CareDx, Inc. Fair Value Disclosure

•

Level 1: Inputs that 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.

December 31, 2018

Fair Value Measured Using

(Level 1)

(Level 2)

(Level 3)

Total

Balance

Assets

Money market funds

$

59,471

$

—

$

—

$

59,471

Liabilities

Common stock warrant liability

—

—

$

10,003

$

10,003

(Level 3)

Contingent

Consideration

Liability

Common Stock Warrant Liability

JGB Debt derivative

Liability

Perceptive Derivative Liability

Total

Balance as of December 31, 2016

$

492

$

5,208

$

—

$

—

$

5,700

Issuance of JGB Debt and warrants

—

900

2,290

—

3,190

Exercise of warrants

—

(4,306

)

—

—

(4,306

)

Conversion of JGB Debt

—

—

(402

)

—

(402

)

Change in estimated fair value

1,180

16,910

12,712

—

30,802

Balance as of December 31, 2017

$

1,672

$

18,712

$

14,600

$

—

$

34,984

Exercise of warrants

—

(27,714

)

—

—

(27,714

)

Extinguishment of derivative liabilities

—

—

(12,066

)

(202

)

(12,268

)

Reclassification to equity (Note 2)

—

(6,550

)

—

—

(6,550

)

Issuance of Perceptive derivative liability

—

—

—

245

245

Issuance of shares of common stock

(2,689

)

—

—

—

(2,689

)

Change in estimated fair value

1,017

25,555

(2,534

)

(43

)

23,995

Balance as of December 31, 2018

$

—

$

10,003

$

—

$

—

$

10,003

•

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

•

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 was 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 227,848 shares on May 22, 2018.  There is no contingent consideration outstanding at December 31, 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 resulted 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 year ended December 31, 2017 and from January 1, 2018 to March 27, 2018, the Company recorded the changes in fair value of the derivative liability of $12.7 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 consolidated statements of operations.  The derivative liability was remeasured 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 Perceptive 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 were reviewed on a quarterly basis and adjusted, as needed. The derivative liability was remeasured and fully extinguished upon the repayment of the Perceptive Credit Agreement on November 20, 2018 (see Note 10).

December 31, 2018

December 31, 2017

Private Placement Common Stock Warrant Liability

Stock Price

$

25.14

$

7.34

Exercise Price

$

1.12

$

1.12

Remaining term (in years)

4.29

5.29

Volatility

79.00

%

66.00

%

Risk-free interest rate

2.46

%

2.21

%

Subsequent Financing Common Stock Warrant Liability

Stock Price

$

—

$

7.34

Exercise Price

$

—

$

4.00

Remaining term (in years)

—

5.46

Volatility

—

%

65.00

%

Risk-free interest rate

—

%

2.21

%

Placement Agent Common Stock Warrant Liability

Stock Price

$

25.14

$

7.34

Exercise Price

$

1.12

$

1.12

Remaining term (in years)

2.29

3.29

Volatility

86.00

%

82.00

%

Risk-free interest rate

2.44

%

1.99

%

JGB Common Stock Warrant Liability

Stock Price

$

—

$

7.34

Exercise Price

$

—

$

4.67

Remaining term (in years)

—

4.71

Volatility

—

%

30.00

%

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

%