Exagen Inc.

Greetings, and welcome to the Exogen Inc. Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during this conference, please press star zero on your telephone keypad. And as a reminder, this conference is being recorded. And it is now my pleasure to introduce to you Ryan Douglas with Investor Relations. Thank you, Ryan. Please go ahead.

Good afternoon, and thank you for joining us. Earlier today, Exygen, Inc. released financial results for the quarter ended September 30th, 2023. The release is currently available on the company's website at www.exygen.com. John Ibali, President and Chief Executive Officer, and Kamala Dowie, Chief Financial Officer, will host this afternoon's call. Before we get started, I'd 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 risk 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 all description of risk 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. In addition, some of the information discussed today includes non-GAAP financial measures such as adjusted EBITDA that have not been calculated in accordance with generally accepted accounting principles in the United States or GAAP. These non-GAAP items should be used in addition to and not as a substitute for any GAAP results. We believe these metrics provide useful supplemental information in assessing our revenue and operating performance. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures are presented in the tables at the end of our earnings release issued earlier today, which has been posted on the investor relations page of the company's website. The information provided in this conference call speaks only to the live broadcast today, November 13, 2023. Exogen disclaims any intention or obligation, except as required by law, to update or advise any information, financial projections, or other forward-looking statements, whether because of new information, future events, or otherwise. I'll now turn the call over to John Avali, President and CEO of Exygen.

Thanks, Ryan, and thanks to everyone joining. For today's call, I'll walk through our third quarter results, the significant progress we are seeing in improving our business, and provide updates on our overall progress to achieve profitability. I'll then turn the call over to our CFO, Kamal, for further details on our financial performance. To start, I'm extremely pleased with the results we are seeing from initiatives implemented this year. Our strategy of focusing on higher margin products and implementing changes that will allow us to expand margins is yielding results. We are doing all of this while paying rigorous attention to controlling costs. our performance has continued the trend of surpassing expectations, and we are well on pace to deliver record and growing advised CTD trailing 12-month ASP, record full-year revenue, and marked improvement in cash burn relative to last year. The team at Exogen has greatly improved the organization while continuing to serve rheumatologists throughout the US with the best testing available. Specifically highlighting a few key metrics, Our trailing 12-month ASP has reached an all-time high for advised CTD testing and increased from $279 at the start of the year to over $320 this past quarter, reflecting a $40 increase. This progress corresponds to third-quarter revenue of $13.4 million with gross margins of 57%. The increases we have seen in ASP over the past few quarters are the result of a more effective billing operation and improved cash collections. We've worked extremely hard to improve in this area, and the results are showing. Our gains in collections are from commercial payers, which is not easy to do, and a direct reflection of our ability to execute. To give an example, historically, accounts over a year old had a very low probability of being collected on. But with the improvements to our billing processes, we've been able to see improved collections on these older cases. In the third quarter, we were able to collect around $600,000 from tests that were completed and billed over a year ago. This momentum is just the start, and we expect to see continued growth in ASP throughout our 2024 performance. Our ability to demonstrate improvement in ASP while significantly reducing costs is validating our strategy. Our adjusted EBITDA for the first three quarters of 2022 reflected a negative $26.4 million. Here in 23, we've cut that in half to $13.2 million while delivering improved ASP revenue and volume for the same nine-month period. Improvements to ASP continue to be the most powerful tool we can utilize to achieve our goals, and we are delivering. I'd like to provide a few details on cash management for the organization, as we have seen significant collections this past month. Our accounts receivable balance at the end of September was $17 million, but has improved to approximately $11.6 million on October 31st. Correspondingly, our cash balance at the end of September was approximately $28 million and has increased to over $31 million at the end of October. We anticipate finishing 2023 with more than $30 million of cash on hand, effectively improving our cash balance from the end of Q2, as we've drawn down our AR exactly as we expected. When factoring our quarterly cash needs against our current cash balance, we estimate that we have sufficient cash on hand to execute on our current operating strategy into late 2025 or early 26. In the third quarter, we continued our strategy of implementing changes to our processes, which are expected to improve ASP in the future. And while I'm confident our team has made every effort to prepare and educate clients about these changes throughout the summer, we did experience a modest decline in test volume in the third quarter to 32,600 advised CTD tests. The decline was expected and was the driving factor in our guidance for Q3. We believe our decline in volume will be transient in the long run as we pursue more profitable business. It's important to recognize that not all testing volume aligns with our current strategy of improving ASP, and some of this loss is reflective of that. Additionally, when we analyze the change in ordering patterns, we've observed that the majority of the decline is reflected in reduced test orders on a per-physician basis and not tied to a significant contraction in the ordering physician base. Our team is diligently working to support customers through this transition and establish processes which best fit each customer's clinical workflow. We anticipate a return to prior volume levels in the back half of 2024 as we work through these changes. For clarity, we believe our Q4 volume will be the low point due to the inherent seasonality typically seen in our business this quarter and some lingering effect from our implemented changes, but building back from here as we head into the new year. Our strategy remains rooted in improving advised CTD ASP and the pursuit of more profitable business, which these changes have set us up to achieve. In regard to our R&D efforts, we recently achieved a significant milestone and are pleased to announce that we've entered into an exclusive license agreement with Johns Hopkins University to develop clinical tests leveraging novel biomarkers for lupus nephritis. This technology and invention is from the laboratory of Doctors Michelle Petrie and Andrea Fava. The opportunity in lupus nephritis meets our requirements for developing testing solutions to better serve our customers. When I speak to rheumatologists in the field, they have made it very clear that having access to biomarkers, which would aid in the management of SLE patients with kidney involvement, would provide significant utility to their practice. And given that approximately half of all SLE patients go on to develop some form of lupus nephritis, We believe this technology will be instrumental in enabling better patient outcomes. To hit on a few ancillary topics, with the recent announcement from the FDA, we are closely monitoring the proposed rules to regulate lab-developed tests, such as Advise CTD. We believe that multiple details need to be addressed with greater clarity and are waiting for the dust to settle in this regard. But we're familiar with the 510 route and believe that with our current level of supporting data, if ICTD would be well positioned to comply or come into compliance with the FDA's requirements and timelines should they come to fruition. Also, in October, we finalized our settlement with the Department of Justice for an investigation that was related to activities which have since been discontinued but occurred in 2014 and 2015. The agreed upon settlement was approximately $650,000 and we're pleased to put this issue behind us so we can continue to focus on operating the business. Kamal will now highlight the financial performance in greater detail.