exdx-20230331

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2023
☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 001-39049

EXAGEN INC.

(Exact name of registrant as specified in its charter)

Delaware

20-0434866

(State or other jurisdiction of
incorporation or organization)

(I.R.S. Employer
Identification No.)

1261 Liberty Way

Vista,

California

92081

(Address of Principal Executive Offices)

(Zip Code)


(760)			560-1501
(Registrant's Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.001 per share

XGN

The Nasdaq Global Market

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Securities Exchange Act of 1934.

Large accelerated filer

☐

Accelerated filer

☐

Non-accelerated filer

☒

Smaller reporting company

☒

Emerging growth company

☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Securities Act ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Total shares of common stock outstanding as of the close of business on May 11, 2023 was 16,825,696.

TABLE OF CONTENTS


		Page
Part I.	Financial Information
Item 1.	Unaudited Condensed Financial Statements	1
	Unaudited Condensed Balance Sheets as of March 31, 2023 and December 31, 20 2 2	1
	Unaudited Condensed Statements of Operations for the Three Months ended March 31, 2023 and 20 2 2	2
	Unaudited Condensed Statements of Stockholders' Equity for the Three Months ended March 31, 2023 and 2 022	3
	Unaudited Condensed Statements of Cash Flows for the Three Months ended March 31, 2023 and 202 2	5
	Notes to Unaudited Condensed Financial Statements	6
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	19
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	27
Item 4.	Controls and Procedures	28

Part II.	Other Information
Item 1.	Legal Proceedings	30
Item 1A.	Risk Factors	30
Item 6.	Exhibits	32
	Signatures	33

Part I. Financial Information

Item 1. Unaudited Condensed Financial Statements

Exagen Inc.

Unaudited Condensed Balance Sheets

(in thousands, except share and per share data)


	March 31, 2023		December 31, 2022

Assets
Current assets:
Cash and cash equivalents	$	52,184	$	62,391
Accounts receivable, net	9,303		6,077
Prepaid expenses and other current assets	4,229		4,143
Total current assets	65,716		72,611
Property and equipment, net	8,264		8,197
Operating lease right-of-use assets	4,651		4,885
Other assets	603		528
Total assets	$	79,234	$	86,221
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$	1,878	$	3,046
Accrued and other current liabilities	6,064		5,347
Operating lease liabilities	1,072		1,040
Borrowings-current portion	254		190
Total current liabilities	9,268		9,623
Borrowings-non-current portion, net of discounts and debt issuance costs	29,092		28,778
Non-current operating lease liabilities	4,211		4,493
Other non-current liabilities	726		867
Total liabilities	43,297		43,761
Commitments and contingencies (Note 5)
Stockholders' equity:
Preferred stock, $0.001 par value; 10,000,000 shares authorized, no shares issued or outstanding as of March 31, 2023 and December 31, 2022	—		—
Common stock, $0.001 par value; 200,000,000 shares authorized as of March 31, 2023 and December 31, 2022; 16,827,014 and 16,549,984 shares issued and outstanding as of March 31, 2023 and December 31, 2022, respectively	17		17
Additional paid-in capital	299,135		297,970
Accumulated deficit	(263,215)		(255,527)
Total stockholders' equity	35,937		42,460
Total liabilities and stockholders' equity	$	79,234	$	86,221

The accompanying notes are an integral part of these condensed financial statements

Exagen Inc.

Unaudited Condensed Statements of Operations

(in thousands, except share and per share data)


	Three Months Ended March 31,
	2023		2022

Revenue	$	11,230	$	10,394
Operating expenses:
Costs of revenue	5,926		5,817
Selling, general and administrative expenses	11,884		12,152
Research and development expenses	1,126		2,104
Total operating expenses	18,936		20,073
Loss from operations	(7,706)		(9,679)
Interest expense	(638)		(598)
Interest income	656		5


Net loss	$	(7,688)	$	(10,272)
Net loss per share, basic and diluted	$	(0.44)	$	(0.60)
Weighted-average number of shares used to compute net loss per share, basic and diluted	17,526,763		16,992,391

The accompanying notes are an integral part of these condensed financial statements

Exagen Inc.

Unaudited Condensed Statements of Stockholders' Equity

(in thousands, except share data)


	Common Stock			Additional Paid-In Capital		Accumulated Deficit		Total Stockholders' Equity
	Shares	Amount
Balances as of December 31, 2022	16,549,984	$	17	$	297,970	$	(255,527)	$	42,460
Issuance of stock from vested restricted stock units	113,378	—		—		—		—
Issuance of stock under Employee Stock Purchase Plan	70,317	—		152		—		152
Exercise of stock options	93,335	—		27		—		27
Stock-based compensation	—	—		986		—		986
Net loss	—	—		—		(7,688)		(7,688)
Balances as of March 31, 2023	16,827,014	$	17	$	299,135	$	(263,215)	$	35,937

The accompanying notes are an integral part of these condensed financial statements

Exagen Inc.

