Earnings Call Transcript - CDNA Q1 2023

Operator, Operator

Greetings. And welcome to the CareDx, Inc. First Quarter 2023 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. As a reminder, this conference is being recorded, Wednesday, May 10, 2023. It is now my pleasure to turn the conference over to Greg from the Gilmartin Group.

Greg Chodaczek, Host

Thank you, Jennifer. Good afternoon, and thank you for joining us today. Earlier today, CareDx released financial results for the quarter ending March 31, 2023. The release is currently available on the company's website. Reg Seeto, Chief Executive Officer; Abhishek Jain, Chief Financial Officer; Alex Johnson, President of Patient Testing and Services; and Robert Woodward, Senior Vice President of R&D, will host this afternoon's call. Before we get started, I would like to remind everyone that management will be making statements during this call that include forward-looking statements within the meaning of the federal securities laws, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act. Any statements contained in this call that are not statements of historical facts should be deemed to be forward-looking statements. All forward-looking statements, including our examination of historical operating trends, expectations regarding coverage decisions, pricing enrollment matters and our financial expectations and results are based upon current estimates and various assumptions. These statements involve material risks and uncertainties that could cause actual results to differ materially from those anticipated or implied by these forward-looking statements. You should not place undue reliance on these statements. For a list and description of the risks and uncertainties associated with our business, please see our filings with the Securities and Exchange Commission. The information provided in this conference call speaks only to the live broadcast today, May 10, 2023. CareDx disclaims any intention or obligation, except as required by law, to update or revise any information, financial projections or forward-looking statements, whether because of new information, future events or otherwise. This call will also include a discussion of certain financial measures that are not calculated in accordance with generally accepted accounting principles. Reconciliation to the most directly comparable GAAP financial measure may be found in today's earnings release filed with the SEC. I will now turn the call over to Reg.

