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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 June 30, 2020
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
Vista,California92081
(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 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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer,” “smaller reporting company” and "emerging growth 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 July 24, 2020 was 12,640,409.



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)

 June 30, 2020December 31, 2019
 (Unaudited)
Assets
Current assets:
Cash and cash equivalents$63,700  $72,084  
Accounts receivable, net7,263  5,715  
Prepaid expenses and other current assets2,500  3,451  
Total current assets73,463  81,250  
Property and equipment, net1,370  1,380  
Goodwill5,506  5,506  
Other assets174  174  
Total assets$80,513  $88,310  
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable$1,438  $1,476  
Accrued and other current liabilities4,317  4,419  
Total current liabilities5,755  5,895  
Borrowings-non-current portion, net of discounts and debt issuance costs26,249  25,854  
Deferred tax liabilities147  264  
Other non-current liabilities521  638  
Total liabilities32,672  32,651  
Commitments and contingencies (Note 5)
Stockholders' equity:
Preferred stock, $0.001 par value; 10,000,000 shares authorized, no shares issued or outstanding at June 30, 2020 and December 31, 2019
    
Common stock, $0.001 par value; 200,000,000 shares authorized at June 30, 2020 and December 31, 2019; 12,640,409 and 12,560,990 shares issued and outstanding at June 30, 2020 and December 31, 2019, respectively
13  13  
        Additional paid-in capital
221,356  220,248  
Accumulated deficit(173,528) (164,602) 
Total stockholders' equity47,841  55,659  
Total liabilities and stockholders' equity$80,513  $88,310  
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 June 30,Six Months Ended June 30,
 2020201920202019
 
Revenue$8,948  $10,474  $18,532  $19,734  
Operating expenses:
Costs of revenue3,338  4,992  7,883  9,434  
Selling, general and administrative expenses8,276  7,302  17,902  13,481  
Research and development expenses751  590  1,385  1,103  
Total operating expenses12,365  12,884  27,170  24,018  
Loss from operations(3,417) (2,410) (8,638) (4,284) 
Interest expense(635) (910) (1,266) (1,811) 
Change in fair value of financial instruments  467    467  
Other income, net689  68  860  139  
Loss before income taxes(3,363) (2,785) (9,044) (5,489) 
Income tax benefit    118    
Net loss(3,363) (2,785) (8,926) (5,489) 
Accretion of redeemable convertible preferred stock  (2,188)   (4,302) 
Net loss attributable to common stockholders (Note 2)$(3,363) $(4,973) $(8,926) $(9,791) 
Net loss per share, basic and diluted (Note 2)$(0.27) $(78.87) $(0.71) $(155.33) 
Weighted-average number of shares used to compute net loss per share, basic and diluted (Note 2)12,637,642  63,050  12,616,678  63,033  
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)

 
 Common StockAdditional
Paid-In
Capital
Accumulated
Deficit
Total
Stockholders'
Equity
 SharesAmount
Balances at December 31, 201912,560,990  $13  $220,248  $(164,602) $55,659  
Exercise of stock options43,700  —  10  —  10  
Stock-based compensation—  —  431  —  431  
Net exercise of common stock warrants22,366  —  —  —  —  
Net loss—  —  —  (5,563) (5,563) 
Balances at March 31, 202012,627,056  13  220,689  (170,165) 50,537  
Exercise of stock options3,599  —  2  —  2  
Stock-based compensation—  —  647  —  647  
Exercise of common stock warrants9,754  —  18  —  18  
Net loss—  —  —  (3,363) (3,363) 
Balances at June 30, 202012,640,409  $13  $221,356  $(173,528) $47,841  

 Redeemable
Convertible
Preferred Stock
Common StockAdditional
Paid-In
Capital
Accumulated
Deficit
Total
Stockholders'
Deficit
 SharesAmountSharesAmount
Balances at December 31, 2018532,606,084  $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 7)
97,646,289  7,520  —  —  —  —  —  
Net loss—  —  —  —  (2,704) (2,704) 
Balances at March 31, 2019630,252,373  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 7)
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) 
The accompanying notes are an integral part of these financial statements

3


Exagen Inc.
Unaudited Statements of Cash Flows
(in thousands)
 
 Six Months Ended June 30,
 20202019
 
Cash flows from operating activities:
Net loss$(8,926) $(5,489) 
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization253  363  
Amortization of debt discount and debt issuance costs132  393  
Non-cash interest expense
263  320  
Revaluation of warrant liabilities  (467) 
Deferred income taxes(117)   
Loss on disposal of assets  217  
Stock-based compensation1,078  23  
Changes in assets and liabilities:
Accounts receivable, net(1,548) (782) 
Prepaid expenses and other current assets951  234  
Other assets(1) 23  
Accounts payable(42) (173) 
Accrued and other liabilities(100) 1,220  
Net cash used in operating activities(8,057) (4,118) 
Cash flows from investing activities:
Purchases of property and equipment(237) (375) 
Proceeds from sale of property and equipment  300  
Net cash used in investing activities(237) (75) 
Cash flows from financing activities:
Proceeds from exercise of stock options12    
Proceeds from exercise of common stock warrants18    
Principal payment on capital lease obligations(120) (57) 
Proceeds from Paycheck Protection Program loan2,865    
Repayment of Paycheck Protection Program loan(2,865)   
Proceeds from issuance of Series G redeemable convertible preferred stock, net of issuance costs  7,742  
Payments of deferred offering costs  (419) 
Net cash (used in) provided by financing activities(90) 7,266  
Net change in cash, cash equivalents and restricted cash(8,384) 3,073  
Cash, cash equivalents and restricted cash, beginning of period72,184  13,264  
Cash, cash equivalents and restricted cash, end of period$63,800  $16,337  
Supplemental disclosure of cash flow information:
Cash paid for interest expense$875  $1,095  
Supplemental disclosure of non-cash items:
Accretion to redemption value of redeemable convertible preferred stock$  $4,302  
Equipment purchased under capital lease obligations$2  $300  
Costs incurred, but not paid, in connection with capital expenditures$4  $5  
Issuance costs included in accounts payable and accrued liabilities$  $475  
The accompanying notes are an integral part of these financial statements
4



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.
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 June 30, 2020, the Company had cash and cash equivalents of $63.7 million and had an accumulated deficit of $173.5 million, respectively. 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. Summary of Significant Accounting Policies
Basis of Presentation and Use of Estimates
The accompanying interim condensed balance sheet as of June 30, 2020, the condensed statements of operations and the condensed statements of redeemable convertible preferred stock and stockholders' equity (deficit) for the three and six months ended June 30, 2020 and 2019 and cash flows for the six months ended June 30, 2020 and 2019 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 normal adjustments, necessary for the fair presentation of the Company's financial position as of June 30, 2020 and its results of operations for the three and six months ended June 30, 2020 and 2019, statements of redeemable convertible preferred stock and stockholders' equity (deficit) for the three and six months ended June 30, 2020 and 2019 and cash flows for the six months ended June 30, 2020 and 2019 in accordance with GAAP. The results for the six months ended June 30, 2020 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
5


conjunction with the Company’s audited financial statements for the year ended December 31, 2019, included in its Annual Report on Form 10-K filed with the SEC on March 25, 2020.
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. Actual results could materially differ from those estimates.
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 and customers are those which represent more than 10% of the Company's total revenue or accounts receivable balance at each respective balance sheet date. For each significant payer and customer, revenue as a percentage of total revenue and accounts receivable as a percentage of total accounts receivable are as follows:
 
 Revenue
 Three Months Ended
June 30,
Six Months Ended
June 30,
 2020201920202019
Janssen (SIMPONI®)
23 %*11 %*
Medicare18 %27 %22 %27 %
Blue Shield11 %12 %12 %13 %
United Healthcare*10 %*10 %
Medicare Advantage*11 %11 %11 %

 Accounts Receivable
 June 30, 2020December 31, 2019
 
Janssen (SIMPONI®)
28 %19 %
United Healthcare14 %22 %
Anthem Blue Cross Blue Shield12 %*
Blue Shield10 %15 %

*Less than 10%.
For the three months ended June 30, 2020 and 2019, approximately 60%, and 82%, respectively, of the Company's revenue was related to the AVISE® CTD test. For the six months ended June 30, 2020 and 2019, approximately 72% and 83%, respectively, of the Company's revenue was related to the AVISE® CTD test.
The Company is dependent on key suppliers for certain laboratory materials. For the three months ended June 30, 2020 and 2019, approximately 97% of the Company's diagnostic testing supplies were purchased from two
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suppliers. For the six months ended June 30, 2020 and 2019, approximately 97% and 96%, respectively, 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 payer and customer category (in thousands):
 