Unaudited Condensed Statements of Stockholders' Equity

(in thousands, except share data)


	Common Stock			Additional Paid-In Capital		Accumulated Deficit		Total Stockholders' Equity
	Shares	Amount
Balances as of December 31, 2021	16,164,994	$	16	$	293,060	$	(208,140)	$	84,936
Issuance of stock from vested restricted stock units and payment of employees' taxes	30,523	—		(115)		—		(115)
Issuance of stock under Employee Stock Purchase Plan	35,681	—		231		—		231
Stock-based compensation	—	—		1,376		—		1,376
Net loss	—	—		—		(10,272)		(10,272)
Balances as of March 31, 2022	16,231,198	$	16	$	294,552	$	(218,412)	$	76,156

The accompanying notes are an integral part of these condensed financial statements

Exagen Inc.

Unaudited Condensed Statements of Cash Flows

(in thousands)


	Three Months Ended March 31,
	2023		2022

Cash flows from operating activities:
Net loss	$	(7,688)	$	(10,272)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	553		283
Amortization of debt discount and debt issuance costs	42		38
Non-cash interest expense	137		135
Loss on disposal of assets	55		—
Non-cash lease expense	234		219
Stock-based compensation	986		1,376
Changes in assets and liabilities:
Accounts receivable, net	(3,226)		(1,257)
Prepaid expenses and other current assets	(86)		664
Other assets	(79)		(273)
Operating lease liabilities	(250)		(155)
Accounts payable	(1,320)		579
Accrued and other current liabilities	893		89
Net cash used in operating activities	(9,749)		(8,574)
Cash flows from investing activities:
Purchases of property and equipment	(396)		(1,087)
Net cash used in investing activities	(396)		(1,087)
Cash flows from financing activities:
Proceeds from exercise of stock options	27		—
Payments of taxes withheld on vested restricted stock units	—		(115)
Proceeds from common stock issued under Employee Stock Purchase Plan	152		231
Principal payments on finance lease obligations	(189)		(146)
Principal payment on note payable obligations	(52)		—
Net cash used in financing activities	(62)		(30)
Net change in cash, cash equivalents and restricted cash	(10,207)		(9,691)
Cash, cash equivalents and restricted cash, beginning of period	62,591		99,542
Cash, cash equivalents and restricted cash, end of period	$	52,384	$	89,851
Supplemental disclosure of cash flow information:
Cash paid for interest	$	449	$	424
Supplemental disclosure of non-cash items:
Equipment purchased under notes payable obligations	$	250	$	—
Costs incurred, but not paid, in connection with capital expenditures	$	199	$	1,672

The accompanying notes are an integral part of these condensed financial statements

Exagen Inc.

Notes to Unaudited Interim Condensed Financial Statements

Note 1. Organization

Description of Business

Exagen Inc. (the Company) is a commercial-stage diagnostics company dedicated to helping patients suffering from debilitating and chronic autoimmune diseases by enabling timely differential diagnosis and optimizing therapeutic intervention.

Liquidity

The Company has incurred recurring losses and negative cash flows from operating activities since inception. The Company anticipates that it will continue to incur net losses into the foreseeable future. As of March 31, 2023, the Company had cash and cash equivalents of $52.2 million and had an accumulated deficit of $263.2 million. Since inception, the Company has financed its operations primarily through a combination of equity financings, debt financing arrangements, and revenue from sales of the Company's products. Based on the Company's current business plan, management believes that its existing capital resources will be sufficient to fund the Company's obligations for at least twelve months following the issuance of these condensed financial statements.

To execute its business plans, the Company may need additional funding to support its continuing operations and pursue its growth strategy. Until such time as the Company can achieve significant cash flows from operations, if ever, it expects to finance its operations through the sale of its stock, debt financings or other strategic transactions. Although the Company has been successful in raising capital in the past, there is no assurance that it will be successful in obtaining such additional financing on terms acceptable to the Company, if at all. The terms of any financing may adversely affect the holdings or the rights of the Company's stockholders. If the Company is unable to obtain funding, the Company could be forced to delay, reduce or eliminate some or all of its programs, product portfolio expansion plans or commercialization efforts, which could have a material adverse effect on the Company's business, operating results and financial condition and the Company's ability to achieve its intended business objectives.

