exdx-20240630

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 June 30, 2024
☐			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 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 Exchange Act.

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 August 1, 2024 was 17,386,389.

TABLE OF CONTENTS


		Page
Part I.	Financial Information
Item 1.	Unaudited Condensed Financial Statements	1
	Unaudited Condensed Balance Sheets as of June 30 , 2024 and December 31, 2023	1
	Unaudited Condensed Statements of Operations for the Three and Six Months ended June 30 , 2024 and 2023	2
	Unaudited Condensed Statements of Stockholders' Equity for the Three and Six Months ende d June 30 , 2024 and 2023	3
	Unaudited Condensed Statements of Cash Flows for the Six Months ende d June 30 , 2024 and 2023	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	29
Item 4.	Controls and Procedures	30

Part II.	Other Information
Item 1.	Legal Proceedings	31
Item 1A.	Risk Factors	31
Item 5.	Other Information	33
Item 6.	Exhibits	35
	Signatures	37

Part I. Financial Information

Item 1. Unaudited Condensed Financial Statements

Exagen Inc.

Unaudited Condensed Balance Sheets

(in thousands, except share and per share data)


	June 30, 2024		December 31, 2023

Assets
Current assets:
Cash and cash equivalents	$	24,479	$	36,493
Accounts receivable, net	11,703		6,551
Prepaid expenses and other current assets	4,612		4,797
Total current assets	40,794		47,841
Property and equipment, net	5,147		5,201
Operating lease right-of-use assets	2,853		3,286
Other assets	513		616
Total assets	$	49,307	$	56,944
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$	2,330	$	3,131
Accrued and other current liabilities	5,658		7,531
Operating lease liabilities	1,035		976
Borrowings-current portion	423		264
Total current liabilities	9,446		11,902
Borrowings-non-current portion, net of discounts and debt issuance costs	19,830		19,231
Operating lease liabilities - non-current portion	2,227		2,760
Other non-current liabilities	219		357
Total liabilities	31,722		34,250
Commitments and contingencies (Note 5)
Stockholders' equity:
Preferred stock, $0.001 par value per share; 10,000,000 shares authorized, no shares issued or outstanding as of June 30, 2024 and December 31, 2023	—		—
Common stock, $0.001 par value per share; 200,000,000 shares authorized as of June 30, 2024 and December 31, 2023; 17,381,575 and 17,045,954 shares issued and outstanding as of June 30, 2024 and December 31, 2023, respectively	17		17
Additional paid-in capital	303,110		301,893
Accumulated deficit	(285,542)		(279,216)
Total stockholders' equity	17,585		22,694
Total liabilities and stockholders' equity	$	49,307	$	56,944

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 June 30,				Six Months Ended June 30,
	2024		2023		2024		2023

Revenue	$	15,064	$	14,137	$	29,479	$	25,367
Operating expenses:
Costs of revenue	6,008		5,836		11,825		11,762
Selling, general and administrative expenses	10,464		11,953		21,006		23,837
Research and development expenses	1,179		1,263		2,238		2,389
Total operating expenses	17,651		19,052		35,069		37,988
Loss from operations	(2,587)		(4,915)		(5,590)		(12,621)
Interest expense	(560)		(574)		(1,109)		(1,212)
Interest income	181		476		373		1,132


Net loss	$	(2,966)	$	(5,013)	$	(6,326)	$	(12,701)
Net loss per share, basic and diluted	$	(0.16)	$	(0.28)	$	(0.35)	$	(0.72)
Weighted-average number of shares used to compute net loss per share, basic and diluted	18,178,185		17,655,483		18,061,312		17,591,478

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, 2023	17,045,954	$	17	$	301,893	$	(279,216)	$	22,694
Issuance of stock from vested restricted stock units	217,056	—		—		—		—
Issuance of stock under Employee Stock Purchase Plan	54,605	—		104		—		104
Exercise of stock options	326	—		—		—		—
Stock-based compensation	—	—		553		—		553
Net loss	—	—		—		(3,360)		(3,360)
Balances as of March 31, 2024	17,317,941	17		302,550		(282,576)		19,991
Issuance of stock from vested restricted stock units	62,998	—		—		—		—

Exercise of stock options	636	—		—		—		—
Stock-based compensation	—	—		560		—		560
Net loss	—	—		—		(2,966)		(2,966)
Balances as of June 30, 2024	17,381,575	$	17	$	303,110	$	(285,542)	$	17,585

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	—		—		—		—
Exercise of stock options	93,335	—		27		—		27
Issuance of stock under Employee Stock Purchase Plan	70,317	—		152		—		152
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
Issuance of stock from vested restricted stock units	31,180	—		—		—		—


Stock-based compensation	—	—		978		—		978
Net loss	—	—		—		(5,013)		(5,013)
Balances as of June 30, 2023	16,858,194	$	17	$	300,113	$	(268,228)	$	31,902

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

Exagen Inc.

Unaudited Condensed Statements of Cash Flows

(in thousands)


	Six Months Ended June 30,
	2024		2023

Cash flows from operating activities:
Net loss	$	(6,326)	$	(12,701)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	887		1,056
Amortization of debt discount and debt issuance costs	78		80
Non-cash interest expense	137		226
Loss on disposal of assets	111		129
Non-cash lease expense	433		473
Stock-based compensation	1,113		1,964

Changes in assets and liabilities:
Accounts receivable, net	(5,152)		(10,158)
Prepaid expenses and other current assets	185		573
Other assets	102		(101)
Operating lease liabilities	(475)		(506)
Accounts payable	(820)		(1,750)
Accrued and other current liabilities	(1,739)		812
Net cash used in operating activities	(11,466)		(19,903)
Cash flows from investing activities:
Purchases of property and equipment	(222)		(720)
Proceeds from disposal of property and equipment	—		2
Net cash used in investing activities	(222)		(718)
Cash flows from financing activities:
Proceeds from exercise of stock options	—		27

Proceeds from common stock issued under Employee Stock Purchase Plan	104		152
Principal payments on finance lease obligations	(267)		(369)
Principal payment on note payable obligations	(163)		(114)
Principal payment on long-term debt	—		(10,000)
Net cash used in financing activities	(326)		(10,304)
Net change in cash, cash equivalents and restricted cash	(12,014)		(30,925)
Cash, cash equivalents and restricted cash, beginning of period	36,693		62,591
Cash, cash equivalents and restricted cash, end of period	$	24,679	$	31,666
Supplemental disclosure of cash flow information:
Cash paid for interest	$	871	$	898
Supplemental disclosure of non-cash items:

Equipment purchased under notes payable obligations	$	706	$	250
Costs incurred, but not paid, in connection with capital expenditures	$	39	$	61

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 which exists to provide clarity in autoimmune disease decision making with the goal of improving patients' clinical outcomes.

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. As of June 30, 2024, the Company had cash and cash equivalents of $24.5 million and had an accumulated deficit of $285.5 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 June 30, 2024, condensed statements of operations and stockholders' equity for the three and six months ended June 30, 2024 and 2023, cash flows for the six months ended June 30, 2024 and 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 fiscal year ended December 31, 2023, included in its Annual Report on Form 10-K filed with the SEC on March 18, 2024. 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 June 30, 2024 and its results of operations for the periods presented. The results for the three and six months ended June 30, 2024 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 June 30,				Six Months Ended June 30,
	2024		2023		2024		2023
Medicare Advantage	25	%	19	%	21	%	18	%
Medicare	23	%	29	%	25	%	34	%
Blue Shield	11	%	10	%	*		*



*						Less than 10%.


	Accounts Receivable, Net
	June 30, 2024		December 31, 2023
Medicare	50	%	42	%
Medicare Advantage	10	%	16	%



*						Less than 10%.

For the three months ended June 30, 2024 and 2023, approximately 90% and 88%, respectively, of the Company's revenue was related to the AVISE® CTD test. Revenue related to the AVISE® CTD test for the six months ended June 30, 2024 and 2023 was approximately 90% and 88%, respectively.

The Company is dependent on key suppliers for certain laboratory materials. For the three months ended June 30, 2024 and 2023, approximately 99% and 95%, respectively, of the Company's diagnostic testing supplies were purchased from two suppliers. For the six months ended June 30, 2024 and 2023, approximately 97% and 96%, 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 June 30,				Six Months Ended June 30,
	2024		2023		2024		2023
Revenue:
Commercial	$	8,672	$	7,484	$	15,535	$	11,699
Government	3,457		4,189		7,643		8,615
Client(1)	2,910		2,273		6,194		4,680
Other(2)	25		191		107		373
Total revenue	$	15,064	$	14,137	$	29,479	$	25,367

(1)Includes hospitals, other laboratories, etc.

(2)Includes patient self-pay.

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 in the amount of $0.2 million as collateral for the balances borrowed on these cards. 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):


	June 30, 2024		December 31, 2023
Cash and cash equivalents	$	24,479	$	36,493
Restricted cash	200		200
	$	24,679	$	36,693

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, the Company combines its intangible assets and other long-lived assets, into groupings, a determination which is made principally on the basis of whether the assets are specific to a particular test offered or technology being developed. 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 (hospitals, other laboratories, etc.) and patient self-pay.

The Company recognizes revenue in accordance with Accounting Standards Codification Topic 606, Revenue from Contracts with Customers and follows a five-step process to determine the amount and timing of revenue recognized: (1) identify the contract with the customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to performance obligations in the contract, and (5) recognize revenue when (or as) the performance obligation is satisfied. 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 generally billed at the Company's list price, unless a separate pricing contract is in place. 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 June 30, 2024 and 2023 was a $3.1 million net revenue increase and a $1.5 million net revenue increase, respectively, associated with changes in estimated variable consideration related to performance obligations satisfied in previous periods. Included in revenues for the six months ended June 30, 2024 and 2023 was a $5.1 million net revenue increase and a $1.8 million net revenue increase, 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, along with any requested medical or other claims-related information to the healthcare insurers. This generally occurs within 30 to 90 days of billing, however, the amount and timing of any reimbursements or collections for our billed tests may vary by payor and other circumstances. 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 June 30, 2024 and 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; depreciation; amortization 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 $0.4 million for each of the three months ended June 30, 2024 and 2023. For the six months ended June 30, 2024 and 2023, total advertising and marketing costs were approximately $0.6 million and $0.7 million, respectively. These costs 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 were approximately $0.9 million and $0.6 million for the three months ended June 30, 2024 and 2023, respectively. For the six months ended June 30, 2024 and 2023, shipping and handling costs were approximately $1.7 million and $1.3 million, 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, as we have concluded that our stock option exercise history does not provide a reasonable basis upon which to estimate the expected term. 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 (RSU) is determined on the grant date using the closing price of the Company's common stock on that date. The Company's RSUs 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 the RSU is subject to the holder's continued service with the Company. The Company issues new shares of common stock to satisfy the RSUs 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, RSUs 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 and six months ended June 30, 2024 and 2023, 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):


	June 30, 2024	June 30, 2023
Warrants to purchase common stock	409,108	409,108
Common stock options	817,046	994,526
Restricted stock units	1,679,469	1,598,578
Employee stock purchase plan	38,299	60,719
Total	2,943,922	3,062,931

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, Accounting Standards Updates (ASU) not included in the Company’s disclosures were assessed and determined to be either not applicable or are not expected to have a material impact on the Company's financial statements or disclosures.

In November 2023, the FASB issued ASU No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures (ASU 2023-07), which requires public entities to disclose significant segment expenses that are regularly provided to the Chief Operating Decision Maker (CODM) and details of how the CODM uses financial reporting to assess the performance of a segment. ASU 2023-07 is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted. This ASU will likely result in additional required disclosure when adopted. The Company is currently evaluating the provisions of this ASU and the impact on its financial statements and related disclosures.

In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures (ASU 2023-09), which requires additional income tax disclosures in the rate reconciliation table for federal, state and foreign income taxes, in addition to more details about the reconciling items in some categories when items meet a certain quantitative threshold. ASU 2023-09 is effective for annual periods beginning after December 15, 2024 with early adoption permitted. The Company is currently evaluating the impact of this standard, but does not expect that it will have a material impact on its 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):


	June 30, 2024		December 31, 2023
Diagnostic testing supplies	$	2,874	$	2,871
Prepaid product royalties	33		35
Prepaid maintenance and insurance contracts	1,705		1,860
Other prepaid expenses and other current assets	—		31
Prepaid expenses and other current assets	$	4,612	$	4,797

Property and Equipment

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


	June 30, 2024		December 31, 2023
Furniture and fixtures	$	98	$	98
Laboratory equipment	4,524		5,312
Computer equipment and software	2,113		2,185
Leasehold improvements	3,089		3,316
Construction in progress	890		59
Total property and equipment	10,714		10,970
Less: accumulated depreciation and amortization	(5,567)		(5,769)
Property and equipment, net	$	5,147	$	5,201

Depreciation and amortization expense for the three months ended June 30, 2024 and 2023 was approximately $0.4 million and $0.5 million, respectively. For the six months ended June 30, 2024 and 2023, depreciation and amortization expense was approximately $0.9 million and $1.1 million, respectively.

Accrued and Other Current Liabilities

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


	June 30, 2024		December 31, 2023
Accrued payroll and related expenses	$	3,777	$	4,738
Accrued interest	136		139
Accrued purchases of goods and services	519		720
Accrued royalties	218		463
Accrued clinical study activity	13		118
Finance lease obligations, current portion	362		490

Refund liability	266		302
Other accrued liabilities	367		561
Accrued and other current liabilities	$	5,658	$	7,531

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 (the Amended Loan Agreement), pursuant to which the Company borrowed $25.0 million. As of June 30, 2024, no additional amounts remained available to borrow under the Amended Loan Agreement.

On April 28, 2023, the Company entered into the Amended Loan Agreement. The Amended Loan Agreement was treated as a modification. In connection with the Amended Loan Agreement, the Company repaid $10.0 million of the principal balance outstanding, for which the prepayment premium was waived. Pursuant to the Amended Loan Agreement, the interest rate on all borrowings under the Amended Loan Agreement is the sum (the Basic Rate) of (a) the greater of 8.0% or The Wall Street Journal prime rate (the Prime Rate), plus (b) 2.0%, which is paid-in-kind in the form of additional term loans (PIK Loans). Under the Amended Loan Agreement, an amount equal to 1.5% of the Basic Rate will be payable in-kind and capitalized to the principal amount of the outstanding term loan on a monthly basis until April 1, 2026, after which interest is scheduled to accrue at the Basic Rate. The maturity date of the loan was extended to December 31, 2026. The Company estimated the effective interest rate of this loan to be approximately 11.0% as of June 30, 2024. Accrued interest is due and payable monthly, unless the Company elects to pay paid-in-kind interest. The outstanding principal and accrued interest under the Amended Loan Agreement is to be repaid in ten equal monthly installments commencing in April 2026. Upon repayment of the final installment under the Amended Loan Agreement, 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 using the effective interest method. For each of the three months ended June 30, 2024 and 2023, the Company issued PIK Loans totaling $0.1 million. For the six months ended June 30, 2024 and 2023, the Company issued PIK Loans totaling $0.1 million and $0.2 million, respectively. The issuances of the PIK Loans are included in borrowings-non-current portion on the accompanying balance sheet.

The Amended Loan Agreement currently requires a prepayment premium of 1% of the aggregate outstanding principal for any prepayments made prior to November 1, 2024.

The Amended Loan Agreement is collateralized by a first priority security interest in substantially all of the Company's assets, including intellectual property. The affirmative covenants of the Amended Loan Agreement 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, however the Company is not required to comply with the revenue covenant for any quarter during which it maintains a minimum aggregate cash balance equal to fifty percent of the aggregate principal amount of the Amended Loan Agreement (excluding any capitalized interest paid-in-kind) at all times during such quarter. The consequences of failing to achieve the performance covenants, when applicable, will be cured if, (i) within thirty days of failing to achieve the performance covenant, the Company submits a new financial plan approved by the Company's board of directors (the Board) to Innovatus under which the Company is expected to break even on a cash flow basis prior to the maturity date, and (ii) within thirty days of the submission of such financial plan, the Company issues additional equity securities or subordinated debt with net proceeds sufficient to fund any cash flow deficiency generated from operations, as defined in the Amended Loan Agreement. The Amended Loan Agreement 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 Amended Loan 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 June 30, 2024, the Company was in compliance with all covenants of the Amended Loan Agreement.

Upon an event of default in any of the Amended Loan Agreement covenants, the repayment of the 2017 Term Loan may be accelerated, and the applicable interest rate will be increased by 4.0% until the default is cured. Although repayment of the 2017 Term Loan 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 Amended Loan Agreement due beyond twelve months of the balance sheet date as non-current.

Equipment Notes Payable

The Company has notes payable outstanding from the purchase of laboratory equipment. At June 30, 2024, the total notes payable balance related to this financed equipment was $1.3 million, with $0.4 million classified within borrowings-current portion and $0.9 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 June 30, 2024, future minimum aggregate payments, including interest, for outstanding borrowings are as follows (in thousands):


2024 (remaining)	$	1,087
2025	2,190
2026	21,483
2027	215
2028	67
Total	25,042
Less:
Unamortized debt discount and issuance costs	(93)
Interest	(4,696)
Total borrowings, net of discounts and debt issuance costs	20,253
Less: Borrowings-current portion	(423)
Borrowings-non-current portion, net of discounts and debt issuance costs	$	19,830

Note 5. Commitments and Contingencies

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 2.0% to 7.0% on net sales of products which incorporate licensed technology, as defined in such agreements. Royalties are accrued when incurred 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 per year. Collaboration expenses under the master research collaboration agreement were $0.1 million for each of the three months ended June 30, 2024 and 2023. For each of the six months ended June 30, 2024 and 2023, collaboration expenses under the master research collaboration agreement were $0.2 million. Collaboration expenses under the AHN collaboration are included in research and development expenses.

Supply Agreements

In December 2021, the Company amended a supply agreement with one supplier for reagents which includes minimum annual purchase commitments of $8.0 million and $9.2 million for the years ending December 31, 2024 and 2025, respectively.

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.

In addition, in October 2023, the Company resolved an investigation with the U.S. Attorney’s Office for the District of Massachusetts that was initiated by a qui tam lawsuit. Pursuant to a settlement agreement entered into by and between the Company and the U.S. Department of Justice (the Settlement Agreement), the Company made a single lump-sum remittance to the government in the amount of $0.7 million in connection with specimen processing arrangements that Exagen historically had with physicians. The U.S. Attorney’s Office dismissed this “covered conduct” in the qui tam lawsuit with prejudice, while non-covered conduct was dismissed without prejudice. In November 2023 the complaint was unsealed and served on Exagen. Exagen filed a motion to dismiss the complaint. In December 2023, the Company's insurance carrier provided reimbursement for certain defense costs the Company incurred in the October 2023 qui tam lawsuit. In February 2024, the relator filed a motion for leave to amend the complaint. Exagen opposed this motion, and all motions are still pending. The Company cannot predict when these matters will be resolved, the outcome of these matters, or their potential impact, which may materially and adversely affect the Company’s business, prospects, and financial condition. The Company intends to vigorously defend against the claims being asserted in the complaint.

The Company's participation in federal healthcare programs is not affected by the Settlement Agreement.

Note 6. 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. 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 June 30, 2024, the 2017 Term Loan had a carrying value of $18.9 million and a fair value of $18.9 million. As of December 31, 2023, the 2017 Term Loan had a carrying value of $18.7 million and a fair value of $19.7 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 carrying value of the Company's other long-term borrowing at June 30, 2024 was $1.3 million and approximated its fair value. At December 31, 2023, the carrying value of the Company's other long-term borrowing was $0.8 million and approximated its fair value.

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 1 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):


	June 30, 2024
	Total		Level 1		Level 2		Level 3
Assets:
Money market funds, included in cash and cash equivalents	$	14,768	$	14,768	$	—	$	—


	December 31, 2023
	Total		Level 1		Level 2		Level 3
Assets:
Money market funds, included in cash and cash equivalents	$	14,386	$	14,386	$	—	$	—

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

Note 7. Stockholders' Equity

Common Stock

Shelf Registration Statement

On November 17, 2023, the Company filed a registration statement on Form S-3, as amended (the 2023 Shelf Registration Statement), covering the offering, from time to time, of up to $150.0 million of common stock, preferred stock, debt securities, warrants and units. The 2023 Shelf Registration Statement became effective on November 29, 2023, and all $150.0 million remain available for sale as of June 30, 2024.

