Exagen(XGN) - 2021 Q1 - Quarterly Report

Part I. Financial Information Item 1. Condensed Financial Statements (unaudited) This section presents Exagen Inc.'s unaudited condensed financial statements, including balance sheets, operations, equity, and cash flows Condensed Balance Sheets Total assets and stockholders' equity significantly increased, driven by a substantial rise in cash and equivalents from financing | Metric | March 31, 2021 (in thousands) | December 31, 2020 (in thousands) | | :-------------------------- | :------------------------------ | :------------------------------- | | Cash and cash equivalents | $118,050 | $57,448 | | Total assets | $137,522 | $78,375 | | Total liabilities | $36,052 | $36,536 | | Total stockholders' equity | $101,470 | $41,839 | Condensed Statements of Operations Revenue increased, but the net loss widened due to higher operating expenses, particularly in research and development | Metric | Three Months Ended March 31, 2021 (in thousands) | Three Months Ended March 31, 2020 (in thousands) | | :------------------------------------------ | :----------------------------------------------- | :----------------------------------------------- | | Revenue | $10,587 | $9,584 | | Total operating expenses | $16,154 | $14,805 | | Loss from operations | $(5,567) | $(5,221) | | Net loss | $(6,209) | $(5,563) | | Net loss per share, basic and diluted | $(0.48) | $(0.44) | - Research and development expenses significantly increased from $634 thousand in Q1 2020 to $1.403 million in Q1 2021[11] Condensed Statements of Stockholders' Equity Stockholders' equity significantly increased due to a public offering of common stock, raising substantial capital despite a net loss | Metric | March 31, 2021 (in thousands) | December 31, 2020 (in thousands) | | :-------------------------------- | :------------------------------ | :------------------------------- | | Total Stockholders' Equity | $101,470 | $41,839 | | Additional Paid-In Capital | $288,951 | $223,115 | | Accumulated Deficit | $(187,498) | $(181,289) | - Issuance of stock in a public offering, net of issuance costs, contributed $64.71 million to additional paid-in capital[15] Condensed Statements of Cash Flows Net cash increased substantially, primarily driven by significant proceeds from a public offering, offsetting operating and investing cash use | Cash Flow Activity | Three Months Ended March 31, 2021 (in thousands) | Three Months Ended March 31, 2020 (in thousands) | | :------------------------------------------ | :----------------------------------------------- | :----------------------------------------------- | | Net cash used in operating activities | $(4,312) | $(3,301) | | Net cash used in investing activities | $(167) | $(84) | | Net cash provided by (used in) financing activities | $65,081 | $(51) | | Net change in cash, cash equivalents and restricted cash | $60,602 | $(3,436) | | Cash, cash equivalents and restricted cash, end of period | $118,150 | $68,748 | - Proceeds from the issuance of common stock in a public offering, gross, amounted to $69.144 million in Q1 2021[17] Notes to Unaudited Condensed Financial Statements Detailed disclosures supporting unaudited financial statements, covering accounting policies, financial instruments, and COVID-19 impact Note 1. Organization Exagen Inc. focuses on autoimmune disease diagnostics, has a history of losses, but believes existing capital is sufficient for 12 months - Exagen Inc. is dedicated to transforming care for patients with debilitating and chronic autoimmune diseases through timely differential diagnosis and optimized therapeutic intervention[20] - The company has incurred recurring losses and negative cash flows from operating activities since inception, with an accumulated deficit of $187.5 million as of March 31, 2021[21] - Management believes existing capital resources will be sufficient to fund obligations for at least twelve months, but additional funding may be needed for growth and will be sought through stock sales, debt financings, or other strategic transactions[21][22] Note 2. Summary of Significant Accounting Policies This section outlines interim financial statement presentation, key estimates, revenue recognition, fair value, and recent pronouncements - The unaudited interim condensed financial statements are prepared in accordance with SEC rules and GAAP, requiring management to make estimates and assumptions[23][24] Significant Payors as