What changed in this filing

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Item 7. Management’s Discussion and Analysis

2024-03-18 compared with 2023-03-20 · 112 added, 138 removed, 160 unchanged (61% of the section changed)

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You should read the "Special note regarding forward-looking statements" and "Risk Factors" section of this Annual Report on Form 10-K for a discussion of important factors that could cause our actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

We are dedicated to transforming the care continuum for patients suffering from debilitating and chronic autoimmune diseases by enabling timely differential diagnosis and optimizing therapeutic intervention.

We have developed and are commercializing a portfolio of innovative testing products under our AVISE ® brand, several of which incorporate CB-CAPs technology.

Our goal is to enable healthcare providers to improve care for patients through the differential diagnosis, prognosis and monitoring of complex autoimmune and autoimmune-related diseases, including SLE and RA.

We market our testing products under our AVISE ® brand that allow for the differential diagnosis, prognosis and monitoring of complex autoimmune and autoimmune-related diseases.

Our lead testing product, AVISE ® CTD, enables differential diagnosis for patients presenting with symptoms indicative of a wide variety of CTDs and other related diseases with overlapping symptoms.

We commercially launched AVISE ® CTD in 2012 and revenue from this product comprised 84% and 81% of our revenue for the years ended December 31, 2022 and 2021, respectively.

There is an unmet need for rheumatologists to add clarity in their CTD clinical evaluation, and we believe there is a significant opportunity for our tests that enable the differential diagnosis of these diseases, particularly for potentially life-threatening diseases such as SLE.

We perform all of our AVISE ® tests in our approximately 13,000 square foot laboratory, which is certified by CLIA and accredited by CAP, and located in Vista, California.

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

We have developed and are commercializing a portfolio of innovative testing products under our AVISE ® brand, which allow for the differential diagnosis, prognosis and monitoring of complex autoimmune and autoimmune-related diseases.

There is an unmet need for rheumatologists to add clarity in their CTD clinical evaluation, and we believe there is a significant opportunity for our tests in this market, particularly for potentially life-threatening diseases such as SLE.

Since inception we have devoted substantially all of our efforts to developing and marketing products for the diagnosis, prognosis and monitoring of autoimmune diseases.

We commercially launched our lead testing product, AVISE ® CTD, in 2012.

Our proprietary AVISE ® Lupus test is included as part of the AVISE ® CTD panel and employs a patent-protected method for diagnosing patients with SLE based on levels of CB-CAPs (e.g.

EC4d and BC4d), ANA, and ds-DNA.

The AVISE ® Lupus test also employs patent-protected algorithms used to generate risk scores to diagnose patients with SLE based on the levels of the biomarkers.

These proprietary, patent-protected methods vastly improve the diagnostic sensitivity of our test compared to the current standard of care.

AVISE ® CTD enables differential diagnosis for patients presenting with symptoms indicative of a wide variety of CTDs and other related diseases with overlapping symptoms.

Revenue from this product comprised 88% and 84% of our revenue for the years ended December 31, 2023 and 2022, respectively.

For the years ended December 31, 2023 and 2022, we incurred net losses of $23.7 million and $47.4 million, respectively, and we expect to continue to incur operating losses in the near term.

Our operations have been funded primarily through equity financings, debt financings and revenue from product sales.

We have never been profitable and, as of December 31, 2023, we had $36.5 million of cash and cash equivalents and an accumulated deficit of $279.2 million.

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

Reimbursement rates vary by product and payor.

All of our AVISE ® tests are performed in our approximately 13,000 square foot laboratory located in Vista, California, which is certified under the CLIA and accredited by CAP.

Our laboratory is certified for performance of high-complexity testing by CMS in accordance with CLIA and is licensed by all states requiring out-of-state licensure.

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We market our AVISE ® testing products using our specialized sales force covering 40 territories in the United States.

Unlike many diagnostic sales forces that are trained only to understand the comparative benefits of their tests, the specialized backgrounds of our sales force coupled with our comprehensive training enables our sales representatives to interpret results from our de-identified patient test reports and provide unique insights in a highly tailored discussion with rheumatologists.

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

Reimbursement rates vary by product and payor.

Since inception we have devoted substantially all of our efforts developing and marketing products for the diagnosis, prognosis and monitoring of autoimmune diseases.

We have never been profitable and, as of December 31, 2022 we had an accumulated deficit of $255.5 million.

We have funded our operations primarily through equity and debt financings and revenue from sales of our products.

We incurred net losses of $47.4 million and $26.9 million for the years ended December 31, 2022 and 2021, respectively and we expect to continue to incur operating losses in the near term.

We completed our initial public offering (IPO) in September 2019, raising net proceeds from the offering of approximately $50.4 million.

In March 2021, we completed a public offering of shares of our common stock for net proceeds of approximately $64.7 million.

As of December 31, 2022, we had $62.4 million of cash and cash equivalents.

Management Change

In October 2022, we appointed a new President and Chief Executive Officer of the Company (the Change in Management).

In connection with the Change in Management, in the fourth quarter of 2022, we began to update our strategy and implement cost savings and other initiatives.

We are continuing the process of evaluating our operations, test offerings, research and development pursuits and facilities footprint, among other aspects of our business strategy.