Reg Seeto, CEO

Thanks, Greg. Good afternoon, everyone, and thank you for joining us for CareDx's first quarter 2023 Earnings conference call. As you'll recall, we ended 2023 having been through a challenging environment in 2022. The four key challenges identified included the growth of the transplant market, marking the year at the low point in transplant since the onset of COVID in 2022; changes in expectations in the diagnostics sector, where we focus on achieving profitability and maintaining a strong cash position; an increase in the commercial payer mix with the full impact of Medicare Advantage and the increase in our commercial testing services volumes with new launches; and driving revenue growth also in our non-testing service business lines. I will address the revised billing articles from MolDx shortly. Before I do, I would like to highlight our strong operational performance that saw a successfully executed plan to address those forward challenges. We continued that effort into Q1 2023, where we delivered our highest ever patient testing services volume and grew faster than the market by 8 share points compared to the prior quarter. We delivered cash collections at 110% of testing services revenues for a second consecutive quarter, representing approximately a 10% year-over-year increase. This maintained our strong cash position of $286 million and helped generate $0.7 million in net cash from operating activities. We recorded our highest non-Medicare revenues through improved payer coverage and collections with a 19% increase in sequential revenues. Furthermore, we recorded our highest patient and digital solutions revenue quarter as we doubled our contribution from our non-testing services business line. We are proud of these results and the strong operational performance and execution in Q1 2023. Now moving on to the billing article changes. We are now faced with new challenges with the introduction of two revisions to the billing articles associated with Medicare coverage of AlloSure and AlloMap. The first revision was published on March 2 and the second on May 4, 2023. Addressing these changes requires significant management time and a reallocation of organizational resources. We have updated our 2023 plan, which is now largely focused on the operational implementation of the requirements of the billing articles. This will require significant ongoing efforts throughout 2023. In parallel, we're aligning the company's cost structure to this new and evolving landscape. Notwithstanding our focus on implementation, the company believes the billing articles are inconsistent with the LCDs. Both Noridian and MolDx responded to public comments which explain the intended scope of various LCDs and medical necessity. We believe the billing articles were changes to the LCD and not merely a clarification of existing coverage by MolDx for kidney services. For instance, in heart care, MolDx direction has changed and they acknowledge that the March billing article is a change from its previous billing article, which provided coverage only when AlloSure Heart was used in conjunction with AlloMap Heart. Adding to this complexity, there is uncertainty over whether and when Noridian, our Medicare administrative contractor, will adopt and issue these new billing articles. To date, they have not adopted either billing article from MolDx. Given these factors and out of an abundance of caution, we adopted a conservative approach and paused Medicare reimbursement submissions for AlloSure Kidney on March 7, 2023. The board and management team made this decision in consultation with third-party advisers. The decision is designed to give the company further time to understand and evaluate the implications of the March billing article. As a result, we did not submit claims for approximately 3,200 AlloSure kidney tests on Medicare reimbursement and did not recognize this revenue representing around $8.9 million in the first quarter of 2023. We refer to these tests as the impacted March tests. We plan to submit these tests during Q2. We've had numerous discussions with MolDx and plan further discussions with them. We've also reached out to CMS in this matter and plan to reach out to Noridian. While the transplant centers and CareDx will adjust and evolve over time, what has been concerning is the impact on patient care during this evolution and uncertainty. It was unrealistic to expect a four-week implementation timeline from when the March billing article revision was issued. Thousands of providers involved in patient care had to be educated on new forms and processes. Despite this being a tremendously difficult feat, we've focused the organization on these hundreds of centers and practices who were not ready for this change nor had planned for it, especially since they were required to update their IT systems. The transplant community has voiced their concerns over the last few weeks on this unprecedented situation. The leading professional transplant associations, ASTS, AST, and ISHLT, as well as the leading patient associations, Encare and Sure, have all reached out to MolDx directly regarding this matter. They also reiterated the importance of noninvasive molecular testing in transplant patient care and raised concerns about the implementation timeline and process and the implications for patient care. In fact, on Monday, a press release was sent out highlighting the results of a new survey conducted by four leading patient groups, Transplant Life Foundation, Transplant Families, Transplant Recipients International Organization, and the Heart Brothers Foundation, showing that 95% of patients surveyed are concerned that the new Medicare billing article limits coverage of noninvasive blood transplant tests. Furthermore, the majority of patients surveyed believe that reduced coverage of noninvasive blood tests would negatively impact their post-transplant care, and that they should have been consulted as part of the process for Medicare policy changes. The survey included the views of over 1,000 patients, as well as caregivers and families. Now on to our Q1 results. Testing Services had a strong first quarter with 17% year-over-year volume growth. We delivered almost 50,000 tests, beating the year-over-year market growth of 10%. We also grew sequentially by 5% versus last quarter, outperforming the -3% quarter-over-quarter market growth. In