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Item 7. Management’s Discussion and Analysis

2021-02-24 compared with 2020-02-28 · 256 added, 194 removed, 202 unchanged (69% of the section changed)

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K.

The following discussion and analysis of our financial condition and results of operations should be read together with our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K.

This discussion contains certain forward-looking statements that involve risk and uncertainties.

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Overview and Recent Highlights

We are a leading precision medicine company focused on the discovery, development and commercialization of clinically differentiated, high-value healthcare solutions for transplant patients and caregivers.

We offer testing services, products, and digital solutions along the pre- and post-transplant patient journey, and is a leading provider of genomics-based information for transplant patients.

We are a leading precision medicine company focused on the discovery, development and commercialization of clinically differentiated, high-value diagnostic solutions for transplant patients and caregivers.

We offer testing services, products, and digital healthcare solutions along the pre- and post-transplant patient journey, and we are a leading provider of genomics-based information for transplant patients.

Testing Services

AlloSure Kidney, our transplant surveillance solution which was commercially launched in October 2017, applies proprietary next generation sequencing technology to measure donor-derived cell-free DNA, or dd-cfDNA, in the blood stream emanating from the donor kidney.

We believe AlloSure Kidney may help clinicians determine rejection-specific activity manifested as cell damage in the transplanted heart, kidney, or other solid organ, irrespective of the type of organ transplanted.

We also believe the use of AlloSure Kidney, in conjunction with other clinical indicators, can help healthcare providers and their patients better manage long-term care following a kidney transplant.

In particular, we believe AlloSure Kidney can improve patient care by helping healthcare providers to reduce the use of invasive biopsies and determine the appropriate dosage levels of immunosuppressants.

Effective October 9, 2017, AlloSure Kidney became available for commercial testing with Medicare coverage and reimbursement.

AlloSure Kidney, our transplant surveillance solution, was commercially launched in October 2017 and is our dd-cfDNA offering built on a NGS platform.

In transplantation, 109 papers from 55 studies globally have shown the value of dd-cfDNA in the management of solid organ transplantation.

AlloSure Kidney is able to discriminate dd-cfDNA from recipient-cell-free DNA, targeting polymorphisms between donor and recipient.

This SNP approach across all the somatic chromosomes is specifically designed for transplantation, allowing a scalable, high-quality test to differentiate dd-cfDNA.

AlloSure Kidney has received positive coverage decisions for reimbursement from Medicare.

The Medicare reimbursement rate for AlloSure Kidney is $2,841.

AlloSure Kidney has also received payment from private payers on a case-by-case basis, with the first private payer, BCBS of South Carolina, issuing a positive coverage decision in its October 2019 review.

Prior to the commercialization of AlloSure Kidney, we generated a strong body of clinical evidence.

In late 2015, we announced the completion of analytical validation of AlloSure Kidney.

A report describing the analytical validation of AlloSure Kidney including clinical validation detailing the quality, reality and consistency of analytical results information for heart transplant, appeared in the November 2016 issue of The Journal of Molecular Diagnostics.

The Circulating Donor-Derived Cell-Free DNA in Blood for Diagnosing Acute Rejection in Kidney Transplant Recipients, or DART, trial, sponsored by us, was conducted between April 2015 and January 2018.

DART is a 14 center observational study of kidney transplant recipients where blood specimens are drawn periodically after transplant during follow up visits and also after treatment for acute rejection.

By the time of completion of the first analysis, 384 patients were followed in DART for up to 24 months.

The results demonstrated that increased levels of dd-cfDNA, determined by the AlloSure Kidney assay, discriminated active rejection of a kidney transplant more effectively than serum creatinine values.

In collaboration with clinical investigators, we published these findings in the scientific peer-reviewed Journal of the American Society of Nephrology and the Journal Applied Laboratory Medicine in March 2017.

A total of 2,109 patient visits had been accrued in DART by January 2018.

We analyzed this data to report on additional findings from this dataset at the American Transplant Congress, or ATC, held in 2019 and intend to continue to report additional findings into the future.

In 2018, we initiated the Kidney Allograft Outcomes AlloSure Kidney Registry, or K-OAR study, to develop further data on the clinical utility of AlloSure Kidney for surveillance of kidney transplant recipients.

In September 2019, we announced the enrollment of the first patient in the Outcomes of KidneyCare on Renal Allografts, or OKRA, study, which is an extension of the K-OAR study.

OKRA is a prospective, multi-center, observational registry of patients receiving KidneyCare for surveillance.

AlloSure Kidney has received positive coverage decisions from BCBS of South Carolina, BCBS of Kansas City and Capital Health, and is reimbursed by other private payers on a case-by-case basis.

Multiple studies have demonstrated that significant allograft injury can occur in the absence of changes in serum creatinine.

Thus, clinicians have limited ability to detect injury early and intervene to prevent long-term damage using this marker.

While histologic analysis of the allograft biopsy specimen remains the standard method used to assess injury and differentiate rejection from other injury in kidney transplants, as an invasive test with complications, repetitive biopsies are not well tolerated.

AlloSure Kidney provides a non-invasive test, assessing allograft injury that enables more frequent, quantitative and safer assessment of allograft rejection and injury status.

Beyond allograft rejection, the assessment of molecular inflammation has shown further utility in the assessment of proteinuria, the formation of DSAs, and as a surrogate predictive measure of eGFR decline.

Monitoring of graft injury through AlloSure Kidney allows clinicians to optimize allograft biopsies, identify allograft injury and guide immunosuppression management more accurately.

Since the analytical validation paper in the Journal of Molecular Diagnostics in 2016 before the commercial launch of AlloSure Kidney, there has been an increasing body of evidence supports the use of AlloSure Kidney dd-cfDNA in the assessment and surveillance of kidney transplants.

Bloom et al evaluated 102 kidney recipients and demonstrated that dd-cfDNA levels could discriminate accurately and non-invasively distinguish rejection from other types of graft injury.

In contrast, serum creatinine has AUC of 50%, showing no significant difference between patients with and without rejection.

Multiple publications and abstracts have shown AlloSure Kidney’s value in the management of BK viremia, as well as numerous pathologies that cause molecular inflammation and injury such as DSAs and eGFR decline.

Most recently its utility in the assessment of T-cell mediated rejection (TCMR) 1A and borderline rejection has also been published in the AJT.

The prospective multicenter trial, the K-OAR study, has enrolled over 1,700 patients, with plans to survey patients with AlloSure Kidney for 3 years and provide further clinical utility of AlloSure Kidney in the surveillance of kidney transplant recipients.

KidneyCare combines the dd-cfDNA analysis of AlloSure Kidney with the gene expression profiling technology of AlloMap Kidney and the predictive artificial intelligence technology of KidneyCare iBox in one surveillance solution.

We have not yet made any applications to payers for reimbursement coverage of AlloMap Kidney or KidneyCare iBox.

Our first commercialized testing solution, the AlloMap Heart transplant molecular test, or AlloMap Heart, is a gene expression test that helps clinicians monitor and identify heart transplant recipients with stable graft function who have a low probability of moderate-to-severe acute cellular rejection.

Since 2008, we have sought to expand the adoption and utilization of our AlloMap Heart solution through ongoing studies to substantiate the clinical utility and actionability of AlloMap Heart, secure positive reimbursement decisions for AlloMap Heart from large private and public payers, develop and enhance our relationships with key members of the transplant community, including opinion leaders at major transplant centers, and explore opportunities and technologies for the development of additional solutions for post-transplant surveillance.

We believe the use of AlloMap Heart, in conjunction with other clinical indicators, can help healthcare providers and their patients better manage long-term care following a heart transplant.

In particular, we believe AlloMap Heart 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 Heart has received 510(k) clearance from the U.S.

Food and Drug Administration, or FDA, for marketing and sale as a test to aid in the identification of recipients with a low probability of moderate or severe acute cellular rejection.

AlloMap Heart has received positive coverage decisions for reimbursement from Medicare.

