CareDx(CDNA) - 2020 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Unaudited Condensed Consolidated Financial Statements This section presents CareDx, Inc's unaudited condensed consolidated financial statements for the period ended March 31, 2020, including balance sheets, statements of operations, comprehensive loss, stockholders' equity, and cash flows, along with detailed notes on accounting policies, business operations, and recent events Condensed Consolidated Balance Sheets The balance sheet shows a slight increase in total assets and liabilities, with a notable increase in operating leases right-of-use assets and a decrease in common stock warrant liability from December 31, 2019, to March 31, 2020 Key Balance Sheet Metrics | Metric (in thousands) | March 31, 2020 | December 31, 2019 | | :-------------------- | :------------- | :---------------- | | Total assets | $156,784 | $151,736 | | Total liabilities | $55,400 | $52,736 | | Total stockholders' equity | $101,384 | $99,000 | | Cash and cash equivalents | $32,191 | $38,223 | | Operating leases right-of-use assets | $17,004 | $4,730 | | Common stock warrant liability | $1,017 | $6,607 | Condensed Consolidated Statements of Operations CareDx reported a net loss of $5.823 million for the three months ended March 31, 2020, an improvement from the $7.531 million net loss in the prior year period, driven by significant revenue growth across all segments and a reduced expense from the change in fair value of common stock warrant liability Key Operational Metrics | Metric (in thousands) | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | | :-------------------- | :-------------------------------- | :-------------------------------- | | Total revenue | $38,380 | $25,982 | | Gross profit | $25,988 | $16,249 | | Loss from operations | $(5,751) | $(5,396) | | Net loss | $(5,823) | $(7,531) | | Basic net loss per share | $(0.14) | $(0.18) | | Diluted net loss per share | $(0.14) | $(0.18) | | Change in estimated fair value of common stock warrant liability | $(405) | $(3,009) | - Total revenue increased by 48% year-over-year, primarily driven by a significant increase in testing services revenue and digital and other revenue[10] Condensed Consolidated Statements of Comprehensive Loss The company reported a net comprehensive loss of $7.528 million for the three months ended March 31, 2020, an improvement from $8.255 million in the prior year, primarily due to a lower net loss, despite an increased foreign currency translation adjustment Comprehensive Loss Summary | Metric (in thousands) | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | | :-------------------- | :-------------------------------- | :-------------------------------- | | Net loss | $(5,823) | $(7,531) | | Foreign currency translation adjustments, net of tax | $(1,705) | $(724) | | Net comprehensive loss | $(7,528) | $(8,255) | Condensed Consolidated Statements of Stockholders' Equity Stockholders' equity increased to $101.384 million as of March 31, 2020, from $99.000 million at December 31, 2019, primarily due to additional paid-in capital from common stock issuances and employee share-based compensation, partially offset by the net loss and foreign currency translation adjustments Changes in Stockholders' Equity | Metric (in thousands) | December 31, 2019 | March 31, 2020 | | :-------------------- | :---------------- | :------------- | | Total Stockholders' Equity | $99,000 | $101,384 | | Additional Paid-In Capital | $437,976 | $447,888 | | Accumulated Deficit | $(333,813) | $(339,636) | | Common Shares Outstanding | 42,498,430 | 43,019,547 | - Issuance of common stock for cash upon exercise of warrants contributed $6.299 million to additional paid-in capital[16] - Employee share-based compensation expense added $4.200 million to additional paid-in capital[16] Condensed Consolidated Statements of Cash Flows Net cash used in operating activities decreased to $3.055 million for the three months ended March 31, 2020, from $5.867 million in the prior year, indicating improved operational cash management despite a net loss Cash Flow Summary | Metric (in thousands) | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | | :-------------------- | :-------------------------------- | :-------------------------------- | | Net cash used in operating activities | $(3,055) | $(5,867) | | Net cash used in investing activities | $(1,704) | $(543) | | Net cash used in financing activities | $(735) | $(688) | | Net decrease in cash, cash equivalents and restricted cash | $(6,046) | $(7,185) | | Cash, cash equivalents, and restricted cash at end of period | $32,433 | $57,623 | Notes to Unaudited Condensed Consolidated Financial Statements This section provides detailed disclosures on the company's business, significant accounting policies, financial instrument valuations, business combinations, intangible assets, commitments, and recent events, offering context to the condensed consolidated financial statements 1. ORGANIZATION AND DESCRIPTION OF BUSINESS CareDx, Inc is a precision medicine company focused on transplant patients, offering testing services, products, and digital solutions, and has been impacted by the COVID-19 outbreak - CareDx is a precision medicine company specializing in high-value healthcare solutions for transplant patients, with headquarters in South San Francisco, California, and operations in Brisbane, Omaha, Fremantle, and Stockholm[20] - Key testing services include AlloSure® Kidney (dd-cfDNA) and AlloMap® Heart (gene expression), both with established Medicare reimbursement[20][21] - The company offers products like TruSight HLA, AlloSeq suite (Tx, cfDNA, HCT), Olerup SSP®, Olerup SBT™, and QTYPE® for HLA typing and surveillance[23] - Digital solutions, acquired in 2019 (OttrCare and XynManagement), provide transplant patient tracking, quality tracking, and waitlist management software[20][25] - The COVID-19 outbreak led to a slowdown in testing services volumes in March and April 2020, but CareDx launched RemoTraC, a remote home-based blood draw solution, which has enrolled over 2,000 patients[26] - The company had an accumulated deficit of $339.6 million and cash and cash equivalents of $32.2 million as of March 31, 2020, but believes existing cash and expected revenues will be sufficient for the next 12 months[27] 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES This note outlines the company's accounting policies, including U.S. GAAP conformity, credit risk concentrations, and the adoption of new accounting standards, none of which had a material impact on the financial statements - The financial statements are prepared in conformity with U.S. GAAP for interim reporting, with certain notes condensed or omitted[30] - Approximately 53% of total revenue for the three months ended March 31, 2020, was derived from Medicare, and 20% of accounts receivable was due from Medicare[33] - The company adopted ASC Topic 842 (Leases) on January 1, 2019, recognizing ROU assets and lease liabilities on the balance sheet[34] - Recent accounting pronouncements adopted on January 1, 2020, including ASU 2018-15 (Cloud Computing), ASU 2018-13 (Fair Value Measurement), and ASU 2016-13 (CECL model), did not have a material or significant impact on the condensed consolidated financial statements[36] 3. NET LOSS PER SHARE Basic and diluted net loss per share were both $(0.14) for the three months ended March 31, 2020, an improvement from $(0.18) in the prior year, with potentially dilutive securities excluded as their effect would have been antidilutive Net Loss Per Share Calculation | Metric | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | | :----- | :-------------------------------- | :-------------------------------- | | Net loss used to compute basic and diluted net loss per share (in thousands) | $(5,823) | $(7,531) | | Weighted-average shares used to compute basic and diluted net loss per share | 42,823,427 | 41,611,399 | | Net loss per share: Basic and diluted | $(0.14) | $(0.18) | - Potentially dilutive securities, including stock options, common stock warrants, and restricted stock units, totaling 4,396,880 for 2020 and 4,101,523 for 2019, were excluded from diluted EPS calculation due to their antidilutive effect[38][40] 4. FAIR VALUE MEASUREMENTS The company measures financial assets and liabilities at fair value using a three-tiered hierarchy, with money market funds classified as Level 1 and the common stock warrant liability as Level 3 - Money market funds are classified as Level 1, valued at $22.761 million as of March 31, 2020, and $29.177 million as of December 31, 2019[42] - The common stock warrant liability is classified as Level 3, with its fair value decreasing from $6.607 million at December 31, 2019, to $1.017 million at March 31, 2020[42][44] - The fair value of the common stock warrant liability is estimated using a Monte Carlo Simulation Model, considering factors like stock price, expected life, volatility, and risk-free rates[44] 5. BUSINESS COMBINATIONS CareDx completed two acquisitions in 2019, OttrCare for $16.1 million and