Item 9A. Controls and Procedures
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures, as such terms are defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Exchange Act, as of December 31, 2022. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2022, in light of the material weaknesses identified in our internal control over financial reporting, our disclosure controls and procedures were not effective at the reasonable assurance level and are not effective to provide reasonable assurance that information required to be disclosed in the reports we file and submit under the Exchange Act, is (i) recorded, processed, summarized and reported as and when required and (ii) accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely discussion regarding required disclosure.
Management’s Annual Report on Internal Control over Financial Reporting
Management, including our Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control system was designed to provide reasonable assurance regarding the preparation and fair presentation of published consolidated financial statements in accordance with accounting principles generally accepted in the United States.
Management assessed the effectiveness of the Company's internal control over financial reporting as of December 31, 2022. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission, or COSO, in the 2013 Internal Control-Integrated Framework. Based on our assessment, management has concluded that our system of internal control over financial reporting was not effective due to the material weaknesses described below. However, after giving full consideration to these material weaknesses, and the additional analyses and other procedures we performed to ensure that our consolidated financial statements included in this Annual Report on Form 10-K were prepared in accordance with U.S. generally accepted accounting principles, or GAAP, our management has concluded that our consolidated financial statements present fairly, in all material respects, our financial position, results of operations and cash flows for the periods disclosed in conformity with GAAP.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. As of December 31, 2022, the following material weaknesses have been identified:
General Information Technology Controls. The Company did not design and maintain effective general information technology controls (“GITCs”), for information systems and applications that are relevant to the preparation of the consolidated financial statements. Specifically, the Company did not design and maintain: (i) sufficient user access controls to ensure appropriate segregation of duties, logical access controls to prevent unauthorized user access and adequately restrict user and privileged access to financial applications, programs and data to appropriate Company personnel; (ii) program change management controls to ensure that information technology (“IT”), program and data changes affecting financial IT applications and underlying accounting records are identified, tested, authorized and implemented appropriately with appropriate segregation of duties; and (iii) Computer and Network operations controls to ensure that batch and interface jobs are monitored and privileges are appropriately granted, authorized and monitored. As a result, business process controls (automated and manual) that are dependent on the ineffective GITCs, or that rely on data produced from systems impacted by the ineffective GITCs, are also deemed ineffective, which affects substantially all financial statement account balances and disclosures.
Purchase Order Approval Workflow. The Company did not design and maintain effective process-level control activities related to procurement to ensure appropriate approval of purchase orders, which could affect the amount and classification of costs capitalized or expensed.
COSO Framework. The Company did not fully maintain components of the COSO framework, including elements of the control environment, information and communication, and control activities and monitoring activities components, relating to: (i) sufficiency of competent personnel to perform internal control activities and support the achievement of the Company’s
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internal control objectives; (ii) enforcing accountability of personnel for the performance of their internal control responsibilities across the organization in the pursuit of objectives; (iii) designing and maintaining general control activities over technology to support the achievement of the Company’s internal control objectives; (iv) performing control activities in accordance with established policies in a timely manner; and (v) performing sufficient reviews of information to assess its relevance, accuracy, and completeness in supporting the internal control components. As such, the Company’s management concluded that the Company did not have an adequate process in place to complete its assessment of the design and operating effectiveness of internal control over financial reporting in a timely manner.
Management’s Plan to Remediate the Material Weaknesses
Our management has been engaged in developing and implementing remediation plans to address the material weaknesses described above. These remediation efforts are ongoing and are expected to include the following:
• Enhancing the design and control procedures of the GITCs to ensure that the control activities related to GITCs are functioning appropriately;
• Improving the control environment in relation to personnel training and accountability of Sarbanes-Oxley Act of 2002 control activities;
• Hiring additional personnel in the IT and Finance and Accounting departments with an appropriate level of knowledge and experience to effectively execute our processes and procedures; and
• Expanding controls and/or applying appropriate procedures to address the design and operation of internal controls related to the procure-to-pay process.
We are committed to continuing to implement a strong system of controls and believe that our ongoing remediation efforts particularly in the improvement of our control environment will result in significant improvements to our system of controls and that we believe will remediate the material weaknesses. However, material weaknesses are not considered remediated until the new controls have been operational for a period of time, are tested, and management concludes that these controls are operating effectively. This remediation process will require resources and time to implement. We will continue to monitor the effectiveness of these remediation measures, and we will make any changes to the design of our remediation plans and take such other actions that we deem appropriate given the circumstances.
Attestation Report of the Independent Registered Public Accounting Firm
The effectiveness of our internal control over financial reporting as of December 31, 2022 has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, which has expressed an adverse opinion, as stated in their report, which appears herein.
Changes in Internal Control over Financial Reporting
Other than the changes associated with the material weaknesses and remediation actions noted above, there have been no changes in our internal control over financial reporting during the quarter ended December 31, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not applicable.