We have not yet made any applications to private payers for reimbursement coverage of AlloMap Kidney or KidneyCare iBox.

In September 2019, we announced the enrollment of the first patient in the OKRA study, which is an extension of the K-OAR study.

OKRA is a prospective, multi-center, observational registry of patients receiving KidneyCare for surveillance.

Combined with K-OAR, 4,000 patients will be enrolled into the study.

AlloMap Heart is a gene expression test that helps clinicians monitor and identify heart transplant recipients with stable graft function who have a low probability of moderate-to-severe acute cellular rejection.

Since 2008, we have sought to expand the adoption and utilization of our AlloMap Heart solution through ongoing studies to substantiate the clinical utility and actionability of AlloMap Heart, secure positive reimbursement decisions from large private and public payers, develop and enhance our relationships with key members of the transplant community, including opinion leaders at major transplant centers, and explore opportunities and technologies for the development of additional solutions for post-transplant surveillance.

We believe the use of AlloMap Heart, in conjunction with other clinical indicators, can help healthcare providers and their patients better manage long-term care following a heart transplant, can improve patient care by helping healthcare providers avoid the use of unnecessary, invasive surveillance biopsies and may help to determine the appropriate dosage levels of immunosuppressants.

In 2008, AlloMap Heart received 510(k) clearance from the FDA for marketing and sale as a test to aid in the identification of heart transplant recipients, who have a low probability of moderate/severe acute cellular rejection at the time of testing, in conjunction with standard clinical assessment.

AlloMap Heart has been a covered service for Medicare beneficiaries since January 1, 2006.

The Medicare reimbursement rate for AlloMap Heart is currently $3,240.

AlloMap Heart has also received positive coverage decisions for reimbursement from many of the largest U.S.

private payers, including Aetna, Anthem, Cigna, HCSC, Humana, Kaiser Foundation Health Plan, Inc., and UnitedHealthcare.

We have also successfully completed a number of landmark clinical trials in the transplant field demonstrating the clinical utility of AlloMap Heart for surveillance of heart transplant recipients.

We initially established the analytical and clinical validity of AlloMap Heart on the basis of our Cardiac Allograft Rejection Gene Expression Observational (Deng, M.

et al., Am J Transplantation 2006), or CARGO, study, which was published in the American Journal of Transplantation.

A subsequent clinical utility trial, Invasive Monitoring Attenuation through Gene Expression (Pham MX et al., N.

Med., 2010), or IMAGE, published in The New England Journal of Medicine, demonstrated that clinical outcomes in recipients managed with AlloMap Heart surveillance were equivalent (non-inferior) to outcomes in recipients managed with biopsies.

private payers, including Aetna, Anthem, Cigna, HCSC, Humana, Kaiser, several BCBS plans and UnitedHealthcare.

In October 2020, AlloSure Heart received a final Palmetto MolDx Medicare coverage decision for AlloSure Heart.

In November 2020, Noridian Healthcare Solutions, our Medicare Administrative contractor, issued a parallel coverage policy granting coverage when used in conjunction with AlloMap Heart, which became effective in December 2020.

The Medicare reimbursement rate for AlloSure Heart is currently $2,753.

We have also successfully completed several landmark clinical trials in the transplant field demonstrating the clinical utility of AlloMap Heart for surveillance of heart transplant recipients.

We initially established the analytical and clinical validity of AlloMap Heart based on our CARGO study, which was published in the AJT.

A subsequent clinical utility trial, IMAGE, published in The New England Journal of Medicine, demonstrated that clinical outcomes in recipients managed with AlloMap Heart surveillance were equivalent (non-inferior) to outcomes in recipients managed with biopsies.

The results of our clinical trials have also been presented at major medical society congresses.

AlloMap Heart is now recommended as part of the International Society for Heart and Lung Transplantation, or ISHLT, guidelines.

In September 2018, we initiated the Surveillance HeartCare Outcomes Registry, or SHORE.

SHORE is a prospective, multi-center, observational, registry of patients receiving HeartCare for surveillance.

HeartCare combines the gene expression profiling technology of AlloMap Heart with the dd-cfDNA analysis of AlloSure Heart in one surveillance solution.

An approach to surveillance using HeartCare provides information from the two complementary measures:

AlloMap Heart is now recommended as part of the ISHLT guidelines.

HeartCare includes the gene expression profiling technology of AlloMap Heart with the dd-cfDNA analysis of AlloSure Heart in one surveillance solution.

An approach to surveillance using HeartCare provides information from two complementary measures:

(i) AlloMap Heart – a measure of immune activation, and (ii) AlloSure Heart – a measure of graft injury.

HeartCare provides robust information about distinct biological processes, such as immune quiescence, active injury, Acute Cellular Rejection, or ACR, and Antibody Mediated Rejection, or AMR.

We have not yet made any applications to private payers for reimbursement coverage of AlloSure Heart except for Medicare.

In August 2019, AlloSure Heart received a positive draft Local Coverage Determination, or dLCD, for Medicare coverage.

Clinical validation data from the D-OAR was published in AJT in 2019.

D-OAR was an observational, prospective, multicenter study to characterize the AlloSure Heart dd-cfDNA in a routine, clinical surveillance setting with heart transplant recipients.

The D-OAR study was designed to validate that plasma levels of AlloSure Heart dd-cfDNA can discriminate acute rejection from no rejection, as determined by endomyocardial biopsy criteria.

HeartCare provides robust information about distinct biological processes, such as immune quiescence, active injury, ACR and AMR.

In September 2018, we initiated the SHORE study.

SHORE is a prospective, multi-center, observational, registry of patients receiving HeartCare for surveillance.

Patients enrolled in SHORE will be followed for 5 years with collection of clinical data and assessment of 5-year outcomes.

In February 2019, AlloSure Lung became available for lung transplant patients through a compassionate use program while the test is undergoing further studies.

AlloSure Lung applies proprietary next generation sequencing, or NGS, technology to

measure dd-cfDNA in the blood stream emanating from the donor lung to monitor graft injury.

We have not yet made any applications to payers for reimbursement coverage of AlloSure Lung.

We develop, manufacture, market and sell products that increase the chance of successful transplants by facilitating a better match between a solid organ or stem cell donor and a recipient, and help to provide post-transplant surveillance to these recipients.

QTYPE enables 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.

One of these studies, launched in April 2020, is the ALARM study, or AlloSure Lung Allograft Remote Monitoring, with Johns Hopkins University, where the impact of AlloSure Lung combined with RemoTraC will be measured.

AlloSure Lung applies proprietary NGS technology to measure dd-cfDNA from the donor lung in the recipient bloodstream to monitor graft injury.

In June 2020, we submitted an application to the Palmetto MolDx Technology Assessment program seeking coverage and reimbursement for AlloSure Lung.

Cellular Therapy

In April 2020, we initiated a research partnership for AlloCell, a surveillance solution that monitors the level of engraftment and persistence of allogeneic cells for patients who have received cell therapy transplants.

AlloCell will initially be commercialized through collaborative research agreements with biopharma companies developing cell therapies.

QTYPE enables HLA typing at a low to intermediate resolution for samples that require a fast turn-around-time and uses real-time PCR methodology.

Olerup SSP is used to type HLA alleles based on the SSP technology.

Olerup SBT is a complete product range for sequence-based typing of HLA alleles.

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

As a result, on June 1, 2018, we became the exclusive worldwide distributor of Illumina’s TruSight HLA product line.

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

On June 1, 2018, we became the exclusive worldwide distributor of Illumina’s TruSight HLA product line.

TruSight HLA is a high-resolution solution that uses NGS methodology.

In addition, we were granted the exclusive right to develop and commercialize other NGS product lines.

These products include:

In addition, we were granted the exclusive right to develop and commercialize other NGS product lines in the field of bone marrow and solid organ transplantation on diagnostic testing.

These NGS products include:

AlloSeq Tx, a high-resolution HLA typing solution, AlloSeq cfDNA, our surveillance solution designed to measure dd-cfDNA in blood to detect active rejection in transplant recipients, and AlloSeq HCT, a NGS solution for chimerism testing for stem cell transplant recipients.