 Three Months Ended June 30,Six Months Ended June 30,
 2020201920202019
Revenue:
Healthcare insurers$4,138  $6,067  $10,200  $11,528  
Government1,807  2,867  4,052  5,299  
Client746  1,088  1,828  2,193  
Other(1)206  148  401  310  
Janssen (SIMPONI®)
2,051  304  2,051  404  
Total revenue$8,948  $10,474  $18,532  $19,734  
(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.
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.
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
7


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):
 
 June 30, 2020December 31, 2019
 
Cash and cash equivalents$63,700  $72,084  
Restricted cash100  100  
$63,800  $72,184  
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 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 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.
Janssen Promotion Agreement
In December 2018, the Company entered into a co-promotion agreement with Janssen Biotech, Inc. (Janssen) to co-promote SIMPONI® in the United States (the Janssen Agreement). 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 all periods presented, the tiered promotion fee ranged from $750 to $1,250 per prescription over a predetermined baseline. Due in part to COVID-19, in June 2020, the Janssen Agreement was amended (Amended Janssen Agreement). In accordance with the Amended Janssen Agreement, the predetermined 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 will receive a minimum promotion fee of $0.3 million and the fee will be capped at 5% above the adjusted predetermined baseline. The predetermined baseline for 2021 will be agreed upon by the Company and Janssen no later than November 30, 2020. 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.
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The Amended 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-promotional revenue of approximately $2.1 million and $0.3 million during the three months ended June 30, 2020 and 2019, respectively. The Company recognized co-promotional revenue of approximately $2.1 million and $0.4 million during the six months ended June 30, 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 $0.3 million and $0.4 million for the three months ended June 30, 2020 and 2019, respectively, and $0.7 million for the six months ended June 30, 2020 and 2019, 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 $0.3 million and $0.4 million for the three months ended June 30, 2020 and 2019, respectively, and $0.7 million for the six months ended June 30, 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 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.
9


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 six months ended June 30, 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):
 
 Three Months Ended June 30,Six Months Ended June 30,
 2020201920202019
Redeemable convertible preferred stock  6,013,941    6,013,941  
Warrants to purchase redeemable convertible preferred stock  224,493    224,493  
Warrants to purchase common stock426,827  934,789  426,827  934,789  
Common stock options1,677,000  662,987  1,677,000  662,987  
Total2,103,827  7,836,210  2,103,827  7,836,210  


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.
Segment Reporting
Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision-maker in making decisions regarding resource allocation and assessing performance. The Company views its operations as, and manages its business in, one operating segment.
Recent Accounting Pronouncements
From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (FASB), or other standard setting bodies and adopted by the Company as of the specified effective date. Under the Jumpstart Our Business Startups Act of 2012 (JOBS Act), the Company meets the definition of an emerging growth company. The Company has elected to use the extended transition period for complying with new or revised accounting standards pursuant to Section 107(b) of the JOBS Act. Unless otherwise discussed, the impact of recently issued standards that are not yet effective will not have a material impact on the Company's financial position or results of operations upon adoption.
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
10


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 condensed 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 for 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 condensed 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. All other amendments should be applied retrospectively to all period presented upon their effective date. 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 condensed financial statements.


Note 3. Other Financial Information
Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consist of the following (in thousands):
 
 June 30, 2020December 31, 2019
Diagnostic testing supplies$947  $1,427  
Prepaid product royalties75  123  
Prepaid maintenance and insurance contracts1,277  1,768  
Other prepaid assets201  133  
Prepaid and other current assets$2,500  $3,451  

Property and Equipment
Property and equipment consist of the following (in thousands):
 
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 June 30, 2020December 31, 2019
Furniture and fixtures$36  $25  
Laboratory equipment2,541  2,228  
Computer equipment and software915  851  
Leasehold improvements424  424  
Construction in progress102  247  
Total property and equipment4,018  3,775  
Less: accumulated depreciation and amortization(2,648) (2,395) 
Property and equipment, net$1,370  $1,380  
Depreciation and amortization expense for the three months ended June 30, 2020 and 2019 was approximately $0.2 million, and for the six months ended June 30, 2020 and 2019, was approximately $0.3 million and $0.4 million. At June 30, 2020 and December 31, 2019, the gross book value of assets under capital lease was $1.1 million and $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):
 
 June 30, 2020December 31, 2019
Accrued payroll and related expenses$2,534  $2,362  
Accrued interest141  145  
Accrued purchases of goods and services318  319  
Accrued royalties193  727  
Accrued clinical study activity93  40  
Capital lease obligations, current portion242  238  
Other accrued liabilities796  588  
Accrued and other current liabilities$4,317  $4,419  