Note 2. Summary of Significant Accounting Policies

Basis of Presentation and Use of Estimates

The accompanying interim condensed balance sheet as of March 31, 2023, condensed statements of operations, stockholders' equity and cash flows for the three months ended March 31, 2023 and the related footnote disclosures are unaudited and have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (SEC), and with accounting principles generally accepted in the United States (GAAP) applicable to interim financial statements. These unaudited condensed financial statements and related footnote disclosures should be read in conjunction with the Company’s audited financial statements for the year ended December 31, 2022, included in its Annual Report on Form 10-K filed with the SEC on March 20, 2023. In management's opinion, the unaudited interim condensed financial statements have been prepared on the same basis as the audited financial statements and include all normal adjustments, necessary for the fair presentation of the Company's financial position as of March 31, 2023 and its results of operations for the periods presented. The results for the three months ended March 31, 2023 are not necessarily indicative of the results expected for the full fiscal year or any other interim period. The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP.

The preparation of the accompanying condensed financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities as of the date of the condensed financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results could materially differ from those estimates.

Significant estimates and assumptions made in the accompanying condensed financial statements include, but are not limited to revenue recognition, the recoverability of its long-lived assets and net deferred tax assets (and related valuation allowance). The Company evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors and adjusts those estimates and assumptions when facts and circumstances dictate. Actual results could materially differ from those estimates.

Concentration of Credit Risk and Other Risk and Uncertainties

Financial instruments that potentially subject the Company to credit risk consist principally of cash, cash equivalents and accounts receivable. Substantially all the Company's cash and cash equivalents are held at one financial institution that management believes is of high credit quality. Such deposits may, at times, exceed federally insured limits. The Company has not experienced any losses on its cash or cash equivalents.

Significant payors and customers are those which represent more than 10% of the Company's total revenue or accounts receivable balance at each respective balance sheet date. For each significant payor and customer, revenue as a percentage of total revenue and accounts receivable as a percentage of total accounts receivable are as follows:


	Revenue
	Three Months Ended March 31,
	2023		2022
Medicare	39	%	20	%
Medicare Advantage	16	%	15	%
Blue Shield	*		13	%



*						Less than 10%.


	Accounts Receivable, Net
	March 31, 2023		December 31, 2022
Medicare	45	%	21	%
Medicare Advantage	10	%	13	%

For the three months ended March 31, 2023 and 2022, approximately 87% and 84%, respectively, of the Company's revenue was related to the AVISE® CTD test.

The Company is dependent on key suppliers for certain laboratory materials. For the three months ended March 31, 2023 and 2022, approximately 97% and 95%, respectively, of the Company's diagnostic testing supplies were purchased from two suppliers. An interruption in the supply of these materials would impact the Company's ability to perform testing services.

Disaggregation of Revenue

The following table includes the Company's revenues as disaggregated by payor and customer category (in thousands):


	Three Months Ended March 31,
	2023		2022
Revenue:
Commercial	$	4,215	$	6,423
Government	4,426		2,120
Client(1)	2,407		1,591
Other(2)	182		260
Total revenue	$	11,230	$	10,394

(1)Includes hospitals, other laboratories, etc.

(2)Includes patient self-pay.

Fair Value Measurements

The carrying value of the Company's cash, cash equivalents and restricted cash, accounts receivable, prepaid expenses and other current assets, accounts payable and accrued and other current liabilities approximate their fair values due to their short-term nature, which are determined to be a Level 1 measurement (see Note 6). The estimated fair value of the Company's long-term borrowings is determined by Level 2 inputs and based primarily on quoted market prices for the same or similar issues. As of March 31, 2023, the 2017 Term Loan (as defined below) had a carrying value of $28.4 million and a fair value of $27.1 million. As of December 31, 2022, the 2017 Term Loan had a carrying value of $28.3 million and a fair value of $26.9 million The estimated fair value of the 2017 Term Loan, was determined based on a discounted cash flow approach using available market information on discount and borrowing rates with similar terms, maturities, and credit ratings. The recorded value of the Company's other long-term borrowing was $0.7 million and approximated its fair value as of March 31, 2023.

Cash, Cash Equivalents and Restricted Cash

The Company considers all highly-liquid investments purchased with a remaining maturity date of three months or less upon acquisition to be cash equivalents. These investments are stated at cost, which approximates fair value.

The Company has an arrangement with a financial institution with which it has an existing banking relationship, whereby in exchange for the issuance of corporate credit cards, the Company agreed to obtain a certificate of deposit with this financial institution as collateral for the balances borrowed on these cards ($0.2 million at March 31, 2023 and December 31, 2022). The Company has classified the value of this certificate of deposit (including all interest earned thereon) within other assets in the accompanying balance sheets. The Company has the right to terminate the credit card program at any time. Upon termination of the credit card program and repayment of all outstanding balances owed, the Company may redeem the certificate of deposit (and all interest earned thereon).