Q1, we recorded a total revenue of $77.3 million. If we had submitted the impacted March tests to Medicare in the first quarter, our total revenue would have been approximately $86.2 million, reflecting a year-over-year increase of 9%. Additionally, our testing services revenue would have grown 6% to $70.7 million. Q1 would have been a record quarter for CareDx if we factor in the impacted tests we plan to submit to Medicare in Q2. Our non-testing services business continues to provide meaningful contributions to our overall revenues. Specifically, Patient and Digital Solutions achieved the highest ever revenues of $8.6 million, representing a 39% year-over-year growth. For the first quarter, we reported a GAAP loss of $23.7 million, a non-GAAP loss of $5.8 million, and an adjusted EBITDA loss of $6.4 million. If we included the revenue from the impacted March tests, we would have recorded a positive adjusted EBITDA of $2.5 million. Notably, we would have achieved our key 2023 goal of delivering a positive adjusted EBITDA in the first half of 2023. Abhishek will cover this in more detail. Now I'll update you on our efforts to operationalize the changes by the March 31 effective date and the ongoing complexities. Firstly, it has taken tremendous effort and will require ongoing work to support patient care. Since the March billing article was announced, we've been diligently updating our forms, systems, and processes to accommodate these changes. This has been a significant undertaking across our testing services business line. While this is not an exhaustive list of what the company has been doing since March 2, it is truly remarkable what has been accomplished over the past nine weeks. Since the start of the billing article, we have reached out to 80% of our 550-plus transplant centers, community hospitals, and practices. Each center, hospital, and practice has multiple providers and support staff that have to be educated, requiring us to visit numerous times with some centers having more than 20 people that need to be educated. This has involved thousands of interactions. We've had to update our internal IT systems and processes, as well as our test requisition forms, also known as TRS, and workflows. All centers using paper TRS have been updated with new requirements, and centers using our portal are now being migrated to our new customer care portal. All centers using electronic medical records are being worked on as part of this process, and we are dependent on the center adjusting its system workflows. Changes to IT systems need to be scheduled well in advance, and we are working on these center by center. Secondly, the effective date for implementation was only four weeks after the billing article revision. It should be noted we began our efforts to operationally implement the March billing article requirements during March to be ready by the effective date of March 31. While we've made excellent progress, it takes time for transplant centers and healthcare systems to make these operational changes and update their system workflows. We can report now that, as of the end of April, approximately 50% of the test orders received used the new forms with the new required information. It has taken a herculean effort to reach this stage. While we continue making strong progress on the operational implementation, we will not be completed by the end of the second quarter. As an indicator of uptake in adoption, we've seen a progressive increase in the percentage of completed submitted forms. We ended April at 50%, and we're trending in May at 60%. We expect to reach approximately 80% to 85% of forms with requisite information by the start of the fourth quarter as more transplant center systems are updated. Given the impact of the March billing article on our business model, we have taken steps to reshape the organization, which we expect will deliver annualized cost savings of $40 million to $50 million. Abhishek will cover this in greater detail. Moving on to guidance. Given the uncertainties in interpreting MolDx and Noridian's positions, as well as the time required for our operational implementation, we believe it is prudent to withdraw guidance. We will revisit this in our next quarterly earnings call once we've gained a better understanding of this evolving landscape. So what are the next steps for CareDx? Firstly, we will implement the updated 2023 plan in response to revised billing articles by continuing the all-hands-on-deck approach to operationalize the plan with physicians, centers, and practices. Alex Johnson and his team have done an excellent job working day and night to get this implemented. We aligned the organizational structure and strategy as the landscape evolves. The management team has been working on this, and that effort is being led by Abhishek, our CFO. We will be following up with MolDx, Noridian, and CMS regarding these changes. Certainly, we will continue to deliver on our 2023 plan, especially the 3Cs. On collections, we have made significant progress over the last two quarters, while testing service collections exceed testing services revenues. On coverage, we have captured wins from the recent ISHLT guidelines, especially with early reimbursement for AlloMap as early as two months, and we are in multiple active discussions to increase commercial coverage. There has been significant work as part of our strategic plan, and we now expect to see this come together over the next few months. On catalyst, we await decisions in our ongoing discussions regarding several pipeline catalysts. Given the recent VA changes, some of these dossiers have been updated. We'll continue to produce and submit clinical data demonstrating the clinical benefits of our individual diagnostic tests and our multi-modal offerings, including heart care. Lastly, the company will be leaner, more efficient, and aligned with the new and evolving landscape. We have enough cash on our balance sheet, and we do not anticipate needing to raise any cash in the near future. Before I hand the call over to Abhishek to go over the financials, I want to thank all the employees of CareDx who have worked tirelessly to educate healthcare providers on the billing article changes and help transplant centers become operationally ready. Their efforts were exemplary, driven by the unwavering commitment to serving patients and the broader transplant ecosystem.

