SEC Info - Exagen Inc. - ‘10-K’ for 12/31/20

Exagen Inc.

Balance Sheets

(in thousands, except share and per share data)

2020

2019

Assets

Current assets:

Cash and cash equivalents

i 57,448

i 72,084

Accounts receivable, net

i 8,910

i 5,715

Prepaid expenses and other current assets

i 4,159

i 3,451

Total current assets

i 70,517

i 81,250

Property and equipment, net

i 2,102

i 1,380

Goodwill

i 5,506

Other assets

i 250

i 174

Total assets

i 78,375

i 88,310

Liabilities and Stockholders' Equity

Current liabilities:

Accounts payable

i 3,014

i 1,476

Accrued and other current liabilities

i 5,757

i 4,419

Total current liabilities

i 8,771

i 5,895

Borrowings-non-current portion, net of discounts and debt issuance costs

i 26,659

i 25,854

Deferred tax liabilities

i 158

i 264

Other non-current liabilities

i 948

i 638

Total liabilities

i 36,536

i 32,651

Commitments and contingencies (Note 5)

Stockholders' equity:

Preferred stock, $ i i 0.001 / par value; i i 10,000,000 / shares authorized, i i i i no / / / shares issued or outstanding at December 31, 2020 and December 31, 2019

i —

Common stock, $ i i 0.001 / par value; i i 200,000,000 / shares authorized at December 31, 2020 and December 31, 2019; i i 12,652,308 / and i i 12,560,990 / shares issued and outstanding at December 31, 2020 and December 31, 2019, respectively

i 13

Additional paid-in capital

i 223,115

i 220,248

Accumulated deficit

( i 181,289)

( i 164,602)

Total stockholders' equity

i 41,839

i 55,659

Total liabilities and stockholders' equity

i 78,375

i 88,310

The accompanying notes are an integral part of these financial statements

Exagen Inc.

Statements of Operations

(in thousands, except share and per share data)

Years Ended December 31,

2020

2019

Revenue

i 41,975

i 40,387

Operating expenses:

Costs of revenue

i 16,559

i 18,808

Selling, general and administrative expenses

i 37,033

i 28,702

Research and development expenses

i 3,568

i 2,176

Total operating expenses

i 57,160

i 49,686

Loss from operations

( i 15,185)

( i 9,299)

Interest expense

( i 2,565)

( i 3,491)

Change in fair value of financial instruments

i —

i 267

Other income, net

i 984

i 510

Loss before income taxes

( i 16,766)

( i 12,013)

Income tax benefit (expense)

i 79

( i 25)

Net loss

( i 16,687)

( i 12,038)

Accretion of redeemable convertible preferred stock

i —

( i 4,640)

Deemed dividend recorded in connection with financing transactions

i —

( i 13,601)

Net loss attributable to common stockholders (Note 2)

( i 16,687)

( i 30,279)

Net loss per share, basic and diluted (Note 2)

( i 1.32)

( i 8.46)

Weighted-average number of shares used to compute net loss per share, basic and diluted (Note 2)

i 12,632,780

i 3,578,771

The accompanying notes are an integral part of these financial statements

Exagen Inc.

Statements of Redeemable Convertible Preferred Stock and Stockholders' Equity

(in thousands, except share and per share amounts)

Redeemable
Convertible
Preferred Stock

Common Stock

Additional
Paid-In
Capital

Accumulated
Deficit

Total
Stockholders'
Equity

Amount

Balances at December 31, 2018

i 532,606,084

i 105,232

i 63,005

i —

i 40,598

( i 152,564)

( i 111,966)

Accretion of redeemable convertible preferred stock

—

i 4,640

—

( i 4,640)

—

( i 4,640)

Exercise of stock options

—

i 1,548

—

i 4

—

i 4

Stock-based compensation

—

i 572

—

i 572

Issuance of Series G redeemable convertible preferred stock for aggregate proceeds of $ i 0.078 per share, net of issuance costs of $ i 124 (Note 7)

i 148,928,337

i 11,492

—

Issuance of Series H redeemable convertible preferred stock for aggregate proceeds of $ i 0.047 per share, net of issuance costs of $ i 318 (Note 7)

i 233,446,519

i 3,941

—

i 6,741

—

i 6,741

Deemed dividend recognized on beneficial conversion features of Series H redeemable convertible preferred stock (Note 7)

—

i 6,741

—

( i 6,741)

—

( i 6,741)

Deemed dividend from conversion of Series G to Series H redeemable convertible preferred stock (Note 7)

i 97,592,739

i 6,860

—

( i 6,860)

Conversion of preferred stock to common stock in connection with initial public offering (Note 7)

( i 1,012,573,679)

( i 138,906)

i 7,816,643

i 8

i 138,898

—

i 138,906

Issuance of common stock in initial public offering, net of underwriting discount, commissions and issuance costs (Note 8)

—

i 4,140,000

i 4

i 50,440

—

i 50,444

Net exercise of common and preferred stock warrants

—

i 539,794

i 1

i 510

—

i 511

Reclassification of redeemable convertible preferred stock warrant liabilities as equity

—

i 726

—

i 726

Net loss

—

( i 12,038)

Balances at December 31, 2019

i —

i 12,560,990

i 13

i 220,248

( i 164,602)

i 55,659

Exercise of stock options

—

i 47,549

—

i 13

—

i 13

Issuance of stock under Employee Stock Purchase Plan

—

i 11,649

—

i 142

—

i 142

Stock-based compensation

—

i 2,694

—

i 2,694

Exercise of common stock warrants

—

i 32,120

—

i 18

—

i 18

Net loss

—

( i 16,687)

Balances at December 31, 2020

i —

i 12,652,308

i 13

i 223,115

( i 181,289)

i 41,839

The accompanying notes are an integral part of these financial statements

Exagen Inc.

Statements of Cash Flows

(in thousands)

Years Ended December 31,

2020

2019

Cash flows from operating activities:

Net loss

( i 16,687)

( i 12,038)

Adjustments to reconcile net loss to net cash used in operating activities:

Depreciation and amortization

i 546

i 591

Amortization of debt discount and debt issuance costs

i 274

i 691

Non-cash interest expense

i 531

i 546

Revaluation of warrant liabilities

i —

( i 267)

Deferred income taxes

( i 106)

i —

Loss on disposal of assets

i —

i 20

Stock-based compensation

i 2,694

i 572

Changes in assets and liabilities:

Accounts receivable, net

( i 3,195)

i 237

Prepaid expenses and other current assets

( i 708)

( i 1,255)

Other assets

( i 15)

( i 24)

Accounts payable

i 986

i 528

Accrued and other current liabilities

i 1,596

i 688

Net cash used in operating activities

( i 14,084)

( i 9,711)

Cash flows from investing activities:

Purchases of property and equipment

( i 455)

( i 403)

Proceeds from sale of property and equipment

i —

i 300

Net cash used in investing activities

( i 455)

( i 103)

Cash flows from financing activities:

Proceeds from sale of common stock upon exercise of stock options

i 13

i 4

Proceeds from common stock issued under Employee Stock Purchase Plan

i 142

i —

Proceeds from exercise of common stock warrants

i 18

i —

Principal payment on capital lease obligations

( i 249)

( i 138)

Proceeds from Paycheck Protection Program loan

i 2,865

i —

Repayment of Paycheck Protection Program loan

( i 2,865)

i —

Proceeds from initial public offering, net of issuance costs and offering costs

i —

i 50,444

Proceeds from issuance of Series G redeemable convertible preferred stock, net of issuance costs

i —

i 7,742

Proceeds from issuance of Series H redeemable convertible preferred stock, net of issuance costs

i —

i 10,682

Payments of deferred offering costs

( i 21)

i —

Net cash (used in) provided by financing activities

( i 97)

i 68,734

Net change in cash, cash equivalents and restricted cash

( i 14,636)

i 58,920

Cash, cash equivalents and restricted cash, beginning of period

i 72,184

i 13,264

Cash, cash equivalents and restricted cash, end of period

i 57,548

i 72,184

Supplemental disclosure of cash flow information:

Cash paid for interest expense

i 1,758

i 2,288

Supplemental disclosure of non-cash items:

Accretion to redemption value of redeemable convertible preferred stock

i —

i 4,640

Equipment purchased under capital lease obligations

i 260

i 654

Costs incurred, but not paid, in connection with capital expenditures

i 553

i —

Conversion of redeemable convertible preferred stock

i —

i 138,906

Net exercise of common and preferred stock warrants

i —

i 511

Deferred offering costs included in accounts payable and accrued and other current liabilities

i 40

i —

Reclassification of redeemable convertible preferred stock warrant liabilities as equity

i —

i 726

Deemed dividend recognized for beneficial conversion features of Series H redeemable convertible preferred stock

i —

i 6,741

Deemed dividend from conversion of Series G to Series H redeemable convertible preferred stock

i —

i 6,860

Conversion of Series G to Series H redeemable convertible preferred stock

i —

i 11,875

The accompanying notes are an integral part of these financial statements

100

Exagen Inc.

