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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the quarterly period ended
OR
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ___________ to __________
Commission
file number
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
(Address of principal executive offices) (Zip Code)
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Exchange Act:
| Title of each class | Trading Symbol | Name of each exchange on which registered | ||
| The
|
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. ☒
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit such files). ☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | Accelerated filer ☐ |
| Smaller reporting company | |
| Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided to Section 13(a) of the Exchange Act. ☐
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒
The number of shares of common stock outstanding as of August 3, 2022 was .
PART 1—FINANCIAL INFORMATION
This Report on Form 10-Q (“Report”) contains forward-looking statements that involve risks and uncertainties. We make such forward-looking statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and other federal securities laws. All statements other than statements of historical facts contained in this Report are forward-looking statements. In some cases, you can identify forward-looking statements by words such as “anticipate,” “believe,” “contemplate,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “seek,” “should,” “target,” “will,” “would,” or the negative of these words or other comparable terminology.
Any forward-looking statements in this Report reflect our current views with respect to future events or to our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. Factors that may cause actual results to differ materially from current expectations include, among other things, those discussed in this Report under Item 1 of the Notes to Condensed Consolidated Interim Financial Statements, under Risk Factors in this Report and those Risk Factors in Part I, Item 1A of our most recent Annual Report on Form 10-K as filed with the Securities and Exchange Commission. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Except as required by law, we assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future.
The forward-looking statements in this Report also include, among other things, statements about:
| ● | the timing and potential achievement of future milestones; | |
| ● | the timing and our ability to obtain and maintain coverage and reimbursements from the Centers for Medicare and Medicaid Services and other third-party payers; | |
| ● | our plans to pursue research and development of diagnostic test; | |
| ● | the potential commercialization of our diagnostic tests currently in development; | |
| ● | the timing and success of future clinical trials and the period during which the results of the clinical trials will become available; | |
| ● | the potential receipt of revenue from future sales of our diagnostic tests or diagnostic tests in development; | |
| ● | our assumptions regarding obtaining reimbursement and reimbursement rates; | |
| ● | our estimates regarding future orders of tests and our ability to perform a projected number of tests; | |
| ● | our estimates and assumptions around patient populations, market size and price points for reimbursement for our diagnostic tests; | |
| ● | our estimates regarding future revenues and operating expenses, and future capital requirements; | |
| ● | our intellectual property position; | |
| ● | the uncertainties associated with the coronavirus (COVID-19) ongoing pandemic, including its possible effects on our operations and the demand for our diagnostic tests and Pharma Services; | |
| ● | our ability to efficiently and flexibly manage our business amid uncertainties related to COVID-19; | |
| ● | the impact of government laws and regulations; and | |
| ● | our competitive position. |
Unless the context otherwise requires, all references to “Oncocyte,” the “Company,” “we,” “us,” “our,” or similar words refer to Oncocyte Corporation, together with our consolidated subsidiaries.
The description or discussion, in this Form 10-Q, of any contract or agreement is a summary only and is qualified in all respects by reference to the full text of the applicable contract or agreement.
DetermaRx™, DetermaIO™, DetermaTx™, DetermaMx™, DetermaCNI™, DetermaDx™ and VitaGraftTM are trademarks of Oncocyte Corporation, and TheraSure™ is a trademark of Chronix Biomedical, Inc., regardless of whether the “TM” symbol accompanies the use of or reference to the applicable trademark in this Report.
| 2 |
Item 1. Financial Statements
ONCOCYTE CORPORATION
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
| June 30, 2022 | December 31, 2021 | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable | ||||||||
| Marketable equity securities | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total current assets | ||||||||
| NONCURRENT ASSETS | ||||||||
| Right-of-use and financing lease assets, net | ||||||||
| Machinery and equipment, net, and construction in progress | ||||||||
| Goodwill | ||||||||
| Intangible assets, net | ||||||||
| Restricted cash | ||||||||
| Other noncurrent assets | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
| CURRENT LIABILITIES | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued compensation | ||||||||
| Accrued expenses and other current liabilities | ||||||||
| Accrued severance from acquisition | ||||||||
| Accrued liabilities from acquisition | ||||||||
| Loans payable, net of deferred financing costs | ||||||||
| Right-of-use and financing lease liabilities, current | ||||||||
| Total current liabilities | ||||||||
| NONCURRENT LIABILITIES | ||||||||
| Right-of-use and financing lease liabilities, noncurrent | ||||||||
| Contingent consideration liabilities | ||||||||
| TOTAL LIABILITIES | ||||||||
| Commitments and contingencies | ||||||||
| Series A Redeemable Convertible Preferred Stock, | ||||||||
| SHAREHOLDERS’ EQUITY | ||||||||
| Preferred stock, | ||||||||
| Common stock, issued and outstanding at June 30, 2022 and December 31, 2021, respectively | ||||||||
| Accumulated other comprehensive loss | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total shareholders’ equity | ||||||||
| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated interim financial statements.
| 3 |
ONCOCYTE CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Net revenue | $ | $ | $ | $ | ||||||||||||
| Cost of revenues | ||||||||||||||||
| Cost of revenues – amortization of acquired intangibles | ||||||||||||||||
| Gross profit | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Operating expenses: | ||||||||||||||||
| Research and development | ||||||||||||||||
| Sales and marketing | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Change in fair value of contingent consideration | ( | ) | ( | ) | ||||||||||||
| Total operating expenses | ||||||||||||||||
| Loss from operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| OTHER INCOME (EXPENSES), NET | ||||||||||||||||
| Interest expense, net | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Unrealized gain (loss) on marketable equity securities | ( | ) | ||||||||||||||
| Pro rata loss from equity method investment in Razor | ( | ) | ||||||||||||||
| Gain on extinguishment of debt (PPP loan) | ||||||||||||||||
| Other income, net | ||||||||||||||||
| Total other expenses, net | ( | ) | ||||||||||||||
| LOSS BEFORE INCOME TAXES | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Income tax benefit | ||||||||||||||||
| NET LOSS | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Net loss per share: basic and diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Weighted average shares outstanding: basic and diluted | ||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated interim financial statements.
| 4 |
ONCOCYTE CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| NET LOSS | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Foreign currency translation adjustments | ( | ) | ( | ) | ||||||||||||
| COMPREHENSIVE LOSS | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
The accompanying notes are an integral part of these unaudited condensed consolidated interim financial statements.
| 5 |
ONCOCYTE CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(In thousands)
| Three Months Ended June 30, 2022 | ||||||||||||||||||||||||||||
| Series A Redeemable Convertible Preferred Stock | Common Stock | Accumulated
Other Comprehensive | Accumulated | Total Stockholders’ | ||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Income | Deficit | Equity | ||||||||||||||||||||||
| Balance at March 31, 2022 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
| Net Loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Stock-based compensation | - | - | ||||||||||||||||||||||||||
| Issuance of common shares, including at-the-market transactions, net of financing costs and underwriting discounts | - | |||||||||||||||||||||||||||
| Shares issued upon vesting of RSU, net of shares retired to pay employees’ taxes | - | |||||||||||||||||||||||||||
| Issuance of Series A redeemable convertible preferred stock, net of financing costs | - | |||||||||||||||||||||||||||
| Accretion of Series A convertible preferred stock to redemption value | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Balance at June 30, 2022 | $ | $ | $ | $ | ( | ) | $ | | ||||||||||||||||||||
| Three Months Ended June 30, 2021 | ||||||||||||||||||||||||||||
| Series A Redeemable Convertible Preferred Stock | Common Stock | Accumulated
Other Comprehensive | Accumulated | Total Stockholders’ | ||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Income | Deficit | Equity | ||||||||||||||||||||||
| Balance at March 31, 2021 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
| Net Loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Stock-based compensation | - | - | ||||||||||||||||||||||||||
| Stock options exercised | - | |||||||||||||||||||||||||||
| Warrants exercised | - | |||||||||||||||||||||||||||
| Shares issued upon vesting of RSU, net of shares retired to pay employees’ taxes | - | ( | ) | ( | ) | |||||||||||||||||||||||
| Issuance of common stock to Chronix Biomedical acquisition | - | |||||||||||||||||||||||||||
| Balance at June 30, 2021 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
| Six Months Ended June 30, 2022 | ||||||||||||||||||||||||||||
| Series A Redeemable Convertible Preferred Stock | Common Stock | Accumulated
Other Comprehensive | Accumulated | Total Stockholders’ | ||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Income | Deficit | Equity | ||||||||||||||||||||||
| Balance at December 31, 2021 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
| Net Loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Stock-based compensation | - | - | ||||||||||||||||||||||||||
| Issuance of common shares, including at-the-market transactions, net of financing costs and underwriting discounts | - | |||||||||||||||||||||||||||
| Shares issued upon vesting of RSU, net of shares retired to pay employees’ taxes | - | |||||||||||||||||||||||||||
| Issuance of Series A redeemable convertible preferred stock, net of financing costs | - | |||||||||||||||||||||||||||
| Accretion of Series A convertible preferred stock to redemption value | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Balance at June 30, 2022 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
| Six Months Ended June 30, 2021 | ||||||||||||||||||||||||||||
| Series A Redeemable Convertible Preferred Stock | Common Stock | Accumulated
Other Comprehensive | Accumulated | Total Stockholders’ | ||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Income | Deficit | Equity | ||||||||||||||||||||||
| Balance at December 31, 2020 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
| Net Loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Stock-based compensation | - | - | ||||||||||||||||||||||||||
| Issuance of common shares, including at-the-market transactions, net of financing costs and underwriting discounts | - | |||||||||||||||||||||||||||
| Stock options exercised | - | |||||||||||||||||||||||||||
| Warrants exercised | - | |||||||||||||||||||||||||||
| Shares issued upon vesting of RSU, net of shares retired to pay employees’ taxes | - | ( | ) | ( | ) | |||||||||||||||||||||||
| Issuance of common stock to Razor Genomics | - | |||||||||||||||||||||||||||
| Issuance of common stock to Chronix Biomedical | - | |||||||||||||||||||||||||||
| Balance at June 30, 2021 | $ | ( | ) | |||||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated interim financial statements.
| 6 |
ONCOCYTE CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
| Six Months Ended | ||||||||
| June 30, | ||||||||
| 2022 | 2021 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation expense | ||||||||
| Amortization of intangible assets | ||||||||
| Pro rata loss from equity method investment in Razor | ||||||||
| Stock-based compensation | ||||||||
| Unrealized (gain) loss on marketable equity securities | ( | ) | ||||||
| Amortization of debt issuance costs | ||||||||
| Change in fair value of contingent consideration | ( | ) | ||||||
| Change in fair value of Series A redeemable convertible preferred stock second tranche obligation | ( | ) | ||||||
| Deferred income tax benefit | ( | ) | ||||||
| Gain on extinguishment of debt (PPP loan) | ( | ) | ||||||
| Accrued severance from Chronix Biomedical acquisition | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ( | ) | ||||
| Lease liabilities | ( | ) | ||||||
| Prepaid expenses and other assets | ( | ) | ( | ) | ||||
| Accounts payable and accrued liabilities | ( | ) | ||||||
| Accrued severance and liabilities from Chronix Biomedical acquisition | ( | ) | ||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Acquisition of Insight Genetics, net of cash acquired | ( | ) | ||||||
| Acquisition of Razor Genomics asset, net of cash acquired | ( | ) | ||||||
| Acquisition of Chronix Biomedical, net of cash acquired | ( | ) | ||||||
| Construction in progress and purchases of furniture and equipment | ( | ) | ( | ) | ||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Proceeds from exercise of stock options | ||||||||
| Proceeds from sale of common shares | ||||||||
| Financing costs to issue common shares | ( | ) | ( | ) | ||||
| Proceeds from sale of redeemable convertible Series A preferred shares | ||||||||
| Financing costs to issue redeemable convertible Series A preferred shares | ( | ) | ||||||
| Proceeds from sale of common shares under at-the-market transactions | ||||||||
| Financing costs for at-the-market sales | ( | ) | ( | ) | ||||
| Proceeds from exercise of warrants | ||||||||
| Common shares received and retired for employee taxes paid | ( | ) | ||||||
| Repayment of loan payable | ( | ) | ( | ) | ||||
| Repayment of financing lease obligations | ( | ) | ( | ) | ||||
| Net cash provided by financing activities | ||||||||
| NET INCREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH | ||||||||
| CASH, CASH EQUIVALENTS AND RESTRICTED CASH, BEGINNING | ||||||||
| CASH, CASH EQUIVALENTS AND RESTRICTED CASH, ENDING | $ | $ | ||||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION | ||||||||
| Cash paid for interest | $ | $ | ||||||
| SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING AND INVESTING ACTIVITIES | ||||||||
| Common stock issued for acquisition of Razor Genomics asset | $ | $ | ||||||
| Deferred tax liability generated from the acquisition of Razor Genomics asset | ||||||||
| Common stock issued for acquisition of Chronix Biomedical | ||||||||
| Deferred tax liability generated from the acquisition of Chronix | ||||||||
| Initial fair value of contingent consideration at acquisition date | ||||||||
| Assumed liability from Chronix Acquisition | ||||||||
| Construction in progress, machinery and equipment purchases included in accounts payable, accrued liabilities and landlord liability | ||||||||
| See Note 10 for additional disclosures around leases | ||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated interim financial statements.
| 7 |
ONCOCYTE CORPORATION
NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(UNAUDITED)
1. Organization, Description of the Business and Liquidity
Oncocyte Corporation (“Oncocyte”), incorporated in 2009 in the state of California, is a molecular diagnostics company focused on developing and commercializing proprietary laboratory tests to serve unmet medical needs across the cancer care continuum. Oncocyte’s mission is to provide actionable information to physicians and patients at critical decision points to optimize diagnosis and treatment decisions, improve patient outcomes, and reduce overall cost of care. Oncocyte has prioritized lung cancer as its first indication. Lung cancer remains the leading cause of cancer death in the United States, despite the availability of molecular testing and novel therapies to treat patients.
Oncocyte’s
first product for commercial release is a proprietary treatment stratification test called DetermaRx™ that identifies which patients
with early-stage non-small cell lung cancer may benefit from chemotherapy, resulting in a significantly higher, five-year survival rate.
Beginning in September 2019 through February 23, 2021, Oncocyte held a
Oncocyte completed its acquisition of Insight Genetics, Inc. (“Insight”) on January 31, 2020 (the “Insight Merger Date”) through a merger with a newly incorporated wholly owned subsidiary of Oncocyte (the “Insight Merger”) under the terms of an Agreement and Plan of Merger (the “Insight Merger Agreement”). Prior to the Insight Merger, Insight was a privately held company specializing in the discovery and development of the multi-gene molecular, laboratory-developed diagnostic tests that Oncocyte has branded as DetermaIO™. DetermaIO™ is a proprietary gene expression assay with promising data supporting its potential to help identify patients likely to respond to checkpoint inhibitor drugs. Insight has a CLIA-certified diagnostic laboratory with the capacity to support clinical trials or assay design on certain commercially available analytic platforms that may be used to develop additional diagnostic tests. Insight also performs Pharma Services in its CLIA-certified laboratory for pharmaceutical and biotechnology companies, including testing for biomarker discovery, assay design and development, clinical trial support, and a broad spectrum of biomarker tests (“Pharma Services”). The Insight Merger was accounted for using the acquisition method of accounting in accordance with ASC 805, which requires, among other things, that the assets and liabilities assumed be recognized at their fair values as of the acquisition date. See Note 3 for a full discussion of the Insight Merger.
On April 15, 2021 (the “Chronix Merger Date”), Oncocyte completed its acquisition of Chronix Biomedical, Inc. (“Chronix”) pursuant to an Agreement and Plan of Merger dated February 2, 2021, amended February 23, 2021, and amended and restated as of April 15, 2021 (as amended and restated, the “Chronix Merger Agreement”), by and among Oncocyte, CNI Monitor Sub, Inc., a Delaware corporation and wholly-owned subsidiary of Oncocyte (“Merger Sub”), Chronix, the stockholders party to the Chronix Merger Agreement and a party named as equity holder representative. Pursuant to the Chronix Merger Agreement, Merger Sub merged with and into Chronix, with Chronix surviving as a wholly owned subsidiary of Oncocyte (the “Chronix Merger”). Prior to the Chronix Merger, Chronix was a privately held molecular diagnostics company, developing blood tests for use in cancer treatment and organ transplantation. Through the Chronix Merger, Oncocyte has added to its laboratory test development pipeline the DetermaCNITM (formerly TheraSureTM-CNI Monitor), a patented, blood-based test for immunotherapy monitoring, and VitaGraft™ (formerly TheraSureTM Transplant Monitor), a blood-based solid organ transplantation monitoring test. See Note 3 for additional information about the Chronix Merger.
| 8 |
Other tests in the development pipeline include DetermaTx™, a test intended to complement DetermaIO™ by assessing the mutational status of a tumor to help identify the appropriate targeted therapy. Oncocyte also plans to initiate the development of DetermaMx™ as a blood-based test to monitor cancer patients for recurrence of their disease.
Liquidity
Oncocyte
has incurred operating losses and negative cash flows since inception and had an accumulated deficit of $
As
of June 30, 2022, Oncocyte had $
On
June 11, 2021, Oncocyte entered into an at-the-market sales agreement with BTIG, LLC as sales agent and/or principal (the “Agent”
or “BTIG”) pursuant to which Oncocyte may sell up to an aggregate of $
Between
July 1, 2021 and June 30, 2022, Oncocyte sold shares of common stock at an average offering price of $ per share, for gross
proceeds of approximately $
On
April 13, 2022, Oncocyte entered into a securities purchase agreement (the “Securities Purchase Agreement”) with institutional
accredited investors (the “Investors”), including Broadwood Capital, L.P. (“Broadwood”), Oncocyte’s largest
shareholder, in a registered direct offering of shares of our Series A Convertible Preferred Stock (the “Series A Preferred
Stock”), which are convertible into a total of shares of our common stock, at a conversion price of $
Further,
on April 13, 2022, Oncocyte entered into an underwriting agreement (the “Underwriting Agreement”) with BTIG, LLC, as representative
of the underwriters named therein (the “Underwriters”), pursuant to which Oncocyte agreed to issue and sell to the Underwriters
an aggregate of shares of common stock, and warrants to purchase up to shares of common stock (“April
2022 Warrants”) (the “Underwritten Offering,” and collectively with the Series A Preferred Stock Offering, the “April
2022 Offerings”). The Underwritten Offering closed on April 19, 2022. Pursuant to the Underwritten Offering, Broadwood acquired
from us (i) shares of common stock, and (ii) April 2022 Warrants to purchase up to shares of common stock
at an exercise price of $
Presently, Oncocyte is devoting substantially all of its efforts on initial commercialization efforts for DetermaRx™, completing clinical development and planning commercialization of DetermaIO™, although DetermaIO™ is currently available for biopharma diagnostic development and research use only as a companion test in immunotherapy drug development to select patients for clinical trials; continuing development and planning commercialization of DetermaTxTM and the clinical launch of VitaGraftTM. While Oncocyte plans to primarily market its laboratory tests in the United States through its own sales force, it is also beginning to make marketing arrangements with distributors in other countries. In order to reduce capital needs and to expedite the commercialization of any new laboratory tests that may become available for clinical use, Oncocyte may also pursue marketing arrangements with other diagnostic companies through which Oncocyte might receive licensing fees and royalty on sales, or through which it might form a joint venture to market its tests and share in net revenues, in the United States or abroad.
