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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
June 30,
2022
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 |
|
The
Nasdaq Stock Market LLC |
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 August 3, 2022
was
118,608,821.
PART
1—FINANCIAL INFORMATION
This
Report on Form 10-Q (“Report”) contains forward-looking statements
that involve risks and uncertainties. We make such forward-looking
statements pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995 and other federal
securities laws. All statements other than statements of historical
facts contained in this Report are forward-looking statements. In
some cases, you can identify forward-looking statements by words
such as “anticipate,” “believe,” “contemplate,” “continue,”
“could,” “estimate,” “expect,” “intend,” “may,” “plan,”
“potential,” “predict,” “project,” “seek,” “should,” “target,”
“will,” “would,” or the negative of these words or other comparable
terminology.
Any
forward-looking statements in this Report reflect our current views
with respect to future events or to our future financial
performance and involve known and unknown risks, uncertainties and
other factors that may cause our actual results, performance or
achievements to be materially different from any future results,
performance or achievements expressed or implied by these
forward-looking statements. Factors that may cause actual results
to differ materially from current expectations include, among other
things, those discussed in this Report under Item 1 of the Notes to
Condensed Consolidated Interim Financial Statements, under Risk
Factors in this Report and those Risk Factors in Part I, Item 1A of
our most recent Annual Report on Form 10-K as filed with the
Securities and Exchange Commission. Given these uncertainties, you
should not place undue reliance on these forward-looking
statements. Except as required by law, we assume no obligation to
update or revise these forward-looking statements for any reason,
even if new information becomes available in the
future.
The
forward-looking statements in this Report also include, among other
things, statements about:
|
● |
the
timing and potential achievement of future milestones; |
|
● |
the
timing and our ability to obtain and maintain coverage and
reimbursements from the Centers for Medicare and Medicaid Services
and other third-party payers; |
|
● |
our
plans to pursue research and development of diagnostic
test; |
|
● |
the
potential commercialization of our diagnostic tests currently in
development; |
|
● |
the
timing and success of future clinical trials and the period during
which the results of the clinical trials will become
available; |
|
● |
the
potential receipt of revenue from future sales of our diagnostic
tests or diagnostic tests in development; |
|
● |
our
assumptions regarding obtaining reimbursement and reimbursement
rates; |
|
● |
our
estimates regarding future orders of tests and our ability to
perform a projected number of tests; |
|
● |
our
estimates and assumptions around patient populations, market size
and price points for reimbursement for our diagnostic
tests; |
|
● |
our
estimates regarding future revenues and operating expenses, and
future capital requirements; |
|
● |
our
intellectual property position; |
|
● |
the
uncertainties associated with the coronavirus (COVID-19) ongoing
pandemic, including its possible effects on our operations and the
demand for our diagnostic tests and Pharma Services; |
|
● |
our
ability to efficiently and flexibly manage our business amid
uncertainties related to COVID-19; |
|
● |
the
impact of government laws and regulations; and |
|
● |
our
competitive position. |
Unless
the context otherwise requires, all references to “Oncocyte,” the
“Company,” “we,” “us,” “our,” or similar words refer to Oncocyte
Corporation, together with our consolidated
subsidiaries.
The
description or discussion, in this Form 10-Q, of any contract or
agreement is a summary only and is qualified in all respects by
reference to the full text of the applicable contract or
agreement.
DetermaRx™,
DetermaIO™, DetermaTx™, DetermaMx™, DetermaCNI™, DetermaDx™ and
VitaGraftTM are trademarks of Oncocyte
Corporation, and TheraSure™ is a trademark of Chronix Biomedical,
Inc., regardless of whether the “TM” symbol accompanies the use of
or reference to the applicable trademark in this
Report.
Item
1. Financial Statements
ONCOCYTE
CORPORATION
UNAUDITED
CONDENSED CONSOLIDATED BALANCE SHEETS
(In
thousands)
The
accompanying notes are an integral part of these unaudited
condensed consolidated interim financial statements.
ONCOCYTE
CORPORATION
UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In
thousands, except per share data)
The
accompanying notes are an integral part of these unaudited
condensed consolidated interim financial statements.
ONCOCYTE
CORPORATION
UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE
LOSS
(In
thousands)
The
accompanying notes are an integral part of these unaudited
condensed consolidated interim financial statements.
ONCOCYTE
CORPORATION
UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’
EQUITY
(In
thousands)
|
|
Three
Months Ended June 30, 2021 |
|
|
|
Series
A Redeemable Convertible Preferred Stock |
|
|
Common
Stock |
|
|
Accumulated
Other
Comprehensive |
|
|
Accumulated |
|
|
Total
Stockholders’ |
|
|
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
|
Income |
|
|
Deficit |
|
|
Equity |
|
Balance
at March 31, 2021 |
|
|
- |
|
|
$ |
- |
|
|
|
88,914 |
|
|
$ |
234,224 |
|
|
$ |
- |
|
|
$ |
(127,596 |
) |
|
$ |
106,628 |
|
Net
Loss |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(10,493 |
) |
|
|
(10,493 |
) |
Stock-based
compensation |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,997 |
|
|
|
- |
|
|
|
- |
|
|
|
1,997 |
|
Stock
options exercised |
|
|
- |
|
|
|
- |
|
|
|
617 |
|
|
|
1,251 |
|
|
|
- |
|
|
|
- |
|
|
|
1,251 |
|
Warrants
exercised |
|
|
- |
|
|
|
- |
|
|
|
7 |
|
|
|
21 |
|
|
|
- |
|
|
|
- |
|
|
|
21 |
|
Shares
issued upon vesting of RSU, net of shares retired to pay employees’
taxes |
|
|
- |
|
|
|
- |
|
|
|
130 |
|
|
|
(37 |
) |
|
|
- |
|
|
|
- |
|
|
|
(37 |
) |
Issuance
of common stock to Chronix Biomedical acquisition |
|
|
- |
|
|
|
- |
|
|
|
648 |
|
|
|
3,299 |
|
|
|
- |
|
|
|
- |
|
|
|
3,299 |
|
Balance
at June 30, 2021 |
|
|
- |
|
|
$ |
- |
|
|
|
90,316 |
|
|
$ |
240,755 |
|
|
$ |
- |
|
|
$ |
(138,089 |
) |
|
$ |
102,666 |
|
|
|
Six
Months Ended June 30, 2022 |
|
|
|
Series
A Redeemable Convertible Preferred Stock |
|
|
Common
Stock |
|
|
Accumulated
Other
Comprehensive |
|
|
Accumulated |
|
|
Total
Stockholders’ |
|
|
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
|
Income |
|
|
Deficit |
|
|
Equity |
|
Balance
at December 31, 2021 |
|
|
- |
|
|
$ |
- |
|
|
|
92,232 |
|
|
$ |
252,954 |
|
|
$ |
37 |
|
|
$ |
(187,774 |
) |
|
$ |
65,217 |
|
Net
Loss |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(18,591 |
) |
|
|
(18,591 |
) |
Foreign
currency translation adjustment |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(6 |
) |
|
|
- |
|
|
|
(6 |
) |
Stock-based
compensation |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
4,242 |
|
|
|
- |
|
|
|
- |
|
|
|
4,242 |
|
Issuance
of common shares, including at-the-market transactions, net of
financing costs and underwriting discounts |
|
|
- |
|
|
|
- |
|
|
|
26,281 |
|
|
|
32,453 |
|
|
|
- |
|
|
|
- |
|
|
|
32,453 |
|
Shares
issued upon vesting of RSU, net of shares retired to pay employees’
taxes |
|
|
- |
|
|
|
- |
|
|
|
96 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Issuance
of Series A redeemable convertible preferred stock, net of
financing costs |
|
|
11,765 |
|
|
|
4,782 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Accretion
of Series A convertible preferred stock to redemption
value |
|
|
- |
|
|
|
72 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(72 |
) |
|
|
(72 |
) |
Balance
at June 30, 2022 |
|
|
11,765 |
|
|
$ |
4,854 |
|
|
|
118,609 |
|
|
$ |
289,649 |
|
|
$ |
31 |
|
|
$ |
(206,437 |
) |
|
$ |
83,243 |
|
|
|
Six
Months Ended June 30, 2021 |
|
|
|
Series
A Redeemable Convertible Preferred Stock |
|
|
Common
Stock |
|
|
Accumulated
Other
Comprehensive |
|
|
Accumulated |
|
|
Total
Stockholders’ |
|
|
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
|
Income |
|
|
Deficit |
|
|
Equity |
|
Balance
at December 31, 2020 |
|
|
- |
|
|
$ |
- |
|
|
|
69,117 |
|
|
$ |
157,160 |
|
|
$ |
- |
|
|
$ |
(123,677 |
) |
|
$ |
33,483 |
|
Net
Loss |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(14,412 |
) |
|
|
(14,412 |
) |
Stock-based
compensation |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
3,287 |
|
|
|
- |
|
|
|
- |
|
|
|
3,287 |
|
Issuance
of common shares, including at-the-market transactions, net of
financing costs and underwriting discounts |
|
|
- |
|
|
|
- |
|
|
|
18,427 |
|
|
|
68,868 |
|
|
|
- |
|
|
|
- |
|
|
|
68,868 |
|
Stock
options exercised |
|
|
- |
|
|
|
- |
|
|
|
757 |
|
|
|
1,599 |
|
|
|
- |
|
|
|
- |
|
|
|
1,599 |
|
Warrants
exercised |
|
|
- |
|
|
|
- |
|
|
|
255 |
|
|
|
823 |
|
|
|
- |
|
|
|
- |
|
|
|
823 |
|
Shares
issued upon vesting of RSU, net of shares retired to pay employees’
taxes |
|
|
- |
|
|
|
- |
|
|
|
130 |
|
|
|
(37 |
) |
|
|
- |
|
|
|
- |
|
|
|
(37 |
) |
Issuance
of common stock to Razor Genomics |
|
|
- |
|
|
|
- |
|
|
|
982 |
|
|
|
5,756 |
|
|
|
- |
|
|
|
- |
|
|
|
5,756 |
|
Issuance
of common stock to Chronix Biomedical |
|
|
- |
|
|
|
- |
|
|
|
648 |
|
|
|
3,299 |
|
|
|
- |
|
|
|
- |
|
|
|
3,299 |
|
Balance
at June 30, 2021 |
|
|
- |
|
|
|
- |
|
|
|
90,316 |
|
|
|
240,755 |
|
|
$ |
- |
|
|
|
(138,089 |
) |
|
|
102,666 |
|
The
accompanying notes are an integral part of these unaudited
condensed consolidated interim financial statements.
ONCOCYTE
CORPORATION
UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In
thousands)
|
|
2022 |
|
|
2021 |
|
|
|
Six
Months Ended |
|
|
|
June 30, |
|
|
|
2022 |
|
|
2021 |
|
|
|
|
|
|
|
|
CASH FLOWS FROM
OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
Net
loss |
|
$ |
(18,591 |
) |
|
$ |
(14,412 |
) |
Adjustments to
reconcile net loss to net cash used in operating activities: |
|
|
|
|
|
|
|
|
Depreciation
expense |
|
|
671 |
|
|
|
327 |
|
Amortization of
intangible assets |
|
|
1,904 |
|
|
|
1,381 |
|
Pro rata loss from
equity method investment in Razor |
|
|
- |
|
|
|
270 |
|
Stock-based
compensation |
|
|
4,242 |
|
|
|
3,286 |
|
Unrealized (gain)
loss on marketable equity securities |
|
|
325 |
|
|
|
(386 |
) |
Amortization of
debt issuance costs |
|
|
11 |
|
|
|
33 |
|
Change in fair
value of contingent consideration |
|
|
(11,015 |
) |
|
|
1,090 |
|
Change in fair
value of Series A redeemable convertible preferred stock second
tranche obligation |
|
|
(305 |
) |
|
|
33 |
|
Deferred income
tax benefit |
|
|
- |
|
|
|
(9,358 |
) |
Gain on
extinguishment of debt (PPP loan) |
|
|
- |
|
|
|
(1,141 |
) |
Accrued severance
from Chronix Biomedical acquisition |
|
|
- |
|
|
|
2,452 |
|
|
|
|
|
|
|
|
|
|
Changes in operating assets and
liabilities: |
|
|
|
|
|
|
|
|
Accounts
receivable |
|
|
(365 |
) |
|
|
(817 |
) |
Lease
liabilities |
|
|
(94 |
) |
|
|
218 |
|
Prepaid expenses
and other assets |
|
|
(773 |
) |
|
|
(103 |
) |
Accounts payable
and accrued liabilities |
|
|
239 |
|
|
|
(766 |
) |
Accrued severance
and liabilities from Chronix Biomedical acquisition |
|
|
(817 |
) |
|
|
- |
|
Net cash used in operating
activities |
|
|
(24,568 |
) |
|
|
(17,893 |
) |
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM
INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
Acquisition of
Insight Genetics, net of cash acquired |
|
|
- |
|
|
|
(607 |
) |
Acquisition of
Razor Genomics asset, net of cash acquired |
|
|
- |
|
|
|
(6,648 |
) |
Acquisition of
Chronix Biomedical, net of cash acquired |
|
|
- |
|
|
|
(4,459 |
) |
Construction in
progress and purchases of furniture and equipment |
|
|
(2,679 |
) |
|
|
(1,452 |
) |
Net cash used in investing
activities |
|
|
(2,679 |
) |
|
|
(13,166 |
) |
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM
FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
Proceeds from
exercise of stock options |
|
|
- |
|
|
|
1,600 |
|
Proceeds from sale
of common shares |
|
|
32,812 |
|
|
|
65,262 |
|
Financing costs to
issue common shares |
|
|
(389 |
) |
|
|
(2,676 |
) |
Proceeds from sale
of redeemable convertible Series A preferred shares |
|
|
4,875 |
|
|
|
- |
|
Financing costs to
issue redeemable convertible Series A preferred shares |
|
|
(93 |
) |
|
|
- |
|
Proceeds from sale
of common shares under at-the-market transactions |
|
|
31 |
|
|
|
6,483 |
|
Financing costs
for at-the-market sales |
|
|
(1 |
) |
|
|
(203 |
) |
Proceeds from exercise of
warrants |
|
|
- |
|
|
|
823 |
|
Common shares
received and retired for employee taxes paid |
|
|
- |
|
|
|
(37 |
) |
Repayment of loan
payable |
|
|
(750 |
) |
|
|
(750 |
) |
Repayment of
financing lease obligations |
|
|
(7 |
) |
|
|
(84 |
) |
Net cash provided by financing
activities |
|
|
36,478 |
|
|
|
70,418 |
|
|
|
|
|
|
|
|
|
|
NET INCREASE IN
CASH, CASH EQUIVALENTS AND RESTRICTED CASH |
|
|
9,231 |
|
|
|
39,359 |
|
|
|
|
|
|
|
|
|
|
CASH, CASH
EQUIVALENTS AND RESTRICTED CASH, BEGINNING |
|
|
37,305 |
|
|
|
8,843 |
|
CASH, CASH
EQUIVALENTS AND RESTRICTED CASH, ENDING |
|
$ |
46,536 |
|
|
$ |
48,202 |
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION |
|
|
|
|
|
|
|
|
Cash paid for
interest |
|
$ |
21 |
|
|
$ |
70 |
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL SCHEDULE OF NONCASH
FINANCING AND INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
Common stock
issued for acquisition of Razor Genomics asset |
|
$ |
- |
|
|
$ |
5,756 |
|
Deferred tax
liability generated from the acquisition of Razor Genomics
asset |
|
|
- |
|
|
|
7,564 |
|
Common stock
issued for acquisition of Chronix Biomedical |
|
|
- |
|
|
|
3,299 |
|
Deferred tax
liability generated from the acquisition of Chronix |
|
|
- |
|
|
|
1,794 |
|
Initial fair value
of contingent consideration at acquisition date |
|
|
- |
|
|
|
42,295 |
|
Assumed liability
from Chronix Acquisition |
|
|
- |
|
|
|
9,294 |
|
Construction in
progress, machinery and equipment purchases included in accounts
payable, accrued liabilities and landlord liability |
|
|
1,331 |
|
|
|
9 |
|
See Note 10 for
additional disclosures around leases |
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these unaudited
condensed consolidated interim financial statements.
