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Item 7. Management’s Discussion and Analysis

2025-03-11 compared with 2024-03-18 · 107 added, 112 removed, 160 unchanged (58% of the section changed)

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

You should read the following discussion of our financial condition and results of operations in conjunction with the financial statements and the notes thereto included elsewhere in this Annual Report on Form 10-K.

Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report on Form 10-K, including information with respect to our plans and strategy for our business and financial performance, includes forward-looking statements that are based on current beliefs, plans and expectations and involve risks, uncertainties and assumptions.

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 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.

Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report, including information with respect to our plans and strategy for our business and financial performance, includes forward-looking statements that are based on current beliefs, plans and expectations and involve risks, uncertainties and assumptions.

You should read the "Special note regarding forward-looking statements" and "Risk Factors" section of this Annual Report 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 a medical technology company primarily focused on the design, development and commercialization of a next-generation portfolio of innovative testing products under our AVISE ® brand, which allow for the differential diagnosis, prognosis and monitoring of complex rheumatic, autoimmune and autoimmune-related disease including, among others, SLE and RA.

We believe our strong focus and extensive background in the field of rheumatology, combined with our commitment to exceptional customer service and support, position us well to respond to the needs of rheumatologists, primary care physicians, other specialists, and the patients they serve.

Our tests are used in a variety of clinical settings to provide clarity in autoimmune disease decision-making with the goal of improving patients' clinical outcomes.

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

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

Traditional screening methods often lack accuracy, resulting in repeat testing and delayed diagnosis.

With significant increases in autoimmune incidence in recent years, AVISE ® CTD provides unique biomarkers that empower clinicians to confidently and quickly diagnose various CTDs.

Beginning in late 2022, w e revitalized our organization with the addition of key members to our senior leadership team, including our Chief Executive Officer, Chief Financial Officer, Vice President of Sales, Chief Medical Officer, and Medical and Laboratory Director.

By leveraging our team’s extensive experience to create clinically distinct solutions that improve patient lives, we have created a strong foundation for growth and believe that we are well-positioned to positively impact patient care and address unmet clinical needs in autoimmune disease .

We strive to become a partner of choice for doctors, hospitals, healthcare systems, and payors.

Under the leadership of our Chief Executive Officer, John Aballi, who joined Exagen in October 2022, we are executing an operational turnaround of the business, resulting in a return to revenue growth and gross margin expansion while significantly reducing operating expenses and cash burn.

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.

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Our clinical laboratory typically reports all AVISE ® testing product results within five business days.

Reimbursement rates vary by product and payor.

Since launching AVISE ® CTD, we have produced an extensive body of peer-reviewed literature supporting the test’s clinical validity and utility, demonstrating the importance of AVISE ® CTD in patient care.

Revenue from this product comprised 91% and 88% of our revenue for the years ended December 31, 2024 and 2023, respectively.

In addition to providing diagnostic testing, we are leveraging our clinical laboratory to enter into agreements in the normal course of business with leading pharmaceutical companies and contract research organizations for the use of our testing products and/or the de-identified data generated from such tests.

We believe the quality of our testing, proprietary offerings and specialized knowledge give us an advantage in this space.

We plan to continue to pursue additional partnerships with leading pharmaceutical companies and academic research centers that are synergistic with our evolving portfolio of testing products, as more of these organizations realize the extent of the service we can provide.

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

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

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

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.

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

▪ Commercial Launch of AVISE ® CTD Enhancements .

Our flagship product, AVISE ® CTD, enables clinicians to more effectively diagnose complex autoimmune conditions such as lupus, rheumatoid arthritis, and Sjögren’s syndrome earlier and with greater accuracy, as compared to the current standard of care.

Our laboratory specializes in the testing of rheumatic diseases, delivering precise and timely results, supported by a full suite of AVISE ® -branded tests for disease diagnosis, prognosis, and monitoring.

With a focus on research, innovation, education, and patient-centered care, we are dedicated to addressing the ongoing challenges of autoimmune disease management.

In January 2025, we announced conditional approval by NYSDOH and commercial launch of our new SLE and RA biomarker assays on the AVISE ® CTD platform.

Collectively, we believe these new biomarkers will further improve the clinical utility of AVISE ® CTD, providing clinicians with the information they need to definitively diagnose patients and shorten their autoimmune diagnostic journeys.

We expect the addition of these new biomarkers will drive gains in our AVISE ® CTD average selling price, gross margin expansion and increase demand while positioning us for profitability.

▪ Reimbursement for Our Testing Products .

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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.

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.

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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.

In addition, in connection with our revenue cycle management initiatives, we held claims in the first half of the year which resulted in increases in our accounts receivable and an accelerated decrease in our cash in the first half of the year.

