Exagen Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Unaudited results. Exagen develops and markets AVISE-branded diagnostic tests for autoimmune diseases, principally AVISE CTD.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $14.7m | $12.3m | $32.7m | $35.6m |
| Gross margin | 59.2% | 55.2% | 45.3% | 56.1% |
| Operating loss | $7.8m | $6.5m | $31.6m | $17.8m |
| Net loss | $8.1m | $7.2m | $33.0m | $19.8m |
| Net loss per share | $0.47 | $0.42 | $1.94 | $1.27 |
| Net cash used in operating activities | — | $26.4m | $14.2m |
Q3 revenue grew 20.2% year over year, but included a $3.7m revenue increase for previously delivered AVISE Lupus tests after Medicare reimbursements resumed; this was partly offset by a $1.9m reduction from updated estimates for prior-period claims. Q3 AVISE CTD test volume rose to 35,569 from 31,742. For the nine-month period, revenue fell 8.1%, despite higher AVISE CTD volume (101,391 versus 94,099), reflecting lower average reimbursement per CTD test, the end of Janssen co-promotion revenue, and lower revenue from other testing.
Costs and operating expenses increased. Nine-month gross margin declined primarily due to lower average reimbursement, loss of Janssen revenue, and higher direct costs. SG&A was $39.2m and R&D was $7.2m for the nine months, up from $32.7m and $5.0m, respectively.
Financial position and liquidity
- Cash and cash equivalents were $68.7m at September 30, 2022, down from $99.4m at December 31, 2021. Cash, cash equivalents and restricted cash totaled $68.9m.
- Total assets were $101.6m; total liabilities were $45.4m; stockholders’ equity was $56.2m. Accumulated deficit was $241.2m.
- Long-term borrowings, net of discounts and issuance costs, were $28.0m. The Innovatus loan bears 8% interest, including 2% paid in kind until December 2024; principal and accrued interest repayments are scheduled to begin in December 2024, with final maturity in November 2026. The loan is secured by substantially all assets, including intellectual property. The company reported covenant compliance at quarter-end.
- Management said existing resources and anticipated revenue should fund obligations for at least 12 months following issuance of the statements. The company expects continuing losses and may need additional financing. A $50m at-the-market equity sales agreement was established in September; no shares had been sold under it by quarter-end.
Material changes, outlook and risks
- Restatement and controls: In November, the company restated its Q2 2022 financial statements for erroneous and duplicate billings related to changes in billing practices. The errors overstated revenue by $1.4m, overstated accounts receivable by $0.9m and understated other liabilities by $0.5m as of June 30. Management identified a material weakness in revenue-recognition controls and concluded internal control over financial reporting and disclosure controls were ineffective as of September 30. Remediation includes reviewing accounting staffing, strengthening revenue controls and improving review of revenue models.
- Reimbursement uncertainty: Medicare resumed payments on AVISE Lupus claims, and Exagen recognized $3.7m of additional revenue and $3.6m of accounts receivable in Q3 for prior-period claims. Commercial claim denials and unfavorable medical policies remain headwinds. Noridian accepted the company’s request for an AVISE Lupus local coverage determination, but a favorable decision is uncertain; proposed Medicare pricing of $840.65 per test for 2023–2025 was not yet final in the filing.
- Operating outlook: The company expects losses and operating expenses to continue as it expands sales, product development and laboratory capacity. It reports no specific revenue or earnings guidance.
- Other exposures: Hurricane Ian disrupted Florida test demand late in Q3 and into the following quarter; the future impact was uncertain. AVISE CTD accounted for 84% of nine-month revenue, and Medicare accounted for 37%. Two suppliers provided approximately 96% of diagnostic testing supplies for the nine-month period. Minimum reagent purchase commitments were $6.0m for 2022 and $6.9m for 2023. The company cited no material legal proceedings.
- Other developments: Centene and MediNcrease network agreements added covered lives, and management said AVISE tests would be in-network for more than 99 million lives. Research and development facility conversion was substantially completed in Q3, with placement into service expected in Q4. A new CEO received a grant of 350,000 restricted stock units in October 2022.
Important facts for investors to verify
- Progress and testing results for remediation of the revenue-recognition material weakness, and whether controls become effective.
- Collections, denials and final coverage and pricing outcomes for AVISE Lupus Medicare claims and the Noridian coverage request.
- Whether test-volume growth translates into sustained revenue growth and improved gross margin, excluding prior-period reimbursement adjustments.
- Cash burn, financing needs, any use of the $50m ATM facility, and compliance with the loan’s revenue and liquidity covenants.
- Effects of hurricane-related disruption, supplier concentration and committed reagent purchases on operations and cash requirements.