Greetings, and welcome to the Exagen Inc. Third Quarter 2022 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ryan Douglas, Investor Relations. Thank you, sir. You may begin.

Good afternoon and thank you for joining us today. Earlier today, Exagen Inc. released financial results for the quarter ended September 30th, 2022. 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; and Mark Hazeltine, Chief Operating Officer, will host this afternoon'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 meanings of federal securities laws, which are made pursuant to the Safe Harbor provisions with 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 2022 guidance, our current and future product offerings, and reimbursement and coverage, restatement of our financial statements for the second quarter of 2022 and our plan for remediation with respect to one or more material weaknesses in internal controls over financial reporting that we expect to identify 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 the 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 31st, 2021, and subsequent filings. Information provided in this conference call speaks only to the live broadcast today, November 14th, 2022. 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. As previously announced on October 17th, Exagen appointed a new President and Chief Executive Officer, John Aballi. I'm pleased to introduce John and will now turn the call over to him.

Thanks Ryan and thank you to everyone joining the call. I'm very excited to be joining Exagen as CEO. We have developed a leadership position in one of the largest fields of medicine with our proprietary AVISE testing platform. Having spent the majority of my career working in labs, developing and commercializing diagnostics and oncology, I'm looking forward to bringing that same successful approach to rheumatology with the incredible team here at Exagen. Today, I will discuss my initial impressions along with our third quarter business highlights and give updates on Medicare reimbursement in addition to our pipeline. I'll then hand the call over to Kamal, our CFO, for details on our financial results. Over the past four weeks, I've started to evaluate Exagen's current business and product portfolio. Specifically, I wanted to gain a better understanding of our competitive advantages and what can be done to enhance them. The AVISE platform is based on proprietary technology. And Exagen has established itself as a rheumatologist's preferred partner in navigating the differential diagnosis of connective tissue disease. The company enhances its competitive advantage by delivering high values of customer service in combination with its innovative technology. I believe we can continue to differentiate through both service and our platform. I'm working with the teams at Exagen to better define our plan in this area and anticipate speaking to it more in the coming quarters. I've grown more excited about the opportunities I see in the organization and believe that my past experiences will provide great reference for improving the company. Of specific note is my experience leading the growth of sales organizations and products, developing medical policy with Medicare on several laboratory-developed tests, recent management of CAP and CLIA Laboratories, and optimizing revenue billing operations. I expect my experiences to add value as I continue to evaluate all aspects of the company. Regarding Exagen's most recent quarterly performance. Our total revenue for the third quarter was $14.7 million, which included a record 35,569 AVISE CTD tests delivered. This is up 12% year-over-year. We also had 2,287 total ordering health care providers, which is a 16% increase over the prior year quarter. We have now delivered a record 101,000 AVISE CTD tests year-to-date. We finished the quarter with 63 sales territories occupied by 54 reps. While it's great to see the continued strong utilization among our existing health care provider base, I believe we can grow faster. I'm working with the management team to review, prioritize, and take action on all aspects of commercial execution to accelerate the growth of our AVISE products. Turning now to an update on Medicare reimbursement for AVISE Lupus. For the past few months, we've been working with Noridian to resubmit claims, including responding to their request for additional information. Following these efforts, Medicare resumed paying claims and has continued to do so at a rate of $1,085. We have recognized approximately $3.7 million from claims that were submitted for Q2. With respect to obtaining a formal coverage determination from CMS, we submitted our application for coverage to the Noridian Medical Directors on July 29th of this year. We received notice that Noridian has deemed our application for a local coverage determination, or LCD, to be valid on September 27th. Ultimately, receiving a favorable LCD is uncertain and may be time-consuming, but our request for Medicare coverage for AVISE Lupus is now officially in queue. A successful LCD will improve transparency regarding Medicare support of AVISE Lupus, which would also