At The Market Sales Agreement

On September 15, 2022, the Company entered into a sales agreement, as amended on November 17, 2023 (the Sales Agreement) with Cowen and Company, LLC, as 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 June 30, 2024, 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 June 30, 2024:


	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 and six months ended June 30, 2024, no warrants to purchase common stock were exercised.

Note 8. Stock Option Plan

2019 Incentive Award Plan

In September 2019, the Board 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, RSUs 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 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. As of June 30, 2024, 2,109,692 shares of common stock remained available for future awards under the 2019 Plan.

Restricted Stock Units

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


	Number of Shares	Weighted- Average Grant Date Fair Value
Outstanding, December 31, 2023	1,387,459	$	4.24
Awards granted	920,175	$	1.89
Awards released	(280,054)	$	5.94
Awards canceled	(348,111)	$	4.33
Outstanding, June 30, 2024	1,679,469	$	2.65

As of June 30, 2024, all of the outstanding RSUs were unvested. The fair value of RSUs vested in the six months ended June 30, 2024 and 2023 was $0.5 million and $0.4 million, respectively. The weighted average grant date fair value for RSUs granted in the six months ended June 30, 2024 and 2023 was $1.89 and $2.42, respectively. As of June 30, 2024, total unrecognized compensation cost related to RSUs was $3.8 million, which is expected to be recognized over a remaining weighted-average vesting period of 3.0 years.

Stock Options

Stock option activity under the 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, 2023	986,819	$	11.87	6.44	$	228
Granted	55,500	$	1.99
Exercised	(962)	$	0.26
Forfeited	(7,695)	$	16.35
Expired	(216,616)	$	14.96
Outstanding, June 30, 2024	817,046	$	10.36	6.27	$	202
Vested and expected to vest, June 30, 2024	817,046	$	10.36	6.27	$	202
Options exercisable, June 30, 2024	786,623	$	10.59	6.16	$	202

There were 55,500 and 58,500 stock options granted in the six months ended June 30, 2024 and 2023, respectively. 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 six months ended June 30, 2024 was negligible. The aggregate intrinsic value of options exercised during the six months ended June 30, 2023 was $0.2 million. As of June 30, 2024, total unrecognized compensation cost related to option awards was $0.1 million, which is expected to be recognized over a remaining weighted-average vesting period of 2.23 years.

2019 Employee Stock Purchase Plan

In September 2019, the Board adopted, and the Company's stockholders approved, the ESPP. The ESPP became effective on the day the ESPP was adopted by the Board. 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. As of June 30, 2024, 565,187 shares of common stock remained available for issuance under the ESPP.

Stock-Based Compensation Expense

Total non-cash stock-based compensation expense recorded related to options granted, RSUs granted and stock purchase rights granted under the ESPP in the condensed statements of operations is as follows (in thousands):


	Three Months Ended June 30,				Six Months Ended June 30,
	2024		2023		2024		2023
Costs of revenue	$	39	$	63	$	56	$	116
Selling, general and administrative	465		874		944		1,705
Research and development	56		41		113		143
Total	$	560	$	978	$	1,113	$	1,964

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion of our financial condition and results of operations in conjunction with the unaudited condensed financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q and with our audited financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2023.

Forward Looking Statements

The following discussion and other parts of this quarterly report contain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act). All statements other than statements of historical facts contained in this quarterly report, including statements regarding our future results of operations and financial position, estimates regarding profitability and the time that may elapse before we may become profitable, business strategy, current and future product offerings, reimbursement and coverage, the expected benefits from our partnership or promotion arrangements with third parties, research and development costs, timing and likelihood of success and plans and objectives of management for future operations, are forward-looking statements. These statements are often identified by the use of words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “could,” “should,” “estimate,” or “continue,” and similar expressions or variations. The forward-looking statements in this quarterly report are only predictions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, operating results, business strategy, and short-term and long-term business operations and objectives. These forward-looking statements speak only as of the date of this quarterly report and are subject to a number of risks, uncertainties and assumptions, including those described in Part I, Item IA, "Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023 and Part II, Item 1A, “Risk Factors” in this Quarterly Report on Form 10-Q. The events and circumstances reflected in our forward-looking statements may not be achieved or occur and actual results could differ materially from those projected in the forward-looking statements. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained herein, whether as a result of any new information, future events, changed circumstances or otherwise.

Overview

We exist to provide clarity in autoimmune disease decision making with the goal of improving patients' clinical outcomes. We have developed and are commercializing a portfolio of innovative testing products under our AVISE® brand, which allow for the differential diagnosis, prognosis and monitoring of complex autoimmune and autoimmune-related diseases. We believe our focus on and experience in the field of rheumatology, combined with our commitment to excellent customer service and support, position us very well to respond to the needs of rheumatologists and the patients they serve. There is an unmet need for rheumatologists to add clarity in their connective tissue disease (CTD) clinical evaluation, and we believe there is a significant opportunity for our tests in this market, particularly for potentially life-threatening diseases such as systemic lupus erythematosus (SLE).

Since inception we have devoted substantially all of our efforts to developing and marketing products for the diagnosis, prognosis and monitoring of autoimmune diseases. We commercially launched our lead testing product, AVISE® CTD, in 2012. Our proprietary AVISE® Lupus test is included as part of the AVISE® CTD panel and employs a patent-protected method for diagnosing patients with SLE based on levels of CB-CAPs (e.g. EC4d and BC4d), ANA, and ds-DNA. The AVISE® Lupus test also employs patent-protected algorithms used to generate risk scores to diagnose patients with SLE based on the levels of the biomarkers. These proprietary, patent-protected methods vastly improve the diagnostic sensitivity of our test compared to the current standard of care. AVISE® CTD enables differential diagnosis for patients presenting with symptoms indicative of a wide variety of CTDs and other related diseases with overlapping symptoms. Revenue from this product comprised 90% and 88% of our revenue for the six months ended June 30, 2024 and 2023, respectively. For the six months ended June 30, 2024 and 2023, we incurred net losses of $6.3 million and $12.7 million, respectively, and we expect to continue to incur operating losses in the near term. Our operations have been funded primarily through equity financings, debt financings and revenue from product sales. We have never been profitable and, as of June 30, 2024, we had $24.5 million of cash and cash equivalents and an accumulated deficit of $285.5 million.

Reimbursement for our testing services comes from several sources, including commercial payors (such as insurance companies and health maintenance organizations), government payors (such as Medicare and

Medicaid), client payors (such as hospitals, other laboratories, etc.) and patients. Reimbursement rates vary by product and payor.

All of our AVISE® tests are performed in our approximately 13,000 square-foot laboratory located in Vista, California, which is certified under the Clinical Laboratory Improvement Amendments of 1988 (CLIA) and accredited by the College of American Pathologists (CAP). Our laboratory is certified for performance of high-complexity testing by the Centers for Medicare & Medicaid Services (CMS) in accordance with CLIA and is licensed by all states requiring out-of-state licensure. Our clinical laboratory typically reports all AVISE® testing product results within five business days

In addition to providing diagnostic testing, we are leveraging our clinical laboratory to enter into agreements in the normal course of business with leading pharmaceutical companies and clinical research organizations for the use of our testing products and/or the data generated from such tests. We believe the quality of our testing, proprietary offerings and specialized knowledge give us an advantage in this space. We plan to continue to pursue additional partnerships with leading pharmaceutical companies and academic research centers that are synergistic with our evolving portfolio of testing products, as more of these organizations realize the extent of the service we can provide.

We market our AVISE® testing products using our specialized sales force covering 40 territories in the United States. Many diagnostic sales forces are trained only to understand the comparative benefits of the tests they promote. In contrast, the specialized backgrounds of our sales personnel, coupled with our comprehensive training, enables our sales representatives to interpret results from our de-identified patient test reports and provide unique insights in a highly tailored discussion with rheumatologists. We believe our focus on and experience in the field of rheumatology, combined with our commitment to excellent customer service and support, position us very well to respond to the needs of rheumatologists and the patients they serve.

Recent Developments

TC4d, TIgG and TIgM Biomarkers

Our collaborative efforts with the Allegheny Health Network Research Institute (AHN) have resulted in further development of three innovative biomarkers, TC4d, TIgG, and TIgM (the T-Cell Biomarkers), for which we obtained an exclusive, worldwide license from AHN in May 2021. These biomarkers have been clinically validated, exhibit a high degree of specificity for lupus and are more sensitive for lupus compared to conventional biomarkers. TC4d is patent protected through 2035, representing a proprietary expansion of CB-CAPs, involving a biochemical process wherein complement activation products are measured on T-cells. We currently plan to incorporate these three biomarkers into our AVISE® CTD test toward the end of 2024. Once incorporated, we believe these biomarkers will significantly enhance the diagnostic sensitivity for lupus of our AVISE® CTD tests beyond its current 80% sensitivity.

RA Sub-Profile

Approximately 70% of rheumatoid arthritis (RA) patients show serological evidence of RA, identified by key biomarkers: anti-CCP and Rheumatoid Factor. The remaining 30% of patients, despite lacking these serological markers, are clinically diagnosed with RA; this subgroup is referred to as “seronegative RA.” These patients often face delays in diagnosis due to the absence of serological evidence. In cases of early inflammatory arthritis, differential diagnosis is broad, including conditions like reactive arthritis, crystal arthropathy, spondyloarthropathy, and other systemic rheumatic diseases such as SLE and Sjogren’s syndrome, alongside seronegative RA. We have identified three unique biomarkers specific to seronegative RA (the RA Sub-Profile Biomarkers) that help bridge this diagnostic gap and would enable AVISE® CTD to correctly identify approximately a third of the traditional seronegative RA subgroup. We currently plan to incorporate these new biomarkers into our AVISE® CTD test toward the end of 2024, allowing for more timely and targeted treatment plans for these patients.

We believe that the addition of the biomarkers discussed above will further differentiate our core test offerings in the market and be accretive to our financial performance. Additionally, we anticipate progressive incremental improvements in demand for AVISE® CTD over time, as we educate physicians about the benefits these new markers provide. Given the financial impact we expect from the planned launch of these new biomarkers, we estimate that we will achieve positive cash flows within a year of launching both the T-Cell Biomarkers and the RA Sub-Profile Biomarkers. This estimate assumes, among other things, that we are able to incrementally increase the average selling price per test. This estimate may ultimately be incorrect.