On May 7, 2019, we acquired 100% of the outstanding common stock of OttrCare for total consideration of $16.1 million.

OttrCare was formed in 1993 and is a leading provider of transplant patient tracking software, or the Ottr software, which provides comprehensive solutions for transplant patient management.

Ottr software enable integration with electronic medical records, or EMR systems, including Cerner and Epic, providing patient surveillance management tools and outcomes data to transplant centers.

On August 26, 2019, we acquired 100% of the outstanding common stock of XynManagement with a combination of cash consideration of $2.0 million paid upfront and contingent consideration with a fair value of $1.4 million.

XynManagement provides two unique solutions, XynQAPI software, or XynQAPI, and Waitlist Management.

XynQAPI simplifies transplant quality tracking and Scientific Registry of Transplant Recipients, or SRTR, reporting.

Waitlist Management includes a team of transplant assistants who maintain regular contact with patients on the waitlist to help prepare for their transplant and maintain eligibility.

XynManagement products have been added to the CareDx digital solutions portfolio and will be integrated with current offerings, including Ottr software and patient care managers.

Our software solutions are currently used in 84 transplant centers in the U.S.

Refer to Note 5 of the consolidated financial statements included elsewhere in this Annual Report on Form 10-K for further detail regarding these acquisitions.

In September 2019, we commercially launched AlloSeq cfDNA, our surveillance solution designed to measure dd-cfDNA in blood to detect active rejection in transplant recipients, and we received CE mark authorization on January 10, 2020.

Our ability to increase the clinical uptake for AlloSeq cfDNA will be a result of multiple factors, including local clinical education, customer lab technical proficiency and levels of country-specific reimbursement.

Also in September 2019, we commercially launched AlloSeq Tx, the first of its kind NGS high-resolution HLA typing solution utilizing hybrid capture technology.

This technology enables the most comprehensive sequencing, covering more of the HLA genes than other solutions on the market and adding coverage of non-HLA genes that may impact transplant patient matching and management.

AlloSeq Tx has simple NGS workflow, with a single tube for processing and steps to reduce errors.

AlloSeq Tx 17 received CE mark authorization on May 15, 2020.

In June 2020, we commercially launched AlloSeq HCT, a NGS solution for chimerism testing for stem cell transplant recipients.

This technology has the potential to provide better sensitivity and data analysis compared to current solutions on the market.

In 2019, we began providing digital solutions to transplant centers following the acquisitions of Ottr, Inc.

and XynManagement.

On May 7, 2019, we acquired 100% of the outstanding common stock of Ottr, Inc.

was formed in 1993 and is a leading provider of the Ottr software, which provides comprehensive solutions for transplant patient management.

The Ottr software enables integration with EMR systems, including Cerner and Epic, providing patient surveillance management tools and outcomes data to transplant centers.

On August 26, 2019, we acquired 100% of the outstanding common stock of XynManagement.

XynManagement provides two unique solutions, XynQAPI and XynCare.

XynQAPI simplifies transplant quality tracking and SRTR reporting.

XynCare includes a team of transplant assistants who maintain regular contact with patients on the waitlist to help prepare for their transplant and maintain eligibility.

In September 2020 we launched AlloCare, a mobile app that provides a patient-centric resource for transplant recipients to manage medication adherence, coordinate with Patient Care Managers for AlloSure scheduling and measure health metrics.

In January 2021, we acquired TransChart for cash.

TransChart provides EMR software to hospitals throughout the United States to care for patients who have or may need an organ transplant.

TransChart builds on our digital offerings, which include Ottr transplant electronic medical record software and XynQAPI transplant quality management solutions.

COVID-19 Impact

In the final weeks of March and during April 2020, with hospitals increasingly caring for COVID-19 patients, hospital administrators chose to limit or even defer, non-emergency procedures.

Immunosuppressed transplant patients either self-prescribed or were asked to avoid transplant centers and caregiver visits to reduce the risk of contracting COVID-19.

As a result, with transplant surveillance visits down, we experienced a slowdown in testing services volumes in the final weeks of March and during April 2020.

As a response to the COVID-19 pandemic, and to enable immune-compromised transplant patients to continue to have their blood drawn, in late March 2020, we launched RemoTraC, a remote home-based blood draw solution using mobile phlebotomy for AlloSure and AlloMap surveillance tests, as well as for other standard monitoring tests.

To date, more than 150 transplant centers can offer RemoTraC to their patients and over 6,000 kidney, heart and lung transplant patients have enrolled.

Based on existing and new relationships with partners, we have established a nationwide network of more than 10,000 mobile phlebotomists.

Following the introduction of RemoTraC and with the easing of stay-at-home restrictions and the opening up of many hospitals to non-COVID-19 patients, our testing services volumes returned to levels consistent with those experienced immediately prior to the COVID-19 pandemic, and volumes continued to be at or above those levels since May 2020.

In spite of the resurgence of COVID-19 infection rates, which resulted in increased stay-at-home and renewed travel restrictions, we did not experience a decrease in testing services volumes.

Our product business experienced a reduction in forecasted sales volume throughout the second and third quarters of 2020, as we were unable to undertake onsite discussions and demonstrations of our recently launched NGS products, including AlloSeq Tx 17, which was awarded CE mark authorization in May 2020.

Our product business maintained normal sales volumes during the fourth quarter of 2020.

We are maintaining our testing, manufacturing, and distribution facilities while implementing specific protocols to reduce contact among our employees.

In areas where COVID-19 impacts healthcare operations, our field-based sales and clinical support teams are supporting providers through telephone and online platforms.

In August 2020, the state of California released revised criteria for loosening and tightening restrictions on certain activities on generally a county-by-county basis.

Under the updated executive orders, San Mateo County, where our laboratory and headquarters are located, continues to be subject to certain restrictions.

These orders and others may be further modified, amended and adopted depending upon the COVID-19 transmission rates in our county and state, as well as other factors.

In addition, we have created a COVID-19 task force that is responsible for crisis decision making, employee communications, enforcing pre-arrival temperature checking, daily health check-ins and enhanced safety training/protocols in our offices for employees that do not work from home.

Due to COVID-19, quarantines, shelter-in-place and similar government orders, or the perception that such orders, shutdowns or other restrictions on the conduct of business operations could occur or could impact personnel at third-party suppliers in the United States and other countries, or the availability or cost of materials, there may be disruptions in our supply chain.

Any manufacturing supply interruption of materials could adversely affect our ability to conduct ongoing and future research and testing activities.

In addition, our clinical studies may be affected by the COVID-19 pandemic.

Clinical site initiation and patient enrollment may be delayed due to prioritization of hospital resources toward the COVID-19 pandemic.

Some patients may not be able to comply with clinical study protocols if quarantines impede patient movement or interrupt healthcare services.

Similarly, the ability to recruit and retain patients and principal investigators and site staff who, as healthcare providers, may have heightened exposure to COVID-19, may adversely impact our clinical trial operations.

Financial Operations Overview

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Testing Services Revenue

Our testing services revenue is derived from AlloSure Kidney and AlloMap Heart tests, which represented 82%, 79% and 69% of our total revenues for the years ended December 31, 2019, 2018 and 2017, respectively.

Our testing services revenue is derived from AlloSure Kidney, AlloMap Heart and AlloSure Heart tests, which represented 85%, 82% and 79% of our total revenues for the years ended December 31, 2020, 2019 and 2018, respectively.

Our testing services revenue depends on a number of factors, including (i) the number of tests performed;

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(iv) our ability to recognize revenues on tests billed prior to the establishment of reimbursement policies, contracts or payment histories;

(v) our ability to expand into markets outside of the United States;

and (vi) how quickly we can successfully commercialize new product offerings.

and (v) how quickly we can successfully commercialize new product offerings.

We currently market testing services to healthcare providers through our direct sales force that targets transplant centers and their physicians, coordinators and nurse practitioners.

