EXAGEN INC. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-Q)

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You should read the following discussion of our financial condition and results
of operations in conjunction with the unaudited condensed financial statements
and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q
and with our audited financial statements and notes thereto for the year ended
December 31, 2021 included in our Annual Report on Form 10-K for the year ended
December 31, 2021.

Forward-looking statements

The following discussion and other parts of this quarterly report contain
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934, as amended, or the Exchange Act. All statements other than
statements of historical facts contained in this quarterly report, including
statements regarding our future results of operations and financial position,
business strategy, the impact of the COVID-19 pandemic, current and future
product offerings, reimbursement and coverage, the expected benefits from our
partnerships or promotion arrangements with third-parties, research and
development costs, timing and likelihood of success and plans and objectives of
management for future operations, are forward-looking statements. These
statements are often identified by the use of words such as "may," "will,"
"expect," "believe," "anticipate," "intend," "could," "should," "estimate," or
"continue," and similar expressions or variations. The forward-looking
statements in this quarterly report are only predictions. We have based these
forward-looking statements largely on our current expectations and projections
about future events and financial trends that we believe may affect our
financial condition, operating results, business strategy, and short-term and
long-term business operations and objectives. These forward-looking statements
speak only as of the date of this quarterly report and are subject to a number
of risks, uncertainties and assumptions, including those described in Part II,
Item 1A, "Risk Factors." The events and circumstances reflected in our
forward-looking statements may not be achieved or occur and actual results could
differ materially from those projected in the forward-looking statements. Except
as required by applicable law, we do not plan to publicly update or revise any
forward-looking statements contained herein, whether as a result of any new
information, future events, changed circumstances or otherwise.


Insight

We are dedicated to transforming the care continuum for patients suffering from
debilitating and chronic autoimmune diseases by enabling timely differential
diagnosis and optimizing therapeutic intervention. We have developed and are
commercializing a portfolio of innovative testing products under our AVISE®
brand, several of which are based on our proprietary Cell-Bound Complement
Activation Products (CB-CAPs) technology. Our goal is to enable healthcare
providers to improve care for patients through the differential diagnosis,
prognosis and monitoring of complex autoimmune and autoimmune-related diseases,
including systemic lupus erythematosus, or SLE, and rheumatoid arthritis, or RA.
Our business model of integrating testing products and therapeutics positions us
to offer targeted solutions to rheumatologists and, ultimately, better serve
patients.

We currently market 10 testing products under our AVISE® brand that allow for
the differential diagnosis, prognosis and monitoring of complex autoimmune and
autoimmune-related diseases. Our lead testing product, AVISE® CTD, enables
differential diagnosis for patients presenting with symptoms indicative of a
wide variety of connective tissue diseases, or CTDs, and other related diseases
with overlapping symptoms. We commercially launched AVISE® CTD in 2012 and
revenue from this product comprised 84% and 81% of our revenue for the three
months ended March 31, 2022 and 2021, respectively. There is an unmet need for
rheumatologists to add clarity in their CTD clinical evaluation, and we believe
there is a significant opportunity for our tests that enable the differential
diagnosis of these diseases, particularly for potentially life-threatening
diseases such as SLE.

We are leveraging our portfolio of testing products to establish partnerships
with leading pharmaceutical companies, academic research centers and patient
advocacy organizations. We also have agreements with GlaxoSmithKline plc., or
GSK, Labcorp Drug Development and Parexel, among others, that leverage our
testing products and/or the information generated from such tests. We provide
GSK, a leader in lupus therapeutics, our test result data to provide market
insight into and help increase awareness of the benefits of early and accurate
diagnosis of SLE and lupus nephritis, and monitoring disease activity. We
partner with academic research centers and patient advocacy organizations, such
as Brigham and Women's Hospital, Hospital for Special Surgery, Duke University
and Emory University as well as the Lupus Foundation of America, to help improve
the quality of life for people affected by
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autoimmune diseases through research, education, support and advocacy programs. We plan to pursue additional strategic partnerships that synergize with our evolving portfolio of test products.