Notes to Financial Statements

Note 1. i Organization

Description of Business

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

Liquidity

The Company has incurred recurring losses and negative cash flows from operating activities since inception. The Company anticipates that it will continue to incur net losses into the foreseeable future. At December 31, 2020, the Company had cash and cash equivalents of $ i 57.4 million and had an accumulated deficit of $ i 181.3 million. Since inception, the Company has financed its operations primarily through private placements of preferred securities, the sale of common stock through its initial public offering (IPO) and debt financing arrangements. Based on the Company's current business plan, management believes that its existing capital resources will be sufficient to fund the Company's obligations for at least twelve months following the issuance of these financial statements.

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

Note 2. i Summary of Significant Accounting Policies

Basis of Presentation and Use of Estimates

The Company's financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). The preparation of the accompanying financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities as of the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results could materially differ from those estimates.

Significant estimates and assumptions made in the accompanying financial statements include, but are not limited to revenue recognition, the fair value of financial instruments measured at fair value, the recoverability of its long-lived assets (including goodwill), net deferred tax assets (and related valuation allowance), and for periods prior to the IPO, the fair value of the Company's common stock and redeemable convertible preferred stock. The Company evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors and adjusts those estimates and assumptions when facts and circumstances dictate. Actual results could materially differ from those estimates.

Concentration of Credit Risk and Other Risk and Uncertainties

Financial instruments that potentially subject the Company to credit risk consist principally of cash, cash equivalents, and accounts receivable. Substantially all the Company's cash and cash equivalents are held at one financial institution that management believes is of high credit quality. Such deposits may, at times, exceed federally insured limits.

101

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

Revenue

Years Ended December 31,

2020

2019

Medicare

i 20

i 25

Janssen (SIMPONI®)

i 12

Blue Shield

i 11

i 12

Medicare Advantage

i 11

United Healthcare

i 11



*						Less than 10%.

Accounts Receivable

2020

2019

Janssen (SIMPONI®)

i 35

i 19

Blue Shield

i 11

i 15

United Healthcare

i 22



*						Less than 10%.

For the years ended December 31, 2020 and 2019, approximately i 70% and i 82% of the Company's revenue was related to the AVISE® CTD test, respectively.

The Company is dependent on key suppliers for certain laboratory materials. For each of the years ended December 31, 2020 and 2019, approximately i i 97 / % of the Company's diagnostic testing supplies were purchased from two suppliers. An interruption in the supply of these materials would impact the Company's ability to perform testing services.

Disaggregation of Revenue

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

Years Ended December 31,

2020

2019

Revenue:

Healthcare insurers

i 22,456

i 23,984

Government

i 8,446

i 9,896

Client(1)

i 5,109

i 4,392

Other(2)

i 836

i 639

Janssen (SIMPONI®)

i 5,128

i 1,476

Total revenue

i 41,975

i 40,387

(1)Includes hospitals, other laboratories, etc.

(2)Includes patient self-pay that is immaterial.

i Fair Value Measurements

102

The carrying value of the Company's cash and cash equivalents approximate fair value due to the short-term nature of these items. Based on the borrowing rates currently available to the Company for debt with similar terms and consideration of default and credit risk, the carrying value of the Company's long-term borrowings approximates its fair value, which is considered a Level 2 input.

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

The fair value hierarchy defines a three-level valuation hierarchy for disclosure of fair value measurements as follows:

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

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

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

The categorization of a financial instrument within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

Prior to the IPO, the Company's redeemable convertible preferred stock warrant liabilities were measured at fair value on a recurring basis and were classified as Level 3 liabilities. The Company recorded subsequent adjustments to reflect the increase or decrease in estimated fair value at each reporting date in current period earnings.

Cash, Cash Equivalents and Restricted Cash

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

In 2016, the Company entered into an arrangement with a financial institution with which it has an existing banking relationship whereby in exchange for the issuance of corporate credit cards, the Company agreed to obtain a $ i 0.1 million certificate of deposit with this financial institution as collateral for the balances borrowed on these credit cards. The Company has classified the value of this certificate of deposit (including all interest earned thereon) within other assets in the accompanying balance sheets. The Company has the right to terminate the credit card program at any time. Upon termination of the credit card program and repayment of all outstanding balances owed, the Company may redeem the certificate of deposit (and all interest earned thereon).

i i

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


		December 31,
	2020	2019
Cash and cash equivalents		$	i 57,448	$	i 72,084
Restricted cash		i 100		i 100
		$	i 57,548	$	i 72,184

/ / i

Property and Equipment

Property and equipment are stated at cost, net of depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, generally between three and i five years. Leasehold improvements are amortized on a straight-line basis over the lesser of the estimated useful life or the remaining term of the related lease. Maintenance and repairs are charged to expense as incurred, and improvements and betterments are capitalized. When assets are retired or otherwise disposed of, the cost and

103

accumulated depreciation are removed from the balance sheet and any resulting gain or loss is reflected in other income or expense in the statements of operations in the period realized.

Long-lived Assets

The Company’s long-lived assets are comprised principally of its property and equipment, finite lived intangible assets, and goodwill.

If the Company identifies a change in the circumstances related to its long-lived assets, such as property and equipment and intangible assets (other than goodwill), that indicates the carrying value of any such asset may not be recoverable, the Company will perform an impairment analysis. A long-lived asset (other than goodwill) is deemed to be impaired when the undiscounted cash flows expected to be generated by the asset (or asset group) are less than the asset’s carrying amount. Any required impairment loss would be measured as the amount by which the asset’s carrying value exceeds its fair value, and would be recorded as a reduction in the carrying value of the related asset and a charge to operating expense.

Goodwill is reviewed for impairment annually (during the fourth quarter) or more frequently if indicators of impairment exist. As the Company operates in a single operating segment and reporting unit, the Company first assesses qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform a quantitative assessment. If, after assessing qualitative factors, the Company determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing a quantitative assessment is unnecessary. If deemed necessary, a quantitative assessment compares the fair value of the reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, goodwill is not considered impaired; otherwise, an impairment loss is recorded. There was no indication of impairment of goodwill for any periods presented.

i Clinical Studies

From time to time, the Company engages in efforts to scientifically measure and document the application and efficacy of its various testing products. These arrangements typically require the Company to pay a fee to a third-party scientific investigator (usually a physician or research institution) for each subject enrolled in a clinical study, and the Company accrues expenses associated with these efforts as subjects are enrolled in each study. Expenses associated with clinical study activities are recorded in research and development expenses in the accompanying statement of operations.

Redeemable Convertible Preferred Stock

Prior to the completion of the IPO, the Company had multiple classes of redeemable convertible preferred stock, all of which were classified as temporary equity in the accompanying balance sheet as the redemption of the shares were outside of the Company's control. Redeemable convertible preferred stock which was redeemable on or after a certain date at the option of the holder was accreted to its redemption value from the date of issuance to the earliest redemption date.

In connection with the completion of the IPO in September 2019, all outstanding shares of redeemable convertible preferred stock were automatically converted into an aggregate of i i 7,816,643 / shares of common stock, excluding warrant conversions.