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PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this item is incorporated by reference from the information contained in our Definitive Proxy Statement to be filed with the SEC within 120 days after the end of the fiscal year ended December 31, 2022 in connection with the Annual Meeting of Stockholders to be held in 2023, or the 2023 Proxy Statement. To the extent that we do not file the 2023 Proxy Statement by such date, we will file an amendment to this Annual Report on Form 10-K that includes the information required by this Item 10.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from the information contained in the 2023 Proxy Statement. The 2023 Proxy Statement will be filed with the SEC within 120 days after the end of the fiscal year ended December 31, 2022. To the extent that we do not file the 2023 Proxy Statement by such date, we will file an amendment to this Annual Report on Form 10-K that includes the information required by this Item 11.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this item is incorporated by reference to from the information contained in the 2023 Proxy Statement. The 2023 Proxy Statement will be filed with the SEC within 120 days after the end of the fiscal year ended December 31, 2022. To the extent that we do not file our 2023 Proxy Statement by such date, we will file an amendment to this Annual Report on Form 10-K that includes the information required by this Item 12.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
The information required by this item is incorporated by reference to from the information contained in our 2023 Proxy Statement. The 2023 Proxy Statement will be filed with the SEC within 120 days after the end of the fiscal year ended December 31, 2022. To the extent that we do not file the 2023 Proxy Statement by such date, we will file an amendment to this Annual Report on Form 10-K that includes the information required by this Item 13.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item is incorporated by reference from the information contained in the 2023 Proxy Statement. The 2023 Proxy Statement will be filed with the SEC within 120 days after the end of the fiscal year ended December 31, 2022. To the extent that we do not file the 2023 Proxy Statement by such date, we will file an amendment to this Annual Report on Form 10-K that includes the information required by this Item 14.
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PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1) Financial Statements:
Our Financial Statements are listed in the “Index to Consolidated Financial Statements” of CareDx, Inc. Part II, Item 8 of this Annual Report on Form 10-K.
(a)(2) Financial Statement Schedules
All financial statement schedules have been omitted because they are not required, not applicable, or the required information is included in the consolidated financial statements or notes thereto included in this Annual Report on Form 10-K.
(a)(3) Exhibits
The following exhibits are incorporated by reference or are filed with this report, in each case as indicated therein (numbered in accordance with Item 601 of Regulation S-K).
Exhibit
Number
Incorporated by Reference
Description Form File No. Exhibit Filing Date
3.1 Amended and Restated Certificate of Incorporation of the Registrant.
10-Q 001-36536 3.1 8/28/2014
3.2 Certificate of Amendment to the Amended and Restated Certificate of Incorporation of CareDx, Inc., filed June 17, 2021.
8-K 001-36536 3.1 6/21/2021
3.3 Amended and Restated Bylaws of the Registrant.
8-K 001-36536 3.2 6/21/2021
4.1 Form of Registrant’s common stock certificate.
10-K 001-36536 4.1 3/31/2015
4.2# 2014 Equity Incentive Plan, as amended.
10-Q 001-36536 4.2 7/29/2021
4.3# Form of Option Agreement under the 2014 Equity Incentive Plan for New Options.
SC TO-I 005-88252 99(d)(3) 10/12/2017
4.4# 2014 Employee Stock Purchase Plan and forms of agreements thereunder.
S-8 333-197493 4.5 7/18/2014
4.5# 2016 Inducement Equity Incentive Plan.
10-Q 333-211538 4.5 7/29/2021
4.6 Form of Warrant.
8-K 001-36536 10.3 4/14/2016
4.7# 2019 Inducement Equity Incentive Plan.
10-Q 001-36536 4.7 7/29/2021
4.8* Description of Securities of CareDx, Inc.
10.1# Offer Letter, dated November 13, 2018, between the Registrant and Reginald Seeto, MBBS.
8-K 001-36536 10.1 11/26/2018
10.2# Form of Change of Control and Severance Agreement between the Registrant and each of its executive officers.
S-1 333-196494 10.11 6/3/2014
10.3# Amendment to Change of Control and Severance Agreement, dated October 29, 2020, by and between the Registrant and Reginald Seeto, MBBS.
8-K 001-36536 10.1 10/29/2020
10.4# Promotion Letter, dated May 21, 2022, by and between the Registrant and Abhishek Jain.
10-Q 001-36536 10.3 8/14/2022
10.5 Consulting Agreement, dated May 20, 2022, by and between the Registrant and Ankur Dhingra.
10-Q 001-36536 10.2 8/14/2022
10.6# Promotion Letter, dated July 12, 2021, between the Registrant and Alex Johnson.
8-K 001-36536 10.1 7/20/2021
10.7# Form of Indemnification Agreement between the Registrant and each of its directors and executive officers.
S-1 333-196494 10.1 6/3/2014
10.8# Executive Incentive Compensation Plan.
10-K 001-36536 10.19 3/31/2015
10.9# Outside Director Compensation Policy.
10-K 001-36536 10.10 2/28/2020
10.10 Lease, dated April 27, 2006, as amended on November 10, 2010, by and between the Registrant and BMR-Bayshore Boulevard LLC, for office and laboratory space located at 3260 Bayshore Boulevard, Brisbane, California 94005.
