time, subject to a prepayment fee.
The Company paid a fee of $0.3 million to Perceptive in its capacity as the administrative agent under the Security Agreement. In addition, on April 17, 2018, the Company issued to Perceptive the Perceptive Tranche A Warrant to purchase up to 140,000 shares of common stock of the Company at an initial exercise price of $8.60. The Perceptive Tranche A Warrant will be exercisable commencing on October 17, 2018 and will terminate, if not earlier exercised, on April 17, 2025.
The Tranche B Term Loan is available at the Company’s option at any time from April 17, 2018 to April 17, 2019, subject to the Company achieving certain product revenue targets and satisfying customary conditions. In the event the Company exercises its
22
option for the
Tranche B Term Loan, the Company will pay to Perceptive as the administrative agent out of the proceeds of the Tranche B Term Loan a fee in the amount equal to 1.75% of the principal amount of the Tranche B Term Loan advanced on such date. If the Tranche B
Term Loan is funded, the Company will issue to Perceptive an additional warrant (the “Tranche B Warrant”), to purchase up to 93,333 shares of common stock at an initial exercise price of $8.60 and with other terms consistent with the Tranche A Warrant.
The Perceptive Credit Agreement contains financial covenants related to minimum cash balance and trailing twelve month revenue. As of June 30, 2018, the Company was in compliance with the financial covenants.
The Perceptive Credit Agreement provides for customary events of default, including, among other things, nonpayments of principal, interest and other amounts, inaccuracies in representations and warranties, failure to comply with covenants, defaults on other material indebtedness, bankruptcy or insolvency, judgments, changes of control or impairments of Perceptive’s security interests. Upon the occurrence of an event of default and following any applicable cure periods, if any, the Applicable Margin shall automatically increase 3.00% per annum (the “Default Rate”). This Default Rate may be applied to the outstanding loan balances, and the Agent may declare all outstanding obligations immediately due and payable and take such other actions as set forth in the Perceptive Credit Agreement
. The Company concluded that the early repayment provisions were an embedded derivative liability requiring bifurcation.
This embedded derivative liability will be re-measured at each reporting period and the change in fair value will be recognized in the consolidated statement of operations.
The following table summarizes the Company’s carrying value of the Perceptive Security Agreement (in thousands) on April 17, 2018, the issuance date (in thousands):
|
|
April 17, 2018
|
|
Debt principal
|
|
$
|
15,000
|
|
Less:
|
|
|
|
|
Issuance cost
|
|
|
(669
|
)
|
Discount related to issued warrants
|
|
|
(784
|
)
|
Embedded derivative liability
|
|
|
(245
|
)
|
Total debt discount
|
|
|
(1,698
|
)
|
Carrying value
|
|
$
|
13,302
|
|
JGB Debt
On March 15, 2017, the Company entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”) with JGB pursuant to which the Company issued to JGB debentures (the “Debentures”) with an aggregate principal amount of $27.8 million and warrants to purchase shares of the Company’s common stock (the “JGB Warrants”) for net proceeds of $24.0 million (the “Financing”). The Company used $11.2 million of the net proceeds from the Financing to repay its existing indebtedness under the Loan Agreement with East West Bank and was required to maintain restricted cash of $9.4 million.
Under the Securities Purchase Agreement, the Debentures would have matured on February 28, 2020, accrued interest at 9.5% per year and were convertible into an aggregate of approximately 6,092,105 shares of the Company’s common stock at a price of $4.56 per share (the “Conversion Price”), subject to adjustment for accrued and unpaid interest and upon the occurrence of certain transactions, at the holder’s option.
Additionally, after September 1, 2017, upon the satisfaction of certain conditions, including the volume weighted average price of the Company’s common stock exceeding 250% of the Conversion Price for twenty consecutive trading days, the Company could have required that the Debentures be converted into shares of the Company’s common stock, subject to certain limitations. Commencing on March 1, 2018, each of the holders of the Debentures had the right, at its option, to require the Company to redeem up to $937,500 of the outstanding principal amount of its Debenture per month. The Company was required to promptly, but in any event no more than one trading day after the holder delivers a redemption notice to the Company, pay the applicable redemption amount in cash or, at the Company’s election and subject to certain conditions, in shares of the Company’s common stock. If the Company elected to pay the redemption amount in shares of the Company’s common stock, then the shares would have been delivered based on a price equal to the lowest of (a) 88% of the average of the three lowest volume weighted average prices of the Company’s common stock over the prior 20 trading days, (b) 88% of the prior trading day’s volume weighted average price, or (c) the Conversion Price.