Redeemable Convertible Preferred Stock Warrants

Prior to the completion of the IPO, the Company accounted for its redeemable convertible preferred stock warrants as liabilities based upon the characteristics and provisions of each instrument. The redeemable convertible preferred stock warrants were recorded at their fair value on the date of issuance and were revalued on each subsequent balance sheet date, with fair value changes recognized as increases or reductions in the statements of operations. Upon the completion of the IPO, all remaining outstanding warrants to purchase shares of redeemable convertible preferred stock were automatically converted into warrants to purchase shares of common stock. As such, the warrants no longer require liability accounting and the then fair value of the warrant liability was reclassified into stockholders’ equity.

104

The Company performed the final remeasurement of the warrant liabilities as of the IPO closing date. See Note 7 for the amounts associated with the fair value measurements and Note 8 for further discussion on the remaining warrants.

Revenue Recognition

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

Payors are billed at the Company's list price. Net revenues recognized consist of amounts billed net of allowances for differences between amounts billed and the estimated consideration the Company expects to receive from such payors. The process for estimating revenues and the ultimate collection of accounts receivable involves significant judgment and estimation. The Company follows a standard process, which considers historical denial and collection experience, insurance reimbursement policies and other factors, to estimate allowances and implicit price concessions, recording adjustments in the current period as changes in estimates occur. Further adjustments to the allowances, based on actual receipts, is recorded upon settlement. The transaction price is estimated using an expected value method on a portfolio basis. The Company's portfolios are grouped per payor (i.e. each individual third-party insurance, Medicare, client payors, patient self-pay, etc.) and per test basis.

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

Janssen Promotion Agreement

In December 2018, the Company entered into a co-promotion agreement (the Janssen Agreement) with Janssen Biotech, Inc. (Janssen) to co-promote SIMPONI® in the United States. The Company is responsible for the costs associated with its salesforce over the course of such co-promotion. Janssen is responsible for all other aspects of the commercialization of SIMPONI® under the Janssen Agreement. In exchange for the Company's sales and co-promotional services, the Company is entitled to a quarterly tiered promotion fee based on the incremental increase in total prescribed units of SIMPONI® for that quarter over a predetermined baseline. For the years ended December 31, 2020 and 2019, the tiered promotion fee ranged from $ i 750 to $ i 1,250 per prescription over a predetermined baseline. Due in part to COVID-19, in June 2020, the Janssen Agreement was amended (June Amended Janssen Agreement). In accordance with the June Amended Janssen Agreement, the predetermined average baseline for prescribed units for each remaining quarter in 2020 was adjusted and is subject to further adjustment, and for each of the third and fourth quarters of 2020, the Company received a minimum promotion fee of $ i i 0.3 / million and the fee was capped at i i 5 / % above the adjusted predetermined baseline. In December 2020, the Janssen Agreement amended. The Janssen Agreement, as amended in June 2020 and December 2020 is collectively referred to as the Amended Janssen Agreement. In accordance with the Amended Janssen Agreement, the predetermined average baseline for prescribed units for the quarters ending December 31, 2020, March 31, 2021 and June 30, 2021, was adjusted to approximately i 28,750 prescribed units per quarter, subject to adjustment under certain circumstances. For the first and second quarters of 2021, the Company will be entitled to an amended tiered promotion fee ranging from $ i i 500 / to $ i i 1,000 / per prescription based on the incremental increase in total prescribed units. Pursuant to the Amended Janssen Agreement, for the first and second quarters of 2021, the Company will receive a minimum promotion fee of $ i i 0.3 / million and the fee will be capped at i i 10 / % above the adjusted predetermined baseline. The Company continued to receive a minimum promotion fee of $ i 0.3 million and the fee was capped at i 5% above the adjusted predetermined baseline for the quarter ended December 31, 2020. The quarterly tiered promotion fee for the remaining term of the Janssen Promotion Agreement beginning with the quarter ended September 30, 2021 will revert to the terms set forth in the Janssen Agreement prior to amendment, with no minimum promotion fee and no cap on predetermined baseline units. In addition, during the term of the Janssen Agreement, the Company is restricted from promoting any other biologic or Janus kinase inhibitor, or JAK inhibitor, used for treatment of indications covered by the agreement without first obtaining Janssen's written consent.

105

The Janssen Agreement expires on December 31, 2021, unless extended by the Company for an additional 12 months upon 180 days written notice prior to the end of the current term. If the Company elects to extend the term, the predetermined baseline for 2022 will be subject to future agreement by the Company and Janssen. Janssen may terminate the Amended Janssen Agreement at any time for any reason upon 30 days' notice to the Company, and the Company may terminate the Amended Janssen Agreement for any reason at the end of any calendar quarter upon 30 days' notice to Janssen. Either party may terminate the Amended Janssen Agreement in the event of the other party's default of any of its material obligations under the agreement if such default remains uncured for a specified period of time following receipt of written notice of such default.

The Company's obligations relating to sales and co-promotion services for SIMPONI® is a series of single performance obligations since Janssen simultaneously receives and consumes benefits provided by the Company's sales and co-promotional services. The method for measuring progress towards satisfying the performance obligations is based on prescribed units in excess of the contractual baseline at the contractual rate earned per unit since the agreement is cancelable. The Company recognized co-promotion revenue of approximately $ i 5.1 million and $ i 1.5 million during the years ended December 31, 2020 and 2019, respectively. The related expenses for marketing SIMPONI® are included in selling, general and administrative expenses and are expensed as incurred.

Research and Development

Costs associated with research and development activities are expensed as incurred and include, but are not limited to, personnel-related expenses, including stock-based compensation expense, materials, laboratory supplies, consulting costs, costs associated with setting up and conducting clinical studies and allocated overhead including rent and utilities.

Advertising and Marketing Costs

Costs associated with advertising and marketing activities are expensed as incurred. Total advertising and marketing costs were approximately $ i 1.3 million and $ i 1.6 million for the years ended December 31, 2020 and 2019, respectively, and are included in selling, general and administrative expenses in the accompanying statements of operations.

Shipping and Handling Costs

Costs incurred for shipping and handling are included in costs of revenue in the accompanying statements of operations and totaled approximately $ i i 1.4 / million for each of the years ended December 31, 2020 and 2019.

Stock-Based Compensation

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

The BSM option pricing model incorporates various estimates, including the fair value of the Company's common stock, expected volatility, expected term and risk-free interest rates. The weighted-average expected term of options was calculated using the simplified method. This decision was based on the lack of relevant historical data due to the Company's limited historical experience. In addition, due to the Company's limited historical data, the estimated volatility incorporates the historical volatility over the expected term of the award of comparable companies whose share prices are publicly available. The risk-free interest rate for periods within the contractual term of the option is based on the U.S. Treasury yield in effect at the time of grant. The dividend yield was i zero, as the Company has never declared or paid dividends and has no plans to do so in the foreseeable future.

Upon the effective date of the IPO, the Company began using the closing price of its common stock as the fair value of its common stock on the corresponding date. Prior to the completion of the IPO in September 2019, due to the absence of a public market for the Company's common stock, it was necessary to estimate the fair value of the common stock underlying the Company's stock-based awards when performing fair value calculations using the BSM option pricing model. The fair value of the common stock underlying the Company's stock-based awards was assessed on each grant date by the Company's board of directors (Board of Directors).

106

Comprehensive Loss

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

Income Taxes

The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined on the basis of the differences between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.

The Company recognizes net deferred tax assets to the extent that the Company believes these assets are more likely than not to be realized. In making such a determination, management considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. If management determines that the Company would be able to realize its deferred tax assets in the future in excess of their net recorded amount, management would adjust the deferred tax asset valuation allowance, which would reduce the provision for income taxes.

The Company records uncertain tax positions on the basis of a two-step process whereby (i) management determines whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (ii) for those tax positions that meet the more-likely-than-not recognition threshold, management recognizes the largest amount of tax benefit that is more than 50% likely to be realized upon ultimate settlement with the related tax authority. The Company recognizes interest and penalties related to unrecognized tax benefits within income tax expense. Any accrued interest and penalties are included within the related tax liability.