Many diagnostic sales forces are trained only to understand the comparative benefits of the tests they promote.

In contrast, the specialized backgrounds of our sales personnel, coupled with our comprehensive training, enables our sales representatives to interpret results from our de-identified patient test reports and provide unique insights in a highly tailored discussion with rheumatologists.

We believe our focus on and experience in the field of rheumatology, combined with our commitment to excellent customer service and support, position us very well to respond to the needs of rheumatologists and the patients they serve.

Factors Affecting Our Performance

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▪ Reimbursement for Our Testing Products .

Our revenue depends on achieving broad coverage and reimbursement for our tests from third-party payors, including both commercial and government payors, such as Medicare and Medicaid.

Payment from third-party payors differs depending on whether we have entered into a contract with the payors as a "participating provider" or do not have a contract and are considered a "non-participating provider." Payors will often reimburse non-participating providers, if at all, at a lower amount than participating providers.

Our revenue depends on achieving broad coverage and reimbursement for our tests from third-party payors, including both commercial payors and government payors.

Payment from third-party payors differs depending on whether we are considered a "participating provider" (have entered into a contract with the payors as a participating provider) or a "non-participating provider" (do not have a contract and are considered a "non-participating provider").

Payors will often

reimburse non-participating providers at a lower amount than participating providers, if at all.

We have received a substantial portion of our revenue from a limited number of commercial payors, most of which have not contracted with us to be a participating provider.

In addition to the challenges described under the heading "Financial Overview" below, historically, we have experienced situations where commercial payors proactively reduced the amounts they were willing to reimburse for our tests, and in other situations, commercial payors have determined that the amounts they previously paid were too high and have sought to recover those perceived excess payments by deducting such amounts from payments otherwise being made.

Historically, we have experienced situations where commercial payors proactively reduced the amounts they were willing to reimburse for our tests, and in other situations, commercial payors have determined that the amounts they previously paid were too high and have sought to recover those perceived excess payments by deducting such amounts from payments otherwise being made.

When we contract to serve as a participating provider, reimbursements are made pursuant to a negotiated fee schedule and are limited to only covered indications.

If we are not able to obtain or maintain coverage and adequate reimbursement from third-party payors, we may not be able to effectively increase our testing volume and revenue as expected.

Additionally, retrospective reimbursement adjustments can negatively impact our revenue and cause our financial results to fluctuate.

Additionally, changes in our estimated reimbursements for tests performed in prior periods can positively or negatively impact our revenue in the current period and cause our financial results to fluctuate.

In addition, in connection with our revenue cycle management initiatives, we plan to hold claims in the first half of the year which will likely result in increases in our accounts receivable and an accelerated decrease in our cash in the first half of the year which we would expect to return to typical levels by the end of our fiscal year.

▪ Continued Growth of Our Testing Products.

Since the launch of AVISE ® CTD in 2012 and through December 31, 2023, we have delivered approximately 887,000 of these tests.

For the year ended December 31, 2022, 135,210 AVISE ® CTD tests were delivered, representing approximately 5% growth over the same period in 2021.

The number of ordering healthcare providers in the fourth quarter of 2022 was a record 2,419, representing an approximate 14% increase over the same period in 2021.

Revenue growth for our testing products will depend on our ability to continue to expand our base of ordering healthcare providers and increase our penetration with existing healthcare providers.

▪ Synergistic Partnerships .

In August 2021, we mutually agreed to terminate the Janssen Agreement regarding our promotion efforts with SIMPONI ® effective August 31, 2021.

Our SIMPONI ® promotion efforts contributed no revenue and $1.2 million in revenue for the years ended December 31, 2022 and 2021, respectively.

We will continue to rely on our existing testing products to drive revenue growth.

137,650 AVISE ® CTD tests were delivered in the year ended December 31, 2023, representing approximately 2% growth over the same period in 2022.

The number of ordering healthcare providers in the quarter ended December 31, 2023 was 2,383, representing an approximate 2% decrease over the same period in 2022.

Revenue growth for our testing products will depend, in part, on our ability to continue to expand our base of ordering healthcare providers and increase our penetration with existing healthcare providers.

▪ Development of Additional Testing Products.

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We expect to continue to invest in research and development in order to develop additional testing products.

Our success in developing new testing products will be important in our efforts to grow our business by expanding the potential market for our testing products and diversifying our sources of revenue.

Our success in developing new testing products will be important in our efforts to grow our business by expanding the potential market for our products and diversifying our sources of revenue.

▪ Maintain Meaningful Margin .

We seek to maintain meaningful margin through a continued focus on increasing operating leverage through the implementation of certain internal initiatives, such as leveraging validation, utility and reimbursement oriented clinical studies to facilitate payor coverage of our testing products.

We plan to increase focus on long-term reimbursement and ASP growth and seek to improve our per test costs by focusing on profitable, core test offerings and reducing fixed costs and overhead.

We plan to center our efforts around long-term reimbursement and ASP growth and seek to improve our per test costs by focusing on profitable, core test offerings and limiting fixed costs and overhead.

▪ Timing of Our Research and Development Expenses .

Our spending on experiments and clinical studies may vary substantially from quarter to quarter.