As expected, this trend reversed in the second half of the year, as cash was collected on billed tests.

▪ Expanding Adoption of AVISE ® CTD .

Since the launch of AVISE ® CTD in 2012 and through December 31, 2024, we have delivered approximately 1,009,812 of these tests.

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

122,883 AVISE ® CTD tests were delivered in the year ended December 31, 2024, representing approximately 11% decline over the same period in 2023.

The number of ordering healthcare providers in the quarter ended December 31, 2024 was 2,370, representing an approximate 1% decrease over the same period in 2023.

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

▪ Development of Additional Testing Products.

We rely on sales of our AVISE ® CTD test to generate the significant majority of our revenue.

▪ Development of Innovative Testing Products .

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

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

▪ Maintain Meaningful Margin .

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

We 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.

We intend to leverage our protein and molecular assay development capabilities, bioinformatic team and proprietary technologies to pursue the development of additional testing products designed to have superior clinical utility for rheumatic conditions.

▪ Deliver Sustainable Profitable Growth .

We seek to establish a solid foundation for growth and path to sustained profitability through continued gross margin enhancements and improved operating expense efficiencies through the implementation of certain internal initiatives, such as leveraging validation, utility

and reimbursement-oriented clinical studies to facilitate payor coverage of our testing products.

We center our efforts around long-term reimbursement and ASP growth.

This strategy includes optimizing revenue cycle practices, focusing managed care efforts on medical policy expansion and continuing to educate insurance payors on the published, real-world evidence of the clinical utility of our testing products, demonstrating healthcare cost savings and reductions in time to diagnosis.

▪ Timing of Our Research and Development Expenses .

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To date, we have derived nearly all of our revenue from the sale of our testing products, most of which is attributable to our AVISE ® CTD test.

We primarily market our testing products to rheumatologists in the United States.

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

Revenue from the sale of our AVISE ® CTD test comprised 91% and 88% of our revenue for the years ended December 31, 2024 and 2023, respectively.

We primarily market our testing products to rheumatologists and their physician assistants in the United States.

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

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

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

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

In the quarter ended March 31, 2022, CMS agreed, effective April 1, 2022, to recognize a new PLA code for our protein-based test, AVISE ® Lupus.

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.

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

Our ability to increase our revenue will depend on the success of the commercial launch of the T-Cell Biomarker and RA Sub-Profile Biomarkers enhancements to our AVISE ® CTD test, in addition to our ability to further penetrate the market for our current and future testing products and increase our ASP for tests delivered.

In April 2022, we were granted a PLA code for our protein-based test, AVISE ® Lupus, which is offered standalone or as part of our AVISE ® CTD test.

Noridian, our MAC, has set the current pricing for this PLA code at $840.65 per test through December 31, 2025.

The process for obtaining and maintaining consistent reimbursement for new tests can be uncertain, lengthy and time consuming.

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Having a price associated with the PLA code for any particular test does not secure coverage or reimbursement for that PLA code from Medicare or any other third-party payor.

In an effort to improve transparency regarding Medicare support of AVISE ® Lupus, on July 29, 2022, we submitted a formal request to Noridian for coverage of our AVISE ® Lupus test under the new PLA Code.

On September 27, 2022, we received notice that Noridian has deemed our application for an LCD to be valid.

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

We submitted a formal request to Noridian for coverage of our AVISE ® Lupus test under the new PLA Code and on September 27, 2022, we received notice that Noridian deemed our application for an LCD to be valid, but our application is still pending.

Ultimately receiving a favorable LCD is uncertain and may be time-consuming, resource intensive and require multiple quarterly or annual periods to complete and is subject to risks and uncertainties described in the section entitled "Risk Factors" in this Annual Report.

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.

The article listed several such tests, including the AVISE ® Lupus test, and requires all laboratories furnishing multi-analyte proteomics testing in MolDX jurisdictions to register with the DEX ® Diagnostics Exchange Registry and obtain a Z-Code ® identifier.

We were issued a Z-Code ® identifier in May 2024.

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

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 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.

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

While collectability has improved with certain plans year-over-year, we continue to experience denials due to unfavorable medical policy with certain plans, and we expect this situation to persist.

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

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

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

We experienced moderate declines in test volume in the second half of 2023, 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

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

We delivered 122,883 tests for our flagship product, AVISE ® CTD, in the year ended December 31, 2024 as compared to 137,650 tests for the year ended December 31, 2023 resulting from the expected impacts of revenue cycle management initiatives and the reduction of sales territories which began in 2022.

Costs of Revenue

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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 remain relatively consistent year-over-year in the near-term.