Abhishek Jain, CFO

Thank you, Reg. We are pleased to share the results from the first quarter. The key takeaways are: number one, we had a good quarter despite the operational challenges associated with the implementation of the billing article; number two, we have some early lead indicators to assess the financial impact of the billing article; number three, we now have plans underway to mitigate the financial impact; number four, we are withdrawing guidance due to factors outside our control. We had a strong first quarter where we delivered on our financial imperatives. Number one, we maintained a solid cash position of $286 million and generated positive cash from operations for the second consecutive quarter. Number two, our testing service volume growth beat market growth quarter-over-quarter and year-over-year. Number three, we maintained our momentum in collections, which increased by 10% year-over-year, at 110% of our reported testing services revenues. The impact of improved collection has started to show on average selling price dynamics. Number four, we achieved our highest ever quarterly revenue for our patient and digital services business. And number five, all three businesses improved gross margin year-over-year. It would have been a record quarter if we were to consider revenue associated with the impacted March tests of $8.9 million, as we would have then reported our highest-ever testing services revenue and a positive adjusted EBITDA. Let me provide details. Firstly, with revenues. In Q1, we reported total revenues of $77.3 million, down 3% year-over-year. If we included the revenue associated with impacted March tests, we would have delivered revenues of $86.2 million, representing a 5% increase compared to the last quarter and 9% year-over-year. This would have been our highest ever revenue in a quarter. Testing Services revenue for the first quarter was $61.8 million, down 7% year-over-year. Testing services revenue, including the revenue associated with impacted March tests, would have been $70.7 million, our highest ever testing services revenue in a quarter, representing an 8% growth compared to last quarter and 6% year-over-year. Our testing services volumes grew by 5% quarter-over-quarter, contrasting with negative 3% growth for transplant volumes. Furthermore, our testing volume growth of 17% year-over-year beat the market growth of 10%. Despite tough market conditions, strong test volume growth demonstrates the value of our tests with proven clinical usage. Turning to average selling price. Our adjusted testing services revenue growth of 8% outpaced volume growth of 5%, indicating a positive overall average selling price change, an inflection point we have been seeking with our focused strategic efforts. In Q1 '23, we improved the average selling price despite continued headwinds from volume mix shifts, primarily driven by one, getting paid for long-outstanding Medicare Advantage claims; and two, having an increased price per test due to improved collections in Q4 '22. As a reminder, we use historical collections per test to recognize our revenue for non-Medicare tests in a given quarter. Importantly, the average selling price on our pay test continues to be approximately $2,500. We track this metric to exclude the impact of mix shift due to our strategy and market dynamics. This is a metric that we use to ensure there is no price degradation for our test. Turning to testing services gross margin. Our GAAP testing services gross margin improved to 75% compared to 73% in the same quarter last year. Our non-GAAP testing services gross margin improved to 77% compared to 74% in the same quarter last year. Half of this improvement in gross margin was driven by volume growth and the impact of improved collections on revenue. The rest was driven by two factors: one, the positive impact of a one-time reversal of accrued amounts associated with royalty payments, and two, it was partially offset by the impact on gross margin due to unrecognized revenues of $8.9 million associated with the impacted March tests, as these costs have been part of the cost of sales. Now turning to our non-testing services business. In Q1, our Digital and Patient Solutions business revenue was at $8.6 million, marking a growth of 39% year-over-year, which is the highest ever for a given quarter in this business line. We are pleased to see our strategy of investing in our digital and patient solutions paying off, with our acquisitions also helping drive business results and strengthen our market position. GAAP and non-GAAP gross margins for our Digital and Patient Solutions business were 23% and 31% in the first quarter of 2023 compared to 21% and 28% in the same quarter last year. Although the non-GAAP gross margin improved by 300 basis points year-over-year, the team is continuously looking for further opportunities to improve. The Products business delivered $6.9 million in revenue, similar to the same quarter a year ago. GAAP gross margin for our products business was 41% in the first quarter of '23 compared to 35% in the same quarter last year. Non-GAAP product gross margin was 52% in the first quarter of '23 compared to 44% in the same quarter last year, an improvement of 800 basis points. As discussed in our previous calls, improving gross margin for our product business remains a core focus area for the company, and we are making good progress in this regard. Turning to operating expenses and adjusted EBITDA, our non-GAAP operating expenses for the first quarter were $61.7 million, up about $1 million sequentially from Q4 '22. The increase in our GAAP operating expenses was primarily driven by increased legal expenses. For the first quarter of '23, we recorded negative adjusted EBITDA of $6.4 million compared to a negative adjusted EBITDA of $3.7 million in the previous quarter. If we were to consider unrecognized revenues associated with the impacted March tests, we would have recorded a positive adjusted EBITDA of $2.5 million. Turning to cash, we continue to maintain a strong financial profile, as emphasized by our robust balance sheet and cash balance of $286 million with no debt. We generated positive cash from operating activities for the second quarter in a row. Importantly, the