We conduct clinical studies to validate our new testing products, as well as ongoing clinical and outcome studies to further expand the published evidence that supports our commercialized AVISE ® testing products.

We also expend funds to secure clinical samples that can be used in discovery, product development, clinical validation, utility and outcome studies.

The timing of these research and development activities is difficult to predict.

Our spending on experiments and clinical studies may vary substantially from quarter to quarter, and the timing of these research and development activities is difficult to predict.

If a substantial number of clinical samples are obtained in a given quarter or if a high-cost experiment is conducted in one quarter versus the next, the timing of these expenses will affect our financial results.

We conduct clinical studies to validate our new testing products, as well as ongoing clinical and outcome studies to further expand the published evidence to support our commercialized AVISE ® testing products.

Spending on research and development for both experiments and studies may vary significantly by quarter depending on the timing of these various expenses.

▪ How We Recognize Revenue .

We record revenue on an accrual basis, using an estimate of the amount we will ultimately realize, as determined based on a historical analysis of amounts collected by test and by payor, among other factors.

We record revenue on an accrual basis, using an estimate of the amount that we will ultimately realize, as determined based on a historical analysis of amounts collected by test and by payor, among other factors.

Changes to such estimates may increase or decrease revenue recognized in future periods.

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We discuss many of these risks, uncertainties and other factors in the section entitled "Risk Factors."

Impact of COVID-19

In January 2023, the Biden administration announced plans to end the national emergencies for addressing COVID-19 on May 11, 2023.

The full extent to which the COVID-19 pandemic may directly or indirectly continue to impact our business, results of operations and financial condition remains dependent on future developments that are highly uncertain.

We have implemented business continuity plans designed to address the COVID-19 pandemic and minimize disruptions to ongoing operations.

Janssen Promotion Agreement

In December 2018, we entered into the Janssen Agreement, under which we were responsible for the costs associated with our sales force in promoting SIMPONI ® in the United States.

In August 2021, we and Janssen mutually agreed to terminate the Janssen Agreement effective August 31, 2021.

Pursuant to the terms of the termination, we were restricted from promoting any other biologic or Janus kinase inhibitor used for treatment of indications covered by the Janssen Agreement without first obtaining Janssen's written consent until May 31, 2022.

For the year ended December 31, 2021, we recognized approximately $1.2 million in revenue for our promotional efforts under the Janssen Agreement.

No revenue from the Janssen Agreement was recognized for the year ended December 31, 2022.

Based on our experience to date, we expect some seasonal variations in our financial results due to a variety of factors.

Some of these factors include the year-end holiday period and other major holidays, vacation patterns of both patients and healthcare providers (including medical conferences), climate and weather conditions in our markets (for example, excess sun exposure can cause flares in SLE), seasonal conditions that may affect medical practices and provider activity (for example influenza outbreaks that may reduce the percentage of patients that can be seen) and other factors relating to the timing of patient benefit changes, as well as patient deductibles and co-insurance limits.

Based on our experience to date, we expect some seasonal variations in our financial results due to a variety of factors, such as:

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

Inflationary Environment

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The rheumatologists who order our testing products, and to whom results are reported, are generally not responsible for payment for these products.

The parties that pay for these services (payors) consist of commercial payors (e.g.

insurance companies, health maintenance organizations, etc.), government payors (primarily Medicare and Medicaid), client payors (e.g.

hospitals, other laboratories, etc.), and patient self-pay.

The parties that pay for these services (payors) consist of commercial payors (insurance companies, health maintenance organizations, etc.), government payors (primarily Medicare and Medicaid), client payors (hospitals, other laboratories, etc.), and patient self-pay.

Our service is completed upon the delivery of test results to the prescribing rheumatologists which triggers billing for the service.

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Noridian, our MAC, priced this PLA code at $1,085 per test.

To determine pricing

beyond 2022, CMS recommended crosswalking AVISE ® Lupus (0312U) to Vectra (81490) at a rate of $840.65 per test.

To determine pricing beyond 2022, CMS recommended crosswalking AVISE ® Lupus (0312U) to Vectra (81490) at a rate of $840.65 per test.

This pricing was finalized on the 2023 CLFS and is effective from January 1, 2023 through December 31, 2025.

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Ultimately receiving a favorable LCD is uncertain and may be time-consuming, resource intensive and require multiple quarterly or annual periods to complete.

In the meantime, we will continue to submit Medicare claims for AVISE ® Lupus, appeal denials and respond to requests for additional information.

In the meantime, we have continued to submit Medicare claims for AVISE ® Lupus, appeal denials and respond to requests for additional information.

On January 31, 2024, CMS released a coverage article under which all multi-analyte proteomic testing will be considered within the scope of MolDX and reviewed through their technology assessment process.

The article requires all laboratories furnishing multi-analyte proteomics testing in MolDX jurisdictions to register with the DEX ® Diagnostics Exchange Registry and obtain a Z-Code ® identifier.

To determine if the submitted tests are compliant with relevant policy requirements, these tests will undergo technical assessment by Palmetto GBA as part of the MolDX program.

The article listed several such tests, including the AVISE ® Lupus test.