In addition to general economic and capital market trends and conditions, Oncocyte’s ability to raise sufficient additional capital to finance its operations from time to time will depend on a number of factors specific to Oncocyte’s operations such as operating revenues and expenses, progress in development of, or in obtaining reimbursement coverage from Medicare for DetermaIO™ and other future laboratory tests that Oncocyte may develop or acquire.
| 9 |
The availability of financing and Oncocyte’s ability to generate revenues from operating activities may be adversely impacted by the ongoing COVID-19 pandemic which could continue to cause deferrals of cancer surgeries that might otherwise have resulted in the utilization of DetermaRx™ and deferrals of drug development clinical trials that might have utilized Oncocyte’s Pharma Services. The COVID-19 pandemic also could continue to depress national and international economies and disrupt capital markets, supply chains, and aspects of Oncocyte’s operations. The extent to which the ongoing COVID-19 pandemic will ultimately impact Oncocyte’s business, results of operations, financial condition, or cash flows is highly uncertain and difficult to predict because it will depend on many factors that are outside Oncocyte’s control.
The unavailability or inadequacy of financing or revenues to meet future capital needs could force Oncocyte to modify, curtail, delay, or suspend some or all aspects of planned operations. Sales of additional equity securities could result in the dilution of the interests of its shareholders. Oncocyte cannot assure that adequate financing will be available on favourable terms, if at all.
2. Basis of Presentation and Summary of Significant Accounting Policies
Basis of presentation
The unaudited condensed consolidated interim financial statements presented herein, and discussed below, have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. In accordance with those rules and regulations, certain information and footnote disclosures normally included in comprehensive consolidated financial statements have been condensed or omitted. The condensed consolidated balance sheets as of December 31, 2021 was derived from the audited consolidated financial statements at that date. These unaudited condensed consolidated interim financial statements should be read in conjunction with the audited financial statements and notes thereto included in Oncocyte’s Annual Report on Form 10-K for the year ended December 31, 2021.
Principles of consolidation
On January 31, 2020, with the consummation of the Insight Merger, Insight became a wholly owned subsidiary of Oncocyte, and on that date Oncocyte began consolidating Insight’s operations and results with Oncocyte’s operations and results (see Note 3). On February 24, 2021, with the acquisition of the remaining equity interests in Razor, Razor became a wholly owned subsidiary of Oncocyte, and on that date Oncocyte began consolidating Razor’s results with Oncocyte’s operations and results (see Note 3). On April 15, 2021, with the acquisition of Chronix, Chronix became a wholly owned subsidiary of Oncocyte, and on that date Oncocyte began consolidating Chronix’s operations and results with Oncocyte’s operations and results (see Note 3).
The accompanying unaudited condensed consolidated interim financial statements, in the opinion of management, include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of Oncocyte’s financial condition and results of operations. The unaudited condensed consolidated results of operations are not necessarily indicative of the results to be expected for any other interim period or for the entire year. All material intercompany accounts and transactions have been eliminated in consolidation.
Use of estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and contingent assets and liabilities, at the date of the unaudited condensed consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, management evaluates estimates which are subject to significant judgment, including, but not limited to, valuation methods used, assumptions requiring the use of judgment to prepare financial projections, timing of potential commercialization of acquired in-process intangible assets, applicable discount rates, probabilities of the likelihood of multiple outcomes of certain events related to contingent consideration, comparable companies or transactions, determination of fair value of the assets acquired and liabilities assumed including those relating to contingent consideration, the valuation of Series A redeemable convertible preferred stock second tranche obligation, revenue recognition, assumptions related to going concern assessments, allocation of direct and indirect expenses, useful lives associated with long-lived intangible assets, key assumptions in operating and financing leases including incremental borrowing rates, loss contingencies, valuation allowances related to deferred income taxes, and assumptions used to value debt and stock-based awards and other equity instruments. Actual results may differ materially from those estimates.
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Similarly, Oncocyte assessed certain accounting matters that generally require consideration of forecasted financial information. The accounting matters assessed included, but were not limited to, Oncocyte’s equity investments, the carrying value of goodwill, acquired in-process intangible assets and other long-lived assets. Those assessments as well as other estimates referenced above were made in the context of information reasonably available to Oncocyte.
Business combinations and fair value measurements
Oncocyte accounts for business combinations in accordance with ASC 805, which requires the purchase consideration transferred to be measured at fair value on the acquisition date in accordance with ASC 820, Fair Value Measurement. ASC 820 establishes a single authoritative definition of fair value, sets out a framework for measuring fair value and expands on required disclosures about fair value measurement. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. ASC 820 describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value, which are the following:
● Level 1 – Quoted prices in active markets for identical assets and liabilities.
● Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted market prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
● Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
When a part of the purchase consideration consists of shares of Oncocyte common stock, Oncocyte calculates the purchase price attributable to those shares, a Level 1 security, by determining the fair value of those shares as of the acquisition date based on prices quoted on the principal national securities exchange on which the shares traded. Oncocyte recognizes estimated fair values of the tangible assets and identifiable intangible assets acquired, including in-process research and development, and liabilities assumed, including any contingent consideration, as of the acquisition date. Goodwill is recognized as any amount of the fair value of the tangible and identifiable intangible assets acquired and liabilities assumed in excess of the consideration transferred. ASC 805 precludes the recognition of an assembled workforce as an asset, effectively subsuming any assembled workforce value into goodwill.
In determining fair value, Oncocyte utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible, and also considers counterparty credit risk in its assessment of fair value. For the periods presented, Oncocyte has no financial assets or liabilities recorded at fair value on a recurring basis, except for cash and cash equivalents consisting of money market funds and marketable equity securities of Lineage and AgeX common stock held by Oncocyte described below. These assets are measured at fair value using the period-end quoted market prices as a Level 1 input. Oncocyte also has certain contingent consideration liabilities which are carried at fair value based on Level 3 inputs (see Note 3).
The carrying amounts of cash equivalents, prepaid expenses and other current assets, accounts payable, accrued expenses and other current liabilities approximate fair values because of the short-term nature of these items.
The carrying amount of the loan payable to Silicon Valley Bank approximates fair value because the loan bears interest at a floating market rate (see Note 12).
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Cash, cash equivalents, and restricted cash
The Company’s reconciliation of cash and cash equivalents, and restricted cash reported within the unaudited condensed consolidated balance sheets that sum to the total of the same amounts shown in the unaudited condensed consolidated statements of cash flows were as follows (in thousands):
| June 30, | December 31, | |||||||
| 2022 | 2021 | |||||||
| Cash and cash equivalents | $ | $ | ||||||
| Restricted cash | ||||||||
| Cash, cash equivalents and restricted cash shown in the condensed statements of cash flows | $ | $ | ||||||
Goodwill and intangible assets
In accordance with ASC 350, Intangibles – Goodwill and Other, in-process research and development (“IPRD”) projects acquired in a business combination that are not complete as of the acquisition date are capitalized and accounted for as indefinite-lived intangible assets until completion or abandonment of the related research and development efforts. Upon successful completion of the project, the capitalized amount is amortized over its estimated useful life. If a project is abandoned, all remaining capitalized amounts are written off immediately. Oncocyte considers various factors and risks for potential impairment of IPRD assets, including the current legal and regulatory environment and the competitive landscape. Adverse clinical trial results, significant delays or inability to obtain local determination coverage (“LCD”) from the Centers for Medicare and Medicaid Services (“CMS”) for Medicare reimbursement for a diagnostic test, the inability to bring a diagnostic test to market and the introduction or advancement of competitors’ diagnostic tests could result in partial or full impairment of the related intangible assets. Consequently, the eventual realized value of the IPRD project may vary from its fair value at the date of acquisition, and IPRD impairment charges may occur in future periods. During the period between completion or abandonment, the IPRD assets will not be amortized but will be tested for impairment on an annual basis and between annual tests if Oncocyte becomes aware of any events occurring or changes in circumstances that would indicate a reduction in the fair value of the IPRD projects below their respective carrying amounts (see Notes 3 and 4).
Goodwill represents the excess of the purchase price over the fair value of net identifiable assets and liabilities. Goodwill, similar to IPRD, is not amortized but is tested for impairment at least annually, or if circumstances indicate its value may no longer be recoverable. Qualitative factors considered in this assessment include industry and market conditions, overall financial performance, and other relevant events and factors affecting Oncocyte’s business. Based on the qualitative assessment, if it is determined that the fair value of goodwill is more likely than not to be less than its carrying amount, the fair value of a reporting unit will be calculated and compared with its carrying amount and an impairment charge will be recognized for the amount that the carrying value exceeds the fair value. Oncocyte continues to operate in one segment and considered to be the sole reporting unit and, therefore, goodwill is tested for impairment at the enterprise level.
Oncocyte does not have intangible assets with indefinite useful lives other than goodwill and the acquired IPRD discussed in Notes 3 and 4. As of June 30, 2022, there has been no impairment of goodwill and intangible assets.
Long-lived intangible assets
Long-lived intangible assets, consisting primarily of acquired customer relationships, are stated at acquired cost, less accumulated amortization. Amortization expense is computed using the straight-line method over the estimated useful life of 5 years (see Notes 3 and 4).
Contingent consideration liabilities
Certain of Oncocyte’s asset and business acquisitions involve the potential for future payment of consideration to third-parties and former selling shareholders in amounts determined as a percentage of future net revenues generated, or upon attainment of revenue milestones, from Pharma Services or laboratory tests, as applicable, or annual minimum royalties to certain licensors, as provided in the applicable agreements. The fair value of such liabilities is determined using unobservable inputs. These inputs include the estimated amount and timing of projected cash flows and the risk-adjusted discount rate used to present value the cash flows (see Notes 3 and 4). These obligations are referred to as contingent consideration.
ASC 805 requires that contingent consideration be estimated and recorded at fair value as of the acquisition date as part of the total consideration transferred. Contingent consideration is an obligation of the acquirer to transfer additional assets or equity interests to the selling shareholders in the future if certain future events occur or conditions are met, such as the attainment of product development milestones. Contingent consideration also includes additional future payments to selling shareholders based on achievement of components of earnings, such as “earn-out” provisions or percentage of future revenues, including royalties paid to the selling shareholders based on a percentage of certain revenues generated.
The fair value of contingent consideration after the acquisition date is reassessed by Oncocyte as changes in circumstances and conditions occur, with the subsequent change in fair value recorded in the condensed consolidated statements of operations. Changes in key assumptions can materially affect the estimated fair value of contingent consideration liabilities and, accordingly, the resulting gain or loss that Oncocyte records in its unaudited condensed consolidated interim financial statements. See Notes 3 and 4 for a full discussion of these liabilities.
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Investments in capital stock of privately held companies
Oncocyte evaluates whether investments held in common stock of other companies require consolidation of the company under, first, the variable interest entity (“VIE”) model, and then under the voting interest model in accordance with accounting guidance for consolidations under Accounting Standards Codification (“ASC”) 810-10. If consolidation of the entity is not required under either the VIE model or the voting interest model, Oncocyte determines whether the equity method of accounting should be applied in accordance with ASC 323, Investments – Equity Method and Joint Ventures. The equity method applies to investments in common stock or in-substance common stock if Oncocyte exercises significant influence over, but does not control, the entity, where significant influence is typically represented by ownership of 20% or more, but less than majority ownership, of the voting interests of a company.
Oncocyte initially records equity method investments at fair value on the date of the acquisition with subsequent adjustments to the investment balance based on Oncocyte’s pro rata share of earnings or losses from the investment.
Since February 24, 2021, the date of Oncocyte’s acquisition of the remaining interests in Razor, the Razor entity’s financial statements have been consolidated with Oncocyte (see Notes 3 and 4).
Impairment of long-lived assets
Oncocyte assesses the impairment of long-lived assets whenever events or changes in circumstances indicate that such assets might be impaired and the carrying value may not be recoverable. Oncocyte’s long-lived assets consist primarily of intangible assets, right-of-use assets for operating leases, customer relationships, and machinery and equipment. If events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable and the expected undiscounted future cash flows attributable to the asset are less than the carrying amount of the asset, an impairment loss, equal to the excess of the carrying value of the asset over its fair value, is recorded. As of June 30, 2022, there has been no impairment of long-lived assets.
Revenue recognition
Pursuant to ASC 606, revenues are recognized when control of services performed is transferred to customers, in an amount that reflects the consideration Oncocyte expects to be entitled to in exchange for those services. ASC 606 provides for a five-step model that includes:
(i) identifying the contract with a customer,
(ii) identifying the performance obligations in the contract,
(iii) determining the transaction price,
(iv) allocating the transaction price to the performance obligations, and
(v) recognizing revenue when, or as, an entity satisfies a performance obligation.
Oncocyte determines transaction prices based on the amount of consideration we expect to receive for transferring the promised goods or services in the contract. Consideration may be fixed, variable, or a combination of both. The Company considers any constraints on the variable consideration and includes in the transaction price variable consideration to the extent it is deemed probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved.
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DetermaRx™ testing revenue
Oncocyte generates revenue from performing DetermaRx™ tests on clinical samples through orders received from physicians, hospitals, and other healthcare providers. In determining whether all the revenue recognition criteria (i) through (v) above are met with respect to DetermaRx™ tests, each test result is considered a single performance obligation and is generally considered complete when the test result is delivered or made available to the prescribing physician electronically, and, as such, there are no shipping or handling fees incurred by Oncocyte or billed to customers. Although Oncocyte bills a list price for all tests ordered and completed for all payer types, Oncocyte considers constraints on the variable consideration when recognizing revenue for DetermaRx™. Because DetermaRx™ is a novel test and there are no current reimbursement arrangements with third-party payers other than Medicare, the transaction price represents variable consideration. Application of the constraint for variable consideration is an area that requires significant judgment. For all payers other than Medicare, Oncocyte must consider the novelty of the test, the uncertainty of receiving payment, or being subject to claims for a refund, from payers with whom it does not have a sufficient payment collection history or contractual reimbursement agreements. Accordingly, for those payers, Oncocyte expects to continue to recognize revenue upon payment until it has a sufficient history to reliably estimate payment patterns or has contractual reimbursement arrangements, or both, in place.
During the three months ended March 31, 2021, after accumulating additional history of cash receipts and other factors considered by management for Medicare Advantage covered tests, including the recently published Medicare rate which management believes entitles Oncocyte to get reimbursed for Medicare Advantage covered tests at the Medicare rate, Oncocyte commenced recognizing Medicare Advantage covered tests on an accrual basis when the test result is delivered or made available to the prescribing physician electronically, upon considering no further constraints on the variable consideration, at the Medicare rate.
As
of June 30, 2022, Oncocyte had accounts receivable of $
Pharma services revenue
Revenues recognized include Pharma Services performed by Oncocyte’s Insight and Chronix subsidiaries for its pharmaceutical customers, including testing for biomarker discovery, assay design and development, clinical trial support, and a broad spectrum of biomarker tests. These Pharma Services are generally performed under individual scope of work (“SOW”) arrangements or license agreements (together with SOW the “Pharma Services Agreements”) with specific deliverables defined by the customer. Pharma Services are performed on a (i) time and materials basis or (ii) per test completed basis. Upon completion of the service to the customer in accordance with a Pharma Services Agreement, Oncocyte has the right to bill the customer for the agreed upon price (either on a per test or per deliverable basis) and recognizes Pharma Service revenue at that time. Insight identifies each sale of its Pharma Service offering as a single performance obligation. Chronix identifies the processing of test samples as a separate performance obligation (considered a series) within license agreements with customers.
Completion of the service and satisfaction of the performance obligation is typically evidenced by access to the report or test made available to the customer or any other form or applicable manner of delivery defined in the Pharma Services Agreements. However, for certain SOWs under which work is performed pursuant to the customer’s highly customized specifications, Oncocyte has the enforceable right to bill the customer for work completed, rather than upon completion of the SOW. For those SOWs, Oncocyte recognizes revenue over a period during which the work is performed using a formula that accounts for expended efforts, generally measured in labor hours, as a percentage of total estimated efforts for the completion of the SOW. As performance obligations are satisfied under the Pharma Services Agreements, any amounts earned as revenue and billed to the customer are included in accounts receivable. Any revenues earned but not yet billed to the customer as of the date of Oncocyte’s consolidated financial statements are recorded as contract assets and are included in prepaids and other current assets as of the financial statement date. Amounts recorded in contract assets are reclassified to accounts receivable in Oncocyte’s consolidated financial statements when the customer is invoiced according to the billing schedule in the contract.
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Oncocyte establishes an allowance for doubtful accounts based on the evaluation of the collectability of its Pharma Services accounts receivables after considering a variety of factors, including the length of time receivables are past due, significant events that may impair the customer’s ability to pay, such as a bankruptcy filing or deterioration in the customer’s operating results or financial position, reasonable and supportable forecast that affect the collectability of the reported amount, and historical experience. If circumstances related to customers change, estimates of the recoverability of receivables would be further adjusted. Oncocyte continuously monitors collections and payments from customers and maintains a provision for estimated credit losses and uncollectible accounts, if any, based upon its historical experience and any specific customer collection issues that have been identified. Amounts determined to be uncollectible are written off against the allowance for doubtful accounts. As of June 30, 2022, Oncocyte has not recorded any losses or allowance for doubtful accounts on its account receivables from Pharma Services.
As
of June 30, 2022, Oncocyte had accounts receivable from Pharma Services customers of $
Licensing revenue
Revenues recognized includes licensing revenue derived from agreements with customers for exclusive rights to market Oncocyte’s proprietary testing technology. Under the agreements, Oncocyte grants exclusive rights to certain trademarks and technology of Oncocyte for the purpose of marketing Oncocyte’s tests within a defined geographic territory. A license agreement may specify milestone deliverables or performance obligations, for which Oncocyte recognizes revenue when its licensee confirms the completion of Oncocyte’s performance obligation. A licensing agreement may also include ongoing sales support from Oncocyte and typically includes non-refundable licensing fees and per-test Pharma Services revenues discussed above, for which Oncocyte treats the licensing of the technology, trademarks, and ongoing support as a single performance obligation satisfied by the passage of time over the term of the agreement.
Cost of revenues
Cost of revenues generally consists of cost of materials, direct labor including benefits, bonus and stock-based compensation, equipment and infrastructure expenses, clinical sample related costs associated with performing DetermaRx™ tests and Pharma Services, providing deliverables according to our licensing agreements, license fees due to third parties, and amortization of acquired intangible assets such as the Razor asset and customer relationship intangible assets. Infrastructure expenses include depreciation of laboratory equipment, allocated rent costs, leasehold improvements, and allocated information technology costs for operations at Oncocyte’s CLIA laboratories in California and Tennessee. Costs associated with generating the revenues are recorded as the tests or services are performed regardless of whether revenue was recognized. Royalties or revenue share payments for licensed technology calculated as a percentage of revenues generated using the associated technology are recorded as expenses at the time the related revenues are recognized.