Cash, cash equivalents and restricted cash presented in the accompanying statements of cash flows consist of the following (in thousands):


	March 31, 2023		March 31, 2022
Cash and cash equivalents	$	52,184	$	89,751
Restricted cash	200		100
	$	52,384	$	89,851

Long-lived Assets

The Company’s long-lived assets are comprised principally of its property and equipment and operating lease assets. The Company amortizes all finite lived intangible assets over their respective estimated useful lives. Operating lease assets are amortized over the term of the leases. In considering whether long-lived assets are impaired, we combine our intangible assets and other long-lived assets, into groupings, a determination which we principally make on the basis of whether the assets are specific to a particular test we offer or technology we are developing. If the Company identifies a change in the circumstances related to its long-lived assets that indicates the carrying value of any such asset may not be recoverable, the Company will perform an impairment analysis. A

long-lived asset is deemed to be impaired when the undiscounted cash flows expected to be generated by the asset (or asset group) are less than the asset’s carrying amount. Management’s estimates of future cash flows are impacted by projected test volume and levels of reimbursement, as well as expectations related to the future cost structure of the entity. Any required impairment loss would be measured as the amount by which the asset’s carrying value exceeds its fair value, and would be recorded as a reduction in the carrying value of the related asset and a charge to operating expense.

Revenue Recognition

Substantially all of the Company's revenue has been derived from sales of its testing products and is primarily comprised of a high volume of relatively low-dollar transactions. The Company primarily markets its testing products to rheumatologists and their physician assistants in the United States. The healthcare professionals who order the Company's testing products and to whom test results are reported are generally not responsible for payment for these products. The parties that pay for these services (each, a payor) consist of commercial payors (healthcare insurers), government payors (primarily Medicare and Medicaid), client payors (i.e., hospitals, other laboratories, etc.) and patient self-pay. The Company's service is a single performance obligation that is completed upon the delivery of test results to the prescribing physician which triggers revenue recognition.

Payors are billed at the Company's list price. Net revenues recognized consist of amounts billed net of allowances for differences between amounts billed and the estimated consideration the Company expects to receive from such payors. The process for estimating revenues and the ultimate collection of accounts receivable involves significant judgment and estimation. The Company follows a standard process, which considers historical denial and collection experience, insurance reimbursement policies and other factors, to estimate allowances and implicit price concessions. Adjustments are recorded in the current period as changes in estimates occur. Further adjustments to the allowances, based on actual receipts, are recorded upon settlement. Included in revenues for the three months ended March 31, 2023 and 2022 was a $0.3 million net revenue increase and a $0.2 million net revenue decrease, respectively, associated with changes in estimated variable consideration related to performance obligations satisfied in previous periods. The transaction price is estimated using an expected value method on a portfolio basis.

Variable consideration is included in the transaction price only to the extent it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainties with respect to the amount are resolved. The Company's portfolios are grouped per payor (i.e. each individual commercial payor, Medicare, Medicaid, client payors, patient self-pay, etc.) and per test. Consideration may be constrained and excluded from the transaction price in situations where there is no contractually agreed upon reimbursement coverage or in absence of a predictable pattern and history of collectability with a payor. Accordingly, in such situations revenues are recognized on the basis of actual cash collections. Additionally, from time to time, the Company may issue refunds to payors for overpayments or amounts billed in error. Any refunds are accounted for as reductions in revenues in the statement of operations as an element of variable consideration. The estimated expected refunds are accrued as a liability on the Company’s balance sheet.

Collection of the Company's net revenues from payors is normally a function of providing complete and correct billing information to the healthcare insurers and generally occurs within 30 to 90 days of billing. Contracts do not contain significant financing components based on the typical period of time between performance of services and collection of consideration.

Accounts Receivable and Allowance for Credit Losses

We accrue an allowance for credit losses against our accounts receivable based on management’s current estimate of amounts that will not be collected. Management’s estimates are typically based on historical loss information adjusted for current conditions. We generally do not perform evaluations of the financial condition of our customers and generally do not require collateral. The allowance for credit losses was zero as of March 31, 2023. Adjustments for implicit price concessions attributable to variable consideration, as discussed above, are incorporated into the measurement of the accounts receivable balances and are not part of the allowance for credit losses.

Research and Development

Costs associated with research and development activities are expensed as incurred and include, but are not limited to, personnel-related expenses, including stock-based compensation expense, materials, laboratory

supplies, consulting costs, costs associated with setting up and conducting clinical studies and allocated overhead including rent and utilities.

Advertising and Marketing Costs

Costs associated with advertising and marketing activities are expensed as incurred. Total advertising and marketing costs were approximately $0.3 million for the three months ended March 31, 2023 and 2022, and are included in selling, general and administrative expenses in the accompanying condensed statements of operations.