Factors Affecting Our Performance

We believe there are several important factors that have impacted, and that we expect will impact, our operating performance and results of operations, including:

▪Reimbursement for Our Testing Products. Our revenue depends on achieving broad coverage and reimbursement for our tests from third-party payors, including both commercial payors and government payors. Payment from third-party payors differs depending on whether we are considered a "participating provider" (have entered into a contract with the payors as a participating provider) or a "non-participating provider" (do not have a contract and are considered a "non-participating provider"). Payors will often reimburse non-participating providers at a lower amount than participating providers, if at all. We have received a substantial portion of our revenue from a limited number of commercial payors, most of which have not contracted with us to be a participating provider. Historically, we have experienced situations where commercial payors proactively reduced the amounts they were willing to reimburse for our tests, and in other situations, commercial payors have determined that the amounts they previously paid were too high and have sought to recover those perceived excess payments by deducting such amounts from payments otherwise being made. When we contract to serve as a participating provider, reimbursements are made pursuant to a negotiated fee schedule and are limited to only covered indications. If we are not able to obtain or maintain coverage and adequate reimbursement from third-party payors, we may not be able to effectively increase our testing volume and revenue as expected. Additionally, changes in our estimated reimbursements for tests performed in prior periods can positively or negatively impact our revenue in the current period and cause our financial results to fluctuate. In addition, in connection with our revenue cycle management initiatives, we've held claims in the first half of the year which has resulted in increases in our accounts receivable and an accelerated decrease in our cash in the first half of the year. We expect this trend to reverse in the second half of the year, as cash is collected on billed tests.

▪Continued Growth of Our Testing Products. Since the launch of AVISE® CTD in 2012 and through June 30, 2024, we have delivered approximately 950,000 of these tests. During the three months ended June 30, 2024, the number of AVISE® CTD tests delivered declined by approximately 13% over the same period in 2023. Revenue growth for our testing products will depend, in part, on our ability to continue to expand our base of ordering healthcare providers and increase our penetration with existing healthcare providers, in addition to our ability to successfully and timely launch the T-Cell Biomarkers and RA Sub-Profile Biomarkers we plan to add to our AVISE® CTD test.

▪Development of Additional Testing Products. We rely on sales of our AVISE® CTD test to generate the significant majority of our revenue. We expect to continue to invest in research and development in order to develop additional testing products. Our success in developing new testing products will be important in our efforts to grow our business by expanding the potential market for our products and diversifying our sources of revenue.

▪Maintain Meaningful Margin. We seek to maintain meaningful margin through a continued focus on increasing operating leverage through the implementation of certain internal initiatives, such as leveraging validation, utility and reimbursement oriented clinical studies to facilitate payor coverage of our testing products. We center our efforts around long-term reimbursement and average sales price (ASP) growth and seek to improve our per-test costs by focusing on profitable, core test offerings and limiting fixed costs and overhead.

▪Timing of Our Research and Development Expenses. We conduct clinical studies to validate our new testing products, as well as ongoing clinical and outcome studies to further expand the published evidence that supports our commercialized AVISE® testing products. We also expend funds to secure clinical samples that can be used in discovery, product development, clinical validation, utility and outcome studies. Our spending on experiments and clinical studies may vary substantially from quarter to quarter, and the timing of these research and development activities is difficult to predict. If a substantial number of clinical samples are obtained in a given quarter or if a high-cost experiment is conducted in one quarter versus the next, the timing of these expenses will affect our financial results.

▪How We Recognize Revenue. We record revenue on an accrual basis, using an estimate of the amount that we will ultimately realize, as determined based on a historical analysis of amounts collected by test and by payor, among other factors. Changes to such estimates may increase or decrease revenue recognized in future periods.

While each of these areas present significant opportunities for us, they also pose significant risks and challenges that we must address. We discuss many of these risks, uncertainties and other factors in the section entitled "Risk Factors" in this Quarterly Report on Form 10-Q, as well as in the section entitled "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2023, filed with the SEC on March 18, 2024.

Seasonality

Based on our experience to date, we expect some seasonal variations in our financial results due to a variety of factors, such as: the year-end holiday period and other major holidays, vacation patterns of both patients and healthcare providers (including medical conferences), climate and weather conditions in our markets (for example, excess sun exposure can cause flares in SLE), seasonal conditions that may affect medical practices and provider activity (for example, influenza outbreaks that may reduce the percentage of patients that can be seen) and other factors relating to the timing of patient benefit changes, as well as patient deductibles and co-insurance limits.

Inflationary Environment

The current inflationary environment has resulted in higher prices, which have impacted our costs incurred to generate revenue from our laboratory testing services, costs to attract and retain personnel, and other operating costs. The severity and duration of the current inflationary environment remains uncertain and may continue to impact our financial condition and results of operations.

Financial Overview

Revenue

We recognize revenue in accordance with the provisions of Accounting Standards Codification Topic 606, Revenue from Contracts with Customers. We record revenue on an accrual basis, using an estimate of the amount we will ultimately receive, as determined based on a historical analysis of amounts collected by test and by payor, among other factors. These assessments require significant judgment by management.