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Product Revenue

Our product revenue is derived primarily from sales of Olerup SSP, QTYPE, Olerup SBT and TruSight products.

Our product revenue is derived primarily from sales of AlloSeq Tx, Olerup SSP, QTYPE and TruSight products.

Product revenue represented 10%, 15% and 20% of total revenue for the years ended December 31, 2020, 2019 and 2018, respectively.

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Our digital and other revenue is mainly derived from sales of our Ottr software and XynQAPI licenses and services and other licensing agreements.

Digital and other revenue represented 3% of total revenue for the year ended December 31, 2019, and 1% of total revenue for each of the years ended December 31, 2018 and 2017.

Digital and other revenue represented 5%, 3% and 1% of total revenue for the years ended December 31, 2020, 2019 and 2018, respectively.

Critical Accounting Policies and Significant Judgments and Estimates

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Revenue Recognition

We recognize revenue from testing services, products and digital 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.

We recognize revenue from testing services, product sales and digital 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 revenue recognition 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

Patient tests are ordered by healthcare providers.

AlloSure Kidney, AlloMap Heart, and AlloSure Heart patient tests are ordered by healthcare providers.

We receive a test requisition form with payer information along with a collected patient blood sample.

We consider the patient to be our customer and the test requisition form a contract.

We consider the patient to be our customer and the test requisition form to be the contract.

Testing services are performed in our laboratory.

Testing services represent one performance obligation in a contract and revenue is recorded when results of the test are provided to the healthcare provider, at a point of time.

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 in time.

The healthcare providers that order the tests and on whose behalf we provide testing services are generally not responsible for the payment of these services.

The first and second revenue recognition criteria are satisfied when we receive a test requisition form with payer information from the healthcare provider.

Generally, we bill third-party payers upon delivery of test result to the healthcare provider.

Generally, we bill third-party payers upon delivery of an AlloSure Kidney, AlloMap Heart or AlloSure Heart test result to the healthcare provider.

Amounts received may vary amongst payers based on coverage practices and policies of the payer.

We determine an estimate of a transaction price by financial class 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.

We estimate revenue for non-contracted payers and self-payers using this methodology.

The estimate requires significant judgment.

We have used the portfolio approach, a practical expedient under Accounting Standards Codification, or ASC, Topic 606, Revenue from Contracts with Customers , to identify financial classes of payers.

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 process for determining the appropriate transaction price involves judgment, and considers such factors as, historical payment trends, current economic conditions and regulatory changes.

The ultimate amounts of collections could be different from the amounts we estimate.

We estimate revenue for non-contracted payers and self-payers using transaction prices determined for each financial class of payers using history of reimbursements.

This includes analysis of an average reimbursement per test and a percentage of tests reimbursed.

This estimate requires significant judgment.

We monitor revenue estimates at each reporting period based on actual cash collections in order to assess whether a revision to the estimate is required.

Changes in transaction price estimates are updated quarterly based on actual cash collected or changes made to contracted rates.

Product Revenue

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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.

Digital and Other Revenue

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We allocate the transaction price to each performance obligation based on relative stand-alone selling prices of each distinct performance obligation.

Digital revenue in connection with perpetual software license agreements is recognized over time based on the Company’s satisfaction of each distinct performance obligation in each agreement.

Digital revenue in connection with perpetual software license agreements is recognized over time based on our satisfaction of each distinct performance obligation in each agreement.

Perpetual software license agreements typically require advance payments from customers upon the achievement of certain milestones.

We record deferred revenue in relation to these agreements when cash payments are received, or invoices are issued in advance of the Company’s performance, and generally recognize revenue over the contractual term, as performance obligations are fulfilled.

We record deferred revenue in relation to these agreements when cash payments are received, or invoices are issued in advance of our performance, and generally recognize revenue over the contractual term, as performance obligations are fulfilled.

In addition, we derive digital revenue from software subscriptions.

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Business Combinations

In accordance with ASC Topic 805, Business Combinations , we determine and allocate the purchase price of an acquired business to the tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values as of the business combination date, including identifiable intangible assets that either arise from a contractual or legal right or are separable from goodwill.

We determine and allocate the purchase price of an acquired business to the assets acquired and liabilities assumed based on their estimated fair values as of the business combination date, including separately identifiable intangible assets, which are separable from goodwill.

We base the estimated fair value of identifiable intangible assets acquired in a business combination on independent valuations that use information and assumptions provided by management, which consider management’s best estimates of inputs and assumptions that a market participant would use.

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The use of alternative valuation assumptions, including estimated revenue projections, growth rates, royalty rates, cash flows, discount rates, estimated useful lives and probabilities surrounding the achievement of contingent milestones, could result in different purchase price allocations and amortization expense in current and future periods.

In those circumstances where an acquisition involves a contingent consideration arrangement that meets the definition of a liability under ASC Topic 480, Distinguishing Liabilities from Equity , we recognize a liability equal to the fair value of the contingent payments we expect to make as of the acquisition date.

We remeasured this liability each reporting period and record changes in the fair value as a component of general and administrative expenses.

We remeasure this liability each reporting period and record changes in the fair value as a component of operating expenses.

In circumstances where the contingent consideration is classified as equity, we recognize it at fair value at the acquisition date.

Contingent consideration classified as equity is not subsequently remeasured.

Transaction costs associated with acquisitions are expensed as incurred in general and administrative expenses.

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Acquired Intangible Assets

Amortizable intangible assets may include customer relationships, developed technology, trademarks, contracts and acquired in-process technology assets as part of a business combination.

Amortizable intangible assets include customer relationships, developed technology, trademarks, contracts and acquired in-process technology assets acquired as part of a business combination.

Intangible assets subject to amortization are amortized over their estimated useful lives.

Acquired in-process technology assets are considered to be indefinite-lived until the completion or abandonment of the associated research and development efforts.

Accordingly, amortization of the acquired in-process technology assets will not occur until the products reach commercialization.

If and when development is complete, which generally occurs if and when regulatory approval to market a product is obtained, the associated assets would be deemed finite-lived and would then be amortized based on their respective estimated useful lives at that point in time.

Impairment of Goodwill, Intangible Assets and Long-lived Assets

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We also consider our market capitalization on the date of the analysis to ensure the reasonableness of the reporting unit’s fair value.

In connection with our annual goodwill assessment on December 1, 2019, we performed a qualitative assessment at the consolidated level taking into consideration past, current and projected future earnings, recent trends and market conditions;

In connection with our annual goodwill assessment on December 1, 2020, we performed a qualitative assessment taking into consideration past, current and projected future earnings, recent trends and market conditions;

and its market capitalization.

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If and when development is complete, which generally occurs when the products are made commercially available, the associated acquired in-process technology asset will be deemed finite-lived and will then be amortized based on its estimated useful life.

As of December 31, 2020, no impairment of acquired in-process technology assets has been identified.

Intangible assets and long-lived assets subject to amortization

We evaluate our finite-lived intangible assets and our long-lived assets for indicators of possible impairment when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

Where indicators of impairment exist, we then compare the carrying amounts of the assets with the future net undiscounted cash flows expected to be generated by such asset.

We then compare the carrying amounts of the assets with the future net undiscounted cash flows expected to be generated by such asset.

If an impairment exists, we measure the impairment based on the excess carrying value of the asset over the asset’s fair value determined using discounted estimates of future cash flows.

We have not identified any such impairment losses to date.

Common Stock Warrant Liability

Common Stock Warrants

Common stock warrants issued with debt, equity or as standalone financing instruments are recorded as either liabilities or equity in accordance with the respective accounting guidance.

Warrants recorded as equity are recorded at their relative fair value determined at the issuance date and are not remeasured after that.

Warrants recorded as liabilities are recorded at their fair

value and remeasured on each reporting date with changes recorded in change in estimated fair value of common stock warrant liability and derivative liability in the consolidated statements of operations.

