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Oncocyte Corp - Quarter Report: 2020 September (Form 10-Q)

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2020

 

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 1-37648

 

OncoCyte Corporation

(Exact name of registrant as specified in its charter)

 

California   27-1041563
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification No.)

 

15 Cushing

Irvine, California 92618

(Address of principal executive offices) (Zip Code)

 

(949) 409-7600

(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
Common Stock, no par value   OCX   NYSE American

 

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. ☒ Yes ☐ No

 

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). ☒ Yes ☐ No

 

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 ☐
Non-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 ☒ No

 

The number of shares of common stock outstanding as of November 6, 2020 was 67,250,639.

 

 

 

 
 

 

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 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.

 

References to “Oncocyte,” “our” or “we” means OncoCyte Corporation.

 

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™, and DetermaDx™ are trademarks of OncoCyte Corporation 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

CONDENSED CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS)

 

  

September 30, 2020

(Notes 2 and 5)

(Unaudited)

   December 31, 2019 
         
ASSETS          
CURRENT ASSETS          
Cash and cash equivalents  $10,292   $22,072 
Accounts receivable   366    - 
Marketable equity securities   361    379 
Prepaid expenses and other current assets   953    505 
Total current assets   11,972    22,956 
           
NONCURRENT ASSETS          
Right-of-use assets, machinery and equipment, net, and construction in progress   5,657    3,728 
Equity method investment in Razor   13,852    10,964 
Goodwill   9,187    - 
Intangibles, net   15,031    - 
Deposits and other noncurrent assets   2,077    2,211 
TOTAL ASSETS  $57,776   $39,859 
           
LIABILITIES AND SHAREHOLDERS’ EQUITY          
CURRENT LIABILITIES          
Amount due to Lineage and affiliates  $-   $6 
Accounts payable   1,264    469 
Accrued expenses and other current liabilities   5,115    2,610 
Loans payable, current   2,061    1,125 
Right-of-use and financing lease liabilities, current   456    230 
Total current liabilities   8,896    4,440 
           
NONCURRENT LIABILITIES          
Loans payable, net of deferred financing costs, noncurrent   2,065    1,905 
Financing lease and right of use liabilities, noncurrent   3,868    2,676 
Contingent consideration liabilities   8,150    - 
Deferred tax liability   158    - 
TOTAL LIABILITIES   23,137    9,021 
           
Commitments and contingencies (Note 14)          
           
SHAREHOLDERS’ EQUITY          
Preferred stock, no par value, 5,000 shares authorized; no shares issued and outstanding   -    - 
Common stock, no par value, 150,000 shares authorized; 67,251 and 57,032 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively   152,007    124,583 
Accumulated deficit   (117,368)   (93,745)
Total shareholders’ equity   34,639    30,838 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY  $57,776   $39,859 

 

The accompanying notes are an integral part of these condensed consolidated interim financial statements.

-

3
 

 

ONCOCYTE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(IN THOUSANDS, EXCEPT PER SHARE DATA)

(UNAUDITED)

 

  

Three Months Ended

September 30,

  

Nine Months Ended

September 30,

 
   2020   2019   2020   2019 
REVENUE                
Total revenue  $555   $-   $713   $- 
                    
TOTAL COSTS AND OPERATING EXPENSES                    
Cost of revenues   601    -    1,139    - 
Research and development   2,615    1,625    8,000    4,476 
General and administrative   4,995    3,002    13,378    9,087 
Sales and marketing   1,568    630    4,620    1,153 
Change in fair value of contingent consideration   (2,980)   -    (2,980)   - 
Total costs and operating expenses   6,799    5,257    24,157    14,716 
                     
Loss from operations   (6,244)   (5,257)   (23,444)   (14,716)
                     
OTHER INCOME (EXPENSES), NET                    
Interest income (expense), net   (78)   135    (175)   282 
Unrealized gain (loss) on marketable equity securities   20    (103)   (18)   (13)
Pro rata loss from equity method investment in Razor   (482)   -    (1,112)   - 
Other income (expenses), net   1    -    31    (25)
Total other income (expenses), net   (539)   32    (1,274)   244 
                     
LOSS BEFORE INCOME TAXES   (6,783)   (5,225)   (24,718)   (14,472)
                     
Income tax benefit   -    -    1,095    - 
                     
NET LOSS  $(6,783)  $(5,225)  $(23,623)  $(14,472)
                     
Net loss per share: basic and diluted  $(0.10)  $(0.10)  $(0.36)  $(0.29)
                     
Weighted average shares outstanding: basic and diluted   67,247    51,973    64,843    50,217 

 

The accompanying notes are an integral part of these condensed consolidated interim financial statements.

 

4
 

 

ONCOCYTE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(IN THOUSANDS)

(UNAUDITED)

 

  

Three Months Ended

September 30,

  

Nine Months Ended

September 30,

 
   2020   2019   2020   2019 
                 
NET LOSS  $(6,783)  $(5,225)  $(23,623)  $(14,472)
Other comprehensive loss, net of tax   -    -    -    - 
COMPREHENSIVE LOSS  $(6,783)  $(5,225)  $(23,623)  $(14,472)

 

The accompanying notes are an integral part of these condensed consolidated interim financial statements.

 

5
 

 

ONCOCYTE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

(UNAUDITED)

 

  

Nine Months Ended

September 30,

 
   2020   2019 
CASH FLOWS FROM OPERATING ACTIVITIES:          
Net loss  $(23,623)  $(14,472)
Adjustments to reconcile net loss to net cash used in operating activities:          
Depreciation expense   529    278 
Amortization of intangible assets   59    - 
Amortization of right-of-use assets and liabilities   959    - 
Impairment charge for long-lived assets   88    - 
Pro rata loss from equity method investment in Razor   1,112    - 
Amortization of prepaid maintenance   52    28 
Stock-based compensation   4,081    2,209 
Unrealized loss on marketable equity securities   18    13 
Amortization of debt issuance costs   80    30 
Warrants issued for advisory services   -    234 
Change in fair value of contingent consideration   (2,980)   - 
Deferred income tax benefit   (1,095)   - 
Other   -    25 
Changes in operating assets and liabilities:        - 
Accounts receivable   (372)   - 
Amount due to Lineage and affiliates   (6)   (2,100)
Prepaid expenses and other assets   (575)   (238)
Accounts payable and accrued liabilities   1,843    (416)
Net cash used in operating activities   (19,830)   (14,409)
           
CASH FLOWS FROM INVESTING ACTIVITIES:          
Acquisition of Insight Genetics, net of cash acquired   (6,189)   - 
Equity method investment in Razor   (4,000)   (11,245)
Purchases of furniture and equipment   (1,061)   (18)
Security deposit and other   (6)   64 
Net cash used in investing activities   (11,256)   (11,199)
           
CASH FLOWS FROM FINANCING ACTIVITIES:          
Proceeds from exercise of stock options   72    943 
Proceeds from sale of common shares   18,343    40,250 
Financing costs to issue common shares   (58)   (3,252)
Common shares received and retired for employee taxes paid   (14)   - 
Repayment of loan payable   (125)   (600)
Repayment of financing lease obligations   (53)   (323)
Proceeds from PPP loan   1,141    - 
Net cash provided by financing activities   19,306    37,018 
           
NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH   (11,780)   11,410 
CASH, CASH EQUIVALENTS AND RESTRICTED CASH:          
At beginning of the period   23,772    8,034 
At end of the period  $11,992   $19,444 
           
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION          
Cash paid for interest  $131   $76 
           
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING AND INVESTING ACTIVITIES          
Common stock issued for acquisition of Insight Genetics  $5,000   $- 
Initial fair value of contingent consideration at acquisition date   11,130    - 
Holdback liability   600    - 
Construction in progress, machinery and equipment purchases included in accounts payable, accrued liabilities and landlord liability   1,109    353 
See Note 14 for additional disclosures around leases          

 

The accompanying notes are an integral part of these condensed consolidated interim financial statements.

 

6
 

 

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-developed tests (“LDTs”) 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. Oncocyte holds a 25% equity interest in Razor Genomics, Inc. (“Razor”), a privately held company, that has developed and licensed to Oncocyte the lung cancer treatment stratification laboratory test that Oncocyte is commercializing as DetermaRx™ (see Note 7).

 

On January 31, 2020 (the “Merger Date”), Oncocyte completed its acquisition of Insight Genetics, Inc. (“Insight”) through a merger with a newly incorporated wholly-owned subsidiary of Oncocyte (the “Merger”) under the terms of an Agreement and Plan of Merger (the “Merger Agreement”). Prior to the 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. This new class of drugs modulate the immune response and show activity in multiple solid tumor types including non-small cell lung cancer (NSCLC), and triple negative breast cancer (TNBC). 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 has also performed assay development and clinical testing services for pharmaceutical and biotechnology companies. The Merger has been accounted for using the acquisition method of accounting in accordance with Accounting Standards Codification (“ASC”) Topic 805, Business Combinations, which requires, among other things, that the assets and liabilities assumed be recognized at their fair values as of the acquisition date. See Note 5 for a full discussion of the Merger.

 

Oncocyte is currently devoting substantially all of its efforts on developing and commercializing its cancer diagnostic tests DetermaRx and DetermaIO.

 

Liquidity

 

Oncocyte has incurred operating losses and negative cash flows since inception and had an accumulated deficit of $117.4 million as of September 30, 2020. Oncocyte expects to continue to incur operating losses and negative cash flows for the foreseeable future. Oncocyte did not generate revenues from its operations prior to the first quarter of 2020, and revenues for the nine months ended September 30, 2020 were not sufficient to cover Oncocyte’s operating expenses for that period. Since inception, Oncocyte has financed its operations through the sale of common stock, warrants, warrant exercises, bank loans, and sales of Lineage Cell Therapeutics, Inc. (“Lineage”) common shares that it holds as marketable equity securities. Lineage also provided Oncocyte with accounting, billing, bookkeeping, payroll, treasury, payment of accounts payable, and other similar administrative services, and the use of Lineage office and laboratory facilities, under a Shared Facilities and Services Agreement (the “Shared Facilities Agreement”), which was terminated as to all services on September 30, 2019, and as to all use of facilities on December 31, 2019 (see Note 8). Lineage’s ownership interest in Oncocyte has decreased to below 10% and Lineage no longer exercises significant influence over the operations and management of Oncocyte.

 

On March 20, 2020, Oncocyte entered into an Equity Distribution Agreement with Piper Sandler & Co for an at-the-market sales agreement (“ATM Agreement”) with Piper Sandler & Co. as “Sales Agent”. Oncocyte may raise up to $25 million of additional equity capital through the sale of shares of Oncocyte common stock from time to time in at-the-market transactions under the ATM Agreement.

 

Oncocyte believes that its current cash, cash equivalents and marketable equity securities, and its access to additional capital through the ATM Agreement are sufficient to carry out current operations through at least twelve months from the issuance date of the condensed consolidated interim financial statements included in this Report.

 

7
 

 

Oncocyte will need to raise additional capital to finance its operations, including the development and commercialization of its cancer diagnostic tests, until such time as it is able to generate sufficient revenues from the commercialization of one or more of its cancer diagnostic tests to cover its operating expenses. Presently, Oncocyte is devoting substantially all of its efforts on initial commercialization efforts for DetermaRx and completing development and planning commercialization of its cancer diagnostic test 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. While Oncocyte plans to primarily market its diagnostic 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 diagnostic 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 cancer 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 or any other future diagnostic tests that Oncocyte may develop or acquire. 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 which 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 favorable 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 balance sheet as of December 31, 2019 was derived from the audited consolidated financial statements at that date but does not include all the information and footnotes required by GAAP. These 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, 2019.

