Exagen Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Exagen develops and sells diagnostic tests for autoimmune diseases, primarily through its AVISE brand, and also earns fees for co-promoting Janssen’s SIMPONI. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $10.8 | $10.4 | $29.3 | $30.2 |
| Gross profit | $6.4 | $5.7 | $17.1 | $16.0 |
| Gross margin | 59.7% | 54.2% | 58.3% | 52.9% |
| Operating expenses | $14.6 | $12.6 | $41.7 | $36.6 |
| Operating loss | $(3.8) | $(2.2) | $(12.4) | $(6.4) |
| Net loss | $(4.3) | $(3.1) | $(13.2) | $(8.6) |
- Q3 revenue rose 3.2%, chiefly as SIMPONI co-promotion revenue increased to $1.3 million from $0.4 million. Lower AVISE CTD test volume and average reimbursement partly offset the increase.
- Nine-month revenue declined 2.9%. AVISE CTD tests delivered fell to 71,849 from 78,237, while SIMPONI co-promotion revenue increased to $3.4 million from $0.8 million.
- Gross margin improved in both comparisons, primarily reflecting the expiration of a 10% royalty on CB-CAPs technology and, year to date, lower test-related costs. Higher SG&A and R&D more than offset these savings, widening operating and net losses.
- Q3 SG&A rose 26% to $9.2 million, including higher employee costs and stock-based compensation, insurance, legal, and professional fees. Nine-month SG&A rose 30% to $27.1 million. R&D increased to $1.0 million in Q3 and $2.4 million year to date.
- Basic and diluted net loss per share was $0.34 for Q3 and $1.05 for the first nine months of 2020. The comparable 2019 loss per share attributable to common shareholders was affected by preferred-stock accretion and financing-related deemed dividends.
Financial position and cash flows
- At September 30, cash and cash equivalents were $61.4 million, down from $72.1 million at December 31, 2019. Current assets were $72.6 million and current liabilities $8.3 million; accumulated deficit was $177.8 million.
- Net cash used in operating activities was $10.2 million for the first nine months, versus $5.8 million in 2019. Investing used $0.5 million; financing used $0.02 million. Cash, cash equivalents, and restricted cash declined $10.7 million.
- Long-term borrowings, net of discounts and issuance costs, were $26.5 million. The Innovatus term loan carries 8.5% interest, including 2% paid in kind through December 2022; principal and accrued interest are scheduled for monthly repayment beginning December 2022, with maturity in November 2024. The loan is secured by substantially all company assets, including intellectual property.
Changes, outlook, and key risks
- Management said AVISE CTD volumes substantially recovered to Q1 pre-pandemic levels in Q3, but volumes remained 4% below the prior-year quarter and 8% lower for the nine-month period. COVID-19 was expected to materially affect results for at least the next quarter and potentially longer.
- Management believes existing cash and anticipated revenue will fund obligations for at least 12 months after issuance of the statements, but expects continuing losses and may need additional capital. It cautioned that financing may not be available on acceptable terms.
- Revenue for the 12 months ended September 30 was below the Innovatus loan’s specified targets. After quarter-end, Exagen and the lender agreed on a new management plan and target to restore compliance. The filing says the company was compliant with loan covenants at quarter-end other than the described revenue-target matter; default could permit acceleration and increase interest.
- COVID-19-related risks include renewed restrictions, reduced patient flow and test demand, laboratory or supplier interruptions, reimbursement delays, and delayed clinical-study enrollment. Exagen also relies heavily on AVISE CTD, payer reimbursement, and a small number of suppliers; two suppliers provided approximately 98% of diagnostic testing supplies in Q3.
- In June, Exagen amended its Janssen agreement: the 2020 quarterly prescribing baseline was adjusted to approximately 26,000 units, with a $0.3 million minimum fee and a cap tied to performance for Q3 and Q4. The 2021 baseline was to be agreed by November 30, 2020. Janssen may terminate on 30 days’ notice.
- Other developments included a planned multi-center validation study for a licensed fibromyalgia test, new in-network arrangements with Humana Military and Provider Network of America, and the September launch of AVISE Vasculitis AAV. The company expanded its laboratory, with completion expected in Q4 2020.
Unusual items and contingencies
- Exagen recognized $0.7 million of CARES Act Provider Relief Fund grant income for lost revenue in the first nine months; none was recognized in Q3. A $2.9 million PPP loan received in April was repaid in full in May.
- COVID-19 workforce reductions included 18 full-time employees, including three vice presidents, and temporary employees. Related termination costs were approximately $0.3 million and had been paid by September 30.
- A September 2020 supplier amendment introduced minimum purchase commitments of $2.8 million in 2020, $4.1 million in 2021, and $6.0 million in 2022, followed by annual increases through 2025.
- The company reported no material legal proceedings and no material changes to previously disclosed risk factors other than the COVID-19 and term-loan risks described in the filing.
Most important facts for investors to verify
- Whether AVISE test volumes, reimbursement per test, and payer collections recover or weaken further, and how estimates for revenue allowances affect reported revenue.
- The exact loan revenue covenant targets, status and terms of the post-quarter management plan, and any potential default, cure, waiver, or acceleration consequences.
- Whether cash burn remains consistent with management’s stated 12-month liquidity outlook, given continuing losses and the possibility of additional funding needs.
- Whether the amended Janssen baseline and fee terms support co-promotion revenue, and whether the 2021 baseline was agreed as planned.
- Supplier commitments, concentration, and the effect of COVID-19 or lower volumes on supply availability, unit costs, and laboratory utilization.