We face challenges relating to commercial payor claim processing and revenue.

Now that we are billing under our PLA code, we are experiencing an increase in denials due to unfavorable medical policy with certain plans, and we expect this situation to persist.

Now that we are billing under our PLA code, we are experiencing denials due to unfavorable medical policy with certain plans, and we expect this situation to persist.

During the year ended December 31, 2023, we implemented several revenue cycle management initiatives, including among others, withholding the submission of commercial payor claims for reimbursement until subsequent quarters, increasing appeals efforts and implementing increases to our patient payment rates.

Additionally, in November 2023, we increased the list price billed for our tests.

These ongoing revenue cycle management initiatives aim to optimize our appeals process and the potential for cash collections.

We experienced moderate declines in test volume in the second half of 2023, as rheumatologists and patients adjust to these changes;

however, we delivered 137,650 tests for our flagship product, AVISE ® CTD, in the year ended December 31, 2023 as compared to 135,210 tests for the year ended December 31, 2022.

Operating Expenses

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Costs of revenue represents the expenses associated with obtaining and testing patient specimens.

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

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

Each payor, whether commercial, government, or individual, reimburses us at different amounts.

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As a result, our costs of revenue as a percentage of revenue may vary significantly from period to period due to the composition of payors for each period's billings.

We expect that our costs of revenue will increase in the near-term as test volume increases.

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

Selling, General and Administrative Expenses

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

We expect that our selling, general and administrative expenses will decrease in the near-term as a result of cost saving initiatives which began in the fourth quarter of 2022.

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

Research and Development Expenses

Research and development expenses include costs incurred to develop our technology, test products and product candidates, in addition to costs incurred to collect clinical specimens and conduct clinical studies to develop and support those products and product candidates.

These costs consist of personnel costs, 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.

These costs consist of personnel-related expenses (including stock-based compensation expense), materials, laboratory supplies, consulting costs, costs associated with setting up and conducting clinical studies and allocated overhead (including rent and utilities).

We expense all research and development costs in the periods in which they are incurred.

We expect that our research and development expenses will decrease in the near-term as a result of cost saving initiatives which began in the fourth quarter of 2022.

We expect that our research and development expenses will increase year-over-year in the near-term as a result of ongoing clinical studies.

Interest Expense

Interest expense consists of cash and non-cash interest expense associated with our financing arrangements, including the borrowings under our amended loan and security agreement with Innovatus.

We expect interest expense to remain consistent in 2023 as compared to 2022.

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

We expect interest expense to remain relatively consistent in the year ending December 31, 2024 as compared to the year ended December 31, 2023.

Interest Income

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Comparison of the Years Ended December 31, 2023 and 2022:

Years Ended December 31, Change

Year Ended December 31, Change

(in thousands)

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Loss before income taxes (23,656) (47,669) 24,013

Income tax expense 282 (175) 457

Income tax (expense) benefit (33) 282 (315)

Net loss $ (23,689) $ (47,387) $ 23,698

Revenue decreased $2.7 million, or 5.7%, for the year ended December 31, 2022 compared to the year ended December 31, 2021, primarily due to the $1.2 million reduction of revenue from the Janssen Agreement and a decrease in ASP, partially offset by increases in volume.

Revenue increased $7.0 million, or 15.3%, for the year ended December 31, 2023 compared to the year ended December 31, 2022, primarily due to improved commercial payor ASP, increased AVISE ® CTD year-over-year volume and cash collections from tests performed in prior periods, partially offset by decreased Medicare ASP.

The number of AVISE ® CTD tests delivered increased to 137,650 in the year ended December 31, 2023 compared to 135,210 tests delivered in the same 2022 period.

The AVISE ® CTD test accounted for 88% and 84% of revenue for the years ended December 31, 2023 and 2022, respectively.

The number of ordering healthcare providers increased to 2,419 for the three months ended December 31, 2022 compared to 2,126 in the same 2021 period.

The number of ordering healthcare providers decreased to 2,383 for the three months ended December 31, 2023 compared to 2,419 in the same 2022 period.

Costs of Revenue

Costs of revenue increased $3.6 million, or 17.6%, for the year ended December 31, 2022 compared to the year ended December 31, 2021.

This increase was primarily due to increases of $1.4 million in labor costs, $0.8 million in materials and supplies expenses, $0.6 million in shipping and handling costs associated with the increase in test volume and inflationary pressures in 2022 compared to 2021, and $0.6 million in overhead costs related to our expanded clinical laboratory.

Gross margin as a percentage of revenue decreased to 46.9% for the year ended December 31, 2022, compared to 57.4% for the year ended December 31, 2021.

This was primarily attributable to decreases in revenue and increased costs, as described above.

Costs of revenue decreased $1.1 million, or 4.6%, for the year ended December 31, 2023 compared to the year ended December 31, 2022.

This decrease was primarily due to decreases of $0.9 million in materials and supplies expenses resulting from price improvements related to transition of biomarkers to suppliers with favorable pricing, and $0.2 million in shipping and handling costs.

Gross margin as a percentage of revenue increased to 56.1% for the year ended December 31, 2023 compared to 46.9% for the year ended December 31, 2022.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased $7.5 million, or 16.8%, for the year ended December 31, 2022 compared to the year ended December 31, 2021.