Warrants recorded as liabilities are recorded at their fair value and remeasured on each reporting date with changes recorded in change in estimated fair value of common stock warrant liability and derivative liability in the consolidated statements of operations.

We utilize a binomial-lattice pricing model, or the Monte Carlo Simulation Model, that involves a market condition simulation to estimate the fair value of the warrants.

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Increases (decreases) in these assumptions result in a directionally similar impact to the fair value of the common stock warrant liability.

Refer to Note 4 of the consolidated financial statements included elsewhere in this Annual Report on Form 10-K for key assumptions used to value outstanding warrant liability.

Recently Issued Accounting Standards

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Factors Affecting Our Performance

The Number of AlloSure Kidney and AlloMap Heart Tests We Receive and Report

The growth of our testing services business is tied to the number of AlloSure Kidney and AlloMap Heart patient samples we receive and patient results we report.

COVID-19 Pandemic

COVID-19 may impact personnel at third-party suppliers in the United States and other countries, or the availability or cost of materials, which would disrupt our supply chain.

Any manufacturing supply interruption of materials could adversely affect our ability to conduct ongoing and future research and testing activities.

Clinical trials, clinical site initiation and patient enrollment may be delayed due to prioritization of hospital resources toward the COVID-19 pandemic.

Some patients may not be able to comply with clinical trial protocols if quarantines impede patient movement or interrupt healthcare services.

The Number of AlloMap Heart, AlloSure Kidney and AlloSure Heart Tests We Receive and Report

The growth of our testing services business is tied to the number of AlloSure Kidney, AlloMap Heart and AlloSure Heart patient samples we receive and patient results we report.

We incur costs in connection with collecting and shipping all samples and a portion of the costs when we cannot ultimately issue a report.

As a result, the number of patient samples received largely correlates directly to the number of patient results reported.

The Number of Diagnostic Products We Sell

The growth of our product revenues is tied to the sales of the Olerup SSP, QTYPE, Olerup SBT, TruSight HLA and AlloSeq product lines.

The product sales organizations are located in Stockholm, Sweden;

Vienna, Austria;

Fremantle, Australia and West Chester, Pennsylvania.

Products are sold directly to customers in 22 countries.

We also use distributors to sell products in approximately 46 countries.

Continued Adoption of and Reimbursement for AlloMap Heart

AlloMap Heart test volume and the corresponding reimbursement revenue has generally increased over time since the launch of AlloMap Heart, as Medicare provided reimbursement and payers adopt coverage policies and fewer payers consider AlloMap Heart to be experimental and investigational.

Reimbursement for AlloMap Heart

AlloMap Heart test volume and the corresponding reimbursement revenue has generally increased over time since the launch of AlloMap Heart, as the ISHLT included AlloMap in guidelines, payers adopted coverage policies and many payers no longer consider AlloMap Heart to be experimental and investigational.

The rate at which our tests are covered and reimbursed has, and is expected to continue to vary by payer.

Revenue growth depends on our ability to maintain Medicare reimbursement, achieve broader reimbursement from third party payers and to expand the number of tests per patient and the base of healthcare providers.

The Protecting Access to Medicare Act of 2014, or PAMA, includes a substantial new payment system for clinical laboratory tests under the Clinical Laboratory Fee Schedule, or CLFS.

Under PAMA, laboratories that receive the majority of their Medicare revenues from payments made under the CLFS would report initially and then on a subsequent three-year basis thereafter (or annually for advanced diagnostic laboratory tests, or ADLTs), private payer payment rates and volumes for their tests.

Revenue growth depends on our ability to maintain Medicare and third party payer reimbursement, and to expand utilization by healthcare providers.

PAMA included a substantial new payment system for clinical laboratory tests under the CLFS.

Under PAMA, laboratories that receive the majority of their Medicare revenues from payments made under the CLFS would report initially and then on a subsequent three-year basis thereafter (or annually for ADLTs), private payer payment rates and volumes for their tests.

The final PAMA ruling was issued June 17, 2016 indicating that data for reporting for the new PAMA process would begin in 2017 and the new market based rates took effect on January 1, 2018.

Effective January 1, 2018, Medicare reimburses us $3,240 for AlloMap Heart testing of Medicare beneficiaries, an increase from the 2017 reimbursement rate of $2,841.

The CARES Act freezes current (2020) CMS CLFS rates through 2021.

Further, the CARES Act delays the reporting cycle under PAMA to January 1 and March 31, 2025, and the preceding data collection period will become January 1 through June 30, 2024.

AlloMap Heart has also received positive coverage decisions for reimbursement from many of the largest U.S.

private payers, including Aetna, Anthem, Cigna, Health Care Services Corporation (HCSC), Humana, Kaiser Foundation Health Plan, Inc., and UnitedHealthcare.

private payers, including Aetna, Anthem, Cigna, HCSC, Humana, Kaiser Foundation Health Plan, Inc., several BCBS plans and UnitedHealthcare.

Reimbursement for AlloSure Kidney

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Reimbursement for AlloSure Heart

In October 2020, AlloSure Heart received a final Palmetto MolDx Medicare coverage decision for AlloSure Heart.

The Medicare reimbursement rate for AlloSure Heart is currently $2,753.

Continued Growth of Product Sales

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Olerup SBT is a complete product range for sequence-based typing of HLA alleles.

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

As a result, on June 1, 2018, we became the exclusive worldwide distributor of Illumina’s TruSight HLA product line.

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Continued Growth of Software Sales

The growth of our digital revenues is tied to the successful implementation of our Ottr and XynQAPI software businesses, as well as continued support and maintenance of existing OttrCare and XynManagement customers.

Also in September 2019, we commercially launched AlloSeq Tx, the first of its kind NGS high-resolution HLA typing solution utilizing hybrid capture technology.

This technology enables the most comprehensive sequencing, covering more of the HLA genes than current solutions and adding coverage of non-HLA genes that may impact transplant patient matching and management.

AlloSeq Tx has a simple NGS workflow that reduces complexity and can reduce errors.

AlloSeq Tx 17 received CE mark authorization on May 15, 2020.

In June 2020, we commercially launched AlloSeq HCT, a NGS solution for chimerism testing for stem cell transplant recipients.

This technology can provide better sensitivity and data analysis compared to current solutions on the market.

Continued Growth of Digital Sales

The growth of our digital revenues is tied to the continued successful implementation of our Ottr and XynQAPI software businesses, as well as continued support and maintenance of existing Ottr, Inc.

and XynManagement customers.

The Ottr software and XynQAPI are currently implemented in multiple locations in the U.S.

The Ottr software and XynQAPI implementation and support teams are based in Omaha, Nebraska.

Development of Additional Products

We rely on sales of AlloSure Kidney, AlloMap Heart, Olerup SSP, Olerup SBT, QTYPE and TruSight HLA to generate the majority of our revenue.

The Ottr software implementation and XynQAPI implementation and support teams are based in Omaha, Nebraska.

Development of Additional Services and Products

Our development pipeline includes other transplant diagnostic solutions to help clinicians and transplant centers make personalized treatment decisions throughout a transplant patient’s lifetime.

We expect to invest in research and development in order to develop additional products.

Our success in developing new products and services will be important in our efforts to grow our business by expanding the potential market for our products and diversifying our sources of revenue.

Our success in developing new products and services will be important in our efforts to grow our business by expanding the potential market for our services and products and diversifying our sources of revenue.

Timing of Research and Development Expenses

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Total revenue 192,194 127,068 65,126

Cost of revenue 45,455 32,987 12,468

Gross profit 81,613 43,582 38,031

Operating expenses:

Cost of testing services 43,932 29,622 14,310

Cost of product 13,847 12,919 928

Cost of digital and other 5,338 2,914 2,424

Research and development 48,941 30,711 18,230

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Interest income (expense), net 271 985 (714)

Debt extinguishment expenses — (5,780) 5,780

Change in estimated fair value of common stock

warrant and derivative liabilities 319 (22,978) 23,297

warrant liabilities (1,495) 319 (1,814)

CARES Act Provider Relief Fund 4,813 — 4,813

Other expense, net (811) (719) (92)

Total other income (expense) 585 (32,637) 33,222

Total other income 2,778 585 2,193

Loss before income taxes (19,750) (23,947) 4,197

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Net loss $ (18,714) $ (21,968) $ 3,254

Net loss attributable to noncontrolling interest — (25) 25

Net loss attributable to CareDx, Inc.