After either a change of control transaction, as defined in the Debentures, or February 28, 2018, subject to the satisfaction of certain conditions, the Company could have redeemed all of the then outstanding principal amount of the Debentures for cash by paying the outstanding principal balance, accrued and unpaid interest, and a payment premium. The payment premium would have been calculated by multiplying the outstanding balance and the following percentage: (i) 15% if the Debentures were prepaid on or prior to
23
March 1, 2018, (ii) 8% if the Debentures were prepaid after March 1, 2018 but prior to March 1, 2019, and (iii) 5% if the Debentures were prepaid on or after March 1, 2019.
The Company’s obligations under the Debentures could have been accelerated upon the occurrence of certain events of default as specified in the agreement. In the event of default and acceleration of the Company’s obligations, the Company would have been required to pay (i) 115% of all amounts of principal and interest then outstanding under the Debentures in cash if the Debentures were accelerated prior to March 1, 2018, (ii) 108% of all amounts of principal and interest then outstanding under the Debentures in cash if the Debentures were accelerated after March 1, 2018, but prior to March 1, 2019, and (iii) 105% of all amounts of principal and interest then outstanding under the Debentures in cash if the Debentures were accelerated after March 1, 2019. The Company’s obligations under the Debentures were secured under a Security Agreement by a senior lien on all of the Company’s assets, other than its interest in CareDx International AB (formerly known as Allenex AB), which was subject to a negative pledge prohibiting the incurrence of additional or replacement debt.
The Debentures contained customary affirmative and restrictive covenants and representations and warranties, including financial reporting obligations, a restriction on the Company’s ability to pay cash dividends on its common stock and limitations on indebtedness, liens, investments, distributions, transfers, corporate changes, deposit accounts and subsidiaries. The Company was also required to maintain a minimum cash amount at all times, achieve commercialization of AlloSure by a certain date and achieve certain gross profit targets for sales of its AlloMap product.
In connection with the Financing, on March 15, 2017, the Company and the Purchasers entered into a Registration Rights Agreement (the “Registration Rights Agreement”) pursuant to which, among other things, the Company agreed to prepare and file one or more registration statements with the SEC for the purpose of registering for resale any shares of Common Stock that may be issued by the Company upon the conversion or redemption of the Debentures or the exercise of the JGB Warrants.
The Debentures included certain embedded derivatives that required bifurcation, including settlement and penalty provisions. The compound embedded derivatives were remeasured at each reporting period and the change in fair value was recognized in the consolidated statements of operations. See also Note 4, “Fair Value Measurements”.
The following table summarizes the Company’s carrying value of the JGB Debt (in thousands) on the March 15, 2017 issuance date:
|
|
March 15, 2017
|
|
Debt principal
|
|
$
|
27,780
|
|
Less:
|
|
|
|
|
Issuance cost
|
|
|
(998
|
)
|
Original issue discount
|
|
|
(2,780
|
)
|
Original warrant valuation
|
|
|
(900
|
)
|
Embedded Derivative Liability
|
|
|
(2,290
|
)
|
Total debt discount
|
|
|
(6,968
|
)
|
Carrying value
|
|
$
|
20,812
|
|
As a result of the issuance of 1,022,544 shares of the Company’s common stock issued at a price per share equal to $1.12 pursuant to the amendments to the Conditional Share Purchase Agreements, the conversion price of the Debentures decreased from $4.56 per share to $4.40 per share, effective July 3, 2017.
As a result of the 2017 Public Offering in accordance with the anti-dilution provisions in the Debentures, effective October 5, 2017, the conversion price of the Debentures decreased from $4.40 to $4.34 per share. On October 5, 2017, JGB elected to convert $1.25 million of outstanding principal under the Debentures into shares of common stock. Accordingly, the Company issued 288,022 shares of common stock to JGB at a price per share of $4.34. As a result of the sale of the 651,240 shares of common stock pursuant to the underwriters’ full exercise of their option to purchase additional shares in accordance with the anti-dilution provisions in the Debentures, effective October 10, 2017, the conversion price of the Debentures were decreased from $4.34 per share to $4.33 per share. As of December 31, 2017, the JGB Debt had an outstanding principal balance of $26.5 million.
On March 1, 2018, the Company notified JGB of its intent to prepay on April 13, 2018 in full the outstanding principal and interest under the Debentures. Pursuant to the terms of the Debentures, on April 13, 2018, the Company would have been obligated to pay the full amount of the outstanding principal balance of the Debentures, plus accrued and unpaid interest thereon and a prepayment premium equal to 8% of the outstanding principal balance in cash. In February and March 31, 2018, JGB converted the remaining $26.7 million of principal and accrued interest of the JGB Debt into an aggregate of 6,161,331 shares of the Company’s common
24
stock. In connection with these conversions in the three months ended March
31, 2018, the Company recognized $6,000 to common stock and $38.8 million to additional paid in capital; the unamortized debt discount of $2.7 million was extinguished; and the compound derivative liability of $12.1 million was also extinguished. The JGB
Debt conversion resulted in a $2.8 million loss on debt extinguishment that was included in other expense, net in the condensed consolidated statements of operations.