This increase was primarily due to an increase of $4.5 million of personnel costs, including salaries, benefits, other reimbursable employee expenses and severance expenses, in addition to increases related to marketing expenses of $1.3 million, facilities and allocated overhead of $0.7 million, legal expenses of $0.6 million, professional service fees of $0.6 million, public company expenses of $0.2 million and third-party billing expenses of $0.2 million.

These increases were partially offset by decreases in expenses related to employee bonuses of $1.0 million.

Selling, general and administrative expenses decreased $4.6 million, or 8.8%, for the year ended December 31, 2023 compared to the year ended December 31, 2022.

This decrease was primarily due to decreases of $6.1 million of personnel costs, including salaries, benefits, stock-based compensation, severance expenses and other reimbursable employee expenses, as a result of lower headcount, in addition to decreases of $1.5 million in marketing expenses related to advertising expenses, speaker programs and trade show expenses, $0.3 million in insurance expenses, $0.2 million in third-party billing expenses and $0.1 million in legal expenses.

These decreases were partially offset by the recognition of a $1.5 million loss on the disposal of assets primarily related to an assignment of a lease, in addition to an increases in expenses related to bonuses of $1.3 million, facilities and allocated overhead expenses of $0.5 million and commissions of 0.3 million.

Research and Development Expenses

Research and development expenses increased $2.6 million, or 36.5%, for the year ended December 31, 2022 compared to the year ended December 31, 2021.

The increase was primarily due to an increase of $1.8 million of personnel costs, including salaries, benefits and severance expenses, increases related to lab supplies of $0.8 million, facilities and allocated overhead of 0.6 million and a long-lived assets impairment charge of $0.4 million.

These increases were partially offset by decreases in expenses related to clinical studies of $0.6 million, collaboration expenses of $0.3 million and employee bonuses of $0.2 million.

Research and development expenses decreased $5.0 million, or 50.7%, for the year ended December 31, 2023 compared to the year ended December 31, 2022.

This decrease was primarily due to decreases of $2.7 million of personnel costs, including salaries, benefits and stock-based compensation, as a result of lower headcount, decreases related to lab supplies expenses of $1.0 million, collaboration expenses of $0.5 million, clinical study expenses of $0.3 million, and professional service fees of $0.2 million, in addition to a long-lived assets impairment charge of $0.4 million for the year ended December 31, 2022.

Goodwill Impairment

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Interest Expense

Interest expense decreased $0.2 million for the year ended December 31, 2022 compared to the year ended December 31, 2021 due to lower interest rates on the company's 2017 Term Loan.

Interest expense decreased $0.1 million for the year ended December 31, 2023 compared to the year ended December 31, 2022 due to a lower principal balance on the company's Amended Loan Agreement.

Interest Income

Interest income increased $0.8 million for the year ended December 31, 2022 compared to the year ended December 31, 2021 due to higher money market interest rates in 2022 compared to 2021.

Interest income increased $0.7 million for the year ended December 31, 2023 compared to the year ended December 31, 2022 due to higher money market and certificate of deposit interest rates in 2023 compared to 2022.

Income Tax (Expense) Benefit

Income tax expense increased $0.5 million for the year ended December 31, 2022 compared to the year ended December 31, 2021 due to a change from a deferred tax liability position to a deferred tax asset position related to indefinite-lived intangibles resulting from our goodwill.

Income tax benefit increased $0.3 million for the year ended December 31, 2023 compared to the year ended December 31, 2022, primarily due to the release of a valuation allowance.

Liquidity and Capital Resources

We have incurred net losses since our inception.

For the years ended December 31, 2022 and 2021, we incurred a net loss of $47.4 million and $26.9 million, respectively, and we expect to incur additional losses and increased operating expenses in future periods.

As of December 31, 2022, we had an accumulated deficit of $255.5 million.

For the years ended December 31, 2023 and 2022, we incurred a net loss of $23.7 million and $47.4 million, respectively, and we expect to incur additional losses in future periods.

To date, we have generated only limited revenue, and we may never achieve revenue sufficient to offset our expenses.

Since becoming public, our primary sources of capital have been cash inflows from product sales, sales of our common stock and, to a lesser extent, borrowings under our 2017 Term Loan.

On November 10, 2020, we filed a registration statement on Form S-3 (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.

In March 2021, we completed a public offering of shares of our common stock, which shares were sold under the Shelf Registration Statement.

Net proceeds from the offering were approximately $64.7 million.

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 and, as of December 31, 2022, the Company had not sold any shares of its common stock pursuant to the Sales Agreement.

As of December 31, 2022, we had $62.4 million of cash and cash equivalents.

As of December 31, 2023, we had an accumulated deficit of $279.2 million and cash and cash equivalents of $36.5 million.

Cash in excess of immediate requirements is invested in accordance with our investment policy, primarily with a view to liquidity and capital preservation.

Currently, our funds are held in cash, money market funds and certificates of deposit.

In September 2017, we entered into the loan and security agreement with Innovatus under which we immediately drew down $20.0 million.

In December 2018, we borrowed an additional $5.0 million under the loan agreement.