Research and development expenses
Research and development expenses are comprised of costs incurred to develop technology, which include salaries and benefits (including stock-based compensation), laboratory expenses (including reagents and supplies used in research and development laboratory work), infrastructure expenses (including allocated facility occupancy costs), and contract services and other outside costs. Indirect research and development expenses are allocated primarily based on headcount, as applicable, and include rent and utilities, common area maintenance, telecommunications, property taxes, and insurance. Research and development costs are expensed as incurred.
Sales and marketing expenses
Sales and marketing expenses consist primarily of personnel costs and related benefits, including stock-based compensation, trade show expenses, branding and positioning expenses, and consulting fees. Sales and marketing expenses also include indirect expenses for applicable overhead allocated based on headcount, and include allocated costs for rent and utilities, common area maintenance, telecommunications, property taxes, and insurance.
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General and administrative expenses
General and administrative expenses consist primarily of compensation and related benefits (including stock-based compensation) for executive and corporate personnel, professional and consulting fees, rent and utilities, common area maintenance, telecommunications, property taxes, and insurance.
Basic loss per share is computed by dividing the net loss applicable to common stockholders after deducting cumulative unpaid dividends and accretion of the preferred stock, by the weighted average number of shares of common stock outstanding during the year. Diluted loss per share is computed by dividing the net loss applicable to common stockholders after deducting cumulative unpaid dividends and accretion of the preferred stock, by the weighted average number of common shares outstanding plus the number of additional common shares that would have been outstanding if all dilutive potential common shares had been issued, using the treasury stock method or the if-converted method, or the two-class method for participating securities, whichever is more dilutive. Potential common shares are excluded from the computation if their effect is antidilutive.
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Numerator: | ||||||||||||||||
| Net loss attributable to Oncocyte Corporation | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Dividend on Series A redeemable convertible preferred stock | ( | ) | ( | ) | ||||||||||||
| Accretion of Series A redeemable convertible preferred stock | ( | ) | ( | ) | ||||||||||||
| Net loss at attributable to common stockholders - Basic and Diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Denominator: | ||||||||||||||||
| Weighted average shares used in computing net loss per share attributable to common stockholders - Basic and Diluted | ||||||||||||||||
| Basic and diluted net loss per common share | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Anti-dilutive potential common shares excluded from the computation of diluted net loss per common share: | ||||||||||||||||
| Stock options | ||||||||||||||||
| Warrants | ||||||||||||||||
| Series A redeemable convertible preferred stock | ||||||||||||||||
| Total | ||||||||||||||||
Leases
Oncocyte accounts for leases in accordance with ASC 842, Leases. Oncocyte determines if an arrangement is a lease at inception. Leases are classified as either financing or operating, with classification affecting the pattern of expense recognition in the condensed consolidated statements of operations. Under the available practical expedients for the adoption of ASC 842, Oncocyte accounts for the lease and non-lease components as a single lease component. Oncocyte recognizes right-of-use (“ROU”) assets and lease liabilities for leases with terms greater than twelve months in the condensed consolidated balance sheet. ROU assets represent the right to use an underlying asset during the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most leases do not provide an implicit rate, Oncocyte uses an incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. Oncocyte uses the implicit rate when it is readily determinable. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. Lease terms may include options to extend or terminate the lease when it is reasonably certain that Oncocyte will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term. Operating leases are included as right-of-use assets in machinery and equipment, and ROU lease liabilities, current and long-term, in the condensed consolidated balance sheets. Financing leases are included in machinery and equipment, and in financing lease liabilities, current and long-term, in the condensed consolidated balance sheets. Oncocyte discloses the amortization of our ROU assets and operating lease payments as a net amount, “Amortization of right-of-use assets and liabilities”, on the condensed consolidated statements of cash flows. Based on the available practical expedients under the standard, Oncocyte elected not to capitalize leases that have terms of twelve months or less.
During 2020 and 2021, Oncocyte entered into various operating leases and an embedded operating lease in accordance with ASC 842 discussed in Note 10. Oncocyte’s accounting for financing leases remained substantially unchanged.
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Oncocyte accounts for the shares of Lineage and AgeX common stock it holds as marketable equity securities in accordance with ASC 320-10-25, Investments – Debt and Equity Securities, as amended by Accounting Standards Update (“ASU”) 2016-01, Financial Instruments–Overall: Recognition and Measurement of Financial Assets and Financial Liabilities, as the shares have a readily determinable fair value quoted on the NYSE American and are held principally to meet future working capital purposes, as necessary. The securities are measured at fair value, with related gains and losses in the value of such securities recorded in the condensed consolidated statements of operations in other income (expense), and are reported as current assets on the condensed consolidated balance sheets based on the closing trading price of the security as of the date being presented.
As
of June 30, 2022 and December 31, 2021, Oncocyte held and shares of common stock of Lineage and AgeX, respectively, as
marketable equity securities with a combined fair market value of $
Deferred revenue
In
June 2018 and subsequently amended in June 2019, Chronix and a medical diagnostic service company in Germany (“the German customer”)
entered into a licensing and testing service agreement (“the German agreement”) for intellectual property related to DetermaCNITM
and VitaGraft™. Under the terms of the agreement, Chronix received from the German customer an upfront payment of €
Recently issued accounting pronouncements not yet adopted
The following accounting standards, which are not yet effective, are presently being evaluated by Oncocyte to determine the impact that it might have on its consolidated financial statements.
| 17 |
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments and subsequent amendments to the initial guidance under ASU 2018-19, ASU 2019-04, ASU 2019-05 and ASU 2019-10, which amends the current approach to estimate credit losses on certain financial assets, including trade and other receivables. Generally, this amendment requires entities to establish a valuation allowance for the expected lifetime losses of these certain financial assets. Upon the initial recognition of such assets, which will be based on, among other things, historical information, current conditions, and reasonable supportable forecasts. Subsequent changes in the valuation allowance are recorded in current earnings and reversal of previous losses are permitted. Currently, U.S. GAAP requires entities to write down credit losses only when losses are probable and loss reversals are not permitted. The update will be effective for Oncocyte in the first quarter of 2023. Early adoption is permitted. Oncocyte is currently evaluating the impact the adoption of this standard will have on its consolidated financial statements and related disclosures.
In October 2021, the FASB issued ASU No. 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, to provide specific guidance to eliminate diversity in practice on how to recognize and measure acquired contract assets and contract liabilities from revenue contracts from customers in a business combination consistent with revenue contracts with customers not acquired in an acquisition. The amendments in this update provide that the acquirer should consider the terms of the acquired contracts, such as timing of payment, identify each performance obligation in the contracts, and allocate the total transaction price to each identified performance obligation on a relative standalone selling price basis as of contract inception (that is, the date the acquiree entered into the contracts) or contract modification to determine what should be recorded at the acquisition date. These amendments are effective for the Company beginning with fiscal year 2023. The impact of the adoption of the amendments in this update will depend on the magnitude of any customer contracts assumed in a business combination in 2023 and beyond.
COVID-19 impact and related risks
The ongoing global outbreak of COVID-19, and the various attempts throughout the world to contain it, have created significant volatility, uncertainty and disruption. In response to government directives and guidelines, health care advisories and employee and other concerns, Oncocyte has altered certain aspects of its operations. A number of Oncocyte’s employees have had to work remotely from home and those on site have had to follow Oncocyte’s social distance guidelines, which could impact their productivity. COVID-19 could also disrupt Oncocyte’s operations due to absenteeism by infected or ill members of management or other employees, or absenteeism by members of management and other employees who cannot effectively work remotely but who elect not to come to work due to the illness affecting others in Oncocyte’s office or laboratory facilities, or due to quarantines.
In addition to operational adjustments, the consequences of the COVID-19 pandemic have led to uncertainties related to Oncocyte’s business growth and ability to forecast the demand for its laboratory tests and Pharma Services and resulting revenues. Concerns over available hospital, staffing, equipment, and other resources, and the risk of exposure to the virus, have led to delays in early-stage lung cancer surgeries and clinical trials of drugs under development by pharma companies, and the continued deferral of lung cancer surgeries and drug development clinical trials due to resurgence in COVID-19 cases could continue to result in delayed or reduced use of DetermaRx™ and Oncocyte’s Pharma Services.
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It is possible that impacts of COVID-19 on Oncocyte’s operations or revenues or its access to capital could prevent Oncocyte from complying, or could result in a material noncompliance, with one or more obligations or covenants under material agreements to which Oncocyte is a party, with the result that Oncocyte would be in material breach of the applicable obligation, covenant, or agreement. Any such material breach could cause Oncocyte to incur material financial liabilities or an acceleration of the date for paying a financial obligation to the other party to the applicable agreement, or could cause Oncocyte to lose material contractual rights, such as rights to use leased equipment or laboratory or office space, or rights to use licensed patents or other intellectual property, the use of which is material to Oncocyte’s business. Similarly, it is possible that impacts of COVID-19 on the business, operations, or financial condition of any third party with whom Oncocyte has a contractual relationship could cause the third party to be unable to perform its contractual obligations to Oncocyte, resulting in Oncocyte’s loss of the benefits of a contract that could be material to Oncocyte’s business.
The full extent to which the COVID-19 pandemic and the various responses to it might impact Oncocytes’ business, operations and financial results will depend on numerous evolving factors that are not subject to accurate prediction and that are beyond Oncocyte’s control.
3. Business Combinations
Acquisition of Insight Genetics, Inc.
On January 31, 2020 (the “Insight Merger Date”), Oncocyte completed its acquisition of Insight pursuant to the Insight Merger Agreement.
Merger Consideration at Closing
Under
the terms of the Insight Merger Agreement, Oncocyte agreed to pay $
In March 2021, in accordance with the Insight Merger Agreement, the Cash Holdback was paid and the Stock Holdback was released from escrow to the selling shareholders.
Milestone Payments (Milestone Contingent Consideration)
In
addition to the Initial Merger Consideration, Oncocyte may also pay contingent consideration of up to $
Revenue Share (Royalty Contingent Consideration)
As additional consideration for Insight’s shareholders, the Insight Merger Agreement provides for Oncocyte to pay a revenue share of not more than ten percent of net collected revenues for current Insight pharma service offerings over a period of ten years, and a tiered revenue share percentage of net collected revenues through the end of the technology lifecycle if certain new cancer tests are developed and commercialized using Insight technology (“Royalty Contingent Consideration”). As of June 30, 2022, the royalty contingent consideration has not been met and no payments have been made.
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Registration Rights
Pursuant to the Insight Merger Agreement, Oncocyte filed a registration statement with the SEC to register the resale of the shares of common stock under the Securities Act of 1933, as amended (the “Securities Act”) issued in connection with the Insight Merger, which the SEC declared effective in August 2020.
Workforce
In connection with the closing of the Insight Merger, Oncocyte did not assume sponsorship of the Insight Equity Incentive Plan. Accordingly, the Insight Equity Incentive Plan and all related stock options to purchase shares of Insight common stock outstanding immediately prior to the Insight Merger were cancelled on the Insight Merger Date for no consideration. At the Insight Merger Date, all of Insight’s employees ceased employment with Insight, and Oncocyte offered employment to certain of those former Insight employees, principally in laboratory roles and certain administrative roles (“New Oncocyte Employees”), and granted new equity awards to the New Oncocyte Employees under the Oncocyte 2018 Equity Incentive Plan. All Oncocyte stock option awards granted to the New Oncocyte Employees have vesting terms and conditions consistent with stock options granted to most other Oncocyte employees.
Aggregate Merger Consideration and Purchase Price Allocation
The calculation of the aggregate merger consideration, consisting of the Initial Merger Consideration, Milestone Contingent Consideration and Royalty Contingent Consideration (the “Aggregate Merger Consideration”) transferred on January 31, 2020, at fair value, is shown in the following table (in thousands, except for share and per share amounts). The Milestone Contingent Consideration and the Royalty Contingent Consideration are collectively referred to as “Contingent Consideration”.
| Cash consideration | $ | (1) | ||
| Stock consideration | ||||
| Shares of Oncocyte common stock issued on the Merger Date | (2) | |||
| Closing price per share of Oncocyte common stock on the Merger Date | $ | |||
| Market value of Oncocyte common stock issued | $ | |||
| Contingent Consideration | $ | (3) | ||
| Total fair value of consideration transferred on the Merger Date | $ |
| (1) | |
| (2) | |
| (3) |
| 20 |
Aggregate Merger Consideration allocation
Oncocyte allocated the Aggregate Merger Consideration transferred to tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values as of the Insight Merger Date. The fair values of the identifiable intangible assets acquired and the liabilities assumed was determined based on inputs that were unobservable and significant to the overall fair value measurement, which is also based on estimates and assumptions made by management at the time of the Insight Merger. As such, this was classified as Level 3 fair value hierarchy measurements and disclosures in accordance with ASC 820, Fair Value Measurement.
The following table sets forth the allocation of the Aggregate Merger Consideration transferred to Insight’s tangible and identifiable intangible assets acquired and liabilities assumed on the Insight Merger Date, with the excess recorded as goodwill (in thousands):
| January 31, | ||||
| 2020 | ||||
| Assets acquired: | ||||
| Cash and cash equivalents | $ | |||
| Accounts receivable and other current assets | ||||
| Right-of-use assets, machinery and equipment | ||||
| Long-lived intangible assets - customer relationships | ||||
| Acquired in-process research and development | ||||
| Total identifiable assets acquired (a) | ||||
| Liabilities assumed: | ||||
| Accounts payable | ||||
| Right-of-use liabilities - operating lease | ||||
| Long-term deferred income tax liability | ||||
| Total identifiable liabilities assumed (b) | ||||
| Net assets acquired, excluding goodwill (a) - (b) = (c) | ||||
| Total cash, contingent consideration, and stock consideration transferred (d) | ||||
| Goodwill (d) - (c) | ||||
The valuation of identifiable intangible assets and applicable estimated useful lives are as follows (in thousands, except for useful life):
| Estimated Assets | Useful Life | |||||||
| Fair Value | (Years) | |||||||
| In process research and development (“IPRD”) | $ | n/a | ||||||
| Customer relationships | ||||||||
| $ | ||||||||
The following is a discussion of the valuation methods and significant assumptions used to determine the fair value of Insight’s material assets and liabilities in connection with the Insight Merger:
| 21 |
Acquired
In-Process Research and Development and Deferred Income Tax Liability – The fair value of identifiable IPRD intangible
assets consists of $
Oncocyte determined the estimated aggregate fair value of DetermaIO™ using the Multi-Period Excess Earnings Method (“MPEEM”) under the income approach. MPEEM calculates the economic benefits by determining the income attributable to an intangible asset after the returns are subtracted for contributory assets such as working capital, assembled workforce, and fixed assets. The resulting after-tax net earnings are discounted at a rate commensurate with the risk inherent in the economic benefit projections of the assets.
To
calculate fair value of DetermaIO™ under MPEEM, Oncocyte used probability-weighted, projected cash flows discounted at a rate considered
appropriate given the significant inherent risks associated with similar assets. Cash flows were calculated based on projections of revenues
and expenses related to the asset and were assumed to extend through a multi-year projection period. Revenues from commercialization
of DetermaIO™ were based on the estimated market potential for the indications for use which may include tests for the treatment
of certain lung cancers and tests for the treatment of certain breast cancers. The expected cash flows from DetermaIO™ were then
discounted to present value using a weighted-average cost of capital for companies with profiles substantially similar to that of Oncocyte
and the risk inherent in the economic benefit projections of similar assets, which Oncocyte believes represents the rate that market
participants would use to value those assets. The discount rate used to value DetermaIO™ was approximately
Because
the IPRD (prior to completion or abandonment of the research and development) is considered an indefinite-lived asset for accounting
purposes but is not recognized for tax purposes, the fair value of the IPRD on the acquisition date generated a deferred income
tax liability (“DTL”) in accordance with ASC 740, Income Taxes. This DTL is computed using the fair value of the IPRD
assets on the acquisition date multiplied by Oncocyte’s federal and state effective income tax rates. While this DTL would reverse
on impairment or sale or commencement of amortization of the related intangible assets, ASC 740 allows Oncocyte to treat acquired available
deferred tax assets (“DTAs”), such as Insight’s net operating loss carryforwards (“NOLs”) (subject to the
annual limitation under Section 382 of the Internal Revenue Code) as available DTAs to offset against the DTLs, as the DTLs are expected
to reverse within the NOL carryforward period. Any excess DTAs over those DTLs would be assessed for a valuation allowance in accordance
with ASC 740. This accounting treatment is acceptable if, at the time of the acquisition, Oncocyte can both reasonably estimate a timeline
to commercialization and the economic useful life of the IPRD assets upon commercialization, which will be amortized during the
carryforward period of the offsetting DTAs. On the Insight Merger Date, Oncocyte estimated and recorded a net DTL of $
Customer
relationships – Insight provided a range of Pharma Services to its pharmaceutical customers. None of the Pharma Services are
related to DetermaIO™. The Pharma Service customer relationships are considered separate long-lived intangible assets under ASC
805 and were valued primarily using the MPEEM discussed above, and will be amortized over their useful life, estimated to be
Customer relationships generate similar DTLs to IPRD as Oncocyte records this asset for accounting purposes but not for tax purposes. Accordingly, Oncocyte has offset all the acquired DTLs associated with the customer relationships with available acquired NOLs and included in the amount recorded discussed above (see Note 8).
| 22 |
Right-of-use
assets and liabilities, machinery and equipment – Insight is a lessee under an operating lease with a third-party lessor for
its facilities, including its laboratory, in Nashville, Tennessee (the “Nashville Lease”). In April 2019, the Nashville lease
was renewed by Insight for a five-year term and is classified as an operating lease under ASC 842. In accordance with ASC 805, when a
company acquired in a business combination is a lessee, the acquirer initially measures the lease liability and the right-of-use asset
for an acquired operating lease as if the lease is new at the acquisition date. In other words, the lease liability is measured at the
present value of the remaining lease payments as of the acquisition date and the right-of-use asset is generally measured at an amount
equal to the lease liability, adjusted for favourable or unfavourable terms of the lease when compared with market terms. Since the Nashville
Lease was renewed by Insight in proximity to the Insight Merger Date, the terms of the Nashville Lease were considered by Oncocyte to
be market terms at the Insight Merger Date. Accordingly, Oncocyte measured the net present value of the remaining contractual Nashville
Lease payments as of the Insight Merger Date using an incremental borrowing rate consistent with Oncocyte’s other operating leases
and recorded a right-of-use liability and a corresponding right-of-use asset of $
Contingent consideration liabilities – ASC 805 requires that contingent consideration be estimated and recorded at fair value as of the acquisition date as part of the total consideration transferred. Contingent consideration is an obligation of the acquirer to transfer additional assets or equity interests to the selling shareholders in the future if certain future events occur or conditions are met, such as the attainment of product development milestones. Contingent consideration also includes additional future payments to selling shareholders based on achievement of components of earnings, such as “earn-out” provisions or percentage of future revenues, including royalties paid to the selling shareholders based on a percentage of revenues generated from DetermaIO™ and Insight Pharma Services over their respective useful life. Accordingly, Oncocyte determined there are two types of contingent consideration in connection with the Insight Merger, the Milestone Contingent Consideration and the Royalty Contingent Consideration discussed below, which are collectively referred to as the “Contingent Consideration”.
