EXAGEN INC. 10-K

Item 9A. Controls and Procedures. Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that the information required to be disclosed by us in such reports is accumulated and communicated to our management, including our principal executive officer and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable and not absolute assurance of achieving the desired control objectives. In reaching a reasonable level of assurance, management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. In addition, the design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, control may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Our management, with the participation of our principal executive officer and our principal financial officer, evaluated, as of the end of the period covered by this Annual Report on Form 10-K, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based on that evaluation, our principal executive officer and principal financial officer have concluded that as of December 31, 2022, our disclosure controls and procedures were not effective to ensure that the information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, due to the material weakness in our internal control over financial reporting described below. Management's Report on Internal Control over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Internal control over financial reporting is a process designed under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. Our internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets, (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors, and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements. Because of its inherent limitations, internal controls over financial reporting may not prevent or detect all misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. On November 13, 2022, management and the audit committee of our board of directors determined that we made certain errors in revenue resulting from erroneous and duplicate billings related to changes in billing practices. The 82 errors were due to the inadequate design and implementation and precision of internal controls and procedures to evaluate and monitor the accounting for revenue recognition. As a result, revenue and accounts receivable were overstated and other liabilities was understated for the quarter and year to date periods ended June 30, 2022. We concluded that these were material errors in the financial statements requiring a restatement of the Form 10-Q for the three and six months ended June 30, 2022. Accordingly, management has determined that this control deficiency constituted a material weakness and, as a result, management has concluded that, as of December 31, 2022, our internal control over financial reporting was not effective based on the criteria in Internal Control Integrated Framework (2013) issued by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission. Based on that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were not effective to ensure that the information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Remediation Plan to Address the Material Weaknesses Management is actively engaged in the implementation of, remediation efforts to address the material weakness. The remediation plan includes: (i) evaluating the staffing level, skills and qualification of accounting department personnel, (ii) enhancement of our existing control structure and processes for revenue recognition and (iii) improving the detailed review process of our revenue recognition models. The elements of our remediation plan can only be accomplished over time, and we can offer no assurance that these initiatives will ultimately have the intended effects. The weakness will not be considered remediated, however, until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively. Attestation Report of the Registered Public Accounting Firm This Annual Report on Form 10-K does not include an attestation report of our registered public accounting firm due to an exemption provided by the JOBS Act for "emerging growth companies." Changes in Internal Control Over Financial Reporting Other than the material weakness discussed above, there have been no changes in our internal control over financial reporting during the three months ended December 31, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Inherent Limitations on Effectiveness of Controls and Procedures Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and our management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. 83 Item 9B. Other Information. Not applicable. Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections. Not applicable. 84 Part III Item 10. Directors, Executive Officers and Corporate Governance. The information required by this item is incorporated herein by reference to our Proxy Statement with respect to our 2022 Annual Meeting of Stockholders to be filed with the SEC within 120 days of the end of the fiscal year covered by this Annual Report on Form 10-K. Item 11. Executive Compensation. The information required by this item is incorporated herein by reference to our Proxy Statement with respect to our 2022 Annual Meeting of Stockholders to be filed with the SEC within 120 days of the end of the fiscal year covered by this Annual Report on Form 10-K. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. The information required by this item is incorporated herein by reference to our Proxy Statement with respect to our 2022 Annual Meeting of Stockholders to be filed with the SEC within 120 days of the end of the fiscal year covered by this Annual Report on Form 10-K. Item 13. Certain Relationships and Related Transactions, and Director Independence. The information required by this item is incorporated herein by reference to our Proxy Statement with respect to our 2022 Annual Meeting of Stockholders to be filed with the SEC within 120 days of the end of the fiscal year covered by this Annual Report on Form 10-K. Item 14. Principal Accountant Fees and Services. Our independent public accounting firm is BDO USA, LLP, San Diego, California, PCAOB ID # 243 . The information required by this item is incorporated herein by reference to our Proxy Statement with respect to our 2022 Annual Meeting of Stockholders to be filed with the SEC within 120 days of the end of the fiscal year covered by this Annual Report on Form 10-K. 85 Part IV Item 15. Exhibits and Financial Statement Schedules. Financial Statements and Financial Statement Schedules (1) Exhibits A list of exhibits is set forth on the Exhibit Index immediately preceding the signature page of this Annual Report on Form 10-K and is incorporated herein by reference. (2) All financial statements The financial statements of Exagen Inc., together with the report thereon of BDO USA, LLP, an independent registered public accounting firm, are included in this Annual Report on Form 10-K beginning on page F-2. (3) Financial statement schedules All schedules have been omitted because the information required to be set forth therein is not applicable or is shown in the financial statements or notes thereto. Item 16. Form 10-K Summary. None. 86 Index to Exhibits Incorporated by Reference Exhibit Number Exhibit Description Form File No. Exhibit Exhibit Filing Date Filed/Furnished Herewith 3.1 Amended and Restated Certificate of Incorporation. 8-K 001-39049 3.1 9/23/2019 3.2 Amended and Restated Bylaws. 8-K 001-39049 3.1 3/22/2021 3.3 Amended and Restated Bylaws, dated January 19, 2023. 8-K 001-39049 3.1 1/23/2023 4.1 Specimen stock certificate evidencing the shares of common stock. S-1/A 333-233446 4.1 9/9/2019 4.2 Amended and Restated Investors’ Rights Agreement, dated July 12, 2019, by and among the Company and certain of its stockholders. S-1/A 333-233446 4.2 9/9/2019 4.3 Amended and Restated Stockholders' Agreement, dated July 12, 2019, by and among the Company and certain of its stockholders. S-1/A 333-233446 4.3 9/9/2019 4.4 Form of Common Stock Purchase Warrant issued to investors by the Company in connection with private placement financings. S-1/A 333-233446 4.4 9/9/2019 4.5 Form of Common Stock Purchase Warrant to purchase common stock issued to investors by the Company in 2016. S-1/A 333-233446 4.8 9/9/2019 4.6 Form of Warrant to Purchase Stock issued to Innovatus Life Sciences Lending Fund I, LP in connection with the Company's 2018 loan agreement. S-1/A 333-233446 4.9 9/9/2019 4.7 Form of Exchange Warrant. 