Net Loss Per Share

Basic net loss per share attributable to common stockholders is calculated by dividing the net loss attributable to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted net loss per share attributable to common stockholders is computed by dividing the net loss attributable to common stockholders by the weighted-average number of common stock equivalents outstanding for the period determined using the treasury-stock and if-converted methods. Potentially dilutive common stock equivalents are comprised of redeemable convertible preferred stock, warrants for the purchase of redeemable convertible preferred and common stock, options outstanding under the Company's stock option plans and shares of the Company's common stock pursuant to Employee Stock Purchase Plan. For the years ended December 31, 2020 and 2019, there is no difference in the number of shares used to calculate basic and diluted shares outstanding as the inclusion of the potentially dilutive securities would be antidilutive.

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

Years Ended December 31,

2020

2019

Warrants to purchase common stock

i 426,827

i 461,273

Common stock options

i 1,975,761

i 1,375,542

Employee stock purchase plan

i 11,640

i —

Total

i 2,414,228

i 1,836,815

Government Assistance Grant Income

Government assistance grants which are unconditional when received and intended to compensate for expenses incurred or replace lost revenue are recognized when those expenses are incurred or during the period that lost revenue is experienced, and are included in other income, net in the accompanying statements of operations.

107

Segment Reporting

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

/ i

Recent Accounting Pronouncements Not Yet Adopted

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

In February 2016, the FASB issued Accounting Standards Update (ASU) 2016-02, Leases (Topic 842). The new topic supersedes Topic 840, Leases, and increases transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and requires disclosures of key information about leasing arrangements. In July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842, which provides narrow amendments to clarify how to apply certain aspects of the new lease standard, and ASU 2018-11, Leases: Targeted Improvements, which was issued to provide relief to companies from restating comparative periods. Pursuant to this ASU, in the period of adoption the Company will not restate comparative periods presented in its financial statements. The effective date of this guidance for public companies is for reporting periods beginning after December 15, 2018. In June 2020, the FASB issued ASU 2020-05, which delays the adoption of ASU 2016-02 for non-public entities to fiscal years beginning after December 15, 2021, and interim periods beginning after December 15, 2022. As an emerging growth company as defined in the JOBS Act, the Company has elected to delay adoption of this ASU until January 1, 2022. Topic 842 mandates a modified retrospective transition method. The Company intends to adopt the new lease standard using a cumulative effect to accumulated deficit and will elect the package of practical expedients, which among other things will allow the Company to carry forward its historical lease classification. The Company is currently evaluating the impact of Topic 842 on its financial statements.

In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes. The new guidance removes certain exceptions to the general principles of ASC 740 in order to simplify the complexities of its application. These changes include eliminations to the exceptions for intraperiod tax allocation, recognizing deferred tax liabilities related to outside basis differences, and year-to-date losses in interim periods, among others. The effective date of this guidance for public companies is for fiscal years, and interim period within those fiscal years, beginning after December 15, 2020. The Company does not anticipate the adoption will have a material impact on its financial statements.

Recently Adopted Accounting Standards

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement: Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement, which adds and modifies certain disclosure requirements for fair value measurements. Under the new guidance, entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, or valuation processes for Level 3 fair value measurements. However, public companies will be required to disclose the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and related changes in unrealized gains and losses included in other comprehensive income. The narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. This update is effective for annual periods beginning after December 15, 2019, and interim periods within those periods, and early adoption is permitted. The Company adopted this guidance on January 1, 2020, and the adoption did not have a material impact on its financial statements.

Note 3. i Other Financial Information

Prepaid Expenses and Other Current Assets

108

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

2020

2019

Diagnostic testing supplies

i 1,203

i 1,427

Prepaid product royalties

i 68

i 123

Prepaid maintenance and insurance contracts

i 2,229

i 1,768

Other prepaid and other current assets

i 659

i 133

Prepaid and other current assets

i 4,159

i 3,451

Property and Equipment

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

2020

2019

Furniture and fixtures

i 64

i 25

Laboratory equipment

i 2,679

i 2,228

Computer equipment and software

i 927

i 851

Leasehold improvements

i 1,072

i 424

Construction in progress

i 301

i 247

Total property and equipment

i 5,043

i 3,775

Less: accumulated depreciation and amortization

( i 2,941)

( i 2,395)

Property and equipment, net

i 2,102

i 1,380

Depreciation and amortization expense for the years ended December 31, 2020 and 2019, was approximately $ i 0.5 million and $ i 0.6 million, respectively. At December 31, 2020 and December 31, 2019, the gross book value of assets under capital lease was $ i 1.2 million and $ i 0.8 million, respectively, and is classified in "Laboratory equipment" in the table above.

Accrued and Other Current Liabilities

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

2020

2019

Accrued payroll and related expenses

i 3,589

i 2,362

Accrued interest

i 147

i 145

Accrued purchases of goods and services

i 311

i 319

Accrued royalties

i 221

i 727

Accrued clinical study activity

i 228

i 40

Capital lease obligations, current portion

i 308

i 238

Other accrued liabilities

i 953

i 588

Accrued and other current liabilities

i 5,757

i 4,419

Note 4. i Borrowings

2017 Term Loan

109

In September 2017, the Company executed a term loan agreement (the 2017 Term Loan) with Innovatus Life Sciences Lending Fund I, LP (Innovatus) and borrowed $ i 20.0 million, $ i 17.8 million of which was immediately used to repay the Company's existing loan with Capital Royalty Partners II L.P. and its affiliates. On December 7, 2018, the Company borrowed an additional $ i 5.0 million under the 2017 Term Loan. At December 31, 2020, no additional amounts remain available to borrow under the 2017 Term Loan.

In November 2019, the Company executed the First Amendment to the Loan and Security Agreement (the 2017 Loan Amendment). The interest rate on all borrowings under the Loan Amendment is i 8.5%, of which i 2.0% is paid in-kind in the form of additional term loans (PIK Loans) until December of 2022, after which interest accrues at an annual rate of i 8.5%. The Company has estimated the effective interest rate of this loan to be approximately i 10%. Accrued interest is due and payable monthly, unless the Company elects to pay paid-in-kind interest. The outstanding principal and accrued interest on the Loan Amendment will be repaid in i twenty-four equal monthly installments commencing in December 2022. Upon repayment of the final installment under the Loan Amendment, the Company is required to pay an additional fee of $ i 1.0 million. This obligation is being accreted into interest expense over the term of Loan Amendment using the effective interest method. For each of the years ended December 31, 2020 and 2019, the Company issued PIK Loans totaling $ i i 0.5 / million.

The Loan Amendment requires a prepayment premium of i 3% of the aggregate outstanding principal. The prepayment premium decreases by i 1% during each subsequent twelve-month period after November 19, 2020.

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

The affirmative covenants require that the Company achieve a specified level of revenue, as measured quarterly on a rolling i twelve-month basis, and commencing with the quarter ending December 31, 2019. The consequences of failing to achieve the performance covenant may be cured if, within i sixty days of failing to achieve the performance covenant, the Company issues additional equity securities or subordinated debt with net proceeds sufficient to fund any cash flow deficiency generated from operations, as defined. The Company's revenues for the i twelve-month ended September 30, 2020 were lower than the specified targets, as a result, the Company and Innovatus agreed on a new management plan and target to bring the Company back into compliance with the Loan Amendment. The Loan Amendment requires that the Company maintain certain levels of minimum liquidity. The Company is required to maintain an unrestricted cash balance of $ i 2.0 million.

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

At December 31, 2020, the Company was in compliance with all covenants of the Loan Amendment.

