Exagen Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Exagen develops and commercializes AVISE autoimmune diagnostic tests and co-promotes SIMPONI. Financial amounts below are in millions unless noted.
Key financial results
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $8.95 | $10.47 | $18.53 | $19.73 |
| Gross profit / margin | $5.61 / 62.7% | $5.48 / 52.3% | $10.65 / 57.5% | $10.30 / 52.2% |
| Operating loss | $(3.42) | $(2.41) | $(8.64) | $(4.28) |
| Net loss | $(3.36) | $(2.79) | $(8.93) | $(5.49) |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $(8.06) | $(4.12) |
Q2 operating margins were approximately -38.2% versus -23.0% a year earlier; six-month operating margins were approximately -46.6% versus -21.7%. Q2 diluted loss per share was $0.27; six-month diluted loss per share was $0.71.
At June 30, cash and cash equivalents were $63.7; current assets were $73.5 and current liabilities $5.8. Total liabilities were $32.7. Borrowings were reported at $26.2, net of discounts and issuance costs; the company separately disclosed $25.0 of principal plus approximately $1.5 of capitalized PIK interest. Six-month cash, cash equivalents and restricted cash declined $8.4 to $63.8.
Material changes and operating trends
- Revenue fell 14.6% in Q2 and 6.1% for the first half, primarily from lower diagnostic testing volume and lower average reimbursement per AVISE CTD test. Q2 AVISE CTD volume was 18,522 tests, down from 26,993; first-half volume was 45,648 versus 51,078.
- COVID-19-related reductions in patient flow weighed on testing. Costs of revenue fell faster than Q2 revenue, lifting gross margin, but selling, general and administrative costs increased 13% in Q2 and 33% for the first half. First-half operating loss worsened to $8.6 from $4.3.
- SIMPONI co-promotion revenue rose to $2.1 in both Q2 and the first half, compared with $0.3 and $0.4, respectively, in 2019. It partially offset lower testing revenue.
- Cash used in operations increased to $8.1 for the first half from $4.1. Investing cash use was $0.2. Financing cash use was $0.1; the $2.9 PPP loan received in April was repaid in full in May.
Outlook, risks and unusual items
- Management expects continued operating losses and stated that existing resources and anticipated revenue should fund obligations for at least 12 months from issuance of the statements. Additional financing may nevertheless be needed; availability and terms are uncertain.
- Management expects COVID-19 to materially affect financial results for at least the next quarter and potentially longer. AVISE CTD volume was down 31% year over year in Q2; the company reported sequential monthly volume increases of 45% in May and 52% in June, and a 2% year-over-year increase from July 1–24. These are volume indicators, not earnings guidance.
- The company was compliant with loan covenants at June 30, but said it was reasonably possible it could miss the rolling revenue covenant in Q3 due to COVID-19. A breach could lead to default consequences, including acceleration; the agreement provides a potential cure through qualifying equity or subordinated-debt proceeds. The loan is secured by substantially all assets, including intellectual property.
- The June amendment to the Janssen agreement sets a $0.3 minimum fee for each of Q3 and Q4 2020 and caps the fee at 5% above the adjusted baseline. The 2021 baseline remained to be agreed by November 30, 2020; Janssen may terminate on 30 days’ notice.
- Other notable items: $0.7 of Provider Relief Fund grant income was recognized for COVID-related lost revenue; $0.1 of tax benefit reflected a CARES Act-related valuation allowance release. The company recorded first-half restructuring charges, including $0.2 in Q1, and terminated 17 full-time employees during March through Q2.
- Risks include reliance on AVISE CTD, reimbursement and collection uncertainty, dependence on two suppliers for approximately 97% of testing supplies, possible supply or shipping interruptions, and potential loss of volume discounts. No material litigation was reported.
Most important facts for investors to verify
- Whether test volumes and reimbursement recover, and whether the reported July improvement persists.
- Whether Exagen meets or cures the loan’s Q3 revenue covenant and maintains adequate liquidity.
- Whether the Janssen 2021 baseline is agreed and co-promotion revenue continues under the amended terms.
- Whether COVID-19-related operating disruptions, supplier concentration and lower testing volumes pressure margins and cash burn beyond management’s 12-month liquidity estimate.