first quarter is typically a seasonally weak quarter for cash usage as we pay annual bonuses to our employees. Our focus on cash collections and working capital management contributed to achieving positive cash from operating activities. I would also like to note that we earned $2.7 million in interest income for the first quarter of '23. Now, moving on to the second takeaway concerning the lead indicators to assess the financial impact of the billing article. Reg has already provided context on how the billing article revisions have impacted our strategy and the operational challenges to implement the changes required for hundreds of transplant centers and the ecosystem around it. All of our efforts have now shifted to operationally implementing the changes required by the billing article. Though we are seeing adoption of revised processes, this has been a demanding effort that will not be complete by the effective date of March 31; especially for our patient services. Given the significant change, complexity, and related uncertainty, it is difficult to assess the financial impact of the billing article yet. However, I would like to share some lead indicators. Number one, education. The first step in implementing the billing article is the education of the transplant centers, providers, and support teams. I'm pleased to inform you that we have educated approximately 80% of all centers, covering over 90% of our volumes for kidney services. The education process is ongoing, which sets the path for adoption of the new requirements. It is important to note that after the first four weeks post the effective date of the billing article, we are experiencing lower testing volumes as centers and clinicians transition to the new processes and need to update their IT systems. Number two, adoption. By the end of April, around 50% of our incoming test requisitions used newly implemented forms that contained the required information to comply with the billing article. This is trending upwards, approximately 60% in May thus far. Our goal is to continue increasing adoption to approximately 80% to 85% by the fourth quarter of '23. Number three, claim submission. For AlloSure kidney tests, starting March 31, '23, we have not billed any tests to Medicare unless they come with the requisite information on the new test acquisition form. Otherwise, we are going back to the prescribing transplant centers to collect that information. I would like to note that this adds significant operational burden on CareDx. As I mentioned earlier, there is still a large percentage of incoming tests coming on old forms or are incomplete. Additionally, if a test is pending collection of requisite information, it will impact revenue recognition. For our AlloMap Heart and AlloSure Heart tests, we are continuing to follow our medical reimbursement submission process. We also plan to inform Noridian that until they adopt the revised billing article, CareDx will continue to submit AlloSure Heart tests for reimbursement only when used in conjunction with AlloMap Heart, including tests for which we have not obtained the additional information required by the billing article. However, post June 30, '23, we plan to submit to Medicare only those tests that meet the billing article requirements. Please refer to our 10-Q for further discussions on billing articles and associated risks. Now turning to our third takeaway concerning our plans to mitigate the impact of the billing article. The billing article will impact our testing services business based on early trends of lead indicators. Therefore, we have started to align our cost structure. We expect these actions will help drive approximately $40 million to $50 million in annualized savings. As we increase our understanding of the financial impact, we will adjust our actions to minimize cash burn. It is important to note that during the transition period of operational implementation, we will require more resources to deal with significant additional administrative burdens in certain areas. Here is a quick summary of various actions we are taking. We are restructuring our workforce, set to reduce approximately 12% of our headcount compared to what we had at the beginning of the year. Number two, we are reviewing our test volumes specifically in areas where the tests are not covered and are not reimbursed even after appeal. Number three, we prioritize clinical studies and R&D spending to stay focused on the most important areas that would help us improve coverage and drive revenue. Number four, we are reviewing legal spend and reducing discretionary spending wherever possible. In addition to looking to cut costs, as Reg mentioned, we will continue to focus on our 3C key strategic areas to drive upside. Regarding guidance, we are withdrawing our '23 revenue guidance at this time due to the multitude of unknown variables related to the billing article we have discussed during this call, many of which are outside our control. Specifically: number one, the interpretation of MolDx's policy in light of the two billing article revisions since March 2; number two, the adoption of the billing article by Noridian and updates of IT systems by centers to incorporate new test forms; number three, the impact of the transition on testing services volume during the education and implementation period; number four, the rate of adoption of new forms, the percentage completion of the requisite information, and successful collection of any missing information from the TRS. We will revisit this in our second quarter earnings call once we have gained a better understanding of the evolving landscape. In summary, we had a good first quarter. It could have been even better had we not faced the challenges due to the billing article revision. All efforts now are focused on the operational implementation of the requirements of the billing articles to increase the rate of adoption as much as possible. We are taking necessary actions to adjust our cost structure and do not anticipate needing to raise cash in the near future. We will continue to build on our key strategies by enhancing our efforts to improve coverage and collections - areas that we can influence. With that, I'll hand over the call back to Reg.