ONCOCYTE
CORPORATION
NOTES
TO CONDENSED CONSOLIDATED INTERIM FINANCIAL
STATEMENTS
(UNAUDITED)
1.
Organization,
Description of the Business and Liquidity
Oncocyte
Corporation (“Oncocyte”), incorporated in 2009 in the state of
California, is a molecular diagnostics company focused on
developing and commercializing proprietary laboratory tests to
serve unmet medical needs across the cancer care continuum.
Oncocyte’s mission is to provide actionable information to
physicians and patients at critical decision points to optimize
diagnosis and treatment decisions, improve patient outcomes, and
reduce overall cost of care. Oncocyte has prioritized lung cancer
as its first indication. Lung cancer remains the leading cause of
cancer death in the United States, despite the availability of
molecular testing and novel therapies to treat patients.
Oncocyte’s
first product for commercial release is a proprietary treatment
stratification test called DetermaRx™ that identifies which
patients with early-stage non-small cell lung cancer may benefit
from chemotherapy, resulting in a significantly higher, five-year
survival rate. Beginning in September 2019 through February 23,
2021, Oncocyte held a 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™. On February 24, 2021, Oncocyte completed the purchase
of all the remaining issued and outstanding shares of common stock
of Razor and paid the selling shareholders in total $10
million in cash and issued them Oncocyte common stock having a
market value of $5.7 million
on that date. As a result of the purchase of the Razor common
stock, Oncocyte became the sole shareholder of Razor. The
acquisition of the remaining equity interests was accounted for as
an asset acquisition in accordance with Accounting Standards
Codification (“ASC”) Topic 805-50, Business Combinations.
See Note 3 for a full discussion of the Razor asset
acquisition.
Oncocyte
completed its acquisition of Insight Genetics, Inc. (“Insight”) on
January 31, 2020 (the “Insight Merger Date”) through a merger with
a newly incorporated wholly owned subsidiary of Oncocyte (the
“Insight Merger”) under the terms of an Agreement and Plan of
Merger (the “Insight Merger Agreement”). Prior to the Insight
Merger, Insight was a privately held company specializing in the
discovery and development of the multi-gene molecular,
laboratory-developed diagnostic tests that Oncocyte has branded as
DetermaIO™. DetermaIO™ is a proprietary gene expression assay with
promising data supporting its potential to help identify patients
likely to respond to checkpoint inhibitor drugs. Insight has a
CLIA-certified diagnostic laboratory with the capacity to support
clinical trials or assay design on certain commercially available
analytic platforms that may be used to develop additional
diagnostic tests. Insight also performs Pharma Services in its
CLIA-certified laboratory for pharmaceutical and biotechnology
companies, including testing for biomarker discovery, assay design
and development, clinical trial support, and a broad spectrum of
biomarker tests (“Pharma Services”). The Insight Merger was
accounted for using the acquisition method of accounting in
accordance with ASC 805, which requires, among other things, that
the assets and liabilities assumed be recognized at their fair
values as of the acquisition date. See Note 3 for a full discussion
of the Insight Merger.
On
April 15, 2021 (the “Chronix Merger Date”), Oncocyte completed its
acquisition of Chronix Biomedical, Inc. (“Chronix”) pursuant to an
Agreement and Plan of Merger dated February 2, 2021, amended
February 23, 2021, and amended and restated as of April 15, 2021
(as amended and restated, the “Chronix Merger Agreement”), by and
among Oncocyte, CNI Monitor Sub, Inc., a Delaware corporation and
wholly-owned subsidiary of Oncocyte (“Merger Sub”), Chronix, the
stockholders party to the Chronix Merger Agreement and a party
named as equity holder representative. Pursuant to the Chronix
Merger Agreement, Merger Sub merged with and into Chronix, with
Chronix surviving as a wholly owned subsidiary of Oncocyte (the
“Chronix Merger”). Prior to the Chronix Merger, Chronix was a
privately held molecular diagnostics company, developing blood
tests for use in cancer treatment and organ transplantation.
Through the Chronix Merger, Oncocyte has added to its laboratory
test development pipeline the DetermaCNITM (formerly
TheraSureTM-CNI Monitor), a patented, blood-based test
for immunotherapy monitoring, and VitaGraft™ (formerly
TheraSureTM Transplant Monitor), a blood-based solid
organ transplantation monitoring test. See Note 3 for additional
information about the Chronix Merger.
Other
tests in the development pipeline include DetermaTx™, a test
intended to complement DetermaIO™ by assessing the mutational
status of a tumor to help identify the appropriate targeted
therapy. Oncocyte also plans to initiate the development of
DetermaMx™ as a blood-based test to monitor cancer patients for
recurrence of their disease.
Liquidity
Oncocyte
has incurred operating losses and negative cash flows since
inception and had an accumulated deficit of $206.4 million as of June 30,
2022. 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 since that period through the date of this
Report were not sufficient to cover Oncocyte’s operating expenses.
Oncocyte finances its operations primarily through the sale of
shares of its common stock.
As of
June 30, 2022, Oncocyte had $44.8 million of cash and
cash equivalents and held shares of Lineage Cell Therapeutics, Inc.
(“Lineage”) and AgeX Therapeutics, Inc. (“AgeX”) common stock as
marketable equity securities with a combined fair market value of
$0.6 million. Oncocyte believes
that its current cash, cash equivalents and marketable equity
securities are sufficient to carry out current operations through
at least twelve months from the issuance date of the unaudited
condensed consolidated interim financial statements included in
this Report.
On
June 11, 2021, Oncocyte entered into an at-the-market sales
agreement with BTIG, LLC as sales agent and/or principal (the
“Agent” or “BTIG”) pursuant to which Oncocyte may sell up to an
aggregate of $50,000,000 of shares
of Oncocyte common stock from time to time through the Agent (the
“ATM Offering”).
Between
July 1, 2021 and June 30, 2022, Oncocyte sold 1,123,337
shares of common stock at an average offering price of $5.58 per share, for
gross proceeds of approximately $6.27
million through the ATM Offering. Oncocyte will need to raise
additional capital to finance its operations, including the
development and commercialization of its cancer diagnostic and
other tests, until such time as it is able to generate sufficient
revenues from the commercialization of one or more of its
laboratory tests and other tests, and performing Pharma Services to
cover its operating expenses.
On
April 13, 2022, Oncocyte entered into a securities purchase
agreement (the “Securities Purchase Agreement”) with institutional
accredited investors (the “Investors”), including Broadwood
Capital, L.P. (“Broadwood”), Oncocyte’s largest shareholder, in a
registered direct offering of 11,765 shares of our Series A
Convertible Preferred Stock (the “Series A Preferred Stock”), which
are convertible into a total of 7,689,542 shares of our
common stock, at a conversion price of $1.53 (the “Series A Preferred Stock
Offering”). The purchase price of each share of Series A Preferred
Stock was $850, which included
an original issue discount to the stated value of $1,000 per share. The closing
of the Series A Preferred Stock Offering will occur in two equal
tranches of $5,000,000 each for
aggregate gross proceeds from both closings of $10,000,000. The first
closing occurred on June 1, 2022, and Oncocyte received net
proceeds of approximately $4.9 million from the Series A Preferred
Stock issued from the first tranche. See Note 14 for additional
information about the Series A Preferred Stock Offering.
Further,
on April 13, 2022, Oncocyte entered into an underwriting agreement
(the “Underwriting Agreement”) with BTIG, LLC, as representative of
the underwriters named therein (the “Underwriters”), pursuant to
which Oncocyte agreed to issue and sell to the Underwriters an
aggregate of 26,266,417
shares of common stock, and 26,266,417 warrants to purchase
up to 13,133,208.5 shares of common
stock (“April 2022 Warrants”) (the “Underwritten Offering,” and
collectively with the Series A Preferred Stock Offering, the “April
2022 Offerings”). The Underwritten Offering closed on April 19,
2022. Pursuant to the Underwritten Offering, Broadwood acquired
from us (i) 5,220,654 shares of common stock,
and (ii) 6,003,752 April 2022 Warrants to
purchase up to 3,001,876 shares of common stock
at an exercise price of $1.53 per share. Pura Vida acquired
from us (i) 4,984,093 shares of common stock,
and (ii) 5,731,707 April 2022 Warrants to
purchase up to 2,865,853 shares of common
stock. On April 19, 2022, Oncocyte received net proceeds of
approximately $32.8 million from the Underwritten
Offering of 26,266,417 shares of common stock
and 26,266,417 April 2022 Warrants
to purchase up to 13,133,208.5 shares of common
stock. See Note 14 for additional information about the
Underwritten Offering.
Presently,
Oncocyte is devoting substantially all of its efforts on initial
commercialization efforts for DetermaRx™, completing clinical
development and planning commercialization of DetermaIO™, although
DetermaIO™ is currently available for biopharma diagnostic
development and research use only as a companion test in
immunotherapy drug development to select patients for clinical
trials; continuing development and planning commercialization of
DetermaTxTM and the clinical launch of
VitaGraftTM. While Oncocyte plans to primarily market
its laboratory tests in the United States through its own sales
force, it is also beginning to make marketing arrangements with
distributors in other countries. In order to reduce capital needs
and to expedite the commercialization of any new laboratory tests
that may become available for clinical use, Oncocyte may also
pursue marketing arrangements with other diagnostic companies
through which Oncocyte might receive licensing fees and royalty on
sales, or through which it might form a joint venture to market its
tests and share in net revenues, in the United States or
abroad.
In
addition to general economic and capital market trends and
conditions, Oncocyte’s ability to raise sufficient additional
capital to finance its operations from time to time will depend on
a number of factors specific to Oncocyte’s operations such as
operating revenues and expenses, progress in development of, or in
obtaining reimbursement coverage from Medicare for DetermaIO™ and
other future laboratory tests that Oncocyte may develop or
acquire.
The
availability of financing and Oncocyte’s ability to generate
revenues from operating activities may be adversely impacted by the
ongoing COVID-19 pandemic which could continue to cause deferrals
of cancer surgeries that might otherwise have resulted in the
utilization of DetermaRx™ and deferrals of drug development
clinical trials that might have utilized Oncocyte’s Pharma
Services. The COVID-19 pandemic also could continue to depress
national and international economies and disrupt capital markets,
supply chains, and aspects of Oncocyte’s operations. The extent to
which the ongoing COVID-19 pandemic will ultimately impact
Oncocyte’s business, results of operations, financial condition, or
cash flows is highly uncertain and difficult to predict because it
will depend on many factors that are outside Oncocyte’s
control.
The
unavailability or inadequacy of financing or revenues to meet
future capital needs could force Oncocyte to modify, curtail,
delay, or suspend some or all aspects of planned operations. Sales
of additional equity securities could result in the dilution of the
interests of its shareholders. Oncocyte cannot assure that adequate
financing will be available on favourable terms, if at
all.
2.
Basis of Presentation
and Summary of Significant Accounting
Policies
Basis
of presentation
The
unaudited condensed consolidated interim financial statements
presented herein, and discussed below, have been prepared in
accordance with U.S. generally accepted accounting principles
(“GAAP”) for interim financial information and with the
instructions to Form 10-Q and Article 8 of Regulation S-X. In
accordance with those rules and regulations, certain information
and footnote disclosures normally included in comprehensive
consolidated financial statements have been condensed or omitted.
The condensed consolidated balance sheets as of December 31, 2021
was derived from the audited consolidated financial statements at
that date. These unaudited condensed consolidated interim financial
statements should be read in conjunction with the audited financial
statements and notes thereto included in Oncocyte’s Annual Report
on Form 10-K for the year ended December 31, 2021.
Principles
of consolidation
On
January 31, 2020, with the consummation of the Insight Merger,
Insight became a wholly owned subsidiary of Oncocyte, and on that
date Oncocyte began consolidating Insight’s operations and results
with Oncocyte’s operations and results (see Note 3). On February
24, 2021, with the acquisition of the remaining equity interests in
Razor, Razor became a wholly owned subsidiary of Oncocyte, and on
that date Oncocyte began consolidating Razor’s results with
Oncocyte’s operations and results (see Note 3). On April 15, 2021,
with the acquisition of Chronix, Chronix became a wholly owned
subsidiary of Oncocyte, and on that date Oncocyte began
consolidating Chronix’s operations and results with Oncocyte’s
operations and results (see Note 3).
The
accompanying unaudited condensed consolidated interim financial
statements, in the opinion of management, include all adjustments,
consisting only of normal recurring adjustments, necessary for a
fair presentation of Oncocyte’s financial condition and results of
operations. The unaudited condensed consolidated results of
operations are not necessarily indicative of the results to be
expected for any other interim period or for the entire year. All
material intercompany accounts and transactions have been
eliminated in consolidation.
Use
of estimates
The
preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities, and contingent
assets and liabilities, at the date of the unaudited condensed
consolidated financial statements, and the reported amounts of
revenues and expenses during the reporting period. On an ongoing
basis, management evaluates estimates which are subject to
significant judgment, including, but not limited to, valuation
methods used, assumptions requiring the use of judgment to prepare
financial projections, timing of potential commercialization of
acquired in-process intangible assets, applicable discount rates,
probabilities of the likelihood of multiple outcomes of certain
events related to contingent consideration, comparable companies or
transactions, determination of fair value of the assets acquired
and liabilities assumed including those relating to contingent
consideration, the valuation of Series A redeemable convertible
preferred stock second tranche obligation, revenue recognition,
assumptions related to going concern assessments, allocation of
direct and indirect expenses, useful lives associated with
long-lived intangible assets, key assumptions in operating and
financing leases including incremental borrowing rates, loss
contingencies, valuation allowances related to deferred income
taxes, and assumptions used to value debt and stock-based awards
and other equity instruments. Actual results may differ materially
from those estimates.
Similarly,
Oncocyte assessed certain accounting matters that generally require
consideration of forecasted financial information. The accounting
matters assessed included, but were not limited to, Oncocyte’s
equity investments, the carrying value of goodwill, acquired
in-process intangible assets and other long-lived assets. Those
assessments as well as other estimates referenced above were made
in the context of information reasonably available to
Oncocyte.
Business
combinations and fair value measurements
Oncocyte
accounts for business combinations in accordance with ASC 805,
which requires the purchase consideration transferred to be
measured at fair value on the acquisition date in accordance with
ASC 820, Fair Value Measurement. ASC 820 establishes a
single authoritative definition of fair value, sets out a framework
for measuring fair value and expands on required disclosures about
fair value measurement. Fair value is defined as the exchange price
that would be received for an asset or paid to transfer a liability
(an exit price) in the principal or most advantageous market for
the asset or liability in an orderly transaction between market
participants on the measurement date. Valuation techniques used to
measure fair value must maximize the use of observable inputs and
minimize the use of unobservable inputs to the extent possible. ASC
820 describes a fair value hierarchy based on three levels of
inputs, of which the first two are considered observable and the
last unobservable, that may be used to measure fair value, which
are the following:
●
Level 1 – Quoted prices in active markets for identical
assets and liabilities.