Shipping and Handling Costs

Costs incurred for shipping and handling are included in costs of revenue in the accompanying condensed statements of operations and totaled approximately $0.7 million and $0.6 million for the three months ended March 31, 2023 and 2022, respectively.

Stock-Based Compensation

The Company recognizes compensation expense for all stock-based awards to employees and directors based on the grant-date estimated fair values over the requisite service period of the awards (usually the vesting period) on a straight-line basis. The fair value of stock options and purchases under the Company's 2019 Employee Stock Purchase Plan (ESPP) rights is determined using the Black-Scholes-Merton (BSM) option pricing model, which requires management to make certain assumptions regarding a number of complex and subjective variables. Equity award forfeitures are recorded as they occur.

The BSM option pricing model incorporates various inputs, including the fair value of the Company's common stock, expected volatility, expected term and risk-free interest rates. Volatility is based on the Company's historical calculated volatility since being publicly traded. The weighted-average expected term of options was calculated using the simplified method. The risk-free interest rate for periods within the contractual term of the option is based on the U.S. Treasury yield in effect at the time of grant. The dividend yield is zero, as the Company has never declared or paid dividends and has no plans to do so in the foreseeable future.

The fair value of each restricted stock unit is determined on the grant date using the closing price of the Company's common stock on that date. The Company's restricted stock units generally vest in equal annual installments over four years from the date of grant or, for grants to new hires, date of hire. Vesting of restricted stock units is subject to the holder's continued service with the Company. The Company issues new shares to satisfy restricted stock units upon vesting.

Comprehensive Loss

Comprehensive loss is defined as a change in equity of a business enterprise during a period, resulting from transactions from nonowner sources. There have been no items qualifying as other comprehensive loss and, therefore, for all periods presented, the Company's comprehensive loss was the same as its reported net loss.

Net Loss Per Share

Basic net loss per share attributable to common stockholders is calculated by dividing the net loss attributable to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted net loss per share attributable to common stockholders is computed by dividing the net loss attributable to common stockholders by the weighted-average number of common stock equivalents outstanding for the period determined using the treasury-stock and if-converted methods. The weighted-average number of shares used to compute basic and diluted shares includes shares issuable upon the exercise of pre-funded warrants at a nominal price. Potentially dilutive common stock equivalents are comprised of warrants for the purchase of common stock, stock options, restricted stock units outstanding under the Company's 2019 Incentive Award Plan (the 2019 Plan) and shares of the Company's common stock pursuant to the ESPP. For the three months ended March 31, 2023 and 2022, there is no difference in the number of shares used to calculate basic and diluted shares outstanding, as the inclusion of the potentially dilutive securities would be antidilutive.

Potentially dilutive securities not included in the calculation of diluted net loss per share, because to do so would be anti-dilutive, are as follows (in common stock equivalent shares):


	March 31,
	2023	2022


Warrants to purchase common stock	409,108	409,108
Common stock options	1,019,076	2,002,039
Restricted stock units	1,494,085	878,575
Employee stock purchase plan	14,736	6,929
Total	2,937,005	3,296,651

Segment Reporting

Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision-maker in making decisions regarding resource allocation and assessing performance. The Company views its operations as, and manages its business in, one operating segment.

Recent Accounting Pronouncements

From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (FASB), or other standard setting bodies and adopted by the Company as of the specified effective date. Under the Jumpstart Our Business Startups Act of 2012 (JOBS Act), the Company meets the definition of an emerging growth company. The Company has elected to use the extended transition period for complying with new or revised accounting standards pursuant to Section 107(b) of the JOBS Act. Unless otherwise discussed, the impact of recently issued standards that are not yet effective will not have a material impact on the Company's financial position or results of operations upon adoption.

Recently Adopted Accounting Standards

In June 2016, the FASB issued Accounting Standards Update (ASU) 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires the measurement of expected credit losses (based on historical experience, current conditions and reasonable forecasts) for financial instruments (such as accounts receivable) held at the reporting date which are carried at amortized cost. The main objective of this ASU is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. In November 2018, the FASB issued ASU 2018-19, Codification Improvements to Topic 326, Financing Instruments-Credit Losses, which included an amendment of the effective date for nonpublic entities. For emerging growth companies, ASU 2016-13 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company adopted this pronouncement on January 1, 2023. The adoption did not have an impact on its condensed financial statements.

In August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40). ASU 2020-06 eliminates the beneficial conversion and cash conversion accounting models for convertible instruments. It also amends the accounting for certain contracts in an entity’s own equity that are currently accounted for as derivatives because of specific settlement provisions. In addition, ASU 2020-06 modifies how particular convertible instruments and certain contracts that may be settled in cash or shares impact the diluted EPS computation. The amendments in ASU 2020-06 are effective for smaller reporting companies as defined by the SEC for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. The Company adopted ASU 2020-06 as of January 1, 2023. The adoption did not have an impact on its condensed financial statements.

