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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 FORM 10-Q

(Mark One)


QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2019
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


Commission File Number: 001-39049

EXAGEN INC.
(Exact name of registrant as specified in its charter)

Delaware20-0434866
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
1261 Liberty Way,Suite C
VistaCalifornia92081
(Address of Principal Executive Offices)(Zip Code)

(760)560-1501
(Registrant's Telephone Number, Including Area Code)
 Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, par value $0.001 per shareXGNThe Nasdaq Global Market
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Securities Exchange Act of 1934.
Large accelerated filerAccelerated filer
Non-accelerated filerSmaller reporting company
Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Securities Act  
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  No
Total shares of common stock outstanding as of the close of business on November 8, 2019 was 12,560,990.



TABLE OF CONTENTS
 
 Page
Part I.Financial Information
Item 1.
Item 2.
Item 3.
Item 4.
Part II.Other Information
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.






Part I. Financial Information
Item 1. Condensed Financial Statements
Exagen Inc.
Condensed Balance Sheets
(in thousands, except share and per share data)

 September 30, 2019December 31, 2018
 (Unaudited)(As Revised)
Assets
Current assets:
Cash and cash equivalents$77,828  $13,164  
Accounts receivable, net6,238  5,952  
Prepaid expenses and other current assets1,686  2,196  
Total current assets85,752  21,312  
Property and equipment, net1,314  1,566  
Goodwill5,506  5,506  
Other assets172  503  
Total assets$92,744  $28,887  
Liabilities, Redeemable Convertible Preferred Stock and Stockholders' Equity (Deficit)
Current liabilities:
Accounts payable$1,213  $1,279  
Accrued liabilities6,449  3,923  
Proceeds received prior to issuance of Series G redeemable convertible preferred stock  3,750  
Total current liabilities7,662  8,952  
Borrowings-non-current portion, net of discounts and debt issuance costs25,677  24,617  
Redeemable convertible preferred stock warrant liabilities  1,503  
Deferred tax liabilities245  245  
Other non-current liabilities510  304  
Total liabilities34,094  35,621  
Commitments and contingencies (Note 6)
Redeemable convertible preferred stock, $0.001 par value; 750,300,000 shares authorized; none and 532,606,084 shares issued and outstanding at September 30, 2019 (unaudited) and December 31, 2018, respectively; liquidation preference of $0 and $163,316 at September 31, 2019 (unaudited) and December 31, 2018, respectively
  105,232  
Stockholders' equity (deficit):
Preferred stock, $0.001 par value; 10,000,000 shares authorized, no shares issued or outstanding at September 30, 2019; no shares authorized, issued or outstanding at December 31, 2018
    
Common stock, $0.001 par value; 200,000,000 and 1,470,000,000 shares authorized at September 30, 2019 (unaudited) and December 31, 2018, respectively; 12,559,492 and 63,005 shares issued and outstanding at September 30, 2019 (unaudited) and December 31, 2018, respectively
13    
        Additional paid-in capital
219,831  40,598  
Accumulated deficit(161,194) (152,564) 
Total stockholders' equity (deficit)58,650  (111,966) 
Total liabilities, redeemable convertible preferred stock and stockholders' equity (deficit)$92,744  $28,887  
The accompanying notes are an integral part of these financial statements

1


Exagen Inc.
Unaudited Condensed Statements of Operations
(in thousands, except share and per share data)

 Three Months Ended September 30,Nine Months Ended September 30,
 2019201820192018
 
Revenue$10,439  $8,223  $30,173  $22,799  
Operating expenses:
Costs of revenue (excluding amortization of purchased technology)4,783  3,852  14,217  11,376  
Selling, general and administrative expenses7,306  4,932  20,787  14,419  
Research and development expenses507  525  1,610  1,592  
Amortization of intangible assets  47    141  
Total operating expenses12,596  9,356  36,614  27,528  
Loss from operations(2,157) (1,133) (6,441) (4,729) 
Interest expense(909) (704) (2,720) (2,098) 
Change in fair value of financial instruments(200) 55  267  55  
Other income, net125  26  264  77  
Net loss(3,141) (1,756) (8,630) (6,695) 
Accretion of redeemable convertible preferred stock(338) (2,768) (4,640) (6,462) 
Deemed dividend recorded in connection with financing transactions(13,601)   (13,601) (1,152) 
Net loss attributable to common stockholders (Note 2)$(17,080) $(4,524) $(26,871) $(14,309) 
Net loss per share, basic and diluted (Note 2)$(11.29) $(71.80) $(48.70) $(227.11) 
Weighted-average number of shares used to compute net loss per share, basic and diluted (Note 2)1,513,189  63,005  551,730  63,005  
The accompanying notes are an integral part of these financial statements