Note 4. Borrowings
2017 Term Loan
In September 2017, the Company executed a term loan agreement (the 2017 Term Loan) with Innovatus Life Sciences Lending Fund I, LP (Innovatus) and borrowed $20.0 million, $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 $5.0 million under the 2017 Term Loan. At June 30, 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 (Loan Amendment). The interest rate on all borrowings under the Loan Amendment is 8.5%, of which 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 8.5%. The Company has estimated the effective interest rate of this loan to be approximately 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 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 $1.0 million. This obligation is being accreted into interest expense over the term of Loan Amendment using the effective interest method. For the three months ended June 30, 2020 and 2019, the Company issued PIK Loans totaling $0.1 million and $0.2 million, respectively. For the six months ended June 30, 2020 and 2019, the Company issued PIK Loans totaling $0.3 million.
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If the Loan Amendment is prepaid before November 19, 2020, the Loan Amendment requires a prepayment premium of 3% of the aggregate outstanding principal. The prepayment premium decreases by 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 twelve-month basis, and commencing with the quarter ending December 31, 2019. The Company believes it is reasonably possible that it may fail to meet this affirmative covenant in the third quarter of 2020 as a result of the COVID-19 pandemic and its adverse impact on testing volumes. The consequences of failing to achieve the performance covenant will be waived if, within sixty days of failing to achieve the performance covenant, the Company issues additional equity securities or subordinated debt with net proceeds sufficient to fund any cash flow deficiency generated from operations, as defined. In addition, the Loan Amendment requires that the Company maintain certain levels of minimum liquidity. The Company is required to maintain an unrestricted cash balance of $2.0 million.
The negative covenants provide, among other things, that without the prior consent of Innovatus subject to certain exceptions, the Company may not dispose of certain assets, engage in certain business combinations or acquisitions, incur additional indebtedness or encumber any of the Company's property, pay dividends on the Company's capital stock or make prohibited investments. The Loan Amendment agreement provides that an event of default will occur if, among other triggers, (i) the Company defaults in the payment of any amount payable under the agreement when due, (ii) there occurs any circumstance(s) that could reasonably be expected to result in a material adverse effect on the Company's business, operations or condition, or on the Company's ability to perform its obligations under the agreement, (iii) the Company becomes insolvent, (iv) the Company undergoes a change in control or (v) the Company breaches any negative covenants or certain affirmative covenants in the agreement or, subject to a cure period, otherwise neglects to perform or observe any material item in the agreement.
At June 30, 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 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 condensed 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
As of June 30, 2020, future minimum aggregate payments, including interest, for outstanding borrowings under the Loan Amendment are as follows (in thousands):
 
June 30, 2020
2020 (remaining)$872  
20211,755  
20222,996  
202315,619  
202414,280  
Total35,522  
Less:
Unamortized debt discount and issuance costs(344) 
Interest(8,929) 
Total borrowings, net of discounts and debt issuance costs$26,249  

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Note 5. Commitments and Contingencies
Leases
As of June 30, 2020, the Company leases an 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 5-year period. In addition, the Company also leases an additional office space in Vista, California, under a lease that expires in January 2026 with an option to extend the lease for an additional 5-year period. The Company's lease payments under each of these leases are subject to escalation clauses.
For the three months ended June 30, 2020 and 2019, rent expense was $0.1 million. For the six months ended June 30, 2020 and 2019, rent expense was $0.2 million.
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 $2.0 million payment due to Prometheus Laboratories, Inc. (Prometheus) for which the fair value was determined to be zero at June 30, 2020 and December 31, 2019.
In addition, the Company has ongoing royalty payment obligations on net sales of products which incorporate certain acquired technologies ranging from 2.5% to 7.5%. Future royalties payable under these arrangements are limited to the lesser of an aggregate of $4.2 million (including an upfront payment of $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 2.0% to 20.0%. Royalties are accrued when earned and recorded in costs of revenue in the accompanying condensed statement of operations.
Supply Agreement
In 2019, the Company entered into an amended supply agreement with one supplier for reagents which includes a minimum annual purchase commitment of $4.2 million for each of the three years covered by the original agreement, which terminates in 2021.
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 payers 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. 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
14


The Company is not a party to any litigation and does not have contingent reserves established for any litigation liabilities. From time to time, the Company may be subject to various legal proceedings that arise in the ordinary course of business activities.


Note 6. 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):
 
 June 30, 2020
 TotalLevel 1Level 2Level 3
Assets:
Money market funds$62,336  $62,336  $  $  
 
 December 31, 2019
 TotalLevel 1