In each of November 2019 and November 2021, we amended the loan and security agreement with Innovatus, which we collectively refer to as the Amended Loan Agreement.

Pursuant to the Amended Loan Agreement, the loan term is for nine years with a final maturity date of November 2026.

The Amended Loan Agreement accrues interest at an annual rate of 8.0%, of which 2.0% will be payable in-kind.

Paid in-kind interest is added to the principal balance each period.

After December 1, 2024, the entire 8.0% will be paid in cash at the end of each period.

On or after November 1, 2022, we may, at our option, prepay the term loan borrowings by paying the lender a prepayment

The prepayment premium was 2% as of December 31, 2022 and decreases by 1% on each of November 1, 2023 and November 1, 2024.

Since becoming a public company, our primary sources of capital have been cash inflows from product sales, sales of our common stock and, to a lesser extent, borrowings under our 2017 Term Loan.

In April 2023, we further amended the 2017 Term Loan, pursuant to which we prepaid $10.0 million of principal and amended additional terms of the agreement.

See Note 4, Borrowings, to our audited financial statements included in this Annual Report on Form 10-K for additional information.

Our obligations under the Amended Loan Agreement are secured by a security interest in substantially all of our assets, including our intellectual property.

The Amended Loan Agreement contains customary conditions to borrowing, events of default, and covenants, including covenants requiring us to maintain minimum liquidity of $2.0 million, covenants to achieve certain minimum amounts of revenue (the performance covenant), and covenants limiting our ability to dispose of assets, undergo a change in control, merge with or acquire other entities, incur debt, incur liens, pay dividends or other distributions to holders of our capital stock, repurchase stock and make investments, in each case subject to certain exceptions.

The consequences of failing to achieve the performance covenant will be cured if, within sixty days of failing to achieve the performance covenant, we issue additional equity securities or subordinated debt with net proceeds sufficient to fund any cash flow deficiency generated from operations, as defined in the Amended Loan Agreement.

At December 31, 2022, we were in compliance with all covenants of the Amended Loan Agreement.

The Amended Loan Agreement contains customary conditions to borrowing, events of default, and covenants, including covenants requiring us to maintain minimum liquidity of $2.0 million, covenants to achieve certain minimum amounts of revenue, and covenants limiting our ability to dispose of assets, undergo a change in control, merge with or acquire other entities, incur debt, incur liens, pay dividends or other distributions to holders of our capital stock, repurchase stock and make investments, in each case subject to certain exceptions.

Per the Amended Loan Agreement, we are not required to comply with the revenue covenant for any quarter during which we maintain a minimum aggregate cash balance equal to fifty percent of the aggregate principal amount of the 2017 Term Loan funded (excluding any capitalized interest paid-in-kind) at all times during such quarter.

The consequences of failing to achieve the performance covenants, when applicable, will be cured if (i) within thirty days of failing to achieve the performance covenant, we submit a new Board approved financial plan to Innovatus under which we are expected to break even on a cash flow basis prior to the maturity date, and (ii) within thirty days of the submission of such financial plan, we issue additional equity securities or subordinated debt with net proceeds sufficient to fund any cash flow deficiency generated from operations, as defined in the Amended Loan Agreement.

As of December 31, 2023, we were in compliance with all covenants of the Amended Loan Agreement with Innovatus.

In addition, upon the occurrence of an event of default, Innovatus, among other things, can declare all indebtedness due and payable immediately, which would adversely impact our liquidity and reduce the availability of our cash flows to fund working capital needs, capital expenditures and other general corporate purposes.

On November 17, 2023, we filed a registration statement on Form S-3 (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, all of which remain available for sale at December 31, 2023.

On September 15, 2022, the Company entered into a sales agreement (the Sales Agreement) with TD Cowen 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 Sales Agreement was amended in November 2023 in connection with the filing of the Form S-3 discussed above.

The Company is not obligated to sell any shares of Company common stock in the offering and, as of December 31, 2023, the Company had not sold any shares of its common stock pursuant to the Sales Agreement.

Our ability to utilize the $150 million of capacity remaining under our Shelf Registration Statement, including the $50.0 million of capacity remaining under our at the market offering sales agreement is limited by our compliance with the baby shelf rules (as defined below).

As of the filing of this Annual Report on Form 10-K, our public float is less than $75 million, and under SEC regulations, for so long as our public float remains less than $75 million, the amount we can raise through primary public offerings of securities in any twelve-month period using shelf registration statements subject to Instruction I.B.6.

to Form S-3 is limited to an aggregate of one-third of our public float, which is referred to as the “baby shelf rules.” As of February 15, 2024, our public float was approximately $29.7 million, based on 12,916,064 shares of outstanding common stock held by non-affiliates and at a price of $2.30 per share, which was the last reported sale price of our common stock on the Nasdaq Capital Market on January 30, 2024.

Funding Requirements

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We expect to continue to incur operating losses in the near term.

In the short-term, we expect costs of revenue to increase as test volume increases.

We expect selling, general and administrative expenses, and research and development expenses to decrease in the short-term as a result of cost saving initiatives which began in the fourth quarter of 2022.

In the short-term, we expect costs of revenue and selling, general and administrative expenses to remain relatively consistent.