10-Q 001-39049 4.5 8/9/2021 10.1# Exagen Corporation 2002 Stock Option Plan, as amended, and form of option agreement thereunder. S-1/A 333-233446 10.1 9/9/2019 10.2# Exagen Diagnostics, Inc. 2013 Stock Option Plan, as amended, and form of option agreement thereunder. S-1/A 333-233446 10.2 9/9/2019 10.3# Exagen Inc. 2019 Incentive Award Plan. S-1/A 333-233446 10.3 9/9/2019 10.4# Form of Option Agreement under Exagen Inc. 2019 Incentive Award Plan. S-1/A 333-233446 10.4 9/9/2019 10.5# Form of Restricted Stock Unit Agreement under Exagen Inc. 2019 Incentive Award Plan. 10-K 001-39049 10.5 3/16/2021 10.6# Exagen Inc. 2019 Employee Stock Purchase Plan. S-1/A 333-233446 10.5 9/9/2019 10.7† License Agreement, dated September 13, 2007, by and between Prometheus Laboratories Inc. and the Company (as successor in interest to Proprius, Inc.). S-1/A 333-233446 10.6 9/9/2019 10.8† First Amendment to License Agreement, dated October 23, 2013, by and between Prometheus Laboratories Inc. and the Company (as successor in interest to Cypress Bioscience, Inc.). S-1/A 333-233446 10.7 9/9/2019 10.9 Letter Agreement, dated September 28, 2021, by and between the Company and Prometheus Laboratories Inc. 10-Q 001-39049 10.6 11/10/2021 10.10† Asset Purchase Agreement, dated October 8, 2010, by and between Cypress Bioscience, Inc., Proprius, Inc. and the Company. S-1/A 333-233446 10.11 9/9/2019 87 10.11† Amendment No. One to Asset Purchase Agreement, dated March 10, 2011, by and between Cypress Bioscience, Inc., Proprius, Inc. and the Company. S-1/A 333-233446 10.12 9/9/2019 10.12 Amendment No. Two to Asset Purchase Agreement, dated August 21, 2012, by and between Royalty Pharma Collection Trust, Proprius, Inc. and the Company. S-1/A 333-233446 10.13 9/9/2019 10.13† Amendment No. Three to Asset Purchase Agreement, dated February 6, 2013, by and between Royalty Pharma Collection Trust, Proprius, Inc. and the Company. S-1/A 333-233446 10.14 9/9/2019 10.14 Amendment No. Four to Asset Purchase Agreement, dated October 8, 2013, by and between Royalty Pharma Collection Trust, Proprius, Inc. and the Company. S-1/A 333-233446 10.15 9/9/2019 10.15 Amendment No. Five to Asset Purchase Agreement, dated January 26, 2016, by and between Royalty Pharma Collection Trust, Proprius, Inc. and the Company. S-1/A 333-233446 10.16 9/9/2019 10.16† Amendment No. Six to Asset Purchase Agreement, dated February 16, 2017, by and between Royalty Pharma Collection Trust, Proprius, Inc. and the Company. S-1/A 333-233446 10.17 9/9/2019 10.17† Amended and Restated Exclusive License Agreement, dated August 2, 2011, by and between the University of Pittsburgh-Of the Commonwealth System of Higher Education and the Company. S-1/A 333-233446 10.18 9/9/2019 10.18† First Amendment to Amended and Restated Exclusive License Agreement, dated May 17, 2012, by and between the University of Pittsburgh-Of the Commonwealth System of Higher Education and the Company. S-1/A 333-233446 10.19 9/9/2019 10.19† Second Amendment to Amended and Restated Exclusive License Agreement, dated September 30, 2013, by and between the University of Pittsburgh-Of the Commonwealth System of Higher Education and the Company. S-1/A 333-233446 10.20 9/9/2019 10.20 Third Amendment to Amended and Restated Exclusive License Agreement, dated June 24, 2016, by and between the University of Pittsburgh-Of the Commonwealth System of Higher Education and the Company. S-1/A 333-233446 10.21 9/9/2019 10.21† Exclusive License Agreement, dated September 30, 2013, by and between the University of Pittsburgh-Of the Commonwealth System of Higher Education and the Company. S-1/A 333-233446 10.22 9/9/2019 10.22† Exclusive License Agreement, dated September 5, 2011, by and between Thierry Dervieux, Ph.D. and the Company. S-1/A 333-233446 10.23 9/9/2019 10.23† Co-Promotion Agreement, dated December 10, 2018, by and between Janssen Biotech, Inc. and the Company. S-1/A 333-233446 10.24 9/9/2019 10.24† Amendment #1 to Co-Promotion Agreement, dated January 1, 2019 by and between Janssen Biotech, Inc. and the Company. 10-Q 001-39049 10.1 7/28/2020 10.25† Amendment #2 to Co-Promotion Agreement, dated June 18, 2020 by and between Janssen Biotech, Inc. and the Company. 10-Q 001-39049 10.2 7/28/2020 10.26† Amendment #3 to Co-Promotion Agreement, dated December 23, 2020 by and between Janssen Biotech, Inc. and the Company. 10-K 001-39049 10.25 3/16/2021 10.27† Amendment #4 to Co-Promotion Agreement, dated June 30, 2021 by and between Janssen Biotech, Inc. and the Company. 10-Q 001-39049 10.1 8/9/2021 88 10.28 Standard Industrial/Commercial Multi-Tenant Lease, dated January 13, 2012, by and between RGS Properties and the Company. 10-Q 001-39049 10.1 7/28/2020 10.29 First Amendment to Standard Industrial/Commercial Multi-Tenant Lease, dated December 1, 2013, by and between RGS Properties and the Company. 10-Q 001-39049 10.2 7/28/2020 10.30 Second Amendment to Standard Industrial/Commercial Multi-Tenant Lease, dated April 29, 2016, by and between RGS Properties and the Company. 10-K 001-39049 10.27 3/25/2020 10.31 Third Amendment to Standard Industrial/Commercial Multi-Tenant Lease, dated June 16, 2017, by and between RGS Properties and the Company. 10-K 001-39049 10.28 3/25/2020 10.32 Fourth Amendment to Standard Industrial/Commercial Multi-Tenant Lease, dated March 16, 2020, by and between RGS Properties and the Company. 10-K 001-39049 10.29 3/25/2020 10.33 Fifth Amendment to Standard Industrial/Commercial Multi-Tenant Lease, dated October 19, 2021, by and between RGS Properties and the Company. 10-Q 001-39049 10.3 11/10/2021 10.34 Standard Industrial/Commercial Single-Tenant Lease, dated September 4, 2014, by and between Geiger Court, LLC and the Company. S-1/A 333-233446 10.31 9/9/2019 10.35 First Amendment to Standard Industrial/Commercial Single-Tenant Lease, dated August 2, 2017, by and between Geiger Court, LLC and the Company. 10-K 001-39049 10.31 3/25/2020 10.36 Extension of Lease to Standard Industrial/Commercial Single-Tenant Lease, dated March 12, 2020, by and between Liberty Vista and the Company. 10-K 001-39049 10.32 3/25/2020 10.37 First Amendment to Standard Industrial/Commercial Single-Tenant Lease, dated January 6, 2021, by and between Liberty Vista and the Company. 10-K 001-39049 10.34 3/16/2021 10.38 Second Amendment to Standard Industrial/Commercial Single-Tenant Lease, dated October 11, 2021, by and between Liberty Vista and the Company. 10-Q 001-39049 10.2 11/10/2021 10.39 Standard Industrial/Commercial Multi-Tenant Lease, dated March 17, 2020 by and between RGS Properties and the Company. 10-K 001-39049 10.33 3/25/2020 10.40 First Amendment to Standard Industrial/Commercial Multi-Tenant Lease, dated October 19, 2021, by and between RGS Properties and the Company. 10-Q 001-39049 10.4 11/10/2021 10.41† Sublease Agreement, dated August 19, 2021, by and between Plum Healthcare Group, LLC and the Company. 10-Q 001-39049 10.1 11/10/2021 10.42 Master Lease Agreement, dated February 1, 2018, by and between Celtic Commercial Finance, a division of MB Equipment Finance, LLC and the Company. S-1/A 333-233446 10.32 9/9/2019 10.43 Loan and Security Agreement, dated September 7, 2017, by and between Innovatus Life Sciences Lending Fund I, LP and the Company. S-1/A 333-233446 10.33 9/9/2019 10.44 First Amendment to Loan and Security Agreement, dated November 19, 2019, by and between Innovatus Life Sciences Lending I, LP and the Company. 10-K 001-39049 10.36 3/25/2020 10.45 Acknowledgement Letter to Loan and Security Agreement, dated October 7, 2020, by and between Innovatus Life Sciences Lending Fund I, LP and the Company. 10-Q 001-39049 10.1 11/10/2020 89 10.46 Second Amendment to Loan and Security Agreement, dated November 1, 2021, by and among Innovatus Life Sciences Lending Fund I, LP, other lenders and the Company. 10-Q 001-39049 10.5 11/10/2021 10.47# Offer Letter, dated October 12, 2010, by and between Thierry Dervieux, Ph.D. and the Company, as amended on September 9, 2011 and September 6, 2019. S-1/A 333-233446 10.34 9/9/2019 10.48 Form of Indemnification Agreement for Directors and Officers. S-1/A 333-233446 10.35 9/9/2019 10.49# Offer Letter, dated October 7, 2011, by and between Fortunato Ron Rocca and the Company, as amended on September 4, 2019. S-1/A 333-233446 10.36 9/9/2019 10.50# Offer Letter, dated May 16, 2017, by and between Kamal Adawi and the Company, as amended on September 4, 2019. S-1/A 333-233446 10.37 9/9/2019 10.51# Offer Letter dated February 21, 2020, by and between Debra Zack, MD Ph.D. and the Company. 