Reg Seeto, CEO

Thanks, Abhishek. I think let's have Greg work with the operator to open the lines to the Q&A. Thank you.

Operator, Operator

Certainly. And our first question is from the line of Matt Sykes from Goldman Sachs. Please proceed with your question.

Matt Sykes, Analyst

Hi, good afternoon. Thanks for taking my questions. Maybe the first one for you. I appreciate the color on the percentage of forms. And Abhishek, I know you said that testing volumes were lower as you've seen it recently. But maybe just help us frame the impact and provide a little more granularity on how testing volumes have trended to date and what it looked like in April and the first start of May, just so we can understand the revenue picture.

Reg Seeto, CEO

Yeah, Matt, thanks for the question. I'll make some introductions. Matt, and I'll hand over to Abhishek for part of that. I think we have some early reads on the market volume. There's clearly a bit of interim flux that we've gone through, a few complexities as part of that process. For example, some centers with EMRs require them to update the forms on their side, which has created a bit of an issue. So there's a bit of this transitioning dynamic. But I'll hand over to Abhishek for the specifics.

Abhishek Jain, CFO

Thanks, Reg. As we were saying, Matt, this is a complex change. There is a lot of education that clinicians and centers need to go through to transition to these new processes. In the first quarter, our testing services volumes were solid. However, after implementing these new test requisition forms, our volumes have started to drop slightly due to the change management associated with this whole exercise. They're currently in the range of high-teens based on the early indications for the first three or four weeks, and we will see how this shapes up in the upcoming weeks.

Matt Sykes, Analyst

Got it. Thanks for that color. Regarding the frequency of tests, do you foresee a drop in frequency for some of your tests in terms of that waterfall that you've traditionally had for your testing services?

Reg Seeto, CEO

Yes, I will add some color, and then I'll have Abhishek talk. What we've discovered during this process is that the key is getting operationally ready. The centers must focus less on whether this is a complete course of tests. The question is when the centers will be ready and operationally ready. That's the most important thing. With over 550 centers, we've had to reach out to, and many of these centers weren't prepared; that has been the key bottleneck. It's about operational implementation. We've had thousands of interactions. If these centers aren't up and running, then that particular discussion may fall away. I think what we're seeing is this trend of how to operationalize the centers and then get the forms in the right format. The team under Alex has made decent progress, going from 50% at the end of April to around 60% now. I'll let Abhishek add additional color.

Abhishek Jain, CFO

You covered it well, Reg. We're still assessing the situation, and there was another billing article that came late last week. We're working on interpreting everything out there, and we'll make that assessment.

Matt Sykes, Analyst

Got it. If I could squeeze one more in. Just Abhishek, regarding the $40 million to $50 million in annualized cost savings, can you give additional color on how we should think about that phasing in over the course of this year?

Abhishek Jain, CFO

Sure, absolutely. We've already started to take actions, and my sense is that you will see a proportionate impact starting in Q3. It might not be the full one-fourth of that $40 million to $50 million, but I would anticipate seeing a significant portion of that by Q3. We would likely start to see one-fourth of that impact by Q4 and Q1.

Operator, Operator

And our next question comes from the line of Andrew Cooper with Raymond James. Please go ahead.