Danske Bank Term Loan and Credit Facility
On June 25, 2013, Allenex entered into a term loan facility (the “Term Loan Facility”) with Danske in an aggregate principal amount of up to SEK 71,000,000 (approximately $8.8 million). The Term Loan Facility was available for utilization in advances of a minimum of SEK 5,000,000 (approximately $0.6 million) and if more, integral multiples of SEK 1,000,000 (approximately $0.1 million). The interest rate applicable to each advance was the percentage rate per annum calculated as the aggregate of (i) Stockholm Interbank Offered Rate (“STIBOR”) (as defined in the Term Loan Facility) and (ii) the Margin (as described in the Term Loan Facility) at 3% conditional on the fulfillment of certain criteria. In March 2015, Allenex entered into a first amendment to the Term Loan Facility, pursuant to which additional loans were granted. In August 2015, Allenex entered into a second amendment to the Term Loan Facility, pursuant to which the term of the Term Loan Facility was extended. In December 2015, Allenex entered into a waiver and amendment agreement relating to the Term Loan Facility, pursuant to which the change of control provision was waived and amended. In March 2016, Allenex entered into another amendment to the Term Loan Facility, which modified the repayment schedule for advances under the Term Loan Facility. Under this Term Loan Facility, SEK 47,000,000 (approximately $5.6 million) was outstanding as of March 31, 2018 and was due on June 30, 2018. This was classified as a current debt as of March 31, 2018.
On June 18, 2015, Allenex also entered into a short term credit facility (“Credit Facility”) with Danske with total available credit of SEK 8,000,000 (approximately $1.0 million). As of August 4, 2016, the available credit under the Credit Facility with Danske was increased to SEK 10,000,000 (approximately $1.2 million). As of March 31, 2018, the total outstanding balance due to Danske under the Credit Facility was approximately SEK 3,850,000 (approximately $0.5 million), and was due on June 30, 2018.
A quarterly debt covenant in the Term Loan Facility with Danske was violated on March 31, 2017, June 30, 2017, and September 30, 2017. The Company obtained a waiver for these violations. The waiver was conditional upon, among other things, the Company making a principal repayment of SEK 6,000,000 (approximately $0.7 million) by October 31, 2017. This amount was paid on October 31, 2017. The Company was not in compliance with certain debt covenants as of December 31, 2017 or March 31, 2018. The Company repaid the full outstanding amount of SEK 47,000,000 (approximately $5.6 million), including accrued interest of SEK 142,000 (approximately $17,000), under the Danske Term Loan and Credit Facility on April 17, 2018.
FastPartner Subordinated Promissory Notes
On June 28, 2013, Allenex issued a SEK 9,400,000 (approximately $1.1 million) subordinated promissory note to FastPartner, which had an interest rate of 10.00%. On December 29, 2015, Allenex issued a SEK 2,000,000 (approximately $0.2 million) subordinated promissory note to FastPartner, which had an annual interest rate of 10.00%.
On March 7, 2016, Allenex issued a SEK 4,000,000 (approximately $0.5 million) subordinated promissory note to FastPartner, which had an annual interest rate of 10.00%. Pursuant to an intercreditor agreement, until the Term Loan Facility with Danske is repaid, FastPartner may not demand or receive payment of its subordinated promissory note, or foreclose on any collateral securing Allenex’s obligations under the subordinated promissory note, without Danske’s prior written consent. Allenex’s obligations under the promissory note are secured by a pledge of Allenex shares to FastPartner. The full amount of the subordinated promissory note was due July 1, 2017.
On July 1, 2017, the Company entered into a note agreement with FastPartner (the “FastPartner Note Agreement”) pursuant to which, among other things, Allenex and FastPartner agreed that all amounts owed under the above subordinated promissory notes would be governed by the FastPartner Note Agreement and to defer repayment of the principal outstanding amount of SEK 15,400,000 (approximately $1.9 million) plus accrued interest of $0.5 million until March 31, 2019. I
nterest began accruing on such amount at a rate of 10% per annum, and in the event the Company makes any cash amortization repayments to JGB of the JGB Debt, or any replacement debt, Allenex will repay in cash a portion of the amount outstanding under the FastPartner Note Agreement equal to 8% of any such cash amortization repayment. As of each of March 31, 2018 and December 31, 2017, the principal outstanding amount remained at SEK 19,757,000 (approximately $2.4 million). The Company repaid the full amount outstanding of SEK 21,300,000 (approximately $2.5 million), including accrued interest of SEK 1,600,000 (approximately $0.2 million), under the FastPartner Note Agreement on April 17, 2018.
