Exagen Inc. (Nasdaq: XGN) — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Exagen is a commercial-stage diagnostics company focused on autoimmune disease testing; AVISE CTD accounted for approximately 89% of Q3 revenue and 88% of nine-month revenue. Amounts below are in millions unless otherwise noted.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $13.416 | $14.726 | $38.783 | $32.726 |
| Costs of revenue | $5.710 | $6.010 | $17.472 | $17.905 |
| Gross margin | 57.4% | 59.2% | 54.9% | 45.3% |
| Operating expenses | $18.485 | $22.543 | $56.473 | $64.286 |
| Operating loss | $(5.069) | $(7.817) | $(17.690) | $(31.560) |
| Net loss | $(5.415) | $(8.096) | $(18.116) | $(33.033) |
| Net loss per share | $(0.31) | $(0.47) | $(1.03) | $(1.94) |
- Q3 change: Revenue fell 8.9%, primarily reflecting lower test volume and Medicare average selling price, and a prior-year $3.7 million favorable adjustment for AVISE Lupus Medicare claims. AVISE CTD deliveries declined 8% to 32,618. Lower SG&A and R&D expenses helped reduce net loss by $2.7 million.
- Nine-month change: Revenue increased 18.5%, supported by higher test volume, Medicare accrual rates and collections on prior-period tests, partly offset by lower commercial-payor accrual rates. AVISE CTD deliveries rose to 107,679 from 101,391. Gross margin improved, while lower SG&A and R&D contributed to the smaller net loss.
- Revenue estimates: Revenue included a $2.5 million Q3 and $2.6 million nine-month increase from changes in estimated variable consideration for prior-period services in 2023. The comparable 2022 impacts were increases of $3.7 million and $2.5 million decreases, respectively.
Cash, liquidity and debt
- At September 30, 2023, cash and cash equivalents were $28.448 million; cash, cash equivalents and restricted cash totaled $28.648 million. Accounts receivable was $17.044 million, up from $6.077 million at year-end 2022, and working capital was approximately $38.8 million.
- Nine-month operating cash use was $22.811 million, investing cash use was $0.720 million, and financing cash use was $10.412 million. Financing outflows included a $10.0 million term-loan principal prepayment. Cash and restricted cash declined $33.943 million during the period.
- Borrowings were $19.454 million net of discounts and issuance costs, including $19.193 million classified as non-current. The Innovatus term loan carries an estimated effective rate of approximately 11%, matures December 31, 2026, and is secured by substantially all assets, including intellectual property. A final $1.0 million fee is due with the last installment. The company reported covenant compliance at quarter-end.
- Management believes existing resources and anticipated revenue are sufficient for at least 12 months from the filing date, but expects continued losses and may need additional capital. The filing cautions that financing may not be available on acceptable terms.
Outlook, developments and risks
- Management expected near-term increases in costs of revenue, SG&A and R&D; it provided no specific revenue, earnings or cash-flow guidance. It said laboratory capacity should support higher test volume.
- Revenue-cycle initiatives involved releasing previously withheld claims; delayed submissions and Medicare requests for medical records contributed to the increase in receivables and operating cash use. Management reported that payments on released claims were being received consistently with expected collection rates.
- Patient payment rates increased in July 2023; the company reported a moderate decline in test volume as providers and patients adjusted. Medicare AVISE Lupus pricing is $840.65 per test through 2025, but pricing does not guarantee coverage; commercial denials and reimbursement uncertainty remain risks.
- In April 2023, Exagen discontinued development of its AVISE RADR platform and associated clinical trials. Two suppliers provided approximately 98% of diagnostic testing supplies in Q3, creating supply-concentration risk. A supplier agreement includes minimum purchases of $6.9 million in 2023, $8.0 million in 2024 and $9.2 million in 2025.
- The DOJ investigation settlement received final approval. Exagen paid $0.7 million plus interest in October 2023, without admission of wrongdoing; no corporate integrity agreement is required, and federal healthcare program participation is unaffected.
- Disclosure controls and internal control over financial reporting were ineffective at September 30, 2023 because of an unremediated material weakness involving revenue-recognition controls. The weakness followed a 2022 restatement for erroneous and duplicate billings that overstated revenue and receivables and understated liabilities. Remediation efforts were ongoing.
- The FDA proposed a rule in October 2023 to phase out enforcement discretion for laboratory-developed tests. Potential new requirements, including premarket review or clinical studies, could increase costs, delay products or interrupt sales; the outcome remains uncertain.
- Subsequent to quarter-end, Exagen assigned an adjacent building lease to Mindera; the company’s remaining payments of $0.9 million were due through October 2023, after which Mindera assumed the obligations.
Investor verification points
- Track receivable aging, claim-submission and Medicare processing delays, and cash collections against the enlarged receivable balance.
- Monitor AVISE CTD test volumes, reimbursement rates and the impact of July patient-rate increases on demand and revenue.
- Assess cash burn, funding needs, debt service and continued compliance with Innovatus covenants.
- Check progress and testing of the revenue-control remediation plan, and whether management later concludes controls are effective.
- Follow FDA rulemaking for laboratory-developed tests and any effects on regulatory requirements, test availability or reimbursement.
- Confirm the final accounting and cash impact of the DOJ settlement and other contingencies.