10-K 001-39049 10.41 3/25/2020 10.52# Non-Employee Director Compensation Program. S-1/A 333-233446 10.38 9/9/2019 10.53# Executive Change in Control Severance Plan. 10-K 001-39049 10.46 3/16/2021 10.54# Employment Agreement, dated as of October 16, 2022, by and between the Company and John Aballi 8-K 001-39049 10.1 10/16/2022 10.55# Severance Agreement, dated as of October 14, 2022, by and between the Company and Ron Rocca 8-K 001-39049 10.2 10/16/2022 10.56 Sales Agreement, dated as of September 15, 2022, by and between the Company and Cowen and Company, LLC 8-K 001-39049 1.1 9/15/2022 10.57 Consulting Agreement, dated as of December 5, 2022, by and between the Company and Debra Zack, M.D., Ph.D. 8-K 001-39049 10.1 12/5/2022 23.1 Consent of Independent Registered Public Accounting Firm. X 24.1 Power of Attorney (included on signature page). X 31.1 Certificate of Principal Executive Officer, pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. X 31.2 Certificate of Principal Financial Officer, pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. X 32.1* Certifications Pursuant to U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Public Company Accounting Reform and Investor Protection Act of 2002. X 101.SCH XBRL Taxonomy Extension Schema Document. X 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document. X 101.DEF XBRL Taxonomy Extension Definition Linkbase Document. X 101.LAB XBRL Taxonomy Extension Labels Linkbase Document. X 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document. X 104 The cover page from the Company's Annual Report on Form 10-K for the year ended December 31, 2021, has been formatted in Inline XBRL. X 90 * This certification is deemed not filed for purpose of section 18 of the Exchange Act or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act or the Exchange Act. # Indicates management contract or compensatory plan. † Portions of this exhibit (indicated by asterisks) have been omitted for confidentiality purposes. 91 Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. EXAGEN INC. Date: March 20, 2023 by: /s/ John Aballi John Aballi President and Chief Executive Officer (Principal Executive Officer) Power of Attorney KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints John Aballi and Kamal Adawi as his or her true and lawful attorneys-in-fact, and each of them, with full power of substitution, for him or her in any and all capacities, to sign any amendments to this Annual Report on Form 10-K and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact, and either of them, or his or their substitute or substitutes may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. 92 Signature Title Date /s/ John Aballi President, Chief Executive Officer and Director March 20, 2023 John Aballi (Principal Executive Officer) /s/ Kamal Adawi Chief Financial Officer and Corporate Secretary March 20, 2023 Kamal Adawi (Principal Financial and Accounting Officer) /s/ Tina S. Nova, Ph.D. Executive Chairperson of the Board March 20, 2023 Tina S. Nova, Ph.D. /s/ Brian Birk Director March 20, 2023 Brian Birk /s/ Ana Hooker Director March 20, 2023 Ana Hooker /s/ Wendy S. Johnson Director March 20, 2023 Wendy S. Johnson /s/ Ebetuel Pallares, Ph.D. Director March 20, 2023 Ebetuel Pallares, Ph.D. /s/ Bruce C. Robertson, Ph.D. Director March 20, 2023 Bruce C. Robertson, Ph.D. /s/ Frank Stokes Director March 20, 2023 Frank Stokes /s/ James L.L. Tullis Director March 20, 2023 James L.L. Tullis 93 Exagen Inc. Index to Financial Statements Page Report of Independent Registered Public Accounting Firm (PCAOB ID No. 243) F- 2 Balance Sheets as of December 31, 202 2 and 202 1 F- 3 Statements of Operations for the Years Ended December 31, 202 2 and 202 1 F- 4 Statements of Stockholders' Equity for the Years Ended December 31, 202 2 and 202 1 F- 5 Statements of Cash Flows for the Years Ended December 31, 202 2 and 202 1 F- 6 Notes to Financial Statements F- 7 F-1 Report of Independent Registered Public Accounting Firm Shareholders and Board of Directors Exagen Inc. Vista, California Opinion on the Financial Statements We have audited the accompanying balance sheets of Exagen Inc. (the "Company”) as of December 31, 2022 and 2021, the related statements of operations, stockholders’ equity, and cash flows for the years then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2022 and 2021, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. Change in Accounting Principle As discussed in Note 5 to the financial statements, effective January 1, 2022, the Company adopted Accounting Standards Codification Topic 842, Leases . Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ BDO USA, LLP We have served as the Company’s auditor since 2017. San Diego, California March 20, 2023 F-2 Exagen Inc. Balance Sheets (in thousands, except share and per share data) December 31, 2022 2021 Assets Current assets: Cash and cash equivalents $ 62,391 $ 99,442 Accounts receivable, net 6,077 9,654 Prepaid expenses and other current assets 4,143 3,638 Total current assets 72,611 112,734 Property and equipment, net 8,197 4,772 Operating lease right-of-use assets 4,885 — Goodwill — 5,506 Other assets 528 433 Total assets $ 86,221 $ 123,445 Liabilities and Stockholders' Equity Current liabilities: Accounts payable $ 3,046 $ 2,492 Operating lease liabilities 1,040 — Borrowings-current portion 190 — Accrued and other current liabilities 5,347 6,826 Total current liabilities 9,623 9,318 Borrowings-non-current portion, net of discounts and debt issuance costs 28,778 27,478 Non-current operating lease liabilities 4,493 — Deferred tax liabilities — 306 Other non-current liabilities 867 1,407 Total liabilities 43,761 38,509 Commitments and contingencies (Note 5) Stockholders' equity: Preferred stock, $ 0.001 par value; 10,000,000 shares authorized, no shares issued or outstanding at December 31, 2022 and December 31, 2021 — — Common stock, $ 0.001 par value; 200,000,000 shares authorized at December 31, 2022 and December 31, 2021; 16,549,984 and 16,164,994 shares issued and outstanding at December 31, 2022 and December 31, 2021, respectively 17 16 Additional paid-in capital 297,970 293,060 Accumulated deficit ( 255,527 ) ( 208,140 ) Total stockholders' equity 42,460 84,936 Total liabilities and stockholders' equity $ 86,221 $ 123,445 The accompanying notes are an integral part of these financial statements F-3 Exagen Inc. Statements of Operations (in thousands, except share and per share data) Year Ended December 31, 2022 2021 Revenue $ 45,563 $ 48,299 Operating expenses: Costs of revenue 24,214 20,588 Selling, general and administrative expenses 52,018 44,541 Research and development expenses 9,876 7,237 Goodwill Impairment 5,506 — Total operating expenses 91,614 72,366 Loss from operations ( 46,051 ) ( 24,067 ) Interest expense ( 2,448 ) ( 2,625 ) Interest income 830 16 Loss before income taxes ( 47,669 ) ( 26,676 ) Income tax expense 282 ( 175 ) Net loss $ ( 47,387 ) $ ( 26,851 ) Net loss per share, basic and diluted (Note 2) $ ( 2.77 ) $ ( 1.68 ) Weighted-average number of shares used to compute net loss per share, basic and diluted (Note 2) 17,082,348 15,972,256 The accompanying notes are an integral part of these financial statements F-4 Exagen Inc. Statements of Stockholders' Equity (in thousands, except share amounts) Common Stock Additional Paid-In Capital Accumulated Deficit Total Stockholders' Equity Shares Amount Balances at December 31, 2020 12,652,308 $ 13 $ 223,115 $ ( 181,289 ) $ 41,839 Issuance of stock in public offering, net of issuance costs of $ 4,435 4,255,000 4 64,705 — 64,709 Retirement of common stock in exchange for common stock warrant ( 804,951 ) ( 1 ) ( 12,774 ) — ( 12,775 ) Issuance of common stock warrant in exchange for retirement of common stock — — 12,775 — 12,775 Exercise of stock options 11,950 — 89 — 89 Issuance of stock under Employee Stock Purchase Plan 32,968 — 390 — 390 Stock-based compensation — — 4,728 — 4,728 Exercise of common stock warrants 17,719 — 32 — 32 Net loss — — — ( 26,851 ) ( 26,851 ) Balances at 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 64,064 — ( 239 ) — ( 239 ) Exercise of stock options 245,186 1 60 — 61 Issuance of stock under Employee Stock Purchase Plan 75,740 — 385 — 385 Stock-based compensation — — 4,704 — 4,704 Net loss — — — ( 47,387 ) ( 47,387 ) Balances at December 31, 2022 16,549,984 $ 17 $ 297,970 $ ( 255,527 ) $ 42,460 The accompanying notes are an integral part of these financial statements F-5 Exagen Inc. Statements of Cash Flows (in thousands) Year Ended December 31, 2022 2021 Cash flows from operating activities: Net loss $ ( 47,387 ) $ ( 26,851 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 1,557 948 Amortization of debt discount and debt issuance costs 161 279 Non-cash interest expense 551 540 Deferred income taxes ( 306 ) 148 Non-cash lease expense 967 — Long-lived assets impairment 397 — Goodwill impairment 5,506 — Stock-based compensation 4,704 4,728 Other 36 — Changes in assets and liabilities: Accounts receivable, net 3,577 ( 744 ) Prepaid expenses and other current assets ( 505 ) 521 Other assets ( 47 ) ( 167 ) Operating lease liabilities ( 854 ) — Accounts payable 901 ( 655 ) Accrued and other current liabilities ( 1,402 ) 984 Net cash used in operating activities ( 32,144 ) ( 20,269 ) Cash flows from investing activities: Purchases of property and equipment ( 4,318 ) ( 2,370 ) Purchase of other assets — ( 50 ) Net cash used in investing activities ( 4,318 ) ( 2,420 ) Cash flows from financing activities: Proceeds from exercise of stock options 61 89 Payments of taxes withheld on vested restricted stock units ( 239 ) — Proceeds from common stock issued under Employee Stock Purchase Plan 385 390 Proceeds from exercise of common stock warrants — 32 Principal payment on finance lease obligations ( 667 ) ( 525 ) Principal payment on note payable obligations ( 29 ) — Proceeds from the issuance of common stock in public offering, gross — 69,144 Payment of issuance costs related to public offering — ( 4,407 ) Payments of deferred offering costs — ( 40 ) Net cash (used in) provided by financing activities ( 489 ) 64,683 Net change in cash, cash equivalents and restricted cash ( 36,951 ) 41,994 Cash, cash equivalents and restricted cash, beginning of year 99,542 57,548 Cash, cash equivalents and restricted cash, end of year $ 62,591 $ 99,542 Supplemental disclosure of cash flow information: Cash paid for interest expense $ 1,732 $ 1,815 Supplemental disclosure of non-cash items: Equipment purchased under finance lease obligations $ 741 $ 1,111 Equipment purchased under notes payable obligations $ 807 $ — Costs incurred, but not paid, in connection with capital expenditures $ 182 $ 685 Deferred offering costs reclassified to equity $ — $ 28 The accompanying notes are an integral part of these financial statements F-6 Exagen Inc. Notes to 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. At December 31, 2022, the Company had cash and cash equivalents of $ 62.4 million and had an accumulated deficit of $ 255.5 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 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 Company's financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). The preparation of the accompanying 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 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 financial statements include, but are not limited to revenue recognition, the estimated incremental borrowing rate for the determination of the Company's operating lease right-of-use (ROU) assets, the recoverability of its long-lived assets and the goodwill impairment test. 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. We have not experienced any losses on our 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, F-7 revenue as a percentage of total revenue and accounts receivable as a percentage of total accounts receivable are as follows: Revenue Year Ended December 31, 2022 2021 Medicare 39 % 19 % Medicare Advantage 15 % 13 % Blue Shield * 12 % * Less than 10%. Accounts Receivable December 31, 2022 2021 Medicare 21 % * Medicare Advantage 13 % * Blue Shield * 19 % United Healthcare * 18 % * Less than 10%. For the years ended December 31, 2022 and 2021, approximately 84 % and 81 % of the Company's revenue was related to the AVISE ® CTD test, respectively. The Company is dependent on key suppliers for certain laboratory materials. For each of the years ended December 31, 2022 and 2021, approximately 96 % 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): Year Ended December 31, 2022 2021 Revenue: Commercial $ 18,975 $ 27,499 Government 17,687 9,221 Client(1) 7,928 9,288 Other(2) 973 1,091 Janssen (SIMPONI ® ) — 1,200 Total revenue $ 45,563 $ 48,299 (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 upon acquisition of three months or less to be cash equivalents and 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 F-8 deposit with this financial institution as collateral for the balances borrowed on these credit cards ($ 0.2 million and $ 0.1 million at December 31, 2022 and 2021, respectively). 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): December 31, 2022 2021 Cash and cash equivalents $ 62,391 $ 99,442 Restricted cash 200 100 $ 62,591 $ 99,542 Property and Equipment Property and equipment are stated at cost, net of depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, generally between three and five years . Leasehold improvements are amortized on a straight-line basis over the lesser of the estimated useful life or the remaining term of the related lease. Maintenance and repairs are charged to expense as incurred, and improvements and betterments are capitalized. When assets are retired or otherwise disposed of, the cost and accumulated depreciation are removed from the balance sheet and any resulting gain or loss is reflected in operating expenses in the statements of operations in the period realized. Long-lived Assets The Company’s long-lived assets are comprised principally of its property and equipment and operating lease assets (see Note 5). We amortize 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 (excluding goodwill), into groupings, a determination which we principally make on the basis of whether the assets are specific to a particular test offered by us or technology we are developing. If the Company identifies a change in the circumstances related to its long-lived assets, such as property and equipment and intangible assets (other than goodwill), that indicates the carrying value of any such asset may not be recoverable, the Company will perform an impairment analysis. A long-lived asset (other than goodwill) 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. During the year ended December 31, 2022, the Company recorded an impairment charge to fixed assets totaling $ 0.4 million (see Note 3). The impairment charge was classified within research and development expenses in the accompanying statements of operations. Goodwill Goodwill is reviewed for impairment annually (during the fourth quarter) or more frequently if indicators of impairment exist. As the Company operates in a single operating segment and reporting unit, the Company first assesses qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform a quantitative assessment. If, after assessing qualitative factors, the Company determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing a quantitative assessment is unnecessary. If deemed necessary, a quantitative assessment compares the fair value of the reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, goodwill is not considered impaired; otherwise, an impairment loss is recorded. F-9 During the year ended December 31, 2022, the Company recorded an impairment charge to goodwill totaling $ 5.5 million (see Note 3). Leases The Company categorizes leases at their commencement as either operating or finance leases. Effective January 1, 2022 upon the adoption of Accounting Standards Codification (ASC) 842, the Company recognizes operating lease ROU assets and operating lease liabilities for each lease arrangement identified. Lease liabilities are recorded at the present value of future lease payments discounted using the Company's incremental borrowing rate for the lease established at the commencement date. ROU assets are measured at the amount of the lease liability plus any initial direct costs, less any lease incentives received before commencement. Lease expense is recognized as a single lease cost over the lease term on a straight-line basis. The Company has elected not to apply the recognition requirements to short-term leases and not to separate non-lease components from lease components for its leases. Clinical Studies From time to time, the Company engages in efforts to scientifically measure and document the application and efficacy of its various testing products. These arrangements typically require the Company to pay a fee to a third-party scientific investigator (usually a physician or research institution) for each subject enrolled in a clinical study, and the Company accrues expenses based on estimated progress of services performed, including actual level of subjects enrolled and progress of the clinical studies. Payments made prior to the completion of clinical study services are capitalized as a prepaid expense. The prepaid amounts are expensed as the related goods are delivered or the services are performed, or when it is no longer expected that the goods will be delivered or the services rendered. Expenses associated with clinical study activities are recorded in research and development expenses in the accompanying statement of operations. 