We expect that our costs of revenue will increase year-over-year in the near-term as a result of costs associated with the addition of the T-Cell Biomarkers and RA Sub-Profile Biomarkers to our AVISE ® CTD test.

Operating Expenses

Selling, General and Administrative Expenses

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

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

We expect that our selling, general and administrative expenses will increase year-over-year in the near-term as a result of increased headcount.

Research and Development Expenses

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

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

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 increase year-over-year in the near-term as a result of ongoing clinical studies.

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

Interest Expense

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

Income Tax (Expense) Benefit

Income Tax Expense

Income taxes include federal and state income taxes in the United States.

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Revenue $ 55,641 $ 52,548 $ 3,093

Operating expenses:

Costs of revenue 22,529 23,092 (563)

Gross margin 33,112 29,456 3,656

Operating expenses:

Selling, general and administrative expenses 41,373 47,428 (6,055)

Research and development expenses 5,375 4,865 510

Goodwill impairment — 5,506 (5,506)

Total operating expenses 46,748 52,293 (5,545)

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Loss before income taxes (15,103) (23,656) 8,553

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

Income tax expense (12) (33) 21

Net loss $ (15,115) $ (23,689) $ 8,574

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.

Revenue increased $3.1 million, or 5.9%, for the year ended December 31, 2024 compared to the year ended December 31, 2023, primarily due to improved ASP (including cash collected related to tests performed in prior periods), partially offset by decreased AVISE ® CTD year-over-year volume resulting from the expected impacts of revenue cycle management initiatives and the reduction of sales territories which began in 2022.

The number of AVISE ® CTD tests delivered decreased to 122,883 in the year ended December 31, 2024 compared to 137,650 tests delivered in the same 2023 period.

The AVISE ® CTD test accounted for 91% and 88% of revenue for the years ended December 31, 2024 and 2023, respectively.

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Costs of revenue decreased $0.6 million, or 2.4%, for the year ended December 31, 2024 compared to the year ended December 31, 2023.

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.

This decrease was primarily due to decreases of $1.0 million in materials and supplies expenses and additional decreases in facilities and allocated overhead expenses, royalties expenses and phlebotomy expenses.

These decreases were partially offset by an increase of $0.7 million in shipping and handling

costs resulting from increased cost-per-shipment, offset in-part by reduced shipping volume;

and an increase of $0.7 million in direct labor.

Gross margin as a percentage of revenue increased to 59.5% for the year ended December 31, 2024 compared to 56.1% for the year ended December 31, 2023, primarily due to improved ASP (including cash collected related to tests performed in prior periods) and decreases in materials and supplies expenses, facilities and allocated overhead expenses, royalties expenses and phlebotomy expenses;

partially offset by increases in shipping and handling costs resulting from increased cost-per shipment, and increases in direct labor.

Selling, General and Administrative Expenses

Selling, general and administrative expenses decreased $6.1 million, or 12.8%, for the year ended December 31, 2024 compared to the year ended December 31, 2023.

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.

This decrease was primarily due to a decrease of $1.8 million in stock-based compensation expense and a decrease of $1.5 million in asset disposal costs related to the assignment of a lease in 2023;

in addition to decreases in professional service expenses, legal expenses, insurance expenses, facilities and allocated overhead expenses, personnel costs and audit and tax services.

These decreases were partially offset by an increase in commissions.

Research and Development Expenses

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

As part of our annual goodwill impairment assessment in the fourth quarter of 2022, we determined that the sustained decrease in our market capitalization constituted an indicator of impairment and as a result, a quantitative goodwill impairment test was completed as of December 31, 2022.

This analysis identified an impairment of $5.5 million related to our goodwill.

Research and development expenses increased $0.5 million, or 10.5%, for the year ended December 31, 2024 compared to the year ended December 31, 2023.

This increase was primarily due to increases of $0.7 million of personnel costs (including salaries, benefits and stock-based compensation) resulting from increased allocation of labor to research and development for laboratory personnel working on the validation of the T-Cell Biomarkers and RA Sub-Profile Biomarkers;

and increases in professional service fees and laboratory expenses.

These increases were partially offset by decreases of $0.3 million of clinical trial expenses and decreases in facilities and allocated overhead expenses.

Interest Expense

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 expense remained substantially consistent for the year ended December 31, 2024 compared to the year ended December 31, 2023.

Interest Income

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 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.

Interest income decreased $0.7 million for the year ended December 31, 2024 compared to the year ended December 31, 2023, primarily due to lower cash and cash equivalents balances of interest-earning accounts.

Income Tax Expense

Income tax expense remained substantially consistent for the year ended December 31, 2024 compared to the year ended December 31, 2023.