Mohammed Al Amoudi Subordinated Promissory Note
On June 28, 2013, Allenex issued a SEK 10,600,000 (approximately $1.2 million) subordinated promissory note to Mohammed Al Amoudi, which provides for an annual interest rate of 10.00%. Pursuant to an intercreditor agreement, until the Term Loan Facility with Danske is repaid, Mohammed Al Amoudi may not demand or receive payment of his subordinated promissory note, or foreclose
25
on any collateral securing Allenex’s obligations under the subordinated promissory note, without Danske’s prior written consent. Allenex’s obligations under the promissory note are secured by a pledge of Allene
x shares to Mohammed Al Amoudi. The full amount of the subordinated promissory note was due July 1, 2017.
On July 1, 2017, the Company
entered into a note agreement with Mohammed Al Amoudi (the “Al Amoudi Note Agreement”) pursuant to which, among other things, Allenex and Mohammed Al Amoudi agreed to defer repayment of the principal outstanding amount of SEK 10,600,000 (approximately $1.3 million) plus accrued interest of $0.5 million until March 31, 2019.
I
nterest began accruing on such amount at a rate of 10% per annum, and in the event the Company makes any cash amortization repayments to JGB of the JGB Debt, or any replacement debt, Allenex will repay in cash a portion of the amount outstanding under the Al Amoudi Note Agreement equal to 6% of any such cash amortization repayment. As of each of March 31, 2018 and December 31, 2017, the principal outstanding amount remained at SEK 14,575,000 (approximately $1.7 million). The Company repaid the full amount outstanding of SEK 15,700,000 (approximately $1.9 million), including accrued interest of SEK 1,200,000 (approximately $0.1 million) under the Al Amoudi Note Agreement on April 17, 2018.
Loan Agreement with SSP Primers Aktieboulag
On February 25, 2015, Allenex entered into a SEK 14,000,000 (approximately $1.7 million) loan agreement with SSP Primers Aktieboulag, pursuant to which SEK 4,000,000 (approximately $0.5 million) was paid on March 7, 2016. The loan amount outstanding as of December 31, 2017 was SEK 10,000,000 (approximately $1.2 million) plus accrued interest of SEK 650,000 (approximately $0.1 million) and was fully paid on February 26, 2018.
11. STOCKHOLDERS’ EQUITY
2017 Public Offering
On October 10, 2017, the Company sold in the 2017 Public Offering an aggregate of 4,992,840 shares of its common stock, including 651,240 shares sold pursuant to the underwriters’ full exercise of their option to purchase additional shares to cover over-allotments, at a public offering price of $4.00 per share.
Net proceeds from the 2017 Public Offering were $18.3 million, after deducting underwriting discounts and commissions and estimated offering expenses payable by the Company.
JGB Debt
On October 5, 2017, JGB converted $1.25 million of outstanding principal under the Debentures into shares of common stock. Accordingly, the Company issued 288,022 shares of common stock to JGB at a price per share of $4.34. In the three months ended March 31, 2018, JGB converted the remaining $26.7 million of outstanding principal and accrued interest for a total issuance of 6,161,331 shares of the Company’s common stock at a price per share of $4.33.
Contingent Consideration Liability
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 shares were issuable upon the Company completing 2,500 commercial tests involving the measurement of dd-cfDNA in organ transplant recipients in the United States by June 10, 2020. The Company achieved the contingent consideration milestone of 2,500 commercial tests and issued the 227,845 shares in the period ended June 30, 2018.
12. 401(K) PLAN
The Company sponsors a 401(k) defined contribution plan covering all U.S. employees under the Internal Revenue Code. Employee contributions are voluntary and are determined on an individual basis subject to the maximum allowable under federal tax regulations. On January 1, 2018, the Company began to make contributions to the employee plan. For each of the three and six months ended June 30, 2018, the Company incurred an expense of $0.1 million related to contributions into the plan.
13. WARRANTS
The Company issues common stock warrants in connection with debt or equity financings to a lender, a placement agent or an investor. Issued warrants are considered standalone financial instruments and the terms of each warrant are analyzed for equity or liability classification in accordance with US GAAP. Warrants that are classified as liabilities usually have various features that would require net-cash settlement by the Company. Warrants that are not liabilities, derivatives and/or meet exception criteria are classified
26
as equity. Warrants liabilities are re-measured at fair valu
e at each period end with changes in fair value recorded in the condensed statements of operations until expired or exercised. The Company utilizes the Monte Carlo Simulation Model to estimate the fair value of its warrants. Refer to Note 4 for further de
tails. Warrants that are classified as equity are valued at fair value on the date of issuance, recorded in additional paid in capital and not re-measured.
On January 1, 2018, the Company adopted new accounting guidance (refer to Note 2) and reclassified the warrants to purchase 1,338,326 shares of common stock issued to JGB from liability to equity at the fair value of $6.6 million.
