Exagen(XGN) - 2021 Q3 - Quarterly Report

Part I. Financial Information This part presents Exagen Inc.'s unaudited financial statements, management's discussion, market risk, and controls Item 1. Condensed Financial Statements (unaudited) This section presents the unaudited condensed financial statements for Exagen Inc., including the balance sheets, statements of operations, stockholders' equity, and cash flows, along with detailed notes explaining the company's accounting policies, financial instruments, debt, commitments, and equity activities. The company reported a net loss and negative cash flows from operations, but management believes existing capital resources are sufficient for at least 12 months Condensed Balance Sheets The balance sheet highlights show significant increases in cash, total assets, and stockholders' equity, alongside an accumulated deficit Condensed Balance Sheet Highlights (in thousands) | Metric | September 30, 2021 | December 31, 2020 | Change | % Change | | :-------------------------------- | :------------------- | :------------------ | :----- | :------- | | Cash and cash equivalents | $106,766 | $57,448 | $49,318 | 85.85% | | Total current assets | $118,381 | $70,517 | $47,864 | 67.88% | | Total assets | $127,772 | $78,375 | $49,397 | 63.03% | | Total current liabilities | $8,096 | $8,771 | $(675) | -7.70% | | Total liabilities | $36,969 | $36,536 | $433 | 1.19% | | Total stockholders' equity | $90,803 | $41,839 | $48,964 | 117.02% | | Accumulated deficit | $(201,087) | $(181,289) | $(19,798) | 10.92% | Condensed Statements of Operations The statements of operations reveal increased revenue but also higher operating expenses, leading to a substantial net loss for both three and nine-month periods Condensed Statements of Operations Highlights (in thousands, except per share data) | Metric | Three Months Ended Sep 30, 2021 | Three Months Ended Sep 30, 2020 | 3M Change | 3M % Change | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | 9M Change | 9M % Change | | :-------------------------------- | :------------------------------ | :------------------------------ | :---------- | :------------ | :----------------------------- | :----------------------------- | :---------- | :------------ | | Revenue | $12,251 | $10,775 | $1,476 | 13.70% | $35,610 | $29,307 | $6,303 | 21.51% | | Costs of revenue | $5,487 | $4,341 | $1,146 | 26.40% | $15,649 | $12,224 | $3,425 | 28.02% | | Selling, general and administrative | $11,528 | $9,202 | $2,326 | 25.28% | $32,739 | $27,104 | $5,635 | 20.79% | | Research and development | $1,740 | $1,018 | $722 | 70.92% | $5,035 | $2,403 | $2,632 | 109.53% | | Total operating expenses | $18,755 | $14,561 | $4,194 | 28.80% | $53,423 | $41,731 | $11,692 | 28.02% | | Loss from operations | $(6,504) | $(3,786) | $(2,718) | 71.80% | $(17,813) | $(12,424) | $(5,389) | 43.38% | | Net loss | $(7,179) | $(4,308) | $(2,871) | 66.64% | $(19,798) | $(13,234) | $(6,564) | 49.60% | | Net loss per share, basic and diluted | $(0.42) | $(0.34) | $(0.08) | 23.53% | $(1.27) | $(1.05) | $(0.22) | 20.95% | Condensed Statements of Stockholders' Equity Stockholders' equity significantly increased due to a public offering, despite an accumulated deficit from ongoing net losses - Total stockholders' equity increased from $41.8 million at December 31, 2020, to $90.8 million at September 30, 2021, primarily driven by a public offering that generated $64.7 million in net proceeds[10][15] - The company issued 4,255,000 shares in a public offering, raising $64.7 million net of issuance costs, and also saw increases from stock option exercises and Employee Stock Purchase Plan issuances[15] - An accumulated deficit of $(201.1) million was reported as of September 30, 2021, reflecting ongoing net losses[10][15] Condensed Statements of Cash Flows Cash flows show significant cash provided by financing activities, offsetting cash used in operating and investing activities, resulting in a net increase in cash Condensed Statements of Cash Flows Highlights (in thousands) | Cash Flow Activity | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | Change | | :-------------------------------- | :----------------------------- | :----------------------------- | :----- | | Net cash used in operating activities | $(14,222) | $(10,185) | $(4,037) | | Net cash used in investing activities | $(1,356) | $(450) | $(906) | | Net cash provided by (used in) financing activities | $64,896 | $(15) | $64,911 | | Net change in cash, cash equivalents and restricted cash | $49,318 | $(10,650) | $59,968 | | Cash, cash equivalents and restricted cash, end of period | $106,866 | $61,534 | $45,332 | Notes to Unaudited Condensed Financial Statements This section details Exagen's accounting policies, financial instruments, debt, commitments, equity, and recent events Note 1. Organization Exagen Inc. focuses on autoimmune disease diagnosis, reporting recurring losses and negative cash flows, but believes existing capital is sufficient for 12 months - Exagen Inc. focuses on transforming care for autoimmune diseases through timely differential diagnosis and optimized therapeutic intervention[24] - The company has incurred recurring losses and negative cash flows from operating activities since inception, with an accumulated deficit of $201.1 million as of September 30, 2021[25] - Management believes existing capital resources of $106.8 million in cash and cash equivalents are sufficient to fund obligations for at least twelve months[25] Note 2. Summary of Significant Accounting Policies This note outlines the unaudited financial statements' preparation, revenue recognition, significant payors, and accounting policy elections - The financial statements are unaudited and prepared in accordance with SEC rules and GAAP, requiring management estimates and assumptions[27][28] Significant Payors and Customers (Revenue and Accounts Receivable %) | Payor/Customer | September 30, 2021 (AR) | December 31, 2020 (AR) | September 30, 2021 (Revenue) | September 30, 2020 (Revenue) | | :--------------- | :---------------------- | :--------------------- | :--------------------------- | :--------------------------- | | Blue Shield | 17% | 11% | 12% | 12% | | United Healthcare | 16% | * | - | - | | Janssen (SIMPONI®) | 11% | 35% | * | 13% | - Approximately 81% of the company's revenue for the nine months ended September 30, 2021, was related to the AVISE CTD test, up from 71% in the same period of 2020[32] - The co-promotion agreement with Janssen Biotech, Inc. for SIMPONI® was mutually terminated effective August 31, 2021, with the company receiving $0.6 million in consideration[46][47] Co-promotion Revenue from Janssen (in thousands) | Period | 2021 | 2020 | | :-------------------------------- | :----- | :----- | | Three Months Ended September 30, | $400 | $1,347 | | Nine Months Ended September 30, | $1,000 | $3,398 | - The company has elected to use the extended transition period for complying with new or revised accounting standards as an emerging growth company under the JOBS Act[60] Note 3. Other Financial Information This note provides details on prepaid expenses, property and equipment, depreciation, and accrued liabilities Prepaid Expenses and Other Current Assets (in thousands) | Category | September 30, 2021 | December 31, 2020 | | :-------------------------------- | :------------------- | :------------------ | | Diagnostic testing supplies | $1,010 | $1,203 | | Prepaid maintenance and insurance contracts | $1,040 | $2,229 | | Total prepaid and other current assets | $2,405 | $4,159 | Property and Equipment, Net (in thousands) | Category | September 30, 2021 | December 31, 2020 | | :-------------------------------- | :------------------- | :------------------ | | Total property and equipment | $7,043 | $5,043 | | Less: accumulated depreciation and amortization | $(3,597) | $(2,941) | | Property and equipment, net | $3,446 | $2,102 | - Depreciation and amortization expense for the nine months ended September 30, 2021, was approximately $0.7 million, compared to $0.4 million in the same period of 2020[65] Accrued and Other Current Liabilities (in thousands) | Category | September 30, 2021 | December 31, 2020 | | :-------------------------------- | :------------------- | :------------------ | | Accrued payroll and related expenses | $3,793 | $3,589 | | Accrued purchases of goods and services | $765 | $311 | | Capital lease obligations, current portion | $586 | $308 |\ | Total accrued and other current liabilities | $6,584 | $5,757 | Note 4. Borrowings This note details the company's term loan, its interest rate, collateral, covenants, and future minimum payment obligations - The company has a 2017 Term Loan with Innovatus Life Sciences Lending Fund I, LP, with an interest rate of 8.5% (2.0% paid in-kind until December 2022)[68] - The loan is collateralized by a first priority security interest in substantially all of the company's assets and includes affirmative and negative covenants, which the company was in compliance with as of September 30, 2021[70][71][72][73] Future Minimum Payments on Outstanding Borrowings (in thousands) | Year | September 30, 2021 | | :-------------------------------- | :------------------- | | 2021 (remaining) | $446 | | 2022 | $2,996 | | 2023 | $15,619 | | 2024 | $14,280 | | Total | $33,341 | | Total borrowings, net of discounts and debt issuance costs | $27,288 | Note 5. Commitments and Contingencies This note outlines the company's lease obligations, license agreements, supply commitments, and collaboration expenses - The company leases office and laboratory space in Vista, California, expiring in January 2026, and entered into a sub-lease for additional office space in Carlsbad, California, commencing October 2021 and expiring April 2027[76][77] - A license agreement with Prometheus Laboratories, Inc. was terminated on September 28, 2021, for a fee of approximately $0.1 million, and the company acquired the associated intellectual property[79] - Ongoing royalty payment obligations are 2.5% on net sales of products incorporating certain acquired technologies, limited to the lesser of $1.2 million or total royalties earned through January 1, 2024[80] - In May 2021, the company entered an exclusive license agreement with Allegheny Health Network Research Institute (AHN) for $0.4 million, with future royalties or minimum annual royalties[82] - A supply agreement includes minimum annual purchase commitments of $4.1 million for 2021 and $6.0 million for 2022, with a 15% annual increase thereafter through 2025[83] - Collaboration expenses under a master research collaboration agreement with AHN were $0.1 million for the three months and $0.2 million for the nine months ended September 30, 2021[84] Note 6. Fair Value Measurements This note details the fair value measurements of financial instruments, primarily money market funds, based on Level 1 inputs Fair Value Measurements of Financial Instruments (in thousands) | Asset Category | September 30, 2021 (Total) | September 30, 2021 (Level 1) | December 31, 2020 (Total) | December 31, 2020 (Level 1) | | :--------------- | :--------------------------- | :--------------------------- | :-------------------------- | :-------------------------- | | Money market funds | $105,679 | $105,679 | $34,507 | $34,507 | - The fair value of money market funds is based on quoted market prices (Level 1 input)[87] Note 7. Stockholders' Equity This note details the public offering, issuance of pre-funded warrants, and outstanding warrants to purchase common stock - On March 25, 2021, the company completed a public offering of 4,255,000 shares of common stock at $16.25 per share, generating net proceeds of approximately $64.7 million[89] - On June 22, 2021, the company exchanged 804,951 shares of common stock for pre-funded warrants (Exchange Warrants) with a nominal exercise price of $0.001 per share, classified as equity[90] Outstanding Warrants to Purchase Common Stock as of September 30, 2021 | Type | Shares | Exercise Price | Issuance Date | Expiration Date | | :-------------------------------- | :------- | :------------- | :------------ | :-------------- | | Common stock warrants | 237,169 | $1.84 | Jan 19, 2016 | Jan 19, 2026 | | Common stock warrants | 67,086 | $1.84 | Mar 31, 2016 | Mar 31, 2026 | | Common stock warrants | 131 | $1.84 | Apr 1, 2016 | Apr 1, 2026 | | Common stock warrants | 83,778 | $14.32 | Sep 7, 2017 | Sep 7, 2024 | | Common stock warrants | 20,944 | $14.32 | Dec 7, 2018 | Dec 7, 2025 | | Common stock warrants (Exchange Warrants) | 804,951 | $0.001 | Jun 22, 2021 | None | | Total | 1,214,059 | | | | Note 8. Stock Option Plan This note details shares available under incentive plans, stock option and RSU activity, and related compensation costs - As of September 30, 2021, 1,139,831 shares of common stock remained available for future awards under the 2019 Incentive Award Plan[92] - As of September 30, 2021, 327,516 shares of common stock remained available for issuance under the 2019 Employee Stock Purchase Plan (ESPP)[93] Stock Option Activity (September 30, 2021) | Category | Number of Options | Weighted Average Exercise Price | | :-------------------------------- | :---------------- | :------------------------------ | | Outstanding, December 31, 2020 | 1,975,761 | $11.81 | | Granted | 229,850 | $16.79 | | Exercised | (11,188) | $7.13 | | Forfeited | (122,435) | $14.49 | | Expired | (4,931) | $21.50 | | Outstanding, September 30, 2021 | 2,067,057 | $12.20 | | Options exercisable, September 30, 2021 | 979,111 | $10.30 | - Total unrecognized compensation cost related to option awards was $7.7 million, expected to be recognized over a remaining weighted-average vesting period of 2.2 years[94] Restricted Stock Unit Activity (September 30, 2021) | Category | Number of Shares | Weighted Average Grant Date Fair Value | | :-------------------------------- | :--------------- | :------------------------------------- | | Outstanding, December 31, 2020 | — | — | | Awards granted | 422,150 | $16.81 | | Awards canceled | (19,050) | $16.28 | | Outstanding, September 30, 2021 | 403,100 | $16.84 | - Total unrecognized compensation cost related to restricted stock units was $5.9 million, expected to be recognized over a remaining weighted-average vesting period of 3.5 years[95] Total Non-Cash Stock-Based Compensation Expense (in thousands) | Category | Three Months Ended Sep 30, 2021 | Three Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :-------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Cost of revenue | $64 | $9 | $136 | $21 | | Selling, general and administrative | $1,115 | $710 | $2,955 | $1,696 | | Research and development | $175 | $80 | $460 | $160 | | Total | $1,354 | $799 | $3,551 | $1,877 | Note 9. COVID-19 This note discusses the pandemic's impact on test volumes, CARES Act benefits received, and PPP Loan repayment - The COVID-19 pandemic led to reduced patient test volumes, clinical study delays, and procurement delays in 2020, but AVISE CTD test volumes increased by approximately 21% for the three months and 31% for the nine months ended September 30, 2021, compared to 2020[100][118] - The CARES Act allowed the company to release a valuation allowance against deferred tax assets, resulting in a $0.1 million discrete tax benefit in Q1 2020[101] - The company recognized $0.7 million from the CARES Act Provider Relief Fund in the nine months ended September 30, 2020, due to lost revenue attributable to COVID-19[102] - A $2.9 million PPP Loan received in April 2020 was fully repaid in May 2020 due to new SBA guidance[103] Note 10. Subsequent Events This note details lease extensions and amendments to the term loan agreement that occurred after the reporting period - In October 2021, the company extended several office and laboratory leases, pushing expiration dates from January 2026 to April 2027[105][106][107] - In October 2021, the company and Innovatus amended the 2017 Term Loan, decreasing the interest rate to 8.0% (2.0% PIK until December 2024), extending the interest-only period through December 2024, and the maturity date to November 19, 2026[108] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial condition and operational results, highlighting revenue drivers, expense trends, the impact of COVID-19, and liquidity. The company continues to focus on its AVISE® testing products for autoimmune diseases, expanding its sales force, and pursuing strategic partnerships, while managing ongoing net losses and capital requirements Overview Exagen Inc. develops and commercializes AVISE® brand testing products for autoimmune diseases, expanding its sales force, and managing ongoing net losses - Exagen Inc. develops and commercializes a portfolio of innovative testing products under its AVISE® brand, primarily for differential diagnosis, prognosis, and monitoring of complex autoimmune diseases like SLE and RA[112] - The lead product, AVISE CTD, accounted for 81% and 71% of revenue for the nine months ended September 30, 2021 and 2020, respectively[112] - The company operates a CLIA-certified and CAP-accredited clinical laboratory in Vista, California, and is expanding its clinical laboratory and R&D facility to enhance testing capacity and develop molecular and multiomic capabilities[114] - As of September 30, 2021, the company had a sales force of 62 representatives covering 63 territories, focused on rheumatologists[114] - The company has never been profitable, reporting an accumulated deficit of $201.1 million and net losses of $19.8 million and $13.2 million for the nine months ended September 30, 2021 and 2020, respectively[115] Recent Developments Exagen recently secured an agreement with Inland Empire Health Plan to offer AVISE CTD and AVISE Lupus tests to over one million members - In October 2021, Exagen entered an agreement with Inland Empire Health Plan (IEHP) to offer AVISE CTD and AVISE Lupus tests on an in-network basis to over one million IEHP members[116] Impact of COVID-19 The COVID-19 pandemic initially reduced test volumes but saw substantial recovery and growth in 2021, while posing ongoing risks to operations and supply chains - COVID-19 led to a 5% decrease in AVISE CTD test volume in 2020 compared to 2019, but volumes substantially recovered in Q4 2020[118] - AVISE CTD test volumes increased by approximately 21% for the three months and 31% for the nine months ended September 30, 2021, compared to the same periods in 2020[118] - Ongoing risks include patient hesitancy for preventative care, supply chain disruptions, limitations on sales force interactions, and increased competition for laboratory personnel[118] - The company implemented remote work for non-clinical staff, provided PPE for laboratory employees, and scaled marketing spend, while terminating 18 full-time employees in 2020 due to the pandemic[119] Factors Affecting Our Performance Key performance factors include growing AVISE CTD test adoption, critical third-party payor reimbursement, the Janssen Agreement termination, and continued R&D investment - AVISE CTD test adoption continues to grow, with 94,099 tests delivered in the first nine months of 2021 (31% growth YoY) and a record 1,969 ordering healthcare providers in Q3 2021 (18% increase YoY)[121] - Reimbursement from third-party payors is critical, with payment rates varying significantly between participating and non-participating providers, and retrospective adjustments posing risks[121] - The termination of the Janssen Agreement in August 2021, which contributed $1.0 million and $3.4 million in revenue for the nine months ended September 30, 2021 and 2020 respectively, shifts focus to existing testing products and new synergistic partnerships[121][123] - Continued investment in R&D for new testing products and maintaining meaningful margins through operating leverage, volume-based pricing, and laboratory automation are key performance factors[121] Janssen Promotion Agreement The co-promotion agreement with Janssen for SIMPONI® was terminated, resulting in decreased revenue and a restriction on promoting other biologics - The co-promotion agreement with Janssen for SIMPONI® was mutually terminated effective August 31, 2021, with Exagen receiving $0.6 million in consideration[123] - Revenue from this agreement was approximately $1.0 million for the nine months ended September 30, 2021, a decrease from $3.4 million in the same period of 2020[123] - The company is restricted from promoting other biologics or Janus kinase inhibitors for covered indications without Janssen's consent until May 31, 2022[123] Seasonality The company anticipates seasonal variations in financial results influenced by holidays, vacation patterns, climate, and patient benefit changes - The company expects seasonal variations in financial results due to factors such as year-end holidays, vacation patterns of patients and healthcare providers, climate, and patient benefit changes[124] Financial Overview This section outlines revenue recognition from AVISE CTD test sales, cost of revenue components, and expected trends in operating expenses - Revenue is primarily from AVISE CTD test sales, recognized on an accrual basis based on estimated realizable amounts, which requires significant management judgment[125][126] - Costs of revenue include materials, labor, equipment, shipping, blood specimen fees, royalties, depreciation, and allocated overhead, and are expected to increase in absolute dollars with test volume but decrease per test due to efficiencies[128][130] - Selling, general and administrative expenses are expected to increase in 2021 due to sales and support functions, headcount additions, and stock-based compensation[132] - Research and development expenses are projected to increase in 2021 due to investments in existing products, new candidates, facility expansion, headcount, and stock-based compensation[134] - Interest expense is expected to remain consistent in 2021 compared to 2020[136] - Other income, net, primarily consists of interest income and amounts from the CARES Act Provider Relief Fund in 2020[137] Results of Operations This section provides a detailed comparison of financial performance for the three and nine months ended September 30, 2021 and 2020, highlighting revenue and expense changes Comparison of Three Months Ended September 30, 2021 and 2020 (in thousands) | Metric | 2021 | 2020 | Change | % Change | | :-------------------------------- | :----- | :----- | :----- | :------- | | Revenue | $12,251 | $10,775 | $1,476 | 13.7% | | Costs of revenue | $5,487 | $4,341 | $1,146 | 26.4% | | Selling, general and administrative expenses | $11,528 | $9,202 | $2,326 | 25.3% | | Research and development expenses | $1,740 | $1,018 | $722 | 70.9% | | Total operating expenses | $18,755 | $14,561 | $4,194 | 28.8% | | Net loss | $(7,179) | $(4,308) | $(2,871) | 66.6% | - Revenue increased by $1.5 million (13.7%) for the three months ended September 30, 2021, driven by a rise in AVISE CTD tests delivered (31,742 vs. 26,201 YoY), partially offset by decreased Janssen Agreement revenue[140] - Costs of revenue increased by $1.1 million (26.4%) for the three months, primarily due to higher direct costs associated with increased test volume[141] - Selling, general and administrative expenses rose by $2.3 million (25.3%) for the three months, mainly due to employee-related expenses, marketing, and professional services[143] - Research and development expenses increased by $0.7 million for the three months, driven by employee-related expenses, clinical trials, and collaboration costs[144] Comparison of Nine Months Ended September 30, 2021 and 2020 (in thousands) | Metric | 2021 | 2020 | Change | % Change | | :-------------------------------- | :----- | :----- | :----- | :------- | | Revenue | $35,610 | $29,307 | $6,303 | 21.5% | | Costs of revenue | $15,649 | $12,224 | $3,425 | 28.0% | | Selling, general and administrative expenses | $32,739 | $27,104 | $5,635 | 20.8% | | Research and development expenses | $5,035 | $2,403 | $2,632 | 109.5% | | Total operating expenses | $53,423 | $41,731 | $11,692 | 28.0% | | Net loss | $(19,798) | $(13,234) | $(6,564) | 49.6% | - Revenue increased by $6.3 million (21.5%) for the nine months ended September 30, 2021, due to increased AVISE CTD tests delivered (94,099 vs. 71,849 YoY), partially offset by lower Janssen Agreement revenue[148] - Costs of revenue increased by $3.4 million (28.0%) for the nine months, mainly from higher direct costs for materials, labor, and shipping, partially offset by decreased royalty costs[149] - Selling, general and administrative expenses increased by $5.6 million (20.8%) for the nine months, primarily due to employee-related expenses, insurance, marketing, and professional services[150] - Research and development expenses surged by $2.6 million for the nine months, driven by clinical trial expenses, employee-related costs, license fees, laboratory supplies, and collaboration expenses[151] - Other income, net, decreased by $1.0 million for the nine months, primarily due to the $0.7 million CARES Act Provider Relief Fund received in 2020 and lower money market interest rates[153] Liquidity and Capital Resources The company has incurred significant net losses and relies on equity and debt financing, with management believing existing capital is sufficient for the next 12 months - The company has incurred net losses since inception, with an accumulated deficit of $201.1 million as of September 30, 2021, and expects continued losses[155] - Operations have been financed through equity and debt financings; a March 2021 public offering generated $64.7 million in net proceeds, contributing to $106.8 million in cash and cash equivalents as of September 30, 2021[156][157] - The Amended Loan Agreement with Innovatus has an 8.0% annual interest rate (2.0% PIK until December 2024), extends maturity to November 2026, and is secured by substantially all company assets[158][159] - Primary uses of cash include funding operations, increasing test volume, expanding marketing, commercializing new products, and R&D, including significant investments in laboratory and R&D facility expansion[162][163] - Management believes existing cash and anticipated future revenue will be sufficient for at least the next 12 months, but future funding may be required through equity offerings, debt financings, or collaborations[164][165] Cash Flows Summary (in thousands) | Cash Flow Activity | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :-------------------------------- | :----------------------------- | :----------------------------- | | Operating activities | $(14,222) | $(10,185) | | Investing activities | $(1,356) | $(450) | | Financing activities | $64,896 | $(15) | | Net change in cash, cash equivalents and restricted cash | $49,318 | $(10,650) | Critical Accounting Policies and Significant Management Estimates The financial statements are prepared under U.S. GAAP, requiring management estimates, with no significant policy changes reported in the quarter - The financial statements are prepared using U.S. GAAP, requiring management to make estimates and assumptions that affect reported amounts and disclosures[173] - No significant changes in critical accounting policies and estimates occurred during the three months ended September 30, 2021, other than those disclosed in Note 2[175] Recent Accounting Pronouncements The company adopted ASU 2019-12 with no material impact and plans to early adopt ASU 2016-02 for leases in 2022 as an emerging growth company - The company adopted ASU 2019-12, Simplifying the Accounting for Income Taxes, on January 1, 2021, with no material impact on its financial statements[62] - As an emerging growth company, Exagen elected to early adopt ASU 2016-02, Leases (Topic 842), effective January 1, 2022, and is currently evaluating its impact[61] Off-Balance Sheet Arrangements The company reported no off-balance sheet arrangements during the periods presented - The company did not have any off-balance sheet arrangements during the periods presented[177] JOBS Act Accounting Election As an emerging growth company, Exagen has elected the extended transition period for new accounting standards and will retain this status until at least 2024 - As an 'emerging growth company' under the JOBS Act, Exagen has elected to use the extended transition period for complying with new or revised accounting standards[178] - The company will remain an emerging growth company until the last day of its fiscal year following the fifth anniversary of its IPO (2024), unless certain conditions are met earlier[179] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section states that there are no applicable quantitative and qualitative disclosures about market risk for the company - The company has no applicable quantitative and qualitative disclosures about market risk[181] Item 4. Controls and Procedures This section details the company's evaluation of its disclosure controls and procedures, concluding their effectiveness at a reasonable assurance level as of September 30, 2021, with no material changes in internal control over financial reporting during the quarter Evaluation of Disclosure Controls and Procedures Management concluded that disclosure controls and procedures were effective at a reasonable assurance level as of September 30, 2021 - Management, including the principal executive and financial officers, concluded that disclosure controls and procedures were effective at the reasonable assurance level as of September 30, 2021[185] - Disclosure controls are designed to ensure information required for SEC reports is recorded, processed, summarized, and reported timely[183] Changes in Internal Control Over Financial Reporting There were no material changes in internal control over financial reporting during the three months ended September 30, 2021 - There were no changes in internal control over financial reporting during the three months ended September 30, 2021, that materially affected or are reasonably likely to materially affect internal control over financial reporting[186] Part II. Other Information This part covers legal proceedings, risk factors, equity sales, defaults, mine safety, other information, exhibits, and signatures Item 1. Legal Proceedings The company is not currently a party to any material legal proceedings, though it may face claims in the ordinary course of business, which could adversely impact operations regardless of outcome - The company is not currently a party to any material legal proceedings[188] - Legal proceedings or claims, even if immaterial, can have an adverse impact due to defense and settlement costs, diversion of resources, and other factors[188] Item 1A. Risk Factors This section updates the risk factors, emphasizing the ongoing impact of the COVID-19 pandemic on business operations, test volumes, supply chain, and workforce. It also highlights risks associated with developing new testing products and the company's integrated testing and therapeutics strategy, particularly after the termination of the Janssen Agreement - No material changes to risk factors were disclosed other than those related to the COVID-19 pandemic, new testing product development, and the integrated business strategy[191] - The COVID-19 pandemic continues to pose substantial public health challenges, affecting test volumes, supply chains, sales activities, and potentially leading to facility shutdowns or increased competition for employees[191][192][193] - Developing new testing products is a lengthy, complex, and high-risk process, with no assurance of commercial success or adequate return on investment, especially for molecular and multiomic capabilities[194][195][196][199] - Future growth depends on the success of integrating proprietary testing products with therapeutics promotion through third-party collaborations, which is uncertain following the termination of the Janssen Agreement[200][201] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section details the use of proceeds from the company's 2019 IPO and reports recent unregistered sales of equity securities through warrant exercises Use of Proceeds The company received $50.4 million net proceeds from its 2019 IPO, with approximately $32.2 million used primarily for selling and marketing activities - The company received net proceeds of approximately $50.4 million from its September 2019 IPO[203] - As of September 30, 2021, approximately $32.2 million of the IPO proceeds have been used, primarily for selling and marketing activities, with no material change in the planned use[204] Recent Sales of Unregistered Securities The company issued 17,719 shares of common stock from warrant exercises in September 2021, relying on Section 4(a)(2) of the Securities Act - Between September 1, 2021, and September 30, 2021, the company issued 17,719 shares of common stock upon the exercise of common stock warrants at an exercise price of $1.84 per share, totaling $32,538[205] - These issuances were made in reliance on Section 4(a)(2) of the Securities Act, with recipients intending to acquire securities for investment[206] Item 3. Defaults Upon Senior Securities This section states that there are no defaults upon senior securities to report - Not applicable[207] Item 4. Mine Safety Disclosures This section states that there are no mine safety disclosures to report - Not applicable[208] Item 5. Other Information This section indicates that there is no other information to report - None[209] Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including corporate documents, stock certificates, agreements, and certifications, indicating whether they are incorporated by reference or filed herewith - The report includes various exhibits such as Amended and Restated Certificate of Incorporation, Bylaws, Specimen stock certificates, Investors' Rights Agreement, Stockholders' Agreement, Common Stock Purchase Warrants, Form of Exchange Warrant, Sublease Agreement, Amendments to Lease Agreements, Second Amendment to Loan and Security Agreement, Letter Agreement, and Certifications[212] - Several exhibits are incorporated by reference from previous SEC filings, while others are filed herewith[212] Signatures This section contains the required signatures for the Form 10-Q, confirming its authorization and submission - The report is duly signed on behalf of EXAGEN INC. by Fortunato Ron Rocca, President and Chief Executive Officer, and Kamal Adawi, Chief Financial Officer, on November 10, 2021[216][217][218]