Note 3. Other Financial Information

Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consist of the following (in thousands):


	March 31, 2023		December 31, 2022
Diagnostic testing supplies	$	1,736	$	1,795
Prepaid product royalties	39		40
Prepaid maintenance and insurance contracts	2,210		2,072
Other prepaid expenses and other current assets	244		236
Prepaid expenses and other current assets	$	4,229	$	4,143

Property and Equipment

Property and equipment consist of the following (in thousands):


	March 31, 2023		December 31, 2022
Furniture and fixtures	$	98	$	98
Laboratory equipment	5,209		5,136
Computer equipment and software	1,548		1,482
Leasehold improvements	5,223		5,223
Construction in progress	1,856		1,382
Total property and equipment	13,934		13,321
Less: accumulated depreciation and amortization	(5,670)		(5,124)
Property and equipment, net	$	8,264	$	8,197

Depreciation and amortization expense for the three months ended March 31, 2023 and 2022 was approximately $0.6 million and $0.3 million, respectively.

Accrued and Other Current Liabilities

Accrued and other current liabilities consist of the following (in thousands):


	March 31, 2023		December 31, 2022
Accrued payroll and related expenses	$	3,662	$	2,355
Accrued interest	142		142
Accrued purchases of goods and services	665		803
Accrued royalties	114		514
Accrued clinical study activity	160		162
Finance lease obligations, current portion	650		700
Refund liability	445		445
Other accrued liabilities	226		226
Accrued and other current liabilities	$	6,064	$	5,347

Note 4. Borrowings

2017 Term Loan

In September 2017, the Company executed a term loan agreement (the 2017 Term Loan) with Innovatus Life Sciences Lending Fund I, LP (Innovatus), as amended, pursuant to which the Company borrowed $25.0 million. As of March 31, 2023, no additional amounts remained available to borrow under the 2017 Term Loan.

In November 2021, the Company executed the Second Amendment to the Loan and Security Agreement (the 2017 Loan Amendment) and, as further described in Note 9, on April 28, 2023, the Company and Innovatus entered into

the Third Loan Amendment to the 2017 Term Loan (Third Loan Amendment). The interest rate on all borrowings under the 2017 Loan Amendment was 8.0%, of which 2.0% was paid in-kind in the form of additional term loans (PIK Loans) until December of 2024, after which interest was scheduled to accrue at an annual rate of 8.0%. The Company estimated the effective interest rate of this loan to be approximately 8.5%. Accrued interest is due and payable monthly, unless the Company elects to pay paid-in-kind interest. The outstanding principal and accrued interest on the 2017 Loan Amendment was to be repaid in twenty-four equal monthly installments commencing in December 2024. Upon repayment of the final installment under the 2017 Loan Amendment, the Company is required to pay an additional fee of $1.0 million. This obligation is being accreted into interest expense over the term of the Loan Amendment using the effective interest method. For each of the three months ended March 31, 2023 and 2022, the Company issued PIK Loans totaling $0.1 million.

The 2017 Loan Amendment required a prepayment premium of 2% of the aggregate outstanding principal and decreased by 1% on each of November 1, 2023 and 2024.

The 2017 Loan Amendment is collateralized by a first priority security interest in substantially all of the Company's assets, including intellectual property. The affirmative covenants of the 2017 Loan Amendment require that the Company timely file taxes, maintain good standing and government compliance, maintain liability and other insurance, provide prompt notification of significant corporate events, and furnish audited financial statements within 150 days of fiscal year end without qualification as to the scope of the audit or as to going concern and without any other similar qualification.

The affirmative covenants require that the Company achieve a specified level of revenue, as measured quarterly on a rolling twelve-month basis. The consequences of failing to achieve the performance covenant were eligible to be cured if, within sixty days of failing to achieve the performance covenant, the Company issues additional equity securities or subordinated debt with net proceeds sufficient to fund any cash flow deficiency generated from operations, as defined. The 2017 Loan Amendment requires that the Company maintain certain levels of minimum liquidity and maintains an unrestricted cash balance of $2.0 million.

The negative covenants provide, among other things, that without the prior consent of Innovatus, subject to certain exceptions, the Company may not dispose of certain assets, engage in certain business combinations or acquisitions, incur additional indebtedness or encumber any of the Company's property, pay dividends on the Company's capital stock or make prohibited investments. The Loan Amendment agreement provides that an event of default will occur if, among other triggers, (i) the Company defaults in the payment of any amount payable under the agreement when due, (ii) there occurs any circumstance(s) that could reasonably be expected to result in a material adverse effect on the Company's business, operations or condition, or on the Company's ability to perform its obligations under the agreement, (iii) the Company becomes insolvent, (iv) the Company undergoes a change in control or (v) the Company breaches any negative covenants or certain affirmative covenants in the agreement or, subject to a cure period, otherwise neglects to perform or observe any material item in the agreement.

As of March 31, 2023, the Company was in compliance with all covenants of the 2017 Loan Amendment.

Upon an event of default in any of the 2017 Loan Amendment covenants, the repayment of the 2017 Loan Amendment may be accelerated, and the applicable interest rate will be increased by 4.0% until the default is cured. Although repayment of the 2017 Loan Amendment can be accelerated under certain circumstances, the Company believes acceleration of this loan is not probable as of the date of these condensed financial statements. Accordingly, the Company has reflected the amounts of the 2017 Loan Amendment due beyond twelve months of the balance sheet date as non-current.

2022 Equipment Notes Payable

In May 2022, the Company purchased laboratory equipment using notes payable. At March 31, 2023, the total notes payable balance related to this financed equipment was $1.0 million, with $0.3 million classified within borrowings-current portion and $0.7 million within borrowings-non-current portion, net of discounts and debt issuance costs in the accompanying balance sheets. The financed equipment is subject to a 5.28% effective interest rate and will mature on October 1, 2026.

Future Minimum Payments on the Outstanding Borrowings

As of March 31, 2023, future minimum aggregate payments, including interest, for outstanding borrowings under the 2017 Loan Amendment are as follows (in thousands):



2023 (remaining)	$	1,498
2024	3,279
2025	16,451
2026	15,037
Total	36,265
Less:
Unamortized debt discount and issuance costs	(145)
Interest	(6,774)
Total borrowings, net of discounts and debt issuance costs	29,346
Less: Borrowings-current portion	(254)
Borrowings-non-current portion, net of discounts and debt issuance costs	$	29,092

Note 5. Commitments and Contingencies

Acquisition-related liabilities

In connection with the acquisition of the medical diagnostics division of Royalty Pharma Collection Trust (Royalty Pharma) (formerly known as Cypress Bioscience, Inc.) in 2010, the Company has ongoing royalty payment obligations of 2.5% on net sales of products which incorporate certain acquired technologies. Future royalties payable under these arrangements are limited to the lesser of (i) an aggregate of $1.2 million (including an upfront payment of $0.1 million) and (ii) the total royalties earned through January 1, 2024.

Licensing Agreements

The Company has licensed technology for use in its diagnostic tests. In addition to the milestone payments required by these agreements, individual license agreements generally provide for ongoing royalty payments ranging from 1.5% to 7.0% on net sales of products which incorporate licensed technology, as defined in such agreements. Royalties are accrued when earned and recorded in costs of revenue in the accompanying condensed statements of operations.

Collaboration Obligations

In May 2021, the Company entered into a master research collaboration agreement with Allegheny Health Network Research Institute (AHN), pursuant to which the Company is required to pay AHN a collaboration fee of $0.4 million for each year during the initial term of the agreement. Collaboration expenses under the master research collaboration agreement were $0.1 million for each of the three months ended March 31, 2023 and 2022. Collaboration expenses under the AHN collaboration are included in research and development expenses.

Supply Agreement

In December 2021, the Company entered into an amended supply agreement with one supplier for reagents which includes minimum annual purchase commitments of $6.9 million and $8.0 million for the years ending December 31, 2023 and 2024, respectively, with a 15% annual increase thereafter for unconditional minimum purchase commitments through the year ending December 31, 2025.

Contingencies

In the normal course of business, the Company enters into contracts and agreements that contain a variety of representations and warranties and provide for general indemnifications; including for subpoenas and other civil investigative demands, from governmental agencies, Medicare or Medicaid and managed care organizations reviewing billing practices or requesting comment on allegations of billing irregularities that are brought to their attention through billing audits or third parties. The Company's exposure under these agreements is unknown because it involves claims that may be made against the Company in the future, but have not yet been made or that the Company believes to be immaterial. The Company accrues a liability for such matters when it is probable that future expenditures will be made and such expenditures can be reasonably estimated.

Litigation

From time to time, the Company may be subject to various legal proceedings that arise in the ordinary course of business activities. The Company does not believe the outcome of any such matters will have a material effect on its financial position or results of operations.

Note 6. Fair Value Measurements

Fair value is defined as the exchange price that would be received for an asset or an exit price paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs.

The three-levels of the valuation hierarchy for disclosure of fair value measurements are defined as follows:

Level 1 - Unadjusted quoted prices in active markets for identical assets or liabilities;

Level 2 - Inputs other than quoted prices included within Level I that are observable, unadjusted quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities; and

Level 3 - Unobservable inputs that are supported by little or no market activity for the related assets or liabilities.