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, recording adjustments 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 years ended December 31, 2022 and 2021 was a net revenue decrease of $ 2.4 million and a net revenue increase of $ 0.7 million, 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. F-10 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. Janssen Promotion Agreement In December 2018, the Company entered into a co-promotion agreement (as amended from time to time, the Janssen Agreement) with Janssen Biotech, Inc. (Janssen) to co-promote SIMPONI ® in the United States. In August 2021, the Company and Janssen mutually agreed to terminate the Janssen Agreement, effective August 31, 2021. Pursuant to the Janssen Agreement, as amended, the Company was responsible for the costs associated with its sales force over the course of such co-promotion. Janssen was responsible for all other aspects of the commercialization of SIMPONI ® under the Janssen Agreement. In exchange for the Company's sales and co-promotional services, the Company was entitled to a quarterly tiered promotion fee based on the incremental increase in total prescribed units of SIMPONI ® for that quarter over a predetermined baseline. The Company's obligations relating to sales and co-promotion services for SIMPONI ® were a series of single performance obligations since Janssen simultaneously received and consumed benefits provided by the Company's sales and co-promotional services. The method for measuring progress towards satisfying the performance obligations was based on prescribed units in excess of the contractual baseline at the contractual rate earned per unit. The Company recognized no co-promotion revenue and $ 1.2 million in co-promotion revenue during the years ended December 31, 2022 and December 31, 2021, respectively. The related expenses for marketing SIMPONI ® were included in selling, general and administrative expenses and were expensed as incurred. Pursuant to the terms of the termination, the Company received $ 0.6 million in consideration (which was earned in the year ended December 31, 2021) and the Company was restricted until May 31, 2022 from promoting any other biologic or Janus kinase inhibitor used for the treatment of indications covered by the Janssen Agreement without first obtaining Janssen's written consent. The restriction no longer applies. 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 $ 3.0 million and $ 1.7 million for the years ended December 31, 2022 and 2021, respectively, and are included in selling, general and administrative expenses in the accompanying statements of operations. Shipping and Handling Costs Costs incurred for shipping and handling are included in costs of revenue in the accompanying statements of operations and totaled approximately $ 2.7 million and $ 2.1 million, for the years ended December 31, 2022 and 2021, 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 F-11 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. Income Taxes The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined on the basis of the differences between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. The Company recognizes net deferred tax assets to the extent that the Company believes these assets are more likely than not to be realized. In making such a determination, management considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. If management determines that the Company would be able to realize its deferred tax assets in the future in excess of their net recorded amount, management would adjust the deferred tax asset valuation allowance, which would reduce the provision for income taxes. The Company records uncertain tax positions on the basis of a two-step process whereby (i) management determines whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (ii) for those tax positions that meet the more-likely-than-not recognition threshold, management recognizes the largest amount of tax benefit that is more than 50% likely to be realized upon ultimate settlement with the related tax authority. The Company recognizes interest and penalties related to unrecognized tax benefits within income tax expense. Any accrued interest and penalties are included within the related tax liability. 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 shares and 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, options and 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 years ended December 31, 2022 and 2021, 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): F-12 Years Ended December 31, 2022 2021 Warrants to purchase common stock 409,108 409,108 Common stock options 1,421,235 2,014,330 Restricted stock units 1,036,208 415,325 Employee stock purchase plan 58,711 20,193 Total 2,925,262 2,858,956 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 February 2016, the FASB issued Accounting Standards Update (ASU) 2016-02, Leases (Topic 842). The new topic supersedes Topic 840, Leases , and increases transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and requires disclosures of key information about leasing arrangements. In July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842 , which provides narrow amendments to clarify how to apply certain aspects of the new lease standard, and ASU 2018-11, Leases: Targeted Improvements , which was issued to provide relief to companies from restating comparative periods. On January 1, 2022, the Company adopted ASU 2016-12, using the modified retrospective transition method. Periods prior to January 1, 2022 have not been restated for the adoption of ASC 842 and continue to reflect the accounting treatment of leases in accordance with the prior lease accounting guidance, ASC 840, Leases . The Company adopted the new lease standard using a cumulative effect to accumulated deficit and there was no impact to accumulated deficit upon adoption. The Company elected the package of practical expedients, which among other things allowed the Company to carry forward its historical lease classification. As part of the adoption, the Company recorded operating lease liabilities of $ 6.4 million, operating lease ROU assets of $ 5.9 million, adjusted for deferred rent and lease incentive obligations of $ 0.5 million previously included in other non-current liabilities and accrued and other current liabilities, pertaining to its office and laboratory space operating leases. Recent Accounting Pronouncements Not Yet Adopted In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments , which requires the measurement of expected credit losses for financial instruments carried at amortized cost, such as accounts receivable, held at the reporting date based on historical experience, current conditions and reasonable forecasts. 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 non-emerging growth companies, ASU 2016-13 is effective for fiscal years beginning after December 15, 2019. 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 and the impact of the provisions of this standard on its Consolidated Financial Statements is expected to be immaterial. 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): Accounting for Convertible F-13 Instruments and Contracts in an Entity’s Own Equity, which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. Specifically, ASU 2020-06 simplifies accounting for the issuance of convertible instruments by removing major separation models required under current GAAP. In addition, the ASU removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception and simplifies the diluted earnings per share (EPS) calculation in certain areas. ASU 2020-06 will be effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted, beginning in fiscal years which begin after December 15, 2020, including interim periods within those fiscal years. The FASB has specified that an entity should adopt the guidance as of the beginning of its annual fiscal year. The amendment is to be adopted through either a modified retrospective or fully retrospective method of transition. The Company is currently evaluating the potential impact that the adoption of ASU 2020-06 may have on its consolidated financial statements and related disclosures. Note 3. Other Financial Information Prepaid Expenses and Other Current Assets Prepaid expenses and other current assets consist of the following (in thousands): December 31, 2022 2021 Diagnostic testing supplies $ 1,795 $ 