In the three months ended June 30, 2018, warrants to purchase 445,000 shares of common stock were exercised for a cash payment of $0.5 million. In the six months ended June 30, 2018, warrants to purchase 468,000 shares of common stock were exercised for a cash payment of $0.5 million. The warrant liability was re-measured prior to the exercise and a change in fair value of $5.2 million and $5.4 million was recorded in the condensed consolidated statement of operations for the three and six months ended June 30, 2018, respectively.
As of June 30, 2018, outstanding warrants to purchase common stock were:
|
|
Classified as
|
|
Original Term
|
|
Exercise Price
|
|
|
Number of Shares
Underlying
Warrants
|
|
Original issue date:
|
|
|
|
|
|
|
|
|
|
|
|
|
August 2009
|
|
Equity
|
|
10 years
|
|
$
|
21.78
|
|
|
|
33,473
|
|
July 2010
|
|
Equity
|
|
9 years
|
|
$
|
21.78
|
|
|
|
6,694
|
|
August 2012
|
|
Equity
|
|
7 years
|
|
$
|
21.78
|
|
|
|
167,182
|
|
January 2015
|
|
Equity
|
|
5 years
|
|
$
|
6.96
|
|
|
|
34,483
|
|
April 2016 (a)
|
|
Liability
|
|
7 years
|
|
$
|
1.12
|
|
|
|
469,124
|
|
April 2016 (b)
|
|
Liability
|
|
5 years
|
|
$
|
1.12
|
|
|
|
136,300
|
|
June 2016 (c)
|
|
Liability
|
|
7 years
|
|
$
|
4.00
|
|
|
|
1,002,507
|
|
March 2017 (d)
|
|
Equity
|
|
5 years
|
|
$
|
4.67
|
|
|
|
1,338,326
|
|
April 2018 (e)
|
|
Equity
|
|
7 years
|
|
$
|
8.60
|
|
|
|
140,000
|
|
April 2018 (f)
|
|
Equity
|
|
7 years
|
|
$
|
8.60
|
|
|
|
93,333
|
|
|
|
|
|
|
|
|
|
|
|
|
3,421,422
|
|
(a)
|
Issued on April 14, 2016 in connection with the private placement to certain accredited investors. In accordance with the anti-dilution provisions, the exercise price of the warrants issued in connection with such private placement was adjusted from $4.98 to $4.00, which was the price paid by investors in the Company’s underwritten public offering of common stock, which closed on September 26, 2016. As a result of the issuance of 1,022,544 shares of the Company’s common stock at $1.12 in connection with the amendments to the Conditional Share Purchase Agreement, the exercise price was adjusted from $4.00 to $1.12, effective July 3, 2017.
|
(b)
|
Issued on April 14, 2016 in connection with the private placement to placement agents. As a result of the issuance of 1,022,544 shares of the Company’s common stock at $1.12 in connection with the amendments to the Conditional Share Purchase Agreement, the exercise price was adjusted from $3.99 to $1.12, effective July 3, 2017.
|
(c)
|
Issued on June 15, 2016 in connection with a subsequent private placement. In accordance with the anti-dilution provisions, the exercise price of the warrants issued in connection with the subsequent private placement was adjusted from $4.98 per share to $4.00 per share, which was the price paid by investors in the Company’s underwritten public offering of common stock, which closed on September 26, 2016. The exercise price remained at $4.00 as the anti-dilution provision was waived for the issuance of shares related to the July 3, 2017 amendment to the Conditional Share Purchase Agreements.
|
(d)
|
Issued on March 15, 2017 in connection with the JGB Debt. As a result of the issuance of 1,022,544 shares of the Company’s common stock at $1.12 in connection with the amendments to the Conditional Share Purchase Agreement, the number of shares issuable pursuant to the JGB Warrants increased from 1,250,000 to 1,296,679 and the exercise price of the JGB Warrants was adjusted from $5.00 to $4.82, effective July 3, 2017. As a result of the 2017 Public Offering, effective October 5, 2017, the aggregate number of shares of common stock issuable upon exercise of the JGB Warrants increased from 1,296,679 to 1,338,326 shares and the exercise price of the JGB Warrants decreased from $4.82 to $4.67 per share.
|
(e)
|
Issued on April 17, 2018 in connection with the Perceptive Credit Agreement.
|
(f)
|
The Perceptive Credit Agreement included a Tranche B loan amount
available at the Company’s option at any time from April 17, 2018 to April 17, 2019. If the Tranche B Term Loan is funded, the Company will issue Perceptive a Tranche B Warrant to purchase up to 93,333 shares of common stock an exercise price of $8.60. The Perceptive Tranche B Warrant is considered issued for accounting purposes only and will not be exercisable unless and until legally issued in connection with a funding of the Tranche B Term Loan.