We perform all of our AVISE® tests in our approximately 10,000 square foot
clinical laboratory, which is certified under the Clinical Laboratory
Improvement Amendments of 1988, or CLIA, by the Centers for Medicare and
Medicaid Services, or CMS, and accredited by the College of American
Pathologists, or CAP, and located in Vista, California. Our laboratory is
certified for performance of high-complexity testing by CMS in accordance with
CLIA and is licensed by all states requiring out-of-state licensure. Our
clinical laboratory reports all AVISE® testing product results within five
business days. In the second half of 2021, we began the conversion of
approximately 8,000 square feet of warehouse space into additional clinical
laboratory space and approximately 6,000 square feet of warehouse space into
additional research and development facility space, and expect to complete such
conversions by mid-2022. The expansion of our clinical laboratory and research
and development facility are expected to allow us to enhance our testing
capacity and improve efficiencies as well as allow us to develop molecular and
multiomic capabilities and advance our product pipeline, including support of
development of tests for fibromyalgia, RA, thrombosis and lupus nephritis.

We market our AVISE® testing products using our specialized sales force. As of
March 31, 2022, we have a sales force of 58 representatives covering a total of
63 territories. Unlike many diagnostic sales forces that are trained only to
understand the comparative benefits of their tests, the specialized backgrounds
of our sales force coupled with our comprehensive training enable our sales
representatives to interpret results from our de-identified patient test reports
and provide unique insights in a highly tailored discussion with
rheumatologists. Our integrated testing and therapeutics strategy results in a
unique opportunity to promote and sell targeted therapies in patient focused
sales calls with rheumatologists, including those with whom we have a
longstanding relationship and history using our portfolio of testing products.

Reimbursement for our testing services comes from several sources, including
commercial third-party payors, such as insurance companies and health
maintenance organizations, government payors, such as Medicare, and patients.
Reimbursement rates vary by product and payor. We continue to focus on expanding
coverage among existing contracted rheumatologists and to achieve coverage with
commercial payors, laboratory benefit managers and evidence review
organizations.

Since inception we have devoted substantially all of our efforts to developing
and marketing products for the diagnosis, prognosis and monitoring of autoimmune
diseases. Although our revenue has increased sequentially year over year, we
have never been profitable and, as of March 31, 2022, we had an accumulated
deficit of $218.4 million. We incurred net losses of $10.3 million and $6.2
million for the three months ended March 31, 2022 and 2021, respectively. We
expect to continue to incur operating losses in the near term as our operating
expenses will increase to support the growth of our business, as well as
additional costs associated with being a public company. We have funded our
operations primarily through equity and debt financings and revenue from sales
of our products. We completed our initial public offering, or IPO, in September
2019, raising net proceeds from the offering of approximately $50.4 million, net
of underwriting discounts, commissions and other offering expenses, for
aggregate expenses of approximately $7.5 million. In March 2021, we completed a
public offering of 4,255,000 shares of our common stock at a public offering
price of $16.25 per share. Net proceeds from the offering were approximately
$64.7 million, net of underwriting discounts and commissions and offering costs
of $4.4 million. As of March 31, 2022, we had $89.8 million of cash and cash
equivalents.

Recent Developments

In March 2022, we entered into an agreement with Centene Corporation, pursuant
to which, effective June 1, 2022, AVISE® test offerings will become an
in-network, covered benefit with Centene Corporation, including its subsidiary
WellCare Health Plans, providing enhanced care to over 22.7 million members. As
a result, AVISE® tests will surpass 90 million lives as an in-network benefit
for patients.

The Centers for Medicare & Medicaid Services ("CMS") agreed to recognize the new
Proprietary Laboratory Analyses ("PLA") code for AVISE® Lupus, effective April
1, 2022. The new PLA code for AVISE® Lupus is 0312U. Noridian, our Medicare
Administrative Contractor, priced the PLA code at $1,085, effective April 1,
2022. Pricing for the PLA code is expected to be published by CMS in the third
quarter of 2022. Our AVISE® CTD test includes the AVISE® Lupus test.

Impact of COVID-19

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The full extent of which the COVID-19 pandemic will directly or indirectly
continue to impact our business, results of operations and financial condition
and 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, including the success of ongoing
vaccination efforts, the emergence and prevalence of variant strains of
COVID-19, the institution or reinstitution of shutdowns, "stay-at-home-orders"
and other public health measures, as well as the related economic impact of
these matters on local, regional and international markets.

We have implemented business continuity plans designed to address the COVID-19
pandemic and minimize disruptions to ongoing operations. While for the three
months ended March 31, 2022 as compared to the same period in 2021, we
experienced an AVISE® CTD test volume increase of approximately 6%, the patient
flow and our related test volumes have in the past been and may continue to be
impacted by the COVID-19 pandemic. We have experienced and may again experience
significant impacts on our test volume, delays in patient enrollment for ongoing
and planned clinical trials, and delays in procurement of our testing supplies
as a result of the COVID-19 pandemic.

In addition, COVID-19 travel limitations and government-mandated work-from-home
or shelter-in-place orders have and may again cause supply chain delays or
reduce the number of in-person meetings between our sales force and healthcare
providers and limit the ability of our sales force to engage in various types of
healthcare provider education activities, which may lead to a decline in orders
of our testing products. To mitigate the impact of COVID-19 on our business, we
put in place certain safety measures for our employees, patients, healthcare
providers, and suppliers to limit exposure and a portion of our workforce was
required to work remotely in an effort to reduce that spread of COVID-19.

We are facing and may continue to face increased competition for laboratory and
scientific employees due to the increased demand in the industry for such
personnel. As the circumstances surrounding the COVID-19 pandemic remain
uncertain, we may inaccurately estimate the duration or severity of the COVID-19
pandemic, which could, among other things, cause us to misalign our staffing,
spending, activities and precautionary measures with market current or future
market conditions.

Factors affecting our performance

In addition to the impact of COVID-19, we believe that several important factors have had and which we believe will impact our operating performance and results of operations, including:


?Continued Adoption of Our Testing Products.  Since the launch of AVISE® CTD in
2012 and through March 31, 2022, we have delivered over 646,000 of these tests.
Through the first quarter of 2022, 30,903 AVISE® CTD tests were delivered,
representing approximately 6% growth over the same period in 2021. The number of
ordering healthcare providers in the first quarter of 2022 was a record 2,175,
representing an approximate 23% increase over the same period in 2021, and we
had a record 761 adopting healthcare providers (defined as those who previously
prescribed at least 11 diagnostic tests in the corresponding period) compared to
659 in the same period in 2021. A high percentage of adopting healthcare
providers continue to order tests in subsequent quarters, as approximately 99%
of adopting healthcare providers from the fourth quarter of 2021 ordered at
least one diagnostic test in the first quarter of 2022. Revenue growth for our
testing products will depend on our ability to continue to expand our base of
ordering healthcare providers and increase our penetration with existing
healthcare providers.

?Reimbursement for Our Testing Products.  Our revenue depends on achieving broad
coverage and reimbursement for our tests from third-party payors, including both
commercial and government payors such as Medicare. Payment from third-party
payors differs depending on whether we have entered into a contract with the
payors as a "participating provider" or do not have a contract and are
considered a "non-participating provider." Payors will often reimburse
non-participating providers, if at all, at a lower amount than participating
providers. We have received a substantial portion of our revenue from a limited
number of third-party commercial payors, most of which have not contracted with
us to be a participating provider. Historically, we have experienced situations
where commercial payors proactively reduced the amounts they were willing to
reimburse for our tests, and in other situations, commercial payors have
determined that the amounts they previously paid were too high and have sought
to recover those perceived excess payments by deducting such amounts from
payments otherwise being made. When we contract to serve as a participating
provider, reimbursements are made pursuant to a negotiated fee schedule and are
limited to only covered indications. If we are not able to obtain or maintain
coverage and adequate reimbursement
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from third-party payors, we may not be able to effectively increase our testing
volume and revenue as expected. Additionally, retrospective reimbursement
adjustments can negatively impact our revenue and cause our financial results to
fluctuate.

?Synergistic Partnerships.  In August 2021, we mutually agreed to terminate the
Janssen Agreement regarding our promotion efforts with SIMPONI® effective August
31, 2021. Our SIMPONI® promotion efforts contributed no co-promotion revenue and
approximately $0.3 million in revenue during the three months ended March 31,
2022 and 2021, respectively. We will continue to rely on our existing testing
products to drive revenue growth.

?Development of Additional Testing Products.  We rely on sales of our AVISE® CTD
test to generate the significant majority of our revenue. We expect to continue
to invest in research and development in order to develop additional testing
products and expect these costs to increase. Our success in developing new
testing products will be important in our efforts to grow our business by
expanding the potential market for our testing products and diversifying our
sources of revenue.

?Maintain Meaningful Margin.  We believe we are well positioned to maintain
meaningful margin through a continued focus on increasing operating leverage
through the implementation of certain internal initiatives, such as conducting
additional validation and reimbursement oriented clinical studies to facilitate
payor coverage of our testing products, capitalizing on our growing reagent
purchasing to negotiate improved volume-based pricing and automation in our
clinical laboratory to reduce material and labor costs.