Percentage of Total Revenue | Payor | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :---------------- | :-------------------------------- | :-------------------------------- | | Medicare | 18 % | 25 % | | Blue Shield | 12 % | 12 % | | Medicare Advantage | 12 % | 13 % | | United Healthcare | *Less than 10% | 10 % | Revenue Disaggregation by Payor/Customer Category (in thousands) | Category | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :-------------------- | :-------------------------------- | :-------------------------------- | | Healthcare insurers | $6,027 | $6,062 | | Government | $2,009 | $2,245 | | Client | $1,965 | $1,082 | | Other | $286 | $195 | | Janssen (SIMPONI®) | $300 | $0 | | Total revenue | $10,587 | $9,584 | - The company recognized approximately $0.3 million in co-promotion revenue from the Janssen Agreement for the three months ended March 31, 2021, compared to no revenue in the prior year period[44] - Total non-cash stock-based compensation expense was $912 thousand for Q1 2021, up from $431 thousand in Q1 2020[98] - The company adopted ASU 2019-12 (Simplifying the Accounting for Income Taxes) on January 1, 2021, with no material impact, and elected to delay adoption of ASU 2016-02 (Leases) until January 1, 2022, as an emerging growth company[58][59] Note 3. Other Financial Information This note details prepaid expenses, property and equipment, and accrued liabilities, showing minor shifts between periods Prepaid Expenses and Other Current Assets (in thousands) | Category | March 31, 2021 | December 31, 2020 | | :-------------------------------- | :------------- | :---------------- | | Diagnostic testing supplies | $921 | $1,203 | | Prepaid maintenance and insurance | $1,892 | $2,229 | | Other prepaid and other current assets | $220 | $659 | | Total | $3,098 | $4,159 | Property and Equipment, Net (in thousands) | Category | March 31, 2021 | December 31, 2020 | | :-------------------------- | :------------- | :---------------- | | Total property and equipment | $5,506 | $5,043 | | Less: accumulated depreciation and amortization | $(3,128) | $(2,941) | | Property and equipment, net | $2,378 | $2,102 | Accrued and Other Current Liabilities (in thousands) | Category | March 31, 2021 | December 31, 2020 | | :-------------------------------- | :------------- | :---------------- | | Accrued payroll and related expenses | $3,318 | $3,589 | | Capital lease obligations, current portion | $394 | $308 | | Other accrued liabilities | $887 | $953 | | Total | $5,714 | $5,757 | Note 4. Borrowings The company has a $25.0 million term loan with Innovatus at 8.5% interest, collateralized by assets and subject to covenants - The company has a $25.0 million term loan (2017 Term Loan) with Innovatus Life Sciences Lending Fund I, LP[64] - The interest rate is 8.5%, with 2.0% paid in-kind (PIK Loans) until December 2022, with an estimated effective interest rate of 10%[65] - The loan is collateralized by substantially all company assets and includes covenants requiring specified revenue levels, minimum liquidity of $2.0 million unrestricted cash, and timely tax filings, with the company in compliance as of March 31, 2021[67][68][69][71] Future Minimum Payments on Outstanding Borrowings (in thousands) | Year | March 31, 2021 | | :------------------------------------------ | :------------- | | 2021 (remaining) | $1,326 | | 2022 | $2,996 | | 2023 | $15,619 | | 2024 | $14,280 | | Total | $34,221 | Note 5. Commitments and Contingencies The company has lease obligations, royalty payments, supply agreement commitments, and new licensing agreements post-Q1 2021 - Leases for office and laboratory space expire in January 2026, with rent expense of $0.2 million for Q1 2021, up from $0.1 million for Q1 2020[74][75] - Ongoing royalty payment obligations of 2.5% on net sales of products incorporating acquired technologies are limited to $1.2 million or total royalties earned through January 1, 2024[78] - Entered into an amended supply agreement in September 2020 with minimum annual purchase commitments for reagents of $4.1 million for 2021 and $6.0 million for 2022, with a 15% annual increase thereafter through 2025[81] - Subsequent to Q1 2021, the company entered into an exclusive license agreement and a master research collaboration agreement with Allegheny Health Network Research Institute (AHN), involving an initial license fee of $0.4 million and an annual collaboration fee of $0.4 million[80][82] Note 6. Fair