$ (21,968) $ (46,756) $ 24,788

Testing Services Revenue

Testing services revenue increased by $59.1 million, or 56%, for the year ended December 31, 2020, compared to the same period in 2019.

This increase is mainly due to an increase of 21,472 test results provided during the year ended December 31, 2019, compared to the year ended December 31, 2018.

This increase is primarily due to an increase of more than 29,000 AlloSure Kidney, AlloMap Heart and AlloSure Heart patient results provided during the year ended December 31, 2020, compared to the year ended December 31, 2019.

Product Revenue

Product revenue increased by $1.0 million, or 6%, for the year ended December 31, 2020, compared to the same period in 2019.

The increase was due to sales of the TruSight HLA products related to the License Agreement with Illumina signed in May 2018, and increased sales of QTYPE, partially offset by a decrease in sales of Olerup SSP and Olerup SBT products.

Our product business was impacted by a reduction in forecasted sales volume throughout the second and third quarters of 2020 due to COVID-19, as there were delays in onsite discussions and demonstrations of recently launched NGS products, including AlloSeq Tx 17, which was awarded CE mark authorization in May 2020.

Sales volumes began to recover in the fourth quarter of 2020.

Digital and Other Revenue

Digital and other revenue increased by $3.6 million for the year ended December 31, 2019, compared to the same period in 2018, primarily due to the acquisition of OttrCare in May 2019 and XynManagement in August 2019.

Cost of Revenue

Cost of revenue increased by approximately $12.5 million, or 38%, for the year ended December 31, 2019, compared to the same period in 2018, primarily due to higher testing volume, increased product sales, and the acquisitions of OttrCare in May 2019 and XynManagement in August 2019.

Gross profit increased by $38.0 million, or 87%, for the year ended December 31, 2019, compared to the same period in 2018, primarily due and increase in revenue and an improvement in gross profit margins resulting from efficiencies in testing services laboratory operations.

Digital and other revenue increased by $5.0 million, or 119%, during the year ended December 31, 2020, compared to the year ended December 31, 2019, primarily due to the new Ottr software implementations and our acquisitions of Ottr, Inc.

in May 2019 and XynManagement in August 2019.

Cost of Testing Services

Cost of testing services increased by $14.3 million, or 48%, for the year ended December 31, 2020, compared to the year ended December 31, 2019, primarily due to an increase in testing volume, the cost of providing RemoTraC and increased utilization of mobile phlebotomy.

Cost of Product

Cost of product increased by $0.9 million , or 7%, for the year ended December 31, 2020, compared to the year ended December 31, 2019.

The increase is primarily due to increased sales and amortization of intangibles.

Cost of Digital and Other

Cost of digital and other increased by $2.4 million, or 83%, for the year ended December 31, 2020, compared to the year ended December 31, 2019, primarily due to the acquisitions of Ottr, Inc.

in Ma y 2019 and XynManagement in August 2019.

Research and Development

Research and development expenses increased by $16.2 million, or 112%, for the year ended December 31, 2019, compared to the same period in 2018.

This increase is primarily due to an increase of $8.9 million in personnel costs, an increase of $2.7 million in stock-based compensation expense, an increase of $1.4 million in consulting and professional fees, and an increase of $1.3 million in external clinical studies expense.

Research and development expenses increased by $18.2 million, or 59%, for the year ended December 31, 2020, compared to the year ended December 31, 2019, primarily due to an increase in personnel-related costs of $7.8 million, an increase of $4.8 million in clinical studies, an increase in consulting and outside service fees of $2.7 million, an increase in reagents and consumables of $2.4 million and an increase in license and collaboration fees of $1.1 million, partially offset by lower travel costs of $0.4 million.

Sales and Marketing

Sales and marketing expenses increased by approximately $17.2 million, or 79%, for the year ended December 31, 2019, compared to the same period in 2018, primarily due to an increase in personnel-related expenses of $7.8 million, an increase in stock-based compensation expenses of $3.0 million, an increase in tradeshow and marketing costs of $2.8 million and an increase in travel costs of $2.0 million.

Sales and marketing expenses increased by approximately $15.0 million, or 38%, for the year ended December 31, 2020, compared to the year ended December 31, 2019, primarily due to an increase in personnel-related costs of $9.9 million, stock-based compensation expense of $1.8 million, $1.8 million of speaker programs and sponsorships and consulting and outside service fees of $1.1 million.

General and Administrative

General and administrative expenses increased by $13.6 million, or 59%, for the year ended December 31, 2019, compared to the same period in 2018, primarily due to an increase of $8.2 million in stock-based compensation expense, an increase of $2.1 million in consulting services, an increase of $1.2 million in personnel-related expenses, and an increase of $1.2 million in legal fees.

Interest Income (Expense), Net

Interest income of $1.0 million for the year ended December 31, 2019, related to interest earned by our money market accounts.

Interest expense of $3.7 million for the year ended December 31, 2018 consisted of $2.5 million of interest expense and debt discount amortization related to the convertible debt with JGB Collateral LLC and certain of its affiliates, or the JGB Debt, $1.2 million of interest expense and debt amortization recorded in relation to the Perceptive Credit Agreement entered into on April 17, 2018 and $0.2 million of interest expense recorded in relation to other debt.

These interest expense amounts were partially offset by interest income of $0.2 million earned on cash and cash equivalent balances.

Debt Extinguishment Expenses

There were no debt extinguishment expenses for the year ended December 31, 2019.

For the year ended December 31, 2018, debt extinguishment expenses were $5.8 million related to a loss recorded on the conversion of the JGB Debt, calculated as the difference between the value of the shares of common stock issued on the days of conversion and the amount of principal debt converted on those days, net of the allocated debt discount and derivative liability balances.

Change in Estimated Fair Value of Common Stock Warrant and Derivative Liabilities

General and administrative expenses increased by $12.3 million, or 34%, for the year ended December 31, 2020, compared to the year ended December 31, 2019.

This increase was primarily due to legal fees of $6.0 million related to litigation and general legal expenses, an increase of $4.5 million in personnel-related costs, an increase of $2.1 million of consulting and outside service fees and $0.5 million of software expense, partially offset by lower stock-based compensation expense of $1.2 million.

Change in Estimated Fair Value of Common Stock Warrant Liability

The change in estimated fair value of common stock warrant liability decreased from income of $0.3 million for the year ended December 31, 2019 to an expense of $1.5 million for the year ended December 31, 2020, resulting in a net change of $1.8 million.

The $1.5 million expense in the year ended December 31, 2020 reflects a remeasurement gain of $6.2 million for the change in the fair value of our common stock warrant liability and a remeasurement charge of $7.7 million for warrants exercised during the year.

In the year ended December 31, 2020, warrants to purchase approximately 314,000 shares of common stock with an average exercise price of $1.12 per share were exercised.

The expense for the change in estimated fair value of common stock warrants decreased by $23.3 million, or 101%, for the year ended December 31, 2019, compared to the same period in 2018.

The income in 2019 was $0.3 million, comprised of a a $3.4 million remeasurement gain related to the change in fair value of our common stock warrant liability, partially offset by a $3.1 million remeasurement charge for warrants exercised during the period.

The $23.0 million expense for the year ended December 31, 2018 consisted of a $25.6 million remeasurement charge related to the change in fair value of our common stock warrant liability, partially offset by a $2.6 million gain recorded for the changes in fair value of the JGB Debt embedded derivative between January 1, 2018 and the conversion date of March 27, 2018.

Other Expense, Net

Other expense, net increased by $0.5 million in the year ended December 31, 2019, compared to the same period in 2018, primarily due to recording of accretion expense of $0.3 million and foreign exchange losses of $0.1 million.