There are three milestones comprising the Milestone Contingent Consideration, collectively referred to as the Milestones, in connection with the Insight Merger which Oncocyte valued and recorded as part of Contingent Consideration as of the Insight Merger Date (see table below), which consist of (i) a payment for clinical trial completion and related data publication (“Milestone 1”), (ii) a payment for an affirmative final local coverage determination from CMS for a specified lung cancer test (“Milestone 2”), and (iii) a payment for achieving specified CMS reimbursement milestones (“Milestone 3”). If achieved, any respective Milestone will be paid at the contractual value shown below, with the payment made either in cash or in shares of Oncocyte common stock as determined by Oncocyte. There can be no assurance that any of the Milestones will be achieved.
There are two separate components of the Royalty Contingent Consideration, collectively referred to as the Royalty Payments, in connection with the Insight Merger which Oncocyte valued and recorded as part of Contingent Consideration as of the Insight Merger Date (see table below); Royalty Payments consist of (i) revenue share payments based on a percentage of future sales generated from DetermaIO™ (“Royalty 1”), and (ii) revenue share payments based on percentage of future sales generated from current Insight Pharma Service offerings, as defined in the Insight Merger Agreement (“Royalty 2”). There can be no assurance that any revenues on which the Royalty Payments are based will be generated from DetermaIO™ or Pharma Service offerings.
The following table shows the Insight Merger Date contractual payment amounts, as applicable, and the corresponding fair value of each respective Contingent Consideration liability (in thousands):
| Fair | ||||||||
| Contractual | Value on the | |||||||
| Value | Merger Date | |||||||
| Milestone 1 | $ | $ | ||||||
| Milestone 2 | ||||||||
| Milestone 3 (a) | ||||||||
| Royalty 1 (b) | See(b) | |||||||
| Royalty 2 (b) | See(b) | |||||||
| Total | $ | $ | ||||||
| (a) | |
| (b) |
| 23 |
The
fair value of the Milestone Contingent Consideration was determined using a scenario analysis valuation method which incorporates Oncocyte’s
assumptions with respect to the likelihood of achievement of the Milestones, credit risk, timing of the Milestone Contingent Consideration
payments and a risk-adjusted discount rate to estimate the present value of the expected payments. The discount rate was estimated at
approximately
The
fair value of the Royalty Contingent Consideration was determined using a single scenario analysis method to value the Royalty Payments.
The single scenario method incorporates Oncocyte’s assumptions with respect to specified future revenues generated from DetermaIO™
and current Insight Pharma Services over their respective useful lives, credit risk, and a risk-adjusted discount rate to estimate the
present value of the expected royalty payments. The credit and risk-adjusted discount rate was estimated at approximately
The
fair value of the Contingent Consideration after the Insight Merger Date is reassessed by Oncocyte as changes in circumstances and conditions
occur, with the subsequent change in fair value recorded in Oncocyte’s condensed consolidated statements of operations. As of June
30, 2022, based on Oncocyte’s reassessment of the significant assumptions noted above, there was an increase of approximately $
The following tables reflect the activity for Oncocyte’s Contingent Consideration for the six months ended June 30, 2022 and June 30, 2021, measured at fair value using Level 3 inputs (in thousands):
| Fair Value | ||||
| Balance at December 31, 2020 | $ | |||
| Change in estimated fair value | ||||
| Balance at June 30, 2021 | $ | |||
| Fair Value | ||||
| Balance at December 31, 2021 | $ | |||
| Change in estimated fair value | ||||
| Balance at June 30, 2022 | $ | |||
Contingent consideration is not deductible for tax purposes, even if paid; therefore, no deferred tax assets related to the Contingent Consideration were recorded.
Goodwill
– Goodwill is calculated as the difference between the acquisition date fair value of the consideration transferred and the
values assigned to the assets acquired and liabilities assumed, including Contingent Consideration. Goodwill also includes the $
| 24 |
Goodwill and identifiable intangible assets are not amortizable or deductible for tax purposes since these assets are not recognized for tax purposes.
Asset acquisition of Razor Genomics, Inc.
On
September 30, 2019, Oncocyte completed the purchase of shares of Razor Series A Convertible Preferred Stock, par value $
per share (the “Razor Preferred Stock”), representing
Purchase Option
The
Purchase Agreement and Minority Shareholder Agreements granted Oncocyte the option to acquire the balance of the outstanding shares of
Razor common stock from Encore under the Purchase Agreement and from the Minority Shareholders under the Minority Purchase Agreements
(the “Option”) for an additional $
On
January 29, 2021, the principal shareholder of Razor informed Oncocyte that the milestone requiring Oncocyte to purchase the outstanding
shares of Razor common stock had been attained under the Purchase Agreement and Minority Shareholder Purchase Agreements. On February
24, 2021, Oncocyte exercised the Option and completed the purchase of all the issued and outstanding shares of common stock of Razor
and paid the selling shareholders in total $
Development Agreement
Under
the Development Agreement, Razor reserved as a “Clinical Trial Expense Reserve” $
On
February 24, 2021, upon the completion of the outstanding shares of Razor common stock and consolidation of Razor’s accounts, Oncocyte
obtained control of approximately $
Upon completion of enrolment of the full number of patients for the Clinical Trial, Oncocyte will issue to Encore and the Minority Shareholders shares of Oncocyte common stock with an aggregate market value at the date of issue equal to $ million (“Clinical Trial Milestone Payment”).
| 25 |
If,
within a specified time frame, Encore is substantially responsible for obtaining funding to Oncocyte or Razor for the Clinical Trial
from any third-party pharmaceutical company, a portion of such additional funding amount will be paid to Encore, subject to a $
Sublicense Agreement
Under the Sublicense Agreement, Razor granted to Oncocyte an exclusive worldwide sublicense under certain patent rights applicable to DetermaRx™ in the field of use covered by the applicable license held by Razor for purposes of commercialization and development of DetermaRx™.
Pursuant to the Razor Sublicense Agreement, Oncocyte will pay all royalties and all revenue sharing and earnout payments owed by Razor to certain third parties with respect to DetermaRx™ revenues, including the licensor of the patent rights sublicensed to Oncocyte, but those payments will be deducted from gross revenues to determine net revenues for the purpose of paying royalties to the former Razor shareholders. Total royalty and earnout payments to the former Razor shareholders, the licensor, and other third parties will be a low double-digit percentage, and in addition certain milestone payments may become due if cumulative net revenue benchmarks are reached. Royalties and earnout payments will be payable on a quarterly basis. This payment obligation will continue after Oncocyte’s purchase of the Razor common stock from Encore and the Minority Shareholders.
Laboratory Agreement
Under
the Laboratory Agreement, Oncocyte has assumed Razor’s Laboratory Agreement payment obligations of $
Accounting for the Razor Investment
Beginning on the Initial Closing and through February 23, 2021, Oncocyte has accounted for the Razor investment under the equity method of accounting under ASC 323 because prior to the Additional Purchase Payment discussed above Oncocyte exercised significant influence over, but did not control, the Razor entity. Oncocyte did not control Razor because, among other factors, Oncocyte was entitled to designate one person to serve on a three-member board of directors of Razor, with the other two members designated by Encore. Also, any deadlocked decisions by a Steering Committee of Oncocyte and Encore representatives that makes decisions with respect to the Clinical Trial, other than with respect to the Clinical Trial budget, will be resolved by a member designated by Encore.
Prior
to February 24, 2021, the aggregate Razor acquisition payments of $
| 26 |
The Initial Closing equity method investment in Razor and the Additional Purchase Payment for the remaining interests in Razor are both considered an asset acquisition, rather than a business combination, because, among other factors, Razor had no workforce, no commercial product (Razor had granted all commercial rights to Oncocyte), no revenues, no distribution system and no facilities. Substantially all of the fair value of Razor’s assets at the Initial Closing and on February 24, 2021 was concentrated in Razor’s intangible asset, the DetermaRx™ patent and related know-how, thus satisfying the requirements of the practical screen test to be considered an asset acquisition in accordance with ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. Accordingly, no goodwill may be recognized in an asset acquisition in accordance with ASC 805-50.
As Razor became a wholly owned subsidiary of Oncocyte on February 24, 2021, the DTA associated with the previous equity method investment was reversed. There is no tax effect of this reversal as the DTA had been fully offset by a valuation allowance (see Note 8). However, upon payment of the Additional Purchase Payment, Oncocyte recorded an additional step-up to fair value for the Razor intangible asset under ASC 805-50 for financial reporting purposes but this “step-up” is not recognized for income tax purposes. As a result, the fair value adjustment of the Razor intangible asset on the acquisition date generated a DTL in accordance with ASC 740. This DTL is computed using the fair value of the intangible assets on the acquisition date multiplied by Oncocyte’s federal and state effective income tax rates, using the simultaneous equations method for asset acquisitions under the guidance provided in ASC 740-10-25-51, which requires that the DTL be recognized as part of the investment of the acquired asset instead of any immediate income tax expense or benefit arising from the recognition of the DTL. Furthermore, ASC 740 allows Oncocyte to treat acquired available deferred tax assets, such as Razor’s NOLs (subject to the annual limitation under Section 382 of the Internal Revenue Code) as available DTAs to offset against the DTLs, as the DTLs are expected to reverse within the NOL carryforward period. Any excess DTAs over those DTLs would be assessed for a valuation allowance in accordance with ASC 740.
On
February 24, 2021, Oncocyte estimated and recorded a net DTL of $
On February 24, 2021, upon Oncocyte’s acquisition of the outstanding common stock of Razor, the Razor intangible asset balance recorded on the acquisition date and included in Intangible Assets was as follows (in thousands):
| As of February 24, | ||||
| 2021 | ||||
| Razor intangible asset recorded on the acquisition date: | ||||
| Equity method investment carrying value | $ | |||
| Cash paid as Additional Purchase Payment for the Razor asset | ||||
| Oncocyte common stock issued (982,318 shares issued at market value) as Additional Purchase Payment | ||||
| Less: cash balance received from Razor for Clinical Trial expenses | ( | ) | ||
| Deferred tax liability generated from the Razor asset | ||||
| Other | ||||
| Total Razor investment asset balance as of February 24, 2021 (a) | $ | |||
| (a) |
Under ASC 805-50, for asset acquisitions, the remaining Clinical Trial Milestone Payment will be recorded only if the consideration is both probable (milestone has been achieved) and estimable in accordance with ASC 450, Contingencies, and as of June 30, 2022, no contingent consideration payment was recorded as the Clinical Trial Milestone Payment was not deemed probable of achievement as of that date.
| 27 |
Summarized standalone financial data for Razor from January 1, 2021 through February 23, 2021
The unaudited standalone results of operations for Razor prior to being consolidated with Oncocyte is summarized below (in thousands):
| For the period from | ||||
| January 1, 2021 through | ||||
| February 23, 2021 | ||||
| Condensed Statement of Operations (1) | (unaudited) | |||
| Research and development expense | $ | |||
| General and administrative expense | ||||
| Loss from operations | ( | ) | ||
| Net loss | $ | ( | ) | |
| (1) |
Acquisition of Chronix Biomedical, Inc.
On April 15, 2021, the Chronix Merger Date, Oncocyte completed its acquisition of Chronix pursuant the Chronix Merger Agreement.
Merger Consideration at Closing
Pursuant
to the Chronix Merger Agreement, Oncocyte agreed to deliver closing consideration consisting of approximately (i) shares of Oncocyte
common stock (the “Closing Shares”), which represents approximately $
Contingent Consideration
As
additional consideration for holders of certain classes and series of Chronix capital stock, the Chronix Merger Agreement also provides
for Oncocyte to pay “Chronix Contingent Consideration” consisting of (i) “Chronix Milestone Payments” of up to
$
The Chronix Closing Consideration and Chronix Contingent Consideration include amounts payable to certain directors, officers and employees of Chronix, including officers and employees who are expected to continue to provide services to Chronix following the Chronix Merger.
| 28 |
Liabilities
Pursuant
to the Chronix Merger Agreement, to the extent that Oncocyte or any of its subsidiaries, including Chronix, pays, performs or discharges
an amount of liabilities of Chronix in excess of $
Deferred
Revenue - In June 2018 and subsequently amended in June 2019, Chronix and a medical diagnostic service company in Germany (“the
German customer”) entered into a licensing and testing service agreement (“the German agreement”) for intellectual
property related to DetermaCNITM and VitaGraftTM. Under the terms of the agreement, Chronix received from the German
customer an upfront payment of €
Registration Rights
Pursuant to the Chronix Merger Agreement, Oncocyte filed a registration statement with the SEC to register the resale of the shares of common stock under the Securities Act issued in connection with the Chronix Merger, which the SEC declared effective in July 2021.
Workforce
At the Chronix Merger Date, all of Chronix’s employees ceased employment with Chronix, and Oncocyte offered employment to certain of those former Chronix employees, principally in laboratory roles and certain administrative roles in Germany, and granted new equity awards to them under the Oncocyte 2018 Equity Incentive Plan. All these Oncocyte stock option awards granted have vesting terms and conditions consistent with stock options granted to most other Oncocyte employees.
Aggregate Chronix Merger Consideration and Purchase Price Allocation
Measurement period adjustments reflect new information obtained about facts and circumstances that existed as of the acquisition date. Final determination of the fair values may result in further adjustments to the values presented. To the extent that significant changes occur in the future, Oncocyte will disclose such changes in the reporting period in which they occur.
The calculation of the aggregate merger consideration, consisting of the Closing Consideration and Chronix Contingent Consideration (the “Aggregate Chronix Merger Consideration”), at fair value, is shown in the following table (in thousands, except for share and per share amounts). In accordance with ASC 805, the Chronix Contingent Consideration, at fair value, is part of the total considered transferred on the Chronix Merger Date, as further discussed below.
| Cash consideration | $ | |||
| Settlement of acquirer/acquiree activity pre-combination, net | $ | |||
| Stock consideration | ||||
| Shares of Oncocyte common stock issued on the Merger Date | ||||
| Closing price per share of Oncocyte common stock on the Merger Date | $ | |||
| Market value of Oncocyte common stock issued | $ | |||
| Contingent Consideration | $ | |||
| Total fair value of consideration transferred on the Merger Date | $ |
| 29 |
Pursuant to ASC 805, Business Combinations (“ASC 805”), Oncocyte accounted for the Chronix acquisition as a business combination using the acquisition method of accounting. Identifiable assets and liabilities of Chronix, including identifiable intangible assets, were recorded based on their fair values as of the date of the closing of the acquisition. The excess of the purchase price over the fair value of the net assets acquired was recorded as goodwill.
Upon further review of the assets acquired and liabilities assumed, it was determined that the amount previously reported as assumed liabilities were not properly reflected. The following has been updated to reflect the assets acquired and liabilities as of the date of acquisition. The following table sets forth the allocation of the Aggregate Chronix Merger Consideration transferred to Chronix’s tangible and identifiable intangible assets acquired and liabilities assumed (in thousands):
| April 15, 2021 | ||||
| Assets acquired: | ||||
| Cash and cash equivalents | $ | |||
| Accounts receivable and other current assets | ||||
| Long-term assets | ||||
| Acquired in-process research and development | ||||
| Total identifiable assets acquired (a) | ||||
| Liabilities assumed: | ||||
| Deferred revenue | ||||
| Assumed liability | ||||
| Long-term deferred income tax liability | ||||
| Total identifiable liabilities assumed (b) | ||||
| Net assets acquired, excluding goodwill (a) - (b) = (c) | ||||
| Total cash, contingent consideration, and stock consideration transferred (d) | ||||
| Goodwill (d) - (c) | $ | |||
All tangible assets and liabilities were valued at their respective carrying amounts as management believes that these amounts approximated their acquisition date fair values.
The following is a discussion of the valuation methods and significant assumptions used to determine the fair value of Chronix’s material assets and liabilities in connection with the Chronix Merger:
Acquired
In-Process Research and Development and Deferred Income Tax Liability – The fair value of identifiable IPRD intangible
assets consists of $
| 30 |
To
calculate fair value of the Test Assets under MPEEM, Oncocyte used probability-weighted, projected cash flows discounted at a rate considered
appropriate given the significant inherent risks associated with similar assets. Cash flows were calculated based on projections of revenues
and expenses related to the asset and were assumed to extend through a multi-year projection period. The discount rate used to value
Test Assets was approximately
Because
the IPRD is considered an indefinite-lived asset for accounting purposes but is not recognized for tax purposes, the fair value
of the IPRD on the acquisition date generated a DTL in accordance with ASC 740, Income Taxes. This DTL is computed using the fair
value of the IPRD assets on the acquisition date multiplied by Oncocyte’s federal and state effective income tax rates. ASC
740 allows Oncocyte to treat acquired available DTAs, such as Chronix’s NOLs (subject to the annual limitation under Section 382
of the Internal Revenue Code) as available DTAs to offset against the DTLs, as the DTLs are expected to reverse within the NOL carryforward
period. Any excess DTAs over those DTLs would be assessed for a valuation allowance in accordance with ASC 740. This accounting treatment
is acceptable if, at the time of the acquisition, Oncocyte can both reasonably estimate a timeline to commercialization and the economic
useful life of the IPRD assets upon commercialization, which will be amortized during the carryforward period of the offsetting
DTAs. Oncocyte estimated and recorded a net DTL of $
Contingent consideration liabilities – ASC 805 requires that contingent consideration be estimated and recorded at fair value as of the acquisition date as part of the total consideration transferred. Contingent consideration is an obligation of the acquirer to transfer additional assets or equity interests to the selling shareholders in the future if certain future events occur or conditions are met, such as the attainment of product development milestones. Contingent consideration also includes additional future payments to selling shareholders based on achievement of components of earnings, such as “earn-out” provisions or percentage of future revenues, including royalties paid to the former Chronix shareholders based on a percentage of revenues generated from DetermaCNITM and VitaGraftTM tests over the useful life of the assets. Accordingly, Oncocyte determined there are three types of contingent consideration in connection with the Chronix Merger: the Milestone Payments, the Royalty Payments, and Transplant Sale Payments, discussed below, which comprise the “Chronix Contingent Consideration”.
The
fair value of the Milestone Payments was determined using a scenario analysis valuation method which incorporates Oncocyte’s assumptions
with respect to the likelihood of achievement of the milestones defined in the Chronix Merger Agreement, credit risk, timing of the Milestone
Payments and a risk-adjusted discount rate to estimate the present value of the expected payments. The discount rate was estimated at
approximately
The
fair value of the Royalty Payments was determined using a single scenario analysis method. The single scenario method incorporates Oncocyte’s
assumptions with respect to specified future revenues generated from DetermaCNITM, over its estimated useful life, taking
into account credit risk and a risk-adjusted discount rate to estimate the present value of the expected Royalty Payments. The credit
and risk-adjusted discount rate was estimated at approximately
The
fair value of the Transplant Sale Payments was determined using a single scenario analysis method. The single scenario method incorporates
Oncocyte’s assumptions with respect to specified future licensing revenues generated from VitaGraftTM, over its estimated
useful life, taking into account credit risk and a risk-adjusted discount rate to estimate the present value of the expected Transplant
Sale Payments. The credit and risk-adjusted discount rate was estimated at approximately
The
fair value of the Chronix Contingent Consideration after the Chronix Merger Date is reassessed by Oncocyte as changes in circumstances
and conditions occur, with the subsequent change in fair value recorded in Oncocyte’s condensed consolidated statements of operations.