Value Measurements Financial instruments measured at fair value primarily consist of money market funds, classified as Level 1 inputs Money Market Funds (in thousands) | Date | Total | Level 1 | | :---------------- | :------ | :------ | | March 31, 2021 | $107,983 | $107,983 | | December 31, 2020 | $34,507 | $34,507 | - The fair value of money market funds is based on quoted market prices, classifying them as Level 1 inputs in the fair value hierarchy[36][86] Note 7. Stockholders' Equity The company completed a public offering in March 2021, raising $64.7 million net by issuing 4,255,000 common shares - On March 25, 2021, the company completed a public offering of 4,255,000 shares of common stock at $16.25 per share, generating approximately $64.7 million in net proceeds[88] Outstanding Common Stock Warrants as of March 31, 2021 | Shares | Exercise Price | | :------- | :------------- | | 252,798 | $1.84 | | 69,176 | $1.84 | | 131 | $1.84 | | 83,778 | $14.32 | | 20,944 | $14.32 | | Total: 426,827 | | Note 8. Stock Option Plan The company operates a 2019 Incentive Award Plan and ESPP, with increased outstanding options and RSUs awarded in Q1 2021 - As of March 31, 2021, 1,391,215 shares remained available for future awards under the 2019 Incentive Award Plan[90] Stock Option Activity (March 31, 2021) | Metric | Number of Options | Weighted Average Exercise Price | | :-------------------------------- | :---------------- | :------------------------------ | | Outstanding, December 31, 2020 | 1,975,761 | $11.81 | | Granted | 88,750 | $18.20 | | Exercised | (3,381) | $12.94 | | Forfeited | (17,197) | $12.16 | | Expired | (2,353) | $29.08 | | Outstanding, March 31, 2021 | 2,041,580 | $12.06 | | Options exercisable, March 31, 2021 | 665,878 | $9.52 | - 185,000 Restricted Stock Units (RSUs) were awarded in Q1 2021 at a weighted-average grant date fair value of $18.20, all outstanding and unvested as of March 31, 2021[94] Total Stock-Based Compensation Expense (in thousands) | Category | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Cost of revenue | $11 | $6 | | Selling, general and administrative | $791 | $422 | | Research and development | $110 | $3 | | Total | $912 | $431 | Note 9. COVID-19 The pandemic led to reduced test volumes and supply chain delays in 2020, but volumes recovered in Q1 2021, with a tax benefit - The company experienced a reduction in patient test volumes and delays in patient enrollment and supply procurement during 2020 due to COVID-19[99] - AVISE CTD test volume increased by approximately 7% in Q1 2021 compared to Q1 2020, following a substantial recovery to pre-COVID-19 levels in Q4 2020[110] - The CARES Act resulted in a $0.1 million discrete tax benefit in Q1 2020 by permitting NOL carryovers to offset 100% of taxable income[100] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Exagen Inc.'s business, Q1 2021 financial performance, and factors affecting operations, liquidity, and capital are reviewed Overview Exagen Inc. specializes in autoimmune disease diagnostics, leveraging partnerships, but remains unprofitable and relies on financing - Exagen Inc. commercializes a portfolio of innovative testing products under its AVISE® brand for differential diagnosis, prognosis, and monitoring of complex autoimmune diseases, with AVISE CTD® comprising 81% of Q1 2021 revenue[105] - The company leverages its testing products to market therapeutics, including a co-promotion agreement with Janssen for SIMPONI®, which contributed approximately $0.3 million in Q1 2021 revenue[105] - Exagen has incurred net losses since inception, with an accumulated deficit of $187.5 million as of March 31, 2021, and expects continued operating losses[108] - Operations are funded primarily through equity and debt financings, including $64.7 million net proceeds from a public offering in March 2021, resulting in $118.1 million in cash and cash equivalents[108] Impact of COVID-19 COVID-19 initially decreased test volumes and disrupted operations, but volumes recovered, though future uncertainty persists - AVISE CTD® test volumes decreased by approximately 5% in 2020 but recovered to pre-COVID-19 levels in Q4 2020, with a 7% increase in Q1 2021 compared to Q1 2020[110] - The pandemic has caused delays in patient enrollment for clinical studies, disruptions in the supply chain for testing materials, and limitations on in-person interactions for the sales force[110] - In response, the company curtailed non-essential