The income in 2019 was $0.3 million, comprised of a $3.4 million remeasurement gain related to the change in fair value of our common stock warrant liability, partially offset by a $3.1 million remeasurement charge for warrants exercised during the period.

CARES Act Provider Relief Fund

The CARES Act Provider Relief Fund increased by $4.8 million, or 100%, for the year ended December 31, 2020, compared to the year ended December 31, 2019, primarily due to the CARES Act payment we received in April 2020.

Income Tax Benefit

For the year ended December 31, 2020, we recorded an income tax benefit of $1.0 million on a loss before income taxes of $19.8 million primarily attributable to the recognition of deferred tax assets from foreign losses and recognition of previous unrecognized tax benefits.

For the year ended December 31, 2018, we recorded an income tax benefit of $1.4 million on a loss

before income taxes of $48.2 million primarily attributable to the tax impact of the losses related to our foreign operations.

The effective tax rate for the year ended December 31, 2020 differs from the federal statutory tax rate as a result of the income tax expense related to non-deductible executive compensation and the increase in valuation allowance.

For the year ended December 31, 2019, we recorded an income tax benefit of $2.0 million on a loss before income taxes of $23.9 million primarily attributable to the recognition of deferred tax assets from foreign losses and recognition of previous unrecognized tax benefits.

The effective tax rate for the year ended December 31, 2019 differs from the federal statutory tax rate as a result of the income tax expense related to non-deductible executive compensation and the increase in valuation allowance.

Comparison of the Years Ended December 31, 2019 and 2018

For a discussion regarding our financial condition and results of operations for the year ended December 31, 2018 as compared to the year ended December 31, 2017, please refer to the discussion under the heading “Results of Operations—Comparison of the Ended December 31, 2018 and 2017” in Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, filed with the SEC on March 6, 2019.

For a discussion regarding our financial condition and results of operations for the year ended December 31, 2019 as compared to the year ended December 31, 2018, please refer to the discussion under the heading “Results of Operations—Comparison of the Ended December 31, 2019 and 2018” in Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, filed with the SEC on February 28, 2020.

Liquidity and Capital Resources

We have incurred significant losses and negative cash flows from operations since our inception and had an accumulated deficit of $352.5 million at December 31, 2020.

As of December 31, 2019, we had cash and cash equivalents of $38.2 million, and no debt outstanding.

Going Concern

As of December 31, 2019, we had cash and cash equivalents of $38.2 million.

We may require future additional financing to fund working capital and pay our obligations as they come due.

Additional financing might include a combination of equity security offerings, debt arrangements or collaborations.

However, there can be no assurance that we will be successful in acquiring additional funding at levels sufficient to fund our operations or on terms favorable to us.

We believe that our existing cash balance and expected revenue along with the net proceeds from any future equity financing available under our effective Form S-3 filed with SEC in August 2018, will be sufficient to meet our anticipated cash requirements for a period of at least 12 months from the issuance date of our consolidated financial statements .

As of December 31, 2020, we had cash, cash equivalents and marketable securities of $224.7 million, and no debt outstanding.

The spread of COVID-19, which has caused a broad impact globally, may materially affect us economically.

While the potential economic impact brought by, and the duration of, COVID-19 may be difficult to assess or predict, a widespread pandemic could result in significant disruption of global financial markets, reducing our ability to access capital, which could in the future negatively affect our liquidity.

Since March 31, 2020, and in response to the outbreak of the COVID-19 pandemic, we have increased our cash and cash equivalents.

With our continuing growth, we may require additional financing in the future to fund working capital and our future products developments.

Additional financing might include issuance of equity securities, including through underwritten public offerings or “at-the-market” offerings, debt offerings or financings or a combination of these financings.

There can be no assurance that we will be successful in acquiring additional funding at levels sufficient to fund our operations or on terms favorable to us.

We believe our existing cash balance and expected cash from existing operations, including cash from current license agreements and future license and collaboration agreements, or a combination of these, will be sufficient to meet our anticipated cash requirements for the next 12 months, as well as beyond the next 12 months.

CMS Accelerated and Advance Payment Program for Medicare Providers

On March 27, 2020, the U.S.

government enacted the CARES Act.

Pursuant to the CARES Act, CMS expanded its current Accelerated and Advance Payment Program in order to increase cash flow to providers of services and suppliers impacted by the COVID-19 pandemic.

CMS was authorized to provide accelerated or advance payments during the period of the public health emergency to any Medicare provider who submits a request to the appropriate Medicare Administrative Contractor and meets the required qualifications.

During April 2020, we received an advance payment from CMS of approximately $20.5 million and recorded the payment as Deferred revenue - CMS advance payment on our consolidated balance sheet.

During December 2020, we reassessed the Deferred revenue - CMS advance payment and determined to repay the entire amount in January 2021.

We recorded the amount as Refund liability - CMS advance payment on the consolidated balance sheet as of December 31, 2020.

On January 19, 2021, we repaid the CMS advance payment of approximately $20.5 million to CMS in full.

At-the-Market Equity Offering

On August 31, 2018, we entered into a sales agreement, or the Sales Agreement, with Jefferies, LLC, or Jefferies, as sales agent, pursuant to which we may offer and sell, from time to time, through Jefferies, up to $50.0 million in shares of our common stock, by any method permitted by law deemed to be an “at-the-market” offering as defined in Rule 415 promulgated under the Securities Act of 1933, as amended.

During April 2020, we issued and sold 1,000,000 shares of our common stock under the Sales Agreement.

The shares were sold at an average price of $24.24 per share for aggregate net proceeds to us of approximately $23.5 million, after deducting sales commissions and offering costs payable by us.

CARES Act Provider Relief Fund for Medicare Providers

Pursuant to the CARES Act, the U.S.

Department of Health & Human Services, or HHS, distributed an initial tranche of $30.0 billion in funds to healthcare providers that received Medicare fee-for-service, or FFS, reimbursements in 2019.

These payments to healthcare providers are not loans and will not be required to be repaid.

As a condition to receiving these payments, providers must agree to certain terms and conditions and submit sufficient documentation demonstrating that the funds are being used for healthcare-related expenses or lost revenue attributable to the COVID-19 pandemic.

Due to the recent enactment of legislation and absence of definitive guidance, there is a high degree of uncertainty around the CARES Act’s implementation and we continue to assess the impact on our business.

Furthermore, HHS has indicated that it, along with the Office of Inspector General, will be closely monitoring and auditing providers to ensure that recipients comply with the terms and conditions of relief programs and to prevent fraud and abuse.

All providers will be subject to civil and criminal penalties for any deliberate omissions, misrepresentations or falsifications of any information given to HHS.

Providers will be distributed a portion of the initial $30.0 billion of funds based on their share of total Medicare FFS reimbursements made by the U.S.

During April 2020, we received a payment of approximately $4.8 million, representing our portion of the initial tranche of funds, recorded in other income (expense), net on the consolidated statement of operations.

Underwritten Public Offering of Common Stock

On June 15, 2020, we sold 4,492,187 shares of common stock (which included shares sold pursuant to the underwriters’ full exercise of an overallotment option granted to the underwriters in connection with the offering) through an underwritten public offering at a price of $32.00 per share for aggregate net proceeds of $134.6 million.

Public Offering of Common Stock

On January 25, 2021, we sold 1,923,077 shares of our common stock through an underwritten public offering at a public offering price of $91.00 per share.

The net proceeds to us from the offering were approximately $164.0 million, after deducting underwriting discounts and commissions and estimated offering expenses.

On February 11, 2021, we sold 288,461 shares of our common stock pursuant to the underwriters' full exercise of an overallotment option granted to the underwriters in connection with the offering.

The net proceeds to us from the full exercise of the underwriters' overallotment option were approximately $24.7 million.

The aggregate net proceeds to us, including shares sold pursuant to the underwriters' full exercise of the overallotment option, were approximately $188.7 million, after deducting underwriting discounts and commissions and estimated offering expenses.