|
27
14. STOCK INCENTIVE PLANS
Stock Options and Restricted Stock Units (“RSU”)
The following table summarizes option and unvested RSU activity under the Company’s 2014 Equity Incentive Plan and 2016 Inducement Plan and related information:
|
|
Shares
Available
for Grant
|
|
|
Stock
Options
Outstanding
|
|
|
Weighted-
Average
Exercise
Price
|
|
|
Number of
RSU Shares
|
|
|
Weighted-
Average
Grant Date
Fair Value
|
|
Balance—December 31, 2017
|
|
|
156,429
|
|
|
|
1,941,473
|
|
|
$
|
4.21
|
|
|
|
439,926
|
|
|
$
|
4.39
|
|
Additional options authorized
|
|
|
1,957,075
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Restricted stock grants
|
|
|
(17,919
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
RSUs granted
|
|
|
(714,834
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
714,834
|
|
|
|
11.63
|
|
RSUs forfeited
|
|
|
13,050
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(13,050
|
)
|
|
|
4.87
|
|
RSUs vested
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(244,806
|
)
|
|
|
9.30
|
|
Repurchases of common stock under employee incentive plans
|
|
|
67,656
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
(809,634
|
)
|
|
|
809,634
|
|
|
|
11.05
|
|
|
|
—
|
|
|
|
—
|
|
Options exercised
|
|
|
—
|
|
|
|
(167,379
|
)
|
|
|
1.07
|
|
|
|
—
|
|
|
|
—
|
|
Options forfeited
|
|
|
20,453
|
|
|
|
(20,453
|
)
|
|
|
4.78
|
|
|
|
—
|
|
|
|
—
|
|
Options expired
|
|
|
1,817
|
|
|
|
(1,817
|
)
|
|
|
3.55
|
|
|
|
—
|
|
|
|
—
|
|
Balance—June 30, 2018
|
|
|
674,093
|
|
|
|
2,561,458
|
|
|
$
|
6.57
|
|
|
|
896,904
|
|
|
$
|
8.83
|
|
The total intrinsic value of options exercised was $0.9 million in the six months ended June 30, 2018.
As of June 30, 2018, the total intrinsic value of outstanding RSUs was approximately $3.0 million and there were $6.6 million of unrecognized compensation costs related to RSUs, which are expected to be recognized over a weighted-average period of 3.37 years.
As of June 30, 2018, the total intrinsic value of outstanding options was approximately $13.6 million and there were $5.8 million of unrecognized compensation costs related to options, which are expected to be recognized over a weighted-average period of 3.33 years.
Options outstanding that have vested and are expected to vest at June 30, 2018 are as follows:
|
|
Number of
Shares
Issued
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted
Average Remaining Contractual Life (Years)
|
|
|
Aggregate
Intrinsic
Value
(In
Thousands)
|
|
Vested
|
|
|
991,627
|
|
|
$
|
6.57
|
|
|
|
6.73
|
|
|
$
|
7,400
|
|
Expected to vest
|
|
|
1,360,609
|
|
|
|
7.83
|
|
|
|
7.54
|
|
|
|
6,191
|
|
Total
|
|
|
2,352,236
|
|
|
|
|
|
|
|
|
|
|
$
|
13,591
|
|
2014 Employee Stock Purchase Plan
During the offering period in 2017 that ended on December 31, 2017, 34,176 shares were purchased for aggregate proceeds of $0.1 million from the issuance of shares, which occurred on January 4, 2018. During the offering period in 2018 that ended on June 30, 2018, 42,534 shares were purchased for aggregate proceeds of $0.3 million from the issuance of shares, which occurred on July 2, 2018.
28
Valuation Assumptions
The estimated fair values of employee stock options and ESPP shares were estimated using the Black-Scholes option-pricing model based on the following weighted-average assumptions:
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Employee stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected term (in years)
|
|
|
6.0
|
|
|
|
6.0
|
|
|
|
6.0
|
|
|
|
6.0
|
|
Expected volatility
|
|
|
66.00
|
%
|
|
55.46-57.71%
|
|
|
|
68.75
|
%
|
|
53.07%-57.71%
|
|
Risk-free interest rate
|
|
|
2.76
|
%
|
|
1.90-1.96%
|
|
|
|
2.71
|
%
|
|
1.90%-2.12%
|
|
Expected dividend yield
|
|
|
—
|
%
|
|
|
—
|
%
|
|
|
—
|
%
|
|
|
—
|
%
|
Employee stock purchase plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected term (in years)
|
|
|
0.5
|
|
|
|
0.5
|
|
|
|
0.5
|
|
|
|
0.5
|
|
Expected volatility
|
|
|
105.32
|
%
|
|
|
62.27
|
%
|
|
|
105.32
|
%
|
|
|
62.27
|
%
|
Risk-free interest rate
|
|
|
1.61
|
%
|
|
|
0.65
|
%
|
|
|
1.61
|
%
|
|
|
0.65
|
%
|
Expected dividend yield
|
|
|
—
|
%
|
|
|
—
|
%
|
|
|
—
|
%
|
|
|
—
|
%
|
Risk-free Interest Rate
:
The Company based the risk-free interest rate over the expected term of the award based on the constant maturity rate of U.S. Treasury securities with similar maturities as of the date of grant.
Volatility: The Company used an average historical stock price volatility of its own stock and those comparable public companies that were deemed to be representative of future stock price trends.
Expected Term: The expected term represents the period for which the Company’s stock-based compensation awards are expected to be outstanding and is based on analyzing the vesting and contractual terms of the awards and the holders’ historical exercise patterns and termination behavior.
Expected Dividends: The Company has not paid and does not anticipate paying any dividends in the near future.
Stock-based Compensation Expense
The following table summarizes stock-based compensation expense relating to employee and nonemployee stock options, RSUs and ESPP shares for the three and six months ended June 30, 2018 and 2017, included in the statements of operations as follows (in thousands):
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Cost of testing
|
|
$
|
191
|
|
|
$
|
63
|
|
|
$
|
252
|
|
|
$
|
119
|
|
Research and development
|
|
|
462
|
|
|
|
111
|
|
|
|
675
|
|
|
|
175
|
|
Sales and marketing
|
|
|
466
|
|
|
|
57
|
|
|
|
529
|
|
|
|
95
|
|
General and administrative
|
|
|
1,393
|
|
|
|
264
|
|
|
|
1,761
|
|
|
|
497
|
|
Total
|
|
$
|
2,512
|
|
|
$
|
495
|
|
|
$
|
3,217
|
|
|
$
|
886
|
|
No tax benefit was recognized related to share-based compensation expense since the Company has never reported taxable income and has established a full valuation allowance to offset all of the potential tax benefits associated with its deferred tax assets. In addition, no amounts of stock-based compensation expense were capitalized for the periods presented.
15. INCOME TAXES
The Company’s effective tax rate may vary from the U.S. federal statutory tax rate due to the change in the mix of earnings in tax jurisdictions with different statutory rates, benefits related to tax credits, and the tax impact of non-deductible expenses and other permanent differences between income before income taxes and taxable income. For each of the three months ended June 30, 2018 and 2017, the Company recorded an income tax benefit of $0.4 million. For the six months ended June 30, 2018 and 2017, the Company recorded an income tax benefit of $0.8 million and $0.7 million, respectively. The income tax benefit of $0.4 million and $0.8 million for the three and six months ended June 30, 2018, respectively, is primarily attributable to the recognition of deferred tax assets from foreign losses. The Company assesses the realizability of its net deferred tax assets by evaluating all available evidence, both positive and negative, including (i) cumulative results of operations in recent years, (ii) sources of recent losses, (iii) estimates of
29
future taxable income and (iv) the length of net operating loss carryforward periods. The Company believes that based on the history of its U.S. losses and other factors, the weight of available evidence indicates that it is mor
e likely than not that it will not be able to realize its U.S. net deferred tax assets. Accordingly, the U.S. net deferred tax assets have been offset by a full valuation allowance.
In accordance with the SEC’s Staff Accounting Bulletin No. 118 (“SAB 118”), the effects of the Tax Act may be adjusted within a one-year measurement period from the enactment date for items that were previously reported as provisional, or where a provisional estimate could not be made. Income tax provision for the three and six months ended June 30, 2018, did not reflect any adjustment to the previously assessed Tax Act enactment effect. The Company will continue to assess forthcoming guidance and accounting interpretations on the effects of the Tax Act and expects to complete its analysis within the measurement period in accordance with the SEC guidance.
Starting in 2018, companies may be subject to global intangible low tax income (“GILTI”), which is a tax on foreign income in excess of a deemed return on tangible assets of foreign corporations as well as the new base erosion anti-abuse tax (“BEAT”) under the Tax Act. GILTI will be effectively taxed at a tax rate of 10.5%. Due to the complexity of the GILTI tax rules, companies are allowed to make an accounting policy choice of either (1) treating taxes due on future U.S. inclusions in taxable income related to GILTI as a current-period expense when incurred or (2) factoring such amounts into a company’s measurement of its deferred taxes under SAB 118. The Company has not yet made an election with respect to GILTI and does not believe GILTI will have an impact on the Company’s 2018 taxes. The Company will continue to review the GILTI and BEAT rules to determine their applicability to the Company as the rules become effective.
16. SEGMENT REPORTING
Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the Chief Operating Decision Maker (“CODM”), or decision making group, whose function is to allocate resources to and assess the performance of the operating segments. The Company has identified its chief executive officer as the CODM. In determining its reportable segments, the Company considered the markets and types of customers served and the products or services provided in those markets.
The Company has identified the following two reportable segments, which are the same as its operating segments:
|
•
|
Post-Transplant:
This segment focuses on discovery, development and commercialization of clinically differentiated, high-value diagnostic 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.
|
|
•
|
Pre-Transplant:
This segment develops, manufactures, markets and sells high quality products that increase the chance of successful transplants by facilitating a better match between a donor and a recipient of stem cells and organs. The pre-transplant product lines include Olerup branded products SSP, SBT, QTYPE and TruSight HLA.
|
There were no intersegment sales for the three and six months ended June 30, 2018 or 2017. The following table summarizes the operating results of the Company’s reportable segments (in thousands):
|
|
Three
Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Total Segments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
17,823
|
|
|
$
|
12,046
|
|
|
$
|
31,876
|
|
|
$
|
23,630
|
|
Operating loss
|
|
|
(5,209
|
)
|
|
|
(3,599
|
)
|
|
|
(10,444
|
)
|
|
|
(12,143
|
)
|
Depreciation and amortization
|
|
|
986
|
|
|
|
887
|
|
|
|
2,025
|
|
|
|
1,821
|
|
Post-Transplant
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
14,171
|
|
|
$
|
8,670
|
|
|
$
|
24,917
|
|
|
$
|
16,587
|
|
Operating loss
|
|
|
(3,138
|
)
|
|
|
(2,662
|
)
|
|
|
(6,333
|
)
|
|
|
(8,121
|
)
|
Depreciation and amortization
|
|
|
316
|
|
|
|
236
|
|
|
|
645
|
|
|
|
498
|
|
Pre-Transplant
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
3,652
|
|
|
$
|
3,376
|
|
|
$
|
6,959
|
|
|
$
|
7,043
|
|
Operating loss
|
|
|
(2,071
|
)
|
|
|
(937
|
)
|
|
|
(4,111
|
)
|
|
|
(4,022
|
)
|
Depreciation and amortization
|
|
|
670
|
|
|
|
651
|
|
|
|
1,380
|
|
|
|
1,323
|
|
30
|
|
June 30,
2018
|
|
|
December
31,
2017
|
|
Assets:
|
|
|
|
|
|
|
|
|
Post-Transplant
|
|
$
|
48,851
|
|
|
$
|
48,734
|
|
Pre-Transplant
|
|
|
31,028
|
|
|
|
34,831
|
|
Total assets
|
|
$
|
79,879
|
|
|
$
|
83,565
|
|
Revenues by geographic regions are based upon the customers’ ship-to address for pre-transplant product revenues and the region of testing for post-transplant service revenue. The following table summarizes reportable revenues by geographic regions (in thousands):
|
|
Three
Months Ended June 30, 2018
|
|
|
Three
Months Ended June 30, 2017
|
|
|
|
Post-Transplant
|
|
|
Pre-Transplant
|
|
|
Post-Transplant
|
|
|
Pre-Transplant
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
14,147
|
|
|
$
|
1,489
|
|
|
$
|
8,647
|
|
|
$
|
983
|
|
Europe
|
|
|
24
|
|
|
|
1,856
|
|
|
|
23
|
|
|
|
1,863
|
|
Australia
|
|
|
—
|
|
|
|
31
|
|
|
|
—
|
|
|
|
125
|
|
Rest of the World
|
|
|
—
|
|
|
|
276
|
|
|
|
—
|
|
|
|
405
|
|
Total
|
|
$
|
14,171
|
|
|
$
|
3,652
|
|
|
$
|
8,670
|
|
|
$
|
3,376
|
|
|
|
Six
Months Ended June 30, 2018
|
|
|
Six
Months Ended June 30, 2017
|
|
|
|
Post-Transplant
|
|
|
Pre-Transplant
|
|
|
Post-Transplant
|
|
|
Pre-Transplant
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
24,876
|
|
|
$
|
2,418
|
|
|
$
|
16,549
|
|
|
$
|
1,983
|
|
Europe
|
|
|
41
|
|
|
|
3,829
|
|
|
|
38
|
|
|
|
3,922
|
|
Australia
|
|
|
—
|
|
|
|
105
|
|
|
|
—
|
|
|
|
241
|
|
Rest of the World
|
|
|
—
|
|
|
|
607
|
|
|
|
—
|
|
|
|
897
|
|
Total
|
|
$
|
24,917
|
|
|
$
|
6,959
|
|
|
$
|
16,587
|
|
|
$
|
7,043
|
|
The following table summarizes long-lived assets, consisting of property and equipment, net, by geographic regions (in thousands):
|
|
June 30, 2018
|
|
|
December
31,
2017
|
|
Long-lived assets:
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
1,572
|
|
|
$
|
1,206
|
|
Europe
|
|
|
708
|
|
|
|
776
|
|
Australia
|
|
|
80
|
|
|
|
93
|
|
Total
|
|
$
|
2,360
|
|
|
$
|
2,075
|
|
31