As of June 30, 2022, based on Oncocyte’s reassessment of the significant assumptions noted above, there was a decrease of approximately
$
| 31 |
The following tables reflect the activity for Oncocyte’s Contingent Consideration for the six months ended June 30, 2022 and June 30, 2021, measured at fair value using Level 3 inputs (in thousands):
| Fair Value | ||||
| Balance at April 15, 2021 | $ | |||
| Change in estimated fair value | ||||
| Balance at June 30, 2021 | $ | |||
| Fair Value | ||||
| Balance at December 31, 2021 | $ | |||
| Change in estimated fair value | ( | ) | ||
| Balance at June 30, 2022 | $ | |||
Goodwill
- Goodwill is calculated as the difference between the acquisition date fair value of the Aggregate Chronix Merger Consideration
transferred and the values assigned to the assets acquired and liabilities assumed. Goodwill also includes the $
None of the goodwill recognized is expected to be deductible for income tax purposes. Goodwill is not amortized but is tested for impairment at least annually, or more frequently if circumstances indicate potential impairment (see Notes 2 and 4).
Goodwill and identifiable intangible assets are not amortizable or deductible for tax purposes since these assets are not recognized for tax purposes.
4. Goodwill and Intangible Assets, net
At June 30, 2022 and December 31, 2021, goodwill and intangible assets, net, consisted of the following (in thousands):
| June 30, 2022 | December 31, 2021 | |||||||
| Goodwill - Insight Merger(1) | $ | $ | ||||||
| Goodwill - Chronix Merger(1) | ||||||||
| Total Goodwill | ||||||||
| Intangible assets: | ||||||||
| Acquired IPRD - DetermaIOTM (2) | $ | $ | ||||||
| Acquired IPRD - DetermaCNI™ and VitaGraft™ (3) | ||||||||
| Intangible assets subject to amortization: | ||||||||
| Acquired intangible assets - customer relationship | ||||||||
| Acquired intangible assets - Razor (see Note 3) | ||||||||
| Total intangible assets | ||||||||
| Accumulated amortization - customer relationship(4) | ( | ) | ( | ) | ||||
| Accumulated amortization - Razor(4) | ( | ) | ( | ) | ||||
| Intangible assets, net | $ | $ | ||||||
| (1) | |
| (2) | |
| (3) | |
| (4) |
| 32 |
Future amortization expense of intangible assets subject to amortization is expected to be the following (in thousands):
| Amortization | ||||
| Year ending December 31, | ||||
| 2022 | ||||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| Thereafter | ||||
| $ | ||||
5. Shareholders’ Equity
Series A Redeemable Convertible Preferred Stock
On
April 13, 2022, the Company entered into a securities purchase agreement (“Purchase Agreement”) with institutional accredited
investors, including Broadwood Capital, L.P., the Company’s largest shareholder, (the “Investors”) in a registered
direct offering of shares of our Series A Convertible Preferred Stock (the “Preferred Stock”), which shares of Preferred
Stock are convertible into a total of shares of our common stock, at a conversion price of $
The
Preferred Stock is convertible into shares of the Company’s common stock at any time at the holder’s option. The conversion
price will be subject to customary anti-dilution adjustments for matters such as stock splits, stock dividends and other distributions
on our common stock, and recapitalizations. The holder will be prohibited from converting shares of Preferred Stock into shares of common
stock if, as a result of such conversion, the holder, together with its affiliates, would own more than
In the event of the Company’s liquidation, dissolution, or winding up, holders of Preferred Stock will receive a payment equal to the stated value of the Preferred Stock plus accrued but unpaid dividends and any other amounts that may have become payable on the Preferred Stock due to any failure or delay that may have occurred in issuing shares of common stock upon conversion of a portion of the Preferred Stock, before any distribution or payment to the holders of common stock or any of our other junior equity.
Shares
of Preferred Stock will generally have no voting rights, except as required by law and except that the consent of holders of a majority
of the outstanding Preferred Stock will be required to amend any provision of our certificate of incorporation that would have a materially
adverse effect on the rights of the holders of the Preferred Stock. Additionally, as long as any shares of Preferred Stock remain outstanding,
unless the holders of at least
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Shares of Preferred Stock will be entitled to receive cumulative dividends at a rate per share (as a percentage of stated value) of 6% per annum, payable quarterly in cash or, at our option, by accreting such dividends to the stated value.
The
Company is required to redeem, for cash, the shares of Preferred Stock on the earlier to occur of (1) April 8, 2024, (2) the commencement
of certain a voluntary or involuntary bankruptcy, receivership, or similar proceedings against the Company or its assets, (3) a Change
of Control Transaction (as defined herein) and (4) at the election and upon notice of 51% in interest of the holders, if the Company
fails to meet the Cash Minimum Requirement. A “Change of Control Transaction” means the occurrence of any of (a) an acquisition
by an individual or legal entity or “group” (as described in Rule 13d-5(b)(1) promulgated under the Exchange Act) of effective
control (whether through legal or beneficial ownership of capital stock of the Company, by contract or otherwise) of in excess of
As
of June 30, 2022, Oncocyte had preferred shares, no-par value, authorized, and shares issued and outstanding. The future
right or obligation associated with the Second Closing Tranche Preferred Stock is recorded at fair value from the $ million proceeds
received. The Company will remeasure the right or obligation associated with the Second Closing Tranche Preferred Stock to its fair value
and record the change in fair value through earnings as an element of other income/expense. As of June 30, 2022, the Company determined
the fair value to be $
Common Stock
As
of June 30, 2022 and December 31, 2021, Oncocyte has shares of common stock,
Common Stock Purchase Warrants
As
of June 30, 2022, Oncocyte had an aggregate of
Oncocyte has considered the guidance in ASC 815-40, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock, which states that contracts that require or may require the issuer to settle the contract for cash are liabilities recorded at fair value, irrespective of the likelihood of the transaction occurring that triggers the net cash settlement feature. This liability classification guidance also applies to financial instruments that may require cash or other form of settlement for transactions outside of the company’s control and, in which the form of consideration to the warrant holder may not be the same as to all other shareholders in connection with the transaction. However, if a transaction is not within the company’s control but the holder of the financial instrument can solely receive the same type or form of consideration as is being offered to all the shareholders in the transaction, then equity classification of the financial instrument is not precluded, if all other applicable equity classification criteria are met. Based on the above guidance and, among other factors, the fact that the warrants cannot be cash settled under any circumstance but require share settlement, all of the outstanding warrants meet the equity classification criteria and have been classified as equity.
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Oncocyte had a 2010 Stock Option Plan (the “2010 Plan”) under which shares of common stock were authorized for the grant of stock options or the sale of restricted stock. On August 27, 2018, Oncocyte shareholders approved a new Equity Incentive Plan (the “2018 Incentive Plan”) to replace the 2010 Plan. In adopting the 2018 Incentive Plan, Oncocyte terminated the 2010 Plan and will not grant any additional stock options or sell any stock under restricted stock purchase agreements under the 2010 Plan; however, stock options issued under the 2010 Plan will continue in effect in accordance with their terms and the terms of the 2010 Plan until the exercise or expiration of the individual options.
In 2018, under the 2010 Plan, Oncocyte granted certain stock options with exercise prices ranging from $ per share to $ per share, that will vest in increments upon the attainment of specified performance conditions related to the development of DetermaDx™ and obtaining Medicare reimbursement coverage for that test (“2018 Performance-Based Options”). The Medicare reimbursement conditions will not be met as Oncocyte has determined not to pursue commercialization of DetermaDx™. Approximately stock options granted in May 2018 contain a hybrid vesting condition which vest on the earlier to occur of three years of service from the grant date or achieving a defined Performance-Based Option milestone with respect to DetermaDx™ local decision coverage. These stock options are considered to be service-based awards for financial accounting purposes with the fair value of the options being recognized in stock-based compensation expense over an effective three-year service period. During the three and six months ended June 30, 2022, and 2021, stock-based compensation expense was recorded with regard to the Performance-Based Options due to the discontinuation of the development of DetermaDx™. As of June 30, 2022, there were 2018 Performance-Based Options outstanding.
During the six months ended June 30, 2022, the Company awarded executive share-based payment awards under the 2018 Plan to certain executive officers and employees with time-based, market-based and performance-based vesting conditions (“2022 equity awards”).
The fair value of the 2022 equity awards with performance-based vesting condition was estimated using the Black-Scholes option-pricing model assuming that performance goals will be achieved. If such performance conditions are not met, no compensation cost is recognized and any recognized compensation cost is reversed. The grant-date fair value of the stock options with time-based and performance-based vesting condition granted during the six months ended June 30, 2022 was $ per option. The probability of 2022 equity awards performance-based vesting conditions will be evaluated each reporting period and the Company will true-up the amount of cumulative cost recognized for the 2022 performance-based awards at each reporting period based on the most up-to-date probability estimates. The Company will recognize the compensation expense for 2022 performance-based awards expected to vest on a straight-line basis over the respective service period for each separately vesting tranche.
The fair value of the 2022 equity awards with market-based vesting condition was estimated using the Monte Carlo simulation model. Assumptions and estimates utilized in the model include the risk-free interest rate, dividend yield, expected stock volatility and the estimated period to achievement of the performance and market conditions, which are subject to the achievement of the market-based goals established by the Company and the continued employment of the participant. These awards vest only to the extent that the market-based conditions are satisfied as specified in the vesting conditions. Unlike the performance-based awards, the grant date fair value and associated compensation cost of the market-based awards reflect the probability of the market condition being achieved, and the Company will recognize this compensation cost regardless of the actual achievement of the market condition. Assumptions utilized in connection with the Monte Carlo valuation technique included: estimated risk-free interest rate of percent; term of years; expected volatility of percent; and expected dividend yield of 0 percent. The risk-free interest rate was determined based on the yields available on U.S. Treasury zero-coupon issues. The expected stock price volatility was determined using historical volatility. The expected dividend yield was based on expectations regarding dividend payments. The total grant date fair value of the market-based awards was $.
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In May 2022, the Company approved amendments to vesting conditions of performance-based and market-based awards of certain executive officers and employees. The performance-based awards were modified such that the stock awards will be eligible to vest as follows: (i) % will vest on December 31, 2023 if the Company achieves LCD reimbursement for VitaGraftTM (formerly TheraSureTM Transplant Monitor) for one organ no later than December 31, 2022 and (ii) % will vest on December 31, 2023 if DetermaIO™ or DetermaCNI™ (formerly TheraSureTM - CNI Monitor) submission for LCD is completed no later than December 31, 2022. Additional performance-based RSU awards were modified to be eligible to vest upon the achievement by The market-based RSU awards were modified such that the awards will be eligible to vest upon the achievement of product commercial launch minimum, target, and maximum goals as follows: (i) 1 laboratory test product in the US; (ii) 2 laboratory test products in US, and (iii) 3 laboratory test products in the US, respectively.
In
accordance with ASC 718, the Company calculated the fair value of the market-based awards on the date of modification, noting an increase
in the fair value of approximately $
| Risk-free interest rates | % | |||
| Expected term (in years) | ||||
| Volatility | % | |||
| Grant date fair value of awards granted during the period | $ |
| Shares | Number | Weighted | ||||||||||
| Available | of Options | Average | ||||||||||
| Options | for Grant | Outstanding | Exercise Price | |||||||||
| Balance at December 31, 2021 | $ | |||||||||||
| Options exercised | $ | |||||||||||
| Options forfeited, canceled and expired | $ | |||||||||||
| Balance at June 30, 2022 | $ | |||||||||||
| Exercisable at June 30, 2022 | $ | |||||||||||
As of June 30, 2022, shares of common stock were reserved under the 2018 Incentive Plan for the grant of stock options or the sale of restricted stock or for the settlement of hypothetical units issued with reference to common stock (“RSUs”). Oncocyte may also grant stock appreciation rights under the 2018 Incentive Plan.
| 36 |
| Weighted | ||||||||||||||||
| Shares Available | Number of Options | Number of RSUs | Average Exercise | |||||||||||||
| for Grant | Outstanding | Outstanding | Price | |||||||||||||
| Balance at December 31, 2021 | $ | |||||||||||||||
| RSUs vested | ( | ) | $ | |||||||||||||
| RSUs granted | ( | ) | $ | |||||||||||||
| Performance RSUs granted | ( | ) | $ | - | ||||||||||||
| Options granted | ( | ) | $ | |||||||||||||
| Options exercised | $ | |||||||||||||||
| Options forfeited/cancelled | ( | ) | $ | |||||||||||||
| Balance at June 30, 2022 | $ | |||||||||||||||
| Options exercisable at June 30, 2022 | $ | |||||||||||||||
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Cost of revenues | $ | $ | $ | $ | ||||||||||||
| Research and development | ||||||||||||||||
| Sales and marketing | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Total stock-based compensation expense | $ | $ | $ | $ | ||||||||||||
| Six Months Ended | ||||||||
| June 30, | ||||||||
| 2022 | 2021 | |||||||
| Expected life (in years) | ||||||||
| Risk-free interest rates | % | % | ||||||
| Volatility | % | % | ||||||
| Dividend yield | % | % | ||||||
The determination of stock-based compensation is inherently uncertain and subjective and involves the application of valuation models and assumptions requiring the use of judgment. If Oncocyte had made different assumptions, its stock-based compensation expense and net loss for the three and six months ended June 30, 2022 and 2021 may have been significantly different.
Oncocyte does not recognize deferred income taxes for incentive stock option compensation expense and records a tax deduction only when a disqualified disposition has occurred.
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7. Disaggregation of Revenues and Concentration Risk
The following table presents the percentage of consolidated revenues generated by unaffiliated customers that individually represent greater than ten percent of consolidated revenues:
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Medicare for DetermaRx™ | % | % | % | % | ||||||||||||
| Medicare Advantage for DetermaRx™ | % | % | % | % | ||||||||||||
| Pharma services - Company A | % | % | ||||||||||||||
| Licensing - Company B | % | % | % | % | ||||||||||||
| Licensing - Company C | % | |||||||||||||||
| * |
The following table presents the percentage of consolidated revenues by products or services classes:
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| DetermaRx™ | % | % | % | % | ||||||||||||
| Pharma Services | % | % | % | % | ||||||||||||
| Licensing | % | % | % | % | ||||||||||||
| % | % | % | % | |||||||||||||
The following table presents the percentage of consolidated revenues attributable to geographical locations:
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| United States | % | % | % | % | ||||||||||||
| Outside of the United States – Pharma Services | % | % | % | % | ||||||||||||
| Outside of the United States – Licensing | % | % | % | % | ||||||||||||
| % | % | % | % | |||||||||||||
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The following table presents accounts receivable, as a percentage of total consolidated accounts receivables, from third-party payers and other customers that provided in excess of 10% of Oncocyte’s total accounts receivable.
| June 30, 2022 | December 31, 2021 | |||||||
| Medicare for DetermaRx™ | % | % | ||||||
| Medicare Advantage for DetermaRx™ | % | % | ||||||
As
of December 31, 2021, our accounts receivable were $
8. Income Taxes
The provision for income taxes for interim periods is determined using an estimated annual effective tax rate in accordance with ASC 740-270, Income Taxes, Interim Reporting. The effective tax rate may be subject to fluctuations during the year as new information is obtained, which may affect the assumptions used to estimate the annual effective tax rate, including factors such as valuation allowances against deferred tax assets, the recognition or de-recognition of tax benefits related to uncertain tax positions, if any, and changes in or the interpretation of tax laws in jurisdictions where Oncocyte conducts business.
In
connection with the Razor acquisition discussed in Note 3, a change in the acquirer’s valuation allowance that stems from the purchase
of assets should be recognized as an element of the acquirer’s income tax benefit in the period of the acquisition. Accordingly,
for the three months ended March 31, 2021, Oncocyte recorded a $
Oncocyte did not record any provision or benefit for income taxes for the six months ended June 30, 2022, as Oncocyte had a full valuation allowance for the periods presented.
A valuation allowance is provided when it is more likely than not that some portion of the deferred tax assets will not be realized. Other than the partial releases discussed above, Oncocyte established a full valuation allowance for all periods presented due to the uncertainty of realizing future tax benefits from its net operating loss carry-forwards and other deferred tax assets.
In December 2017, the Tax Cuts and Jobs Act, or Tax Act, was signed into law. The Tax Act, among other things, contains significant changes to corporate taxation, including changes to the expensing of research and development expenses for tax years beginning after December 31, 2021. The changes will not have a material impact to the Company’s provision as the Company still expects to be in a taxable loss position.
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9. Right-of-use assets, machinery and equipment, net, and construction in progress
As of June 30, 2022 and December 31, 2021, right-of-use assets, machinery and equipment, net, and construction in progress were as follows (in thousands):
| June 30, 2022 (unaudited) | December 31, 2021 | |||||||
| Right-of-use assets (1) | ||||||||
| Machinery and equipment | ||||||||
| Accumulated depreciation and amortization | ( | ) | ( | ) | ||||
| Right-of-use assets, machinery and equipment, net | ||||||||
| Construction in progress | ||||||||
| Right-of-use assets, machinery and equipment, net, and construction in progress | ||||||||
Depreciation
expense amounted to $
10. Commitments and Contingencies
Oncocyte has certain commitments other than discussed in Note 3.
Office Lease Agreement
On
December 23, 2019, Oncocyte entered into an Office Lease Agreement (the “Irvine Lease”) of a building containing approximately
The Irvine Lease has an initial term of 89 calendar months (the “Term”), which commenced on June 1, 2020 (the “Commencement Date”). Oncocyte has an option to extend the Term for a period of five years (the “Extended Term”).
Oncocyte
will pay base monthly rent in the amount of $
If Oncocyte exercises its option to extend the Term, the initial base monthly rent during the Extended Term will be the greater of the base monthly rent in effect during the last year of the Term or the prevailing market rate. The prevailing market rate will be determined based on annual rental rates per square foot for comparable space in the area where the Premises are located. If Oncocyte does not agree with the prevailing market rate proposed by the lessor, the rate may be determined through an appraisal process. The base monthly rent during the Extended Term shall be subject to the same annual rent adjustment as applicable for base monthly rent during the Term.
In addition to base monthly rent, Oncocyte will pay in monthly installments (a) all costs and expenses, other than certain excluded expenses, incurred by the lessor in each calendar year in connection with operating, maintaining, repairing (including replacements if repairs are not feasible or would not be effective) and managing the Premises and the building in which the Premises are located (“Expenses”), and (b) all real estate taxes and assessments on the Premises and the building in which the Premises are located, all personal property taxes for property that is owned by lessor and used in connection with the operation, maintenance and repair of the Premises, and costs and fees incurred in connection with seeking reductions in such tax liabilities (“Taxes”). Subject to certain exceptions, Expenses shall not be increased by more than 4% annually on a cumulative, compounded basis.
| 40 |
Oncocyte
was entitled to an abatement of its obligations to pay Expenses and Taxes while constructing improvements to the Premises constituting
“Tenant’s Work” under the Irvine Lease prior to the Commencement Date, except that Oncocyte was obligated to pay
The
lessor provided Oncocyte with a “Tenant Improvement Allowance” in the amount of $
Oncocyte
has provided the lessor with a security deposit in the amount of $
To obtain the letter of credit, Oncocyte has provided the issuing bank with a restricted cash deposit that the bank will hold to cover its obligation to pay any draws on the letter of credit by the lessor. The restricted cash may not be used for any other purpose.