The following table summarizes our cash flows for the years ended December 31, 2020, 2019 and 2018:

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(in thousands)

Net cash (used in) provided by:

Net cash provided by (used in):

Operating activities $ 33,431 $ (2,769) $ (4,007)

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Cash Flows from Operating Activities

Net cash used in operating activities consists of our net loss, adjusted for certain non-cash items in the consolidated statements of operations and changes in operating assets and liabilities.

Net cash provided by (used in) operating activities consists of net loss, adjusted for certain noncash items in the consolidated statements of operations and changes in operating assets and liabilities.

Net cash provided by operating activities for the year ended December 31, 2020 was $33.4 million.

Our net loss of $18.7 million was our primary use of cash in operating activities and included $4.8 million of cash provided by the CARES Act Provider Relief Fund.

Our net loss also included the following noncash items:

$23.4 million in stock-based compensation expense, $7.0 million of depreciation and amortization expense, amortization of right-of-use assets of $2.5 million and a $1.5 million loss on the revaluation of common stock warrant liability to estimated fair value.

Net operating assets decreased by $3.1 million, offset by an increase in Refund liability - CMS advance payment of $20.5 million.

Net cash used in operating activities for the year ended December 31, 2019 was $2.8 million.

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Net operating assets and liabilities decreased by $10.4 million.

Net cash used in operating activities for the year ended December 31, 2018 was $4.0 million.

Our net loss of $46.8 million was our primary use of cash in operating activities and included the following noncash items:

$23.0 million loss on the change in fair value of warrants and derivative liabilities, $7.1 million stock-based compensation expense, $5.8 million loss on debt extinguishment expenses, $4.2 million of depreciation and amortization expense, $2.2 million amortization expense related to the JGB Debt discount, $1.2 million loss related to the revaluation of the contingent consideration, and $0.2 million on amortization of inventory fair market value adjustment.

Net operating assets and liabilities decreased by $0.9 million.

Cash Flows from Investing Activities

For the year ended December 31, 2019, net cash used in investing activities was $22.6 million and consisted of $18.2 million for the acquisition of OttrCare and XynManagement, $2.2 million related to additions of capital expenditures, $1.2 million related to the acquisition of intangible assets, and $1.0 million related to our investment in equity securities.

For the year ended December 31, 2018, net cash used in investing activities was $7.9 million and consisted of $5.2 million related to the acquisition of intangible assets per the Illumina License Agreement, $2.0 million for additions of capital expenditures and $0.7 million for the acquisition of the Allenex minority interest.

For the year ended December 31, 2020, net cash used in investing activities was $100.4 million and consisted of $90.0 million related to the purchase of marketable securities, $7.1 million related to additions of capital expenditures, net, $2.0 million related to payments for the license and commercialization agreement with Cibiltech and $1.3 million related to payments for acquired intangibles.

For the year ended December 31, 2019, net cash used in investing activities was $22.6 million and consisted of $18.2 million for the acquisition of Ottr, Inc.

and XynManagement, $2.2 million related to additions of capital expenditures, $1.2 million related to the acquisition of intangible assets, and $1.0 million related to our investment in equity securities.

Cash Flows from Financing Activities

Net cash provided by financing activities for the year ended December 31, 2020 was $163.1 million and primarily related to $134.7 million of proceeds from the issuance of shares of common stock in an underwritten offering, net of issuance costs, $23.5 million of proceeds from the issuance of shares of common stock in an “at-the-market” equity offering, net of issuance costs, proceeds from exercises of stock options of $8.0 million, proceeds from issuances of shares of common stock under our employee stock purchase plan of $1.4 million and proceeds from exercises of warrants of $0.4 million.

These proceeds were partially offset by taxes paid related to net share settlements of restricted stock units of $4.5 million.

Net cash used by financing activities for the year ended December 31, 2019 was $0.1 million and primarily related to $4.2 million of taxes paid related to the net share settlement of restricted stock units and other miscellaneous payments totaling $0.3 million, offset by $3.6 million cash proceeds from the exercise of stock options, and $0.8 million cash proceeds from issuance of common stock under employee stock purchase plan.

Net cash provided by financing activities for the year ended December 31, 2018 was $50.3 million and primarily related to $52.9 million net proceeds from the 2018 Public Offering, $14.3 million net proceeds from the Perceptive Credit Agreement, $11.0 million proceeds from the exercise of warrants, $1.5 million cash proceeds from the exercise of stock options, and $0.3 million proceeds from issuance of common stock under employee stock purchase plan.

Cash received was partially offset by $28.1 million of principal payments of the promissory notes issued to FastPartner AB and Mohammed Al Amoudi, Danske Bank Term Loan, the SSP Primers Loan, and the Perceptive Credit Agreement, $0.7 million of taxes paid related to the net share settlement of restricted stock units, $0.7 million repayment of the Danske Credit Facility, and $0.2 million of acquisition of Conexio.

For a discussion regarding our cash flows for the year ended December 31, 2017, please refer to the discussion under the heading “Results of Operations—Liquidity and Capital Resources” in Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, filed with the SEC on March 6, 2019.

For a discussion regarding our cash flows for the year ended December 31, 2018, please refer to the discussion under the heading “Results of Operations—Liquidity and Capital Resources” in Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, filed with the SEC on February 28, 2020.

Contractual Obligations

The following table summarizes our significant contractual obligations as of December 31, 2019 and the effect those

obligations are expected to have on our liquidity and cash flows in future periods (in thousands):

Contractual obligations Payments due by period

Total Less than 1 year 1-3 years 3-5 years More than 5 years

Finance lease obligations $ 280 $ 209 $ 71 $ — $ —

Operating lease obligations 6,024 3,416 2,608 — —

Total $ 6,304 $ 3,625 $ 2,679 $ — $ —

We lease operating and office facilities for various terms under long-term, non-cancelable operating lease agreements in South San Francisco, California;

Brisbane, California;

West Chester, Pennsylvania;

Fremantle, Australia;

and Stockholm, Sweden.

The facility leases expire at various dates through 2022.

In the normal course of business, it is expected that these leases will be renewed or replaced by leases on other properties.

On January 2, 2020, we executed the second amendment to the operating lease agreement for the building located at Brisbane, California.

The minimum lease payments in connection with this amendment total $23.9 million starting in March 2021 and up to February 2029.

As of December 31, 2019, we had net unrecognized tax benefits of $3.7 million, which include penalties and interest of $0.2 million.

Approximately $0.3 million has been recorded as a noncurrent liability.

At this time, we are unable to make a reasonably reliable estimate of the timing of payments in individual years in connection with these tax liabilities.

Therefore, such amounts are not included in the above contractual obligation table.

We have also committed to make potential future payments to third parties as part of our collaboration and licensing agreements.

Payments under these agreements generally become due and payable only upon achievement of specific project

Because the achievement of these milestones is generally neither probable nor reasonably estimable, such contingencies have not been recorded on our Consolidated Balance Sheets and have not been included in the table above.

For a discussion regarding our significant contractual obligations as of December 31, 2020 and the effect those obligations are expected to have on our liquidity and cash flows in future periods, please refer to Note 9 of the consolidated financial statements, and “Results of Operations—Liquidity and Capital Resources”, respectively, included elsewhere in this Annual Report on Form 10-K.

Off-Balance Sheet Arrangements

As of December 31, 2019, we had no off-balance sheet arrangements as defined under Regulation S-K 303(a)(4) of the Exchange Act, and the instructions thereto.

Not required.

Foreign Operations

The accompanying consolidated balance sheets contain certain recorded assets in foreign countries, namely Stockholm, Sweden, Vienna, Austria and Fremantle, Australia.

The accompanying consolidated balance sheets contain certain recorded assets in foreign countries, namely Sweden, Austria and Australia.

Although these countries are considered economically stable and we have experienced no notable burden from foreign exchange transactions, export duties or government regulations, unanticipated events in foreign countries could have a material adverse effect on our operations.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis