Exagen Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. Exagen is a commercial-stage diagnostics company focused on autoimmune diseases; its AVISE CTD test generated 87% of Q1 revenue. Amounts below are in U.S. dollars.
Financial performance and position
| Metric | Q1 2023 | Q1 2022 / prior balance-sheet date |
|---|---|---|
| Revenue | $11.23 million | $10.39 million |
| Gross margin | 47.2% | 44.0% |
| Operating expenses | $18.94 million | $20.07 million |
| Loss from operations | $7.71 million | $9.68 million |
| Net loss | $7.69 million | $10.27 million |
| Net loss per share, basic and diluted | $0.44 | $0.60 |
| Cash used in operating activities | $9.75 million | $8.57 million |
| Cash and cash equivalents at period-end | $52.18 million | $62.39 million at Dec. 31, 2022 |
| Total borrowings, carrying value | $29.35 million | — |
- Revenue rose 8.0%, primarily from higher test volume, partly offset by lower average selling price. AVISE CTD tests delivered increased to 37,312 from 30,903, up approximately 20.7%.
- Costs of revenue were $5.93 million. Gross margin improved as revenue grew faster than these costs.
- SG&A declined 2.2% to $11.88 million; R&D declined by $0.98 million to $1.13 million. Management attributed reductions mainly to lower employee-related costs and cost-saving initiatives.
- Interest income increased to $0.66 million from $0.01 million, primarily due to higher rates on invested cash; interest expense was $0.64 million.
- Current assets were $65.72 million and current liabilities $9.27 million at March 31. The cash-flow statement reports $52.38 million of cash, cash equivalents and restricted cash, including $0.20 million restricted cash.
Material changes and notable developments
- Government revenue increased to $4.43 million from $2.12 million, while commercial revenue declined to $4.22 million from $6.42 million. Medicare represented 39% of revenue, Medicare Advantage 16%, and Blue Shield 13% in Q1 2023.
- Operating cash use increased year over year despite the lower net loss. Accounts receivable rose $3.23 million during the quarter; management said a revenue-cycle initiative held first-quarter claims until Q2 to optimize appeals.
- In April 2023, Exagen discontinued development of its AVISE RADR platform and associated clinical trials.
- On April 28, 2023, Exagen amended its Innovatus term loan and prepaid $10.0 million of principal. The amendment waived the prepayment fee, extended the interest-only period through March 2026 and maturity to December 31, 2026, and revised revenue covenant terms. Interest is based on the greater of prime or 8%, plus 2%; 1.5% is payable in kind through April 1, 2026. The filing does not give a post-amendment cash balance.
- Management reported compliance with loan covenants as of March 31, 2023. The debt is secured by substantially all company assets, including intellectual property.
Outlook, risks and contingencies
- Management expects continued operating losses in the near term, costs of revenue to rise year over year with test volume, and SG&A and R&D to decline year over year due to cost-saving measures and RADR discontinuation.
- Based on its current business plan, management believes existing resources and anticipated revenue are sufficient for at least 12 months following the filing. The company may need additional financing; availability and terms are uncertain and equity financing could dilute shareholders.
- Reimbursement and collections remain key risks. Exagen reported increased denials under certain commercial medical policies for AVISE Lupus. Medicare pricing of $840.65 per test is effective through 2025, but pricing does not guarantee coverage; a favorable coverage decision remains uncertain.
- One supplier agreement includes minimum reagent purchases of $6.9 million for 2023 and $8.0 million for 2024, with annual increases thereafter through 2025. Two suppliers provided approximately 97% of diagnostic testing supplies in Q1 2023.
- A material weakness in revenue-recognition controls remained unremediated, and management concluded disclosure controls were ineffective as of March 31. The weakness followed erroneous and duplicate billings that led to a restatement of the 2022 second-quarter filing. Remediation efforts include additional accounting staffing and enhanced revenue controls and review.
- The company disclosed no material legal proceedings and no material changes to previously reported risk factors other than the control weakness.
Most important facts for investors to verify
- Whether the revenue-control remediation is implemented, tested and effective, and whether further billing or reporting errors arise.
- Whether AVISE Lupus obtains Medicare coverage and whether commercial denials, reimbursement rates and collections support revenue growth.
- Cash, operating cash use and accounts-receivable collections after the claims holdback and the $10.0 million loan prepayment.
- Compliance with the amended Innovatus loan covenants, revised interest burden and future financing needs.
- Execution against test-volume growth, gross-margin objectives, cost reductions and the impact of discontinuing AVISE RADR.