The categorization of a financial instrument within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The following table sets forth the Company's financial instruments that were measured at fair value on a recurring basis within the fair value hierarchy (in thousands):


	March 31, 2023
	Total		Level 1		Level 2		Level 3
Assets:
Money market funds, included in cash and cash equivalents	$	20,146	$	20,146	$	—	$	—
Certificate of deposit, included in cash and cash equivalents	30,000		30,000		—		—
Total	$	50,146	$	50,146	$	—	$	—


	December 31, 2022
	Total		Level 1		Level 2		Level 3
Assets:
Money market funds, included in cash and cash equivalents	$	29,438	$	29,438	$	—	$	—
Certificate of deposit, included in cash and cash equivalents	30,100		30,100		—		—
Total	$	59,538	$	59,538	$	—	$	—

The fair value of the Company's money market funds is based on quoted market prices.

Note 7. Stockholders' Equity

Common Stock

At The Market Sales Agreement

On September 15, 2022, the Company entered into a sales agreement (the Sales Agreement) with Cowen and Company, LLC (the Sales Agent), pursuant to which the Company may offer and sell, from time to time, shares of Company common stock having an aggregate offering price of up to $50.0 million. The Company is not obligated to

sell any shares of Company common stock in the offering. As of March 31, 2023, the Company has not sold any shares of its common stock pursuant to the Sales Agreement.

Outstanding Warrants

The following equity classified warrants to purchase common stock were outstanding as of March 31, 2023:


	Shares	Exercise Price		Issuance date	Expiration date
Common stock warrants	237,169	$	1.84	January 19, 2016	January 19, 2026
Common stock warrants	67,086	$	1.84	March 31, 2016	March 31, 2026
Common stock warrants	131	$	1.84	April 1, 2016	April 1, 2026
Common stock warrants	83,778	$	14.32	September 7, 2017	September 7, 2024
Common stock warrants	20,944	$	14.32	December 7, 2018	December 7, 2025
Common stock warrants	804,951	$	0.001	June 22, 2021	None
	1,214,059

During the three months ended March 31, 2023, no warrants to purchase common stock were exercised.

Note 8. Stock Option Plan

2019 Incentive Award Plan

In September 2019, the Company's Board of Directors adopted, and the Company's stockholders approved, the 2019 Plan. Under the 2019 Plan, which expires in September 2029, the Company may grant stock options, stock appreciation rights, restricted stock, restricted stock units and other awards to individuals who are then employees, officers, non-employee directors or consultants of the Company or its subsidiaries. The options generally expire ten years after the date of grant and are exercisable to the extent vested. Vesting is established by the Board of Directors and is generally four years from the date of grant or, for grants to new hires, date of hire. The 2019 Plan contains an "evergreen provision" that allows annual increases in the number of shares available for issuance on the first day of each calendar year through January 1, 2029 in an amount equal to the lesser of: (i) 4% of the outstanding capital stock on each December 31st, or (ii) such lesser amount determined by the Board of Directors. As of March 31, 2023, 1,851,836 shares of common stock remained available for future awards under the 2019 Plan.

2019 Employee Stock Purchase Plan

In September 2019, the Board of Directors adopted, and the Company's stockholders approved, the ESPP. The ESPP became effective on the day the ESPP was adopted by the Company's Board of Directors. The ESPP permits participants to purchase common stock through payroll deductions of up to 20% of their eligible compensation. The number of shares of common stock available for issuance under the ESPP will be annually increased on the first day of each calendar year during the term of the ESPP through January 1, 2029 in an amount equal to the lesser of (i) 1% of the outstanding capital stock on each December 31st, or (ii) such lesser amount determined by the Board of Directors. As of March 31, 2023, 508,608 shares of common stock remained available for issuance under the ESPP.

Stock Options

Stock option activity under the Company's 2019 Plan is set forth below:


	Number of Options	Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value (in thousands)
Outstanding, December 31, 2022	1,421,235	$	12.94	7.09	$	483
Granted	—	$	—
Exercised	(93,335)	$	0.26
Forfeited	(31,019)	$	14.36
Expired	(277,805)	$	17.96
Outstanding, March 31, 2023	1,019,076	$	12.68	6.97	$	287
Vested and expected to vest, March 31, 2023	1,019,076	$	12.68	6.97	$	287
Options exercisable, March 31, 2023	804,742	$	12.80	6.64	$	287

There were no stock options granted in the three months ended March 31, 2023 and 2022.

The intrinsic value is calculated as the difference between the fair value of the Company's common stock and the exercise price of the stock options. The aggregate intrinsic value of options exercised during the three months ended March 31, 2023 was $0.2 million. There were no options exercised during the three months ended March 31, 2022. As of March 31, 2023, total unrecognized compensation cost related to option awards was $

SEC Form 10-Q filed by Exagen Inc.