?Timing of Our Research and Development Expenses.  Our spending on experiments
and clinical studies may vary substantially from quarter to quarter. We also
expend funds to secure clinical samples that can be used in discovery, product
development, clinical validation, utility and outcome studies. The timing of
these research and development activities is difficult to predict. If a
substantial number of clinical samples are obtained in a given quarter or if a
high-cost experiment is conducted in one quarter versus the next, the timing of
these expenses will affect our financial results. We conduct clinical studies to
validate our new testing products, as well as ongoing clinical and outcome
studies to further expand the published evidence to support our commercialized
AVISE® testing products. Spending on research and development for both
experiments and studies may vary significantly by quarter depending on the
timing of these various expenses.

?How We Recognize Revenue.  We record revenue on an accrual basis based on our
estimate of the amount that will be ultimately realized for each test upon
delivery based on a historical analysis of amounts collected by test and by a
payor. Changes to such estimates may increase or decrease revenue recognized in
future periods.

While each of these areas presents significant opportunities for us, they also
pose significant risks and challenges that we must address. We discuss many of
these risks, uncertainties and other factors in the section entitled "Risk
Factors."

Janssen promotion agreement

In December 2018, we entered into the Janssen Agreement, under which we were
responsible for the costs associated with our sales force in promoting SIMPONI®
in the United States. In August 2021, we and Janssen mutually agreed to
terminate the Janssen Agreement effective August 31, 2021. Pursuant to the
Janssen Agreement, as amended, Janssen was responsible for all other costs
associated with our promotion of SIMPONI® under the Janssen Agreement. In
exchange for our sales and co-promotional services, we were 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.
Upon termination of the Janssen Agreement on August 31, 2021, we became entitled
to receive an aggregate of $0.6 million in consideration, which was earned in
the year ended December 31, 2021. Pursuant to the terms of the termination, we
are restricted from promoting any other biologic or Janus kinase inhibitor used
for the treatment of indications covered by the Janssen Agreement without first
obtaining Janssen's written consent until May 31, 2022.

We recognized no revenue and approximately $0.3 million in revenue during the
three months ended March 31, 2022 and 2021, respectively, for our promotional
efforts under the Janssen Agreement.

Seasonality

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Based on our experience to date, we expect seasonal variations in our financial results due to various factors, such as the holiday season and other major holidays, holiday habits patients and healthcare providers, including medical conferences, climate and weather conditions in our markets (for example, excessive sun exposure may cause LED flare-ups), seasonal conditions which may affect practices and provider activity, including, for example, influenza outbreaks which may reduce the percentage of patients who can be seen, and other factors regarding the timing of changes in patient benefits, as well as deductibles for patients and coinsurance limits.

Financial Overview

Revenue

To date, we have derived nearly all of our revenue from the sale of our testing
products, most of which is attributable to our AVISE® CTD test. We primarily
market our testing products to rheumatologists in the United States. The
rheumatologists who order our testing products and to whom results are reported
are generally not responsible for payment for these products. The parties that
pay for these services, or payors, consist of healthcare insurers, government
payors (primarily Medicare and Medicaid), client payors (e.g. hospitals, other
laboratories, etc.), and patient self-pay. Our service is completed upon the
delivery of test results to the prescribing rheumatologists which triggers
billing for the service.

We recognize revenue in accordance with the provisions of ASC Topic 606, Revenue
from Contracts with Customers. We record revenue on an accrual basis based on
our estimate of the amount that will be ultimately realized for each test upon
delivery based on a historical analysis of amounts collected by test and by
payor. These assessments require significant judgment by management.

Our ability to increase our revenues will depend on our ability to further penetrate the market for our current and future test products, and to increase our reimbursement and collection rates for the tests provided.

As discussed above, our volume of AVISE® CTD tests delivered substantially
recovered to pre-COVID-19 levels in the fourth quarter of 2020. However, the
continued spread of COVID-19, including any of its viral variants, may adversely
affect testing volumes in future periods, and the extent of any such adverse
effects is highly uncertain.

CMS agreed to recognize the new PLA code for AVISE® Lupus, effective April 1,
2022. The new PLA code for AVISE® Lupus is 0312U. Noridian, our Medicare
Administrative Contractor, priced the PLA code at $1,085, effective April 1,
2022. Pricing for the PLA code is expected to be published by CMS in the third
quarter of 2022. Our AVISE® CTD test includes the AVISE® Lupus test.