2


Exagen Inc.
Unaudited Condensed Statements of Redeemable Convertible Preferred Stock and Stockholders' Equity (Deficit)
(in thousands, except share and per share amounts)

 
 Redeemable
Convertible
Preferred Stock
Common StockAdditional
Paid-In
Capital
Accumulated
Deficit
Total
Stockholders'
Equity (Deficit)
 SharesAmountSharesAmount
Balances at December 31, 2018 (as revised)532,606,084  $105,232  63,005  $  $40,598  $(152,564) $(111,966) 
Accretion of redeemable convertible preferred stock
—  2,114  —  —  (2,114) —  (2,114) 
Exercise of stock options—  —  24    —  —    
Stock-based compensation—  —  —  —  12  —  12  
Issuance of Series G redeemable convertible preferred stock for aggregate proceeds of $0.078 per share, net of issuance costs of $96 (Note 8)
97,646,289  7,520  —  —  —  —  —  
Net loss—  —  —  —  —  (2,704) (2,704) 
Balances at March 31, 2019 (as revised)630,252,373  114,866  63,029    38,496  (155,268) (116,772) 
Accretion of redeemable convertible preferred stock
—  2,188  —  —  (2,188) —  (2,188) 
Exercise of stock options—  —  26    —  —    
Stock-based compensation—  —  —  —  11  —  11  
Issuance of Series G redeemable convertible preferred stock for aggregate proceeds of $0.078 per share, net of issuance costs of $28 (Note 8)
51,282,048  3,972  —  —  —  —  —  
Net loss—  —  —  —  —  (2,785) (2,785) 
Balances at June 30, 2019681,534,421  121,026  63,055    36,319  (158,053) (121,734) 
Accretion of redeemable convertible preferred stock—  338  —  —  (338) —  (338) 
Stock-based compensation—  —  —  —  62  —  62  
Issuance of Series H redeemable convertible preferred stock for aggregate proceeds of $0.047 per share, net of issuance costs of $318 (Note 8)
233,446,519  3,941  —  —  6,741  —  6,741  
Deemed dividend recognized on beneficial conversion features of Series H redeemable convertible preferred stock (Note 8)—  6,741  —  —  (6,741) —  (6,741) 
Deemed dividend from conversion of Series G to Series H redeemable convertible preferred stock (Note 8)97,592,739  6,860  —  —  (6,860) (6,860) 
Conversion of preferred stock to common stock in connection with initial public offering (Note 8)(1,012,573,679) (138,906) 7,816,643  8  138,898  —  138,906  
Issuance of common stock in initial public offering, net of underwriting discount, commissions and issuance costs (Note 9)—  —  4,140,000  4  50,514  —  50,518  
Net exercise of common and preferred stock warrants—  —  539,794  1  510  —  511  
Reclassification of redeemable convertible preferred stock warrant liabilities as equity—  —  —  —  726  —  726  
Net loss—  —  —  —  —  (3,141) (3,141) 
Balances at September 30, 2019  $  12,559,492  $13  $219,831  $(161,194) $58,650  
The accompanying notes are an integral part of these financial statements
3


Exagen Inc.
Unaudited Condensed Statements of Redeemable Convertible Preferred Stock and Stockholders' Deficit
(in thousands, except share and per share amounts)
 
 Redeemable
Convertible
Preferred Stock
Common StockAdditional
Paid-In
Capital
Accumulated
Deficit
Total
Stockholders'
Deficit
 SharesAmountSharesAmount
Balances at December 31, 2017497,691,757  $92,046  63,005  $  $50,954  $(147,638) $(96,684) 
Cumulative effect of changes in accounting principle related to revenue recognition—  —  —  —  —  3,086  3,086  
Accretion of redeemable convertible preferred stock—  1,382  —  —  (1,382) —  (1,382) 
Stock-based compensation—  —  —  —  46  —  46  
Issuance of Series F redeemable convertible preferred stock for aggregate proceeds of $0.078 per share, net of issuance costs of $7, in the third tranche closing of the Series F financing
34,914,327  3,868  —  —  (1,152) —  (1,152) 
Net loss—  —  —  —  —  (2,793) (2,793) 
Balances at March 31, 2018532,606,084  97,296  63,005    48,466  (147,345) (98,879) 
Accretion of redeemable convertible preferred stock—  2,312  —  —  (2,312) —  (2,312) 
Stock-based compensation—  —  —  —  44  —  44  
Net loss—  —  —  —  —  (2,146) (2,146) 
Balances at June 30, 2018532,606,084  99,608  63,005    46,198  (149,491) (103,293) 
Accretion of redeemable convertible preferred stock—  2,768  —  —  (2,768) —  (2,768) 
Stock-based compensation—  —  —  —  10  —  10  
Net loss—  —  —  —  —  (1,756) (1,756) 
Balances at September 30, 2018532,606,084  $102,376  63,005  $  $43,440  $(151,247) $(107,807) 
The accompanying notes are an integral part of these financial statements

4


Exagen Inc.
Unaudited Statements of Cash Flows
(in thousands)
 
 Nine Months Ended September 30,
 20192018
 
Cash flows from operating activities:
Net loss$(8,630) $(6,695) 
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization480  576  
Amortization of debt discount and debt issuance costs575  425  
Non-cash interest expense
484  380  
Revaluation of warrant liabilities(267) (55) 
Loss on disposal of assets20    
Stock-based compensation85  100  
Changes in assets and liabilities:
Accounts receivable, net(286) (1,168) 
Prepaid expenses and other current assets510  (590) 
Other assets(24) (8) 
Accounts payable174  (392) 
Accrued and other liabilities1,095  (5) 
Net cash used in operating activities(5,784) (7,432) 
Cash flows from investing activities:
Purchases of property and equipment(377) (128) 
Proceeds from sale of property and equipment300    
Purchases of short-term investments  (2,000) 
Maturities of short-term investments  1,000  
Net cash used in investing activities(77) (1,128) 
Cash flows from financing activities:
Principal payment on capital lease obligations(94) (17) 
Proceeds from initial public offering, net of issuance costs and offering costs52,195    
Proceeds from the issuance of Series F redeemable convertible preferred stock, net of issuance costs  2,716  
Proceeds from issuance of Series G redeemable convertible preferred stock, net of issuance costs7,742    
Proceeds from issuance of Series H redeemable convertible preferred stock, net of issuance costs10,682    
Net cash provided by financing activities70,525  2,699  
Increase (decrease) in cash, cash equivalents and restricted cash64,664  (5,861) 
Cash, cash equivalents and restricted cash, beginning of period13,264  11,341  
Cash, cash equivalents and restricted cash, end of period$77,928  $5,480  
Supplemental disclosure of cash flow information:
Cash paid for interest expense$1,661  $1,293  
Supplemental disclosure of non-cash items:
Accretion to redemption value of redeemable convertible preferred stock$4,640  $6,462  
Equipment purchased under capital lease obligations$412  $289  
Costs incurred, but not paid, in connection with capital expenditures$71  $207  
Conversion of redeemable convertible preferred stock$138,906  $  
Net exercise of common and preferred stock warrants$511  $  
Issuance costs included in accounts payable and accrued liabilities$1,677  $  
Reclassification of redeemable convertible preferred stock warrant liabilities as equity$726  $  
Deemed dividend recognized for beneficial conversion features of Series H redeemable convertible preferred stock$6,741  $  
Deemed dividend from conversion of Series G to Series H redeemable convertible preferred stock$6,860  $  
Conversion of Series G to Series H redeemable convertible preferred stock$11,875  $  
Deemed dividend from issuance of Series F redeemable convertible preferred stock$  $1,152  
Adjustment upon adoption of Topic 606$  $3,086  
The accompanying notes are an integral part of these financial statements

5


Exagen Inc.
Notes to Unaudited Interim Condensed Financial Statements


Note 1. Organization
Description of Business
Exagen Inc. (the Company) was incorporated under the laws of the state of New Mexico in 2002, under the name Exagen Corporation. In 2003, Exagen Corporation changed its state of incorporation from New Mexico to Delaware by merging with and into Exagen Diagnostics, Inc., pursuant to which the Company changed its name to Exagen Diagnostics, Inc. In January 2019, the Company changed its name to Exagen Inc. 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.
Initial Public Offering
On September 23, 2019, the Company closed its initial public offering (the IPO) of 4,140,000 shares of its common stock at a price to the public of $14.00 per share, including the exercise in full by the underwriters of their option to purchase 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 $50.5 million, net of underwriting discounts, commissions and other estimated offering expenses, for aggregate expenses of approximately $7.5 million. In addition, an aggregate of 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.
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 condensed financial statements and notes to the condensed financial statements.
Liquidity
The Company has suffered 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 September 30, 2019, the Company had cash and cash equivalents of $77.8 million and had an accumulated deficit of $161.2 million, respectively. Since inception, the Company has financed its operations primarily through private placements of preferred securities, the sale of common stock through its 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 the next twelve months.
To execute its business plans, the Company may need additional funding to support its continuing operations and pursue its growth strategy. Until such time as the Company can achieve significant cash flows from operations, if ever, it expects to finance its operations through the sale of its stock, debt financings or other strategic transactions. Although the Company has been successful in raising capital in the past, there is no assurance that it will be successful in obtaining such additional financing on terms acceptable to the Company, if at all. The terms of any financing may adversely affect the holdings or the rights of the Company's stockholders. If the Company is unable to obtain funding, the Company could be forced to delay, reduce or eliminate some or all of its programs, product portfolio expansion plans or commercialization efforts, which could have a material adverse effect on the Company's business, operating results and financial condition and the Company's ability to achieve its intended business objectives.

Note 2. Summary of Significant Accounting Policies
6


Basis of Presentation and Use of Estimates
The accompanying interim condensed balance sheet as of September 30, 2019, the condensed statements of operations and the condensed statements of redeemable convertible preferred stock and stockholders' equity (deficit) for the three and nine months ended September 30, 2019 and 2018 and cash flows for the nine months ended September 30, 2019 and 2018 and the related footnote disclosure are unaudited and have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (SEC), and with accounting principles generally accepted in the United States (GAAP) applicable to interim financial statements. In management's opinion, the unaudited interim condensed financial statements have been prepared on the same basis as the audited financial statements and include all adjustments, which include only normal recurring adjustments, necessary for the fair presentation of the Company's financial position as of September 30, 2019 and its results of operations for the three and nine months ended September 30, 2019 and 2018 and cash flows for the nine months ended September 30, 2019 and 2018 in accordance with GAAP. The results for the nine months ended September 30, 2019 are not necessarily indicative of the results expected for the full fiscal year or any other interim period. The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. These unaudited condensed financial statements should be read in conjunction with the Company’s audited financial statements for the year ended December 31, 2018, included in its Prospectus dated September 18, 2019 filed with the SEC on September 20, 2019.
The preparation of the accompanying condensed financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities as of the date of the condensed financial statements, and the reported amounts of revenue and expenses during the reporting period.
Significant estimates and assumptions made in the accompanying condensed 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.
 
Significant payers are those which represent more than 10% of the Company's total revenue or accounts receivable balance at each respective balance sheet date. For each significant payer, revenue as a percentage of total revenue and accounts receivable as a percentage of total accounts receivable are as follows:
 
 Revenue
 Three Months Ended
September 30,
Nine Months Ended
September 30,
 2019201820192018
Medicare25 %30 %26 %31 %
Blue Shield13 %14 %13 %14 %
United Healthcare10 %12 %10 %13 %
Medicare Advantage12 %12 %11 %11 %
 