●
Level 2 – Inputs other than Level 1 that are observable,
either directly or indirectly, such as quoted market prices for
similar assets or liabilities; quoted prices in markets that are
not active; or other inputs that are observable or can be
corroborated by observable market data for substantially the full
term of the assets or liabilities.
●
Level 3 – Unobservable inputs that are supported by little
or no market activity and that are significant to the fair value of
the assets or liabilities.
When
a part of the purchase consideration consists of shares of Oncocyte
common stock, Oncocyte calculates the purchase price attributable
to those shares, a Level 1 security, by determining the fair value
of those shares as of the acquisition date based on prices quoted
on the principal national securities exchange on which the shares
traded. Oncocyte recognizes estimated fair values of the tangible
assets and identifiable intangible assets acquired, including
in-process research and development, and liabilities assumed,
including any contingent consideration, as of the acquisition date.
Goodwill is recognized as any amount of the fair value of the
tangible and identifiable intangible assets acquired and
liabilities assumed in excess of the consideration transferred. ASC
805 precludes the recognition of an assembled workforce as an
asset, effectively subsuming any assembled workforce value into
goodwill.
In
determining fair value, Oncocyte utilizes valuation techniques that
maximize the use of observable inputs and minimize the use of
unobservable inputs to the extent possible, and also considers
counterparty credit risk in its assessment of fair value. For the
periods presented, Oncocyte has no financial assets or liabilities
recorded at fair value on a recurring basis, except for cash and
cash equivalents consisting of money market funds and marketable
equity securities of Lineage and AgeX common stock held by Oncocyte
described below. These assets are measured at fair value using the
period-end quoted market prices as a Level 1 input. Oncocyte also
has certain contingent consideration liabilities which are carried
at fair value based on Level 3 inputs (see Note 3).
The
carrying amounts of cash equivalents, prepaid expenses and other
current assets, accounts payable, accrued expenses and other
current liabilities approximate fair values because of the
short-term nature of these items.
The
carrying amount of the loan payable to Silicon Valley Bank
approximates fair value because the loan bears interest at a
floating market rate (see Note 12).
Cash, cash equivalents, and restricted cash
The
Company’s reconciliation of cash and cash equivalents, and
restricted cash reported within the unaudited condensed
consolidated balance sheets that sum to the total of the same
amounts shown in the unaudited condensed consolidated statements of
cash flows were as follows (in thousands):
Schedule of Cash and Cash Equivalents and
Restricted Cash
|
|
June
30, |
|
|
December
31, |
|
|
|
2022 |
|
|
2021 |
|
Cash
and cash equivalents |
|
$ |
44,836 |
|
|
$ |
35,605 |
|
Restricted
cash |
|
|
1,700 |
|
|
|
1,700 |
|
Cash,
cash equivalents and restricted cash shown in the condensed
statements of cash flows |
|
$ |
46,536 |
|
|
$ |
37,305 |
|
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 3 and
4).
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 3 and
4. As of June 30, 2022, there has been no impairment of goodwill
and intangible assets.
Long-lived
intangible assets
Long-lived
intangible assets, consisting primarily of acquired customer
relationships, are stated at acquired cost, less accumulated
amortization. Amortization expense is computed using the
straight-line method over the estimated useful life of 5 years (see
Notes 3 and 4).
Contingent
consideration liabilities
Certain
of Oncocyte’s asset and business acquisitions involve the potential
for future payment of consideration to third-parties and former
selling shareholders in amounts determined as a percentage of
future net revenues generated, or upon attainment of revenue
milestones, from Pharma Services or laboratory tests, as
applicable, or annual minimum royalties to certain licensors, as
provided in the applicable agreements. The fair value of such
liabilities is determined using unobservable inputs. These inputs
include the estimated amount and timing of projected cash flows and
the risk-adjusted discount rate used to present value the cash
flows (see Notes 3 and 4). These obligations are referred to as
contingent consideration.
ASC
805 requires that contingent consideration be estimated and
recorded at fair value as of the acquisition date as part of the
total consideration transferred. Contingent consideration is an
obligation of the acquirer to transfer additional assets or equity
interests to the selling shareholders in the future if certain
future events occur or conditions are met, such as the attainment
of product development milestones. Contingent consideration also
includes additional future payments to selling shareholders based
on achievement of components of earnings, such as “earn-out”
provisions or percentage of future revenues, including royalties
paid to the selling shareholders based on a percentage of certain
revenues generated.
The
fair value of contingent consideration after the acquisition date
is reassessed by Oncocyte as changes in circumstances and
conditions occur, with the subsequent change in fair value recorded
in the condensed consolidated statements of operations. Changes in
key assumptions can materially affect the estimated fair value of
contingent consideration liabilities and, accordingly, the
resulting gain or loss that Oncocyte records in its unaudited
condensed consolidated interim financial statements. See Notes 3
and 4 for a full discussion of these liabilities.
Investments
in capital stock of privately held companies
Oncocyte
evaluates whether investments held in common stock of other
companies require consolidation of the company under, first, the
variable interest entity (“VIE”) model, and then under the voting
interest model in accordance with accounting guidance for
consolidations under Accounting Standards Codification (“ASC”)
810-10. If consolidation of the entity is not required under either
the VIE model or the voting interest model, Oncocyte determines
whether the equity method of accounting should be applied in
accordance with ASC 323, Investments – Equity Method and Joint
Ventures. The equity method applies to investments in common
stock or in-substance common stock if Oncocyte exercises
significant influence over, but does not control, the entity, where
significant influence is typically represented by ownership of 20%
or more, but less than majority ownership, of the voting interests
of a company.
Oncocyte
initially records equity method investments at fair value on the
date of the acquisition with subsequent adjustments to the
investment balance based on Oncocyte’s pro rata share of earnings
or losses from the investment.
Since
February 24, 2021, the date of Oncocyte’s acquisition of the
remaining interests in Razor, the Razor entity’s financial
statements have been consolidated with Oncocyte (see Notes 3 and
4).
Impairment
of long-lived assets
Oncocyte
assesses the impairment of long-lived assets whenever events or
changes in circumstances indicate that such assets might be
impaired and the carrying value may not be recoverable. Oncocyte’s
long-lived assets consist primarily of intangible assets,
right-of-use assets for operating leases, customer relationships,
and machinery and equipment. If events or changes in circumstances
indicate that the carrying amount of an asset may not be
recoverable and the expected undiscounted future cash flows
attributable to the asset are less than the carrying amount of the
asset, an impairment loss, equal to the excess of the carrying
value of the asset over its fair value, is recorded. As of June 30,
2022, there has been no impairment of long-lived assets.
Revenue
recognition
Pursuant
to ASC 606, revenues are recognized when control of services
performed is transferred to customers, in an amount that reflects
the consideration Oncocyte expects to be entitled to in exchange
for those services. ASC 606 provides for a five-step model that
includes:
(i)
identifying the contract with a customer,
(ii)
identifying the performance obligations in the contract,
(iii)
determining the transaction price,
(iv)
allocating the transaction price to the performance obligations,
and
(v)
recognizing revenue when, or as, an entity satisfies a performance
obligation.
Oncocyte
determines transaction prices based on the amount of consideration
we expect to receive for transferring the promised goods or
services in the contract. Consideration may be fixed, variable, or
a combination of both. The Company considers any constraints on the
variable consideration and includes in the transaction price
variable consideration to the extent it is deemed probable that a
significant reversal in the amount of cumulative revenue recognized
will not occur when the uncertainty associated with the variable
consideration is subsequently resolved.
DetermaRx™ testing revenue
Oncocyte
generates revenue from performing DetermaRx™ tests on clinical
samples through orders received from physicians, hospitals, and
other healthcare providers. In determining whether all the revenue
recognition criteria (i) through (v) above are met with respect to
DetermaRx™ tests, each test result is considered a single
performance obligation and is generally considered complete when
the test result is delivered or made available to the prescribing
physician electronically, and, as such, there are no shipping or
handling fees incurred by Oncocyte or billed to customers. Although
Oncocyte bills a list price for all tests ordered and completed for
all payer types, Oncocyte considers constraints on the variable
consideration when recognizing revenue for DetermaRx™. Because
DetermaRx™ is a novel test and there are no current reimbursement
arrangements with third-party payers other than Medicare, the
transaction price represents variable consideration. Application of
the constraint for variable consideration is an area that requires
significant judgment. For all payers other than Medicare, Oncocyte
must consider the novelty of the test, the uncertainty of receiving
payment, or being subject to claims for a refund, from payers with
whom it does not have a sufficient payment collection history or
contractual reimbursement agreements. Accordingly, for those
payers, Oncocyte expects to continue to recognize revenue upon
payment until it has a sufficient history to reliably estimate
payment patterns or has contractual reimbursement arrangements, or
both, in place.
During
the three months ended March 31, 2021, after accumulating
additional history of cash receipts and other factors considered by
management for Medicare Advantage covered tests, including the
recently published Medicare rate which management believes entitles
Oncocyte to get reimbursed for Medicare Advantage covered tests at
the Medicare rate, Oncocyte commenced recognizing Medicare
Advantage covered tests on an accrual basis when the test result is
delivered or made available to the prescribing physician
electronically, upon considering no further constraints on the
variable consideration, at the Medicare rate.
As of
June 30, 2022, Oncocyte had accounts receivable of $1.7 million from Medicare and
Medicare Advantage covered DetermaRx™ tests (see Note 7). As of
December 31, 2021, Oncocyte had accounts receivable of $1.1 million from Medicare
covered DetermaRx™ tests.
Pharma services revenue
Revenues
recognized include Pharma Services performed by Oncocyte’s Insight
and Chronix subsidiaries for its pharmaceutical customers,
including testing for biomarker discovery, assay design and
development, clinical trial support, and a broad spectrum of
biomarker tests. These Pharma Services are generally performed
under individual scope of work (“SOW”) arrangements or license
agreements (together with SOW the “Pharma Services Agreements”)
with specific deliverables defined by the customer. Pharma Services
are performed on a (i) time and materials basis or (ii) per test
completed basis. Upon completion of the service to the customer in
accordance with a Pharma Services Agreement, Oncocyte has the right
to bill the customer for the agreed upon price (either on a per
test or per deliverable basis) and recognizes Pharma Service
revenue at that time. Insight identifies each sale of its Pharma
Service offering as a single performance obligation. Chronix
identifies the processing of test samples as a separate performance
obligation (considered a series) within license agreements with
customers.
Completion
of the service and satisfaction of the performance obligation is
typically evidenced by access to the report or test made available
to the customer or any other form or applicable manner of delivery
defined in the Pharma Services Agreements. However, for certain
SOWs under which work is performed pursuant to the customer’s
highly customized specifications, Oncocyte has the enforceable
right to bill the customer for work completed, rather than upon
completion of the SOW. For those SOWs, Oncocyte recognizes revenue
over a period during which the work is performed using a formula
that accounts for expended efforts, generally measured in labor
hours, as a percentage of total estimated efforts for the
completion of the SOW. As performance obligations are satisfied
under the Pharma Services Agreements, any amounts earned as revenue
and billed to the customer are included in accounts receivable. Any
revenues earned but not yet billed to the customer as of the date
of Oncocyte’s consolidated financial statements are recorded as
contract assets and are included in prepaids and other current
assets as of the financial statement date. Amounts recorded in
contract assets are reclassified to accounts receivable in
Oncocyte’s consolidated financial statements when the customer is
invoiced according to the billing schedule in the
contract.
Oncocyte
establishes an allowance for doubtful accounts based on the
evaluation of the collectability of its Pharma Services accounts
receivables after considering a variety of factors, including the
length of time receivables are past due, significant events that
may impair the customer’s ability to pay, such as a bankruptcy
filing or deterioration in the customer’s operating results or
financial position, reasonable and supportable forecast that affect
the collectability of the reported amount, and historical
experience. If circumstances related to customers change, estimates
of the recoverability of receivables would be further adjusted.
Oncocyte continuously monitors collections and payments from
customers and maintains a provision for estimated credit losses and
uncollectible accounts, if any, based upon its historical
experience and any specific customer collection issues that have
been identified. Amounts determined to be uncollectible are written
off against the allowance for doubtful accounts. As of June 30,
2022, Oncocyte has not recorded any losses or allowance for
doubtful accounts on its account receivables from Pharma
Services.
As of
June 30, 2022, Oncocyte had accounts receivable from Pharma
Services customers of $0.1
million, as compared to $0.4 million as of December
31, 2021 (see Note 7).
Licensing revenue
Revenues
recognized includes licensing revenue derived from agreements with
customers for exclusive rights to market Oncocyte’s proprietary
testing technology. Under the agreements, Oncocyte grants exclusive
rights to certain trademarks and technology of Oncocyte for the
purpose of marketing Oncocyte’s tests within a defined geographic
territory. A license agreement may specify milestone deliverables
or performance obligations, for which Oncocyte recognizes revenue
when its licensee confirms the completion of Oncocyte’s performance
obligation. A licensing agreement may also include ongoing sales
support from Oncocyte and typically includes non-refundable
licensing fees and per-test Pharma Services revenues discussed
above, for which Oncocyte treats the licensing of the technology,
trademarks, and ongoing support as a single performance obligation
satisfied by the passage of time over the term of the
agreement.
Cost
of revenues
Cost
of revenues generally consists of cost of materials, direct labor
including benefits, bonus and stock-based compensation, equipment
and infrastructure expenses, clinical sample related costs
associated with performing DetermaRx™ tests and Pharma Services,
providing deliverables according to our licensing agreements,
license fees due to third parties, and amortization of acquired
intangible assets such as the Razor asset and customer relationship
intangible assets. Infrastructure expenses include depreciation of
laboratory equipment, allocated rent costs, leasehold improvements,
and allocated information technology costs for operations at
Oncocyte’s CLIA laboratories in California and Tennessee. Costs
associated with generating the revenues are recorded as the tests
or services are performed regardless of whether revenue was
recognized. Royalties or revenue share payments for licensed
technology calculated as a percentage of revenues generated using
the associated technology are recorded as expenses at the time the
related revenues are recognized.
Research
and development expenses
Research
and development expenses are comprised of costs incurred to develop
technology, which include salaries and benefits (including
stock-based compensation), laboratory expenses (including reagents
and supplies used in research and development laboratory work),
infrastructure expenses (including allocated facility occupancy
costs), and contract services and other outside costs. Indirect
research and development expenses are allocated primarily based on
headcount, as applicable, and include rent and utilities, common
area maintenance, telecommunications, property taxes, and
insurance. Research and development costs are expensed as
incurred.
Sales
and marketing expenses
Sales
and marketing expenses consist primarily of personnel costs and
related benefits, including stock-based compensation, trade show
expenses, branding and positioning expenses, and consulting fees.
Sales and marketing expenses also include indirect expenses for
applicable overhead allocated based on headcount, and include
allocated costs for rent and utilities, common area maintenance,
telecommunications, property taxes, and insurance.
General
and administrative expenses
General
and administrative expenses consist primarily of compensation and
related benefits (including stock-based compensation) for executive
and corporate personnel, professional and consulting fees, rent and
utilities, common area maintenance, telecommunications, property
taxes, and insurance.
