Exagen Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Exagen develops and commercializes AVISE autoimmune diagnostic tests, primarily for rheumatologists; AVISE CTD generated 83% of quarterly revenue. Financial statements are unaudited.
Financial results
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Revenue | $9.584 million | $9.260 million | Up 3.5% |
| Gross profit / margin | $5.039 million / 52.6% | $4.818 million / 52.0% | Margin up about 0.6 percentage points |
| Operating expenses | $14.805 million | $11.134 million | Up $3.671 million |
| Operating loss | $5.221 million | $1.874 million | Loss widened |
| Net loss | $5.563 million | $2.704 million | Loss widened |
| Operating cash use | $3.301 million | $1.950 million | Cash use increased |
Cash and cash equivalents were $68.648 million at March 31, down from $72.084 million at December 31, 2019. Total assets were $84.644 million and stockholders’ equity was $50.537 million. Long-term borrowings, net of discounts and issuance costs, were $26.050 million; the company reported $25.0 million principal plus approximately $1.4 million of capitalized PIK interest. The loan is secured by substantially all company assets, including intellectual property. Management said existing resources and anticipated revenue were expected to fund obligations for at least 12 months.
Cash used in investing was $0.084 million; cash used in financing was $0.051 million. Cash, cash equivalents and restricted cash declined by $3.436 million to $68.748 million. The company reported a $0.118 million income tax benefit, including a discrete benefit from releasing a valuation allowance following the CARES Act.
Material changes and operating drivers
- Revenue rose by $0.324 million, mainly as AVISE CTD tests delivered increased to 27,126 from 24,085. Ordering providers increased to 1,692 from 1,327. Lower average reimbursement and COVID-19-related volume declines partly offset test growth.
- SG&A increased $3.447 million, or 55.8%, chiefly from employee-related costs, including stock compensation, following salesforce growth from 41 to 62 representatives, as well as higher audit, professional-services and insurance costs. Q1 included approximately $0.2 million of restructuring charges.
- Interest expense declined by $0.270 million, primarily due to the lower loan rate. The company cited expiration of a 10% annual royalty on CB-CAPs technology as a contributor to improved gross margin.
- Janssen co-promotion revenue for SIMPONI was zero in Q1 2020, versus approximately $0.1 million in Q1 2019; prescriptions were below the contractual baseline.
Outlook, risks and unusual items
- COVID-19: AVISE CTD volumes were down 12% year over year from March 15–31 and 56% in April. Management expected a material effect on financial results for at least the next quarter and potentially longer, with no clear timing for volume recovery. Risks include lower testing demand, supply and courier disruptions, delayed reimbursement decisions and studies, and weaker absorption of fixed laboratory costs and supplier volume discounts.
- Loan covenant: The company was in compliance at March 31, but said it was reasonably possible it could miss its rolling-revenue covenant in Q2 or Q3 2020 because of COVID-19. A specified equity or subordinated-debt issuance could cure the shortfall under the agreement. Minimum unrestricted liquidity is $2.0 million; covenant failure could lead to acceleration and enforcement against collateral.
- Costs and financing: Management expected 2020 SG&A and R&D to increase year over year, while costs of revenue could fall in absolute dollars with lower volumes but rise per test. The company expects continuing losses and may require additional financing; availability and terms are uncertain.
- Workforce actions: In March, Exagen terminated temporary staff and six full-time employees, including three vice presidents. It recorded approximately $0.3 million of termination benefits, paid by May, and reversed $0.1 million of stock compensation. It also reduced schedules and marketing, halted travel and instituted a temporary hiring freeze.
- Subsequent event: On April 10, Exagen received $0.7 million from the CARES Act Provider Relief Fund; the filing says the funds are not loans and need not be repaid, subject to program terms.
- Other commitments: A supplier agreement includes a $4.2 million minimum annual purchase commitment for each of three years through 2021. The filing reports no material litigation and no material changes to previously disclosed risk factors other than COVID-19 and loan-related risks.
Important facts for investors to verify
- Subsequent quarterly test volumes, reimbursement rates and revenue trends, particularly the duration and recovery path of COVID-19 effects.
- Whether Exagen meets the loan’s rolling-revenue covenant and maintains liquidity; review any waiver, cure financing or debt amendment.
- Cash burn, operating expense growth and management’s 12-month liquidity assessment against actual results and financing needs.
- Gross margin effects from lower volumes, supplier commitments, reimbursement changes and the expired CB-CAPs royalty.
- Whether SIMPONI promotion generates revenue above its baseline and whether AVISE CTD concentration and payer exposure change.