 

Prior to January 1, 2020, to the extent Oncocyte did not have its own employees or human resources for its operations, Lineage or Lineage subsidiaries provided certain employees for administrative or operational services, as necessary, for the benefit of Oncocyte (see Note 8). Lineage allocated expenses such as salaries and payroll related expenses incurred and paid on behalf of Oncocyte based on the amount of time that particular employees devoted to Oncocyte affairs. Other expenses such as legal, accounting, human resources, marketing, travel, and entertainment expenses were allocated to Oncocyte to the extent that those expenses were incurred by or on behalf of Oncocyte. Lineage also allocated certain overhead expenses such as facilities rent, utilities, property taxes, insurance, and internet and telephone expenses based on a percentage determined by management. These allocations have been made based upon activity-based allocation drivers such as time spent, percentage of square feet of office or laboratory space used, and percentage of personnel devoted to Oncocyte’s operations or management. Management has evaluated the appropriateness of the percentage allocations on a periodic basis and believes that this basis for allocation is reasonable.

 

Principles of consolidation

 

On January 31, 2020, with the consummation of the Merger, Insight became Oncocyte’s wholly owned subsidiary and on that date Oncocyte began consolidating Insight’s operations and results with its own operations and results (see Note 5).

 

The accompanying 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 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.

 

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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.

 

During the COVID-19 pandemic, Oncocyte may not be able to maintain its preferred level of physician or customer outreach and marketing of its diagnostic testing and pharma services, which could negatively impact potential new customers’ interest in those tests and services. Because of COVID-19, travel, visits, and in-person meetings related to Oncocyte’s business have been severely curtailed or canceled and Oncocyte has instead used on-line or virtual meetings to meet with potential customers and others.

 

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 diagnostic testing and pharma services and resulting revenues. Concerns over available hospital, staffing, equipment, and other resources, and the risk of exposure to the virus, has led to early stage lung cancer surgeries being delayed, and the continued deferral of lung cancer surgeries due to resurgence in COVID-19 cases could result in delayed or reduced use of DetermaRx.

 

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.

 

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 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, assumptions related to the 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.

 

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. While Oncocyte considered known or expected impacts of COVID-19 in making its assessments and estimates, the future impacts of COVID-19 are not presently determinable and could cause actual results to differ materially from Oncocyte’s estimates and assessments. Oncocyte’s future analysis or forecast of COVID-19 impacts could lead to changes in Oncocyte’s future estimates and assessments which could result in material impacts to Oncocyte’s consolidated financial statements in future reporting periods.

 

9
 

 

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 quoted on the NYSE American as of the acquisition date. 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.

 

Goodwill and intangible assets

 

In accordance with ASC 350, Intangibles – Goodwill and Other, in-process research and development (“IPR&D”) 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 IPR&D 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 IPR&D project may vary from its fair value at the date of acquisition, and IPR&D impairment charges may occur in future periods. During the period between completion or abandonment, the IPR&D 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 IPR&D projects below their respective carrying amounts (see Notes 5 and 6).

 

Goodwill represents the excess of the purchase price over the fair value of net identifiable assets and liabilities. Goodwill, similar to IPR&D, 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 IPR&D discussed in Notes 5 and 6. As of September 30, 2020, there has been no impairment of goodwill and intangible assets.

 

Obligations related to royalties

 

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 net revenue milestones, from pharma services or diagnostic 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 5 and 7).

 

10
 

 

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 share of earnings or losses from the investment. The equity method investment balance is shown in noncurrent assets on the condensed balance sheets.

 

Oncocyte reviews investments accounted for under the equity method for impairment whenever events or changes in circumstances indicate that the carrying amount of the investment may not be fully recoverable. If a determination is made that an “other-than-temporary” impairment exists, Oncocyte writes down its investment to fair value. On September 30, 2019, Oncocyte acquired a 25% ownership interest in Razor that is accounted for under the equity method of accounting as further discussed in Note 7.

 

Impairment of long-lived assets

 

Oncocyte assesses the impairment of long-lived assets, which consist primarily of right-of-use assets for operating leases and machinery and equipment whenever events or changes in circumstances indicate that such assets might be impaired and the carrying value may not be recoverable. 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 asset’s carrying value over its fair value is recorded.

 

As part of Oncocyte’s impairment assessment of its long-lived assets, Oncocyte determined that certain assets, mainly comprised of machinery and equipment and related prepaid service agreements used in the development of DetermaDx™ were impaired as of June 30, 2020 because Oncocyte determined to discontinue the development of that diagnostic test. Accordingly, Oncocyte recorded a noncash charge of $422,000 representing the net book value of those assets as of that date and included that charge in research and development expenses for the nine months ended September 30, 2020 (see Note 4).

 

Revenue recognition

 

Prior to January 1, 2020, Oncocyte generated no revenues. Effective on January 1, 2020, Oncocyte adopted the revenue recognition standard ASC Topic 606, Revenue from Contracts with Customers (ASC) 606. 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.

 

Pharma services revenue

 

Revenues recognized during the three and nine months ended September 30, 2020, were generated primarily from pharma services performed by Oncocyte’s Insight subsidiary. Insight provides a range of molecular diagnostic services to its pharmaceutical customers (referred to as “pharma services”) including testing for biomarker discovery, assay design and development, clinical trial support, and a broad spectrum of biomarker tests in its CLIA-certified laboratory. These pharma services are generally performed under individual scope of work (“SOW”) arrangements with specific deliverables defined by the customer. Pharma services are generally performed on a time and materials basis. Upon Insight’s completion of the service to the customer in accordance with the SOW, Insight has the right to bill the customer for the agreed upon price (either on a per test or per deliverable basis) and recognizes the pharma service revenue at that time. Insight identifies each sale of its pharma service offering as a single performance obligation.

 

Completion of the service and satisfaction of the performance obligation under a SOW 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 SOW. However, for certain SOWs under which work is performed pursuant to the customer’s highly customized specifications, Insight has the enforceable right to bill the customer for work completed, rather than upon completion of the SOW. For those SOWs, Insight recognizes revenue over a period of time 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 Insight satisfies the performance obligation under the SOW, 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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Insight 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, and historical experience. If circumstances related to customers change, estimates of the recoverability of receivables would be further adjusted. Insight 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 September 30, 2020, Oncocyte has not recorded any losses or allowance for doubtful accounts on its account receivables from pharma services.

 

As of September 30, 2020, Oncocyte had accounts receivable and contract assets from pharma services customers of $231,000 and $27,000, respectively (see Note 13).

 

DetermaRx testing revenue

 

In the first quarter of 2020, Oncocyte commercially launched DetermaRx and commenced performing tests on clinical samples through orders received from physicians, hospitals and other healthcare providers. In determining whether all of 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 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 recognizes realized revenue on a cash basis rather than accrual basis when it cannot conclude that all the revenue recognition criteria have been met. Because 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 take into account the uncertainty of receiving payment, or being subject to claims for refund, from payors 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 on a cash basis until it has a sufficient history to reliably estimate payment patterns or has contractual reimbursement arrangements, or both, in place. In September 2020, Oncocyte received a final pricing decision for DetermaRx from CMS and with Medicare coverage in effect, Oncocyte commenced recognizing revenue when DetermaRx tests are performed for Medicare patients, or when payment was approved by Medicare in the case of certain tests performed prior to September 2020, rather than on a cash basis.

 

As of September 30, 2020, Oncocyte had accounts receivable from Medicare of $135,000 for completed DetermaRx tests (see Note 13).

 

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 pharma services and DetermaRx tests, and license fees due to third parties, and also includes amortization of acquired 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 performing diagnostic tests and pharma services are recorded as the tests or services are performed regardless of whether revenue was recognized with respect to that test or pharma service. 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. As discussed above, Oncocyte generated no revenues or cost of revenues prior to January 1, 2020.

 

Research and development expenses

 

Research and development expenses are comprised of costs incurred to develop technology, and 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. For periods prior to January 1, 2020, indirect research and development expenses included overhead costs incurred and allocated by Lineage to Oncocyte under the Shared Facilities Agreement as expenses that benefited or supported Oncocyte’s research and development functions. The Shared Facilities Agreement was terminated as of December 31, 2019 (see Note 8).

 

General and administrative expenses

 

General and administrative expenses include both direct expenses incurred by Oncocyte and, prior to January 1, 2020, indirect overhead costs incurred by Lineage and allocated to Oncocyte under the Shared Facilities Agreement as expenses that benefited or supported Oncocyte’s general and administrative functions. Direct 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. Indirect general and administrative expenses allocated by Lineage to Oncocyte under the Shared Facilities Agreement, which was terminated as of December 31, 2019 (see Note 8), were primarily based on headcount or space occupied, as applicable, and include costs for financial reporting and compliance, rent and utilities, common area maintenance, telecommunications, property taxes, and insurance.

 

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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. Prior to January 1, 2020, a portion of the expenses allocated by Lineage under the Shared Facilities Agreement were designated by Oncocyte as sales and marketing expenses to the extent Oncocyte determined that such expenses were fairly allocable to sales and marketing functions, including overhead.

 

Accounting for Lineage and AgeX shares of common stock

 

Oncocyte accounts for the Lineage and AgeX shares of common 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 and 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 September 30, 2020 and December 31, 2019, Oncocyte held 353,264 and 35,326 shares of common stock of Lineage and AgeX, respectively, as marketable equity securities with a combined fair market value of $361,000 and $379,000, respectively.

 

Net loss per common share

 

All potentially dilutive common stock equivalents are antidilutive because Oncocyte reported a net loss for all periods presented. The following common stock equivalents were excluded from the computation of diluted net loss per common share of common stock for the periods presented because including them would have been antidilutive (in thousands):

 

  

Three Months Ended

September 30,

(Unaudited)

  

Nine Months Ended

September 30,

(Unaudited)

 
   2020   2019   2020   2019 
Stock options   9,256    2,146    8,583    3,158 
Warrants   3,384    3,285    3,384    3,285 

 

Leases

 

On January 1, 2019, Oncocyte adopted Accounting Standards Update 2016-02, Leases (Topic 842, “ASC 842”) using the modified retrospective method. Oncocyte management 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 statements of operations. When determining whether a lease is a finance lease or an operating lease, ASC 842 does not specifically define criteria to determine “major part of remaining economic life of the underlying asset” and “substantially all of the fair value of the underlying asset.” For lease classification determination, Oncocyte continues to use (i) 75% or greater to determine whether the lease term is a major part of the remaining economic life of the underlying asset and (ii) 90% or greater to determine whether the present value of the sum of lease payments is substantially the fair value of the underlying asset. Oncocyte uses either the rate implicit in the lease or its incremental borrowing rate as the discount rate in lease accounting, as applicable. Operating leases require the recognition of right-of-use (“ROU”) assets and lease liabilities on the balance sheet.

 

The adoption of ASC 842 did not have a material impact to Oncocyte’s financial statements because Oncocyte did not have any significant operating leases at the time of adoption. During 2019, Oncocyte entered into various operating leases and an embedded operating lease in accordance with ASC 842 discussed in Note 14. Oncocyte’s accounting for financing leases (previously referred to as “capital leases”) remained substantially unchanged. Financing leases are included in machinery and equipment, and in financing lease liabilities, current and noncurrent, in Oncocyte’s condensed balance sheets (see Note 14).

 

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Recently issued accounting pronouncements not yet adopted

 

The recently issued accounting pronouncements applicable to Oncocyte that are not yet effective are disclosed in Oncocyte’s Annual Report on Form 10-K for the year ended December 31, 2019, and as follows:

 

In August 2020, the Financial Accounting Standards Board issued ASU No. 2020-06, Debt – Debt with Conversion and Other Options (subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40). This update simplifies the accounting for convertible debt instruments and amends the accounting for certain contracts and freestanding financial instruments in an entity’s own equity, including warrants and preferred stock. The new guidance modifies how particular convertible instruments and certain contracts that may be settled in cash or shares impact the computation of diluted EPS. The amendments in this update are effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020. Oncocyte is currently evaluating the impact of this guidance on its consolidated financial statements.