We expect research and development expenses to increase in the short-term as a result of ongoing clinical studies.

We believe we have sufficient laboratory capacity to support increased test volume.

Cash used to fund operating expenses is impacted by the timing of when we pay expenses, as reflected in the change in our outstanding accounts payable and accrued expenses.

We expect that our near- and longer-term liquidity requirements will continue to consist of working capital and general corporate expenses associated with the growth of our business, including payments we may be required to make upon the achievement of previously negotiated milestones associated with intellectual property we have licensed, payments related to non-cancelable purchase obligations with one supplier for reagents, payments related to our principal and interest under our long term borrowing arrangements, payments for operating leases related to our office and laboratory space in Vista, California and our office space in Carlsbad, California, and payments for finance leases related to our laboratory equipment (see Note 4 and Note 5 to our audited financial statements included in this Annual Report on Form 10-K).

We expect that our near- and longer-term liquidity requirements will continue to consist of working capital and general corporate expenses associated with the growth of our business, including payments we may be required to make upon the achievement of previously negotiated milestones associated with intellectual property we have licensed, payments related to non-cancelable purchase obligations with one supplier for reagents, payments related to our principal and interest under our long term borrowing arrangements, payments for operating leases related to our office and laboratory space in Vista, California and our office space in Carlsbad, California, and payments for finance leases related to our laboratory equipment (see Note 4, Borrowings, and Note 6, Commitments and Contingencies, to our audited financial statements included in this Annual Report on Form 10-K).

Based on our current business plan, we believe that our existing cash and cash equivalents and our anticipated future revenue, will be sufficient to meet our anticipated cash requirements for at least the next 12 months from the date of this filing.

Our estimate of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement and involves risks and uncertainties, and actual results could vary as a result of a number of factors, including:

Our estimate of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement and involves risks and uncertainties.

Actual results could vary as a result of a number of factors, including:

• our ability to achieve sufficient market acceptance, coverage and adequate reimbursement from third-party payors and adequate market share and revenue for our testing products;

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The following table summarizes our cash flows for the periods indicated:

Years Ended December 31,

Year Ended December 31,

(in thousands)

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Cash Flows from Operating Activities

Net cash used in operating activities for the year ended December 31, 2022 was $32.1 million and primarily resulted from (i) our net loss of $47.4 million adjusted for non-cash charges of $13.5 million primarily related to impairment of our goodwill, stock-based compensation, depreciation, amortization, non-cash lease expenses, non-cash interest and deferred income taxes and (ii) changes in our net operating assets of $1.7 million primarily related to net increases in accounts receivable and net decreases in accounts payable, partially offset by net decreases in prepaid expenses and other current assets and net increases in accrued liabilities and other current liabilities.

Net cash used in operating activities for the year ended December 31, 2023 was $14.5 million and primarily resulted from (i) our net loss of $23.7 million adjusted for non-cash charges of $8.9 million primarily related to stock-based compensation, depreciation, amortization, loss on disposal of assets primarily related to the assignment of a lease, non-cash lease expenses and non-cash interest and (ii) changes in our net operating assets of $0.3 million primarily related to net increases in prepaid expenses and other current assets and accounts receivable, and net decreases in operating lease liabilities, partially offset by net increases in accrued and other current liabilities.

Net cash used in operating activities for the year ended December 31, 2022 was $32.1 million and primarily resulted from (i) our net loss of $47.4 million adjusted for non-cash charges of $13.6 million related to stock-based compensation, depreciation, amortization, non-cash interest and deferred income taxes and (ii) changes in our net operating assets of $1.7 million primarily related to net increases in accounts receivable and net decreases in accounts payable, partially offset by net decreases in prepaid expenses and other current assets and net increases in accrued liabilities and other current liabilities.

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Cash Flows from Financing Activities

Net cash used in financing activities for the year ended December 31, 2022 was $0.5 million, primarily consisting of principal payments on finance lease obligations and payment of taxes on vested restricted stock units, partially offset by the proceeds from the Exagen Inc.

Net cash used in financing activities for the year ended December 31, 2023 was $10.6 million, primarily consisting of principal payments on the Amended Loan Agreement, finance lease obligations and notes payable, partially offset by the proceeds from the Exagen Inc.

2019 Employee Stock Purchase Plan (the ESPP) purchases.

Net cash provided by financing activities for the year ended December 31, 2021 was $64.7 million and primarily resulted from the net proceeds received from our public offering in March 2021 of $64.7 million and proceeds from the ESPP purchases, partially offset by principal payments on finance lease obligations.

Critical Accounting Estimates

Our management’s discussion and analysis of our financial condition and results of operations is based on our audited financial statements, which have been prepared in accordance with accounting principles generally accepted in United States of America (GAAP).

The preparation of these audited financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the audited financial statements, as well as the reported revenue

generated and expenses incurred during the reporting periods.

Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources.

apparent from other sources.

Actual results may differ from these estimates under different assumptions or conditions and any such differences may be material.

We believe the following accounting policies are the most critical to us, in that they require our most difficult, subjective or complex judgments in the preparation of our financial statements.