travel, enabled remote work, implemented health protection measures for lab employees, and reduced headcount, including 18 full-time employees in 2020[111] Factors Affecting Our Performance Performance drivers include product adoption, reimbursement, SIMPONI promotion, new product development, and maintaining gross margins - AVISE CTD® tests delivered in Q1 2021 increased by approximately 7% to 29,029, with a record 1,763 ordering healthcare providers (4% increase) and 659 adopting healthcare providers (from 582 in Q1 2020)[112][113] - Revenue growth is dependent on achieving broad coverage and adequate reimbursement from third-party payors, with historical challenges including proactive reductions and recovery attempts by commercial payors[114] - Promotion of SIMPONI® contributed $0.3 million in Q1 2021 revenue, but the company expects difficulties in maintaining meaningful co-promotion revenue above the predetermined baseline in 2021, with no minimum promotion fee for the second half of the year[114] - Maintaining meaningful gross margins is a focus, driven by increasing operating leverage through clinical studies, volume-based reagent pricing, and clinical laboratory automation, partially offset by potential challenges in co-promotion revenue[114] Janssen Promotion Agreement The amended Janssen Agreement provides tiered promotion fees for SIMPONI based on incremental units, with a minimum fee for Q1/Q2 2021 - The Amended Janssen Agreement adjusted the predetermined average baseline for SIMPONI® prescribed units to approximately 28,750 per quarter for Q4 2020, Q1 2021, and Q2 2021[116] - For Q1 and Q2 2021, the company is entitled to a tiered promotion fee of $500 to $1,000 per prescription above baseline, with a minimum fee of $0.3 million and a cap at 10% above the adjusted baseline[116] - For the remaining term of the agreement starting July 1, 2021, the terms revert to the original agreement with no minimum promotion fee and no cap on predetermined baseline units[116] - The agreement expires on December 31, 2021, with an option for the company to extend for an additional 12 months[116] Seasonality The company expects seasonal variations in financial results due to holidays, vacation patterns, climate, and patient benefit changes - Seasonal variations are expected due to year-end holidays, other major holidays, vacation patterns of patients and healthcare providers, medical conferences, climate and weather conditions, and timing of patient benefit changes (deductibles and co-insurance limits)[117] Financial Overview This section details revenue and operating expense components, with expected increases in R&D and SG&A, and consistent interest expense - Revenue is primarily derived from AVISE CTD® test sales, recognized on an accrual basis based on estimated collectible amounts[118][120] - Costs of revenue are expected to increase in absolute dollars with test volume but decrease per test due to volume discounts and efficiencies[124] - Selling, general and administrative (SG&A) expenses are expected to increase in 2021 due to sales force evaluation, headcount additions, and personnel costs[126] - Research and development (R&D) expenses are expected to increase in 2021 due to investments in existing products, new candidates, and expansion of the clinical R&D facility[129] - Interest expense is expected to remain consistent in 2021 and until 2023[130] Results of Operations (Comparison of the Three Months Ended March 31, 2021 and 2020) Q1 2021 revenue increased by 10.5% to $10.6 million, but net loss widened to $6.2 million due to higher operating expenses Key Financial Results (in thousands) | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | Change | % Change | | :------------------------------------ | :-------------------------------- | :-------------------------------- | :----- | :------- | | Revenue | $10,587 | $9,584 | $1,003 | 10.5% | | Costs of revenue | $4,711 | $4,545 | $166 | 3.7% | | Selling, general and administrative | $10,040 | $9,626 | $414 | 4.3% | | Research and development | $1,403 | $634 | $769 | 121.3% | | Total operating expenses | $16,154 | $14,805 | $1,349 | 9.1% | | Loss from operations | $(5,567) | $(5,221) | $(346) | 6.6% | | Net loss | $(6,209) | $(5,563) | $(646) | 11.6% | - Revenue increase was primarily due to a rise in AVISE CTD® tests delivered (29,029 in Q1 2021 vs. 27,126 in Q1 2020) and $0.3 million from SIMPONI® co-promotion[134][135] - Research and development