To date, we have derived nearly all of our revenue from the sale of our testing products, most of which is attributable to our AVISE® CTD test. We primarily market our testing products to rheumatologists and their physician assistants in the United States. The healthcare professionals who order our testing products, and to whom results are reported, are generally not responsible for payment for these products. The parties that pay for these services (payors) consist of commercial payors (insurance companies, health maintenance organizations, etc.), government payors (primarily Medicare and Medicaid), client payors (hospitals, other laboratories, etc.), and patient self-pay. Our service is completed upon the delivery of test results to the prescribing rheumatologists which triggers billing for the service.

Our ability to increase our revenue will depend on our ability to further penetrate the market for our current and future testing products and increase our reimbursement and collection rates for tests delivered.

In April 2022, we were granted a Proprietary Laboratory Code (PLA) code for our protein-based test, AVISE® Lupus. Noridian, our Medicare Administrative Contractor, has set the current pricing for this PLA code at $840.65 per test through December 31, 2025. The process for obtaining and maintaining consistent reimbursement for new tests can be uncertain, lengthy and time consuming. A pricing determination is not synonymous with a coverage determination. Having a price associated with the PLA code for any particular test does not secure coverage or reimbursement for that PLA code from Medicare or any other third-party payor.

We submitted a formal request to Noridian for coverage of our AVISE® Lupus test under the new PLA Code, and on September 27, 2022, we received notice that Noridian has deemed our application for a Local Coverage Determination (LCD) to be valid. Ultimately receiving a favorable LCD is uncertain and may be time-consuming, resource intensive and require multiple quarterly or annual periods to complete and is subject to risks and uncertainties described in the section entitled "Risk Factors" in this Quarterly Report on Form 10-Q. In the meantime, we have continued to submit Medicare claims for AVISE® Lupus, appeal denials and respond to requests for additional information. On January 31, 2024, CMS released a coverage article under which all multi-analyte proteomic testing will be considered within the scope of molecular diagnostic services (MolDX) and reviewed through their technology assessment process. The article listed several such tests, including the AVISE® Lupus test, and requires all laboratories furnishing multi-analyte proteomics testing in MolDX jurisdictions to register with the

DEX® Diagnostics Exchange Registry and obtain a Z-Code® identifier. We were issued a Z-Code® in May 2024. To determine if the submitted tests are compliant with relevant policy requirements, these tests will undergo technical assessment by Palmetto GBA as part of the MolDX program.

We face consistent challenges relating to commercial payor claim processing and revenue. While collectability has improved with certain plans year-over-year, we continue to experience denials due to unfavorable medical policy with certain plans, and we expect this situation to persist.

During the year ended December 31, 2023, we implemented several revenue cycle management initiatives, including among others, withholding the submission of commercial payor claims for reimbursement until subsequent quarters, increasing appeals efforts, adjusting the documentation required of physicians when ordering our tests and implementing increases to our patient payment rates. Additionally, in November 2023, we increased the list price billed for our tests. These ongoing revenue cycle management initiatives aim to optimize our appeals process and the potential for cash collections. We experienced moderate declines in test volume in the second half of 2023 and into January 2024, as rheumatologists and patients adjusted to these changes. The number of AVISE® CTD tests delivered during the three months ended June 30, 2024 grew by approximately 8% as compared to the number of AVISE® CTD tests delivered during the three months ended March 31, 2024. We consider reporting of absolute test volumes to be a competitive disadvantage. As a result, beginning in the quarter ended June 30, 2024, we will be providing the percentage change in test volume on a quarterly basis and the annual test volume on an annual basis in our Annual Report on Form 10-K.

Operating Expenses

Costs of Revenue

Costs of revenue represents the expenses associated with obtaining and testing patient specimens. The components of our costs of revenue include materials costs, direct labor, equipment, infrastructure expenses, shipping charges to transport specimens, blood specimen collections fees, royalties, depreciation and allocated overhead (including rent and utilities).

Each payor, whether commercial, government, or individual, reimburses us at different amounts. These differences can be significant. As a result, our costs of revenue as a percentage of revenue may vary significantly from period to period due to the composition of payors for each period's billings.

We expect that our costs of revenue will remain relatively consistent in the near-term.

Selling, General and Administrative Expenses

Selling, general and administrative expenses consist of personnel costs (including stock-based compensation expense), direct marketing expenses, accounting and legal expenses, consulting costs and allocated overhead (including rent, information technology, depreciation and utilities).

We expect that our selling, general and administrative expenses will remain relatively consistent in the near-term.

Research and Development Expenses

Research and development expenses include costs incurred to develop our technology, test products and product candidates, in addition to costs incurred to collect clinical specimens and conduct clinical studies to develop and support those products and product candidates. These costs consist of 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). We expense all research and development costs in the periods in which they are incurred.

We expect that our research and development expenses will remain relatively consistent in the near-term.

Interest Expense

Interest expense consists of cash and non-cash interest expense associated with our financing arrangements, including the borrowings under our Amended Loan Agreement with Innovatus.

Interest Income

Interest income consists of interest income earned on our cash and cash equivalents.

Results of Operations

Comparison of the Three Months Ended June 30, 2024 and 2023 (in thousands):


	Three Months Ended June 30,
	2024		2023		Change
Revenue	$	15,064	$	14,137	$	927
Operating expenses:
Costs of revenue