On
August 27, 2021, Oncocyte entered into a lease agreement to add an additional suite to its Nashville office space, containing approximately
Application of leasing standard, ASC 842
The Irvine Lease is an operating lease under ASC 842 included in the tables below. The tables below provide the amounts recorded in connection with the application of ASC 842 as of, and during, the six months ended June 30, 2022, for Oncocyte’s operating and financing leases (see Note 2).
Under
the Laboratory Agreement discussed in Note 3, Oncocyte assumed all of Razor’s Laboratory Agreement payment obligations. Although
Oncocyte is not a party to any lease agreement with Razor or Encore, under the terms of the Laboratory Agreement, Oncocyte received the
landlord’s consent for the use of the laboratory at Razor’s Brisbane, California location (the “Brisbane Facility”)
under the terms of a sublease to which Encore is the sublessee. The sublease expires on
| 41 |
Financing lease
As
of June 30, 2022, Oncocyte has one financing lease remaining through December 2023 for certain laboratory equipment with aggregate remaining
payments of $
Operating and Financing leases
The following table presents supplemental cash flow information related to operating and financing leases for the six months ended June 30, 2022 and 2021 (in thousands):
| Six Months Ended | ||||||||
| June 30, | ||||||||
| 2022 | 2021 | |||||||
| Cash paid for amounts included in the measurement of financing lease liabilities: | ||||||||
| Operating cash flows from operating leases | ||||||||
| Operating cash flows from financing leases | ||||||||
| Financing cash flows from financing leases | ||||||||
The following table presents supplemental balance sheets information related to operating and financing leases as of June 30, 2022 and June 30, 2021 (in thousands, except lease term and discount rate):
| June 30, 2022 | June 30, 2021 | |||||||
| Operating lease | ||||||||
| Right-of-use assets, net | $ | $ | ||||||
| Right-of-use lease liabilities, current | $ | $ | ||||||
| Right-of-use lease liabilities, noncurrent | ||||||||
| Total operating lease liabilities | $ | $ | ||||||
| Financing lease | ||||||||
| Machinery and equipment | $ | $ | ||||||
| Accumulated depreciation | ( | ) | ( |
) | ||||
| Machinery and equipment, net | $ | $ | ||||||
| Current liabilities | $ | $ | ||||||
| Noncurrent liabilities | ||||||||
| Total financing lease liabilities | $ | $ | ||||||
| Weighted average remaining lease term | ||||||||
| Operating lease | ||||||||
| Financing lease | ||||||||
| Weighted average discount rate | ||||||||
| Operating lease | % | % | ||||||
| Financing lease | % | % | ||||||
| 42 |
Future minimum lease commitments are as follows (in thousands):
| Operating | Financing | |||||||
| Leases | Leases | |||||||
| Year Ending December 31, | ||||||||
| 2022 | ||||||||
| 2023 | ||||||||
| 2024 | ||||||||
| 2025 | ||||||||
| 2026 | ||||||||
| Thereafter | ||||||||
| Total minimum lease payments | $ | $ | ||||||
| Less amounts representing interest | ( | ) | ( | ) | ||||
| Present value of net minimum lease payments | $ | $ | ||||||
Litigation – General
Oncocyte will be subject to various claims and contingencies in the ordinary course of its business, including those related to litigation, business transactions, employee-related matters, and other matters. When Oncocyte is aware of a claim or potential claim, it assesses the likelihood of any loss or exposure. If it is probable that a loss will result and the amount of the loss can be reasonably estimated, Oncocyte will record a liability for the loss. If the loss is not probable or the amount of the loss cannot be reasonably estimated, Oncocyte discloses the claim if the likelihood of a potential loss is reasonably possible and the amount involved could be material.
Tax Filings
Oncocyte tax filings are subject to audit by taxing authorities in jurisdictions where it conducts business. These audits may result in assessments of additional taxes that are subsequently resolved with the authorities or potentially through the courts. Management believes Oncocyte has adequately provided for any ultimate amounts that are likely to result from these audits; however, final assessments, if any, could be significantly different than the amounts recorded in the unaudited condensed consolidated interim financial statements.
Employment Contracts
Oncocyte
has entered into employment and severance benefit contracts with certain executive officers. Under the provisions of the contracts, Oncocyte
may be required to incur severance obligations for matters relating to changes in control, as defined, and certain terminations of executives.
As of June 30, 2022, Oncocyte accrued approximately $
| 43 |
Indemnification
In the normal course of business, Oncocyte may provide indemnification of varying scope under Oncocyte’s agreements with other companies or consultants, typically Oncocyte’s clinical research organizations, investigators, clinical sites, suppliers and others. Pursuant to these agreements, Oncocyte will generally agree to indemnify, hold harmless, and reimburse the indemnified parties for losses and expenses suffered or incurred by the indemnified parties arising from claims of third parties in connection with the use or testing of Oncocyte’s diagnostic tests. Indemnification provisions could also cover third party infringement claims with respect to patent rights, copyrights, or other intellectual property pertaining to Oncocyte’s diagnostic tests. Oncocyte’s office and laboratory facility leases also will generally contain indemnification obligations, including obligations for indemnification of the lessor for environmental law matters and injuries to persons or property of others, arising from Oncocyte’s use or occupancy of the leased property. The term of these indemnification agreements will generally continue in effect after the termination or expiration of the particular research, development, services, lease, or license agreement to which they relate. The Purchase Agreement also contains provisions under which Oncocyte has agreed to indemnify Razor and Encore from losses and expenses resulting from breaches or inaccuracy of Oncocyte’s representations and warranties and breaches or nonfulfillment of Oncocyte’s covenants, agreements, and obligations under the Purchase Agreement. Oncocyte periodically enters into underwriting and securities sales agreements with broker-dealers in connection with the offer and sale of Oncocyte securities. The terms of those underwriting and securities sales agreements include indemnification provisions pursuant to which Oncocyte agrees to indemnify the broker-dealers from certain liabilities, including liabilities arising under the Securities Act, in connection with the offer and sale of Oncocyte securities. The potential future payments Oncocyte could be required to make under these indemnification agreements will generally not be subject to any specified maximum amounts. Historically, Oncocyte has not been subject to any claims or demands for indemnification. Oncocyte also maintains various liability insurance policies that limit Oncocyte’s financial exposure. As a result, Oncocyte management believes that the fair value of these indemnification agreements is minimal. Accordingly, Oncocyte has not recorded any liabilities for these agreements as of June 30, 2022 and December 31, 2021.
11. Related Party Transactions
Financing Transactions
On
January 20, 2021, Oncocyte entered into Subscription Agreements with certain institutional investors for a registered direct offering
of shares of common stock, no par value, at an offering price of $ per share, for an aggregate purchase price of $
On
February 9, 2021, Oncocyte completed an underwritten public offering of shares of common stock at a public offering price of
$ per share, before underwriting discounts and commissions (the “2021 Offering”). Oncocyte received aggregate net proceeds
of approximately $
On
September 23, 2021, Oncocyte entered into a Warrant Exercise Agreement with Broadwood, pursuant to which (i) Oncocyte agreed to reduce
the exercise price of a common stock warrant held by Broadwood to purchase up to shares of common stock from $
| 44 |
On April 13, 2022, Oncocyte entered into the Securities Purchase Agreement with Investors, including Broadwood and John Peter Gutfreund, a director of Oncocyte, for the Series A Preferred Stock Offering. Each of Broadwood and Mr. Gutfreund has a direct material interest in the Series A Preferred Stock Offering and agreed to purchase and shares, respectively, in the Series A Preferred Stock Offering and on the same terms as other investors. See Note 14 for additional information about the Series A Preferred Stock Offering.
Further,
on April 13, 2022, Oncocyte entered into the Underwriting Agreement with the Underwriters for the Underwritten Offering. Pursuant to
the Underwritten Offering, Broadwood acquired from us (i) shares of common stock, and (ii)
12. Loan Payable to Silicon Valley Bank
Amended Loan Agreement
On October 17, 2019, Oncocyte entered into a First Amendment to Loan and Security Agreement (the “Amended Loan Agreement”) with Silicon Valley Bank (“the Bank”) pursuant to which Oncocyte obtained a new $ million secured credit facility (“Tranche 1”), a portion of which was used to repay the remaining balance of approximately $ on outstanding loans from the Bank, plus a final payment of $, under the February 21, 2017 Loan Agreement. The credit line under the Amended Loan Agreement may be increased by an additional $ million (“Tranche 2”) if Oncocyte obtains at least $ million of additional equity capital, as was the case with the original Loan Agreement, and a positive final coverage determination is received from CMS for DetermaRxTM at a specified minimum price point per test (the “Tranche 2 Milestone”), and Oncocyte is not in default under the Amended Loan Agreement. As of June 30, 2022, Oncocyte had satisfied the Tranche 2 Milestone and was eligible to borrow the $ million Tranche 2 funds. However, Oncocyte has not yet borrowed any funds under Tranche 2.
| 45 |
Payments
of interest only on the principal balance were due monthly from the draw date through March 31, 2020, followed by 24 monthly payments
of principal and interest, but the Bank has agreed to a deferral of principal payments, as discussed below. The outstanding principal
balance of the loan will bear interest at a stated floating annual interest equal to the greater of (a) the prime rate or (b) per
annum. As of June 30, 2022, the latest published prime rate was
On
April 2, 2020, as part of the Bank’s COVID-19 pandemic relief program, Oncocyte and the Bank entered into a Loan Deferral Agreement
(“Loan Deferral”) with respect to the Amended Loan Agreement.
At
maturity of the loan, Oncocyte will also pay the Bank an additional final payment fee of $
The outstanding principal amount of the loan, with interest accrued, the final payment fee, and the prepayment fee may become due and payable prior to the applicable maturity date if an “Event of Default” as defined in the Amended Loan Agreement occurs. Oncocyte’s obligations under the Amended Loan Agreement are collateralized by substantially all its assets other than intellectual property such as patents and trade secrets that Oncocyte owns. Accordingly, if an Event of Default were to occur and not be cured, the Bank could foreclose on its security interest in the collateral. Oncocyte was in compliance with the Amended Loan Agreement as of the filing date of this Report.
Bank Warrants
In
2017, in connection with the Loan Agreement, Oncocyte issued common stock purchase warrants to the Bank (the “2017 Bank Warrants”)
entitling the Bank to purchase shares of Oncocyte common stock in tranches related to the loan tranches under the Loan Agreement. In
conjunction with the availability of the loan, the Bank was issued warrants to purchase
On
October 17, 2019, in conjunction with Tranche 1 becoming available under the Amended Loan Agreement, Oncocyte issued a common stock purchase
warrant to the Bank (the “2019 Bank Warrant”) entitling the Bank to purchase
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13. Co-Development Agreement with Life Technologies Corporation
On January 13, 2022, Oncocyte entered into a Collaboration Agreement (the “LTC Agreement”) with Life Technologies Corporation, a Delaware corporation and subsidiary of Thermo Fisher Scientific (“LTC” and together with Oncocyte, the “Parties” or individually, a “Party”), in order to partner in the development and collaborate in the commercialization of Thermo Fisher Scientific’s existing Oncomine Comprehensive Assay Plus (“OCA Plus”) and Oncocyte’s DetermaIO assay for use with LTC’s Ion TorrentTM GenexusTM Integrated Sequencer and LTC’s Ion TorrentTM GenexusTM Purification System (“Genexus system”) in order to obtain in vitro diagnostic (“IVD”) regulatory approval.
Development
Under the terms of the LTC Agreement, Oncocyte will clinically validate LTC’s OCA Plus assay, which is LTC’s proprietary NGS-based assay designed to be run on the Genexus system as an IVD assay (the “Collaboration LTC Product”) and Oncocyte’s Determa IO assay, which is a multivariate gene expression test performed on FFPE biopsy specimens, as an IVD assay run on the Genexus system (the “Collaboration Determa Product”), paving the way toward regulatory approval for use in tumor profiling and guidance of therapy selection for solid tumor cancers in humans. LTC retains the exclusive right to partner with therapeutics companies to develop the Collaboration LTC Product as a companion diagnostic. Oncocyte retains the exclusive right to partner with therapeutics companies to develop the Collaboration Determa Product as a companion diagnostic. All development work will be conducted pursuant to development plans agreed by the Parties through a series of governance committees that will oversee the collaboration.
Costs Associated with Product Development
Oncocyte will be responsible for all costs associated with Oncocyte activities under the LTC product development budget. Oncocyte and LTC will share development costs associated with LTC activities under the LTC product development budget. LTC will be responsible for costs associated with the performance of research and development activities for the RUO-labeled OCA Plus and related components as is necessary to enable the development of the Collaboration LTC Product as contemplated by the LTC product development plan. Oncocyte will be responsible for all costs associated with activities of both Parties under the Determa product development budget. LTC will be responsible, at LTC’s own cost, for the performance of research and development activities for the RUO-labeled OCA Plus and related components as is necessary to enable the development of the Collaboration LTC Product as contemplated by the development plan for the Collaboration LTC Product.
Commercialization
LTC will be responsible for the commercialization of the Collaboration LTC Product throughout the world, but the Parties will co-market it in the United States, Canada, the United Kingdom, European Union, Switzerland, Australia, and New Zealand (the “LTC Product Territory”). Oncocyte will be responsible for the commercialization of the Collaboration Determa Product in the United States (the “Determa Product Territory”), and LTC will be responsible for commercializing it in the rest of the world. All commercialization activities for the Collaboration LTC Product and the Collaboration Determa Product will be conducted pursuant to commercialization plans agreed by the Parties through the collaboration’s governance committees.
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Economic Terms
Under the LTC Agreement, LTC will pay Oncocyte a percentage of revenue received by LTC on sales of the Collaboration LTC Product throughout the world and on sales of the Collaboration Determa Product outside the United States. The revenue share percentage for the Collaboration LTC Product will vary based on the timing of the sale, the territory of the sale, and the degree to which consumables, reagents, and other products are included in the kit being sold, but the Company estimates that the average revenue share percentage that it will receive under the LTC Agreement will likely range from the low teens to the low twenties. The revenue share percentage LTC will pay to Oncocyte on sales of the Collaboration Determa Product will vary based on the timing of the sale, and the degree to which consumables, reagents, and other products are included in the kit being sold, but the Company estimates that the average revenue share that it will receive under the LTC Agreement will likely range in the low twenties. Oncocyte will pay LTC a mid single-digit percentage of its revenue on sales of the Collaboration Determa Product in the United States. Oncocyte will also receive up to two milestone payments in the low seven figures if LTC successfully commercializes the OCA Plus IVD assay as a companion diagnostic with certain claims.
Exclusivity
During the term of the LTC Agreement, (a) LTC will not enter into any agreement or arrangement with any third party with respect to the development or commercialization of OCA Plus on the Genexus system in the field of distributed IVD assay kits for the tumor profiling of and guidance of therapy selection for solid tumor cancers in humans (the “LTC Field”) in the LTC Product Territory, (b) Oncocyte will not partner with any third-party NGS equipment manufacturer with respect to the development and commercialization of a comprehensive genomic profiling assay on an instrument platform similar to or competitive with LTC’s NGS systems in the LTC Field in the LTC Product Territory, and (c) LTC will not develop, market or sell a new panel or other substantially similar comprehensive genomic profiling assay that would compete with the Collaboration LTC Product in the LTC Field in the LTC Product Territory on the Genexus system.
Manufacturing
LTC is responsible for the manufacture and supply of all OCA Plus assays and Collaboration LTC products, among other consumables and reagents required for the development of the Collaboration LTC Product. LTC will supply Oncocyte all consumables and reagents necessary for use in developing the Collaboration LTC Product pursuant to the LTC product development plan.
In addition, following the effective date of the LTC Agreement, the Parties will negotiate in good faith a supply agreement pursuant to which LTC will supply Oncocyte with the Collaboration Determa Products for commercialization in the United States. LTC will also supply Oncocyte with all Genexus instruments, consumables and reagents, necessary for use in developing Collaboration Determa Products pursuant to the Determa product development plan.
Term; Termination
Unless earlier terminated as described in the LTC Agreement, the LTC Agreement will remain in effect until December 31, 2035. The LTC Agreement may be (i) terminated for cause by either Party based on any uncured material breach or insolvency by the other Party, and (ii) terminated by either Party with respect to specific termination events occurring for either the Collaboration LTC products or the Collaboration Determa Products, including but not limited to, the failure to achieve certain milestones and failure to agree to initial development or commercialization plans for the Collaboration Determa Product. If LTC fails to meet its certain product development milestones, the term of the LTC Agreement shall be extended on a proportionate basis.
The
Company purchased 10 Genexus Integrated Sequencers and 10 Genexus Purification Instruments by submission of an initial PO of $
As
of June 30, 2022, LTC has incurred $
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14. April 2022 Offerings
Series A Preferred Stock Offering
On
April 13, 2022, Oncocyte entered into the Securities Purchase Agreement with Investors, including Broadwood, in a registered direct offering
of shares of our Series A Preferred Stock, which shares of Series A Preferred Stock are convertible into a total of
shares of our common stock, at a conversion price of $
The
Series A Preferred Stock is convertible into shares of common stock at any time at the holder’s option. The conversion price will
be subject to customary anti-dilution adjustments for matters such as stock splits, stock dividends and other distributions on common
stock, and recapitalizations.
In the event of the Company’s liquidation, dissolution, or winding up, holders of Series A Preferred Stock will receive a payment equal to the stated value of the Series A Preferred Stock plus accrued but unpaid dividends and any other amounts that may have become payable on the Series A Preferred Stock due to any failure or delay that may have occurred in issuing shares of common stock upon conversion of a portion of the Series A Preferred Stock, before any distribution or payment to the holders of common stock or any of Oncocyte’s other junior equity.
Shares
of Series A Preferred Stock will generally have no voting rights, except as required by law and except that the consent of holders of
a majority of the outstanding Series A Preferred Stock will be required to amend any provision of our certificate of incorporation that
would have a materially adverse effect on the rights of the holders of the Series A Preferred Stock. Additionally, as long as any shares
of Series A Preferred Stock remain outstanding, unless the holders of at least
Shares
of Series A Preferred Stock will be entitled to receive cumulative dividends at a rate per share (as a percentage of stated value) of
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The
Company is required to redeem, for cash, the shares of Series A Preferred Stock on the earlier to occur of (1) April 8, 2024, (2) the
commencement of certain a voluntary or involuntary bankruptcy, receivership, or similar proceedings against us or our assets, (3) a Change
of Control Transaction (as defined herein) and (4) at the election and upon notice of
The issuance and sale of the Series A Preferred Stock was completed pursuant to the Company’s effective shelf registration statement on Form S-3 (Registration No. 333-256650), filed with the Securities and Exchange Commission on May 28, 2021 and declared effective by the SEC on June 8, 2021, and an accompanying prospectus dated June 8, 2021 as supplemented by a prospectus supplement dated April 13, 2022.
