Business context and reporting period
Exagen Inc. is a commercial-stage diagnostics company focused on autoimmune disease testing, marketed primarily under its AVISE brand. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2023. AVISE CTD represented 88% of revenue in both periods; the company operates in one segment.
Financial performance and liquidity
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $14.1 million | $7.6 million | $25.4 million | $18.0 million |
| Gross margin | 58.7% | 20.1% | 53.6% | 33.9% |
| Operating loss | $4.9 million | $14.1 million | $12.6 million | $23.7 million |
| Net loss | $5.0 million | $14.7 million | $12.7 million | $24.9 million |
| Net loss per share | $0.28 | $0.86 | $0.72 | $1.46 |
Q2 revenue rose 85.9% year over year; first-half revenue rose 40.9%. Growth reflected higher test volume, average selling prices and accrual rates, as well as prior-period collection and revenue-estimate effects. AVISE CTD tests delivered were 37,749 in Q2, up from 34,919, and 75,061 in the first half, up from 65,822.
For the first half, cash used in operating activities was $19.9 million, versus $19.7 million in 2022. Investing used $0.7 million; financing used $10.3 million, primarily the $10.0 million term-loan principal prepayment. Cash and cash equivalents were $31.5 million at June 30, down from $62.4 million at year-end 2022; cash, cash equivalents and restricted cash totaled $31.7 million. Accounts receivable increased to $16.2 million from $6.1 million, primarily reflecting delayed claim submission and Medicare processing.
Borrowings totaled approximately $19.4 million net of discounts and issuance costs ($0.3 million current and $19.2 million non-current). The amended term loan carries an estimated 10.8% effective interest rate, matures December 31, 2026, and is secured by substantially all company assets, including intellectual property. The company reported covenant compliance at quarter-end.
Material changes, outlook and risks
- Operating expenses declined year over year: Q2 costs of revenue fell 4.0%, selling, general and administrative expenses fell 7.4%, and research and development fell 53.0%. First-half total operating expenses declined $3.8 million. Management attributed expense reductions in part to cost-saving actions begun in late 2022.
- During Q2, Exagen began releasing previously withheld claims as part of revenue-cycle initiatives. It reported receiving payments on such claims beginning in July. Medicare review required additional records for an unusually high proportion of AVISE Lupus claims; most requested records had been submitted, but most claims awaited final adjudication. Payments received to date were consistent with the established 2023 CLFS price. Medicare represented 29% of Q2 revenue and 34% of first-half revenue.
- Revenue includes material estimates: changes in estimated consideration for prior-period services increased Q2 revenue by $1.5 million and first-half revenue by $1.8 million. The year-over-year comparison also reflects approximately $4.0 million of revenue impact from claims constrained in Q2 2022. Revenue and collections remain sensitive to payer coverage, denials, reimbursement rates and collection estimates.
- Management expects continued near-term operating losses; costs of revenue and R&D are expected to rise year over year, while SG&A is expected to decline. Management believes current resources and anticipated revenue can fund obligations for at least 12 months from the filing date, but may need additional capital. No specific revenue or earnings guidance was provided.
- In April, the company discontinued development and clinical trials for its AVISE RADR platform. AVISE Lupus pricing under the 2023 CLFS is $840.65 per test through 2025, but pricing does not guarantee Medicare coverage or payment. Patient payment rates were increased in July; management noted a possible short-term revenue impact.
- In July 2023, the company reached an agreement in principle with the DOJ to resolve an investigation related to potential federal healthcare offenses and recorded a $0.7 million charge in Q2. The contemplated settlement includes a payment of approximately $0.7 million; a definitive agreement is not assured, and the matter remains subject to negotiation. A Massachusetts suit remains under seal until a definitive settlement is executed.
- Disclosure controls and internal control over financial reporting were ineffective at June 30 due to a material weakness in revenue recognition controls. Erroneous and duplicate billing errors required restatement of 2022 interim financial statements. Remediation actions are underway, but the company said they require time and may not be effective.
- Other exposures include dependence on two suppliers for approximately 95% of Q2 diagnostic supplies and minimum reagent purchase commitments of $6.9 million in 2023, $8.0 million in 2024 and $9.2 million in 2025. The company expects ongoing losses and relies on payer reimbursement, continued test growth and access to financing.
Important facts for investors to verify
- Whether withheld and newly submitted claims are adjudicated and collected, particularly the pending Medicare AVISE Lupus claims, and the resulting effect on accounts receivable and cash flow.
- How much reported revenue growth reflects sustained test volume and pricing versus prior-period estimates, constrained claims and collection assumptions.
- Progress in remediating revenue recognition controls, and whether the material weakness is resolved through sustained effective testing.
- Execution and final terms of the DOJ settlement, including payment and any additional obligations.
- Cash burn, funding runway, debt service and covenant compliance, including the ability to obtain additional capital if needed.