1,091 Prepaid product royalties 40 49 Prepaid maintenance and insurance contracts 2,072 2,008 Other prepaid and other current assets 236 490 Prepaid and other current assets $ 4,143 $ 3,638 Property and Equipment Property and equipment consist of the following (in thousands): December 31, 2022 2021 Furniture and fixtures $ 98 $ 83 Laboratory equipment 5,136 4,361 Computer equipment and software 1,482 1,206 Leasehold improvements 5,223 1,151 Construction in progress 1,382 1,855 Total property and equipment 13,321 8,656 Less: accumulated depreciation and amortization ( 5,124 ) ( 3,884 ) Property and equipment, net $ 8,197 $ 4,772 Depreciation and amortization expense for the years ended December 31, 2022 and 2021, was approximately $ 1.6 million and $ 0.9 million, respectively. At December 31, 2022 and 2021, the gross book value of assets under finance leases was $ 2.8 million and $ 2.5 million, respectively, and is classified in "Laboratory equipment" in the table above. Impairment of Long-Lived Assets and Goodwill During the year ended December 31, 2022, the Company recorded an impairment charge of $ 0.4 million related to previously capitalized equipment used in research and development activities that were halted in the fourth quarter of 2022. The Company based the fair values of these assets on their anticipated disposal values, which is considered a Level 3 measurement. The impairment charge was classified within research and development expenses in the accompanying statements of operations. The Company determined that the sustained decrease in its market capitalization constituted an indicator of impairment and as a result, instead of performing a qualitative test, the Company chose to proceed directly to performing a quantitative test during the fourth quarter. The Company determined the fair value of the reporting unit using the discounted cash flow (DCF) method, which is considered a Level 3 measurement. In applying the DCF F-14 method, cash flows are estimated for a five-year financial forecast developed by management. A terminal value, which represents the value of additional cash flows into perpetuity, is also calculated. Cash flows are then discounted to present value at a discount rate commensurate with their risk. Based on this analysis, the carrying value of the reporting unit was in excess of the fair value and the goodwill was fully impaired. During the year ended December 31, 2022, the Company recorded an impairment charge of $ 5.5 million. The following table presents details of the Company's goodwill for the year ended December 31, 2022 (in thousands): Total Balance as of December 31, 2021 $ 5,506 Goodwill impairment ( 5,506 ) Balance as of December 31, 2022 $ — Accrued and Other Current Liabilities Accrued and other current liabilities consist of the following (in thousands): December 31, 2022 2021 Accrued payroll and related expenses $ 2,355 $ 4,048 Accrued interest 142 139 Accrued purchases of goods and services 803 510 Accrued royalties 514 180 Accrued clinical study activity 162 254 Finance lease obligations, current portion 700 587 Refund liability 445 — Other accrued liabilities 226 1,108 Accrued and other current liabilities $ 5,347 $ 6,826 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 has borrowed $ 25 million. At December 31, 2022, no additional amounts remain 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). The interest rate on all borrowings under the 2017 Loan Amendment is 8.0 %, of which 2.0 % is paid in-kind in the form of additional term loans (PIK Loans) until December of 2024, after which interest accrues at an annual rate of 8.0 %. The Company has 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 will 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 Loan Amendment using the effective interest method. For the years ended December 31, 2022 and 2021, the Company issued PIK Loans totaling $ 0.6 million and $ 0.5 million, respectively. The 2017 Loan Amendment requires a prepayment premium of 2 % of the aggregate outstanding principal. The prepayment premium decreases 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. F-15 The affirmative covenants require that the Company achieve a specified level of revenue, as measured quarterly on a rolling twelve-month basis, commencing with the quarter ending December 31, 2022. The consequences of failing to achieve the performance covenant may 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. At December 31, 2022, 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 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 December 31, 2022, the total notes payable balance related to this financed equipment was $ 0.8 million, with $ 0.2 million classified within borrowings-current portion and $ 0.6 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 December 31, 2022, future minimum aggregate payments, including interest, for outstanding borrowings are as follows (in thousands): Years Ending December 31, 2023 $ 1,911 2024 3,205 2025 16,377 2026 14,973 Total 36,466 Less: Unamortized debt discount and issuance costs ( 158 ) Interest ( 7,340 ) Total borrowings, net of discounts and debt issuance costs 28,968 Less: Borrowings-current portion ( 190 ) Borrowings-non-current portion, net of discounts and debt issuance costs $ 28,778 Note 5. Commitments and Contingencies Leases The Company adopted ASC 842, Leases , as of January 1, 2022. Prior period amounts have not been adjusted and continue to be reported in accordance with the Company's historic accounting under ASC 840, Leases . Operating Leases F-16 The Company leases office and laboratory spaces in Vista, California, under leases that expire in April 2027, with an option to extend portions of the leases for additional 5-year periods. The Company has not included the optional renewal periods in the measurement of the lease liabilities because it is not reasonably certain that the Company will exercise these renewal options. The Company's lease payments under each of these leases are subject to escalation clauses. Effective on August 23, 2021, the Company entered into a sub-lease agreement for an additional office space in Carlsbad, California. The sub-lease commenced in October 2021 and expires in April 2027. The sub-lease agreement provides for monthly base rent of $ 66,021 which began on October 1, 2021, and such amount increases by approximately 3 % annually beginning October 1, 2022. The Company determines if a contract contains a lease at inception or modification of a contract. The Company discounts their lease obligations using its incremental borrowing rate at the commencement date. The incremental borrowing rate is the rate of interest the Company would have to pay to borrow on a collateralized basis over a similar term and amount equal to the lease payments in a similar economic environment. The Company primarily considers industry data, its credit rating and the lease term to determine its incremental borrowing rate. Finance Leases The Company has entered into various finance lease agreements to obtain laboratory equipment. The terms of the Company's finance leases generally range from three to five years and are typically secured by the underlying equipment. The portion of the future payments designated as principal repayments were classified as finance lease liabilities on the Company's balance sheet. Operating and Finance Leases Balances and Costs Operating and finance leases consist of the following (in thousands): Lease Balance Classification December 31, 2022 Lease Assets Operating Operating lease right-of-use assets $ 4,885 Finance Property and equipment, net $ 1,427 Lease Liabilities Current Operating Operating lease liabilities $ 1,040 Finance Accrued and other current liabilities $ 700 Non-current Operating Non-current operating lease liabilities $ 4,493 Finance Other non-current liabilities $ 848 Costs associated with the Company's leases were included in the statements of operations as follows (in thousands): Lease Cost Year Ended December 31, 2022 Operating leases Operating lease cost (1) $ 1,540 Finance lease cost Amortization of lease assets 679 Interest on finance lease liabilities 80 Total lease cost $ 2,299 (1) Includes variable lease cost of $ 165,000 for the year ended December 31, 2022. F-17 Supplemental cash flow information on leases is as follows (in thousands): Cash paid for amounts included in the measurement of lease liabilities Year Ended December 31, 2022 Operating cash out flows from operating leases $ 1,262 Operating cash out flows from interest paid on finance leases $ 80 Financing cash out flows from finance leases $ 667 Information regarding the weighted-average lease term and weighted average discount rate are as follows: December 31, 2022 Weighted-average remaining lease term (years) Operating leases 4.3 Finance leases 1.94 Weighted-average discount rate Operating leases 8.0 % Finance leases 4.8 % Future payments under operating and finance leases as of December 31, 2022 are as follows (in thousands): Operating Leases Finance Leases 2023 $ 1,446 $ 828 2024 1,489 574 2025 1,533 248 2026 1,584 147 Thereafter 539 29 Total minimum lease payments 6,591 1,826 Less: imputed interest ( 1,058 ) ( 278 ) Total lease liabilities 5,533 1,548 Less: current portion ( 1,040 ) ( 700 ) Lease obligations, net of current portion $ 4,493 $ 848 Disclosures Under ASC 840 Minimum annual lease payments under non-cancelable operating lease arrangements as of December 31, 2021 are as follows (in thousands): Years Ending December 31, Operating Leases 2022 $ 1,337 2023 1,445 2024 1,489 2025 1,533 2026 1,584 Thereafter 539 Total minimum lease payments $ 7,927 For the year ended December 31, 2021, rent expense was $ 0.9 million. Acquisition-related liabilities F-18 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 was required to pay certain amounts in the event that certain revenue milestones were achieved and upon the first commercial sale of a product associated with this acquisition, for which the obligations no longer exist at December 31, 2022. In addition, the Company has ongoing royalty payment obligations with Royalty Pharma 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 statement of operations. In May 2021, the Company entered into an exclusive license agreement with Allegheny Health Network Research Institute (AHN) to obtain an exclusive license to AHN's patent rights in certain inventions, pursuant to which the Company paid AHN an initial license fee of $ 0.4 million. In addition, under the terms of the exclusive license agreement, the Company is required to pay the greater of royalties in the low single digits on net sales of diagnostic tests using the assigned patents or a flat annual minimum royalty amount, pending approvals and commercialization. In November 2021, the Company entered into an exclusive license agreement with Queen Mary University of London (QMUL) to obtain an exclusive license to QMUL's patent rights in certain inventions, pursuant to which the Company paid QMUL an initial license fee of $ 0.4 million. The Company is obligated to make a one-time payment of $ 0.1 million relating to the first commercial sale of the licensed products. In addition, after the first 18 months of commercial sales under the terms of the exclusive license agreement, the Company is required to pay royalties in the high single-digits on net sales of testing products using the assigned patents, pending approvals and commercialization. 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 $ 6.0 million and $ 6.9 million for the years ended December 31, 2022 and 2023, respectively, with a 15 % annual increase thereafter for unconditional minimum purchase commitments through the year ending December 31, 2025. Collaboration Obligations In May 2021, the Company entered into a master research collaboration agreement with 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 $ 0.4 million for the year ended December 31, 2022. Collaboration expenses under the AHN collaboration are included in research and development expenses. 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. F-19 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 values of the Company's long-term borrowings are determined by Level 2 inputs and are based primarily on quoted market prices for the same or similar issues. 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, which uses Level 2 fair value inputs, 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 long-term borrowings as of December 31, 2021 approximated their fair values as the interest rate and other terms were that which were available to the Company at the time. See footnote 3 for discussion of recorded impairment charges related to long-lived assets and goodwill. 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. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The fair value hierarchy defines a three-level valuation hierarchy for disclosure of fair value measurements 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): 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 $ — $ — December 31, 2021 Total Level 1 Level 2 Level 3 Assets: Money market funds, included in cash and cash equivalents $ 95,761 $ 95,761 $ — $ — 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 F-20 On November 10, 2020, the Company filed a registration statement on Form S-3 (the 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, which Shelf Registration Statement became effective on November 19, 2020. On March 25, 2021, the Company completed a public offering of 4,255,000 shares of its common stock at a public offering price of $ 16.25 per share. Net proceeds from the offering were approximately $ 64.7 million, after deducting underwriting discounts, commissions and other offering expenses of $ 4.4 million. The shares were registered pursuant to the Company's Shelf Registration Statement discussed above. At The Market Sales Agreement On September 15, 2022, the Company entered into a sales agreement (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 December 31, 2022, the Company has not sold any shares of its common stock pursuant to the Sales Agreement . Exchange Agreement On June 22, 2021, the Company entered into an exchange agreement (the Exchange Agreement) with an investor and its affiliates (the Exchanging Stockholders), pursuant to which the Company exchanged an aggregate of 804,951 shares of the Company's common stock owned by the Exchanging Stockholders for pre-funded warrants (the Exchange Warrants) to purchase an aggregate of 804,951 shares of common stock (subject to adjustment in the event of any stock dividends and splits, reverse stock split, recapitalization, reorganization or similar transaction, as described in the Exchange Warrants), with an exercise price of $ 0.001 per share. The Exchange Warrants do not expire and are exercisable at any time except that the Exchange Warrants cannot be exercised by the Exchanging Stockholders if, after giving effect thereto, the Exchanging Stockholders would beneficially own more than 4.99 % of the Company's common stock, which percentage may change at the Exchanging Stockholder's election to any other percentage upon 61 days' notice to the Company. The Company recorded the retirement of common stock exchanged as a reduction of common shares outstanding and additional paid-in-capital at the fair value of the Exchange Warrants on the issuance date. The Exchange Warrants are classified as equity and the fair value of the Exchange Warrants was recorded as an increase to additional paid-in-capital and is not subject to remeasurement. The Company determined that the fair value of the Exchange Warrants is substantially similar to the fair value of the retired shares on the issuance date due to the negligible exercise price for the Exchange Warrants. As of December 31, 2022, none of the Exchange Warrants have been exercised. Outstanding Warrants The following equity classified warrants to purchase common stock were outstanding as of December 31, 2022: 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 (Exchange Warrants) 804,951 0.001 June 22, 2021 None 1,214,059 During the year ended December 31, 2022, 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 F-21 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 December 31, 2022, 1,452,435 shares remained available for future awards. Under the evergreen provision, on January 1, 2023, an additional 661,999 shares became available for issuance 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 December 31, 2022, 413,425 shares of common stock remained available for issuance under the ESPP. Under the evergreen provision, on January 1, 2023, an additional 165,500 shares became available for issuances 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 Outstanding, December 31, 2021 2,014,330 $ 12.10 7.87 $ 5,428 Granted 63,000 $ 5.25 Exercised ( 245,186 ) $ 0.26 Forfeited ( 257,982 ) $ 16.09 Expired ( 152,927 ) $ 13.73 Outstanding, December 31, 2022 1,421,235 $ 12.94 7.09 $ 483 Vested and expected to vest, December 31, 2022 1,421,235 $ 12.94 7.09 $ 483 Options exercisable, December 31, 2022 1,129,333 $ 12.94 6.89 $ 483 The weighted-average grant date fair value per share of employee options granted to employees