The
Series A Preferred Stock dividend for all issued and outstanding shares is set at
As of June 30, 2022, Oncocyte had preferred shares,
Underwritten Offering
On
April 13, 2022, Oncocyte entered into the Underwriting Agreement with the Underwriters, pursuant to which the Company agreed to issue
and sell to the Underwriters an aggregate of shares of common stock and
Under
the terms of the Underwriting Agreement, the Company also granted to the Underwriters an over-allotment option, exercisable in whole
or in part at any time for a period of 30 days from the date of the Underwriting Agreement, to purchase up to an additional
shares of common stock and
The
Company received net proceeds of approximately $
The Underwritten Offering was made pursuant to the Company’s effective “shelf” registration statement on Form S-3 (Registration No. 333-256650) filed with the Securities and Exchange Commission on May 28, 2021 and declared effective by the SEC on June 8, 2021, and an accompanying prospectus dated June 8, 2021 as supplemented by a prospectus supplement dated April 13, 2022.
15. Subsequent Events
Workforce Reduction
On
August 10, 2022, Oncocyte announced plans to strategically realign its
operations and implement cost reduction programs to prioritize near term revenue generators and to manage and preserve cash. As part of
this strategic realignment, the Company announced a reduction in force involving full-time employees (the “Reduction”), which
Oncocyte expects will decrease its annual cash compensation costs by over $
In
connection with the Reduction, we estimate that we will incur charges of approximately $
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The matters addressed in this Item 2 that are not historical information constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, including statements about any of the following: uncertainties associated with the ongoing coronavirus (COVID-19) pandemic, including its possible effects on our operations, the demand for our diagnostic tests and other laboratory tests and Pharma Services, and our ability to raise capital to finance our operations; our ability to efficiently and flexibly manage our business amid uncertainties related to COVID-19; any projections of earnings, revenue, cash, effective tax rate, use of net operating losses, or any other financial items; the plans, strategies and objectives of management for future operations or prospects for achieving such plans, and any statements of assumptions underlying any of the foregoing. Any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words “believes,” “anticipates,” “plans,” “expects,” “seeks,” “estimates,” and similar expressions are intended to identify forward-looking statements. While Oncocyte may elect to update forward-looking statements in the future, it specifically disclaims any obligation to do so, even if the Oncocyte estimates change and readers should not rely on those forward-looking statements as representing Oncocyte views as of any date subsequent to the date of the filing of this Quarterly Report. Although we believe that the expectations reflected in these forward-looking statements are reasonable, such statements are inherently subject to risks and Oncocyte can give no assurances that its expectations will prove to be correct. Actual results could differ materially from those described in this report because of numerous factors, many of which are beyond the control of Oncocyte. A number of important factors could cause the results of the company to differ materially from those indicated by such forward-looking statements, including those detailed under the heading “Risk Factors” in our Form 10-K for the year ended December 31, 2021, and our other reports filed with the SEC from time to time.
The following discussion should be read in conjunction with Oncocyte’s unaudited condensed consolidated interim financial statements and the related notes provided under “Item 1- Financial Statements” above.
Recent Developments
On August 10, 2022, Oncocyte announced plans to strategically realign its operations and implement cost reduction programs to prioritize near term revenue generators and to manage and preserve cash. As part of this strategic realignment, the Company announced a Reduction in force involving full-time employees, which Oncocyte expects will decrease its annual cash compensation costs by over $4.5 million, exclusive of related employee severance and benefit costs. See Note 15 for additional information about the Reduction.
Management believes that, as a result of the strategic realignment, the expected program cost reductions combined with the Reduction in headcount and planned monetization of assets through strategic activities are anticipated to result in an over $12 million decrease in annualized operating expenses.
Critical Accounting Policies
This Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses and analyzes data in our unaudited condensed consolidated interim financial statements, which we have prepared in accordance with U.S. generally accepted accounting principles. Preparation of the financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. Management bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Senior management has discussed the development, selection and disclosure of these estimates with the Audit Committee of our Board of Directors. Actual conditions may differ from our assumptions and actual results may differ from our estimates.
An accounting policy is deemed critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, if different estimates reasonably could have been used, or if changes in the estimate are reasonably likely to occur, that could materially impact the financial statements. Management believes that there have been no significant changes during the six months ended June 30, 2022 to the matters that we disclosed as our critical accounting policies and estimates in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2021, except as disclosed in Note 2 to our unaudited condensed consolidated interim financial statements included elsewhere in this Report.
Results of Operations
The ongoing global outbreak of COVID-19, and the various attempts throughout the world to contain it, have created significant financial volatility, economic uncertainty, and changes to the way Oncocyte conducts certain aspects of its operations. The COVID-19 pandemic has had, and may continue to have, significant effects on our operations, ability to generate revenues, and financing activities. In response to government directives and guidelines, health care advisories and employee and other concerns, a number of our employees have had to work remotely from home and those on site have had to follow our social distance guidelines, which could impact their productivity. Although employee absenteeism due to COVID-19 illness has not had an adverse impact on our operations as of the date of this Report, we face the risk of losing, at least temporarily, the services of employees if they become ill.
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The consequences of the COVID-19 pandemic have led to uncertainties related to our growth and our ability to forecast the demand for our diagnostic testing and Pharma Services and resulting revenues, as we have not had time to establish a base of customers, revenues or other relevant trends prior to the outbreak of COVID-19. We had no commercial revenues until the first quarter of 2020 when we launched our first commercial diagnostic test, DetermaRx™, and acquired the Pharma Services business of Insight. We had expected that initial DetermaRx™ revenues would be constrained by the lack of Medicare coverage. CMS Medicare reimbursement pricing approval for DetermaRx™ did not become effective until September 2020. Deferrals in lung cancer surgeries due to COVID-19 may have reduced demand for DetermaRx™, but because of the lack of historical DetermaRx™ revenues, with and without Medicare reimbursement, we are unable to determine the extent to which the deferral of those surgeries impacted our DetermaRx™ revenues. Resurgences in COVID-19 cases could cause additional deferrals of lung cancer surgeries during the course of the pandemic. The lack of in-person interaction with healthcare providers for our promotion of the use of DetermaRx™ has also placed a constraint on our ability to market that test, but we cannot determine the extent to which that has impacted our revenues due to the absence of historical revenues. Similarly, our Pharma Services revenues commenced with our acquisition of Insight during the first quarter of 2020, and because we do not have a prior history of Pharma Services revenues we cannot assess how COVID-19 may have impacted those revenues, although we are aware that certain planned clinical trials of new pharmaceuticals for which we had expected to provide Pharma Services were delayed due to the pandemic.
During the COVID-19 pandemic, we have not been, and may not be, able to maintain our preferred level of physician or customer outreach and marketing of our diagnostic testing and Pharma Services, which could negatively impact our potential new customers’ interest in our tests and services. Even if government and other COVID-19 related restrictions are relaxed and lung cancer surgeries are performed at or close to pre-pandemic levels, any growth and anticipated adoption of our diagnostic tests may not occur. Although we have not yet experienced COVID-19 related supply chain disruptions impacting our testing capacity, if the vendors of equipment and reagents used in our diagnostic laboratories experience supply, operational, or financial disruptions due to the COVID-19 pandemic, we could experience supply constraints in the future that could cause increased costs or delays in performing DetermaRx™ tests and Pharma Services and in continuing the development of new diagnostic tests.
The full extent to which the COVID-19 pandemic and the various responses might impact our business, operations and financial results will depend on numerous evolving factors that we will not be able to accurately predict, including: the duration and scope of the pandemic; governmental, business and individuals’ actions that have been and continue to be taken in response to the pandemic; the availability and cost to access COVID-19 tests, vaccines and therapies; the effect on our potential customers and their demand for our diagnostic testing and Pharma Services; the effect on our suppliers and their ability to provide the necessary equipment and materials to support our tests and services; disruptions or restrictions on our employees’ ability to work and travel; interruptions or restrictions related to the distribution of our tests in foreign markets, including impacts on logistics of shipping and receiving patient samples; and any stoppages, disruptions or increased costs associated with development, production and marketing of our diagnostic tests. In addition to the direct impacts to our business operations, the global economy is likely to continue to be significantly weakened as a result of actions taken in response to the COVID-19 pandemic and to the extent that such a weakened global economy impacts customers’ ability or willingness to purchase and pay for our tests, our business and results of operation could be negatively impacted. Due to the uncertain scope and duration of the COVID-19 pandemic and uncertain timing of any recovery or normalization, we are currently unable to estimate the resulting impacts on our operations and financial results. We will continue to actively monitor the issues raised by the COVID-19 pandemic and may take further actions that alter our operations, as may be required by federal, state, local or foreign authorities, or that we determine are in the best interests of our employees, our customers, and our shareholders.
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Operating Summary for the Three and Six Months ended June 30, 2022 and 2021 (amounts in thousands, except percentage changes)
| Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||||
| June 30, | June 30, | |||||||||||||||||||||||||||||||
| 2022 | 2021 | $ Change | % Change | 2022 | 2021 | $ Change | % Change | |||||||||||||||||||||||||
| Revenues | 2,067 | 2,030 | 37 | 2 | % | 3,491 | 3,154 | 337 | 11 | % | ||||||||||||||||||||||
| Cost of revenues | 2,381 | 2,424 | (43 | ) | -2 | % | 4,338 | 3,469 | 869 | 25 | % | |||||||||||||||||||||
| Research and development expenses | 5,574 | 2,537 | 3,037 | 120 | % | 10,702 | 5,898 | 4,804 | 81 | % | ||||||||||||||||||||||
| Sales and marketing expenses | 3,522 | 2,673 | 849 | 32 | % | 6,759 | 4,927 | 1,832 | 37 | % | ||||||||||||||||||||||
| General and administrative expenses | 5,511 | 7,934 | (2,423 | ) | -31 | % | 11,164 | 12,698 | (1,534 | ) | -12 | % | ||||||||||||||||||||
| Change in fair value of contingent consideration | (6,359 | ) | 30 | (6,389 | ) | -21297 | % | (11,015 | ) | 1,090 | (12,105 | ) | -1111 | % | ||||||||||||||||||
| Loss from operations | (8,562 | ) | (13,568 | ) | 5,006 | -37 | % | (18,457 | ) | (24,928 | ) | 6,471 | -26 | % | ||||||||||||||||||
| Other income (expense) | 262 | 1,281 | (1,019 | ) | -80 | % | (134 | ) | 1,158 | (1,292 | ) | -112 | % | |||||||||||||||||||
| Loss before income taxes | (8,300 | ) | (12,287 | ) | 3,987 | -32 | % | (18,591 | ) | (23,770 | ) | 5,179 | -22 | % | ||||||||||||||||||
| Income tax benefit | - | 1,794 | (1,794 | ) | n/a | - | 9,358 | (9,358 | ) | -100 | % | |||||||||||||||||||||
| Net Loss | (8,300 | ) | (10,493 | ) | 2,193 | -21 | % | (18,591 | ) | (14,412 | ) | (4,179 | ) | 29 | % | |||||||||||||||||
Results of Operations – Three Months Ended June 30, 2022 Compared with the Three Months Ended June 30, 2021
Revenues increased by $0.1 million to $2.1 million for the three months ended June 30, 2022, as compared to $2.0 million in the comparable prior year quarter, primarily due to increased revenues in DetermaRx™ tests.
Loss before income taxes was $8.3 million for the three months ended June 30, 2022, and $12.3 million for the three months ended June 30, 2021. Net change in loss before income taxes was comprised of the change in revenues described above and other changes in operating expenses and other income and expenses as follows:
● DetermaRx™ testing revenue increased by $0.2 million due to an increase in revenue from increased tests during the quarter. Pharma Services revenue increased by $0.1 million due to an increased number of contracts performed during the period. Licensing revenue decreased by $0.2 million due to decreased assay shipments in relation to the Burning Rock Sublicense Agreement.
● Cost of revenue and amortization of acquired intangibles was $2.4 million for the three months ended June 30, 2022 and three months ended June 30, 2021, primarily consisting of labor and allocated overhead associated with performing our DetermaRx™ tests and Pharma Services, and with providing revenue deliverables under our license agreements, as well as noncash amortization of acquired intangible assets such as our Razor asset and customer relationship intangible assets acquired as part of the Insight merger.
● Research and development expenses increased $3.0 million to $5.6 million, primarily due to increased headcount and continued development of DetermaIO™, DetermaTx™, DetermaMx™ and VitaGraftTM (formerly TheraSureTM Transplant Monitor), increased expense in clinical trials to promote the commercialization of DetermaRx™, and the development of our planned DetermaCNI™ (formerly TheraSureTM - CNI Monitor).
● Sales and marketing expenses increased $0.8 million to $3.5 million primarily attributable to increase in headcount and continued ramp in sales and marketing activities related to the transplant business, as well as support the commercialization efforts within oncology.
● General and administrative expenses decreased $2.4 million to $5.5 million, primarily due to decreased consulting, and personnel expenses.
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● Change in fair value of contingent considerations increased by $6.4 million, from a loss of $30,000 to a gain of $6.4 million, due to changes in discount rates and revised estimates on the timing of possible future payouts.
● Other expenses decreased by $1.0 million, from a gain of $1.3 million to $0.3 million, primarily due to unrealized loss on marketable equity securities.
Results of Operations – Six Months Ended June 30, 2022 Compared with the Six Months Ended June 30, 2021
Revenues increased by $0.3 million to $3.5 million for the six months ended June 30, 2022, as compared to $3.2 million in the comparable prior year quarter, primarily due to increased revenues in DetermaRx™ tests.
Loss before income taxes was $18.6 million for the six months ended June 30, 2022, and $23.8 million for the six months ended June 30, 2021. Net change in loss before income taxes was comprised of the change in revenues described above and other changes in operating expenses and other income and expenses as follows:
● DetermaRx™ testing revenue increased by $0.6 million due to an increase in revenue from increased tests during the quarter. Pharma Services revenue decreased by $0.1 million due to a decreased number of contracts performed during the period. Licensing revenue decreased by $0.2 million due to decreased assay shipments in relation to the Burning Rock Sublicense Agreement.
● Cost of revenue and amortization of acquired intangibles increased by $0.8 million, from $3.5 million to $4.3 million, primarily due to increased labor and allocated overhead associated with performing our DetermaRx™ tests and Pharma Services, and with providing revenue deliverables under our license agreements, as well as increased noncash amortization of acquired intangible assets such as our Razor asset and customer relationship intangible assets acquired as part of the Insight merger.
● Research and development expenses increased $4.8 million to $10.7 million, primarily due to increased headcount and continued development of DetermaIO™, DetermaTx™, DetermaMx™ and VitaGraftTM, increased expense in clinical trials to promote the commercialization of DetermaRx™, and the development of our planned DetermaCNI™.
● Sales and marketing expenses increased $1.8 million to $6.8 million primarily attributable to increase in headcount and continued ramp in sales and marketing activities related to the transplant business, as well as support the commercialization efforts within oncology.
● General and administrative expenses decreased $1.5 million to $11.2 million, primarily due to decreased consulting, and personnel expenses.
● Change in fair value of contingent considerations increased by $12.1 million, from a loss of $1.1 million to a gain of $11.0 million, due to changes in discount rates and revised estimates on the timing of possible future payouts.
● Other expenses increased by $1.3 million, from a gain of $1.2 million to a loss of $0.1 million, primarily due to unrealized loss on marketable equity securities.
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Revenues (amounts in thousands, except percentage changes)
| Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||||
| June 30, | June 30, | |||||||||||||||||||||||||||||||
| 2022 | 2021 | $ Change | % Change | 2022 | 2021 | $ Change | % Change | |||||||||||||||||||||||||
| DetermaRx™ | $ | 830 | $ | 645 | $ | 185 | 29 | % | $ | 1,834 | $ | 1,251 | $ | 583 | 47 | % | ||||||||||||||||
| Pharma Services | 237 | 168 | 69 | 41 | % | 617 | 686 | (69 | ) | -10 | % | |||||||||||||||||||||
| Licensing | 1,000 | 1,217 | (217 | ) | -18 | % | 1,040 | 1,217 | (177 | ) | -15 | % | ||||||||||||||||||||
| Total | $ | 2,067 | $ | 2,030 | $ | 37 | 2 | % | $ | 3,491 | $ | 3,154 | $ | 337 | 11 | % | ||||||||||||||||
We recognize testing revenues for our services in accordance with the provisions of ASC 606, Revenue from Contracts with Customers as further discussed in Note 2 of this Report. During the first quarter of 2020, we generated revenues for the first time since our company’s inception in 2009. We currently derive our revenues from the sale of our novel lung cancer stratification test, DetermaRx™, which we commercially launched in early 2020, and from Pharma Services generated by our wholly owned subsidiaries, Insight and Chronix, which we acquired on January 31, 2020 and April 15, 2021, respectively. From 2021, we also recognized revenue from the licensing of our technology related to DetermaRx™, DetermaCNITM and VitaGraftTM. See Notes 2 and 3.
Under U.S. generally accepted accounting principles, we may not recognize revenues even if we have performed the diagnostic tests we have commercialized until we have contracts for reimbursement from third-party payers and a history of experience of cash collections for the tests we perform. Until we develop that experience or have the contracts in place with payers or there is Medicare or other insurance coverage for a test, we recognize revenue upon payment for the tests that we perform. In September 2020, we received a final pricing decision for our DetermaRx™ test from CMS and commenced recognizing revenue on an accrual basis when DetermaRx™ tests are performed for Medicare covered patients, or when payment was approved by Medicare in the case of certain tests performed prior to September 2020. As of March 31, 2021, we also commenced recognizing revenues when the test result is delivered or made available to the prescribing physician electronically for Medicare Advantage covered tests at the CMS approved rate. All other payers for the DetermaRx™ test are currently recognized upon payment. For financial accounting purposes, regardless of when, or whether, revenues may be recognized, we incurred and accrued costs of revenues and other operating expenses discussed below related to any services we perform. Our ability to increase our testing revenue for DetermaRx™ will depend on our ability to penetrate the market and obtain coverage from additional third-party payers.
Pharma Services are generally performed on a time and materials basis. Upon our completion of the service to the customer in accordance with the contract, we have the right to bill the customer for the agreed upon price (either on a per test or per deliverable basis) and recognize the Pharma Services revenue at that time, on an accrual basis.
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Licensing revenues are generally recognized upon transfer of promised technology information and other contractual performance obligations to licensees in an amount that reflects the consideration we expect to receive in exchange. Licensing revenue is recognized at the point in time when the applicable performance obligations are satisfied and all other revenue recognition criteria have been met.
Pharma Services revenues are generated under discrete agreements for particular customer projects that generally expire with the completion or termination of the customer’s project. Accordingly, different customers may account for greater or lesser portions of Pharma Services during different accounting periods, and Pharma Services revenues may exhibit a larger variance from accounting period to accounting period than other revenues such as DetermaRx™ testing revenues.
Licensing revenues for the six months ended June 30, 2022 primarily reflect the revenue recognition of $1.0 million in relation to the Initial Milestone Payments related to the Exclusive Sublicense Agreement in the PRC Territory (the “Sublicense Agreement”) with Burning Rock Biotech Limited (“Burning Rock”). Like Pharma Services revenues, licensing revenues may vary significantly between accounting periods reflecting the attainment of additional licensing agreement milestones that trigger license fees payable to Oncocyte, or reflecting the beginning or end of a revenue stream upon the commencement or termination of a license agreement related to a particular customer project.