Liquidity and Capital Resources

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For the years ended December 31, 2024 and 2023, we incurred a net loss of $15.1 million and $23.7 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.

To date, we have generated only limited revenue, and despite any estimates we may make regarding our ability to become profitable, we may never achieve revenue sufficient to offset our expenses.

As of December 31, 2024, we had an accumulated deficit of $294.3 million and cash and cash equivalents of $22.0 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.

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

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, 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.

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 financial plan approved by our board of directors 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.

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.

As of December 31, 2024, we were in compliance with all covenants of the Amended Loan Agreement with Innovatus.

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.

On September 15, 2022, we entered into a sales agreement, as amended on November 17, 2023 (the Sales Agreement) with TD Securities (USA) 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, 2024, the Company has not sold any shares of its common stock pursuant to the Sales Agreement.

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 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.

In the short-term, we expect increases in costs of revenue as a result of costs associated with the addition of the T-Cell Biomarkers and RA Sub-Profile Biomarkers to our AVISE ® CTD test.

We also anticipate increases in our selling, general and administrative expenses due to increased headcount.

We expect research and development expenses to remain relatively consistent in the short-term.

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, Borrowings, and Note 6, Commitments and Contingencies, 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 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, CA and our office space in Carlsbad, CA, 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).

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.

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

• our ability to improve AVISE ® CTD ASP as a result of the launch of the T-Cell Biomarkers and RA Sub-Profile Biomarkers, in addition to our ability to achieve adequate reimbursement for these additions to our AVISE ® CTD test offering;

• 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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▪ fluctuations in working capital;

▪ the costs of developing our product pipeline, including the costs associated with conducting our ongoing and future validation, utility and outcome studies as well as the success of our development efforts;

▪ the extent to which we establish additional partnerships or in-license, acquire or invest in complementary businesses or products as well as the success of our existing partnerships and/or in-licenses.

Until such time, if ever, as we can generate revenue to support our costs structure, we expect to finance our operations through equity offerings, debt financings or other capital sources, including potentially collaborations, licenses and other similar arrangements.

Until such time, if ever, as we can generate revenue to support our costs structure, we expect to finance our operations as needed through equity offerings, debt financings or other capital sources, including potentially collaborations, licenses and other similar arrangements.

Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends.

To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our stockholders may be diluted, and the terms of these

securities may include liquidation or other preferences that adversely affect the rights of our common stockholders.

To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our stockholders may be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our common stockholders.

If additional funding is required or desired, there can be no assurance that additional funds will be available to us on acceptable terms on a timely basis, if at all, or that we will generate sufficient cash from operations to adequately fund our operating needs or achieve or sustain profitability.

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Cash Flows from Operating Activities

Net cash used in operating activities for the year ended December 31, 2024 was $13.3 million and primarily resulted from (i) our net loss of $15.1 million adjusted for non-cash charges of $4.9 million primarily related to stock-based compensation, depreciation, amortization, non-cash lease expenses and non-cash interest and (ii) changes in our net operating assets of $3.1 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 accounts payable.

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.

Cash Flows from Investing Activities

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Cash Flows from Financing Activities

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.

Net cash used in financing activities for the year ended December 31, 2024 was $0.7 million, primarily consisting of principal payments on finance lease obligations and notes payable, partially offset by the proceeds from the Exagen Inc.

2019 Employee Stock Purchase Plan (the ESPP) purchases.

Critical Accounting Estimates

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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.

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

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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, 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 $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 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, 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.

Included in revenues for the years ended December 31, 2024 and 2023 were net revenue increases of $6.6 million and $3.4 million, respectively, associated with changes in estimated variable consideration related to performance obligations satisfied in previous periods.

Recent Accounting Pronouncements

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" like 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.

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.

We will remain an emerging growth company until the last day of our fiscal year following the fifth anniversary of the date of the first sale of our common equity securities pursuant to an effective registration statement under the Securities Act, which will occur in 2024.

However, if certain events occur prior to the end of this five-year period, including if we become a "large accelerated filer" as defined in Rule 12b-2 under the Exchange Act, our annual gross revenues exceed $1.235 billion or we issue more than $1.0 billion of non-convertible debt in any three-year period, we will cease to be an emerging growth company prior to this anniversary.

Quantitative and Qualitative Disclosures About Market Risk.

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Financial Statements and Supplementary Data.

The financial statements and supplemental data required by this item are set forth at the pages indicated in Part IV, Item 15(a)(1) of this Annual Report on Form 10-K.

The financial statements and supplemental data required by this item are set forth at the pages indicated in Part IV, Item 15(a)(1) of this Annual Report.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis