Exagen Inc. (NASDAQ:XGN) Q2 2023 Earnings Call Transcript

Exagen Inc. (NASDAQ:XGN) Q2 2023 Earnings Call Transcript August 7, 2023

Exagen Inc. misses on earnings expectations. Reported EPS is $-0.28 EPS, expectations were $0.48.

Operator: Greetings. Welcome to the Exagen Inc. Second Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded. At this time, I would like to hand the call over to Ryan Douglas of Investor Relations. Thank you. You may begin.

Ryan Douglas: Good morning and thank you for joining us. Earlier today, Exagen Inc. released financial results for the quarter ended June 30, 2023. The release is currently available on the company’s website at www.exagen.com. John Aballi, President and Chief Executive Officer; Kamal Adawi, Chief Financial Officer, will host this morning’s call. Before we get started, I would like to remind everyone that management will be making statements during this call that include forward-looking statements within the meaning of federal securities laws, which are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Any statements contained in this call that are not statements of historical facts should be deemed to be forward-looking statements.

All forward-looking statements, including, without limitation, statements regarding our business strategy and future financial and operating performance, including guidance for the quarter, potential profitability, our current and future product offerings, and reimbursement and coverage are based upon current estimates and various assumptions. These statements involve material risks and uncertainties that could cause actual results to differ materially from those anticipated or implied by these forward-looking statements. Accordingly, you should not place undue reliance on these statements. For a list and description of risks and uncertainties associated with our business, please see our filings with the Securities and Exchange Commission, including our Form 10-K for the year ended December 31, 2022 and any subsequent filings.

The information provided in this conference call speaks only to the live broadcast today, August 7, 2023. Exagen disclaims any intention or obligation, except as required by law, to update or revise any information, financial projections or other forward-looking statements, whether because of new information, future events, or otherwise. I will now turn the call over to John Aballi, President and CEO of Exagen.

John Aballi: Thanks, Ryan, and thank you to everyone joining the call. Today, I’ll discuss our second quarter results and provide updates on our revenue cycle initiatives, including our path to profitability. I’ll then turn over the call to Kamal, our CFO, for details on our financial performance. Our strategy to prioritize and focus on AVISE CTD has resulted in another strong quarter, with over 37,000 AVISE CTD tests delivered and total revenues of 14.1 million. As a reminder, we’ve made substantial changes to the structure and size of our sales team and we believe that our Q2 performance is testament to the fact that we continue to serve the rheumatology community in a highly effective manner. I’m encouraged to see consecutive quarterly growth in volume as we make operational improvements to our business.

But this also reinforces the strategic decisions we made at the end of last year. Exagen has significant opportunity ahead, and we’re really starting to get on track as a team. It’s exciting to see our progress reflected in the performance of the company this quarter. Our revenue for the second quarter was reflective of the strong testing demand and volume delivered in Q2, but also a result of improved cash collections from testing performed in prior quarters. We continue to focus heavily on our revenue cycle operations and have made major strides in Q2 to improve our processes, which I’ll detail shortly. We expect to see incremental improvement in ASP as we move into early 2024, but we believe these early improvements in cash collections are a positive sign.

Overall, we’re seeing positive momentum in our operations and our efforts to achieve profitability continue to progress. One of the key metrics where we saw improvement quarter-over-quarter was our trailing 12-month ASP, which increased to $320 from $279. The increase in Q2 was aided by timing of cash collections on claims from prior periods, which we don’t necessarily expect to recur each quarter. However, this was nonetheless a positive development reflected in the improvement in ASP. In general, we’re beginning to trend in the right direction, but expect the bulk of our efforts to materialize into 2024. As we conveyed in Q1, we held claims to give ourselves time to optimize our appeal process, including an effort to increase the overall volume, quality and persistence of appeals.

To give some color on the extent of our efforts to date, we’ve brought in new leadership to this area of our business. We’ve worked with a technical writer to revise all appeal letters sent to payers on denied claims. We’ve restructured the appeals process with our internal team, redefining roles and responsibilities for every person involved in the process. We’ve worked with our clients to improve the clinical notes they draft on each patient to better communicate the rationale for ordering and utilizing advice. We’ve worked to improve the process for exchanging these progress notes with our team to lessen the burden on our customer staff. We brought in other personnel to increase the outbound calls to insurance companies, allowing us to keep better track of our appeal status.

We strengthen the documentation around test ordering and the list continues. These efforts have been a substantial adjustment compared to what we were doing even six months ago. And we’re still making progress to execute efficiently with these changes. All this requires communication and resetting of expectations with our customers in a manner which minimizes disruption and reinforces the value they’ve seen with AVISE testing for the last 12 years. We continue to focus on achieving a profitable business. We refinanced our loan this quarter, which included a principal payment of $10 million. Our changes to revenue cycle management increased our accounts receivable by 6.9 million. Excluding these two items, our cash decreased 3.8 million in the second quarter.

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We are making progress in all areas of the company to operate as a leaner, more effective organization, and the team at Exagen is striving to deliver the best service in the industry with a markedly improved cost structure. Additionally, we continue to expect our annual R&D expenses to approach 6 million, and therefore our Q2 performance was aided by the timing of some of these expected expenses. As an ancillary item, we recently reached an agreement in principle with the Department of Justice to settle an investigation that was initiated in February of 2022. This investigation was related to conduct that occurred in 2014 and 2015. We agreed in principle to make a settlement payment with associated fees of approximately $700,000 and admitted to certain facts, although we did not concede liability.

The DoJ will not require an outside compliance monitor to oversee our operations going forward. The definitive settlement agreement is subject to further negotiations. But ultimately, we look forward to putting this issue behind us so we can continue to focus on operating the business. In closing, it’s rewarding to see another quarter where our organizational performance is trending in the right direction. This is testament to the hard work of the Exagen team and the value AVISE testing provides the rheumatology community. I’m very encouraged by our recent performance, knowing that we continue to improve in many areas and have yet to see the results from several ongoing efforts. Before I hand the call over to Kamal, I’d like to note that at our annual meeting this past quarter, Jim Tullis retired as a member of the Exagen Board of Directors.

Jim had been a director on the Board for nine years and a vital member of the team. I want to thank Jim for his guidance and support to me personally. Jim has been a strong supportive of Exagen throughout much of the company’s history, and we wish him well. Additionally, I’d like to extend a warm welcome to Paul Kim, the newest member of our Board. Paul joins us with vast business and leadership experience and currently serves as the CFO of Fulgent Genetics, where he played a pivotal role in growing the company into a successful and profitable business. I’ll now turn the call over to Kamal.

Kamal Adawi: Thank you, John, and good morning, everyone. For Q2 2023, total revenues were 14.1 million compared with 11.2 million in Q1 of 2023 and 7.6 million in the second quarter of 2022. As a reminder, for year-over-year comparisons, in 2022, payments for Medicare were delayed from Q2 to Q3. Sequential quarter growth in revenue was driven primarily by an increase in ASP. The increase in ASP was a result of improved collections from prior quarters dating back to Q1 2022, mostly due to greater than expected cash collections. Testing volumes for AVISE CTD were record 37,749. Other testing revenue was 1.6 million in the second quarter of 2023 compared with 1.4 million in the first quarter of 2023, and 1.7 million in the second quarter of 2022.

Cost of revenue were 5.8 million in Q2, resulting in a total gross margin of 58.7% compared to 47.2% in Q1 of 2023 and 20.1% in the second quarter of 2022. The increase in gross margin percentage from the first quarter was primarily due to increased accrual rates from improved collections in prior periods. Operating expenses were 19.1 million in the second quarter of 2023 compared with 21.7 million in the second quarter of 2022, primarily driven by a decrease in employee-related expenses due to the reduction in force in early December 2022. For the second quarter of 2023, our net loss was 5 million compared with a net loss of 7.7 million for the first quarter of 2023 and 14.7 million for the second quarter of 2022. As a reminder, we refinanced our debt on April 28 which included a principal prepayment of 10 million.

The refinance was through our existing lender and the current balance of the loan is 18.1 million. The terms of the agreement include a floating interest rate, which is greater of 10%, or prime plus 2%, resetting the interest-only period to three years, the implementation of a new management plan and improved covenants. Cash and cash equivalents as of June 30, 2023 were approximately 31.5 million. As John mentioned, with our revenue cycle management strategy, the claims held in Q1 and Q2 contributed to the AR balance increasing to 16.2 million, which is offset by a lower cash balance. Overall, the company is performing better operationally than we were even a few quarters ago. And we’re seeing the results in our key metrics. As you heard from John, excluding the loan principal prepayment and changes in AR, this resulted in a decrease in our cash balance of 3.8 million in the second quarter.