Functionnary costs

Revenue costs

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

Each payor, whether a commercial third-party, government, or individual,
reimburses us at different amounts. These differences can be significant. As a
result, our costs of revenue as a percentage of revenue may vary significantly
from period to period due to the composition of payors for each period's
billings.

Assuming future testing volumes are not negatively impacted by the continued
spread of COVID-19, we expect that our costs of revenue will increase in
absolute dollars as the number of tests we perform increases. However, we expect
that the cost per test will decrease over time due to volume discounts on
materials and other volume efficiencies we may gain as the number of tests we
perform increases. The decrease in cost per test may be partially offset due to
increased depreciation and allocated overhead associated with our clinical
laboratory expansion as well as increased labor, material and shipping costs
(including as a result of inflation) associated with the commercialization of
our portfolio products. As discussed above, the continued spread of COVID-19 may
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adversely affect test volumes, which may result in an increased cost per test due to our inability to achieve volume savings.

Selling, general and administrative expenses

Selling, general and administrative expenses include personnel expenses, including stock-based compensation expenses, direct marketing expenses, accounting and legal expenses, consulting expenses, and allocated overhead expenses, including rent, information technology, depreciation and utilities.

We expect that our selling, general and administrative expenses will increase in
absolute dollars in 2022 as compared to 2021, due to expected additions to
headcount and associated increases for personnel costs, including stock-based
compensation.

Research and development costs

Research and development expenses include costs incurred to develop our
technology, test products and product candidates, collect clinical specimens and
conduct clinical studies to develop and support our testing products and product
candidates. These costs consist of personnel costs, including stock-based
compensation expense, materials, laboratory supplies, consulting costs, costs
associated with setting up and conducting clinical studies and allocated
overhead including rent and utilities. We expense all research and development
costs in the periods in which they are incurred.

We expect that our research and development expenses will increase in absolute
dollars in 2022 as compared to 2021, as we continue to invest in research and
development activities related to our existing testing products and product
candidates, including the expansion of our clinical research and development
facility, expected additions to headcount and associated increases for personnel
costs, including stock-based compensation.

Interest charges

Interest expense consists of cash and non-cash interest expense associated with
our financing arrangements, including the borrowings under our amended loan and
security agreement with Innovatus Life Sciences Lending Fund I, LP, or
Innovatus.

We expect interest expense to remain substantially constant in the near term.

Other income, net

Other income, net, consists primarily of interest income earned on our cash and cash equivalents.


Results of Operations

Comparison of the three months ended March 31, 2022 and 2021:

                                                                    Three Months Ended March 31,
                                                                      2022                2021             Change
                                                                                    (in thousands)
Revenue                                                           $   10,394          $  10,587          $   (193)
Operating expenses:
Costs of revenue                                                       5,817              4,711             1,106
Selling, general and administrative expenses                          12,152             10,040             2,112
Research and development expenses                                      2,104              1,403               701

Total operating expenses                                              20,073             16,154             3,919
Loss from operations                                                  (9,679)            (5,567)           (4,112)
Interest expense                                                        (598)              (645)               47

Other income, net                                                          5                  3                 2

Net loss                                                          $  (10,272)         $  (6,209)         $ (4,063)


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Revenue

Revenue decreased $0.2 million, or 1.8%, for the three months ended March 31,
2022 compared to the three months ended March 31, 2021, primarily due to a
decrease in revenue resulting from the Janssen Agreement during the three months
ended March 31, 2022 to no revenue compared to $0.3 million during the three
months ended March 31, 2021. The decrease in revenue was partially offset by an
increase in the number of diagnostic tests delivered, partially offset by a
decrease in average reimbursement per AVISE® CTD test. The number of AVISE® CTD
tests delivered, which accounted for 84% and 81% of revenue in the three months
ended March 31, 2022 and 2021, respectively, increased to 30,903 tests delivered
in the three months ended March 31, 2022 compared to 29,029 tests delivered in
the same 2021 period. The adoption of the AVISE® CTD test by healthcare
providers for the three months ended March 31, 2022 increased to 2,175 ordering
healthcare providers as compared to 1,763 ordering healthcare providers in the
same 2021 period.

Costs of Revenue

Costs of revenue increased $1.1 million, or 23.5%, for the three months ended
March 31, 2022 compared to the three months ended March 31, 2021. This increase
was primarily due to increased direct costs such as materials and supplies,
labor, shipping and handling and allocated overhead associated with the increase
in test volume and increase in cost per test in 2022 compared to 2021. Gross
margin as a percentage of revenue decreased to 44.0% for the three months ended
March 31, 2022, compared to 55.5% for the three months ended March 31, 2021.
This was primarily attributable to an increase in cost per test, a decrease in
average reimbursement per AVISE® CTD test and a decrease in revenue resulting
from the Janssen Agreement.

Selling, general and administrative expenses

Selling, general and administrative expenses increased $2.1 million, or 21.0%,
for the three months ended March 31, 2022 compared to the three months ended
March 31, 2021. This increase was primarily due to an increase of $1.5 million
of employee related expenses, including stock-based compensation and recruitment
expenses, increases related to allocated overhead of $0.2 million, legal fees of
$0.1 million and marketing expenses of $0.1 million.


Research and development costs

Research and development expenses increased $0.7 million for the three months
ended March 31, 2022 compared to the three months ended March 31, 2021. This
increase was primarily due to increases related to employee related expenses,
including stock-based compensation, of $0.5 million, collaboration expenses of
$0.1 million, allocated overhead of $0.1 million and laboratory supplies expense
of $0.1 million, partially offset by a decrease in clinical trial expenses of
$0.2 million.

Interest Expense

Interest expense remained substantially constant for the three months ended
March 31, 2022 compared to the three months ended March 31, 2021.

Other income, net

Other income, net, was essentially flat for the three months ended
March 31, 2022 compared to the three months ended March 31, 2021.

Cash and capital resources

We have incurred net losses since our inception. For the three months ended
March 31, 2022 and 2021, we incurred a net loss of $10.3 million and
$6.2 million, respectively, and we expect to incur additional losses and
increased operating expenses in future periods. As of March 31, 2022, we had an
accumulated deficit of $218.4 million. To date, we have generated only limited
revenue, and we may never achieve revenue sufficient to offset our expenses.
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Our primary sources of capital have been sales of our common stock and
redeemable convertible preferred stock, the sale of our common stock in our IPO,
and, to a lesser extent, borrowings under various debt financings. On November
10, 2020, we filed a registration statement on Form S-3, or the Shelf
Registration Statement, covering the offering, from time to time, of up to
$150.0 million of common stock, preferred stock, debt securities, warrants and
units, which Shelf Registration Statement became effective on November 19, 2020.
In March 2021, we completed a public offering of 4,255,000 shares of our common
stock at a public offering price of $16.25 per share, which shares were sold
under the Shelf Registration Statement. Net proceeds from the offering were
approximately $64.7 million, net of underwriting discounts and commissions and
other offering expenses of $4.4 million. As of March 31, 2022, we had
$89.8 million of cash and cash equivalents. Cash in excess of immediate
requirements is invested in accordance with our investment policy, primarily
with a view to liquidity and capital preservation. Currently, our funds are held
in cash and money market funds.

In September 2017, we entered into the loan and security agreement with
Innovatus under which we immediately drew down $20.0 million. In December 2018,
we borrowed an additional $5.0 million under the loan agreement. In each of
November 2019 and November 2021, we amended the loan and security agreement with
Innovatus, which we collectively refer to as the Amended Loan Agreement.
Pursuant to the Amended Loan Agreement, the loan term is for nine years with a
final maturity date of November 2026. The Amended Loan Agreement accrues
interest at an annual rate of 8.0%, of which 2.0% will be payable in-kind. Paid
in-kind interest is added to the principal balance each period. After December
1, 2024, the entire 8.0% will be paid in cash at the end of each period. On or
after November 1, 2022, we may, at our option, prepay the term loan borrowings
by paying the lender a prepayment premium. The prepayment premium was 3% as of
November 2021 and decreases by 1% on each of November 1, 2022, November 1, 2023
and November 1, 2024.

Our obligations under the Amended Loan Agreement are secured by a security
interest in substantially all of our assets, including our intellectual
property. The Amended Loan Agreement contains customary conditions to borrowing,
events of default, and covenants, including covenants requiring us to maintain
certain levels of minimum liquidity of $2.0 million, performance covenants to
achieve certain minimum amounts of revenue, and covenants limiting our ability
to dispose of assets, undergo a change in control, merge with or acquire other
entities, incur debt, incur liens, pay dividends or other distributions to
holders of our capital stock, repurchase stock and make investments, in each
case subject to certain exceptions. The consequences of failing to achieve the
performance covenant will be cured if, within sixty days of failing to achieve
the performance covenant, we issue additional equity securities or subordinated
debt with net proceeds sufficient to fund any cash flow deficiency generated
from operations, as defined in the Amended Loan Agreement. At March 31, 2022, we
were in compliance with all covenants of the Amended Loan Agreement. In
addition, upon the occurrence of an event of default, Innovatus, among other
things, can declare all indebtedness due and payable immediately, which would
adversely impact our liquidity and reduce the availability of our cash flows to
fund working capital needs, capital expenditures and other general corporate
purposes.

Funding Requirements

Our primary uses of cash are to fund our operations as we continue to grow our
business. We expect to continue to incur operating losses in the near term as
our operating expenses will be increased to support the growth of our business.
We expect that our costs of revenue, selling, general and administrative
expenses, and research and development expenses will continue to increase as we
increase our test volume, expand our marketing efforts and increase our internal
sales force to drive increased adoption of and reimbursement for our AVISE®
testing products, prepare to commercialize new testing products, continue our
research and development efforts and further develop our product pipeline. We
believe we have sufficient laboratory capacity to support increased test volume.
We expect to make significant investments for laboratory equipment and capital
expenditures in the near term related to our laboratory facilities and expansion
of research capabilities, including an investment to convert approximately 8,000
square feet of warehouse space into additional clinical laboratory space and
approximately 6,000 square feet of warehouse space into additional research and
development facility space. We began such conversion in the second half of 2021
and expect to complete the conversion for the clinical laboratory space and the
additional research and development facility by mid-2022. The expansion of our
clinical laboratory and research and development facility are expected to allow
us to enhance our testing capacity and improve efficiencies as well as allow us
to develop molecular and multiomic capabilities and advance our product
pipeline, including support of the development of tests for fibromyalgia, RA,
thrombosis and lupus nephritis. Cash used to fund operating expenses is impacted
by the timing of when we pay expenses, as reflected in the change in our
outstanding accounts payable and accrued expenses.
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We expect that our near- and longer-term liquidity requirements will continue to
consist of working capital and general corporate expenses associated with the
growth of our business, including payments we may be required to make upon the
achievement of previously negotiated milestones associated with intellectual
property we have licensed, payments related to non-cancelable purchase
obligations with one supplier for reagents, payments related to our principal
and interest under our long term borrowing arrangements, payments for operating
leases related to our office and laboratory space in Vista, California and our
office space in Carlsbad, California, and payments for finance leases related to
our laboratory equipment. Based on our current business plan, we believe that
our existing cash and cash equivalents and our anticipated future revenue, will
be sufficient to meet our anticipated cash requirements for at least the next
12 months from the date of this filing.

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

•the impact of the COVID-19 pandemic on our business;

• our ability to maintain and increase sales of our AVISE® test products, as well as the costs associated with conducting clinical studies to demonstrate the utility of our products and support reimbursement efforts;

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

•fluctuations in working capital;

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

•additional costs we may incur as a result of our activities as a public company;

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

• the costs associated with our promotion of other therapeutic products, if any, including the expansion of our sales capabilities, and the scope and timing of revenue generation from each such promotion, if any.

Until such time, if ever, as we can generate revenue to support our costs
structure, we expect to finance our operations through equity offerings, debt
financings or other capital sources, including potentially collaborations,
licenses and other similar arrangements. Debt financing, if available, may
involve agreements that include covenants limiting or restricting our ability to
take specific actions, such as incurring additional debt, making capital
expenditures or declaring dividends. To the extent that we raise additional
capital through the sale of equity or convertible debt securities, the ownership
interest of our stockholders may be diluted, and the terms of these securities
may include liquidation or other preferences that adversely affect the rights of
our common stockholders. If additional funding is required or desired, there can
be no assurance that additional funds will be available to us on acceptable
terms on a timely basis, if at all, or that we will generate sufficient cash
from operations to adequately fund our operating needs or achieve or sustain
profitability. If we are unable to raise additional capital or generate
sufficient cash from operations to adequately fund our operations, we will need
to delay, reduce or eliminate some or all of our research and development
programs, product portfolio expansion plans or commercialization efforts. Doing
so will likely have an unfavorable effect on our ability to execute on our
business plan and could have a negative impact on our commercial and strategic
relationships. If we cannot expand our operations or otherwise capitalize on our
business opportunities because we lack sufficient capital, our business,
financial condition, and results of operations could be adversely affected.

Cash flow

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

Three months completed March, 31st,

                                                                                   2022                  2021
(in thousands)
Net cash (used in) provided by:
Operating activities                                                        $        (8,574)         $  (4,312)
Investing activities                                                                 (1,087)              (167)
Financing activities                                                                    (30)            65,081
Net change in cash, cash equivalents and restricted cash                    

($9,691) $60,602

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Cash flow from operating activities

Net cash used in operating activities for the three months ended March 31, 2022
was $8.6 million and primarily resulted from (i) our net loss of $10.3 million
adjusted for non-cash charges of $2.1 million related to stock-based
compensation, depreciation, amortization, non-cash lease expense and non-cash
interest and (ii) changes in our net operating assets of $0.4 million primarily
related to net increases in accounts receivables, partially offset by net
decreases in prepaid expenses and other current assets and net increases in
accounts payables.

Net cash used in operating activities for the three months ended March 31, 2021
was $4.3 million and primarily resulted from (i) our net loss of $6.2 million
adjusted for non-cash charges of $1.3 million related to stock-based
compensation, depreciation, amortization and non-cash interest and (ii) changes
in our net operating assets of $0.6 million primarily related to net decreases
in prepaid expenses and other current assets and accounts receivable, net,
partially offset by net decreases in accounts payables and accrued and other
current liabilities.

Cash flow from investing activities

Net cash used in investing activities for the three months ended March 31, 2022
and 2021 was $1.1 million and $0.2 million, respectively, and was primarily due
to net purchases of property and equipment.

Cash flow from financing activities

Net cash used in financing activities for the three months ended March 31, 2022
was $30,000 primarily resulted from payment on finance lease obligations and
payment of taxes withheld on vested restricted stock units, partially offset by
proceeds from ESPP purchases.

Net cash provided by financing activities for the three months ended March 31,
2021 was $65.1 primarily resulted from the net proceeds received from our public
offering in March 2021 of $65.0 million and proceeds from ESPP purchases,
partially offset by principal payments on finance lease obligations.

Significant Accounting Policies and Significant Management Estimates

Our management's discussion and analysis of our financial condition and results
of operations is based on our condensed financial statements, which have been
prepared in accordance with United States generally accepted accounting
principles, or U.S. GAAP. The year-end condensed balance sheet data was derived
from audited financial statements, but does not include all disclosures required
by U.S. GAAP. The preparation of these financial statements requires us to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements, as well as the reported revenue generated and
expenses incurred during the reporting periods. Our estimates are based on our
historical experience and on various other factors that we believe are
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying value of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions, and any such differences
may be material.

For a description of our critical accounting policies, please see the section
entitled "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Critical Accounting Policies and Significant Management
Estimates" contained in our Annual Report on Form 10-K for the year ended
December 31, 2021. There have been no significant changes in our critical
accounting policies and estimates during the three months ended March 31, 2022
as compared to the critical accounting policies and estimates disclosed in the
Management's Discussion and Analysis of Financial Condition and Operations
included in our Annual Report on Form 10-K for the year ended December 31, 2021
filed with the SEC on March 22, 2022.

Recent accounting pronouncements

Please see Note 2 of the unaudited condensed financial statements included with this Quarterly Report on Form 10-Q for a summary of the changes in significant accounting policies.

Accounting election of the JOBS law

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The Jumpstart Our Business Startups Act of 2012, or the JOBS Act, contains
provisions that, among other things, reduce certain reporting requirements for
an "emerging growth company." The JOBS Act permits an "emerging growth company"
such as us to take advantage of an extended transition period to comply with new
or revised accounting standards applicable to public companies. We have elected
to use this extended transition period under the JOBS Act until the earlier of
the date we (i) are no longer an emerging growth company or (ii) affirmatively
and irrevocably opt out of the extended transition period provided in the JOBS
Act. As a result, our audited financial statements may not be comparable to
companies that comply with new or revised accounting pronouncements as of public
company effective dates.

We will remain an emerging growth company until the last day of our fiscal year
following the fifth anniversary of the date of the first sale of our common
equity securities pursuant to an effective registration statement under the
Securities Act of 1933, as amended, or the Securities Act, which will occur in
2024. However, if certain events occur prior to the end of this five-year
period, including if we become a "large accelerated filer" as defined in
Rule 12b-2 under the Exchange Act, our annual gross revenues exceed
$1.07 billion or we issue more than $1.0 billion of non-convertible debt in any
three-year period, we will cease to be an emerging growth company prior to this
anniversary.

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