Net
loss per common share
Basic
loss per share is computed by dividing the net loss applicable to
common stockholders after deducting cumulative unpaid dividends and
accretion of the preferred stock, by the weighted average number of
shares of common stock outstanding during the year. Diluted loss
per share is computed by dividing the net loss applicable to common
stockholders after deducting cumulative unpaid dividends and
accretion of the preferred stock, by the weighted average number of
common shares outstanding plus the number of additional common
shares that would have been outstanding if all dilutive potential
common shares had been issued, using the treasury stock method or
the if-converted method, or the two-class method for participating
securities, whichever is more dilutive. Potential common shares are
excluded from the computation if their effect is
antidilutive.
All
common stock equivalents are antidilutive because Oncocyte reported
a net loss for all periods presented. The following table presents
the calculation of basic and diluted loss per share of common stock
(in thousands):
Common Stock Computation of Diluted Net Loss
Per Share of Common Stock
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
|
|
Three
Months Ended |
|
|
Six
Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to
Oncocyte Corporation |
|
$ |
(8,300 |
) |
|
$ |
(10,493 |
) |
|
$ |
(18,591 |
) |
|
$ |
(14,412 |
) |
Dividend on Series A redeemable
convertible preferred stock |
|
|
(29 |
) |
|
|
- |
|
|
|
(29 |
) |
|
|
- |
|
Accretion of Series A redeemable
convertible preferred stock |
|
|
(43 |
) |
|
|
- |
|
|
|
(43 |
) |
|
|
- |
|
Net loss at attributable to common
stockholders - Basic and Diluted |
|
$ |
(8,372 |
) |
|
$ |
(10,493 |
) |
|
$ |
(18,663 |
) |
|
$ |
(14,412 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares used in
computing net loss per share attributable to common stockholders -
Basic and Diluted |
|
|
113,042 |
|
|
|
89,758 |
|
|
|
102,700 |
|
|
|
85,961 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per common
share |
|
$ |
(0.07 |
) |
|
$ |
(0.12 |
) |
|
$ |
(0.18 |
) |
|
$ |
(0.17 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Anti-dilutive
potential common shares excluded from the computation of diluted
net loss per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options |
|
|
14,611 |
|
|
|
3,941 |
|
|
|
13,132 |
|
|
|
2,856 |
|
Warrants |
|
|
16,892 |
|
|
|
3,129 |
|
|
|
16,892 |
|
|
|
3,129 |
|
Series A redeemable convertible
preferred stock |
|
|
6 |
|
|
|
- |
|
|
|
6 |
|
|
|
- |
|
Total |
|
|
31,509 |
|
|
|
7,070 |
|
|
|
30,030 |
|
|
|
5,985 |
|
Leases
Oncocyte
accounts for leases in accordance with ASC 842, Leases.
Oncocyte determines if an arrangement is a lease at inception.
Leases are classified as either financing or operating, with
classification affecting the pattern of expense recognition in the
condensed consolidated statements of operations. Under the
available practical expedients for the adoption of ASC 842,
Oncocyte accounts for the lease and non-lease components as a
single lease component. Oncocyte recognizes right-of-use (“ROU”)
assets and lease liabilities for leases with terms greater than
twelve months in the condensed consolidated balance sheet. ROU
assets represent the right to use an underlying asset during the
lease term and lease liabilities represent the obligation to make
lease payments arising from the lease. Operating lease ROU assets
and liabilities are recognized at commencement date based on the
present value of lease payments over the lease term. As most leases
do not provide an implicit rate, Oncocyte uses an incremental
borrowing rate based on the information available at commencement
date in determining the present value of lease payments. Oncocyte
uses the implicit rate when it is readily determinable. The
operating lease ROU asset also includes any lease payments made and
excludes lease incentives. Lease terms may include options to
extend or terminate the lease when it is reasonably certain that
Oncocyte will exercise that option. Lease expense for lease
payments is recognized on a straight-line basis over the lease
term. Operating leases are included as right-of-use assets in
machinery and equipment, and ROU lease liabilities, current and
long-term, in the condensed consolidated balance sheets. Financing
leases are included in machinery and equipment, and in financing
lease liabilities, current and long-term, in the condensed
consolidated balance sheets. Oncocyte discloses the amortization of
our ROU assets and operating lease payments as a net amount,
“Amortization of right-of-use assets and liabilities”, on the
condensed consolidated statements of cash flows. Based on the
available practical expedients under the standard, Oncocyte elected
not to capitalize leases that have terms of twelve months or
less.
During
2020 and 2021, Oncocyte entered into various operating leases and
an embedded operating lease in accordance with ASC 842 discussed in
Note 10. Oncocyte’s accounting for financing leases remained
substantially unchanged.
Accounting
for Lineage and AgeX shares of common stock
Oncocyte
accounts for the shares of Lineage and AgeX common stock it holds
as marketable equity securities in accordance with ASC 320-10-25,
Investments – Debt and Equity Securities, as amended by
Accounting Standards Update (“ASU”) 2016-01, Financial
Instruments–Overall: Recognition and Measurement of Financial
Assets and Financial Liabilities, as the shares have a readily
determinable fair value quoted on the NYSE American and are held
principally to meet future working capital purposes, as necessary.
The securities are measured at fair value, with related gains and
losses in the value of such securities recorded in the condensed
consolidated statements of operations in other income (expense),
and are reported as current assets on the condensed consolidated
balance sheets based on the closing trading price of the security
as of the date being presented.
As of
June 30, 2022 and December 31, 2021, Oncocyte held 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
$0.6 million and
$0.9 million,
respectively.
Deferred
revenue
In
June 2018 and subsequently amended in June 2019, Chronix and a
medical diagnostic service company in Germany (“the German
customer”) entered into a licensing and testing service agreement
(“the German agreement”) for intellectual property related to
DetermaCNITM and VitaGraft™. Under the terms of the
agreement, Chronix received from the German customer an upfront
payment of €3.7 million, less
applicable VAT obligations, which Chronix recognized ratably over
the contract term of 3.5 years. The
German agreement contains a stipulation that requires Chronix to
refund to the German customer a portion of the upfront fee on a pro
rata basis if the German agreement is terminated prior to December
31, 2021. The deferred revenue of $738,000 recorded at the acquisition
date represents the refund Oncocyte would pay to the German
customer should it terminate the agreement prior to the agreed upon
term. As of December 31, 2021, Oncocyte has fully amortized the
deferred revenue and recorded revenue ratably over the remaining
period as the German customer’s refund rights expire.
Recently
issued accounting pronouncements not yet adopted
The
following accounting standards, which are not yet effective, are
presently being evaluated by Oncocyte to determine the impact that
it might have on its consolidated financial statements.
In
June 2016, the Financial Accounting Standards Board (“FASB”) issued
Accounting Standards Update (“ASU”) No. 2016-13, Financial
Instruments-Credit Losses (Topic 326): Measurement of Credit Losses
on Financial Instruments and subsequent amendments to the initial
guidance under ASU 2018-19, ASU 2019-04, ASU 2019-05 and ASU
2019-10, which amends the current approach to estimate credit
losses on certain financial assets, including trade and other
receivables. Generally, this amendment requires entities to
establish a valuation allowance for the expected lifetime losses of
these certain financial assets. Upon the initial recognition of
such assets, which will be based on, among other things, historical
information, current conditions, and reasonable supportable
forecasts. Subsequent changes in the valuation allowance are
recorded in current earnings and reversal of previous losses are
permitted. Currently, U.S. GAAP requires entities to write down
credit losses only when losses are probable and loss reversals are
not permitted. The update will be effective for Oncocyte in the
first quarter of 2023. Early adoption is permitted. Oncocyte is
currently evaluating the impact the adoption of this standard will
have on its consolidated financial statements and related
disclosures.
In
October 2021, the FASB issued ASU No. 2021-08, Business
Combinations (Topic 805): Accounting for Contract Assets and
Contract Liabilities from Contracts with Customers, to provide
specific guidance to eliminate diversity in practice on how to
recognize and measure acquired contract assets and contract
liabilities from revenue contracts from customers in a business
combination consistent with revenue contracts with customers not
acquired in an acquisition. The amendments in this update provide
that the acquirer should consider the terms of the acquired
contracts, such as timing of payment, identify each performance
obligation in the contracts, and allocate the total transaction
price to each identified performance obligation on a relative
standalone selling price basis as of contract inception (that is,
the date the acquiree entered into the contracts) or contract
modification to determine what should be recorded at the
acquisition date. These amendments are effective for the Company
beginning with fiscal year 2023. The impact of the adoption of the
amendments in this update will depend on the magnitude of any
customer contracts assumed in a business combination in 2023 and
beyond.
COVID-19
impact and related risks
The
ongoing global outbreak of COVID-19, and the various attempts
throughout the world to contain it, have created significant
volatility, uncertainty and disruption. In response to government
directives and guidelines, health care advisories and employee and
other concerns, Oncocyte has altered certain aspects of its
operations. A number of Oncocyte’s employees have had to work
remotely from home and those on site have had to follow Oncocyte’s
social distance guidelines, which could impact their productivity.
COVID-19 could also disrupt Oncocyte’s operations due to
absenteeism by infected or ill members of management or other
employees, or absenteeism by members of management and other
employees who cannot effectively work remotely but who elect not to
come to work due to the illness affecting others in Oncocyte’s
office or laboratory facilities, or due to quarantines.
In
addition to operational adjustments, the consequences of the
COVID-19 pandemic have led to uncertainties related to Oncocyte’s
business growth and ability to forecast the demand for its
laboratory tests and Pharma Services and resulting revenues.
Concerns over available hospital, staffing, equipment, and other
resources, and the risk of exposure to the virus, have led to
delays in early-stage lung cancer surgeries and clinical trials of
drugs under development by pharma companies, and the continued
deferral of lung cancer surgeries and drug development clinical
trials due to resurgence in COVID-19 cases could continue to result
in delayed or reduced use of DetermaRx™ and Oncocyte’s Pharma
Services.
It is
possible that impacts of COVID-19 on Oncocyte’s operations or
revenues or its access to capital could prevent Oncocyte from
complying, or could result in a material noncompliance, with one or
more obligations or covenants under material agreements to which
Oncocyte is a party, with the result that Oncocyte would be in
material breach of the applicable obligation, covenant, or
agreement. Any such material breach could cause Oncocyte to incur
material financial liabilities or an acceleration of the date for
paying a financial obligation to the other party to the applicable
agreement, or could cause Oncocyte to lose material contractual
rights, such as rights to use leased equipment or laboratory or
office space, or rights to use licensed patents or other
intellectual property, the use of which is material to Oncocyte’s
business. Similarly, it is possible that impacts of COVID-19 on the
business, operations, or financial condition of any third party
with whom Oncocyte has a contractual relationship could cause the
third party to be unable to perform its contractual obligations to
Oncocyte, resulting in Oncocyte’s loss of the benefits of a
contract that could be material to Oncocyte’s business.
The
full extent to which the COVID-19 pandemic and the various
responses to it might impact Oncocytes’ business, operations and
financial results will depend on numerous evolving factors that are
not subject to accurate prediction and that are beyond Oncocyte’s
control.
3.
Business
Combinations
Acquisition of Insight Genetics, Inc.
On
January 31, 2020 (the “Insight Merger Date”), Oncocyte completed
its acquisition of Insight pursuant to the Insight Merger
Agreement.
Merger Consideration at Closing
Under
the terms of the Insight Merger Agreement, Oncocyte agreed to pay
$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 Insight Merger Date but were placed
in an escrow account and was to 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 Insight
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
Insight Merger Agreement.
In
March 2021, in accordance with the Insight Merger Agreement, the
Cash Holdback was paid and the Stock Holdback was released from
escrow to the selling shareholders.
Milestone Payments (Milestone Contingent
Consideration)
In
addition to the Initial Merger Consideration, Oncocyte may also pay
contingent consideration of up to $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) $1.5 million for 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. As of June 30, 2022,
no milestones have been met
and no payments have been made.
Revenue Share (Royalty Contingent
Consideration)
As
additional consideration for Insight’s shareholders, the Insight
Merger Agreement provides for Oncocyte to pay a revenue share of
not more than ten percent of net collected revenues for current
Insight pharma service offerings over a period of ten years, and a
tiered revenue share percentage of net collected revenues through
the end of the technology lifecycle if certain new cancer tests are
developed and commercialized using Insight technology (“Royalty
Contingent Consideration”). As of June 30, 2022, the royalty
contingent consideration has not been met and no payments have been
made.
Registration Rights
Pursuant
to the Insight Merger Agreement, Oncocyte filed a registration
statement with the SEC to register the resale of the shares of
common stock under the Securities Act of 1933, as amended (the
“Securities Act”) issued in connection with the Insight Merger,
which the SEC declared effective in August 2020.
Workforce
In
connection with the closing of the Insight Merger, Oncocyte did not
assume sponsorship of the Insight Equity Incentive Plan.
Accordingly, the Insight Equity Incentive Plan and all related
stock options to purchase shares of Insight common stock
outstanding immediately prior to the Insight Merger were cancelled
on the Insight Merger Date for no consideration. At the Insight
Merger Date, all of Insight’s employees ceased employment with
Insight, and Oncocyte offered employment to certain of those former
Insight employees, principally in laboratory roles and certain
administrative roles (“New Oncocyte Employees”), and granted new
equity awards to the New Oncocyte Employees under the Oncocyte 2018
Equity Incentive Plan. All Oncocyte stock option awards granted to
the New Oncocyte Employees have vesting terms and conditions
consistent with stock options granted to most other Oncocyte
employees.
Aggregate Merger Consideration and Purchase Price
Allocation
The
calculation of the aggregate merger consideration, consisting of
the Initial Merger Consideration, Milestone Contingent
Consideration and Royalty Contingent Consideration (the “Aggregate
Merger Consideration”) transferred on January 31, 2020, at fair
value, is shown in the following table (in thousands, except for
share and per share amounts). The Milestone Contingent
Consideration and the Royalty Contingent Consideration are
collectively referred to as “Contingent Consideration”.
Schedule of Fair Value of Aggregate Merger
Consideration
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 Insight 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 Insight 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
Insight Merger Date. The fair values of the identifiable intangible
assets acquired and the liabilities assumed was determined based on
inputs that were unobservable and significant to the overall fair
value measurement, which is also based on estimates and assumptions
made by management at the time of the Insight Merger. As such, this
was classified as Level 3 fair value hierarchy measurements and
disclosures in accordance with ASC 820, Fair Value
Measurement.
The
following table sets forth the allocation of the Aggregate Merger
Consideration transferred to Insight’s tangible and identifiable
intangible assets acquired and liabilities assumed on the Insight
Merger Date, with the excess recorded as goodwill (in
thousands):
Schedule of Intangible Assets Acquired and
Liabilities Assumed
|
|
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 |
|
Long-term deferred income tax
liability |
|
|
1,254 |
|
|
|
|
|
|
Total identifiable liabilities assumed
(b) |
|
|
1,810 |
|
|
|
|
|
|
Net assets acquired, excluding
goodwill (a) - (b) = (c) |
|
|
13,943 |
|
|
|
|
|
|
Total cash, contingent consideration,
and stock consideration transferred (d) |
|
|
23,130 |
|
|
|
|
|
|
Goodwill (d) - (c) |
|
|
9,187 |
|
The
valuation of identifiable intangible assets and applicable
estimated useful lives are as follows (in thousands, except for
useful life):
Schedule of Identifiable Intangible Assets
and Estimated Useful Life
|
|
Estimated
Assets |
|
|
Useful Life |
|
|
|
Fair Value |
|
|
(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 Insight’s material
assets and liabilities in connection with the Insight
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 Insight 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 8).