7


 Accounts Receivable
 September 30, 2019December 31, 2018
 
Medicare23 %26 %
Blue Shield16 %16 %
United Healthcare9 %11 %
Medicare Advantage8 %11 %
For the three months ended September 30, 2019 and 2018, approximately 83%, and 86%, respectively, of the Company's revenue was related to the AVISE® CTD test. For the nine months ended September 30, 2019 and 2018, approximately 83% and 86%, respectively, of the Company's revenue was related to the AVISE® CTD test.
The Company is dependent on key suppliers for certain laboratory materials. An interruption in the supply of these materials would temporarily impact the Company's ability to perform testing services.
Disaggregation of Revenue
The following table includes the Company's revenues as disaggregated by payer category (in thousands):
 
 Three Months Ended September 30,Nine Months Ended September 30,
 2019201820192018
Revenue:
Healthcare insurers$6,188  $5,408  $17,716  $15,023  
Government2,665  2,524  7,964  7,013  
Client1,007  171  3,200  428  
Other(1)148  120  458  335  
Janssen (SIMPONI®)
431    835    
Total revenue$10,439  $8,223  $30,173  $22,799  
(1)Includes patient self-pay that is immaterial.
Fair Value Measurements
The carrying value of the Company's cash and cash equivalents, other assets and accrued liabilities 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.
8


The categorization of a financial instrument within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
The 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 $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).
Cash, cash equivalents and restricted cash presented in the accompanying condensed statements of cash flows consist of the following (in thousands):
 
 September 30, 2019December 31, 2018
 
Cash and cash equivalents$77,828  $13,164  
Restricted cash100  100  
$77,928  $13,264  
Deferred Offering Costs
As of December 31, 2018, the Company deferred offering costs of $0.4 million consisting of legal, accounting and other fees and costs directly attributable to its IPO, which are recorded within other assets in the accompanying condensed balance sheet. As of September 30, 2019, the deferred offering costs were offset against the proceeds received upon the completion of the IPO.
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 condensed 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 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.
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 5 for further discussion on the remaining warrants.
9


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 Payers) consist of healthcare insurers, government payers (primarily Medicare and Medicaid), client payers (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
Payers 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 payers. 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. 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 payer (i.e. each individual third-party insurance, Medicare, client payers, patient self-pay, etc.) and per test basis.
Collection of the Company's net revenues from payers 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.
The Company early adopted Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers (Topic 606) as of January 1, 2018 using a cumulative-effect adjustment to the opening balance of accumulated deficit and accounts receivable of $3.1 million.
Janssen Promotion Agreement
In December 2018, the Company entered into a co-promotion agreement with Janssen (the Janssen agreement) to co-promote SIMPONI® in the United States. The Company recognized revenue of approximately $0.4 million and $0.8 million during the three and nine months ended September 30, 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 $0.4 million for the three months ended September 30, 2019 and 2018, and $1.1 million for the nine months ended September 30, 2019 and 2018, and are included in selling, general and administrative expenses in the accompanying condensed statements of operations.
Shipping and Handling Costs
Costs incurred for shipping and handling are included in costs of revenue in the accompanying condensed statements of operations and totaled approximately $0.4 million and $0.3 million for the three months ended September 30, 2019 and 2018, respectively, and $1.1 million and $0.9 million for the nine months ended September 30, 2019 and 2018, respectively.
Stock-Based Compensation
The Company recognizes compensation expense for all stock-based awards to employees and directors based on the grant-date estimated fair values over the requisite service period of the awards (usually the vesting
10


period) on a straight-line basis. The fair value of stock options 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 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).
Comprehensive Loss
Comprehensive loss is defined as a change in equity of a business enterprise during a period, resulting from transactions from nonowner sources. There have been no items qualifying as other comprehensive loss and, therefore, for all periods presented, the Company's comprehensive loss was the same as its reported net loss.
Net Loss Per Share
Basic net loss per share attributable to common stockholders is calculated by dividing the net loss attributable to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted net loss per share attributable to common stockholders is computed by dividing the net loss attributable to common stockholders by the weighted-average number of common stock equivalents outstanding for the period determined using the treasury-stock and if-converted methods. Potentially dilutive common stock equivalents are comprised of redeemable convertible preferred stock, warrants for the purchase of redeemable convertible preferred and common stock and options outstanding under the Company's stock option plans. For the three and nine months ended September 30, 2019 and 2018, 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):
 
 Three Months Ended September 30,Nine Months Ended September 30,
 2019