XynManagement for $2.0 million, expanding the company's digital solutions for transplant patient management - On May 7, 2019, CareDx acquired OttrCare for $16.1 million, a leading provider of organ transplant patient tracking software[46] - The OttrCare acquisition resulted in $10.2 million in goodwill, primarily from synergies with transplant center EMR systems and acquired workforce know-how[46] OttrCare Acquired Intangible Assets | OttrCare Acquired Intangible Assets (in thousands) | Estimated Fair Value | Estimated Useful Lives (Years) | | :--------------------------------- | :------------------- | :----------------------------- | | Customer relationships | $4,200 | 15 | | Developed technology | $2,300 | 10 | | Trademark | $100 | 2 | | Total | $6,600 | | - On August 26, 2019, CareDx acquired XynManagement for $2.0 million cash, recognizing $1.7 million in goodwill and $2.1 million in intangible assets, expanding its digital solutions with XynQAPI and Waitlist Management[52] 6. GOODWILL AND INTANGIBLE ASSETS Goodwill remained stable at $23.857 million as of March 31, 2020, while total net intangible assets decreased slightly due to amortization and foreign currency translation adjustments Goodwill and Intangible Asset Balances | Metric (in thousands) | March 31, 2020 | December 31, 2019 | | :-------------------- | :------------- | :---------------- | | Goodwill | $23,857 | $23,857 | | Total intangible assets, net | $43,112 | $45,541 | - Amortization expense for intangible assets was $1.1 million for the three months ended March 31, 2020, compared to $0.6 million in the prior year, allocated to cost of revenue and sales and marketing[57] Estimated Future Amortization Expense | Estimated Future Amortization Expense (in thousands) | | :----------------------------------- | | Remainder of 2020: $3,389 | | 2021: $4,290 | | 2022: $4,273 | | 2023: $4,273 | | 2024: $4,273 | | Thereafter: $20,511 | | Total: $41,009 | 7. BALANCE SHEET COMPONENTS Inventory increased to $6.947 million at March 31, 2020, driven by increases across all categories, while accrued and other liabilities decreased mainly due to a reduction in short-term lease liability Inventory Breakdown | Inventory (in thousands) | March 31, 2020 | December 31, 2019 | | :----------------------- | :------------- | :---------------- | | Finished goods | $1,347 | $1,236 | | Work in progress | $1,685 | $1,189 | | Raw materials | $3,915 | $3,589 | | Total inventory | $6,947 | $6,014 | Accrued and Other Liabilities Breakdown | Accrued and Other Liabilities (in thousands) | March 31, 2020 | December 31, 2019 | | :------------------------------------------- | :------------- | :---------------- | | Deferred revenue | $3,482 | $3,686 | | Clinical studies | $4,084 | $3,068 | | Short-term lease liability | $1,570 | $3,017 | | Total accrued and other liabilities | $15,576 | $16,838 | 8. COMMITMENTS AND CONTINGENCIES CareDx has various lease and royalty commitments and is involved in ongoing litigation with Natera regarding false advertising and patent infringement, which it intends to vigorously defend - The company executed a second amendment to its Brisbane, California operating lease, extending it for eight years and two months starting January 1, 2021[62] Lease Cost Summary | Lease Cost (in thousands) | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | | :------------------------ | :-------------------------------- | :-------------------------------- | | Operating lease cost | $1,119 | $435 | | Finance lease cost | $53 | $56 | | Total lease cost | $1,172 | $491 | Future Minimum Lease Payments | Future Minimum Lease Payments (in thousands) | Finance Leases | Operating Leases | | :------------------------------------------- | :------------- | :--------------- | | Remainder of 2020 | $157 | $2,514 | | 2021 | $71 | $3,511 | | 2022 | — | $3,963 | | 2023 | — | $2,811 | | 2024 | — | $2,909 | | Thereafter | — | $13,267 | | Total future minimum lease payments | $228 | $28,975 | - CareDx has royalty commitments from license agreements with Stanford (dd-cfDNA patents), Illumina (NGS product lines), and Cibiltech (KidneyCare iBox revenue share)[65][66][67] - The company is involved in litigation with Natera, including a counterclaim for false advertising and a patent infringement suit against AlloSure, which CareDx intends to vigorously defend[69][71] 9. 401(K) PLAN CareDx sponsors a 401(k) defined contribution plan for U.S. employees, incurring $0.3 million in contributions for the three months ended March 31, 2020 - The company's contributions to the 401(k) plan were $0.3 million for Q1 2020, up from $0.2 million for Q1 2019[72] 10. WARRANTS Common stock warrants classified as liabilities are remeasured at fair value each period, with approximately 306,000 warrants exercised during Q1 2020 - Warrants classified as liabilities are remeasured at fair value, with changes recorded in the consolidated statements of operations[73] - In Q1 2020, 272,000 warrants were exercised for $0.3 million cash, and 34,000 warrants were exercised on a cashless basis[73] Outstanding Warrants | Outstanding Warrants (as of March 31, 2020) | | :------------------------------------------ | | Original issue date: April 2016 | | Classification: Liability | | Original Term: 7 years | | Exercise Price: $1.12 | | Number of Shares Underlying Warrants: 49,006 | 11. STOCK INCENTIVE PLANS The company's stock incentive plans include stock options, restricted stock units (RSUs), and an Employee Stock Purchase Plan (ESPP), with total stock-based compensation expense of $4.259 million for Q1 2020 Stock Incentive Plan Activity | Stock Incentive Plan Activity (as of March 31, 2020) | | :--------------------------------------------------- | | Shares Available for Grant: 1,737,579 | | Stock Options Outstanding: 2,845,862 | | Number of RSU Shares: 1,502,012 | - As of March 31, 2020, there were $26.2 million of unrecognized compensation costs related to RSUs, expected to be recognized over 2.77 years, and $20.1 million for stock options, expected over 3.04 years[75] Stock-based Compensation Expense | Stock-based Compensation Expense (in thousands) | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | | :---------------------------------------------- | :-------------------------------- | :-------------------------------- | | Cost of revenue | $365 | $776 | | Research and development | $810 | $832 | | Sales and marketing | $971 | $727 | | General and administrative | $2,113 | $3,718 | | Total | $4,259 | $6,053 | 12. INCOME TAXES CareDx recorded an income tax benefit of $0.3 million for Q1 2020 and maintains a full valuation allowance against its U.S. and Australian net deferred tax assets due to a history of losses - Income tax benefit was $0.3 million for Q1 2020, compared to $0.6 million for Q1 2019[81] - The benefit is mainly due to deferred tax assets from foreign losses and acquired deferred tax liabilities[81] - A full valuation allowance is maintained against U.S. and Australia net deferred tax assets due to the company's history of losses[81][83] 13. SEGMENT REPORTING CareDx operates as a single reportable segment, with the majority of its $38.380 million in Q1 2020 revenue and long-lived assets located in the United States - CareDx operates in a single reportable segment, with the Chief Executive Officer identified as the Chief Operating Decision Maker (CODM)[84] Revenue by Geographic Region | Revenue by Geographic Region (in thousands) | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | | :------------------------------------------ | :-------------------------------- | :-------------------------------- | | Total United States | $35,573 | $23,240 | | Total Europe | $2,032 | $1,952 | | Total Rest of World | $775 | $790 | | Total | $38,380 | $25,982 | Long-lived Assets by Geographic Region | Long-lived Assets (in thousands) | March 31, 2020 | December 31, 2019 | | :------------------------------- | :------------- | :---------------- | | United States | $4,583 | $3,346 | | Europe | $406 | $509 | | Rest of World | $512 | $575 | | Total | $5,501 | $4,430 | 14. SUBSEQUENT EVENTS Subsequent to March 31, 2020, CareDx received significant liquidity injections from CMS advance payments, an at-the-market equity offering, and the Provider Relief Fund - In April 2020, CareDx received an advance payment of approximately $20.5 million from CMS under the CARES Act's Accelerated and Advance Payment Program[87] - During April 2020, the company issued and sold 1,000,000 shares of common stock through an at-the-market offering, generating approximately $23.5 million in net proceeds[88] - In April 2020, CareDx received approximately $4.8 million from the Provider Relief Fund for Medicare providers, a non-repayable payment under the CARES Act[89] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on CareDx's financial performance, condition, and future outlook, highlighting revenue growth, operational expenses, cash flow dynamics, liquidity, and key business factors Overview and Recent Highlights CareDx achieved $38.4 million in total revenue (48% YoY increase) and its seventh consecutive quarter of positive adjusted EBITDA for Q1 2020, while also launching a remote blood draw service in response to COVID-19 - Total revenue for Q1 2020 reached $38.4 million, marking a 48% year-over-year increase[96] - The company provided over 15,000 AlloSure Kidney and AlloMap Heart patient results[96] - CareDx recorded its seventh straight quarter of positive adjusted EBITDA[96] - Successfully introduced RemoTraC, a service for at-home blood draws for transplant patients, in response to COVID-19[96] Testing Services CareDx offers Medicare-covered surveillance tests for heart and kidney transplant recipients and is developing combined solutions and expanding into lung transplantation, supported by ongoing clinical studies - AlloMap Heart, a gene expression test, has Medicare coverage ($3,240 reimbursement) and positive private payer decisions, supported by landmark clinical trials like CARGO and IMAGE[99] - AlloSure Kidney, a dd-cfDNA test, launched in October 2017, has Medicare coverage ($2,841 reimbursement) and is supported by increasing evidence for assessing allograft injury[100] - HeartCare combines AlloMap Heart and AlloSure Heart, with AlloSure Heart receiving a positive draft Local Coverage Determination for Medicare in August 2019[103] - KidneyCare integrates AlloSure Kidney, AlloMap Kidney, and KidneyCare iBox (AI technology), with the OKRA study enrolling 4,000 patients for surveillance[104] - AlloSure Lung is available through a compassionate use program for lung transplant patients, with further studies ongoing[105] Products CareDx develops and sells HLA typing and NGS-based surveillance solutions for transplant success, with AlloSeq cfDNA and AlloSeq Tx commercially launched in September 2019 - Product offerings include QTYPE, Olerup SSP, and Olerup SBT for HLA typing[106] - Through a license agreement with Illumina, CareDx is the exclusive worldwide distributor of TruSight HLA and develops other NGS products like AlloSeq Tx, AlloSeq cfDNA, and AlloSeq HCT[106] - AlloSeq cfDNA and AlloSeq Tx were commercially launched in September 2019, with AlloSeq cfDNA receiving CE mark approval in January 2020[106] Digital CareDx expanded its digital solutions in 2019 through the acquisitions of OttrCare and XynManagement, providing comprehensive transplant patient management and quality tracking software - Acquired Ottr Complete Transplant Management (OttrCare) in May 2019, providing transplant patient tracking software with EMR integration[107] - Acquired XynManagement, Inc in August 2019, offering XynQAPI software for transplant quality tracking and SRTR reporting, and Waitlist Management services[109] Financial Operations Overview CareDx generates revenue from testing services, product sales, and digital solutions, with testing services being the primary revenue driver dependent on test volume and reimbursement policies - Revenue is derived from testing services (82-83% of total revenue), product sales (12-17%), and digital and other revenue (0-6%)[111][112][113] - Testing services revenue depends on test volume, third-party payer coverage, collection ability, and commercialization of new offerings[111] - Product revenue is recognized upon delivery, with no further performance obligations[112] - Digital and other revenue primarily comes from Ottr software and XynQAPI licenses and services[113] Critical Accounting Policies and Significant Judgments and Estimates Management's financial analysis relies on estimates for revenue recognition, business combinations, and asset valuations, with no material changes in these estimates during Q1 2020 - Critical accounting policies include revenue recognition, business combinations, acquired intangible assets, impairment of assets, and common stock warrant liability[116] - There were no material changes in critical accounting estimates during Q1 2020, except for the determination of estimated present value of lease payments using the incremental borrowing rate[117] Results of Operations For Q1 2020, total revenue increased by 48% to $38.380 million, driven by strong growth in testing services and digital revenue, while operating expenses also increased, leading to a slight increase in loss from operations Q1 2020 vs Q1 2019 Operational Results | Metric (in thousands) | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | Change | | :-------------------- | :-------------------------------- | :-------------------------------- | :----- | | Total revenue | $38,380 | $25,982 | $12,398 | | Testing services revenue | $31,442 | $21,518 | $9,924 | | Product revenue | $4,695 | $4,433 | $262 | | Digital and other revenue | $2,243 | $31 | $2,212 | | Gross profit | $25,988 | $16,249 | $9,739 | | Loss from operations | $(5,751) | $(5,396) | $(355) | - Testing services revenue increased by $9.9 million (46%) due to over 5,000 additional test results[122] - Digital and other revenue increased by $2.2 million, primarily due to the acquisitions of OttrCare and XynManagement in 2019[124] - Research and development expenses increased by $4.4 million (78%) due to increased headcount, clinical studies, and consulting fees[126] - Sales and marketing expenses increased by $4.8 million (69%) due to higher headcount, tradeshows, marketing, and medical programs[127] - The change in estimated fair value of common stock warrant liability decreased from a $3.0 million expense in Q1 2019 to a $0.4 million expense in Q1 2020, a net change of $2.6 million[129] Cash Flows Net cash used in operating activities significantly decreased to $3.1 million in Q1 2020 from $5.9 million in Q1 2019, primarily due to improved net loss and noncash adjustments Cash Flow Summary | Metric (in thousands) | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | | :-------------------- | :-------------------------------- | :-------------------------------- | | Net cash used in operating activities | $(3,055) | $(5,867) | | Net cash used in investing activities | $(1,704) | $(543) | | Net cash used in financing activities | $(735) | $(688) | | Net decrease in cash, cash equivalents and restricted cash | $(6,046) | $(7,185) | - Operating activities cash usage decreased due to a lower net loss and noncash items like stock-based compensation ($4.3 million) and depreciation/amortization ($1.6 million)[132] - Financing activities included $1.5 million in common stock repurchases, partially offset by proceeds from ESPP, warrant exercises, and stock option exercises[134] Liquidity and Capital Resources CareDx had $32.2 million in cash and cash equivalents as of March 31, 2020, and significantly boosted its liquidity post-quarter with nearly $50 million from CMS payments, an equity offering, and the Provider Relief Fund - As of March 31, 2020, CareDx had $32.2 million in cash and cash equivalents and an accumulated deficit of $339.6 million[135] - Subsequent to March 31, 2020, the company received approximately $20.5 million from CMS advance payments, $23.5 million net proceeds from an at-the-market equity offering, and $4.8 million from the Provider Relief Fund[135][137][138][139] - The COVID-19 pandemic may affect the company's financial condition and liquidity, but these subsequent events have increased cash and cash equivalents[135] Factors Affecting Our Performance CareDx's performance is influenced by the COVID-19 pandemic's impact, test volumes, reimbursement policies, product and digital sales growth, and R&D investments - The COVID-19 outbreak poses risks to supply chains, clinical trials (delays in site initiation and patient enrollment), and the ability to recruit/retain staff[140] - Performance is tied to the number of AlloSure Kidney and AlloMap Heart tests received and reported[141] - Reimbursement for AlloMap Heart (Medicare rate $3,240) and AlloSure Kidney (Medicare rate $2,841) is crucial, with ongoing efforts to secure broader private payer coverage[142][145] - AlloSure Heart received a positive draft Local Coverage Determination for Medicare coverage when used with AlloMap Heart[146] - Continued growth of product sales (HLA typing, NGS products) and digital sales (Ottr, XynQAPI) are important performance factors[147][148] - Investment in research and development for new transplant diagnostic solutions and the timing of R&D expenses are significant factors[149][150] Contractual Obligations As of March 31, 2020, there have been no material changes to CareDx's outstanding contractual obligations from those disclosed in its 2019 Annual Report on Form 10-K - No material changes to contractual obligations as of March 31, 2020, compared to December 31, 2019[152] Off-Balance Sheet Arrangements CareDx had no off-balance sheet arrangements as of March 31, 2020 - The company had no off-balance sheet arrangements as of March 31, 2020[153] Foreign Operations CareDx has operations in Sweden, Austria, and Australia, with foreign currency exchange risk impacting product revenue and operating expenses - Operations in Sweden, Austria, and Australia expose the company to foreign currency risks[154][156] - A hypothetical 10% unfavorable change in foreign currency exchange rates would negatively impact Q1 2020 financial