 

3. Selected Balance Sheet Components

 

Restricted cash

 

ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, requires that the statement of cash flows explain the change during the period in the total of cash, cash equivalents and restricted cash, and that restricted cash be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statements of cash flows. Prior to the adoption of ASU 2016-18, restricted cash was not included with cash and cash equivalents on the statements of cash flows.

 

The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the condensed consolidated balance sheet dates that comprise the total of the same such amounts shown in the condensed consolidated statements of cash flows for all periods presented in accordance with ASU 2016-18 (in thousands):

 

  

September 30, 2020

(unaudited)

  

December 31, 2019

 
         
Cash and cash equivalents  $10,292   $22,072 
Restricted cash included in deposits and other noncurrent assets (see Note 14)   1,700    1,700 
Total cash, cash equivalents, and restricted cash as shown in the condensed consolidated statements of cash flows  $11,992   $23,772 

 

Prepaid expenses and other current assets

 

As of September 30, 2020 and December 31, 2019, prepaid expenses and other current assets were comprised of the following (in thousands):

 

  

September 30, 2020

(unaudited)

  

December 31, 2019

 
         
Prepaid insurance  $509   $80 
Prepaid vendors, deposits and service agreements   390    389 
Other   54    36 
Total prepaid expenses and other current assets  $953   $505 

 

Deposits and other noncurrent assets

 

As of September 30, 2020 and December 31, 2019, deposits and other noncurrent assets were comprised of the following (in thousands):

 

  

September 30, 2020
(unaudited)

  

December 31, 2019

 
         
Restricted cash and security deposit for the Irvine Lease (Note 14)  $1,850   $1,850 
Long-term prepaid maintenance contracts   140    268 
Other   87    93 
Total deposits and other noncurrent assets  $2,077   $2,211 

 

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Accrued expenses and other current liabilities

 

As of September 30, 2020 and December 31, 2019, accrued expenses and other current liabilities were comprised of the following (in thousands):

 

  

September 30, 2020

(unaudited)

  

December 31, 2019

 
         
Accrued compensation (1)  $3,723   $1,287 
Accrued insurance   156    - 
Cash holdback liability (see Note 5)   600    - 
Accrued vendor and other expenses   636    1,323 
Total accrued expenses and other current liabilities  $5,115   $2,610 

 

(1) Includes approximately $1.3 million in severance accrual as of September 30, 2020, in accordance with the severance benefits provided under certain employment and severance benefit agreements, in connection with Oncocyte’s partial reduction in force plan and salary reduction agreements instituted in September 2020 (see Note 14).

 

4. Right-of-use assets, machinery and equipment, net, and construction in progress

 

As of September 30, 2020 and December 31, 2019, rights-of-use assets, machinery and equipment, net, and construction in progress were as follows (in thousands):

 

  

September 30, 2020

(unaudited)

  

December 31 2019

 
         
Right-of-use assets (1)  $3,397   $2,856 
Machinery and equipment   1,458    1,089 
Accumulated depreciation and amortization   (1,209)   (343)
Right-of-use assets, machinery and equipment, net  $3,646   $3,602 
Construction in progress   2,011    126 
Right-of-use assets, machinery and equipment, net, and construction in progress  $5,657   $3,728 

 

(1)Oncocyte recorded certain right-of-use assets and liabilities for operating leases in accordance with ASC 842 (see Notes 5 and 14).

 

Depreciation expense amounted to $69,000 and $84,000 for the three months ended September 30, 2020 and 2019, and $617,000 and $278,000 for the nine months ended September 30, 2020 and 2019, respectively. Accumulated depreciation and amortization as of September 30, 2020 reflects a noncash impairment charge of $333,000 representing the net book value of certain machinery and equipment primarily used in the discontinued DetermaDx development program (see Note 2); the noncash charge is included in research and development expenses in the condensed consolidated statements of operations for the three and nine months ended September 30, 2020.

 

Construction in progress

 

Construction in progress as of September 30, 2020 includes $1.3 million for leasehold improvements, consisting primarily of a laboratory buildout, at the Oncocyte Irvine, California facilities. Of this amount, $0.6 million is being financed by the landlord and is included in landlord liability (see Note 14). Construction in progress is not depreciated until the underlying asset is placed into service.

 

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5. Acquisition of Insight

 

On January 31, 2020, Oncocyte completed its acquisition of Insight pursuant to the Merger Agreement.

 

Merger Consideration at Closing

 

Under the terms of the Merger Agreement, Oncocyte agreed to pay $7 million in cash and $5 million of Oncocyte common stock (the “Initial Merger Consideration”), subject to a holdback for indemnity claims not to exceed ten percent of the total Merger Consideration. The parties agreed to holdback $0.6 million in cash (“Cash Holdback”) and approximately 0.2 million shares of Oncocyte common stock (“Stock Holdback”) through December 31, 2020, in the event that Oncocyte has indemnity claims. The Stock Holdback shares are considered to be issued and outstanding shares of Oncocyte common stock as of the Merger Date but were placed in an escrow account and will be released from escrow after the holdback period, less any shares that may be returned to Oncocyte on account of any indemnity claims. Accordingly, on the Merger Date, Oncocyte delivered approximately $11.4 million in Merger Consideration, consisting of $6.4 million in cash, which was net of the $0.6 million cash holdback, and 1.9 million shares of Oncocyte common stock, which includes the stock holdback shares placed in escrow. The shares of Oncocyte common stock delivered were valued at $5 million, based on the average closing price of Oncocyte common stock on the NYSE American during the five trading days immediately preceding the date of the Merger Agreement.

 

Milestone Payments (Milestone Contingent Consideration)

 

In addition to the Initial Merger Consideration, Oncocyte may also pay contingent consideration of up to $6.0 million in any combination of cash or shares of Oncocyte common stock if certain milestones are achieved (the “Milestone Contingent Consideration”), which consist of (i) a $1.5 million clinical trial completion and data publication milestone, (ii) $3.0 million for an affirmative final local coverage determination from CMS for a specified lung cancer test, and (iii) up to $1.5 million for achieving certain CMS reimbursement milestones.

 

Revenue Share (Royalty Contingent Consideration)

 

As additional consideration for Insight’s shareholders, the 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.

 

Registration Rights

 

Pursuant to the Merger Agreement, Oncocyte agreed to file a registration statement with the SEC and to use reasonable efforts to register under the Securities Act the resale of the shares of common stock issued in connection with the Merger within six months following the closing.

 

Workforce

 

In connection with the closing of the 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 Merger were canceled on the Merger Date for no consideration. At the 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”.

 

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Cash consideration  $7,000(1)
      
Stock consideration     
      
Shares of Oncocyte common stock issued on the Merger Date   1,915,692(2)
      
Closing price per share of Oncocyte common stock on the Merger Date  $2.61 
      
Market value of Oncocyte common stock issued  $5,000 
      
Contingent Consideration  $11,130(3)
      
Total fair value of consideration transferred on the Merger Date  $23,130 

 

(1) The cash consideration paid on the Merger Date was $6.4 million, which was net of a $0.6 million cash holdback discussed above, recorded as a holdback liability since Oncocyte retained the cash. In accordance with ASC 805, amounts held back for general representations and warranties of the sellers are included as part of the total consideration transferred.
   
(2) The 229,885 Stock Holdback shares were placed in an escrow account and considered to be issued and outstanding Oncocyte common stock. In accordance with ASC 805, amounts held back for general representations and warranties of the sellers, including escrowed shares of common stock, are included as part of the total consideration transferred.
   
(3) In accordance with ASC 805, Contingent Consideration, at fair value, is part of the total considered transferred on the Merger Date, as further discussed below.

 

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 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 Merger. As such, this was classified as Level 3 fair value hierarchy measurements and disclosures in accordance with ASC 820.

 

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 Merger Date, with the excess recorded as goodwill (in thousands):

 

  

January 31,

2020

 
Assets acquired:     
Cash and cash equivalents  $36 
Accounts receivable and other current assets   42 
Right-of-use assets, machinery and equipment   585 
Long-lived intangible assets – customer relationships   440 
Acquired in-process research and development   14,650 
      
Total identifiable assets acquired (a)   15,753 
      
Liabilities assumed:     
Accounts payable   61 
Right-of-use liabilities – operating lease   495 
Contingent Consideration transferred   11,130 
Long-term deferred income tax liability   1,254 
      
Total identifiable liabilities assumed (b)   12,940 
      
Net assets acquired, excluding goodwill (a) - (b) = (c)   2,813 
      
Total cash and stock consideration transferred (d)   12,000 
      
Goodwill (d) - (c)  $9,187 

 

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The valuation of identifiable intangible assets and applicable estimated useful lives are as follows (in thousands, except for useful life):

 

   Estimated Asset
Fair Value
   Useful Life
(Years)
 
In process research and development (“IPR&D”)  $14,650        n/a 
Customer relationships   440    5 
   $15,090      

 

The following is a discussion of the valuation methods and significant assumptions used to determine the fair value of Insights’ material assets and liabilities in connection with the Merger:

 

Acquired In-Process Research and Development and Deferred Income Tax Liability – The fair value of identifiable IPR&D intangible assets consists of $14.7 million allocated to DetermaIO.

 

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 35%. The projected cash flows were based on significant assumptions, including the time and resources needed to complete development of the asset, timing and reimbursement rates from CMS, regulatory approvals, if any, to commercialize the asset, estimates of the number of tests that might be performed, revenue and operating profit expected to be generated by the asset, the expected economic life of the asset, market penetration and competition, and risks associated with achieving commercialization, including delay or failure to obtain CMS and any required regulatory approval, failure of clinical trials, and intellectual property litigation.

 

Because the IPR&D (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 IPR&D 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 IPR&D 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 IPR&D assets upon commercialization, which will be amortized during the carryforward period of the offsetting DTAs. On the Merger Date, Oncocyte estimated and recorded a net DTL of $1.3 million after offsetting the acquired available NOLs with the IPR&D generated DTLs (see Note 12).

 

Customer relationships – Insight provided a range of molecular diagnostic services to its pharmaceutical customers referred to as “pharma services,” including testing for biomarker discovery, assay design and development, clinical trial support and a broad spectrum of biomarker tests in its CLIA-certified laboratory. 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 5 years based on the net income that can be expected from these relationships in future years and based on observed historical trends. The resulting cash flows were discounted to the valuation date based on a rate of return that recognizes a lower level of risk associated with these assets as compared to DetermaIO discussed above. As of the Merger Date, there were no uncompleted performance obligations by Insight under any of its pharma services contracts, therefore no deferred revenues were assumed.

 

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Customer relationships generate similar DTLs to IPR&D 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 12).

 

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, Leases. 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 favorable or unfavorable terms of the lease when compared with market terms. Since the Nashville Lease was renewed by Insight in proximity to the Merger Date, the terms of the Nashville Lease were considered by Oncocyte to be market terms at the Merger Date. Accordingly, Oncocyte measured the net present value of the remaining contractual Nashville Lease payments as of the 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 $0.5 million. In addition, $0.1 million was allocated to certain laboratory machinery and equipment approximating the fair value of those assets as of the Merger Date.

 

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 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 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 Merger which Oncocyte valued and recorded as part of Contingent Consideration as of the 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 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 Merger Date contractual payment amounts, as applicable, and the corresponding fair value of each respective Contingent Consideration liability (in thousands):

 

  

Contractual

Value

  

Fair

Value

 
Milestone 1  $1,500   $1,340 
Milestone 2   3,000    1,830 
Milestone 3 (a)   1,500    770 
Royalty 1 (b)   See(b)    5,980 
Royalty 2 (b)   See(b)    1,210 
Total  $6,000   $11,130 

 

(a)Indicates the maximum payable if the Milestone achieved.
(b)Royalty Payments are based on a percentage of future revenues of DetermaIO and pharma services over their respective useful life, as defined, accordingly, there is no fixed contractual value for the Royalty Contingent Consideration.

 

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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 12% after adjustment for the probability of achievement of the Milestones. No Milestone Contingent Consideration is payable with respect to a particular Milestone unless and until the Milestone is achieved. Since the Milestone Contingent Consideration payments are based on nonfinancial, binary events, management believes the use of the scenario analysis method is appropriate. The fair value of each Milestone after the Merger Date will be 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.

 

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 47%. Since the Royalty Contingent Consideration payments are based on future revenues and linear payouts, management believes the use of the single scenario method is appropriate.

 

The fair value of the Contingent Consideration after the Merger Date will be 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 September 30, 2020, based on Oncocyte’s reassessment of the significant assumptions note above, there was a reduction of approximately $3 million to the fair value of the Contingent Consideration primarily attributable to revised estimates of the timing of the possible future payouts and, accordingly, this decrease was recorded as an unrealized gain in the consolidated statements of operations for the three and nine months ended September 30, 2020.

 

The following table reflects the activity for Oncocyte’s Contingent Consideration since the Merger Date, measured at fair value using Level 3 inputs (in thousands):

 

   Fair Value 
Balance at January 31, 2020, March 31, 2020 and June 30, 2020  $ 11,130 
Change in estimated fair value   (2,980)
Balance at September 30, 2020  $8,150 

 

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 $1.3 million of net deferred tax liabilities recorded principally related to DetermaIO and customer relationships discussed above. Goodwill is not amortized but is tested for impairment at least annually, or more frequently if circumstances indicate potential impairment (see Notes 2 and 6).

 

Goodwill and identifiable intangible assets may not be amortizable or deductible for tax purposes since these assets are not recognized for tax purposes.

 

6. Goodwill and Intangible Assets, net

 

At September 30, 2020 and December 31, 2019, goodwill and intangible assets, net, consisted of the following (in thousands):

 

  

September 30, 2020

(unaudited)

  

December 31, 2019

 
Goodwill (1)  $9,187   $- 
           
Intangible assets:          
Acquired IPR&D – DetermaIO (2)  $14,650   $- 
         - 
Intangible assets subject to amortization:          
Acquired intangible assets – customer relationship   440    - 
Total intangible assets   15,090    - 
Accumulated amortization   (59)   - 
Intangible assets, net  $15,031   $       - 

 

(1) Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired in the Merger (see Note 5).
   
(2) See Note 5 for information on the Merger which was consummated on January 31, 2020.

 

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7. Equity Method Investment in Razor Genomics, Inc.

 

On September 30, 2019, Oncocyte completed the purchase of 1,329,870 shares of Razor Series A Convertible Preferred Stock, par value $0.0001 per share (the “Preferred Stock”), representing 25% of the outstanding equity of Razor on a fully diluted basis, for $10 million in cash (the “Initial Closing”) pursuant to a Subscription and Stock Purchase Agreement (the “Purchase Agreement”), dated September 4, 2019, among Oncocyte, Encore Clinical, Inc. (“Encore”), and Razor. Pursuant to the Purchase Agreement, Oncocyte entered into Minority Holder Stock Purchase Agreements of like tenor (the “Minority Purchase Agreements”) with the shareholders of Razor other than Encore (the “Minority Shareholders”) for the future purchase of the shares of Razor common stock they own. Oncocyte has also entered into certain other agreements with Razor and Encore, including a Sublicense and Distribution Agreement (the “Sublicense Agreement”), a Development Agreement (the “Development Agreement”), and an amendment to a Laboratory Services Agreement (the “Laboratory Agreement”) pursuant to which Oncocyte became a party to that agreement.

 

Purchase Option

 

Oncocyte has 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 $10 million in cash and Oncocyte common stock valued at $5 million in total (the “Additional Purchase Payment”). If the issuance of shares of Oncocyte common stock having a market value of $5 million would exceed the number of shares issuable without shareholder approval under applicable stock exchange rules, Oncocyte may deliver a number of shares of common stock that would not exceed the number of shares permissible under stock exchange rules and an amount of cash necessary to bring the combined value of cash and shares to $5 million.

 

Oncocyte has agreed to exercise the Option if, within a specified time frame, certain milestones are met related to the contracting of clinical trial sites for a clinical trial of DetermaRx. Even if DetermaRx clinical trial milestones are not met within the time frame referenced in the Purchase Agreement and the Minority Purchase Agreements, Oncocyte will have the option, but not the obligation, to purchase the balance of the outstanding Razor common stock from Encore and the Minority Shareholders for the Additional Purchase Payment that would be applicable if the milestones were met. Oncocyte’s obligations to purchase the Razor shares from Encore and the Minority Shareholders are subject to the satisfaction of certain conditions customary for a transaction of this kind.

 

Development Agreement

 

Under the Development Agreement, Razor reserved as a “Clinical Trial Expense Reserve” $4 million of the proceeds it received at the Initial Closing from the sale of the Preferred Stock to Oncocyte, to fund Razor’s share of costs incurred in connection with a clinical trial of DetermaRx for purposes of promoting commercialization (“Clinical Trial”).

 

Oncocyte will be responsible for all expenses for the Clinical Trial that exceed the Clinical Trial Expense Reserve up to the total budget amount approved by representatives of Oncocyte and Encore on a Steering Committee, which is expected to cover multiple years and is estimated to be up to $12 million for Oncocyte’s portion.

 

The Development Agreement provides for certain payments by Oncocyte to Encore if certain product reimbursement, Clinical Trial, and financing milestones are attained. Oncocyte has paid Encore $1 million in cash as a milestone payment for the receipt of a preliminary positive coverage decision from CMS for DetermaRx (the “Preliminary Coverage Milestone Payment”). In June 2020, following Razor’s receipt of a positive final coverage decision from CMS for reimbursement of patient costs of DetermaRx, Oncocyte paid Encore $4 million (“CMS Final Milestone Payment”). Oncocyte accounted for those milestone payments as part of its equity method investment in Razor.

 

Upon completion of enrollment 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 $3 million (“Clinical Trial Milestone Payment”). If the issuance of shares of our common stock having a market value of $3 million would require us to issue a number of shares that, when combined with any shares we issued under the Purchase Agreement and the Minority Shareholder Purchase Agreements, would exceed the number of shares that may be issued without shareholder approval under applicable stock exchange rules, Oncocyte may deliver the number of shares permissible under stock exchange rules and an amount of cash necessary to bring the combined value of cash and shares to $3 million.

 

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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 $3 million cap on the payment to Encore if the funding is provided by a designated pharmaceutical company.

 

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.

 

Oncocyte will make royalty payments to Encore and the Minority Shareholders based on the net cash revenues actually collected from the commercialization of DetermaRx, less certain related costs including certain payments by Oncocyte to third parties as royalties and revenue share payments owed by Razor to third parties with respect to revenues from the commercialization of DetermaRx. The initial royalty rate payable to Encore and the Minority Shareholders will be a low double-digit percentage and will decline as certain cumulative net revenue benchmarks are reached, with a single digit royalty rate payable to them as the benchmarks are attained. Royalties will be payable to Encore and the Minority Shareholders on a quarterly basis.

 

Laboratory Agreement

 

Under the Laboratory Agreement, Oncocyte has assumed Razor’s Laboratory Agreement payment obligations of $450,000 per year (see Note 14). The Laboratory Agreement gives Oncocyte the right to use Razor’s CLIA laboratory in Brisbane, California. Oncocyte pays Encore a quarterly fee for services related to operating and maintaining the CLIA laboratory, including certain staffing. The Laboratory Agreement will expire on September 29, 2021, but Oncocyte may extend the term for additional one-year periods, or Oncocyte may terminate the agreement at its option after it completes the purchase of the shares of Razor common stock from Razor stockholders pursuant to the Purchase Agreement and Minority Purchase Agreements. Oncocyte also has the right to terminate the Laboratory Agreement if there is an event or occurrence that adversely affects, in any material respect, DetermaRx or its prospects or its ability to be commercialized, and it remains continuing and uncured.

 

Accounting for the Razor Investment

 

The Razor investment is accounted for under the equity method of accounting under ASC 323 because Oncocyte exercises significant influence over, but does not control, the Razor entity. Oncocyte does not control the Razor entity because, among other factors, Oncocyte is entitled to designate one person to serve on a three-member board of directors of Razor, with the other two members designated by Encore, and 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.

 

The Razor Preferred Stock is considered in-substance common stock for purposes of the ASC 323 equity method investment in Razor. The equity method investment in Razor is considered an asset, rather than a business, because, among other factors, Razor has no workforce, no commercial product, no revenues, no distribution system and no facilities. Substantially all of the fair value of Razor’s assets at the Initial Closing was concentrated in Razor’s intangible asset, DetermaRx, thus satisfying the requirements of the screen test in accordance with Accounting Standards Update (“ASU”) 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business.

 

The aggregate Razor acquisition payments of $11.245 million incurred during September 2019, including $10 million paid for the Razor Preferred Stock, the $1 million Preliminary Coverage Milestone Payment, and $0.245 million in transaction expenses, and the $4 million CMS Final Milestone Payment made by Oncocyte during June 2020, will be amortized over a 10-year useful life of DetermaRx and will be reflected in Oncocyte’s pro rata earnings and losses of the equity method investment in Razor. Under ASC 323, the additional contingent consideration arrangements, including the Clinical Trial Milestone Payment and the Additional Purchase Payment discussed above, 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 September 30, 2020, none of those other contingent consideration payments were recorded as none of the applicable conditions were achieved as of that date.

 

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Summarized standalone financial data for Razor

 

The unaudited results of operations for the three and nine months ended September 30, 2020 of Razor is summarized below (in thousands):

 

Condensed Statement of Operations (1) 

Three Months Ended

September 30, 2020

(unaudited)

  

Nine Months Ended

September 30, 2020

(unaudited)

 
Research and development expense  $233   $502 
General and administrative expense   -    - 
Loss from operations   (233)   (502)
Net loss  $(233)  $(502)

 

(1) The condensed statement of operations of Razor is provided for informational purposes only. Razor’s full results are not included in Oncocyte’s consolidated results of operations because Razor is not consolidated with Oncocyte’s financial statements for any period presented but accounted for under the equity method of accounting since the September 30, 2019 Initial Closing date. However, beginning on September 30, 2019, Oncocyte’s pro rata share of losses from the Razor investment are included in other income or expenses, net, on the condensed consolidated statements of operations.

 

8. Related Party Transactions

 

Shared Facilities Agreement

 

On October 8, 2009, Oncocyte and Lineage executed the Shared Facilities Agreement. Beginning on October 1, 2019, Oncocyte ceased using shared services and has relied its own administrative, finance and accounting personnel. Effective December 31, 2019, Oncocyte terminated the Shared Facilities Agreement. Under the terms of the Shared Facilities Agreement, Lineage permitted Oncocyte to use Lineage’s office and laboratory facility and equipment located in Alameda, California. Through September 30, 2019, Lineage provided accounting, billing, bookkeeping, payroll, treasury, payment of accounts payable, and other similar administrative services to Oncocyte and through December 31, 2019, Lineage permitted Oncocyte the use of Lineage’s office and laboratory facilities and equipment. In January 2020, Oncocyte moved into its new corporate headquarters in Irvine, California, and also operates clinical laboratories in Brisbane, California and Nashville, Tennessee (see Note 14).

 

Lineage charged Oncocyte a “Use Fee” for services received and usage of facilities, equipment, and supplies. For each billing period, Lineage prorated and allocated costs incurred, as applicable, to Oncocyte. Such costs included services of Lineage employees, equipment, insurance, lease, professional, software, supplies and utilities. Allocation of expenses between Lineage and Oncocyte depended on key cost drivers including actual documented use, square footage of facilities used, time spent, costs incurred by or for Oncocyte, or upon proportionate usage by Lineage and Oncocyte, as reasonably estimated by Lineage. Lineage charged Oncocyte a 5% markup on such allocated costs as permitted by the Shared Facilities Agreement.

 

In addition to the Use Fees, Oncocyte reimbursed Lineage for any out of pocket costs incurred by Lineage for the purchase of office supplies, laboratory supplies, and other goods and materials and services for the account or use of Oncocyte based on invoices documenting such costs.

 

The Shared Facilities Agreement was not considered a lease under the provisions of ASC 842 discussed in Note 2, because, among other factors, a significant part of the Shared Facilities Agreement was a contract for services, not a tangible asset, and was cancelable by either party without penalty.

 

In the aggregate, Lineage charged Use Fees to Oncocyte during the three and nine months ended September 30, 2019 as follows (in thousands):

 

  

Three Months Ended

September 30, 2019

(unaudited)

  

Nine Months Ended

September 30, 2019

(unaudited)

 
Research and development  $160   $579 
General and administrative   125    341 
Sales and marketing   53    69 
Total Use Fees  $338   $989 

 

As of December 31, 2019, amounts owed to Lineage under the Shared Facilities Agreement were insignificant.

 

Financing Transactions

 

On January 2, 2020, Oncocyte entered into Subscription Agreements with selected investors, including Broadwood Partners, L.P. (“Broadwood”) and certain funds and accounts managed by Pura Vida Investments LLC (“Pura Vida”), in a registered direct offering of 3,523,776 shares of common stock, no par value, at an offering price of $2.156 per share, for an aggregate purchase price of approximately $7.6 million.

 

During April 2020, Oncocyte sold 4,733,700 shares of common stock, no par value, at an offering price of $2.27 per share, for an aggregate purchase price of approximately $10.75 million, in a registered direct offering. Oncocyte paid no fees or commissions to broker-dealers or any underwriting or finder’s fees. Broadwood and certain funds and accounts managed by Pura Vida purchased shares in the offering.

 

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Consulting Services

 

During the three and nine months ended September 30, 2020, Oncocyte incurred consulting fees of $0.1 million and $0.6 million, respectively, to a firm in which Oncocyte’s current President and Chief Executive Officer, Ronald Andrews, formerly was a partner. Mr. Andrews resigned from the firm as an active partner effective June 30, 2019, the date prior to commencement of his employment by Oncocyte.

 

9. Loan Payable to Silicon Valley Bank

 

On February 21, 2017, Oncocyte entered into a Loan and Security Agreement (the “Loan Agreement”) with Silicon Valley Bank (the “Bank”) pursuant to which Oncocyte borrowed $2.0 million. Payments of interest only on the principal balance were due monthly from the loan funding date, March 23, 2017, through October 31, 2017, and, beginning on November 1, 2017, monthly payments of principal of approximately $67,000 plus interest are due and payable.

 

The outstanding principal amount plus accrued interest was due and payable to the Bank at maturity on April 1, 2020, but was paid off through a loan refinancing completed in October 2019, including a payment of a $116,000 final payment fee due under the terms of the Loan Agreement. The Bank waived a 1.0% prepayment fee in connection with the refinancing of the loan.

 

Amended Loan Agreement

 

On October 17, 2019, Oncocyte entered into a First Amendment to Loan and Security Agreement (the “Amended Loan Agreement”) with the Bank pursuant to which Oncocyte obtained a new $3 million secured credit facility (“Tranche 1”), a portion of which was used to repay the remaining balance of approximately $400,000 on outstanding loans from the Bank, plus a final payment of $116,000, under the February 21, 2017 Loan Agreement. The credit line under the Amended Loan Agreement may be increased by an additional $2 million (“Tranche 2”) if Oncocyte obtains at least $20 million of additional equity capital, as was the case with the original Loan Agreement, and a positive final coverage determination is received from the Centers for Medicate and Medicaid Services for DetermaRx at a specified minimum price point per test (the “Tranche 2 Milestone”), and Oncocyte is not in default under the Amended Loan Agreement.

 

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) 5% per annum. As of September 30, 2020, the latest published prime rate was 3.25% per annum.

 

On April 2, 2020, as part of the Bank’s COVID-19 pandemic relief program, Oncocyte and Silicon Valley Bank entered into a Loan Deferral Agreement (“Loan Deferral”) with respect to the Amended Loan Agreement. Under the Loan Deferral Agreement, the Bank agreed to (i) extend the scheduled maturity date of the Amended Loan Agreement from March 31, 2022 to September 30, 2022, and (ii) deferred the principal payments by an additional 6 months whereby payments of interest only on the Bank loan principal balance will be due monthly from May 1, 2020 through October 1, 2020, followed by 23 monthly payments of principal and interest beginning on November 1, 2020, all provided at no additional fees to Oncocyte. No other terms of the Amended Loan Agreement were changed or modified. The Loan Deferral was accounted for as a modification of debt in accordance with ASC 470-50, Debt – Modifications and Extinguishments, thus there was no gain or loss recognized on the transaction.

 

At maturity of the loan, Oncocyte will also pay the Bank an additional final payment fee of $200,000, which was recorded as a deferred financing charge in October 2019 and is being amortized to interest expense over the term of the loan using the effective interest method. As of September 30, 2020, the unamortized deferred financing cost was $90,000.

 

Oncocyte may prepay in full the outstanding principal balance at any time, subject to a prepayment fee equal to 3.0% of the outstanding principal balance if prepaid within one year after October 17, 2019, 2.0% of the outstanding principal balance if prepaid more than one year but less than two years after October 17, 2019, or 1.0% of the outstanding principal balance if prepaid two years or more after October 17, 2019. Any amounts borrowed and repaid may not be reborrowed.

 

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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 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 8,247 shares of Oncocyte common stock at an exercise price of $4.85 per share, through February 21, 2027. On March 23, 2017, the Bank was issued warrants to purchase an additional 7,321 shares at an exercise price of $5.46 per share, through March 23, 2027. The Bank may elect to exercise the 2017 Bank Warrants on a “cashless exercise” basis and receive a number of shares determined by multiplying the number of shares for which the applicable tranche is being exercised by (A) the excess of the fair market value of the common stock over the applicable exercise price, divided by (B) the fair market value of the common stock. The fair market value of the common stock will be the last closing or sale price on a national securities exchange, interdealer quotation system, or over-the-counter market.

 

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 98,574 shares of Oncocyte common stock at the initial “Warrant Price” of $1.69 per share through October 17, 2029. The number of shares of common stock issuable upon the exercise of the 2019 Bank Warrant will increase on the date of each draw, if any, on Tranche 2. The number of additional shares of common stock issuable upon the exercise of the 2019 Bank Warrant will be equal to 0.02% of Oncocyte’s fully diluted equity outstanding for each $1 million draw under Tranche 2. The Warrant Price for Tranche 2 warrant shares will be determined upon each draw of Tranche 2 funds and will be closing price of Oncocyte common stock on the NYSE American or other applicable market on the date immediately before the applicable date on which Oncocyte borrows funds under Tranche 2. The Bank may elect to exercise the 2019 Bank Warrant on a “cashless exercise” basis and receive a number of shares determined by multiplying the number of shares for which the 2019 Bank Warrant is being exercised by (A) the excess of the fair market value of the common stock over the applicable Warrant Price, divided by (B) the fair market value of the common stock. The fair market value of the common stock will be last closing or sale price on a national securities exchange, interdealer quotation system, or over-the-counter market.

 

Paycheck Protection Program Loan

 

On April 23, 2020, Oncocyte entered into a U.S. Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) promissory note in the principal amount of $1,140,930 payable to Silicon Valley Bank evidencing a PPP loan from the Bank. The PPP loan will bear interest at a rate of 1% per annum. No payments will be due on the PPP loan during a six-month deferral period commencing on the date of the promissory note. Commencing one month after the expiration of the deferral period, and continuing on the same day of each month thereafter until the maturity date of the PPP loan, Oncocyte will be obligated to make monthly payments of principal and interest, each in such equal amount required to fully amortize the principal amount outstanding on the PPP loan by the maturity date. The maturity date is April 23, 2022.

 

The principal amount of the PPP loan is subject to forgiveness by the Bank through the SBA under the PPP upon Oncocyte’s request to the extent that PPP loan proceeds are used to pay expense permitted by the PPP, including payroll, rent, and utilities. The Bank may forgive interest accrued on any principal forgiven if the SBA pays the interest. There can be no assurance that any part of the PPP loan will be forgiven.

 

The PPP loan promissory note contains customary borrower default provisions and lender remedies, including the right of the Bank to require immediate repayment in full the outstanding principal balance of the PPP loan with accrued interest.

 

10. Shareholders’ Equity

 

Preferred Stock

 

Oncocyte is authorized to issue 5,000,000 shares of no par value preferred stock. As of September 30, 2020, no preferred shares were issued or outstanding.

 

Common Stock

 

Oncocyte has 150,000,000 shares of common stock, no par value, authorized. As of September 30, 2020 and December 31, 2019, respectively, Oncocyte had 67,250,639 and 57,031,654 shares of common stock issued and outstanding.

 

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Common Stock Purchase Warrants

 

As of September 30, 2020, Oncocyte had an aggregate of 3,383,913 common stock purchase warrants issued and outstanding with exercise prices ranging from $1.69 to $5.50 per warrant. The warrants will expire on various dates through March 23, 2027. Certain warrants have “cashless exercise” provisions meaning that the value of a portion of warrant shares may be used to pay the exercise price rather than payment in cash, which may be exercised under any circumstances in the case of the 2017 Bank Warrants and 2019 Bank Warrants or, in the case of certain other warrants, only if a registration statement for the warrants and underlying shares of common stock is not effective under the Securities Act or a prospectus in the registration statement is not available for the issuance of shares upon the exercise of the warrants.

 

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.

 

Reconciliation of Changes in Shareholders’ Equity

 

The following tables show changes in components of shareholders’ equity for the periods from January 1, 2020 to September 30, 2020, and from June 30, 2020 to September 30, 2020 (unaudited and in thousands).

 

   Common Stock  

Accumulated

Other

Comprehensive

   Accumulated  

Total

Shareholders’

 
   Shares   Amount   Loss   Deficit   Equity 
BALANCE AT JANUARY 1, 2020   57,032   $124,583   $      -   $(93,745)  $30,838 
Net loss   -    -    -    (23,623)   (23,623)
Stock-based compensation   -    4,081    -    -    4,081 
Sale of common shares   8,257    18,343    -    -    18,343 
Financing costs paid to issue common shares        (58)   -    -    (58)
Exercise of stock options   33    72    -    -    72 
Shares issued upon vesting of RSU, net of shares retired to pay employees’ taxes   13    (14)   -    -    (14)
Issuance of common stock for Insight Genetics, Inc. acquisition   1,916    5,000    -    -    5,000 
BALANCE AT SEPTEMBER 30, 2020   67,251   $152,007   $-   $(117,368)  $34,639 

 

   Common Stock  

Accumulated

Other

Comprehensive

   Accumulated  

Total

Shareholders’

 
   Shares   Amount   Loss   Deficit   Equity 
BALANCE AT JUNE 30, 2020   67,218   $150,178   $       -   $(110,585)  $39,593 
Net loss   -    -    -    (6,783)   (6,783)
Stock-based compensation   -    1,784    -    -    1,784 
Financing costs paid to issue common shares   -    (27)   -    -    (27)
Exercise of stock options   33    72    -    -    72 
BALANCE AT SEPTEMBER 30, 2020   67,251   $152,007   $-   $(117,368)  $34,639 

 

26
 

 

The following tables show changes in components of shareholders’ equity for the periods from January 1, 2019 to September 30, 2019, and from June 30, 2019 to September 30, 2019 (unaudited and in thousands).

 

   Common Stock  

Accumulated

Other

Comprehensive

   Accumulated  

Total

Shareholders’

 
   Shares   Amount   Loss   Deficit   Equity 
BALANCE AT JANUARY 1, 2019   40,664   $74,742   $       -   $(71,319)  $3,423 
Net loss   -    -    -    (14,472)   (14,472)
Stock-based compensation   -    2,209    -    -    2,209 
Sale of common shares   10,733    40,250    -    -    40,250 
Financing costs paid to issue common shares   -    (3,252)   -    -    (3,252)
Exercise of stock options   576    943    -    -    943 
Issuance of warrants to Chardan Capital   -    234    -    -    234 
BALANCE AT SEPTEMBER 30, 2019   51,973   $115,126   $-   $(85,791)  $29,335 

 

   Common Stock  

Accumulated

Other

Comprehensive

   Accumulated  

Total

Shareholders’

 
   Shares   Amount   Loss   Deficit   Equity 
BALANCE AT JUNE 30, 2019   51,973   $114,071   $       -   $(80,566)  $33,505 
Net loss   -    -    -    (5,225)   (5,225)
Stock-based compensation   -    821    -    -    821 
Issuance of warrants to Chardan Capital   -    234    -    -    234 
BALANCE AT SEPTEMBER 30, 2019   51,973   $115,126   $-   $(85,791)  $29,335 

 

11. Stock-Based Compensation

 

Oncocyte had a 2010 Stock Option Plan (the “2010 Plan”) under which 5,200,000 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 to employees and consultants, with exercise prices ranging from $2.30 per share to $3.15 per share with vesting in tranches based on the attainment of specified performance conditions related to the development of DetermaDx and obtaining Medicare reimbursement coverage for that test (“Performance-Based Options”). The Medicare reimbursement conditions will not be met as Oncocyte has determined not to pursue commercialization of DetermaDx. Approximately 125,000 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 months ended September 30, 2020 and 2019, none of the vesting conditions were met and, accordingly, no stock-based compensation expense was recorded during those periods. During the nine months ended September 30, 2020, certain performance conditions required for vesting were met, and, accordingly, 265,000 shares vested and $466,000 of stock-based compensation expense was recorded with regard to the Performance-Based Options during this period. During the nine months ended September 30, 2019, certain performance conditions required for vesting were met, and, accordingly, 47,500 shares vested and $101,000 of stock-based compensation expense was recorded with regard to the Performance-Based Options. As of September 30, 2020, there were no Performance-Based Options outstanding.

 

A summary of Oncocyte’s 2010 Plan activity and related information follows (in thousands except weighted average exercise price):

 

Options 

Shares

Available

for Grant

  

Number

of Options

Outstanding

  

Weighted

Average

Exercise Price

 
             
Balance at December 31, 2019   -    3,191   $3.08 
Options exercised   -    (33)  $(2.20)
Options forfeited, canceled and expired   -    (734)  $(2.33)
Balance at September 30, 2020   -    2,424   $3.20 
Exercisable at September 30, 2020        2,325   $3.14 

 

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As of September 30, 2020, 11,000,000 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.

 

In February 2020, Oncocyte granted stock options to purchase 2.1 million common shares with an exercise price of $2.63 per share to its employees, including to New Oncocyte Employees, under the 2018 Incentive Plan. These grants are subject to customary time-based vesting terms and conditions in accordance with the 2018 Incentive Plan.

 

A summary of Oncocyte’s 2018 Incentive Plan activity and related information follows (in thousands except weighted average exercise price):

 

  

Shares

Available

for Grant

  

Number

of Options

Outstanding

  

Number

of RSUs

Outstanding

  

Weighted

Average

Exercise Price

 
Balance at December 31, 2019   6,742    4,088    85   $2.77 
RSUs vested   -    -    (20)  $- 
RSUs granted   (272)   -    136   $- 
Options granted   (3,042)   3,042    -   $2.46 
Options exercised   -    -    -   $- 
Options forfeited/cancelled   143    (143)   -   $(2.47)
Balance at September 30, 2020   3,571    6,987    201   $2.64 
Options exercisable at September 30, 2020        1,926        $2.83 

 

Oncocyte recorded stock-based compensation expense in the following categories on the accompanying condensed statements of operations for the three and nine months ended September 30, 2020 and 2019 (unaudited and in thousands):

 

  

Three Months Ended

September 30,

  

Nine Months Ended

September 30,

 
   2020   2019   2020   2019 
Cost of revenues  $38   $-   $60   $- 
Research and development   462    165    1,070    439 
General and administrative   1,131    617    2,551    1,711 
Sales and marketing   153    39    400    59 
Total stock-based compensation expense (1)  $1,784   $821   $4,081   $2,209 

 

(1) For the three and nine months ended September 30, 2020, stock-based compensation expense includes approximately $0.7 million in an accelerated stock option vesting charge recorded in accordance with the severance benefits provided under certain employment and severance benefit agreements, in connection with Oncocyte’s partial reduction in force plan and salary reduction agreements instituted in September 2020 (see Note 14).

 

The assumptions that were used to calculate the grant date fair value of Oncocyte’s employee and non-employee stock option grants for the nine months ended September 30, 2020 and 2019 were as follows (unaudited):

 

  

Nine Months Ended

September 30,

 
   2020   2019 
Expected life (in years)   6.00    6.03 
Risk-free interest rates   1.14%   2.10%
Volatility   104.24%   78.92%
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 nine months ended September 30, 2020 and 2019 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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12. 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 Merger discussed in Note 5 and in accordance with ASC 805, a change in the acquirer’s valuation allowance that stems from a business combination should be recognized as an element of the acquirer’s income tax expense or benefit in the period of the acquisition. Accordingly, for the nine months ended September 30, 2020, Oncocyte recorded a $1.1 million partial release of its valuation allowance and a corresponding income tax benefit stemming from the DTLs generated by the IPR&D and customer relationships intangible assets acquired in the Merger.

 

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 release 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 carryforwards and other deferred tax assets.

 

Oncocyte did not record any provision or benefit for income taxes for the three months ended September 30, 2020, and for the three and nine months ended September 30, 2019 as Oncocyte had a full valuation allowance for the periods presented.

 

Other tax matters

 

On March 27, 2020, the President of the United States signed into law the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”). The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. Oncocyte is currently assessing the impact of the CARES Act, but it does not expect there to be a material impact on its condensed consolidated financial statements.

 

13. 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

September 30,

  

Nine Months Ended

September 30,

 
   2020   2019   2020   2019 
Medicare for DetermaRx   35%   -    27%   - 
Pharma services Company A   28%   -    22%   - 
Pharma services Company B   20%   -    16%   - 
Pharma services Company C   *    -    21%   - 

 

*Less than 10%

 

The following table presents the percentage of consolidated revenues attributable to products or services classes that represent greater than ten percent of consolidated revenues:

 

  

Three Months Ended

September 30,

  

Nine Months Ended

September 30,

 
   2020   2019   2020   2019 
DetermaRx   37%   -    31%   - 
Pharma Services   63%   -    69%   - 
Total   100%   -    100%   - 

 

The following table presents the percentage of consolidated revenues attributable to geographical locations:

 

  

Three Months Ended

September 30,

  

Nine Months Ended

September 30,

 
   2020   2019   2020   2019 
United States   63%   -    56%   - 
Outside of the United States – Pharma Services   37%   -    44%   - 
Total   100%   -    100%   - 

 

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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.

 

   September 30, 2020   December 31, 2019 
Pharma Services Company A   39%   - 
Medicare for DetermaRx   34%   - 
Pharma Services Company B   13%   - 

 

14. Commitments and Contingencies

 

Oncocyte has certain commitments other than discussed in Notes 5 and 7.

 

Office Lease Agreement

 

On December 23, 2019, Oncocyte entered into an Office Lease Agreement (the “Irvine Lease”) of a building containing approximately 26,800 square feet of rentable space located at 15 Cushing in Irvine California (the “Premises”) that will serve as Oncocyte’s new principal executive and administrative offices and laboratory facility. Oncocyte completed the relocation of its offices to the Premises in January 2020 and will construct a clinical diagnostic laboratory and a research laboratory at the Premises and then relocate its laboratories to the Premises later in 2020.

 

The Irvine Lease has an initial term of 89 calendar months, plus any fraction of the calendar month in which the “Commencement Date” occurs (the “Term”), which occurred on June 1, 2020. Oncocyte has an option to extend the term of the Lease for a period of five years (the “Extended Term”).

 

Oncocyte will pay base monthly rent in the amount of $61,640 during the first 12 months of the Term. Base monthly rent will increase annually, over the base monthly rent then in effect, by 3.5%. If the Term or Extended Term commences or expires on a day other than the first day of a calendar month, the base monthly rent, and expenses and taxes payable by Oncocyte under the Lease as described below, will be prorated for the partial month. Oncocyte will not be obligated to pay base monthly rent during the period of its occupancy of the Premises prior to the Commencement Date and will be entitled to an abatement of 50% of the base monthly rent during the first ten calendar months of the Term. If the Lease is terminated based on the occurrence of an “event of default,” Oncocyte will be obligated to pay the abated rent to the lessor.

 

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 Landlord 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.

 

The lessor has agreed to provide Oncocyte with a “Tenant Improvement Allowance” in the amount of $1,340,000 to pay for the plan, design, permitting, and construction of the improvements constituting Tenant’s Work. The lessor shall be entitled to retain 1.5% of the Tenant Improvement Allowance as an administrative fee. As of September 30, 2020, the lessor had provided $0.6 million of the total Tenant Improvement Allowance.

 

Oncocyte has provided the lessor with a security deposit in the amount of $150,000 and a letter of credit in the amount of $1,700,000. The lessor may apply the security deposit, in whole or in part, for the payment of rent and any other amount that Oncocyte is or becomes obligated to pay under the Irvine Lease but fails to pay when due and beyond any cure period. The lessor may draw on the letter of credit from time to time to pay any amount that is unpaid and due, or if the original issuing bank notifies the lessor that the letter of credit will not be renewed or extended for the period required under the Irvine Lease and Oncocyte fails to timely provide a replacement letter of credit, or an event of default under the Irvine Lease occurs and continues beyond the applicable cure period, or if certain insolvency or bankruptcy or insolvency with respect to Oncocyte occur. Oncocyte is required to restore any portion of the security deposit that is applied by the lessor to payments due under the Lease, and Oncocyte is required to restore the amount available under the letter of credit to the required amount if any portion of the letter of credit is drawn by the lessor. Commencing on the 34th month of the Term, (a) the amount of the letter of credit that Oncocyte is required to maintain shall be reduced on a monthly basis, in equal installments, to amortize the required amount to zero at the end of the Term, and (b) Oncocyte will have the right to cancel the letter of credit at any time if it meets certain market capitalization and balance sheet thresholds; provided, in each case, that Oncocyte is not in then default under the Lease beyond any applicable notice and cure period and the lessor has not determined that an event exists that would lead to an event of default.

 

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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 (see Note 3).

 

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 nine months ended September 30, 2020, for Oncocyte’s operating and financing leases (see Note 2).

 

Under the Laboratory Agreement discussed in Note 7, Oncocyte assumed all of Razor’s Laboratory Agreement payment obligations amounting to $450,000 per year. 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 March 31, 2023 (the “Brisbane Lease”). The laboratory fee payments to Encore include both laboratory services and the use of the Brisbane Facility. Under the provisions of the Laboratory Agreement, if Oncocyte terminates the Laboratory Agreement prior to the expiration of the Brisbane Lease, Oncocyte shall assume the costs related to the subletting or early termination of the Brisbane Lease. If the Laboratory Agreement were to be terminated on September 30, 2020, the aggregate payments due to the landlord for early cancellation of the Brisbane Lease would be approximately $360,000 (aggregate payments from September 30, 2020 through March 31, 2023). Oncocyte determined that the Laboratory Agreement contains an embedded operating lease for the Brisbane Facility and Oncocyte allocated the aggregate payments to this lease component for purposes of calculating the net present value of the right-of-use asset and liability as of the inception of the Laboratory Agreement in accordance with ASC 842, as shown in the table below.

 

The following table presents supplemental cash flow information related to operating and financing leases for the nine months ended September 30, 2020 and 2019 (in thousands):

 

  

Nine Months Ended

September 30,

 
   2020   2019 
Cash paid for amounts included in the measurement of financing lease liabilities:        
Operating cash flows from financing leases  $363   $30 
Financing cash flows from financing leases   53    323 
Right-of-use assets obtained in exchange for lease obligation:          
Operating lease, including lease acquired in Insight Genetics business combination   536    397 

 

The following table presents supplemental balance sheet information related to operating and financing leases as of September 30, 2020 (in thousands, except lease term and discount rate):

 

   September 30,
2020
 
Operating leases     
Right-of-use assets, net  $3,036 
      
Right-of-use lease liabilities, current  $287 
Right-of-use lease liabilities, noncurrent   3,647 
Total operating lease liabilities  $3,934 
      
Financing leases     
Machinery and equipment  $209 
Accumulated depreciation   (145)
Machinery and equipment, net  $64 
      
Current liabilities  $169 
Noncurrent liabilities   221 
Total financing lease liabilities  $390 
      
Weighted average remaining lease term     
Operating leases   6.4 years 
Financing leases   2.6 years 
      
Weighted average discount rate     
Operating leases   11.14%
Financing leases   11.20%

 

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Future minimum lease commitments are as follows (in thousands):

 

 

Operating
Leases

   

Financing
Leases

 
Year Ending December 31,               
2020 $ 189     $ 51  
2021   1,031       185  
2022   1,096       124  
2023   1,000       93  
2024   890       -  
Thereafter   2,463       -  
Total minimum lease payments $ 6,669     $ 453  
Less amounts representing interest   (2,016 )     (63 )
Less remaining tenant improvement allowance (1)   (719 )     -  
Present value of net minimum lease payments $ 3,934     $ 390  

 

  (1) In accordance with ASC 842, a tenant allowance should be included in the measurement of the consideration in the lease agreement at inception and reflected as a reduction to the right-of-use asset and a corresponding reduction to the right-use-liability if the lessee both controls the construction of the tenant improvements and the expects to fully earn all of the tenant allowance. Oncocyte has met both conditions at the inception of the Irvine Lease and has recorded the Tenant Improvement Allowance accordingly. As the cash for the Tenant Improvement Allowance is received from the lessor under the terms of the Irvine Lease, the corresponding right-of-use liability will increase and will be amortized as part of the right-of use asset and liability amortization over the term of the Irvine Lease in accordance with ASC 842. As of September 30, 2020, the lessor had provided $0.6 million of the total $1.3 million Tenant Improvement Allowance, leaving a balance of $0.7 million.

 

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 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 September 30, 2020, Oncocyte accrued approximately $1.3 million in severance obligations for certain executive officers, in accordance with the severance benefit provisions of their respective employment and severance benefit agreements, related to Oncocyte’s partial reduction in force plan and salary reduction agreements instituted in September 2020.

 

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. The term of these indemnification agreements will generally continue in effect after the termination or expiration of the particular research, development, services, 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. 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 September 30, 2020 and December 31, 2019.

 

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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 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, 2019, and our other reports filed with the SEC from time to time.

 

The following discussion should be read in conjunction with Oncocyte’s condensed interim financial statements and the related notes provided under “Item 1- Financial Statements” above.

 

Critical Accounting Policies

 

This Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses and analyzes data in our unaudited condensed 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 nine months ended September 30, 2020 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, 2019, except as disclosed in Note 2 to our 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. Travel and visits related to our business and business meetings, including planned or expected travel and in-person meetings to market DetermaRx, have been eliminated or severely curtailed. 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.

 

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 Genetics Inc. (“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.

 

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The pandemic is affecting our revenue-generating activities. During the COVID-19 pandemic, we have not 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, including DetermaIO.

 

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.

 

Comparison of three and nine months ended September 30, 2020 and 2019

 

Revenues

 

  

Three Months Ended

September 30,

(unaudited)

   $ Increase/   % Increase/ 
   2020   2019   (Decrease)   (Decrease) 
Revenues  $555   $-   $555    n/a 

 

  

Nine Months Ended

September 30,

(unaudited)

   $ Increase/   % Increase/ 
   2020   2019   (Decrease)   (Decrease) 
  Revenues  $713   $-   $713    n/a 

 

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. This year we generated revenues for the first time since our company’s inception in 2009. We currently derive our revenues from pharma services generated by our wholly owned subsidiary, Insight, which we acquired on January 31, 2020, and from the sale of our lung cancer stratification test, DetermaRx, which we commercially launched in early 2020.

 

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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 Medicare or other insurance coverage for a test, we recognize revenue on a cash basis 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, rather than on a cash basis. All other payers for the DetermaRx test are currently recognized on a cash basis. 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.

 

The following table presents the percentage of consolidated revenues attributable to products or services classes that represent greater than ten percent of consolidated revenues:

 

  

Three Months Ended

September 30,

  

Nine Months Ended

September 30,

 
   2020   2019   2020   2019 
DetermaRx   37%   -    31%   - 
Pharma Services   63%   -    69%   - 
Total   100%   -    100%   - 

 

The following table presents the percentage of consolidated revenues received from unaffiliated customers that individually represent greater than ten percent of consolidated revenues:

 

  

Three Months Ended

September 30,

  

Nine Months Ended

September 30,

 
   2020   2019   2020   2019 
Medicare for DetermaRx   35%   -    27%   - 
Pharma Services Company A   28%   -    22%   - 
Pharma Services Company B   20%   -    16%   - 
Pharma Services Company C   *    -    21%   - 

 

*Less than 10%

 

Costs and Operating Expenses

 

  

Three Months Ended

September 30,

(unaudited)

   $ Increase/   % Increase/ 
   2020   2019   (Decrease)   (Decrease) 
Cost of revenues  $601   $-   $601    n/a 
Research and development expenses   2,615    1,625    990    61%
General and administrative expenses   4,995    3,002    1,993    66%
Sales and marketing expenses   1,568    630    938    149%

 

  

Nine Months Ended

September 30,

(unaudited)

   $ Increase/   % Increase/ 
   2020   2019   (Decrease)   (Decrease) 
Cost of revenues  $1,139   $-   $1,139    n/a 
Research and development expenses   8,000    4,476    3,524    79%
General and administrative expenses   13,378    9,087    4,291    47%
Sales and marketing expenses   4,620    1,153    3,467    301%

 

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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 customer relationship 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.

 

The cost of revenues for the three and nine months ended September 30, 2020 were primarily incurred from performing our DetermaRx tests and pharma services. Oncocyte generated no cost of revenues prior to January 1, 2020.

 

We expect the cost of DetermaRx testing and pharma services to generally increase in line with the increase in the number of tests we perform, even if we have no corresponding revenues. 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 will vary depending on the nature, timing, and scope of customer projects.

 

Research and development expenses

 

Research and development expenses increased by approximately $1.0 million during the three months ended September 30, 2020, as compared to the same period in the prior year. This increase is primarily comprised of $1.2 million in personnel and related expenses, including a noncash stock-based compensation expense increase of $0.3 million. Personnel and related expenses for the three months ended September 30, 2020 include a $0.4 million cash based severance charge and $0.2 million in accelerated noncash stock-based compensation expense recorded as part of the partial reduction in force plan and salary reduction agreements we instituted in September 2020.

 

Research and development expenses increased by $3.5 million during the nine months ended September 30, 2020 as compared to the same period in the prior year. This increase is primarily attributable to the following: $2.6 million in personnel and related expenses, including noncash stock-based compensation expense; and $0.9 million in clinical consulting and outside services fees for our development programs, primarily for our DetermaIO and DetermaDx tests. Personnel and related expenses for the nine months ended September 30, 2020 include the $0.4 million cash based severance charge and $0.2 million accelerated noncash stock-based compensation expense recorded during the third quarter as part of the partial reduction in force plan and salary reduction agreements we instituted in September 2020.

 

We expect to continue to incur a significant amount of research and development expenses during the foreseeable future. Near the end of June 2020, our management decided to terminate any further significant product development work for our DetermaDx product line. Among other expenses, future research and development expenses will include direct costs for the continued development of DetermaIO, clinical trials to promote commercialization of DetermaRx, and allocated costs for leasing and operating our CLIA laboratories in California and Tennessee, 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 may be feasible.

 

General and administrative expenses

 

General and administrative expenses for the three months ended September 30, 2020 increased by $2.0 million in comparison to the three months ended September 30, 2019. This increase is primarily comprised of $2.2 million in personnel and related expenses, including noncash stock-based compensation expense. Personnel and related expenses for the three months ended September 30, 2020 include a $0.9 million cash based severance charge and $0.5 million in accelerated noncash stock-based compensation expense recorded as part of the partial reduction in force plan and salary reduction agreements we instituted in September 2020.

 

General and administrative expenses for the nine months ended September 30, 2020 increased by $4.3 million in comparison to the nine months ended September 30, 2019. This increase is primarily attributable to the following: $3.7 million in personnel and related expenses, including noncash stock-based compensation expense; and $0.6 million in legal, audit, investment banking, business development, license, patent and patent fee expenses, including costs incurred for the acquisition of Insight. Personnel and related expenses for the nine months ended September 30, 2020 include a $0.9 million cash based severance charge and $0.5 million in accelerated noncash stock-based compensation expense recorded during the third quarter as part of the partial reduction in force plan and salary reduction agreements we instituted in September 2020.

 

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We are no longer receiving services or use of facilities from Lineage under the Shared Facilities Agreement. We have hired our own accounting and administrative personnel and we are now bearing the full cost of their compensation and employee benefits, and we have acquired our own leased office and laboratory facilities and are bearing directly lease and other operating costs related to those facilities. Our general and administrative expenses increase during 2020 as we replaced services from Lineage with services from our own employees and leased and operated our own office and laboratory facilities.

 

Sales and marketing expenses

 

Sales and marketing expenses for the three months ended September 30, 2020 increased by $0.9 million in comparison to the three months ended September 30, 2019. This increase is primarily attributable to $0.8 million in personnel and related expenses, including noncash stock-based compensation expense, as we continued to ramp up our sales and marketing activities for DetermaRx.

 

Sales and marketing expenses for the nine months ended September 30, 2020 increased by $3.5 million in comparison to the nine months ended September 30, 2019. This increase is primarily attributable to the following: $2.6 million in personnel and related expenses, including noncash stock-based compensation expense; $0.5 million in marketing and consulting expenses, including travel and related expenses primarily for the commercialization of DetermaRx, and $0.4 million in allocation of facility, insurance, and information technology expenses.

 

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, begin commercialization efforts for DetermaIO as a clinical test. Sales and marketing expenses will also increase if we successfully develop or acquire other diagnostic tests. Our sales and marketing efforts, and the amount of related expenses that we will incur in the near term, will largely depend upon the degree of success we have in commercializing DetermaRx, and whether we can successfully complete the development and commercialization of DetermaIO as a clinical test. Our commercialization efforts and expenses will also depend on the amount of capital that we are able to raise to finance commercialization of our diagnostic 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 tests and our expenditures on sales and marketing are likely to increase if our diagnostic or other tests qualify for reimbursement by Medicare and private health insurance companies

 

Change in fair value of contingent consideration

 

The change in fair value of the contingent consideration is based on our reassessment of the key assumptions underlying the determination of this liability as changes in circumstances and conditions occur from the Insight acquisition date 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 three and nine months ended September 30, 2020, we recorded an unrealized gain of approximately $3.0 million related to the decrease in the fair value of contingent consideration primarily attributable to 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, pro rata loss from our equity method investment in Razor, and unrealized gains and losses on marketable equity securities we hold.

 

For the three and nine months ended September 30, 2020, we recorded interest expense, net, of $78,000 and $175,000, respectively, from our bank loan and financing leases.

 

Our $11.245 million equity method investment in Razor that we made in September 2019, plus the $4.0 million milestone payment we made in June 2020, are being amortized over a 10-year useful life from the investment date, and that amortization, including our pro rata share of Razor’s losses, is included in other income and expenses, net, as a pro rata loss in our equity method investment in Razor. The losses of $0.5 million and $1.1 million, respectively, that we recognized for the three and nine months ended September 30, 2020 reflect a combination of the amortization of our investment balance and our pro rata share of losses recognized by Razor for its operating results for the three and nine months ended September 30, 2020.

 

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Income taxes

 

In connection with the acquisition of Insight discussed in Note 5 to our condensed consolidated interim financial statements included elsewhere in this Report, and in accordance with business combination accounting standards, a change in the acquirer’s valuation allowance that stems from a business combination should be recognized as an element of the acquirer’s income tax expense or benefit in the period of the acquisition. Accordingly, for the nine months ended September 30, 2020, we recorded a $1.1 million partial release of our valuation allowance with a corresponding income tax benefit stemming from the deferred tax liabilities generated by the acquired Insight in-process research and development (IPR&D) and customer relationships intangible assets.

 

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 release 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 carryforwards and other deferred tax assets.

 

We did not record any provision or benefit for income taxes for the three months ended September 30, 2020 and for the three and nine months ended September 30, 2019 as we had a full valuation allowance for the periods presented.

 

Liquidity and Capital Resources

 

Since inception, we have financed our operations through the sale of our common stock, warrants, warrant exercises, bank loans, and sales of Lineage common shares that we hold as marketable equity securities. We have incurred operating losses and negative cash flows since inception and had an accumulated deficit of $117.4 million at September 30, 2020. We expect to continue to incur operating losses and negative cash flows for the near future.

 

We believe that our current cash, cash equivalents, marketable equity securities, and our access to additional capital through the ATM Agreement described below are sufficient to carry out our current operations through at least twelve months from the issuance date of the condensed consolidated interim financial statements included in this Report. As of September 30, 2020, we had $10.3 million of cash and cash equivalents and held marketable equity securities valued at $0.4 million.

 

In March 2020, we entered into an Equity Distribution Agreement (the “ATM Agreement”) with Piper Sandler & Co as “Sales Agent” which we may utilize from time to time in the future to raise up to $25 million of additional equity capital through the sale of shares of our common stock in “at the market” transactions.

 

We expect that our operating expenses will increase as we build our marketing and sales force and add new equipment and personnel to our CLIA laboratories to commercialize DetermaRx, followed by DetermaIO after development is completed, although DetermaIO is currently available for biopharma diagnostic development and research use only as a companion test for selecting patients for clinical trials of immunotherapies. We will also incur additional operating expenses as we explore or commence the development of, or acquire, additional diagnostic tests. Additional expenses will also arise from leasing and improving our new office and laboratory facilities in Irvine California, and from operating our CLIA laboratories in Brisbane, California and Nashville, Tennessee. Oncocyte received a final pricing decision for DetermaRx from CMS during September 2020 and has begun recognizing revenue from the performance of that test for Medicare patients. We are also performing DetermaRx tests for non-Medicare patients. 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.

 

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 become due under our obligations to Razor shareholders and 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 or any 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.

 

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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 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. COVID-19 also could continue to depress national and international economies and disrupt capital markets, supply chains, and aspects of our operations, 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, detected, contained and treated. We do not yet know the extent to which COVID-19 will negatively impact our financial results or liquidity.

 

Cash used in operations

 

During the nine months ended September 30, 2020 and 2019, our total research and development expenses were $8.0 million and $4.5 million, respectively, our general and administrative expenses were $13.4 million and $9.1 million, respectively, and our sales and marketing expenses were $4.6 million and $1.2 million, respectively, and we also incurred $1.1 million in cost of revenues in the first nine months of 2020. Net loss for the nine months ended September 30, 2020 amounted to $23.6 million and net cash used in operating activities amounted to $19.8 million. Our cash used in operating activities during the nine months ended September 30, 2020 does not include the following noncash items: $4.1 million in stock-based compensation; $3.0 million in gain from change in fair value of contingent consideration; $1.8 million in depreciation and amortization expenses, including a $0.4 million noncash impairment charge for long-lived assets; a $1.1 million income tax benefit associated with a partial release of our valuation allowance stemming from our acquisition of Insight; and $1.1 million in pro rata loss from our equity method investment in Razor. Changes in working capital were approximately $0.9 million as an additional source of cash.

 

Cash used in investing activities

 

During the nine months ended September 30, 2020, net cash used in investing activities was $11.3 million, primarily attributable to the $6.2 million cash portion of the consideration paid for the acquisition of Insight in January 2020, net of cash acquired; the $4.0 million CMS Final Milestone Payment to Razor; and $1.1 million paid for the purchase of furniture and equipment.

 

Cash provided by financing activities

 

During the nine months ended September 30, 2020, net cash provided by financing operations was $19.3 million primarily attributable to $18.3 million of net cash proceeds from the sale of common shares and the $1.1 million we borrowed under the Paycheck Protection Program. See Notes 8 and 9 to our condensed consolidated interim financial statements included elsewhere in this Report.

 

Off-Balance Sheet Arrangements

 

As of September 30, 2020 and December 31, 2019, 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 26, 2020 (the “2019 Form 10-K”), which we encourage you to review. There have been no material changes from the risk factors disclosed in the 2019 Form 10-K except for the following.

 

The ongoing COVID-19 global pandemic and the worldwide attempts to contain it could harm our business and our results of operations and financial condition could be adversely impacted by such pandemic.

 

The ongoing global outbreak of the coronavirus COVID-19, and the various attempts throughout the world to contain it, have created significant volatility, uncertainty and disruption. 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, we have altered certain aspects of our operations. 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. COVID-19 could also disrupt our 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 our office or laboratory facilities, or due to quarantines. COVID-19 illness could also impact members of our Board of Directors resulting in absenteeism from meetings of the directors or committees of directors, and making it more difficult to convene the quorums of the full Board of Directors or its committees needed to conduct meetings for the management of our affairs.

 

The pandemic is affecting our revenue-generating activities. During the COVID-19 pandemic, we have not 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. Because of COVID-19, travel, visits, and in-person meetings related to our business have been severely curtailed or canceled and we have instead used on-line or virtual meetings to meet with potential customers and others.

 

The concern over available hospital, staffing, equipment, and other resources, and the risk of exposure to the virus, has led to early stage lung cancer surgeries being delayed, and the continued deferral of lung cancer surgeries could result in delayed or reduced use of DetermaRx in the near term. Even if 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 due to reasons other than COVID-19.

 

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. We have had no commercial revenues until the first quarter of 2020 when we launched of 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. 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 or 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.

 

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, including DetermaIO.

 

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Additionally, the anticipated economic consequences of the COVID-19 pandemic have adversely impacted financial markets, resulting in high share price volatility, reduced market liquidity, and substantial declines in the market prices of the securities of some publicly traded companies. Volatile or declining markets for equities could adversely affect our ability to raise capital when needed through the sale of shares of common stock or other securities. Accordingly, we cannot assure that adequate financing will be available on favorable terms, if at all. If we are not able to raise the capital we need, we could be forced to modify, curtail, delay, or suspend some or all aspects of planned operations. Sales of additional equity securities could result in significant dilution of the interests of our shareholders.

 

It is possible that impacts of COVID-19 on our operations or revenues or our access to capital could prevent us from complying, or could result in a material noncompliance, with one or more obligations or covenants under material agreements to which we are a party, with the result that we would be in material breach of the applicable obligation, covenant, or agreement. Any such material breach could cause us 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 us 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 our business. Similarly, it is possible that impacts of COVID-19 on the business, operations, or financial condition of any third party with whom we have a contractual relationship could cause the third party to be unable to perform its contractual obligations to us, resulting in Oncocyte’s loss of the benefits of a contract that could be material to our business.

 

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; and the effect on our suppliers and their ability to provide the necessary equipment and materials to support our tests and services. 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, any customers and stockholders. It is not clear what the potential effects any such alterations or modifications may have on our business, including the effects on our financial results.

 

The discontinuation of our DetermaDx program could impact our future revenues and prospects.

 

Based on the results of our DetermaDx clinical validation study, we determined to discontinue the development of that test and to focus our efforts on maximizing the opportunities for DetermaRx and DetermaIO. As a result, we will now be relying on a smaller group of diagnostic tests as sources of revenue, which could reduce our future revenue, make it more difficult for us to finance our operations, and impair our prospects for profitability and growth. We are already commercializing DetermaRx for clinical use in treatment selection for early stage lung cancer management, but DetermaIO is currently available only for biopharma diagnostic development and research use. We plan to continue DetermaIO development, initially for use as a companion test in immunotherapy drug development to select patients for clinical trials, and subsequently as a full companion diagnostic for clinical use to help physicians determine which patients are most likely to have a sustained response to immunotherapies. However, there is no assurance that our development plans for DetermaIO will be successful or that we will be generate sufficient revenues from commercialization of DetermaRx and DetermaIO to finance our operations and earn a profit.

 

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

 

Exhibit Numbers   Exhibit Description
3.1   Articles of Incorporation with all amendments (Incorporated by reference to OncoCyte Corporation’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on July 29, 2020)
     
3.2   Amended and Restated By-Laws (Incorporated by reference to OncoCyte Corporation’s Current Report on Form 8-K filed with the Securities and Exchange Commission on March 6, 2020)
     
10.1   Reduction in Salary Agreement between OncoCyte Corporation and Albert Parker (Incorporated by reference to OncoCyte Corporation’s Current Report on Form 8-K filed with the Securities and Exchange Commission on September 28, 2020)
     
10.2   Reduction in Salary Agreement between OncoCyte Corporation and Lyndal Hesterberg (Incorporated by reference to OncoCyte Corporation’s Current Report on Form 8-K filed with the Securities and Exchange Commission on September 28, 2020)
     
10.3   Reduction in Salary Agreement between OncoCyte Corporation and Tony Kalajian (Incorporated by reference to OncoCyte Corporation’s Current Report on Form 8-K filed with the Securities and Exchange Commission on September 28, 2020)
     
31   Rule 13a-14(a)/15d-14(a) Certification*
     
32   Section 1350 Certification*
     
101   Interactive Data Files*
     
101.INS   XBRL Instance Document*
     
101.SCH   XBRL Taxonomy Extension Schema*
     
101.CAL   XBRL Taxonomy Extension Calculation Linkbase*
     
101.DEF   XBRL Taxonomy Extension Definition Document*
     
101.LAB   XBRL Taxonomy Extension Label Linkbase*
     
101.PRE   XBRL Taxonomy Extension Presentation Linkbase*

 

* Filed herewith

 

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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: November 12, 2020 /s/ Ronald Andrews
  Ronald Andrews
  President and Chief Executive Officer

 

Date: November 12, 2020 /s/ Mitchell Levine
  Mitchell Levine
  Chief Financial Officer

 

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