Customer
relationships – Insight provided a range of Pharma Services to
its pharmaceutical customers. None of the Pharma Services are
related to DetermaIO™. The Pharma Service customer relationships
are considered separate long-lived intangible assets under ASC 805
and were valued primarily using the MPEEM discussed above, and will
be amortized over their useful life, estimated to be 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 Insight Merger Date, there were no
uncompleted performance obligations by Insight under any of its
Pharma Services contracts, therefore no deferred revenues were
assumed.
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
8).
Right-of-use
assets and liabilities, machinery and equipment – Insight is a
lessee under an operating lease with a third-party lessor for its
facilities, including its laboratory, in Nashville, Tennessee (the
“Nashville Lease”). In April 2019, the Nashville lease was renewed
by Insight for a five-year term and is classified as an operating
lease under ASC 842. In accordance with ASC 805, when a company
acquired in a business combination is a lessee, the acquirer
initially measures the lease liability and the right-of-use asset
for an acquired operating lease as if the lease is new at the
acquisition date. In other words, the lease liability is measured
at the present value of the remaining lease payments as of the
acquisition date and the right-of-use asset is generally measured
at an amount equal to the lease liability, adjusted for favourable
or unfavourable terms of the lease when compared with market terms.
Since the Nashville Lease was renewed by Insight in proximity to
the Insight Merger Date, the terms of the Nashville Lease were
considered by Oncocyte to be market terms at the Insight Merger
Date. Accordingly, Oncocyte measured the net present value of the
remaining contractual Nashville Lease payments as of the Insight
Merger Date using an incremental borrowing rate consistent with
Oncocyte’s other operating leases and recorded a right-of-use
liability and a corresponding right-of-use asset of $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 Insight
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 Insight Merger, the
Milestone Contingent Consideration and the Royalty Contingent
Consideration discussed below, which are collectively referred to
as the “Contingent Consideration”.
There
are three milestones comprising the Milestone Contingent
Consideration, collectively referred to as the Milestones, in
connection with the Insight Merger which Oncocyte valued and
recorded as part of Contingent Consideration as of the Insight
Merger Date (see table below), which consist of (i) a payment for
clinical trial completion and related data publication (“Milestone
1”), (ii) a payment for an affirmative final local coverage
determination from CMS for a specified lung cancer test (“Milestone
2”), and (iii) a payment for achieving specified CMS reimbursement
milestones (“Milestone 3”). If achieved, any respective Milestone
will be paid at the contractual value shown below, with the payment
made either in cash or in shares of Oncocyte common stock as
determined by Oncocyte. There can be no assurance that any of the
Milestones will be achieved.
There
are two separate components of the Royalty Contingent
Consideration, collectively referred to as the Royalty Payments, in
connection with the Insight Merger which Oncocyte valued and
recorded as part of Contingent Consideration as of the Insight
Merger Date (see table below); Royalty Payments consist of (i)
revenue share payments based on a percentage of future sales
generated from DetermaIO™ (“Royalty 1”), and (ii) revenue share
payments based on percentage of future sales generated from current
Insight Pharma Service offerings, as defined in the Insight Merger
Agreement (“Royalty 2”). There can be no assurance that any
revenues on which the Royalty Payments are based will be generated
from DetermaIO™ or Pharma Service offerings.
The
following table shows the Insight Merger Date contractual payment
amounts, as applicable, and the corresponding fair value of each
respective Contingent Consideration liability (in
thousands):
Schedule of Fair Value of Contingent
Consideration Liability
|
|
|
|
|
Fair |
|
|
|
Contractual |
|
|
Value
on the |
|
|
|
Value |
|
|
Merger Date |
|
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 is achieved. |
|
|
(b) |
As
defined, Royalty Payments are based on a percentage of future
revenues of DetermaIO™ and Pharma Services over their respective
useful life, accordingly there is no fixed contractual value for
the Royalty Contingent Consideration. |
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 15% 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 Insight Merger Date is reassessed by Oncocyte
as changes in circumstances and conditions occur, with the
subsequent change in fair value recorded in Oncocyte’s condensed
consolidated statements of operations.
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 45%. 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 Insight Merger
Date is reassessed by Oncocyte as changes in circumstances and
conditions occur, with the subsequent change in fair value recorded
in Oncocyte’s condensed consolidated statements of operations. As
of June 30, 2022, based on Oncocyte’s reassessment of the
significant assumptions noted above, there was an increase of
approximately $1.4 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 increase was recorded as
change in fair value of contingent consideration in the unaudited
condensed consolidated statements of operations for the six months
ended June 30, 2022.
The
following tables reflect the activity for Oncocyte’s Contingent
Consideration for the six months ended June 30, 2022 and June 30,
2021, measured at fair value using Level 3 inputs (in
thousands):
Schedule of Contingent Consideration, Measured at
Fair Value
|
|
Fair
Value |
|
Balance
at December 31, 2020 |
|
$ |
7,120 |
|
Change
in estimated fair value |
|
|
1,090 |
|
Balance
at June 30, 2021 |
|
$ |
8,210 |
|
|
|
Fair Value |
|
Balance at December 31, 2021 |
|
$ |
7,060 |
|
Change in estimated fair value |
|
|
1,400 |
|
Balance at June 30, 2022 |
|
$ |
8,460 |
|
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 4).
The slight increase to Goodwill as of March 31, 2021 from December
31, 2020 was related to the true up of the final working capital
adjustment paid to the selling shareholders in March
2021.
Goodwill
and identifiable intangible assets are not amortizable or
deductible for tax purposes since these assets are not recognized
for tax purposes.
Asset acquisition of Razor Genomics, Inc.
On
September 30, 2019, Oncocyte completed the purchase of 1,329,870 shares of Razor Series
A Convertible Preferred Stock, par value $0.0001 per share (the
“Razor 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
The
Purchase Agreement and Minority Shareholder Agreements granted
Oncocyte the option to acquire the balance of the outstanding
shares of Razor common stock from Encore under the Purchase
Agreement and from the Minority Shareholders under the Minority
Purchase Agreements (the “Option”) for an additional $10 million in cash and Oncocyte
common stock valued at $5 million in total (the
“Additional Purchase Payment”). Oncocyte 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™.
On
January 29, 2021, the principal shareholder of Razor informed
Oncocyte that the milestone requiring Oncocyte to purchase the
outstanding shares of Razor common stock had been attained under
the Purchase Agreement and Minority Shareholder Purchase
Agreements. On February 24, 2021, Oncocyte exercised the Option and
completed the purchase of all the issued and outstanding shares of
common stock of Razor and paid the selling shareholders in total
$10
million in cash and issued a total of 982,318 shares of
Oncocyte common stock having a market value of $5.7 million on that date. As a
result of Oncocyte exercising the Option and purchasing the Razor
common stock, Oncocyte is now the sole shareholder of
Razor.
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 Razor 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”).
On
February 24, 2021, upon the completion of the outstanding shares of
Razor common stock and consolidation of Razor’s accounts, Oncocyte
obtained control of approximately $3.4 million in
cash from Razor, which was the remaining balance in the Clinical
Trial Expense Reserve account that Razor was using to pay for the
Clinical Trial expenses. Beginning on February 24, 2021, this
balance was transferred to Oncocyte’s control as part of the
acquisition date assets and liabilities recorded from the Razor
entity shown below. Oncocyte will be responsible for all expenses
for the Clinical Trial 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 cost
up to $16
million.
Upon
completion of enrolment of the full number of patients for the
Clinical Trial, Oncocyte will issue to Encore and the Minority
Shareholders shares of Oncocyte common stock with an aggregate
market value at the date of issue equal to $3
million (“Clinical Trial Milestone Payment”).
If the issuance of shares of common stock having a market value of
$3 million would require Oncocyte to issue a number of shares that,
when combined with any shares 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.
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™.
Pursuant
to the Razor Sublicense Agreement, Oncocyte will pay all royalties
and all revenue sharing and earnout payments owed by Razor to
certain third parties with respect to DetermaRx™ revenues,
including the licensor of the patent rights sublicensed to
Oncocyte, but those payments will be deducted from gross revenues
to determine net revenues for the purpose of paying royalties to
the former Razor shareholders. Total royalty and earnout payments
to the former Razor shareholders, the licensor, and other third
parties will be a low double-digit percentage, and in addition
certain milestone payments may become due if cumulative net revenue
benchmarks are reached. Royalties and earnout payments will be
payable on a quarterly basis. This payment obligation will continue
after Oncocyte’s purchase of the Razor common stock from Encore and
the Minority Shareholders.
Laboratory Agreement
Under
the Laboratory Agreement, Oncocyte has assumed Razor’s Laboratory
Agreement payment obligations of $450,000 per year (see Note
10). 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. 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. The
agreement was not extended after the expiration date.
Accounting for the Razor Investment
Beginning
on the Initial Closing and through February 23, 2021, Oncocyte has
accounted for the Razor investment under the equity method of
accounting under ASC 323 because prior to the Additional Purchase
Payment discussed above Oncocyte exercised significant influence
over, but did not control, the Razor entity. Oncocyte did not
control Razor because, among other factors, Oncocyte was entitled
to designate one person to serve on a three-member board of
directors of Razor, with the other two members designated by
Encore. Also, any deadlocked decisions by a Steering Committee of
Oncocyte and Encore representatives that makes decisions with
respect to the Clinical Trial, other than with respect to the
Clinical Trial budget, will be resolved by a member designated by
Encore.
Prior
to February 24, 2021, the aggregate Razor acquisition payments of
$11.245 million incurred
during September 2019 and a $4 million CMS milestone payment
made by Oncocyte during June 2020 under the Development Agreement,
were amortized over a 10-year
useful life of DetermaRx™ and were reflected in Oncocyte’s pro rata
earnings and losses of the equity method investment in Razor in the
condensed consolidated statements of operations. Beginning on
February 24, 2021, Razor’s results are included with Oncocyte’s
consolidated results, primarily consisting of outside research and
development expenses incurred by Razor for the Clinical
Trial.
The
Initial Closing equity method investment in Razor and the
Additional Purchase Payment for the remaining interests in Razor
are both considered an asset acquisition, rather than a business
combination, because, among other factors, Razor had no workforce,
no commercial product (Razor had granted all commercial rights to
Oncocyte), no revenues, no distribution system and no facilities.
Substantially all of the fair value of Razor’s assets at the
Initial Closing and on February 24, 2021 was concentrated in
Razor’s intangible asset, the DetermaRx™ patent and related
know-how, thus satisfying the requirements of the practical screen
test to be considered an asset acquisition in accordance with ASU
2017-01, Business Combinations (Topic 805): Clarifying the
Definition of a Business. Accordingly, no goodwill may be
recognized in an asset acquisition in accordance with ASC
805-50.
As
Razor became a wholly owned subsidiary of Oncocyte on February 24,
2021, the DTA associated with the previous equity method investment
was reversed. There is no tax effect of this reversal as the DTA
had been fully offset by a valuation allowance (see Note 8).
However, upon payment of the Additional Purchase Payment, Oncocyte
recorded an additional step-up to fair value for the Razor
intangible asset under ASC 805-50 for financial reporting purposes
but this “step-up” is not recognized for income tax purposes. As a
result, the fair value adjustment of the Razor intangible asset on
the acquisition date generated a DTL in accordance with ASC 740.
This DTL is computed using the fair value of the intangible assets
on the acquisition date multiplied by Oncocyte’s federal and state
effective income tax rates, using the simultaneous equations method
for asset acquisitions under the guidance provided in ASC
740-10-25-51, which requires that the DTL be recognized as part of
the investment of the acquired asset instead of any immediate
income tax expense or benefit arising from the recognition of the
DTL. Furthermore, ASC 740 allows Oncocyte to treat acquired
available deferred tax assets, such as Razor’s NOLs (subject to the
annual limitation under Section 382 of the Internal Revenue Code)
as available DTAs to offset against the DTLs, as the DTLs are
expected to reverse within the NOL carryforward period. Any excess
DTAs over those DTLs would be assessed for a valuation allowance in
accordance with ASC 740.
On
February 24, 2021, Oncocyte estimated and recorded a net DTL of
$7.1
million after offsetting the acquired available NOLs with the
intangible asset shown in the table below. See Note 8 for a
discussion related to the partial release of Oncocyte’s valuation
allowance pertaining to the DTL generated above in accordance with
ASC 740.
On
February 24, 2021, upon Oncocyte’s acquisition of the outstanding
common stock of Razor, the Razor intangible asset balance recorded
on the acquisition date and included in Intangible Assets was as
follows (in thousands):
Schedule of Acquisition Intangible
Assets
|
|
As of
February 24, |
|
|
|
2021 |
|
Razor intangible
asset recorded on the acquisition date: |
|
|
|
|
Equity method investment
carrying value |
|
$ |
13,147 |
|
Cash paid as Additional Purchase
Payment for the Razor asset |
|
|
10,000 |
|
Oncocyte common stock issued (982,318
shares issued at market value) as Additional Purchase Payment |
|
|
5,756 |
|
Less: cash balance received from Razor
for Clinical Trial expenses |
|
|
(3,352 |
) |
Deferred tax liability generated from
the Razor asset |
|
|
7,077 |
|
Other |
|
|
169 |
|
|
|
|
|
|
Total
Razor investment asset balance as of February 24, 2021 (a) |
|
$ |
32,797 |
|
(a) |
This balance will be amortized over the remaining useful life of
the Razor asset, approximating
8.5 years, as of the February 24, 2021 acquisition date,
with the amortization expense included in “Cost of revenues –
amortization of acquired intangibles” on the condensed consolidated
statements of operations. |
Under
ASC 805-50, for asset acquisitions, the remaining Clinical Trial
Milestone Payment will be recorded only if the consideration is
both probable (milestone has been achieved) and estimable in
accordance with ASC 450, Contingencies, and as of June 30,
2022, no contingent consideration payment was recorded as the
Clinical Trial Milestone Payment was not deemed probable of
achievement as of that date.
Summarized
standalone financial data for Razor from January 1, 2021 through
February 23, 2021
The
unaudited standalone results of operations for Razor prior to being
consolidated with Oncocyte is summarized below (in
thousands):
Schedule of Condensed Statement of
Operations
|
|
For
the period from |
|
|
|
January 1, 2021
through |
|
|
|
February 23, 2021 |
|
Condensed
Statement of Operations (1) |
|
(unaudited) |
|
Research and development
expense |
|
$ |
125 |
|
General and administrative
expense |
|
|
- |
|
Loss from operations |
|
|
(125 |
) |
Net loss |
|
$ |
(125 |
) |
(1) |
The
unaudited condensed standalone statement of operations of Razor is
provided for informational purposes only. Razor’s results for the
period from January 1, 2021 through February 23, 2021 are not
included in Oncocyte’s consolidated results of operations because
Razor was not consolidated with Oncocyte’s financial statements but
had been accounted for under the equity method of accounting since
the September 30, 2019 Initial Closing date, however, Oncocyte’s
results included its pro rata losses from Razor. Beginning on
February 24, 2021, Razor’s results are included with Oncocyte’s
consolidated results, primarily consisting of outside research and
development expenses incurred by Razor for the Clinical Trial
discussed above. |
Acquisition of Chronix Biomedical, Inc.
On
April 15, 2021, the Chronix Merger Date, Oncocyte completed its
acquisition of Chronix pursuant the Chronix Merger
Agreement.
Merger Consideration at Closing
Pursuant
to the Chronix Merger Agreement, Oncocyte agreed to deliver closing
consideration consisting of approximately (i) 648,000 shares of
Oncocyte common stock (the “Closing Shares”), which represents
approximately $1.43 million of Closing Shares
issued to Chronix stockholders and approximately $1.87
million of Closing Shares issued to payoff assumed liabilities,
based on the $5.09 closing price per share
of Oncocyte common stock on the NYSE American on February 1, 2021;
(ii) $4.0 million in cash; and (iii) $550,000 net
settlement of acquirer/acquiree pre-combination activity
(collectively, the “Chronix Closing Consideration”).
Contingent Consideration
As
additional consideration for holders of certain classes and series
of Chronix capital stock, the Chronix Merger Agreement also
provides for Oncocyte to pay “Chronix Contingent Consideration”
consisting of (i) “Chronix Milestone Payments” of up to $14
million in any combination of cash or Oncocyte common stock if
certain milestones specified in the Chronix Merger Agreement are
achieved, (ii) “Royalty Payments” of up to 15% of
net collections for sales of specified tests and products during
the five-to-ten year earnout periods, and (iii) “Transplant Sale
Payments” of up to 75%
of net collections from the sale or license to a third party of
Chronix’s patents for use in transplantation medicine during a
seven-year earnout period.
The
Chronix Closing Consideration and Chronix Contingent Consideration
include amounts payable to certain directors, officers and
employees of Chronix, including officers and employees who are
expected to continue to provide services to Chronix following the
Chronix Merger.
Liabilities
Pursuant
to the Chronix Merger Agreement, to the extent that Oncocyte or any
of its subsidiaries, including Chronix, pays, performs or
discharges an amount of liabilities of Chronix in excess of
$8.25 million (the “Excess
Liabilities”), Oncocyte may offset the Excess Liabilities against
any Chronix Contingent Consideration payments that subsequently
become due and payable pursuant to the Chronix Merger Agreement.
Chronix had Excess Liabilities approximating $4.6 million as of the Chronix
Merger Date. Prior to Chronix equity holders receiving any Chronix
Contingent Consideration payments, all or a partial amount of any
funds that would otherwise be payable as Chronix Contingent
Consideration payments may be used to pay Excess
Liabilities.
Deferred
Revenue - In June 2018 and subsequently amended in June 2019,
Chronix and a medical diagnostic service company in Germany (“the
German customer”) entered into a licensing and testing service
agreement (“the German agreement”) for intellectual property
related to DetermaCNITM and VitaGraftTM.
Under the terms of the agreement, Chronix received from the German
customer an upfront payment of €3.7 million, less
applicable VAT obligations, which Chronix recognized ratably over
the contract term of 3.5 years. The
German agreement contains a stipulation that requires Chronix to
refund to the German customer a portion of the upfront fee on a pro
rata basis if the German agreement is terminated prior to December
31, 2021. The deferred revenue of $738,000 recorded at the acquisition
date represents the refund Oncocyte would pay to the German
customer should it terminate the agreement prior to the agreed upon
term. Oncocyte will amortize the deferred revenue and record
revenue ratably over the remaining period as the German customer’s
refund rights expire. As of June 30, 2022, Oncocyte has fully
amortized the deferred revenue and recorded revenue ratably over
the remaining period as the German customer’s refund rights
expire.
Registration Rights
Pursuant
to the Chronix Merger Agreement, Oncocyte filed a registration
statement with the SEC to register the resale of the shares of
common stock under the Securities Act issued in connection with the
Chronix Merger, which the SEC declared effective in July
2021.
Workforce
At
the Chronix Merger Date, all of Chronix’s employees ceased
employment with Chronix, and Oncocyte offered employment to certain
of those former Chronix employees, principally in laboratory roles
and certain administrative roles in Germany, and granted new equity
awards to them under the Oncocyte 2018 Equity Incentive Plan. All
these Oncocyte stock option awards granted have vesting terms and
conditions consistent with stock options granted to most other
Oncocyte employees.
Aggregate Chronix Merger Consideration and Purchase Price
Allocation
Measurement
period adjustments reflect new information obtained about facts and
circumstances that existed as of the acquisition date. Final
determination of the fair values may result in further adjustments
to the values presented. To the extent that significant changes
occur in the future, Oncocyte will disclose such changes in the
reporting period in which they occur.
The
calculation of the aggregate merger consideration, consisting of
the Closing Consideration and Chronix Contingent Consideration (the
“Aggregate Chronix Merger Consideration”), at fair value, is shown
in the following table (in thousands, except for share and per
share amounts). In accordance with ASC 805, the Chronix Contingent
Consideration, at fair value, is part of the total considered
transferred on the Chronix Merger Date, as further discussed
below.
Schedule of Fair Value of Aggregate Merger
Consideration
Cash consideration |
|
$ |
3,960 |
|
|
|
|
|
|
Settlement of acquirer/acquiree activity pre-combination, net |
|
$ |
550 |
|
|
|
|
|
|
Stock
consideration |
|
|
|
|
Shares of Oncocyte common stock issued
on the Merger Date |
|
|
647,911 |
|
Closing price
per share of Oncocyte common stock on the Merger Date |
|
$ |
5.09 |
|
Market value of
Oncocyte common stock issued |
|
$ |
3,298 |
|
|
|
|
|
|
Contingent Consideration |
|
$ |
42,295 |
|
|
|
|
|
|
Total fair
value of consideration transferred on the Merger Date |
|
$ |
50,103 |
|
Pursuant
to ASC 805, Business Combinations (“ASC 805”), Oncocyte accounted
for the Chronix acquisition as a business combination using the
acquisition method of accounting. Identifiable assets and
liabilities of Chronix, including identifiable intangible assets,
were recorded based on their fair values as of the date of the
closing of the acquisition. The excess of the purchase price over
the fair value of the net assets acquired was recorded as
goodwill.
Upon
further review of the assets acquired and liabilities assumed, it
was determined that the amount previously reported as assumed
liabilities were not properly reflected. The following has been
updated to reflect the assets acquired and liabilities as of the
date of acquisition. The following table sets forth the allocation
of the Aggregate Chronix Merger Consideration transferred to
Chronix’s tangible and identifiable intangible assets acquired and
liabilities assumed (in thousands):
Schedule of Intangible Assets Acquired and
Liabilities Assumed
|
|
April 15, 2021 |
|
Assets
acquired: |
|
|
|
|
Cash and cash
equivalents |
|
$ |
50 |
|
Accounts receivable and other current
assets |
|
|
25 |
|
Long-term assets |
|
|
12 |
|
Acquired
in-process research and development |
|
|
46,800 |
|
|
|
|
|
|
Total
identifiable assets acquired (a) |
|
|
46,887 |
|
|
|
|
|
|
Liabilities
assumed: |
|
|
|
|
Deferred revenue |
|
|
738 |
|
Assumed liability |
|
|
3,352 |
|
Long-term
deferred income tax liability |
|
|
2,184 |
|
|
|
|
|
|
Total
identifiable liabilities assumed (b) |
|
|
6,274 |
|
|
|
|
|
|
Net
assets acquired, excluding goodwill (a) - (b) = (c) |
|
|
40,613 |
|
|
|
|
|
|
Total
cash, contingent consideration, and stock consideration transferred
(d) |
|
|
50,103 |
|
|
|
|
|
|
Goodwill (d) - (c) |
|
$ |
9,490 |
|
All
tangible assets and liabilities were valued at their respective
carrying amounts as management believes that these amounts
approximated their acquisition date fair values.
The
following is a discussion of the valuation methods and significant
assumptions used to determine the fair value of Chronix’s material
assets and liabilities in connection with the Chronix
Merger:
Acquired
In-Process Research and Development and Deferred Income Tax
Liability – The fair value of identifiable IPR&D intangible
assets consists of $46.8 million
allocated to DetermaCNITM and VitaGraftTM.
Oncocyte determined the estimated aggregate fair value of the test
assets for DetermaCNITM and VitaGraftTM (the
“Test Assets”) using the 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 the Test Assets under MPEEM, Oncocyte used
probability-weighted, projected cash flows discounted at a rate
considered appropriate given the significant inherent risks
associated with similar assets. Cash flows were calculated based on
projections of revenues and expenses related to the asset and were
assumed to extend through a multi-year projection period. The
discount rate used to value Test Assets was approximately 12%. 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 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 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. ASC 740 allows Oncocyte to treat acquired available
DTAs, such as Chronix’s NOLs (subject to the annual limitation
under Section 382 of the Internal Revenue Code) as available DTAs
to offset against the DTLs, as the DTLs are expected to reverse
within the NOL carryforward period. Any excess DTAs over those DTLs
would be assessed for a valuation allowance in accordance with ASC
740. This accounting treatment is acceptable if, at the time of the
acquisition, Oncocyte can both reasonably estimate a timeline to
commercialization and the economic useful life of the IPR&D
assets upon commercialization, which will be amortized during the
carryforward period of the offsetting DTAs. Oncocyte estimated and
recorded a net DTL of $2.2 million after
offsetting the acquired available NOLs with the IPR&D generated
DTLs (see Note 8).
Contingent
consideration liabilities – ASC 805 requires that contingent
consideration be estimated and recorded at fair value as of the
acquisition date as part of the total consideration transferred.
Contingent consideration is an obligation of the acquirer to
transfer additional assets or equity interests to the selling
shareholders in the future if certain future events occur or
conditions are met, such as the attainment of product development
milestones. Contingent consideration also includes additional
future payments to selling shareholders based on achievement of
components of earnings, such as “earn-out” provisions or percentage
of future revenues, including royalties paid to the former Chronix
shareholders based on a percentage of revenues generated from
DetermaCNITM and VitaGraftTM tests over the
useful life of the assets. Accordingly, Oncocyte determined there
are three types of contingent consideration in connection with the
Chronix Merger: the Milestone Payments, the Royalty Payments, and
Transplant Sale Payments, discussed below, which comprise the
“Chronix Contingent Consideration”.
The
fair value of the Milestone Payments was determined using a
scenario analysis valuation method which incorporates Oncocyte’s
assumptions with respect to the likelihood of achievement of the
milestones defined in the Chronix Merger Agreement, credit risk,
timing of the Milestone Payments and a risk-adjusted discount rate
to estimate the present value of the expected payments. The
discount rate was estimated at approximately 15% after adjustment for the
probability of achievement of the milestones.
The
fair value of the Royalty Payments was determined using a single
scenario analysis method. The single scenario method incorporates
Oncocyte’s assumptions with respect to specified future revenues
generated from DetermaCNITM, over its estimated useful
life, taking into account credit risk and a risk-adjusted discount
rate to estimate the present value of the expected Royalty
Payments. The credit and risk-adjusted discount rate was estimated
at approximately 15%.
The
fair value of the Transplant Sale Payments was determined using a
single scenario analysis method. The single scenario method
incorporates Oncocyte’s assumptions with respect to specified
future licensing revenues generated from VitaGraftTM,
over its estimated useful life, taking into account credit risk and
a risk-adjusted discount rate to estimate the present value of the
expected Transplant Sale Payments. The credit and risk-adjusted
discount rate was estimated at approximately 15%.
The
fair value of the Chronix Contingent Consideration after the
Chronix Merger Date is reassessed by Oncocyte as changes in
circumstances and conditions occur, with the subsequent change in
fair value recorded in Oncocyte’s condensed consolidated statements
of operations. As of June 30, 2022, based on Oncocyte’s
reassessment of the significant assumptions noted above, there was
a decrease of approximately $12.4 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 a change in fair value
of contingent consideration in the unaudited condensed consolidated
statements of operations as of June 30, 2022.
The
following tables reflect the activity for Oncocyte’s Contingent
Consideration for the six months ended June 30, 2022 and June 30,
2021, measured at fair value using Level 3 inputs (in
thousands):
Schedule of Contingent Consideration,
Measured at Fair Value
|
|
Fair Value |
|
Balance at April 15,
2021 |
|
$ |
42,295 |
|
Change in estimated fair value |
|
|
- |
|
Balance at June
30, 2021 |
|
$ |
42,295 |
|
|
|
Fair Value |
|
Balance at December 31, 2021 |
|
$ |
69,621 |
|
Change in estimated fair value |
|
|
(12,415 |
) |
Balance at June 30, 2022 |
|
$ |
57,206 |
|
Goodwill
- Goodwill is calculated as the difference between the acquisition
date fair value of the Aggregate Chronix Merger Consideration
transferred and the values assigned to the assets acquired and
liabilities assumed. Goodwill also includes the $2.2 million of net
deferred tax liabilities recorded principally related to the
VitaGraftTM discussed above. Oncocyte recognized
approximately $9.5 million of goodwill related to the
Chronix acquisition.
None
of the goodwill recognized is expected to be deductible for income
tax purposes. Goodwill is not amortized but is tested for
impairment at least annually, or more frequently if circumstances
indicate potential impairment (see Notes 2 and 4).
Goodwill
and identifiable intangible assets are not amortizable or
deductible for tax purposes since these assets are not recognized
for tax purposes.
4.
Goodwill and
Intangible Assets, net
At
June 30, 2022 and December 31, 2021, goodwill and intangible
assets, net, consisted of the following (in thousands):
Schedule of Goodwill and Intangible
Assets
|
|
June 30, 2022 |
|
|
December 31, 2021 |
|
Goodwill
- Insight Merger(1) |
|
$ |
9,194 |
|
|
$ |
9,194 |
|
Goodwill
- Chronix Merger(1) |
|
|
9,490 |
|
|
|
9,490 |
|
Total
Goodwill |
|
|
18,684 |
|
|
|
18,684 |
|
|
|
|
|
|
|
|
|
|
Intangible assets: |
|
|
|
|
|
|
|
|
Acquired
IPR&D - DetermaIOTM (2) |
|
$ |
14,650 |
|
|
$ |
14,650 |
|
Acquired
IPR&D - DetermaCNI™ and VitaGraft™ (3) |
|
|
46,800 |
|
|
|
46,800 |
|
|
|
|
|
|
|
|
|
|
Intangible assets subject to
amortization: |
|
|
|
|
|
|
|
|
Acquired
intangible assets - customer relationship |
|
|
440 |
|
|
|
440 |
|
Acquired intangible assets - Razor (see Note 3) |
|
|
32,797 |
|
|
|
32,797 |
|
Total intangible assets |
|
|
94,687 |
|
|
|
94,687 |
|
Accumulated
amortization - customer relationship(4) |
|
|
(213 |
) |
|
|
(169 |
) |
Accumulated
amortization - Razor(4) |
|
|
(5,133 |
) |
|
|
(3,273 |
) |
Intangible
assets, net |
|
$ |
89,341 |
|
|
$ |
91,245 |
|
(1) |
Goodwill
represents the excess of the purchase price over the fair value of
the net tangible and identifiable intangible assets acquired in the
Insight Merger and the Chronix Merger (see Note 3). |
(2) |
See
Note 3 for information on the Insight Merger. |
(3) |
See
Note 3 for information on the Chronix Merger. |
(4) |
Amortization
of intangible assets is included in “Cost of revenues –
amortization of acquired intangibles” on the condensed consolidated
statements of operations in the current year because the intangible
assets pertain directly to the revenues generated from the acquired
intangibles. |
Future
amortization expense of intangible assets subject to amortization
is expected to be the following (in thousands):
Schedule of Intangible Assets Future
Amortization Expense
|
|
Amortization |
|
Year ending December 31, |
|
|
|
|
2022 |
|
|
1,952 |
|
2023 |
|
|
3,904 |
|
2024 |
|
|
3,904 |
|
2025 |
|
|
3,823 |
|
2026 |
|
|
3,816 |
|
Thereafter |
|
|
10,492 |
|
Total |
|
$ |
27,891 |
|
5.
Shareholders’
Equity
Series
A Redeemable Convertible Preferred Stock
On
April 13, 2022, the Company entered into a securities purchase
agreement (“Purchase Agreement”) with institutional accredited
investors, including Broadwood Capital, L.P., the Company’s largest
shareholder, (the “Investors”) in a registered direct offering of
11,765 shares of our Series A
Convertible Preferred Stock (the “Preferred Stock”), which shares
of Preferred Stock are convertible into a total of 7,689,542 shares of our
common stock, at a conversion price of $1.53. The purchase price of each
share of Preferred Stock was $850, which included
an original issue discount to the stated value of $1,000 per share. The rights,
preferences and privileges of the Preferred Stock are set forth in
our Certificate of Determination of Preferences, Rights and
Limitations of Series A Convertible Preferred Stock (the
“Certificate of Determination”), which we will file with the
Secretary of State of the State of California. The closing of the
offering of Preferred Stock will occur in two equal tranches of
$5,000,000 each for
aggregate gross proceeds from both closings of $10,000,000. The first
closing will occur on the later of (i) the second (2nd) trading day
following the execution of the Purchase Agreement and (ii) the
second (2nd) trading day following the date that the Secretary of
State accepts the Certificate of Determination. The second closing
will occur on the earlier of (a) the second (2nd) trading day
following the date that we receive notice from an Investor to
accelerate the second closing and (b) a date selected by us on or
after October 8, 2022 and on or prior to March 8, 2023. The Company
intends to use the proceeds of the offering for general corporate
purposes and working capital.
The
Preferred Stock is convertible into shares of the Company’s common
stock at any time at the holder’s option. The conversion price will
be subject to customary anti-dilution adjustments for matters such
as stock splits, stock dividends and other distributions on our
common stock, and recapitalizations. The holder will be prohibited
from converting shares of Preferred Stock into shares of common
stock if, as a result of such conversion, the holder, together with
its affiliates, would own more than 4.99% of the shares of our
common stock then issued and outstanding (provided a holder may
elect, at the first closing, to increase such beneficial ownership
limitation solely as to itself up to 19.99% of the number of shares
of our common stock outstanding immediately after giving effect to
the conversion). The Company may force the conversion of up to
one-third of the shares of Preferred Stock originally issued,
subject to customary equity conditions, if the daily volume weighted average
price of our common stock for 20 out of 30 trading days exceeds
140% of the conversion price and on 20 out of the same 30
trading days the daily trading volume equals or exceeds 400,000
shares of our common stock. The Company may only effect one forced
conversion during any 30-trading day period.
In
the event of the Company’s liquidation, dissolution, or winding up,
holders of Preferred Stock will receive a payment equal to the
stated value of the Preferred Stock plus accrued but unpaid
dividends and any other amounts that may have become payable on the
Preferred Stock due to any failure or delay that may have occurred
in issuing shares of common stock upon conversion of a portion of
the Preferred Stock, before any distribution or payment to the
holders of common stock or any of our other junior
equity.
Shares
of Preferred Stock will generally have no voting rights, except as
required by law and except that the consent of holders of a
majority of the outstanding Preferred Stock will be required to
amend any provision of our certificate of incorporation that would
have a materially adverse effect on the rights of the holders of
the Preferred Stock. Additionally, as long as any shares of
Preferred Stock remain outstanding, unless the holders of at least
51% of the then outstanding shares of Preferred Stock shall
have otherwise given prior written consent, we, on a consolidated
basis with our subsidiaries, are not permitted to (1) have less
than $8 million of unrestricted, unencumbered
cash on hand (“Cash Minimum Requirement”); (2) other than certain
permitted indebtedness, incur indebtedness to the extent that our
aggregate indebtedness exceeds $15 million; (3) enter into any
agreement (including any indenture, credit agreement or other debt
instrument) that by its terms prohibits, prevents, or otherwise
limits our ability to pay dividends on, or redeem, the Preferred
Stock in accordance with the terms of the Certificate of
Determination; or (4) authorize or issue any class or series of
preferred stock or other capital stock of the Company that ranks
senior or pari passu with the Preferred Stock.
Shares
of Preferred Stock will be entitled to receive cumulative dividends
at a rate per share (as a percentage of stated value) of 6% per
annum, payable quarterly in cash or, at our option, by accreting
such dividends to the stated value.
The
Company is required to redeem, for cash, the shares of Preferred
Stock on the earlier to occur of (1) April 8, 2024, (2) the
commencement of certain a voluntary or involuntary bankruptcy,
receivership, or similar proceedings against the Company or its
assets, (3) a Change of Control Transaction (as defined herein) and
(4) at the election and upon notice of 51% in interest of the
holders, if the Company fails to meet the Cash Minimum Requirement.
A “Change of Control Transaction” means the occurrence of any of
(a) an acquisition by an individual or legal entity or “group” (as
described in Rule 13d-5(b)(1) promulgated under the Exchange Act)
of effective control (whether through legal or beneficial ownership
of capital stock of the Company, by contract or otherwise) of in
excess of 50% of the voting securities of
the Company (other than by means of conversion of Preferred Stock),
(b) the Company merges into or consolidates with any other person,
or any person merges into or consolidates with the Company and,
after giving effect to such transaction, the stockholders of the
Company immediately prior to such transaction own less than
50% of the aggregate voting
power of the Company or the successor entity of such transaction,
or (c) the Company sells or transfers all or substantially all of
its assets to another person. Additionally, the Company has the
right to redeem the Preferred Stock for cash upon 30 days prior
notice to the holders; provided if the Company undertakes a capital
raise in connection with such redemption, the Investors will have
the right to participate in such financing.
As of
June 30, 2022, Oncocyte had 11,765 preferred
shares, no-par value, authorized, and 5,882.4
shares issued and outstanding. The future right or obligation
associated with the Second Closing Tranche Preferred Stock is
recorded at fair value from the $5
million proceeds received. The Company will remeasure the right or
obligation associated with the Second Closing Tranche Preferred
Stock to its fair value and record the change in fair value through
earnings as an element of other income/expense. As of June 30,
2022, the Company determined the fair value to be $0.3 million and recorded the change in
fair value through earnings as an element of other income/expense
on the unaudited condensed consolidated statements of operations
and within other current assets on the unaudited condensed
consolidated balance sheets.
Common
Stock
As of
June 30, 2022 and December 31, 2021, Oncocyte has 230,000,000
shares of common stock,
no-par value, authorized. As of June 30, 2022 and
December 31, 2021, Oncocyte had 118,608,821 and
92,231,917 shares
of common stock issued and outstanding, respectively.
Common
Stock Purchase Warrants
As of
June 30, 2022, Oncocyte had an aggregate of
16,892,266 common stock purchase warrants issued and
outstanding with exercise prices ranging from $1.53 to $5.50 per warrant.
The warrants will expire on various dates through October 17, 2029.
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.
6.
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
with exercise prices ranging from $2.30 per share to
$3.15 per share,
that will vest in increments upon the attainment of specified
performance conditions related to the development of DetermaDx™ and
obtaining Medicare reimbursement coverage for that test (“2018
Performance-Based Options”). The Medicare reimbursement conditions
will not be met as Oncocyte has determined not to pursue
commercialization of DetermaDx™. Approximately 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 and six months ended June 30,
2022, and 2021, no
stock-based compensation expense was recorded with regard to the
Performance-Based Options due to the discontinuation of the
development of DetermaDx™. As of June 30, 2022, there were
no 2018
Performance-Based Options outstanding.
During
the six months ended June 30, 2022, the Company awarded executive
share-based payment awards under the 2018 Plan to certain executive
officers and employees with time-based, market-based and
performance-based vesting conditions (“2022 equity
awards”).
The
fair value of the 2022 equity awards with performance-based vesting
condition was estimated using the Black-Scholes option-pricing
model assuming that performance goals will be achieved. If such
performance conditions are not met, no compensation cost is
recognized and any recognized compensation cost is reversed. The
grant-date fair value of the stock options with time-based and
performance-based vesting condition granted during the six months
ended June 30, 2022 was $0.96 per option. The
probability of 2022 equity awards performance-based vesting
conditions will be evaluated each reporting period and the Company
will true-up the amount of cumulative cost recognized for the 2022
performance-based awards at each reporting period based on the most
up-to-date probability estimates. The Company will recognize the
compensation expense for 2022 performance-based awards expected to
vest on a straight-line basis over the respective service period
for each separately vesting tranche.
The
fair value of the 2022 equity awards with market-based vesting
condition was estimated using the Monte Carlo simulation model.
Assumptions and estimates utilized in the model include the
risk-free interest rate, dividend yield, expected stock volatility
and the estimated period to achievement of the performance and
market conditions, which are subject to the achievement of the
market-based goals established by the Company and the continued
employment of the participant. These awards vest only to the extent
that the market-based conditions are satisfied as specified in the
vesting conditions. Unlike the performance-based awards, the grant
date fair value and associated compensation cost of the
market-based awards reflect the probability of the market condition
being achieved, and the Company will recognize this compensation
cost regardless of the actual achievement of the market condition.
Assumptions utilized in connection with the Monte Carlo valuation
technique included: estimated risk-free interest rate of 2.0 percent; term of
2.8 years; expected
volatility of 100 percent; and expected
dividend yield of 0 percent. The risk-free interest rate was
determined based on the yields available on U.S. Treasury
zero-coupon issues. The expected stock price volatility was
determined using historical volatility. The expected dividend yield
was based on expectations regarding dividend payments. The total
grant date fair value of the market-based awards was $117,625.
In
May 2022, the Company approved amendments to vesting conditions of
1,237,500 performance-based
and 250,000 market-based awards
of certain executive officers and employees. The performance-based
awards were modified such that the stock awards will be eligible to
vest as follows: (i) 50% will vest on December 31, 2023
if the Company achieves LCD reimbursement for
VitaGraftTM (formerly TheraSureTM Transplant
Monitor) for one organ no later than December 31, 2022 and (ii)
50% will vest on December 31, 2023
if DetermaIO™ or DetermaCNI™ (formerly TheraSureTM - CNI
Monitor) submission for LCD is completed no later than December 31,
2022. Additional performance-based RSU awards were modified to be
eligible to vest upon the achievement by
the Company of average market capitalization minimum, target, and
maximum goals of (i) $300 million; (ii) $400 million; and (iii)
$500 million, respectively, during the period beginning on January
1, 2022 and ending on December 31, 2024. The market-based
RSU awards were modified such that the awards will be eligible to
vest upon the achievement of product commercial launch minimum,
target, and maximum goals as follows: (i) 1 laboratory test product
in the US; (ii) 2 laboratory test products in US, and (iii) 3
laboratory test products in the US, respectively.
In
accordance with ASC 718, the Company calculated the fair value of
the market-based awards on the date of modification, noting an
increase in the fair value of approximately $58,500 on the date of
modification, with the incremental increase in fair value
representing additional unrecognized stock-based compensation
expense. The following assumptions were used in calculating the
fair value of the market-based options on the date of
modification:
Schedule of Assumptions Used to Calculate Fair
Value of Stock Options
Risk-free interest
rates |
|
|
2.72 |
% |
Expected term (in years) |
|
|
2.6 |
|
Volatility |
|
|
95.0 |
% |
Grant date fair value of awards
granted during the period |
|
$ |
1.13 |
|
A
summary of Oncocyte’s 2010 Plan activity and related information
follows (in thousands except weighted average exercise
price):
Summary of Stock Option Activity
|
|
Shares |
|
|
Number |
|
|
Weighted |
|
|
|
Available |
|
|
of
Options |
|
|
Average |
|
Options |
|
for Grant |
|
|
Outstanding |
|
|
Exercise Price |
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2021 |
|
|
- |
|
|
|
923 |
|
|
$ |
3.65 |
|
Options exercised |
|
|
- |
|
|
|
- |
|
|
$ |
- |
|
Options
forfeited, canceled and expired |
|
|
- |
|
|
|
- |
|
|
$ |
- |
|
Balance at June 30, 2022 |
|
|
- |
|
|
|
923 |
|
|
$ |
3.65 |
|
Exercisable at June 30, 2022 |
|
|
|
|
|
|
923 |
|
|
$ |
3.65 |
|
As of
June 30, 2022, 21,000,000 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.
A
summary of Oncocyte’s 2018 Incentive Plan activity and related
information follows (in thousands except weighted average exercise
price):
Summary of Stock Option
Activity
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
Shares Available |
|
|
Number of Options |
|
|
Number of RSUs |
|
|
Average Exercise |
|
|
|
for Grant |
|
|
Outstanding |
|
|
Outstanding |
|
|
Price |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2021 |
|
|
9,006 |
|
|
|
10,679 |
|
|
|
121 |
|
|
$ |
3.63 |
|
RSUs vested |
|
|
96 |
|
|
|
- |
|
|
|
(96 |
) |
|
$ |
- |
|
RSUs granted |
|
|
(56 |
) |
|
|
- |
|
|
|
56 |
|
|
$ |
- |
|
Performance RSUs granted |
|
|
(500 |
) |
|
|
- |
|
|
|
500 |
|
|
$ |
- |
|
Options granted |
|
|
(3,432 |
) |
|
|
3,432 |
|
|
|
- |
|
|
$ |
1.20 |
|
Options exercised |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
$ |
- |
|
Options
forfeited/cancelled |
|
|
704 |
|
|
|
(704 |
) |
|
|
- |
|
|
$ |
2.51 |
|
Balance at June 30, 2022 |
|
|
5,818 |
|
|
|
13,407 |
|
|
|
581 |
|
|
$ |
3.02 |
|
Options exercisable at June 30,
2022 |
|
|
|
|
|
|
5,033 |
|
|
|
|
|
|
$ |
3.23 |
|
Oncocyte
recorded stock-based compensation expense in the following
categories on the accompanying condensed consolidated statements of
operations for the three and six months ended June 30, 2022 and
2021 (unaudited and in thousands):
Summary of Stock-based Compensation
Expense
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
|
|
Three
Months Ended |
|
|
Six
Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
Cost of revenues |
|
$ |
76 |
|
|
$ |
74 |
|
|
$ |
145 |
|
|
$ |
96 |
|
Research and development |
|
|
470 |
|
|
|
379 |
|
|
|
896 |
|
|
|
636 |
|
Sales and marketing |
|
|
403 |
|
|
|
308 |
|
|
|
738 |
|
|
|
541 |
|
General and
administrative |
|
|
1,283 |
|
|
|
1,235 |
|
|
|
2,463 |
|
|
|
2,013 |
|
Total
stock-based compensation expense |
|
$ |
2,232 |
|
|
$ |
1,996 |
|
|
$ |
4,242 |
|
|
$ |
3,286 |
|
The
assumptions that were used to calculate the grant date fair value
of Oncocyte’s employee and non-employee stock option grants for the
six months ended June 30, 2022 and 2021 were as follows:
Schedule of Assumptions Used to
Calculate Fair Value of Stock
Options
|
|
Six
Months Ended |
|
|
|
June 30, |
|
|
|
2022 |
|
|
2021 |
|
Expected life (in
years) |
|
|
6.01 |
|
|
|
6.00 |
|
Risk-free interest rates |
|
|
2.24 |
% |
|
|
0.88 |
% |
Volatility |
|
|
106.98 |
% |
|
|
100.67 |
% |
Dividend yield |
|
|
0 |
% |
|
|
0 |
% |
The
determination of stock-based compensation is inherently uncertain
and subjective and involves the application of valuation models and
assumptions requiring the use of judgment. If Oncocyte had made
different assumptions, its stock-based compensation expense and net
loss for the three and six months ended June 30, 2022 and 2021 may
have been significantly different.
Oncocyte
does not recognize deferred income taxes for incentive stock option
compensation expense and records a tax deduction only when a
disqualified disposition has occurred.
7.
Disaggregation of
Revenues and Concentration Risk
The
following table presents the percentage of consolidated revenues
generated by unaffiliated customers that individually represent
greater than ten percent of consolidated revenues:
Schedule of Consolidated Revenues Generated by
Unaffiliated Customers
|
|
Three
Months Ended |
|
|
Six
Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
Medicare for
DetermaRx™ |
|
|
22 |
% |
|
|
21 |
% |
|
|
26 |
% |
|
|
23 |
% |
Medicare Advantage for DetermaRx™ |
|
|
15 |
% |
|
|
12 |
% |
|
|
23 |
% |
|
|
17 |
% |
Pharma services - Company A |
|
|
10 |
% |
|
|
* |
|
|
|
12 |
% |
|
|
* |
|
Licensing - Company B |
|
|
48 |
% |
|
|
49 |
% |
|
|
30 |
% |
|
|
32 |
% |
Licensing - Company C |
|
|
* |
|
|
|
11 |
% |
|
|
* |
|
|
|
* |
|
The
following table presents the percentage of consolidated revenues by
products or services classes:
Schedule of Consolidated Revenues
Attributable to Products or Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended |
|
|
Six
Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
DetermaRx™ |
|
|
40 |
% |
|
|
32 |
% |
|
|
53 |
% |
|
|
40 |
% |
Pharma Services |
|
|
11 |
% |
|
|
8 |
% |
|
|
18 |
% |
|
|
22 |
% |
Licensing |
|
|
49 |
% |
|
|
60 |
% |
|
|
29 |
% |
|
|
38 |
% |
Concentration risk, percentage |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
The
following table presents the percentage of consolidated revenues
attributable to geographical locations:
Schedule of Percentage of Consolidated
Revenues Attributable to Geographical Locations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended |
|
|
Six
Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
United States |
|
|
50 |
% |
|
|
32 |
% |
|
|
65 |
% |
|
|
43 |
% |
Outside of the United States – Pharma
Services |
|
|
2 |
% |
|
|
8 |
% |
|
|
5 |
% |
|
|
19 |
% |
Outside of the
United States – Licensing |
|
|
48 |
% |
|
|
60 |
% |
|
|
30 |
% |
|
|
38 |
% |
Concentration risk, percentage |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
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.
Schedule of Percentage of Total Consolidated
Accounts Receivables
|
|
|
|
|
|
|
|
|
|
|
June 30, 2022 |
|
|
December 31, 2021 |
|
Medicare for
DetermaRx™ |
|
|
15 |
% |
|
|
9 |
% |
Medicare Advantage for DetermaRx™ |
|
|
80 |
% |
|
|
65 |
% |
As of
December 31, 2021, our accounts receivable were $1.4
million. During the six months ending June 30, 2022, our accounts
receivable increased by $3.5 million for
revenues recognized, offset by cash collected of approximately
$3.1 million (see Notes 2
and 3).
8.
Income
Taxes
The
provision for income taxes for interim periods is determined using
an estimated annual effective tax rate in accordance with ASC
740-270, Income Taxes, Interim Reporting. The effective tax
rate may be subject to fluctuations during the year as new
information is obtained, which may affect the assumptions used to
estimate the annual effective tax rate, including factors such as
valuation allowances against deferred tax assets, the recognition
or de-recognition of tax benefits related to uncertain tax
positions, if any, and changes in or the interpretation of tax laws
in jurisdictions where Oncocyte conducts business.
In
connection with the Razor acquisition discussed in Note 3, a change
in the acquirer’s valuation allowance that stems from the purchase
of assets should be recognized as an element of the acquirer’s
income tax benefit in the period of the acquisition. Accordingly,
for the three months ended March 31, 2021, Oncocyte recorded a
$7.6 million
partial release of its valuation allowance and a corresponding
income tax benefit stemming from the estimated DTLs generated by
the Razor intangible asset we acquired.
Oncocyte
did not record any provision or benefit for income taxes for the
six months ended June 30, 2022, as Oncocyte had a full valuation
allowance for the periods presented.
A
valuation allowance is provided when it is more likely than not
that some portion of the deferred tax assets will not be realized.
Other than the partial releases discussed above, Oncocyte
established a full valuation allowance for all periods presented
due to the uncertainty of realizing future tax benefits from its
net operating loss carry-forwards and other deferred tax
assets.
In
December 2017, the Tax Cuts and Jobs Act, or Tax Act, was signed
into law. The Tax Act, among other things, contains significant
changes to corporate taxation, including changes to the expensing
of research and development expenses for tax years beginning after
December 31, 2021. The changes will not have a material impact to
the Company’s provision as the Company still expects to be in a
taxable loss position.
9.
Right-of-use assets,
machinery and equipment, net, and construction in
progress
As of
June 30, 2022 and December 31, 2021, right-of-use assets, machinery
and equipment, net, and construction in progress were as follows
(in thousands):
Schedule of Right-of-use Assets, Machinery
and Equipment, Net, and Construction in Progress
|
|
|
|
|
|
|
|
|
|
|
June 30, 2022
(unaudited) |
|
|
December 31, 2021 |
|
|
|
|
|
|
|
|
Right-of-use
assets (1) |
|
|
3,499 |
|
|
|
3,499 |
|
Machinery and equipment |
|
|
8,841 |
|
|
|
6,501 |
|
Accumulated
depreciation and amortization |
|
|
(3,621 |
) |
|
|
(2,715 |
) |
Right-of-use assets, machinery and
equipment, net |
|
|
8,719 |
|
|
|
7,285 |
|
Construction in
progress |
|
|
2,857 |
|
|
|
1,242 |
|
Right-of-use assets, machinery and
equipment, net, and construction in progress |
|
|
11,576 |
|
|
|
8,527 |
|
Depreciation
expense amounted to $384,000 and $206,000 for the three months ended June
30 2022 and 2021, and $671,000 and $327,000 for the six months ended June
30, 2022 and 2021, respectively.
10.
Commitments and
Contingencies
Oncocyte
has certain commitments other than discussed in Note 3.
Office
Lease Agreement
On
December 23, 2019, Oncocyte entered into an Office Lease Agreement
(the “Irvine Lease”) of a building containing approximately
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 subsequently
constructed a laboratory at the Irvine facility to perform cancer
diagnostic tests.
The
Irvine Lease has an initial term of 89 calendar months (the
“Term”), which commenced on June 1, 2020 (the “Commencement Date”).
Oncocyte has an option to extend the Term for a period of five
years (the “Extended Term”).
Oncocyte
will pay base monthly rent in the amount of $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%. Oncocyte was
entitled to an abatement of 50% of the base
monthly rent during the first ten calendar months of the Term. If
the Irvine Lease is terminated based on the occurrence of an “event
of default,” Oncocyte will be obligated to pay the abated rent to
the lessor.
If
Oncocyte exercises its option to extend the Term, the initial base
monthly rent during the Extended Term will be the greater of the
base monthly rent in effect during the last year of the Term or the
prevailing market rate. The prevailing market rate will be
determined based on annual rental rates per square foot for
comparable space in the area where the Premises are located. If
Oncocyte does not agree with the prevailing market rate proposed by
the lessor, the rate may be determined through an appraisal
process. The base monthly rent during the Extended Term shall be
subject to the same annual rent adjustment as applicable for base
monthly rent during the Term.
In
addition to base monthly rent, Oncocyte will pay in monthly
installments (a) all costs and expenses, other than certain
excluded expenses, incurred by the lessor in each calendar year in
connection with operating, maintaining, repairing (including
replacements if repairs are not feasible or would not be effective)
and managing the Premises and the building in which the Premises
are located (“Expenses”), and (b) all real estate taxes and
assessments on the Premises and the building in which the Premises
are located, all personal property taxes for property that is owned
by lessor and used in connection with the operation, maintenance
and repair of the Premises, and costs and fees incurred in
connection with seeking reductions in such tax liabilities
(“Taxes”). Subject to certain exceptions, Expenses shall not be
increased by more than 4% annually on a cumulative, compounded
basis.
Oncocyte
was entitled to an abatement of its obligations to pay Expenses and
Taxes while constructing improvements to the Premises constituting
“Tenant’s Work” under the Irvine Lease prior to the Commencement
Date, except that Oncocyte was obligated to pay 43.7%
of Expenses and Taxes during the period prior to the Commencement
Date for its use of the second floor of the Premises, which was
already built out as office space.
The
lessor provided Oncocyte with a “Tenant Improvement Allowance” in
the amount of $1.3
million to pay for the plan, design, permitting, and construction
of the improvements constituting Tenant’s Work. The lessor retained
1.5% of the Tenant Improvement Allowance as an
administrative fee as provided in the Irvine Lease. As of June 30,
2022, the lessor had provided $1.3 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 $1.7 million. 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 Irvine 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 sheets
thresholds; provided, in each case, that Oncocyte is not in then
default under the Irvine 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.
To
obtain the letter of credit, Oncocyte has provided the issuing bank
with a restricted cash deposit that the bank will hold to cover its
obligation to pay any draws on the letter of credit by the lessor.
The restricted cash may not be used for any other
purpose.
On
August 27, 2021, Oncocyte entered into a lease agreement to add an
additional suite to its Nashville office space, containing
approximately 1,928 square feet of rentable space
located at 2 International Plaza, Suite 103, Nashville TN. The term
of the lease commences on October 1, 2021 and extends through April
9, 2024 and will serve as additional office space for Insight
Genetics’s operations.
Application
of leasing standard, ASC 842
The
Irvine Lease is an operating lease under ASC 842 included in the
tables below. The tables below provide the amounts recorded in
connection with the application of ASC 842 as of, and during, the
six months ended June 30, 2022, for Oncocyte’s operating and
financing leases (see Note 2).
Under
the Laboratory Agreement discussed in Note 3, Oncocyte assumed all
of Razor’s Laboratory Agreement payment obligations. Although
Oncocyte is not a party to any lease agreement with Razor or
Encore, under the terms of the Laboratory Agreement, Oncocyte
received the landlord’s consent for the use of the laboratory at
Razor’s Brisbane, California location (the “Brisbane Facility”)
under the terms of a sublease to which Encore is the sublessee. The
sublease expires on 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 June 30, 2022, the aggregate payments due to
the landlord for early cancellation of the Brisbane Lease would be
approximately $117,000
(aggregate payments from July 1, 2022 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.
Financing
lease
As of
June 30, 2022, Oncocyte has one financing lease remaining through
December 2023 for certain laboratory equipment with aggregate
remaining payments of $186,000 shown in the
table below. Oncocyte’s lease obligations are collateralized by the
equipment financed under the lease schedule.
Operating
and Financing leases
The
following table presents supplemental cash flow information related
to operating and financing leases for the six months ended June 30,
2022 and 2021 (in thousands):
Schedule of Supplemental Cash Flow
Information Related to Operating and Financing
Lease
|
|
|
|
|
|
|
|
|
|
|
Six
Months Ended |
|
|
|
June 30, |
|
|
|
2022 |
|
|
2021 |
|
Cash paid for amounts included in the
measurement of financing lease liabilities: |
|
|
|
|
|
|
Operating cash flows from operating leases |
|
|
564 |
|
|
|
499 |
|
Operating cash
flows from financing leases |
|
|
51 |
|
|
|
19 |
|
Financing cash
flows from financing leases |
|
|
7 |
|
|
|
84 |
|
The
following table presents supplemental balance sheets information
related to operating and financing leases as of June 30, 2022 and
June 30, 2021 (in thousands, except lease term and discount
rate):
Schedule of Supplemental Balance Sheet Information
Related to Operating and Financing Leases
|
|
|
|
|
|
|
|
|
|
|
June 30,
2022 |
|
|
June 30,
2021 |
|
Operating
lease |
|
|
|
|
|
|
|
|
Right-of-use assets,
net |
|
$ |
2,343 |
|
|
$ |
2,683 |
|
|
|
|
|
|
|
|
|
|
Right-of-use lease
liabilities, current |
|
$ |
728 |
|
|
$ |
252 |
|
Right-of-use lease
liabilities, noncurrent |
|
|
3,075 |
|
|
|
4,092 |
|
Total operating lease
liabilities |
|
$ |
3,803 |
|
|
$ |
4,344 |
|
|
|
|
|
|
|
|
|
|
Financing
lease |
|
|
|
|
|
|
|
|
Machinery and
equipment |
|
$ |
537 |
|
|
$ |
537 |
|
Accumulated
depreciation |
|
|
(391 |
) |
|
|
(270 |
) |
Machinery and
equipment, net |
|
$ |
146 |
|
|
$ |
267 |
|
Current
liabilities |
|
$ |
110 |
|
|
$ |
118 |
|
Noncurrent
liabilities |
|
|
60 |
|
|
|
170 |
|
Total financing lease
liabilities |
|
$ |
170 |
|
|
$ |
288 |
|
|
|
|
|
|
|
|
|
|
Weighted average
remaining lease term |
|
|
|
|
|
|
|
|
Operating
lease |
|
|
4.9 years |
|
|
|
5.8
years |
|
Financing
lease |
|
|
1.5 years |
|
|
|
2.4
years |
|
|
|
|
|
|
|
|
|
|
Weighted average
discount rate |
|
|
|
|
|
|
|
|
Operating
lease |
|
|
11.20 |
% |
|
|
11.18 |
% |
Financing
lease |
|
|
11.55 |
% |
|
|
11.43 |
% |
Future
minimum lease commitments are as follows (in thousands):
Schedule of Future Minimum Lease Commitments
for Operating and Financing Leases
|
|
Operating |
|
|
Financing |
|
|
|
Leases |
|
|
Leases |
|
Year Ending December 31, |
|
|
|
|
|
|
|
|
2022 |
|
|
579 |
|
|
|
62 |
|
2023 |
|
|
1,048 |
|
|
|
124 |
|
2024 |
|
|
903 |
|
|
|
- |
|
2025 |
|
|
869 |
|
|
|
- |
|
2026 |
|
|
899 |
|
|
|
- |
|
Thereafter |
|
|
695 |
|
|
|
- |
|
Total minimum lease payments |
|
$ |
4,992 |
|
|
$ |
186 |
|
Less amounts
representing interest |
|
|
(1,190 |
) |
|
|
(16 |
) |
Present value
of net minimum lease payments |
|
$ |
3,803 |
|
|
$ |
170 |
|
Litigation
– General
Oncocyte
will be subject to various claims and contingencies in the ordinary
course of its business, including those related to litigation,
business transactions, employee-related matters, and other matters.
When Oncocyte is aware of a claim or potential claim, it assesses
the likelihood of any loss or exposure. If it is probable that a
loss will result and the amount of the loss can be reasonably
estimated, Oncocyte will record a liability for the loss. If the
loss is not probable or the amount of the loss cannot be reasonably
estimated, Oncocyte discloses the claim if the likelihood of a
potential loss is reasonably possible and the amount involved could
be material.
Tax
Filings
Oncocyte
tax filings are subject to audit by taxing authorities in
jurisdictions where it conducts business. These audits may result
in assessments of additional taxes that are subsequently resolved
with the authorities or potentially through the courts. Management
believes Oncocyte has adequately provided for any ultimate amounts
that are likely to result from these audits; however, final
assessments, if any, could be significantly different than the
amounts recorded in the unaudited condensed consolidated interim
financial statements.