Andrew Cooper, Analyst

Hey, everybody. Thanks for your question. Maybe first, you gave a lot of those comments on the rate of completed forms. But I just want to understand, when you say completed forms, are those completed in a way that, to your knowledge, meets the reimbursement requirements? Or just completing the information that CMS, or MolDx, or Noridian would need to decide on reimbursement for that test? Meaning in the indication where you need to replace a biopsy, is it just that there's commentary to support? Or do you think this is enough to actually justify the payment?

Abhishek Jain, CFO

Yes, Andrew. I'll comment first, then I'll let Robert add details. The way we have rolled out the new test requisition forms, we specifically ask for the information necessary to ensure compliance with the requirements of the new billing article. So yes, if they are deemed complete, that would mean they are billable. The numbers we are sharing indicate that over 90% of those forms are indeed billable to Medicare.

Andrew Cooper, Analyst

Okay, that's helpful. I think initially, there was some conversation around incremental data to add to multi-modality sooner versus later. Can you give us an update regarding driving confidence in multi-modality as opposed to single modality?

Reg Seeto, CEO

Certainly, Andrew. On multi-modality, this is an area we've seen considerable demand due to the technologies coming forward. We've had active dialogues with MolDx regarding this subject. So I'll hand it over to Robert.

Robert Woodward, SVP of R&D

We certainly believe there is sufficient evidence to demonstrate the validity and utility of heart care, our primary multi-modality test. Several independent publications support that utility. We discussed our approach with MolDx, and they requested we submit additional data. We are preparing a detailed analysis that we will submit shortly for consideration.

Andrew Cooper, Analyst

Great to hear. Lastly, regarding the potential cash raise since you’re not anticipating needing any cash, I noticed a shelf was filed. Can you comment on this in relation to your current cash needs?

Abhishek Jain, CFO

Sure, Andrew. As a company, we have been extremely prudent, which is evident from our performance in the last few quarters. We have focused on managing our cash, ending Q1 with $286 million, and this year we generated positive operating cash flow. We remain focused on maintaining cash as our priority. The shelf filing is standard housekeeping, and there are currently no plans to raise cash in Q2.

Reg Seeto, CEO

Certainly, it's just part of standard housekeeping. As we mentioned in our prepared remarks, we don't plan to engage in a raise in Q2.

Operator, Operator

And our next question comes from the line of Brandon Couillard from Jefferies. Please proceed with your question.

Brandon Couillard, Analyst

Hi, thanks. Good afternoon. Abhishek, regarding the $8 million to $9 million in delayed March orders that you expect to submit in Q2. Is there a chunk of initial orders in April and May that are also getting deferred? How do you think about recouping that but also a portion you won't recognize again in Q2?

Abhishek Jain, CFO

It was difficult to hear you, Brandon. If I were to retrace, you're asking about the $8.9 million of tests we did not submit in Q1 that we plan to submit in Q2. Are you inquiring about revenue recognition for those tests?

Brandon Couillard, Analyst

Yes, that's right. I'm talking about the $8 million to $9 million you didn't submit in March but expect to recognize in Q2. But isn't there another chunk in Q2 that will also get pushed out? How do you think about the magnitude, I guess, of those two numbers?

Abhishek Jain, CFO

That's part of the complexity we're trying to handle. For the impacted March tests, the adoption of the new TRS is trending at 50% and improving to 60%. There will still be a portion that needs prior updates, and until we collect that information, we won't be able to recognize that revenue. So yes, there will be a lag on some tests we were able to recognize revenue for before.

Reg Seeto, CEO

Part of that is also why Abhishek factored these uncertainties into considerations for guidance. The timeline is essential; we need the tests completed rightly formatted for submission. We have previously communicated that the testing is trending at a 50% completion rate, which now is at 60% in May. We'll carry this forward as adoption rates increase.

Brandon Couillard, Analyst

That's helpful. Lastly, regarding the $40 million to $50 million of targeted cost savings, can you categorize that across the three OpEx lines: R&D, SG&A, and sales and marketing? Is that after accounting for the additional remediation costs you have to spend on education efforts with customers?

Abhishek Jain, CFO

For now, I would summarize that this will largely relate to headcount reductions across multiple areas, including R&D, S&M, and G&A. We won't see considerable cuts to headcount right now because we're still processing received tests. However, as we build more understanding of volumes, further actions could take place. We've also been reviewing distribution and legal expenditures.

Brandon Couillard, Analyst

Okay. One last question. You have a buyback authorization out there. Is that currently being contemplated, considering the selloff in the stock? What are the prerequisites for feeling comfortable enough to restore guidance?

Abhishek Jain, CFO

On the share buyback, we placed a pause on that after the billing article. Once we get additional clarity, we will make a decision on proceeding.

Reg Seeto, CEO

Regarding guidance, we've discussed needing leading indicators and understanding the adoption rates. Also, we require insights from Noridian on the adoption of these articles. They haven't adopted either yet. Moreover, we need to engage with MolDx, given multiple revisions have occurred.

Operator, Operator

And our next question comes from the line of Mark Massaro with BTIG. Please proceed.

Mark Massaro, Analyst

Thanks for taking the question. I understand about the withdrawal of the 2023 revenue guidance, but I wanted to ensure it is logical that you are also withdrawing your adjusted EBITDA positivity goal in the first half of '23.

Abhishek Jain, CFO

Yes, that's correct. We've never provided actual adjusted EBITDA guidance; it was only a goal. However, we have adjusted our revenue guidance due to the impacts.

Reg Seeto, CEO

I think this is a crucial point. In our prepared remarks, we wanted to highlight our operational execution. With the impact of the March tests included, we achieved adjusted EBITDA of $2.5 million during a quarter that we aimed for operational focus.

Mark Massaro, Analyst

Medicare isn't your only payer. Have you had conversations with commercial health plans regarding their intent to follow the new Medicare policy?

Reg Seeto, CEO

Yes, we had discussions about the 3Cs. We've built a plan and executed successfully, demonstrating excellent collection performance. This has reflected in collections exceeding revenues for positive cash flow. Regarding coverage with ICHLT guidelines, we demonstrated early reimbursement for AlloMap and continue working on kidney and heart coverage efforts.

Mark Massaro, Analyst

You have a robust development program. One major study is the SHORE study. Could publishing an interim readout help satisfy CMS expectations?

Robert Woodward, SVP of R&D

Yes, we're actively working on that. Enrollment varies by the process, and following patient timelines has extended for us. However, we understand the timeline for interim data and are focused on maintaining quality data for necessary publications.

Mark Massaro, Analyst

Lastly, can you provide updates on the DoJ investigation and the lawsuit against your liability insurance provider?

Abhishek Jain, CFO

There isn't any significant update regarding the DoJ and SEC inquiries. We might have initiated discussions regarding our liability insurance provider to recover expenses incurred on some legal cases.

Operator, Operator

And our next question is from the line of Yi Chen with H.C. Wainwright. Please go ahead.

Unidentified Analyst, Analyst

Could you provide color on the total number of centers you anticipate educating every quarter and hope to see implement these new processes?

Reg Seeto, CEO

Our complete universe comprises heart, kidney, and community practices. There are over 550 centers, and we have focused on ensuring 90% of our volume is covered, and 80% of those centers are now educated.

Unidentified Analyst, Analyst

What catalysts should we keep an eye on this year?

Reg Seeto, CEO

We are in active discussions surrounding updates within heart care based on MolDx feedback and will share announcements in the upcoming months, especially for new introductions like UroMap. We aim to support patient care with all these developments.

Operator, Operator

There are no further questions in the queue at this time. I will now turn the call back over for closing remarks.

Reg Seeto, CEO

Thanks very much. I want to thank the analysts and investors listening to this call, including any patients. It's been a tough time. We clearly work in a unique space, and there have been changes. We had a specific plan in 2022 that we have continued to execute into Q1. Moving forward, we have an updated plan, and the team is committed to executing it while addressing new challenges. Thank you for your support and your commitment to transplant patients.

Operator, Operator

That concludes your conference call for today. We thank you for your participation and ask that you please disconnect your lines.