S-1 333-196494 10.12 6/3/2014
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Exhibit
Number
Incorporated by Reference
Description Form File No. Exhibit Filing Date
10.11+ Second Amendment to Lease, dated January 2, 2020, by and between the Registrant and BMR-Bayshore Boulevard LP (formerly known as BMR-Bayshore Boulevard LLC), for office and laboratory space located at 3260 Bayshore Boulevard, Brisbane, California 94005.
10-Q 001-36536 10.1 4/30/2020
10.12+ Third Amendment to Lease, dated June 27, 2022, by and between the Registrant and BMR-Bayshore Boulevard LP.
10-Q 001-36536 10.2 11/3/2022
10.13+ Lease, dated June 14, 2022, by and between the Registrant and HCP Life Science REIT, Inc.
10-Q 001-36536 10.4 8/14/2022
10.14+ Lease, dated February 28, 2022, by and between the Registrant and One Miracle Place, LLC.
10-Q 001-36536 10.1 11/3/2022
10.15 Amended and Restated Exclusive Agreement, dated January 27, 2014, by and between the Board of Trustees of the Leland Stanford Junior University and ImmuMetrix, Inc.
10-Q 001-36536 10.1 8/14/2022
10.16† License and Commercialization Agreement, dated May 4, 2018, between the Registrant and Illumina, Inc.
10-Q/A 001-36536 10.3 10/9/2018
10.17 Sales Agreement, dated April 14, 2022, by and between the Registrant and Jefferies LLC.
8-K 001-36536 1.1 4/15/2022
21.1* Subsidiaries of the Registrant.
23.1* Consent of Deloitte & Touche LLP, Independent Registered Public Accounting Firm.
24.1* Power of Attorney (see page 1 3 3 of this Annual Report on Form 10-K).
31.1* Principal Executive Officer’s Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2* Principal Financial Officer’s Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1** Certification Pursuant to 18 U.S.C. § 1350 (Section 906 of Sarbanes-Oxley Act of 2002).
101.INS* Inline XBRL Instance Document
101.SCH* Inline XBRL Taxonomy Extension Schema
101.CAL* Inline XBRL Taxonomy Extension Calculation Linkbase
101.DEF* Inline XBRL Taxonomy Extension Definition Linkbase
101.LAB* Inline XBRL Taxonomy Extension Label Linkbase
101.PRE* Inline XBRL Taxonomy Extension Presentation Linkbase
104 Cover Page Interactive Data File, formatted in Inline XBRL
_____________________
† Confidential treatment has been granted with respect to certain portions of this Exhibit. Omitted portions have been filed separately with the SEC.
‡ Certain identified information has been omitted pursuant to Item 601(b)(10) of Regulation S-K because such information is both (i) not material and (ii) information that the Registrant treats as private or confidential. The Registrant hereby undertakes to furnish supplemental copies of the unredacted exhibit upon request by the SEC.
+ Non-material schedules and exhibits have been omitted pursuant to Item 601(a)(5) of Regulation S-K. The Registrant hereby undertakes to furnish supplementally copies of any of the omitted schedules and exhibits upon request by the SEC.
# Indicates management contract or compensatory plan or arrangement.
* Filed herewith.
** Furnished herewith.
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ITEM 16. FORM 10-K SUMMARY
None.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
CAREDX, INC.
By: /s/ Reginald Seeto, MBBS
Reginald Seeto, MBBS
President and Chief Executive Officer
Date: February 27, 2023
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POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Reginald Seeto and Abhishek Jain, and each of them, his true and lawful attorneys-in-fact, each with full power of substitution, for him or her in any and all capacities, to sign any amendments to this Annual Report on Form 10-K and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact or their substitute or substitutes may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons, on behalf of the registrant on the dates and the capacities indicated.
Signature Title Date
/s/ REGINALD SEETO, MBBS President, Chief Executive Officer and Director
(Principal Executive Officer)
February 27, 2023
Reginald Seeto, MBBS
/s/ ABHISHEK JAIN Chief Financial Officer
(Principal Financial and Accounting Officer)
February 27, 2023
Abhishek Jain
/s/ GEORGE W. BICKERSTAFF, III Director February 27, 2023
George W. Bickerstaff, III
/s/ FRED E. COHEN Director February 27, 2023
Fred E. Cohen
/s/ GRACE COLÓN Director February 27, 2023
Grace Colón
/s/ CHRISTINE M. COURNOYER Director February 27, 2023
Christine M. Cournoyer
/s/ MICHAEL D. GOLDBERG Director February 27, 2023
Michael D. Goldberg
/s/ WILLIAM HAGSTROM Director February 27, 2023
William Hagstrom
/s/ PETER MAAG, PH.D. Director February 27, 2023
Peter Maag, Ph.D.
/s/ ARTHUR TORRES Director February 27, 2023
Arthur Torres
/s/ HANNAH VALANTINE Director February 27, 2023
Hannah Valantine
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