improve our communication of coverage from Medicare Advantage patients to commercial payers. We believe that our strong support in the rheumatology community, robust clinical validity, and proven clinical utility will help us successfully obtain an LCD for AVISE Lupus. Our CAPSTONE study demonstrates the utility of AVISE Lupus, which we believe will be a key component of the evidentiary review by CMS. However, we must note that the process can be unpredictable. And while we are being reimbursed for AVISE Lupus today, reimbursement is not guaranteed throughout the process. In terms of payment levels, companies that develop new clinical diagnostic laboratory tests such as AVISE Lupus can apply for a new or substantially revised CPT code. For the year in which this code is made effective, the initial reimbursement rates are assigned by the Medicare Administrative Contractor and for Exagen, this is Noridian. As we previously stated, Noridian priced the AVISE Lupus PLA code 0312U at $1,085 for 2022. CMS establishes pricing by either a crosswalk or gap fill methodology before finalizing on the clinical laboratory fee schedule or CLFS. To determine pricing beyond 2022, the CMS pricing process resulted in a recommendation that the AVISE Lupus PLA code be cross walked to the Vectra CPT code at a rate of $840.65. We expect pricing to be finalized on the CLFS by the end of the year. This would then become our price with Medicare effective January 1st, 2023, and remain effective through the end of 2025 given current payment reporting timelines. Until an LCD is secured, we expect Noridian to adjudicate claims for AVISE Lupus on a per-claim basis and when determined to be medically necessary paid at the applicable PLA rate. As is common in the specialty diagnostic area, unique laboratory-developed tests face significant commercial payer scrutiny for medical necessity. As discussed in the second quarter, we continue to see headwinds relating to commercial payer claim processing and revenue. Now that we are billing under our PLA code, we are experiencing an increase in denials due to unfavorable medical policy with select plans and we expect this to persist. This has resulted in a reversal of revenue and a write-down of $1.7 million of accounts receivable in Q3 from prior period claims. We will continue to engage with commercial payers to obtain and maintain coverage for AVISE Lupus. While the dossier is a key component in engaging commercial payers for medical policy, clinical guidelines do not currently recognize the AVISE Lupus test. We view the inclusion into guidelines as an important catalyst to expanding coverage and payment. Our approach to commercial payers remains a focus point of the company and one that has my full attention. Turning now to our pipeline. Our pipeline has several exciting projects and I'm very impressed with our team, our lab, and our scientific capabilities. As would be expected with the change in leadership, I am currently reviewing every project to assess how it fits into Exagen's long-term portfolio strategy and I plan to bring a fresh perspective to the prioritization of our research program. My criteria for evaluation is as follows; first and foremost, does the product have the potential to deliver impactful results to clinicians and patients? Next, does it have a strong competitive advantage, which is durable or can be improved upon? And finally, does it have a path to reimbursement with an anticipated operating profile, which makes it a viable long-term offering, thereby justifying the investment? I'll discuss some of the milestones that we have reached recently. Of specific note, under the AVISE RADR program, we enrolled our first rheumatoid arthritis patients into our prospective clinical trial known as TiGER. The aim of this trial is to amass a clinical cohort capable of validating the work performed at Queen Mary University of London. We look forward to providing updates on our commercial development of biomarkers from synovial tissue to personalized therapy for rheumatoid arthritis patients. We remain focused on and will communicate our reimbursement pathway for and bias RADR in the near future and plan to provide updates regarding our product pipeline as we continue our review. This past week, I had the opportunity to join our scientific team at the American College of Rheumatology's Annual Conference, where they presented nine abstracts and we were honored to be selected as a featured presenter. At the conference, I spoke with several health care providers that use the AVISE platform. They expressed to me how important AVISE testing has been for them in their practice for helping diagnose connective tissue disorders and specifically stress the value AVISE plays in the clinical management of their patients. As I complete my first month, I'm taking a holistic approach at analyzing the business and implementing changes to improve Exagen's profitability. I'm very excited about Exagen's future and I'm looking forward to building on the solid foundation that's in place and leading the next phase of growth. I'll now turn the call over to Kamal for details on the finances.