results by less than $0.1 million and product revenue by $0.3 million[156] Item 3. Quantitative and Qualitative Disclosures About Market Risk CareDx is exposed to market risks primarily from interest rate fluctuations and foreign currency exchange rates, though the company currently has no formal hedging program - Interest rate risk is minimal; a hypothetical 50 basis point change would impact financial statements by less than $0.2 million[155] - Foreign currency exchange risk exists due to operations in Sweden, Austria, and Australia, affecting product revenue and operating expenses[156] - A 10% unfavorable change in foreign currency exchange rates would negatively impact Q1 2020 financial results by less than $0.1 million and product revenue by $0.3 million[156] Item 4. Controls and Procedures Management concluded that CareDx's disclosure controls and procedures were effective as of March 31, 2020, with no material changes in internal control over financial reporting during the quarter - Disclosure controls and procedures were evaluated as effective at the reasonable assurance level as of March 31, 2020[157] - No material changes in internal control over financial reporting occurred during the three months ended March 31, 2020[160] PART II. OTHER INFORMATION Item 1. Legal Proceedings CareDx is involved in ongoing litigation with Natera, including a counterclaim by Natera alleging false advertising and patent infringement suits against AlloSure, which CareDx intends to vigorously defend - Natera filed a counterclaim against CareDx on February 18, 2020, alleging false and misleading claims about AlloSure's performance capabilities[162] - Natera also filed patent infringement suits against CareDx on January 13, 2020, and March 25, 2020, alleging AlloSure infringes U.S. Patents 10,526,658 and 10,597,724[162] - CareDx intends to vigorously defend these matters and believes it has good and substantial defenses[162] Item 1A. Risk Factors This section updates risk factors, primarily focusing on the adverse effects of the COVID-19 pandemic on business operations, supply chain, clinical trials, and financial condition - The COVID-19 outbreak is a significant risk, potentially impacting supply chains, clinical trials, and overall financial condition and liquidity[164] - Failure to meet projected development goals or delays in commercialization of diagnostic solutions could harm the business and stock price[167] - The inoperability of the Brisbane, California laboratory would severely impact the ability to perform testing services[168] - Loss of key senior management or inability to attract/retain skilled personnel could adversely affect business operations and strategy[172] - The company's operating results and stock price are subject to significant fluctuations due to various factors, including demand, reimbursement decisions, and public health emergencies like COVID-19[173][177] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds CareDx repurchased 67,477 shares of common stock during Q1 2020 to satisfy tax withholding obligations upon the vesting of restricted stock unit awards Issuer Purchases of Equity Securities | Period (2020) | Total Number of Shares Purchased | Average Price Paid per Share | | :------------ | :------------------------------- | :--------------------------- | | January 1 - January 31 | 20,047 | $2.95 | | February 1 - February 29 | 47,328 | $6.44 | | March 1 - March 31 | 102 | $9.88 | | Total | 67,477 | — | - Shares were withheld from employees for the payment of taxes related to restricted stock unit awards[179] Item 3. Defaults Upon Senior Securities CareDx reported no defaults upon senior securities for the period - No defaults upon senior securities[180] Item 4. Mine Safety Disclosures This item is not applicable to CareDx - Not applicable[181] Item 5. Other Information CareDx reported no other information for the period - None[182] Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including organizational documents, equity incentive plans, lease agreements, and required certifications - Includes Amended and Restated Certificate of Incorporation, Bylaws, Common Stock Certificate, Equity Incentive Plans (2014, 2016, 2019), Form of Warrant, and Employee Stock Purchase Plan[184] - Lists recent lease amendments and consent to sub-sublease agreements[184] - Includes certifications by the Chief Executive Officer and Chief Financial Officer under Sections 302 and 906 of the Sarbanes-Oxley Act of 2002[184] - XBRL Instance Document and Taxonomy Extension Documents are also filed[184]