The following table presents the percentage of consolidated revenues by products or services classes:
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| DetermaRx™ | 40 | % | 32 | % | 53 | % | 40 | % | ||||||||
| Pharma Services | 11 | % | 8 | % | 18 | % | 22 | % | ||||||||
| Licensing | 49 | % | 60 | % | 29 | % | 38 | % | ||||||||
| 100 | % | 100 | % | 100 | % | 100 | % | |||||||||
Cost of revenues
Cost of revenues generally consists of cost of materials; direct labor including payroll, payroll taxes, bonus, benefit and stock-based compensation; equipment and infrastructure expenses; clinical sample costs associated with performing Pharma Services and the DetermaRx™ tests; license fees due to third parties, and amortization of acquired intangible assets. Infrastructure expenses include depreciation of laboratory equipment; allocated rent costs; leasehold improvements; and allocated information technology costs for operations at our CLIA laboratories in California and Tennessee. Costs associated with performing the tests are recorded as the tests are performed regardless of whether revenue was recognized with respect to that test. Royalties payable by Oncocyte for licensed technology, calculated as a percentage of revenues generated using the associated technology, are recorded as expenses at the time the related revenues are recognized.
We expect the cost of DetermaRx™ testing to generally increase in line with the increase in the number of tests we perform, even if we do not recognize corresponding revenues when Medicare, Medicare Advantage, or other insurance coverage is not available. We expect that our cost per test to decrease modestly over time due to the efficiencies we may gain if testing volume increases, and from automation and other cost reductions. There can be no assurance, however, that any of these efficiencies or cost savings will be achieved. Cost of revenues for Pharma Services and licensing revenue will vary depending on the nature, timing, and scope of customer projects.
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Research and development expenses
A summary of the main drivers of the change in research and development expenses for the periods presented, is as follows (amounts in thousands, except percentage changes):
| Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||||
| June 30, | June 30, | |||||||||||||||||||||||||||||||
| 2022 | 2021 | $ Change | % Change | 2022 | 2021 | $ Change | % Change | |||||||||||||||||||||||||
| Personnel-related expenses | $ | 2,146 | $ | 878 | $ | 1,268 | 144 | % | $ | 4,261 | $ | 1,966 | $ | 2,295 | 117 | % | ||||||||||||||||
| Laboratory supplies and expenses | 791 | 657 | 134 | 20 | % | 1,627 | 1,214 | 413 | 34 | % | ||||||||||||||||||||||
| Clinical trials | 746 | 140 | 606 | 433 | % | 1,517 | 114 | 1,403 | 1231 | % | ||||||||||||||||||||||
| Professional fees, legal, and outside services | 719 | 120 | 599 | 499 | % | 1,129 | 1,377 | (248 | ) | -18 | % | |||||||||||||||||||||
| Share-based compensation | 470 | 330 | 140 | 42 | % | 896 | 596 | 300 | 50 | % | ||||||||||||||||||||||
| Facilities and insurance | 286 | 69 | 217 | 314 | % | 563 | 134 | 429 | 320 | % | ||||||||||||||||||||||
| Depreciation | 289 | 124 | 165 | 133 | % | 499 | 211 | 288 | 136 | % | ||||||||||||||||||||||
| Severance | 19 | - | 19 | n/a | 19 | - | 19 | n/a | ||||||||||||||||||||||||
| Other | 108 | 219 | (111 | ) | -51 | % | 191 | 286 | (95 | ) | -33 | % | ||||||||||||||||||||
| Total | $ | 5,574 | $ | 2,537 | $ | 3,037 | 120 | % | $ | 10,702 | $ | 5,898 | $ | 4,804 | 81 | % | ||||||||||||||||
| % of Net Revenue | 270 | % | 125 | % | 145 | % | 307 | % | 187 | % | 120 | % | ||||||||||||||||||||
We expect to continue to incur a significant amount of research and development expenses during the foreseeable future. Although we have terminated development work for our DetermaDx™ product line, we will continue development of DetermaIO™, DetermaTx™, DetermaMx™ and VitaGraftTM; clinical trials to promote commercialization of DetermaRx™; and, with the recent completion of the Chronix merger, the development of our planned DetermaCNI™ test. Our future research and development efforts and expenses will also depend on the amount of capital that we are able to raise to finance those activities and whether we acquire rights to any new diagnostic tests. A portion of our costs for leasing and operating our CLIA laboratories in California and Tennessee, and in Germany with the recent completion of the Chronix Merger, will also be included in research and development expenses to the extent allocated to the development of our diagnostic tests.
The COVID-19 global pandemic has negatively impacted, and is expected to continue to negatively impact, patient recruitment for clinical trials necessary for us to promote the use of DetermaRx™ by physicians, and clinical trials of immunotherapies by pharma companies that may use DetermaIO™ in selecting patients for their trials. We believe that our planned DetermaRx™ clinical trials are critical to gaining physician adoption and driving favorable coverage decisions by private payers, and we expect our investment in the DetermaRx™ clinical trial to increase over time. We may also commence our own clinical trials of DetermaIO™ if we develop that diagnostic test to the point where we determine that its use as a clinical diagnostic appears to be feasible.
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Sales and marketing expenses
A summary of the main drivers of the change in sales and marketing expenses for the periods presented, is as follows (amounts in thousands, except percentage changes):
| Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||||
| June 30, | June 30, | |||||||||||||||||||||||||||||||
| 2022 | 2021 | $ Change | % Change | 2022 | 2021 | $ Change | % Change | |||||||||||||||||||||||||
| Personnel-related expenses | $ | 2,058 | $ | 1,618 | $ | 440 | 27 | % | $ | 3,917 | $ | 3,031 | $ | 886 | 29 | % | ||||||||||||||||
| Professional fees, legal, and outside services | 370 | 324 | 46 | 14 | % | 789 | 667 | 122 | 18 | % | ||||||||||||||||||||||
| Share-based compensation | 403 | 334 | 69 | 21 | % | 738 | 587 | 151 | 26 | % | ||||||||||||||||||||||
| Marketing Advertising | 299 | 119 | 180 | 151 | % | 651 | 194 | 457 | 236 | % | ||||||||||||||||||||||
| Facilities and insurance | 96 | 50 | 46 | 92 | % | 173 | 80 | 93 | 116 | % | ||||||||||||||||||||||
| Other | 296 | 228 | 68 | 30 | % | 491 | 368 | 123 | 33 | % | ||||||||||||||||||||||
| Total | $ | 3,522 | $ | 2,673 | $ | 849 | 32 | % | $ | 6,759 | $ | 4,927 | $ | 1,832 | 37 | % | ||||||||||||||||
| % of Net Revenue | 170 | % | 132 | % | 39 | % | 334 | % | 244 | % | 90 | % | ||||||||||||||||||||
We expect to continue to incur a significant amount of sales and marketing expenses during the foreseeable future as we continue to market and sell DetermaRx™ and if we successfully complete product development and begin commercialization efforts for DetermaIO™ as a clinical test. Sales and marketing expenses will also increase if we successfully develop and begin commercializing DetermaCNI™, DetermaTx™, and DetermaMx™, or if we acquire and commercialize other diagnostic tests. Our commercialization efforts and expenses will also depend on the amount of capital that we are able to raise to finance commercialization of our tests. Our future expenditures on sales and marketing will also depend on the amount of revenue that those efforts are likely to generate. Because physicians are more likely to prescribe a test for their patients if the cost is covered by Medicare or health insurance, demand for our diagnostic and other tests and our expenditures on sales and marketing are likely to increase if our diagnostic or other tests qualify for reimbursement by Medicare or private health insurance companies.
General and administrative expenses
A summary of the main drivers of the change in general and administrative expenses for the periods presented, is as follows (amounts in thousands, except percentage changes):
| Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||||
| June 30, | June 30, | |||||||||||||||||||||||||||||||
| 2022 | 2021 | $ Change | % Change | 2022 | 2021 | $ Change | % Change | |||||||||||||||||||||||||
| Personnel-related expenses and board fees | $ | 2,219 | $ | 1,285 | $ | 934 | 73 | % | $ | 4,557 | $ | 2,514 | $ | 2,043 | 81 | % | ||||||||||||||||
| Professional fees, legal, and outside services | 1,034 | 1,994 | (960 | ) | -48 | % | 2,309 | 4,010 | (1,701 | ) | -42 | % | ||||||||||||||||||||
| Share-based compensation | 1,282 | 1,171 | 111 | 9 | % | 2,463 | 1,897 | 566 | 30 | % | ||||||||||||||||||||||
| Facilities and insurance | 641 | 959 | (318 | ) | -33 | % | 1,339 | 1,682 | (343 | ) | -20 | % | ||||||||||||||||||||
| Severance | 125 | - | 125 | n/a | 124 | - | 124 | n/a | ||||||||||||||||||||||||
| Severance - Chronix acquisition | - | 2,323 | (2,323 | ) | -100 | % | - | 2,310 | (2,310 | ) | -100 | % | ||||||||||||||||||||
| Other | 210 | 202 | 8 | 4 | % | 372 | 285 | 87 | 31 | % | ||||||||||||||||||||||
| Total | $ | 5,511 | $ | 7,934 | $ | (2,423 | ) | -31 | % | $ | 11,164 | $ | 12,698 | $ | (1,534 | ) | -12 | % | ||||||||||||||
| % of Net Revenue | 267 | % | 391 | % | -124 | % | 552 | % | 628 | % | -76 | % | ||||||||||||||||||||
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Change in fair value of contingent consideration
We will pay contingent consideration if various payment milestones are triggered under the merger agreements through which we acquired Insight and Chronix. See Note 3 to our unaudited condensed consolidated interim financial statements included in this Report. Changes in the fair value of the contingent consideration will be based on our reassessment of the key assumptions underlying the determination of this liability as changes in circumstances and conditions occur from the Insight and Chronix acquisition dates to the reporting period being presented, with the subsequent change in fair value recorded as part of our consolidated loss from operations for that period. For the six months ended June 30, 2022, we recorded a gain of approximately $11.0 million related to the decrease in the fair value of contingent consideration primarily attributable to change in discount rates and a revised estimate of the timing of the possible future payouts.
Other income and expenses, net
Other income and expenses, net, is primarily comprised of interest income and interest expenses, net, and unrealized gains and losses on Lineage and AgeX marketable equity securities we hold. Interest income is earned from money market funds we hold for capital preservation. Interest expense was incurred under our loan payable to the Silicon Valley Bank, and under financing lease obligations. Interest expense, net, reflects the interest expense incurred on our loans and financing obligations in excess of interest income earned from money market accounts.
Income taxes
In connection with the Razor acquisition discussed in Note 3 to our unaudited condensed consolidated interim financial statements included elsewhere in this Report, a change in the acquirer’s valuation allowance that stems from the purchase of assets should be recognized as an element of the acquirer’s income tax benefit in the period of the acquisition. Accordingly, for the three months ended March 31, 2021, we recorded a $7.6 million partial release of our valuation allowance and a corresponding income tax benefit stemming from the deferred tax liability generated by the Razor intangible assets we acquired.
Oncocyte did not record any provision or benefit for income taxes for the six months ended June 30, 2022, as Oncocyte had a full valuation allowance for the periods presented.
A valuation allowance is provided when it is more likely than not that some portion of the deferred tax assets will not be realized. Other than the partial releases discussed above, we established a full valuation allowance for all periods presented due to the uncertainty of realizing future tax benefits from our net operating loss carry-forwards and other deferred tax assets.
Liquidity and Capital Resources
We finance our operations primarily through the sale of our common stock. We have incurred operating losses and negative cash flows since inception and had an accumulated deficit of $206.4 million at June 30, 2022. We expect to continue to incur operating losses and negative cash flows for the near future.
At June 30, 2022, we had $44.8 million of cash and cash equivalents, and held shares of Lineage and AgeX common stock as marketable equity securities valued at $0.6 million. During the six months ended June 30, 2022 we raised approximately $30,000 in net cash proceeds through sales of shares of our common stock through the ATM Offering. On June 1, 2022, Oncocyte received net proceeds of approximately $4.9 million from the Series A Preferred Stock issued from the first tranche of the Series A Preferred Stock Offering. On April 19, 2022, Oncocyte received net proceeds of approximately $32.8 million from the Underwritten Offering of 26,266,417 shares of common stock and 26,266,417 April 2022 Warrants to purchase up to 13,133,208.5 shares of common stock. See Notes 1 and 14 for additional information about the April 2022 Offerings. We believe that our current cash, cash equivalents, and marketable equity securities are sufficient to finance our current operations through at least twelve months from the issuance date of the unaudited condensed consolidated interim financial statements included in this Report.
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We expect that our operating expenses will increase as we build our marketing and sales force along with actively looking for partner companies to share or take on the sales efforts for new products. We also expect to add new equipment and personnel to our CLIA laboratories to commercialize DetermaRx™, followed by DetermaIO™ for clinical use and other diagnostic tests in our pipeline after development is completed, including VitaGraftTM and DetermaCNI™ acquired through the Chronix Merger. Although we intend to market our diagnostic tests in the United States through our own sales force, we are also beginning to make marketing arrangements with distributors in other countries. We may also explore a range of other commercialization options in order to enter overseas markets and to reduce our capital needs and expenditures, and the risks associated the timelines and uncertainty for attaining the Medicare reimbursement approvals that will be essential for the successful commercialization of additional cancer diagnostic tests. Those alternative arrangements could include marketing arrangements with other diagnostic companies through which we might receive a licensing fee and royalty on sales, or through which we might form a joint venture to market one or more tests and share in net revenues, in the United States or abroad.
In addition to sales and marketing expenses, we will incur expenses from leasing and improving our new office and laboratory facilities in Nashville, Tennessee.
We may need to meet significant cash payment or stock obligations to former Insight and Chronix shareholders in connection with our acquisition of those companies, as disclosed in Note 3 to the unaudited condensed consolidated interim financial statements included elsewhere in this Report. To meet the future cash payment obligations, we may have to utilize cash on hand that would otherwise be available to us for other business and operational purposes, which could cause us to delay or reduce activities in the development and commercialization of our cancer tests.
We will need to continue to raise additional capital to finance our operations, including the development and commercialization of our diagnostic tests, and making payments that may become due under our obligations to former Chronix shareholders and former Insight shareholders, until such time as we are able to generate sufficient revenues to cover our operating expenses. Delays in the development of DetermaIO™, or obtaining reimbursement coverage from Medicare for that diagnostic test and for the other diagnostic tests that we may develop or acquire, could prevent us from raising sufficient additional capital to finance the completion of development and commercial launch of those tests. Investors may be reluctant to provide us with capital until our tests are approved for reimbursement by Medicare or reimbursement by private healthcare insurers or healthcare providers, or until we begin generating significant amounts of revenue from performing those tests. The unavailability or inadequacy of financing or revenues to meet future capital needs could force us to modify, curtail, delay, or suspend some or all aspects of our planned operations. Sales of additional equity securities could result in the dilution of the interests of our shareholders. We cannot assure that adequate financing will be available on favorable terms, if at all.
Our ability to generate revenues from operating activities and the availability of financing may be adversely impacted by the COVID-19 pandemic which could continue to cause deferrals of cancer surgeries that might otherwise have resulted in the utilization of DetermaRx™, or could cause the deferral of clinical development of therapies that might otherwise have resulted in the utilization of DetermaIO™ or our Pharma Services. The commercial release of DetermaRx™ and our acquisition of the Insight Pharma Services business during the COVID-19 pandemic has rendered it more difficult for prospective investors to forecast the demand for our diagnostic testing and Pharma Services and to assess our opportunities for growth. Although the deployment of the recently developed vaccines may quell the impact of COVID-19, the pandemic could continue to depress national and international economies and disrupt capital markets, supply chains, and aspects of our operations for a period of time, all of which may render it more difficult for us to secure additional financing when needed. The extent to which the ongoing COVID-19 pandemic will ultimately impact our business, results of operations, financial condition, or cash flows is highly uncertain and difficult to predict because it will depend on many factors that are outside of our control, such as the duration, scope and severity of the pandemic, steps required or mandated by governments to mitigate the impact of the pandemic, and whether COVID-19 can be effectively prevented and contained by the new vaccines, and whether effective treatments may be developed. We do not yet know the extent to which COVID-19 will negatively impact our financial results or liquidity.
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Cash used in operations
During the six months ended June 30, 2022, our total research and development expenses were $10.7 million, our sales and marketing expenses were $6.8 million, and our general and administrative expenses were $11.2 million. We also incurred $4.3 million in cost of revenues, including $1.9 million amortization of intangible expenses, in the first six months of 2022. Net loss for the six months ended June 30, 2022 amounted to $18.6 million and net cash used in operating activities amounted to $24.6 million. Our cash used in operating activities during the six months ended June 30, 2022 does not include the following noncash items: $4.2 million in stock-based compensation; $11.0 million in gain from change in fair value of contingent consideration; $0.3 million in gain from change in fair value of Series A redeemable convertible preferred stock second tranche obligation; $2.6 million in depreciation and amortization expenses; and $0.3 million in unrealized loss on marketable equity securities. Changes in operating assets and liabilities were approximately $1.8 million as an additional use of cash.
Cash used in investing activities
During the six months ended June 30, 2022, net cash used in investing activities was $2.7 million, primarily attributable to $2.7 million paid for construction in progress and purchase of furniture and equipment.
Cash provided by financing activities
During the six months ended June 30, 2022, net cash provided in financing activities was $36.5 million, primarily attributable to $32.5 million of net cash proceeds from the sale of shares of common stock, including $30,000 of net cash proceeds from at-the-market transactions, and $4.8 million of net cash proceeds from the sale of redeemable convertible Series A preferred shares, offset by repayments of principal on loans payable and financing lease obligations of $0.8 million.
Off-Balance Sheet Arrangements
As of June 30, 2022 and December 31, 2021, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Under SEC rules and regulations, as a smaller reporting company, we are not required to provide the information required by this item.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
It is management’s responsibility to establish and maintain adequate internal control over all financial reporting pursuant to Rule 13a-15 under the Securities Exchange Act of 1934 (“Exchange Act”). Our management, including our principal executive officer and principal financial officer, have reviewed and evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Following this review and evaluation, the principal executive officer and principal financial officer determined that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act (i) is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to management, including our principal executive officer, and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Controls
There were no changes in our internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. We have not experienced any material impact to our internal controls over financial reporting despite the fact that a number of our employees are working remotely due to the COVID-19 pandemic. We are continually monitoring and assessing the COVID-19 situation on our internal controls to minimize the impact on their design and operating effectiveness.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
From time to time, we may be involved in routine litigation incidental to the conduct of our business. We are not presently involved in any material litigation or proceedings, and to our knowledge no such litigation or proceedings are contemplated.
Item 1A. Risk Factors
Our business, financial condition, results of operations and future growth prospects are subject to various risks, including those described in Item 1A “Risk Factors” of our Annual Report on Form 10-K, filed with the Securities and Exchange Commission on March 11, 2022 (the “2021 Form 10-K”), which we encourage you to review. There have been no material changes from the risk factors disclosed in the 2021 Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 3. Default Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
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Item 6. Exhibits
* Filed herewith
** This certification is not deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section. Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that the registrant specifically incorporates it by reference.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| ONCOCYTE CORPORATION | |
| Date: August 11, 2022 | /s/ Ronald Andrews |
| Ronald Andrews | |
| President and Chief Executive Officer | |
| Date: August 11, 2022 | /s/ Anish John |
| Anish John | |
| Chief Financial Officer |
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