Thank you, John, and good afternoon, everyone. First, I would like to address the material weakness that we identified during the third quarter close process. The material weakness was caused by the transition to the PLA code for billing. We had to correct the test charge in error and reverse the revenue accrual that was built incorrectly. As a company, we are committed to best practices in our financial reporting and have taken immediate action towards remediating this weakness. Earlier this year, we hired a consulting firm for our upcoming SOX 404(b) requirement and are working with them to strengthen our internal controls. Due to this weakness, we will be restating second quarter results and filing a restated 10-Q for the second quarter. The identified PLA code issue had an impact on revenue, accounts receivables, and other liabilities on the second quarter financials. The effect of these errors was an overstatement of revenue and accounts receivable in the amount of $1.4 million and $0.9 million, respectively, and an understatement of other liabilities in the amount of $0.5 million. Second quarter revenue will be restated to $7.6 million. As mentioned earlier, we continue to see the number of ordering health care providers increase. This quarter, we achieved 2,287 ordering health care providers compared with 1,969 in the third quarter of 2021, a 16% increase. In the third quarter, tests grew approximately 12% year-over-year and 2% quarter-over-quarter to 35,569 tests delivered compared with 31,742 tests in the third quarter of 2021 and 34,919 tests in Q2 2022. We did see an impact on demand from Hurricane Ian during the last week of the quarter as people began to evacuate. Florida is one of our largest markets and we saw the impact on demand continue through the first weeks of Q4. Total revenues in the third quarter of 2022 were $14.7 million compared to $12.3 million in the third quarter of 2021. This represents an increase of 20.2% over the third quarter of 2021. As John mentioned, this includes $3.7 million in revenue from Q2 Medicare claims. We saw a continued disruption caused by the PLA code with commercial payers, which resulted in a reduction in revenue due to write-downs from the trailing two quarters. We are not collecting at the rate we have previously accrued and have to reduce the accrual rate down per ASC 606. The $14.7 million of Q3 revenue contains $3.7 million from Q2 Medicare claims. AVISE CTD test revenue was $12.8 million in the third quarter of 2022 compared with $9.9 million in the third quarter of 2021. Other testing revenue was $1.9 million in the third quarter of 2022 compared with $2 million in the third quarter of 2021. Our AVISE CTD and other testing revenue resulted in testing revenues of $14.7 million in the third quarter of 2022 compared with $11.9 million in the third quarter of 2021. With Q2 financials restated, year-to-date revenue through the third quarter is $32.7 million compared to $35.6 million through the third quarter of last year. The $2.9 million decrease in year-over-year revenue is primarily due to a decrease of $1.4 million in AVISE CTD testing due to lower ASPs, partially offset by an increase in volume, a $1 million decrease due to the termination of the SIMPONI agreement, and a $0.5 million decrease from other testing. Cost of revenue were $6 million in Q3, resulting in total gross margin of 59.2% compared to 55.2% in the third quarter of 2021. Testing gross margin was 59.2% in the third quarter of 2022 compared to 53.7% in the third quarter of 2021. Operating expenses in the quarter were $22.5 million compared with $18.8 million in the third quarter of 2021. The increase was primarily due to larger expenses in the following areas; employee-related expenses associated with the overall increase in headcount, marketing spend, R&D expenses, cost of revenue due to the increase in testing volumes and public company cost. This equated to a net loss in the quarter of $8.1 million compared with $7.2 million in the third quarter of 2021. Looking at our balance sheet. Cash and cash equivalents as of September 30th, 2022 were approximately $68.7 million. We put an ATM facility in place during the third quarter. We do not have any immediate plans to raise capital from an ATM offering. We view this as a prudent way to make sure we have access to capital at opportunistic times to support the business as capital needs change. Our burn in Q3 was $7.6 million. We're reviewing all aspects of the organization's control spend. We are focused on improving our profitability profile. We aim to provide a more detailed strategy of our path to profitability once our current analysis is complete. For full year 2022, given current reimbursement trends, we are increasing our guidance to the revised range of $40 million to $43 million. We will now open the call for questions.

Thank you. We'll now be conducting a question-and-answer session. Our first question comes from the line of Max Masucci with Cowen & Company. Please proceed with your question.

Hi, good afternoon. First question for John. I just want to first congratulate you on your next chapter and nice start out of the gate. So, you served in a leadership role at Decipher during the company's triple-digit growth phase, through major reimbursement milestones into a more maturing phase under the umbrella of Veracyte. So, it would be great to hear what initially piqued your interest in joining Exagen, how the reality is compared to your expectations and where you're seeing opportunity to make an immediate impact.

Hi Max. Thank you for the question. I really appreciate it. I've been part of some successful teams and have had the opportunity to benefit from that, and I believe Exagen has a similar strong foundation. I was drawn to Exagen because of its proprietary testing and its effort to create a distinct service model. I think that combination is a winning one, and I feel equipped to contribute and add value. Over the past four weeks, I have focused on meeting as many people within the organization as I can. I've held one-on-one meetings with many individuals across all areas of the organization, including field staff, billing and provider relations, and customer service. I've also engaged with our scientists in the lab and spent time with our research team. Opportunities are beginning to emerge, but it's still early for me to determine a clear path forward. I’m starting to see some trends, and as I continue these one-on-one discussions and meet more people, the direction will become clearer. I don’t think I had the complete prescription right from the start, which would have likely been a mistake. I’m learning what makes Exagen unique and what is special about its products, and I’m applying my past experience to help drive improvements. Hopefully, this gives you some insight. I understand that people are looking for more specifics, and I expect to provide that in the upcoming quarters. I’m very excited about what I’ve observed so far.

That's fantastic. I appreciate the details. Kamal, with all the changes happening, could you help us understand the rationale behind the expected guidance for Q4? I know it's probably early to discuss 2023, but do you have any insights on how we're approaching average selling price and margin trends for that year?

Yes, thanks for the question, Max. As you saw, we had some strong volumes in Q3 and that's continuing into our projections for guidance for the full year. Reimbursement is definitely one of the biggest challenges. We saw Medicare resume paying, but we still have headwinds with our commercial payers. We did note a write-down in Q3 of about $1.7 million. That gets us clear through Q3 and our guidance that we provided on this call is take into account any future headwinds that we can see at this point. But that's pretty much the most I can say with where we are at this point and improving our guidance to $40 million to $43 million.

No worries. Final question from me. Would just love to hear any feedback, maybe from John, that you received following some of the presentations at the ACR conference in September, just how RADR was received and just generally, the sort of feedback you had coming out of that event.

Certainly. I think it's an important point and thanks again for the question. ACR was exciting from my perspective. The rheumatology space is newer to me and so I got the opportunity to interact with our team there along with several rheumatologists and learn from them. Feedback from some of the individual presentations has been positive. I still actually need to connect with our team in greater depth. The conference runs through tomorrow actually. So, we had a talk today and we had one yesterday as well. So, looking forward to finalizing some of that feedback. But I know our talks were well attended. We had a significant number of physicians sign up to attend the talk regarding our CAPSTONE study. And I really leveraged the time to meet one-on-one with physicians, our team as well. But I was able to speak with a few academics and it became apparent that our tests do have proprietary aspects, which are differentiating and that was reassuring to me and the value that they are providing is significant. And so I think if we take a look at the business as a whole and continue to improve our service offering, it gives me a lot of optimism going forward. So it was great in that respect, I think, well-received certainly.

Well, congrats again on the new role and thanks for taking the questions.

Thanks a lot.

Thank you. Our next question comes from the line of Mark Massaro with BTIG. Please proceed with your question.

Hey guys, this is Vivian on for Mark. Thanks for taking the question. So, I believe on the last call, you guys talked about the percentage of claims that were denied by Medicare as well as the percentage that required additional information. So, I think we found that color quite helpful if you could just comment on the denial rate. Thanks.

When it comes to Medicare, we've resumed getting paid from all their testing and this goes back to Q2. That's why we have that adjustment of a positive revenue recognition of $3.7 million in Q3 for the Q2 claims and we are being paid for the Q3 claims. So, right now, we're getting paid for all the claims for AVISE CTD and Lupus that's being submitted to Medicare.

I would like to provide some context about our process thus far. We applied for our PLA code, which became effective in April of this year. Throughout the summer, we collaborated with Medicare and specifically Noridian, our local MAC, to address their inquiries about additional information on a per-claim basis as well as our test overall. When we received the PLA code, we believe it positively distinguishes us, but we still had to clarify exactly who we are and what our intentions are. By working with Noridian over the summer to fulfill their requests for more information, they have since resumed payments. This should give you some insight, and they have also compensated us for all claims from Q2 in addition to Q3.

Okay, got it. Thanks for this clarification. So, could you also discuss any color you might have on potential timing for guideline inclusion and any additional evidence or action you might take to move along conversations on that front? Thanks.

Certainly, guideline inclusion is a crucial element of an overall managed care strategy and is particularly important for our relationships with payers. The guidelines relevant to Lupus are noteworthy. Recently, payers have indicated that they refer to the ACR guidelines, which are provided by the American College of Rheumatology, to determine whether AVISE Lupus is deemed medically necessary. It is important to note that these guidelines are not for diagnosis; they are intended for classification. Their purpose is to ensure uniformity in patient enrollment for Lupus trials globally, not just within the United States. While payers are using these guidelines for diagnostic classification, they are primarily providing criteria for clinical trial enrollment. We are engaging with the ACR on this matter, and our medical team has recently initiated these discussions. Additionally, we need to assess how our current evidentiary package is perceived by some of these payers over the next year. I believe it's premature to provide a timeline at this point, as predicting these developments can be challenging. Recognizing the significance of this issue, I am highly focused on it. The clinical demand for the product strongly supports its utility, and our evidentiary package is robust. We just need to gather more feedback on its strength. These conversations are ongoing, and I will be glad to provide updates in the coming quarters.

Got it. Thanks for taking the questions.

Thank you. Our next question comes from the line of Andrew Brackmann with William Blair. Please proceed with your question.

Good afternoon. This is Griffin filling in for Andrew. Thank you for addressing my questions. Kamal, I'd like to follow up on the guidance. I believe the midpoint implies about $8.8 million in Q4. If we exclude the $3.7 million from the claims in Q2, would it be correct to estimate an ASP of around $250 in Q4? And is that your perspective on the ASP for Q3 as well as how you view Q4?

Well, when you look at the $250 million and the average selling price for Q3, that's based on the assumption that the $1.7 million write-down persists into Q4. This is an assumption that needs to be acknowledged, especially since we had write-downs in Q2 and Q3, and we are encountering challenges from payers. Therefore, it's uncertain, but it's certainly a challenge we are dealing with. We must consider this when providing guidance in the range of $40 million to $43 million. Without the $1.7 million, the average selling price in Q3 would be just over $300.

Got it, that's very helpful. Thank you. And then just a quick follow-up on RADR timelines. I think initial plans have been for a KOL launch sometime in the fourth quarter and then maybe a commercial launch sort of mid-2023. Any update to those as you are sort of reassessing that, John?

Certainly, Griffin. Thanks for the question. It's an important note. So, I mentioned in the remarks a second ago that I'm evaluating every aspect of our research pipeline. It's very important to me that we have clarity and a higher level of predictability into when we think a product can be reimbursed. And I'm not quite there on the RADR side yet. So, I need to learn more, as I mentioned. It takes a little bit more time for me to make some of those conclusions. But from my perspective, I'll be happy to provide updates here in the coming quarter. But I don't have that level of certainty right now on the reimbursement side with the RADR program. It is proceeding well from a development standpoint and from a research standpoint. Just on the commercialization side, I may have to reset some of those timelines.

Okay. Thanks for the questions.

Thank you. Our next question comes from the line of Kyle Mikson with Canaccord Genuity. Please proceed with your question.

Hey thanks. Welcome John. I guess Kamal, it's a question for you on this $3.7 million catch-up revenue from the second quarter. How many claims does that represent? It looks like maybe 3,000, 4,000 like that. I was just kind of curious about that given it didn't occur in the third quarter? And then I know the commercial side is kind of uncertain right now. But like is there any risk at all you're not paid for Medicare claims next quarter? Thanks.

So, to address the first part of that question, historically, we've seen our Medicare percent of AVISE CTD volume coming at about 13%. It's been pretty constant in terms of volume there. So, you can imply what one quarter would be based on our testing amount. And again, it was all Medicare claims. We are now getting paid on all Medicare claims for AVISE CTD and Lupus for Q2 and Q3 from the start of when the Medicare reimbursement issue occurred. I'm going to let John address the second part of the question in regards to going forward with Medicare in Q4 and 2023.

Thanks for the question, Kyle. In terms of the long-term predictability of Medicare payments related to the AVISE Lupus claims, I can't state that with high confidence. Currently, Medicare has reached out to us for additional information about our tests and individual claims. We have provided that information satisfactorily, and as a result, they have resumed payment on all claims over the last two quarters. This gives us confidence that claims are being processed positively on an individual basis. Moving forward, the next appropriate step is to secure a local coverage determination, which we have begun, and then continue with the subsequent steps. I hope this answers your question.

Okay. Yes, that was great, John. And then just on that point, the crosswalk to Vectra is kind of interesting. I was wondering if you were surprised by that. And what was your reaction? Is this $840 rate like a letdown compared to the $1,085?

So, that's a great question. I think from our perspective, we were looking to secure a price commensurate with the value and the cost of the test being performed, right? And so I think if you take a holistic look at it, we were able to do that. The company was able to do that. Initially, the price that's set is really consistent with your list price. And the only mechanism to maintain that over a longer period of time is really the ADLT route. So, I think from our perspective, to be cross walked to a reasonable code where it's similar resources used and similar analytes evaluated, I think it was a successful endeavor.

Okay, that's helpful. And then just back to the fourth quarter guidance, it does imply this steep revenue decline, but the factors don't make sense to me. It's just not quite clear if volume will increase. Is that implied in the expectation? I think like the trends are typically that fourth quarter volume should increase a little bit, Kamal and John. Like I think maybe 2019, that was different. But just could you just talk about like volume trends? And should we expect like a decline or flat, something like that?

We experienced an unusual situation last year in Q4 due to the COVID year of 2020, where volume increased. During that time, many physicians weren't attending the ACR conference since it was held virtually. They continued to see patients, and many patients also chose not to take vacations during the holidays, which was atypical. Generally, in most years, Q4 shows lower volume compared to Q3 for several reasons. This pattern is consistent year after year when COVID is not affecting operations. The main reasons include physicians being unavailable during the ACR conference, which recently occurred in Philadelphia, and fewer lab days. The holiday season leading into Q4, with Thanksgiving, Christmas, and Hanukkah, results in fewer lab days. Additionally, the lab days we do have later in the year typically experience reduced patient traffic, contributing to lower volume. Historically, we observe that Q4 volume tends to be less than Q3, and I don't expect this year to deviate significantly from that trend. I anticipate these seasonal effects will be present in Q4.

Can you provide the number of adopters in the third quarter? I didn't find that information in the release or remarks. Last quarter, there were nearly 800; how is that currently trending?

Thanks Kyle. Great question. Relatively flat if not a little bit down in Q3 relative to Q2. The reason why it wasn't necessarily in the prepared remarks, this actually ties back to my analysis of the company and evaluation of the company. I'm really looking at every aspect, including all of our metrics and trying to better understand exactly how they drive action on our side. And so I may suggest an alternative metric in the future. I just didn't have one readily available at this time. So, I think adopters is a good concept in general. Our definition, I want to evaluate a little bit.

Okay, no totally fair. I get that John. Thanks a lot. Thanks guys. Appreciate it.

Thank you. We have reached the end of our question-and-answer session. I would like to turn the call back over to Mr. Aballi for any closing remarks.

Thank you. I wanted to end by thanking everyone for joining the call today and for your interest in Exagen. I also want to thank the team at Exagen as they've continued to serve our customers through this transition in the company. I look forward to continuing to drive improvements within the organization and operations at Exagen and updating you on our progress over the coming months.