We believe the following accounting estimates are the most critical to us, in that they require our most difficult, subjective or complex judgments in the preparation of our financial statements.

For further information, see Note 2, Summary of Significant Accounting Policies, to our Financial Statements, which outlines our application of significant accounting policies.

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The healthcare professionals who order our services and to whom test results are reported are generally not responsible for payment for these services.

The parties that pay for these services consist of commercial payors, government payors (primarily Medicare and Medicaid), client payors (e.g.

hospitals, other laboratories, etc.) and patient self-pays.

The parties that pay for these services consist of commercial payors, government payors (primarily Medicare and Medicaid), client payors (hospitals, other laboratories, etc.) and patient self-pays.

Payors are billed at our list price.

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The transaction price is estimated using an expected value method on a portfolio basis.

Our portfolios are grouped per payor (e.g.

each individual third-party insurance, Medicare, Medicaid, client payors, patient self-pay, etc.) and per test basis.

Our portfolios are grouped per payor (each individual third-party insurance, Medicare, Medicaid, client payors, patient self-pay, etc.) and per test basis.

Collection of our 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.

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Should we later determine the judgements underlying estimated collections change, our financial results could be impacted in future periods.

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.

Goodwill is not amortized but is tested for impairment at least annually or more frequently whenever a triggering event or change in circumstances occurs at the reporting unit level.

For our goodwill impairment analysis, we operate in a single reporting unit, and allocate all goodwill to this reporting unit.

Management first assesses qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit is less than the carrying amount as a basis for determining whether it is necessary to perform a quantitative assessment.

If a quantitative assessment is deemed necessary, management uses all available information to make this fair value determination, including the present values of expected future cash flows, driven by our forecast of future revenue, using discount rates commensurate with the risks involved in the assets and observed market multiples of operating cash flows.

Our stock price and associated market capitalization is also considered in the determination of reporting unit fair value.

A prolonged or significant decline in our share price could provide evidence of a need to record a material impairment to goodwill.

We are required to recognize an impairment charge if the carrying amount of the reporting unit exceeds its fair value.

The judgments and estimates involved in identifying and quantifying the impairment of goodwill involve inherent uncertainties, and the measurement of the fair value is dependent on the accuracy of the assumptions used in making the estimates and how those estimates compare to our future operating performance.

Included in revenues for the years ended December 31, 2023 and 2022 was a net revenue increase of $3.4 million and a net revenue decrease of $2.4 million, respectively, associated with changes in estimated variable consideration related to performance obligations satisfied in previous periods.

Stock-Based Compensation

We recorded stock-based compensation expense of approximately $4.7 million for each of the years ended December 31, 2022 and 2021, respectively.

We expect to continue to grant stock options, restricted stock units and other equity-based awards in the future and to the extent that we do, our stock-based compensation expense recognized in future periods will likely increase.

For stock options and purchase rights granted under the ESPP, we

estimate the grant date fair value using the Black-Scholes option-pricing valuation model.

We recorded stock-based compensation expense of approximately $3.6 million and $4.7 million for the years ended December 31, 2023 and 2022, respectively.

We expect to continue to grant stock options, restricted stock units (RSUs) and other equity-based awards in the future and to the extent that we do, our stock-based compensation expense recognized in future periods will likely increase.

For stock options and purchase rights granted under the ESPP, we estimate the grant date fair value using the Black-Scholes option-pricing valuation model.

For RSUs, we use the closing price of our common stock on the date of grant to determine the fair value.

The Black-Scholes option pricing model requires the use of highly subjective and complex assumptions, which determine the fair value of stock-based awards.

The Black-Scholes option pricing model requires the use of assumptions, which determine the fair value of stock-based awards.

If we had made different assumptions, our stock-based compensation expense, net loss and net loss per share attributable to common stockholders could have been significantly different.

See Note 2 and Note 8 to our audited financial statements in this Annual Report on Form 10-K for information concerning certain of the specific assumptions we used in applying the Black-Scholes option pricing model to determine the estimated fair value of our stock options granted and purchases under our ESPP rights in the years ended December 31, 2022 and 2021.

See Note 2, Summary of Significant Accounting Policies, and Note 9, Stock Option Plan, to our audited financial statements in this Annual Report on Form 10-K for information concerning certain of the specific assumptions we used in applying the Black-Scholes option pricing model to determine the estimated fair value of our stock options granted and purchases under our ESPP rights in the years ended December 31, 2023 and 2022.

Recent Accounting Pronouncements

See "Notes to the Financial Statements-Note 2-Recent Accounting Pronouncements" of our annual financial statements.

See Note 2, Recent Accounting Pronouncements, of our annual financial statements.

JOBS Act Accounting Election

The JOBS Act contains provisions that, among other things, reduce certain reporting requirements for an "emerging growth company." The JOBS Act permits an "emerging growth company" such as us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies.

We have elected to use this extended transition period under the JOBS Act until the earlier of the date we (i) are no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act.

The JOBS Act contains provisions that, among other things, reduce certain reporting requirements for an "emerging growth company." The JOBS Act permits an "emerging growth company" like us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies.

the JOBS Act.

As a result, our audited financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates.

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What changed 10-K

Item 7. Management’s Discussion and Analysis