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

Future Minimum Payments on the Outstanding Borrowings

i As of December 31, 2020, future minimum aggregate payments, including interest, for outstanding borrowings under the Loan Amendment are as follows (in thousands):

110


	Years Ending December 31,


2021	$	i 1,755
2022	i 2,996
2023	i 15,619
2024	i 14,280
Total	i 34,650
Less:
Unamortized debt discount and issuance costs	( i 296)
Interest	( i 7,695)
Total borrowings, net of discounts and debt issuance costs	$	i 26,659

Note 5. i Commitments and Contingencies

Leases

As of December 31, 2020, the Company leases office and laboratory space in Vista, California, under leases that expire in January 2026, with an option to extend a portion of the lease for an additional i 5-year period. In addition, the Company also leases additional office space in Vista, California, under a lease that expires in January 2026 with an option to extend the lease for an additional i 5-year period. The Company's lease payments under each of these leases are subject to escalation clauses.

i i

Minimum annual lease payments under non-cancelable lease arrangements at December 31, 2020 are as follows (in thousands):

Years Ending December 31,

Capital Leases

Operating Leases

2021

i 344

i 590

2022

i 318

i 613

2023

i 231

i 626

2024

i 58

i 640

2025

i —

i 654

Thereafter

i —

i 55

Total minimum lease payments

i 951

i 3,178

Less: amount representing interest

( i 67)

Present value of future minimum lease payments

i 884

Less: current portion

( i 308)

Long-term capital lease obligations

i 576

/ /

For the years ended December 31, 2020 and 2019, rent expense was $ i 0.6 million and $ i 0.5 million, respectively.

Acquisition-related liabilities

In connection with the acquisition of the medical diagnostics division of Cypress Bioscience, Inc. in 2010, the Company was required to pay certain amounts in the event that certain revenue milestones were achieved and upon the first commercial sale of a product associated with this acquisition. The acquisition also included amounts that may be due under several licensing agreements. All milestone payments other than one have been paid as of December 31, 2017. The remaining milestone obligation is for an additional $ i 2.0 million payment due to Prometheus Laboratories, Inc. (Prometheus) for which the fair value was determined to be i i zero / at December 31, 2020 and 2019.

In addition, the Company has ongoing royalty payment obligations on net sales of products which incorporate certain acquired technologies of i 2.5%. Future royalties payable under these arrangements are limited to the lesser

111

of an aggregate of $ i 1.2 million (including an upfront payment of $ i 100,000) or the total royalties earned through January 1, 2024.

Licensing Agreements

The Company has licensed technology for use in its diagnostic tests. In addition to the milestone payments required by these agreements as described above, individual license agreements generally provide for ongoing royalty payments on net sales of products which incorporate licensed technology, as defined, ranging from i 2.0% to i 3.0%. Royalties are accrued when earned and recorded in costs of revenue in the accompanying statement of operations.

Supply Agreement

In September 2020, the Company entered into an amended supply agreement with one supplier for reagents which includes minimum annual purchase commitments of $ i 4.1 million and $ i 6.0 million for years ended December 31, 2021 and 2022, respectively, with a i 15% annual increase thereafter through the year ended December 31, 2025.

Contingencies

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

Litigation

From time to time, the Company may be subject to various legal proceedings that arise in the ordinary course of business activities.

Note 6. i Fair Value Measurements

The following table sets forth the Company's financial instruments that were measured at fair value on a recurring basis within the fair value hierarchy (in thousands):

December 31, 2020

Total

Level 1

Level 2

Level 3

Assets:

Money market funds

i 34,507

i —

December 31, 2019

Total

Level 1

Level 2

Level 3

Assets:

Money market funds

i 70,760

i —

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

Note 7. i Redeemable Convertible Preferred Stock

Series G Financing

In January 2019, the Company entered into an agreement with new and certain existing preferred stockholders to issue shares of Series G redeemable convertible preferred stock in multiple separate closings at a per share price of $ i 0.078 in each closing. In conjunction with the issuance of the Series H redeemable convertible preferred stock,

112

each share of issued and outstanding Series G redeemable convertible preferred stock was converted into shares of Series H redeemable convertible preferred stock.

Series H Financing

In July 2019, the Company entered into an agreement with a new investor to issue shares of Series H redeemable convertible preferred stock at a per share price of $ i 0.04712. The Company accounted for the difference between the effective conversion price of $ i 0.04712 and the fair value of the underlying common stock at the commitment date as a beneficial conversion feature, which was immediately accreted as a deemed dividend. As a result, the Company recognized a beneficial conversion feature in the amount of $ i 6.7 million in the third quarter of 2019, that was recorded as additional paid-in capital (in the absence of retained earnings) in the accompanying statement of redeemable convertible preferred stock and stockholders’ equity. Additionally, the Company concluded that the conversion of shares of Series G into shares of Series H redeemable convertible preferred stock in connection with the issuance of Series H redeemable convertible preferred stock represented an extinguishment of the Series G shares. As a result, the Company recognized a deemed dividend for the extinguishment charge in the amount of $ i 6.9 million in the third quarter of 2019, that was recorded as additional paid-in capital (in the absence of retained earnings) in the accompanying statement of redeemable convertible preferred stock and stockholders' equity.

Initial Public Offering

Upon completion of the Company's IPO in September 2019, an aggregate of i 7,816,643 shares of common stock, excluding warrant conversion, were issued to the holders of the Company's Series A-3, Series B-3, Series C, Series D, Series E, Series F and Series H redeemable convertible preferred stockholders upon the automatic conversion of all shares of redeemable convertible preferred stock to common stock. As a result, i i no / shares of redeemable convertible preferred stock remained outstanding at December 31, 2020 and 2019.

Note 8. i Stockholders' Equity

Reverse Stock Split

On September 6, 2019, the Company effected a one-for-183.635 reverse stock split of its common stock (the Reverse Stock Split). The par value and the authorized shares of the common stock were not adjusted as a result of the Reverse Stock Split. All issued and outstanding common stock and the conversion ratio of the redeemable convertible preferred stock have been retroactively adjusted to reflect this Reverse Stock Split for all periods presented in the accompanying financial statements and notes to the financial statements.

Common Stock

On September 23, 2019, the Company closed its IPO of i 4,140,000 shares of its common stock at a price to the public of $ i 14.00 per share, including the exercise in full by the underwriters of their option to purchase i 540,000 additional shares of the Company's common stock. Including the exercise of the option to purchase additional shares, the aggregate net proceeds to the Company from the offering was approximately $ i 50.4 million, net of underwriting discounts, commissions and other offering expenses, for aggregate expenses of approximately $ i 7.5 million. In addition, an aggregate of i 7,816,643 shares of common stock, excluding warrant conversions, were issued to the holders of the Company's Series A-3, Series B-3, Series C, Series D, Series E, Series F and Series H redeemable convertible preferred stockholders upon the automatic conversion of all shares of redeemable convertible preferred stock to common stock.

Outstanding Warrants

i The following equity classified warrants to purchase common stock were outstanding as of December 31, 2020:

113

Exercise Price

Issuance date

Expiration date

Common stock warrants

i 252,798

i 1.84

January 19, 2016

January 19, 2026

Common stock warrants

i 69,176

i 1.84

March 31, 2016

March 31, 2026

Common stock warrants

i 131

i 1.84

April 1, 2016

April 1, 2026

Common stock warrants

i 83,778

i 14.32

September 7, 2017

September 7, 2024

Common stock warrants

i 20,944

i 14.32

December 7, 2018

December 7, 2025

i 426,827

During the year ended December 31, 2020, warrants to purchase common stock were exercised resulting in the issuance of i 32,120 shares of the Company's common stock and cash proceeds of an immaterial amount.

Note 9. i Stock Option Plan

In September 2019, the Company's Board of Directors adopted, and the Company's stockholders approved, the 2019 Incentive Award Plan (the 2019 Plan). A total of (i) i 2,011,832 shares of common stock plus (ii) shares subject to awards granted under the 2013 Plan on or before the effective date of the 2019 Plan became available for issuance under the 2019 Plan and was initially be reserved for issuance under the 2019 Plan. Under the 2019 Plan, the Company may grant stock options, stock appreciation rights, restricted stock, restricted stock units and other awards to individuals who are then employees, officers, non-employee directors or consultants of the Company or its subsidiaries. The options generally expire i ten years after the date of grant and are exercisable to the extent vested. Vesting is established by the Board of Directors and is generally i four years from the date of grant. The 2019 Plan contains an "evergreen provision" that allows annual increases in the number of shares available for issuance on the first day of each calendar year through January 1, 2029 in an amount equal to the lesser of: (i) i 4% of the outstanding capital stock on each December 31st, or (ii) such lesser amount determined by the Board of Directors. As of December 31, 2020, i 1,139,323 shares remained available for future awards. Under the evergreen provision, on January 1, 2021, an additional i 506,092 shares became available for issuance under the 2019 Plan.

Activity under the Company's stock option plans is set forth below:

Number of
Options

Weighted-
Average
Exercise Price

Weighted-
Average
Remaining
Contractual
Term (Years)

Aggregate
Intrinsic
Value

Outstanding, December 31, 2019

i 1,375,542

i 8.33

i 9.16

i 23,654

Granted

i 951,031

i 16.02

Exercised

( i 47,549)

i 0.27

Forfeited

( i 293,412)

i 10.46

Expired

( i 9,851)

i 29.02

Outstanding, December 31, 2020

i 1,975,761

i 11.81

i 8.71

i 6,750

Vested and expected to vest, December 31, 2020

i 1,975,761

i 11.81

i 8.71

i 6,750

Options exercisable, December 31, 2020

i 464,606

i 6.75

i 8.01

i 3,362

The weighted-average grant date fair value per share of employee options granted to employees during the years ended December 31, 2020 and 2019 was $ i 7.55 and $ i 7.79, respectively. The intrinsic value is calculated as the difference between the fair value of the Company's common stock and the exercise price of the stock options. The fair value of the Company's common stock is $ i 13.20 and $ i 25.40 per share at December 31, 2020 and 2019, respectively. The intrinsic value of options exercised for the years ended December 31, 2020 and 2019 was $ i i 1.0 / million and an immaterial amount, respectively.

Stock-Based Compensation Expense

The fair value of employee stock options was estimated using the following assumptions to determine the fair value of stock options granted:

114

Years Ended December 31,

2020

2019

Expected volatility

i 47%- i 53%

i 46%- i 59%

Risk-free interest rate

i 0.4%- i 1.7%

i 1.6%- i 2.6%

Dividend yield

i —

Expected term (in years)

i 5.50- i 6.08

i 5.75- i 6.08

Employee Stock Purchase Plan

In September 2019, the Board of Directors adopted the Employee Stock Purchase Plan (the ESPP). The ESPP became effective on the day the ESPP was adopted by the Company's Board of Directors. The ESPP permits participants to purchase common stock through payroll deductions of up to i 20% of their eligible compensation. A total of i 120,000 shares of common stock was initially reserved for issuance under the ESPP. In addition, the number of shares of common stock available for issuance under the ESPP will be annually increased on the first day of each fiscal year during the term of the ESPP, beginning with the 2020 calendar year through January 1, 2029 in an amount equal to the lesser of (i) i 1% of the outstanding capital stock on December 31st, or (ii) such lesser amount determined by the Board of Directors. Under the evergreen provision, on January 1, 2021, an additional i 126,523 shares became available for issuances under the ESPP. Stock-based compensation expense for the ESPP was an immaterial amount for the year ended December 31, 2020.

The following assumptions were used to calculate the stock-based compensation for each stock purchase right granted under the ESPP:

Years Ended December 31,

2020

Expected volatility

i 58%- i 83%

Risk-free interest rate

i 0.1%- i 1.1%

Dividend yield

i —

Expected term (in years)

i 0.5

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

Years Ended December 31,

2020

2019

Cost of revenue

i 33

i 9

Selling, general and administrative

i 2,419

i 445

Research and development

i 242

i 118

Total

i 2,694

i 572

As of December 31, 2020, total unrecognized compensation cost was $ i 8.5 million, which is expected to be recognized over a remaining weighted-average vesting period of i 2.8 years.

Common stock reserved for future issuance consists of the following at December 31, 2020:


Warrants to purchase common stock						i 426,827
Common stock option grants issued and outstanding						i 1,975,761
Common shares available for grant under the stock option plan						i 1,139,323
Common shares available for future issuance under ESPP						i 233,961
Total						i 3,775,872

115

Note 10. i Income Taxes

The provision for income taxes consists of the following (in thousands):

Years Ended December 31,

2020

2019

Current:

Federal

i —

State

i 27

i 5

Total current

i 27

i 5

Deferred:

Federal

( i 117)

i 10

State

i 11

i 10

Total deferred

( i 106)

i 20

(Benefit) provision for income tax

( i 79)

i 25

The effective tax rate of our provision for income taxes differs from the federal statutory rate as follows:


	Years Ended December 31,
	2020		2019
Federal statutory tax rate	( i 21.0)	%	( i 21.0)	%
State income taxes, net of federal tax benefits	( i 3.9)	%	( i 3.6)	%
Change in fair value of preferred stock liabilities	i —	%	( i 0.5)	%
Change in valuation allowance	i 22.6	%	( i 36.1)	%
Limitation of net operating losses	i —	%	i 59.8	%
Other	i 1.8	%	i 1.6	%
Effective tax rate	( i 0.5)	%	i 0.2	%

Significant components of the Company’s deferred tax assets at December 31, 2020 and 2019 are shown below. A valuation allowance has been established as realization of the Company’s deferred tax assets has not met the more likely-than-not threshold requirement. i If the Company’s judgment changes and it is determined that the Company will be able to realize these deferred tax assets, the tax benefits relating to any reversal of the valuation allowance on deferred tax assets will be accounted for as a reduction to income tax expense (in thousands).

116

2020

2019

Deferred tax assets:

Net operating loss carryforwards

i 17,733

i 15,287

Research and development tax credits

i 629

i 419

Accruals, reserves and other

i 1,448

i 590

Interest expense

i 1,306

i 744

Basis differences in fixed and intangible assets

i 117

i 225

Total gross deferred tax assets

i 21,233

i 17,265

Less: Valuation allowance

( i 20,596)

( i 16,797)

Deferred tax assets, net

i 637

i 468

Deferred tax liabilities:

Financing and acquisition-related liabilities

( i 336)

Indefinite lived assets

( i 459)

( i 396)

Deferred tax liabilities, net

( i 795)

( i 732)

Net deferred tax liabilities

( i 158)

( i 264)

Changes in the valuation allowance for deferred tax assets during the years ended December 31, 2020 and 2019, which related primarily to increases in net operating loss carryforwards, accrued revenue and accruals and reserves were as follows (in thousands):

Incorporated by Reference

2020

2019

Valuation allowance at the beginning of the year

i 16,797

i 21,138

Decreases recorded as benefits to income tax provision

i —

( i 4,341)

Increases recorded to income tax provision

i 3,799

i —

Valuation allowance at the end of the year

i 20,596

i 16,797

At December 31, 2020 and 2019, the Company had federal net operating loss carryforwards of approximately $ i 70.6 million and $ i 60.7 million, respectively. At December 31, 2020 and 2019, the Company had state net operating loss carryforwards of $ i 48.9 million and $ i 43.5 million, respectively. Approximately $ i 43.5 million of the federal tax loss carryforwards will begin to expire in 2022, unless previously utilized. The federal net operating loss carryforwards generated in after December 31, 2017 of $ i 27.1 million will carryforward indefinitely. The Company’s state tax loss carryforwards will expire in 2032, unless previously utilized.

At December 31, 2019, the Company's deferred tax assets are primarily comprised of federal and state tax net operating loss carryforwards. The Company completed a formal study through the year ended December 31, 2019 and determined ownership changes within the meaning of Internal Revenue Code (IRC), Section 382 had occurred in 2003, 2008, 2012, 2017 and 2019. Based on the analysis, $ i 61.8 million of the Company's tax attribute carryforwards through December 31, 2017 cannot be utilized under IRC Section 382. The Company's ability to utilize net operating loss carryforwards generated after December 31, 2017 will not expire under the Tax Cuts and Jobs Act of 2017. The Company adjusted tax attribute carry forwards and deferred tax assets accordingly. As the deferred tax assets associated with the tax attribute carry forwards were fully offset by a valuation allowance, a corresponding reduction in the Company's valuation allowance was also recorded, resulting in no income tax impact.

The Company is subject to taxation in the U.S. and in various state jurisdictions. The Company’s tax years for 2002 and forward are subject to examination by the U.S. and state tax authorities due to the carryforward of unutilized net operating losses and research and development credits.

117

The Company recognizes interest and/or penalties related to income tax matters in its provision for income taxes. The Company does not have any accruals for, and did not recognize any, interest or penalties in these financial statements in any period presented.

Uncertain Tax Positions

At December 31, 2020 and 2019, the Company had i i no / unrecognized tax benefits.

The Company does not believe that the balance of unrecognized tax benefits will materially change within the next twelve months.

Note 11. i Related Parties

The closings of the Series G financing and the Series H financing described in Note 7 were issued to existing holders of the Company's redeemable convertible preferred stock, including certain members of our Board of Directors.

Note 12. 401(k) Plan

The Company sponsors an employee savings plan that qualifies as a deferred salary arrangement under Section 401(k) of the Code. Participating employees may defer up to the Internal Revenue Service annual contribution limit. Additionally, the Company may elect to make contributions into the savings plan at its sole discretion. For the years ended December 31, 2020 and 2019, the Company made contributions to the Plan at i i 3 / % of qualified employee compensation, which totaled approximately $ i 0.5 million and $ i 0.4 million, respectively.

Note 13. i COVID-19

During 2020, due to the worldwide COVID-19 pandemic, the Company experienced a reduction in patient test volumes, delays in patient enrollment in ongoing and planned clinical studies, and delays in the procurement of its testing supplies. In response to the pandemic, the Company has curtailed non-essential employee travel, equipped employees with the ability to work remotely with the exception of clinical laboratory employees, and reduced marketing spend and employee headcount. The reduction in headcount resulted in a restructuring charge for termination benefits of $ i 0.3 million which has been paid as of December 31, 2020. The full extent to which the COVID-19 pandemic will directly or indirectly continue to impact the Company's business, results of operations and financial condition, will depend on future developments that are highly uncertain, including as a result of new information that may emerge concerning COVID-19 and the actions taken to contain it or treat COVID-19, as well as the economic impact on local, regional and international markets.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was enacted in response to the COVID-19 pandemic. The CARES Act, among other things, permits NOL carryovers and carrybacks to offset 100% of taxable income for taxable years beginning before 2021. Under the Tax Cuts and Jobs Act (TCJA), NOLs generated post TCJA were allowed to be carried forward indefinitely but were only allowed to offset 80% of taxable income. As a result of the CARES Act and the change to permit NOLs generated in taxable years 2018, 2019 and 2020 to offset 100% of taxable income, the Company released valuation allowance against its deferred tax assets in the amount of $ i 0.1 million for the year ended December 31, 2020.

On December 27, 2020, the Consolidated Appropriations Act, 2021 was signed into law. It provides additional COVID-19 focused relief and extends certain provisions of the CARES Act. At this time, the Company does not believe that the Consolidated Appropriations Act, 2021 has a material impact on its financial statements.

In April 2020, the Company received $ i 0.7 million of funding under the CARES Act Provider Relief Fund, subject to the Company's agreement to comply with the Department of Health & Human Services' (HHS) standard terms and conditions. The CARES Act Provider Relief Fund is a federal fund allocated for general distributions to Medicare facilities and providers impacted by the COVID-19 pandemic and is intended to support COVID-related expenses or lost revenue attributable to COVID-19. The funding received is considered a government grant which is recognized when there is reasonable assurance that the grant will be received and that conditions attached to the grant have

118

been met. For the year ended December 31, 2020, the Company recognized $ i 0.7 million due to lost revenue attributable to COVID-19, which is reflected in other income, net, on its statements of operations.

On April 16, 2020, the Company entered into a promissory note with BOKF, NA dba Bank of Oklahoma, the lender, evidencing an unsecured loan pursuant to the U.S. Small Business Administration (SBA) Paycheck Protection Program (PPP) of the CARES Act of approximately $ i 2.9 million (the PPP Loan). The Company applied for and received the PPP Loan pursuant to the then published PPP qualification and certification requirements. On April 23, 2020, the SBA, in consultation with the Department of Treasury, issued new guidance that created uncertainty regarding the qualification requirements for the PPP Loan (the New Guidance). In light of the New Guidance, on May 11, 2020, the Company paid off in full the principal and interest on the PPP Loan, resulting in the termination of the promissory note.

119

Index to Exhibits

Exhibit Number

Exhibit Description

Form

File No.

Exhibit

Exhibit Filing Date

Filed/Furnished Herewith

3.1

Form of Amended and Restated Certificate of Incorporation.

8-K

Form of Amended Restated Bylaws.

3.1

9/23/2019

3.2

8-K

Specimen stock certificate evidencing the shares of common stock.

3.2

9/23/2019

4.1

S-1/A

Amended and Restated Investors’ Rights Agreement, dated July 12, 2019, by and among the Registrant and certain of its stockholders.

4.1

9/9/2019

4.2

S-1/A

Amendment to Convertible Promissory Notes and Warrants, dated January 19, 2016.

4.2

9/9/2019

4.3

S-1/A

Form of Warrant to Purchase Stock issued to Innovatus Life Sciences Lending Fund I, LP in connection with the Registrant's 2018 loan agreement.

4.7

9/9/2019

4.4

S-1/A

Exagen Corporation 2002 Stock Option Plan, as amended, and form of option agreement thereunder.

4.9

9/9/2019

10.1#

S-1/A

Exagen Diagnostics, Inc. 2013 Stock Option Plan, as amended, and form of option agreement thereunder.

10.1

9/9/2019

10.2#

S-1/A

Exagen Inc. 2019 Incentive Award Plan.

10.2

9/9/2019

10.3#

S-1/A

Form of Option Agreement under Exagen Inc. 2019 Incentive Award Plan.

10.3

9/9/2019

10.4#

S-1/A

Form of Restricted Stock Unit Agreement under Exagen Inc. 2019 Incentive Award Plan.

10.4

9/9/2019

10.5#

10.6#

Exagen Inc. 2019 Employee Stock Purchase Plan.

S-1/A

License Agreement, dated September 13, 2007, by and between Prometheus Laboratories Inc. and the Registrant (as successor in interest to Proprius, Inc.).

10.5

9/9/2019

10.7†

S-1/A

First Amendment to License Agreement, dated October 23, 2013, by and between Prometheus Laboratories Inc. and the Registrant (as successor in interest to Cypress Bioscience, Inc.).

10.6

9/9/2019

10.8†

S-1/A

Asset Purchase Agreement, dated October 8, 2010, by and between Cypress Bioscience, Inc., Proprius, Inc. and the Registrant.

10.7

9/9/2019

10.9†

S-1/A

Amendment No. One to Asset Purchase Agreement, dated March 10, 2011, by and between Cypress Bioscience, Inc., Proprius, Inc. and the Registrant.

10.11

9/9/2019

10.10†

S-1/A

Amendment No. Two to Asset Purchase Agreement, dated August 21, 2012, by and between Royalty Pharma Collection Trust, Proprius, Inc. and the Registrant.

10.12

9/9/2019

10.11

S-1/A

Amendment No. Three to Asset Purchase Agreement, dated February 6, 2013, by and between Royalty Pharma Collection Trust, Proprius, Inc. and the Registrant.

10.13

9/9/2019

10.12†

S-1/A

Amendment No. Four to Asset Purchase Agreement, dated October 8, 2013, by and between Royalty Pharma Collection Trust, Proprius, Inc. and the Registrant.

10.14

9/9/2019

10.13

S-1/A

Amendment No. Five to Asset Purchase Agreement, dated January 26, 2016, by and between Royalty Pharma Collection Trust, Proprius, Inc. and the Registrant.

10.15

9/9/2019

120

10.14

S-1/A

Amendment No. Six to Asset Purchase Agreement, dated February 16, 2017, by and between Royalty Pharma Collection Trust, Proprius, Inc. and the Registrant.

10.16

9/9/2019

10.15†

S-1/A

Amended and Restated Exclusive License Agreement, dated August 2, 2011, by and between the University of Pittsburgh—Of the Commonwealth System of Higher Education and the Registrant.

10.17

9/9/2019

10.16†

S-1/A

First Amendment to Amended and Restated Exclusive License Agreement, dated May 17, 2012, by and between the University of Pittsburgh—Of the Commonwealth System of Higher Education and the Registrant.

10.18

9/9/2019

10.17†

S-1/A

Second Amendment to Amended and Restated Exclusive License Agreement, dated September 30, 2013, by and between the University of Pittsburgh—Of the Commonwealth System of Higher Education and the Registrant.

10.19

9/9/2019

10.18†

S-1/A

Third Amendment to Amended and Restated Exclusive License Agreement, dated June 24, 2016, by and between the University of Pittsburgh—Of the Commonwealth System of Higher Education and the Registrant.

10.20

9/9/2019

10.19

S-1/A

Exclusive License Agreement, dated September 30, 2013, by and between the University of Pittsburgh—Of the Commonwealth System of Higher Education and the Registrant.

10.21

9/9/2019

10.20†

S-1/A

Exclusive License Agreement, dated September 5, 2011, by and between Thierry Dervieux, Ph.D. and the Registrant.

10.22

9/9/2019

10.21†

S-1/A

Co-Promotion Agreement, dated December 10, 2018, by and between Janssen Biotech, Inc. and the Registrant.

10.23

9/9/2019

10.22†

S-1/A

Amendment #1 to Co-Promotion Agreement, dated January 1, 2019, by and between Janssen Biotech, Inc. and the Registrant.

10.24

9/9/2019

10.23†

10-Q

Amendment #2 to Co-Promotion Agreement, dated June 18, 2020, by and between Janssen Biotech, Inc. and the Registrant.

10.1

7/28/2020

10.24†

10-Q

Amendment #3 to Co-Promotion Agreement, dated December 23, 2020, by and between Janssen Biotech, Inc. and the Registrant.

10.2

7/28/2020

10.25†

10.26

Standard Industrial/Commercial Multi-Tenant Lease, dated January 13, 2012, by and between RGS Properties and the Registrant.

10-Q

First Amendment to Standard Industrial/Commercial Multi-Tenant Lease, dated December 1, 2013, by and between RGS Properties and the Registrant.

10.1

7/28/2020

10.27

10-Q

Second Amendment to Standard Industrial/Commercial Multi-Tenant Lease, dated April 29, 2016, by and between RGS Properties and the Registrant.

10.2

7/28/2020

10.28

10-K

Third Amendment to Standard Industrial/Commercial Multi-Tenant Lease, dated June 16, 2017, by and between RGS Properties and the Registrant.

10.27

3/25/2020

10.29

10-K

Certifications Pursuant to U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Public Company Accounting Reform and Investor Protection Act of 2002.

10.28

3/25/2020

121


10.30	Fourth Amendment to Standard Industrial/Commercial Multi-Tenant Lease, dated March 16, 2020, by and between RGS Properties and the Registrant.	10-K	001-39049	10.29	3/25/2020
10.31	Standard Industrial/Commercial Single-Tenant Lease, dated September 4, 2014, by and between Geiger Court, LLC and the Registrant.	S-1/A	333-233446	10.31	9/9/2019
10.32	First Amendment to Standard Industrial/Commercial Single-Tenant Lease, dated August 2, 2017, by and between Geiger Court, LLC and the Registrant.	10-K	001-39049	10.31	3/25/2020
10.33	Extension of Lease to Standard Industrial/Commercial Single-Tenant Lease, dated March 12, 2020, by and between Liberty Vista and the Registrant.	10-K	001-39049	10.32	3/25/2020
10.34	First Amendment to Standard Industrial/Commercial Single-Tenant Lease, dated January 6, 2021, by and between Liberty Vista and the Registrant.					X
10.35	Standard Industrial/Commercial Multi-Tenant Lease, dated March 17, 2020 by and between RGS Properties and the Registrant.	10-K	001-39049	10.33	3/25/2020
10.36	Master Lease Agreement, dated February 1, 2018, by and between Celtic Commercial Finance, a division of MB Equipment Finance, LLC and the Registrant.	S-1/A	333-233446	10.32	9/9/2019
10.37	Loan and Security Agreement, dated September 7, 2017, by and between Innovatus Life Sciences Lending Fund I, LP and the Registrant.	S-1/A	333-233446	10.33	9/9/2019
10.38	First Amendment to Loan and Security Agreement with Innovatus Life Sciences Lending I, LP dated November 19, 2019.	10-K	001-39049	10.36	3/25/2020
10.39	Acknowledgement Letter to Loan and Security Agreement, by and between Innovatus Life Sciences Lending Fund I, LP and the Registrant.	10-Q	001-39049	10.1	11/10/2020
10.40#	Offer Letter, dated October 12, 2010, by and between Thierry Dervieux, Ph.D. and the Registrant, as amended on September 9, 2011 and September 6, 2019.	S-1/A	333-233446	10.34	9/9/2019
10.41	Form of Indemnification Agreement for Directors and Officers.	S-1/A	333-233446	10.35	9/9/2019
10.42#	Offer Letter, dated October 7, 2011, by and between Fortunato Ron Rocca and the Registrant, as amended on September 4, 2019.	S-1/A	333-233446	10.36	9/9/2019
10.43#	Offer Letter, dated May 16, 2017, by and between Kamal Adawi and the Registrant, as amended on September 4, 2019.	S-1/A	333-233446	10.37	9/9/2019
10.44#	Offer Letter dated February 21, 2020, by and between Debra Zack, MD Ph.D. and the Registrant.	10-K	001-39049	10.41	3/25/2020
10.45#	Non-Employee Director Compensation Program.	S-1/A	333-233446	10.38	9/9/2019
10.46#	Executive Change in Control Severance Plan.					X
23.1	Consent of Independent Registered Public Accounting Firm					X
24.1	Power of Attorney (included on signature page).					X
31.1	Certificate of Principal Executive Officer, pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.					X
31.2	Certificate of Principal Financial Officer, pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.					X

122

32.1*

101.SCH

XBRL Taxonomy Extension Schema Document.

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document.

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB

XBRL Taxonomy Extension Labels Linkbase Document.

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document.

* This certification is deemed not filed for purpose of section 18 of the Exchange Act or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act or the Exchange Act.

# Indicates management contract or compensatory plan.

† Portions of this exhibit (indicated by asterisks) have been omitted for confidentiality purposes.

123

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.


		EXAGEN INC.


Date: March 16, 2021	by:	/s/ *Fortunato Ron Rocca*
		Fortunato Ron Rocca
		President and Chief Executive Officer
		(Principal Executive Officer)

Power of Attorney

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Fortunato Ron Rocca and Kamal Adawi as his or her true and lawful attorneys-in-fact, and each of them, with full power of substitution, for him or her in any and all capacities, to sign any amendments to this Annual Report on Form 10-K and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact, and either of them, or his or their substitute or substitutes may do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

124

Signature

Title

Date

/s/ Fortunato Ron Rocca

President, Chief Executive Officer and Director

Fortunato Ron Rocca

(Principal Executive Officer)

/s/ Kamal Adawi

Chief Financial Officer and Corporate Secretary

Kamal Adawi

(Principal Financial and Accounting Officer)

/s/ Brian Birk

Chairman of the Board of Directors

Brian Birk

/s/ Jeff Elliott

Director

Jeff Elliott

/s/ Wendy S. Johnson

Director

Wendy S. Johnson

/s/ Tina S. Nova, Ph.D.

Director

Tina S. Nova, Ph.D.

/s/ Ebetuel Pallares, Ph.D.

Director

Ebetuel Pallares, Ph.D.

/s/ Bruce C. Robertson, Ph.D.

Director

Bruce C. Robertson, Ph.D.

/s/ James L.L. Tullis

Director