during the years ended December 31, 2022 and 2021 was $ 2.74 and $ 8.83 , 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 fair value of the Company's common stock was $ 2.40 and $ 11.63 per share at December 31, 2022 and 2021, respectively. The intrinsic value of options exercised for the years ended December 31, 2022 and 2021 was $ 0.6 million and $ 0.1 million, respectively. As of December 31, 2022, total unrecognized compensation cost related to option awards was $ 1.8 million, which is expected to be recognized over a remaining weighted-average vesting period of 1.1 years. Restricted Stock Units Restricted stock unit activity under the Company's 2019 Plan is set forth below: Number of Shares Weighted- Average Grant Date Fair Value Aggregate Intrinsic Value Outstanding, December 31, 2021 415,325 $ 16.54 $ 4,830 Awards granted 1,076,725 $ 5.89 Awards released ( 100,586 ) $ 16.55 Awards canceled ( 355,256 ) $ 11.29 Outstanding, December 31, 2022 1,036,208 $ 7.28 $ 2,487 F-22 As of December 31, 2022, all of the outstanding restricted stock units are unvested. The fair value of restricted stock units vested in the year ended December 31, 2022 was $ 0.7 million. No restricted stock units vested in the year ended December 31, 2021. The weighted average grant date fair value for restricted stock units granted during the years ended December 31, 2022 and 2021 was $ 5.89 and $ 16.53 , respectively. As of December 31, 2022, total unrecognized compensation cost related to restricted stock units was $ 6.0 million, which is expected to be recognized over a remaining weighted-average vesting period of 3.3 years. Stock-Based Compensation Expense Stock Options The fair value of employee stock options was estimated using the following assumptions in the Black-Scholes options pricing model to determine the fair value of stock options granted: Year Ended December 31, 2022 2021 Expected volatility 54 % 56 %- 60 % Risk-free interest rate 3.4 % 0.8 %- 1.1 % Dividend yield — — Expected term (in years) 5.5 5.5 - 6.1 Employee Stock Purchase Plan The following assumptions were used to calculate the stock-based compensation for each stock purchase right granted under the ESPP: Year Ended December 31, 2022 2021 Expected volatility 45 %- 57 % 45 %- 60 % Risk-free interest rate 0.6 %- 3.3 % 0.1 % Dividend yield — — Expected term (in years) 0.5 0.5 Stock-based compensation expense related to the ESPP for the years ended December 31, 2022 and 2021 was less than $ 0.1 million and $ 0.2 million, respectively. As of December 31, 2022, total unrecognized compensation cost related to stock purchase rights granted under the ESPP was less than $ 0.1 million, which is expected to be recognized over a remaining weighted-average vesting period of 0.2 years. Total non-cash stock-based compensation expense recorded related to options granted, restricted stock units granted and stock purchase rights granted under the ESPP in the statement of operations is as follows (in thousands): Year Ended December 31, 2022 2021 Cost of revenue $ 213 $ 164 Selling, general and administrative 3,860 3,943 Research and development 631 621 Total $ 4,704 $ 4,728 Common stock reserved for future issuance consists of the following at December 31, 2022: Warrants to purchase common stock 1,214,059 Common stock option grants issued and outstanding 1,421,235 Common stock reserved for issuance upon vesting of outstanding restricted stock units 1,036,370 Common shares available for grant under the 2019 Plan 1,452,435 Common shares available for future issuance under ESPP 413,425 Total 5,537,524 F-23 Note 9. Income Taxes The provision for income taxes consists of the following (in thousands): Year Ended December 31, 2022 2021 Current: Federal $ — $ — State 24 27 Total current 24 27 Deferred: Federal ( 137 ) 137 State ( 169 ) 11 Total deferred ( 306 ) 148 Provision (benefit) for income tax $ ( 282 ) $ 175 The effective tax rate of our provision for income taxes differs from the federal statutory rate as follows: Year Ended December 31, 2022 2021 Federal statutory tax rate ( 21.0 ) % ( 21.0 ) % State income taxes, net of federal tax benefits ( 4.3 ) % ( 3.8 ) % Research and development tax credits ( 1.5 ) % ( 1.2 ) % Stock compensation 1.4 % 0.9 % Non-deductible expenses 0.9 % 1.1 % Change in valuation allowance 23.9 % 24.6 % Effective tax rate ( 0.6 ) % 0.6 % Significant components of the Company’s deferred tax assets at December 31, 2022 and 2021 are shown below (in thousands). A valuation allowance has been established as realization of the Company’s deferred tax assets has not met the more likely-than-not threshold requirement. If the Company’s judgment changes and it is determined that the Company will be able to realize these deferred tax assets, the tax benefits relating to any reversal of the valuation allowance on deferred tax assets will be accounted for as a reduction to income tax expense. F-24 December 31, 2022 2021 Deferred tax assets: Net operating loss carryforwards $ 29,789 $ 22,365 Research and development tax credits 2,216 1,102 Accruals, reserves and other 349 1,055 Interest expense 2,236 1,953 Indefinite lived assets 362 — Stock compensation 1,606 1,407 Lease liability 1,374 — Capitalization of research and experimentation costs 2,047 — Total gross deferred tax assets 39,979 27,882 Less: valuation allowance ( 38,567 ) ( 27,158 ) Deferred tax assets, net 1,412 724 Deferred tax liabilities: Financing and acquisition-related liabilities — ( 335 ) Indefinite lived assets — ( 521 ) Right of use assets ( 1,206 ) — Basis differences in fixed and intangible assets ( 206 ) ( 175 ) Deferred tax liabilities, net ( 1,412 ) ( 1,031 ) Net deferred tax liabilities $ — $ ( 307 ) Changes in the valuation allowance for deferred tax assets during the years ended December 31, 2022 and 2021, which related primarily to increases in net operating loss (NOL) carryforwards, research and development tax credits, capitalization of research and experimentation costs, and impairment of goodwill were as follows (in thousands): December 31, 2022 2021 Valuation allowance at the beginning of the year $ 27,158 $ 20,596 Increases recorded to income tax provision 11,409 6,562 Valuation allowance at the end of the year $ 38,567 $ 27,158 At December 31, 2022 and 2021, the Company had federal NOL carryforwards of approximately $ 118.4 million and $ 89.4 million, respectively. At December 31, 2022 and 2021, the Company had state NOL carryforwards of $ 87.0 million and $ 61.0 million, respectively. Approximately $ 43.5 million of the federal tax loss carryforwards will begin to expire in 2023, unless previously utilized. The federal NOL carryforwards generated in after December 31, 2017 of $ 74.9 million will carryforward indefinitely. The Company’s state tax loss carryforwards will expire in 2030, unless previously utilized. At December 31, 2022, the Company's deferred tax assets are primarily comprised of federal and state tax NOL carryforwards. The Company completed a formal study through the year ended December 31, 2019 and determined ownership changes within the meaning of Internal Revenue Code (IRC), Section 382 had occurred in 2003, 2008, 2012, 2017 and 2019. The Company is subject to taxation in the United States and in various state jurisdictions. The Company’s tax years for 2003 and forward are subject to examination by the U.S. and state tax authorities due to the carryforward of unutilized net operating losses and research and development credits. The Company recognizes interest and/or penalties related to income tax matters in its provision for income taxes. The Company does not have any material accruals for, and did not recognize any, material interest or penalties in these financial statements in any period presented. F-25 Uncertain Tax Positions At December 31, 2022 and 2021, the Company had no unrecognized tax benefits. The Company does not believe that the balance of unrecognized tax benefits will materially change within the next twelve months. Note 10. 401(k) Plan The Company sponsors an employee savings plan that qualifies as a deferred salary arrangement under Section 401(k) of the Code. Participating employees may defer up to the Internal Revenue Service annual contribution limit. Additionally, the Company may elect to make contributions into the savings plan at its sole discretion. For the years ended December 31, 2022 and 2021, the Company made contributions to the Plan at 4 % and 3 % of qualified employee compensation, respectively. For the years ended December 31, 2022 and 2021, these contributions totaled approximately $ 0.9 million and $ 0.5 million, respectively. F-26