expenses increased significantly by $0.8 million, driven by employee-related expenses and clinical study costs[138] - Other income, net, decreased by $0.2 million due to lower money market interest rates[140] Liquidity and Capital Resources The company has a history of losses, relies on equity and debt financing, and raised $64.7 million net from a March 2021 public offering - As of March 31, 2021, the company had an accumulated deficit of $187.5 million and incurred net losses of $6.2 million and $5.6 million for Q1 2021 and Q1 2020, respectively[142] - In March 2021, the company completed a public offering, raising approximately $64.7 million in net proceeds, increasing cash and cash equivalents to $118.1 million[144] - The company has a $25.0 million term loan with Innovatus, secured by substantially all assets, with an 8.5% annual interest rate (2.0% paid in-kind for the first 36 months)[145] - As of March 31, 2021, the company was in compliance with all covenants of the Amended Loan Agreement, including maintaining minimum liquidity of $2.0 million and achieving certain revenue targets[146] Funding Requirements Liquidity needs are driven by operations, growth, and R&D investments, with existing cash believed sufficient for 12 months, but risks remain - Primary uses of cash include funding operations, business growth, and significant investments in laboratory equipment and capital expenditures, including converting 8,000 square feet of warehouse space into additional clinical laboratory and R&D facility space by H1 2022[149][150] - Management believes existing cash and cash equivalents, along with anticipated future revenue, will be sufficient to meet cash requirements for at least the next 12 months[151] - Future funding may be required through equity offerings, debt financings, or other capital sources, which could dilute stockholder ownership or impose restrictive covenants[152] - Key risks to liquidity include the impact of COVID-19, ability to grow sales and secure reimbursement for AVISE® testing products, costs of developing the product pipeline, and expenses associated with SIMPONI® promotion[153] Cash Flows Q1 2021 saw a $60.6 million net cash increase, primarily from $65.1 million in financing activities, offsetting operating and investing uses Summary of Cash Flows (in thousands) | Activity | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :------------------------------------------ | :-------------------------------- | :-------------------------------- | | Operating activities | $(4,312) | $(3,301) | | Investing activities | $(167) | $(84) | | Financing activities | $65,081 | $(51) | | Net change in cash, cash equivalents and restricted cash | $60,602 | $(3,436) | - Net cash used in operating activities for Q1 2021 was $4.3 million, primarily from a net loss of $6.2 million, partially offset by non-cash charges and changes in net operating assets[155] - Net cash provided by financing activities for Q1 2021 was $65.1 million, mainly from $65.0 million net proceeds from the public offering[158] Critical Accounting Policies and Significant Management Estimates Financial statements are prepared using U.S. GAAP, requiring significant estimates, with no material changes in Q1 2021 - Financial statements are prepared in accordance with U.S. GAAP, necessitating significant management estimates and assumptions[160] - No significant changes in critical accounting policies and estimates occurred during Q1 2021, other than those detailed in Note 2[161][162] Recent Accounting Pronouncements Refers to Note 2 for a summary of changes in significant accounting policies - Refer to Note 2 for a summary of recently issued and adopted accounting pronouncements[163] Off-Balance Sheet Arrangements The company did not have any off-balance sheet arrangements during the periods presented - The company did not have any off-balance sheet arrangements during the periods presented[164] JOBS Act Accounting Election As an emerging growth company, Exagen Inc. uses an extended transition period for new accounting standards, affecting comparability - As an emerging growth company, Exagen Inc. has elected to use the extended transition period for complying with new or revised financial accounting standards, which may impact comparability with other public companies[165] - The company expects to remain an emerging growth company until 2024, unless it becomes a large accelerated filer, its annual gross revenues exceed $1.07 billion, or it issues more than $1.0 billion of non-convertible debt in any three-year period[166] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company states that this item is not applicable - This section is marked as 'Not applicable', indicating no quantitative and qualitative disclosures about market risk are provided[168] Item 4. Controls and Procedures Management evaluated disclosure controls and procedures as effective, with no material changes in internal control over financial reporting Evaluation of Disclosure Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective at a reasonable assurance level as of March 31, 2021 - Management, including the principal executive officer and principal financial officer, concluded that disclosure controls and procedures were effective at the reasonable assurance level as of March 31, 2021[171][172] Changes in Internal Control Over Financial Reporting No material changes in internal control over financial reporting occurred during the three months ended March 31, 2021 - No material changes in internal control over financial reporting occurred during the three months ended March 31, 2021[173] Part II. Other Information Item 1. Legal Proceedings The company is not currently a party to any material legal proceedings, though ordinary course claims could have an adverse impact - The company is not currently a party to any material legal proceedings[175] - From time to time, the company may be involved in legal proceedings or claims incident to the ordinary course of business, which could have an adverse impact[175] Item 1A. Risk Factors Updated risk factors emphasize the ongoing impact of COVID-19 and inherent risks in developing new testing products and expanding labs - The COVID-19 pandemic continues to pose substantial public health challenges, affecting employees, patients, healthcare providers, and business operations, with uncertain future impacts on testing volumes, supply chain, and commercial activities[178] - AVISE CTD® test volume increased by approximately 7% in Q1 2021 compared to Q1 2020, but the continued spread of COVID-19 may adversely affect future testing volumes[178] - Developing new testing products involves a lengthy and complex process with a high degree of risk, including failure to identify biomarkers, suboptimal performance, and difficulties in clinical validation, which may delay or prevent commercialization[182] - Plans to convert warehouse space into an additional clinical laboratory and R&D facility for molecular and multiomic capabilities carry risks, as the company lacks prior experience in developing and integrating molecular biomarkers[183] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds No recent unregistered sales; $21.1 million of IPO proceeds used for selling and marketing, with no material change in planned use - There were no recent unregistered sales of equity securities[187] - As of March 31, 2021, approximately $21.1 million of the $50.4 million net proceeds from the September 2019 IPO has been used, primarily for selling and marketing activities, with no material change in the planned use of proceeds[188][189] Item 3. Defaults Upon Senior Securities The company states that this item is not applicable - This section is marked as 'Not applicable', indicating no defaults upon senior securities[191] Item 4. Mine Safety Disclosures The company states that this item is not applicable - This section is marked as 'Not applicable', indicating no mine safety disclosures[191] Item 5. Other Information The company states that there is no other information to disclose under this item - This section states 'None', indicating no other information to disclose[191] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including corporate governance documents, stock agreements, and certifications - Exhibits include Amended and Restated Certificate of Incorporation, Bylaws, stock certificates, Investors' Rights Agreement, Stockholders' Agreement, Common Stock Purchase Warrant, Restricted Stock Unit Agreement, Lease Amendment, Executive Change in Control Severance Plan, and various certifications (31.1, 31.2, 32.1) and XBRL Taxonomy documents[194] Signatures The report is signed by Fortunato Ron Rocca, President and Chief Executive Officer, and Kamal Adawi, Chief Financial Officer, on May 11, 2021 - The report was signed by Fortunato Ron Rocca (President and CEO) and Kamal Adawi (Chief Financial Officer) on May 11, 2021[199]