I’m very proud of the team and the changes we have implemented as we’re off to a great start in our path to profitability. Our cost of revenue is lower, our operations are much more efficient, and all departments have goals that align across the organization and continue to drive improved operations. Not to get lost in all the numbers, but just as important is the culture of the organization. I originally joined the company almost 10 years ago, and the culture is stronger than I’ve ever seen which is reinforced by a decrease in our trailing 12-month voluntary turnover rate. The rate has decreased 36% from the end of 2022 to June 30. Turning to guidance. Some of the changes in revenue cycle management that John mentioned will have an impact on future quarters.

We’re modeling a softening in volume in Q3 due to changes in revenue cycle optimization, but are anticipating the lower volume to begin to be offset by higher ASPs in 2024. For Q3, we’re providing revenue guidance in the range of 10 million to 10.5 million. We will now open the call for questions.

Operator: Thank you. We will now be conducting a question-and-answer session. [Operator Instructions]. Our first questions come from the line of Dan Brennan with TD Cowen. Please proceed with your questions.

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Q&A Session

Dan Brennan: Great. Thanks for taking the questions. Congrats on the quarter. Maybe just a couple. Maybe just in terms of the benefit this quarter that you had from past collections, can you just quantify kind of what that was? And are you expecting any more benefit in the back half of the year?

Kamal Adawi: Hi, Dan. Thanks for the question. Yes. To quantify the prior period collections that were received in Q2 of ’23, but mainly took place in the prior year, it was just under $2 million. This is a very positive impact. But I view it as one-time. It’s very tough to quantify if this is going to occur again. So this comes from mainly 2022. And sometimes there are payments that take up to a year to be received. But I wouldn’t anticipate it to be as large as what we just saw for ’22 and in future quarters.

Dan Brennan: Great. And then on the burn in the quarter. So the way I understand it is, I guess when you net out some of the changes that you had there, it sounds like you’re basically saying your underlying cash burn was 3.8 million. If that’s correct, then what level of burn — which is a nice step down obviously from what you guys have been having, what level of burn should we be expecting in the back half of the year? And with the impact on the account receivables that you highlighted, is that going to stop? So should we see that kind of normalize going forward?

John Aballi: Great. Good morning, Dan. This is John. So here’s kind of the way we think about the cash burn in general, if I can open up the question a little bit more broadly. So we burned almost 40 million of cash or an average of just over 9 million of cash per quarter in 2022. So far here in 2023, looking at the change in cash, as you mentioned, accounting for the AR as well as our debt principal payment, we burned approximately 11 million operating the company these past two quarters. And that was driven largely by some of the improvements we made. Just to recap, we’ve had the reduction in force of 42 individuals at the end of Q4. That was a substantial cost savings. We’ve completed the evaluation of our R&D pipeline. We’ve set up criteria to pursue what we consider real business opportunities.

These also strive to ensure financial success of the projects we’re working to develop. We’ve worked to reduce the cost of our internal operations. And we’ve seen a reduction in our COGS as well. You see that with similar overall COG expense, yet an increase in volume year-over-year. We’ve created an awareness and accountability at the company level. From a budgeting standpoint, that’s been one of the key things I’ve worked to implement is transparency into the expenses that we’re incurring as a business all the way throughout the organization, especially at the department head level. And then everyone is generally bought into our efforts to reduce costs. Kamal spoke to it a little bit about the culture. It’s certainly a team effort, but it’s embraced that way.

So we intentionally helped claims the first part of the year because we have the cash to do so and because we are working to improve our revenue cycle operations. I gave details in prior quarters. But this was a huge undertaking and a significant opportunity for us. We began releasing these claims at the end of the quarter. And this will obviously slow the pace of cash burn going forward is how we look at it. I’ll let Kamal maybe speak a little bit more on some of the specifics. But I wanted to give you our view here. We’re ahead of schedule with the strategy we put in place, very positive from our standpoint. The success we’re having in reducing the cash used for operations has come down pretty substantially, dramatic changes relative to where we were really even six months ago.