NOTES
TO CONDENSED INTERIM FINANCIAL STATEMENTS
(UNAUDITED)
1.
Organization, Description of the Business and Liquidity
OncoCyte
Corporation (“OncoCyte”) is a developer of novel, non-invasive blood-based tests for the early detection of cancer.
It is focused on developing molecular cancer diagnostics utilizing a discovery platform that focuses on identifying genetic markers
that are differentially expressed in certain types of cancers. OncoCyte is currently devoting substantially all of its efforts
on developing its lung cancer diagnostic test DetermaVu™.
OncoCyte
was incorporated in 2009 in the state of California and was formerly a majority-owned subsidiary of BioTime, Inc. (“BioTime”),
a publicly traded, clinical-stage, biotechnology company developing new cellular therapies for degenerative retinal diseases,
neurological conditions associated with demyelination, and aiding the body in detecting and combating cancer. Beginning on February
17, 2017, OncoCyte ceased to be a subsidiary of BioTime for financial reporting purposes when BioTime’s percentage ownership
of outstanding OncoCyte common stock declined below 50% as a result of the issuance of additional OncoCyte common stock to certain
investors who exercised OncoCyte stock purchase warrants (see Note 6).
Liquidity
Since
inception, OncoCyte has financed its operations through the sale of common stock, warrants, warrant exercises, a bank loan, and
sales of BioTime common shares that it holds as marketable equity securities. BioTime also provides OncoCyte with the use
of BioTime facilities and services under a Shared Facilities and Services Agreement (the “Shared Facilities Agreement”)
as described in Note 4. OncoCyte has incurred operating losses and negative cash flows since inception and had an accumulated
deficit of $75.2 million as of March 31, 2019. OncoCyte expects to continue to incur operating losses and negative cash flows
for the foreseeable future
.
At
March 31, 2019, OncoCyte had $39.3 million of cash and cash equivalents and held BioTime and AgeX Therapeutics, Inc. (“AgeX”)
common stock as marketable equity securities valued at $0.6 million.
OncoCyte believes that
its current cash, cash equivalents and marketable equity securities is sufficient to carry out current operations through at least
twelve months from the issuance date of the condensed interim financial statements included in this Report.
OncoCyte
will need to raise additional capital to finance its operations, including the development and commercialization of its
cancer diagnostic tests, until such time as it is able to complete development and commercialize one or more diagnostic tests
and generate sufficient revenues to cover its operating expenses. Presently,
OncoCyte is
devoting substantially all of its research and development resources to the completion of the development and planned commercialization
of DetermaVu™.
OncoCyte may also explore a range of other commercialization options in order to reduce capital
needs and the risks associated with the timelines and uncertainty for attaining the Medicare and commercial reimbursement approvals
that will be essential for the successful commercialization of DetermaVu™ and any other diagnostic tests that OncoCyte may
develop. Those alternative arrangements could include marketing arrangements with other diagnostic companies through which OncoCyte
might receive a royalty on sales, or through which it might form a joint venture to market DetermaVu™ and share in net revenues.
Delays
in the development of DetermaVu™ could prevent OncoCyte from raising sufficient additional capital to finance the completion
of development and commercial launch of DetermaVu™ or other cancer diagnostic tests. Even if OncoCyte is successful in completing
the development of DetermaVu™, i
nvestors
may be reluctant to provide
OncoCyte
with capital until
DetermaVu™
is approved for reimbursement by
Medicare
. The unavailability or inadequacy of financing
or revenues to meet future capital needs could force OncoCyte to modify, curtail, delay, or suspend some or all aspects of planned
operations. Sales of additional equity securities could result in the dilution of the interests of its shareholders. OncoCyte
cannot assure that adequate financing will be available on favorable terms, if at all.
Basis
of presentation
The
unaudited condensed interim financial statements presented herein, and discussed below, have been prepared on a stand-alone basis
in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information
and in accordance with the instructions to Form 10-Q and Article 8 of Regulation S-X of the Securities Exchange Commission (the
“SEC”). In accordance with those rules and regulations certain information and footnote disclosures normally included
in comprehensive financial statements have been condensed or omitted. The condensed balance sheet as of December 31, 2018 was
derived from the audited financial statements at that date, but does not include all the information and footnotes required by
GAAP. These condensed 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, 2018.
The
accompanying condensed interim financial statements, in the opinion of management, include all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation of OncoCyte’s financial condition and results of operations.
The condensed results of operations are not necessarily indicative of the results to be expected for any other interim period
or for the entire year.
Prior
to February 17, 2017, BioTime consolidated the results of OncoCyte into BioTime’s consolidated results based on BioTime’s
ability to control OncoCyte’s operating and financial decisions and policies through its majority ownership of OncoCyte
common stock. Beginning on February 17, 2017, BioTime’s percentage ownership of the outstanding OncoCyte common stock declined
below 50%, resulting in a loss of “control” of OncoCyte under GAAP and, as a result, BioTime deconsolidated OncoCyte’s
financial statements from BioTime’s consolidated financial statements. As a result of this deconsolidation, OncoCyte is
no longer considered a subsidiary of BioTime under GAAP with effect from February 17, 2017. OncoCyte remains an affiliate of BioTime
based on BioTime’s retained share ownership in OncoCyte, which is sufficient to allow BioTime to exert significant influence
over the operations and management of OncoCyte.
To
the extent OncoCyte does not have its own employees or human resources for its operations, BioTime or BioTime subsidiaries provide
certain employees for administrative or operational services, as necessary, for the benefit of OncoCyte (see Note 4). Accordingly,
BioTime allocates expenses such as salaries and payroll related expenses incurred and paid on behalf of OncoCyte based on the
amount of time that particular employees devote to OncoCyte affairs. Other expenses such as legal, accounting, human resources,
marketing, travel, and entertainment expenses are allocated to OncoCyte to the extent that those expenses are incurred by or on
behalf of OncoCyte. BioTime also allocates certain overhead expenses such as facilities rent and utilities, property taxes, insurance,
internet and telephone expenses based on a percentage determined by management. These allocations are made based upon activity-based
allocation drivers such as time spent, percentage of square feet of office or laboratory space used, and percentage of personnel
devoted to OncoCyte’s operations or management. Management evaluates the appropriateness of the percentage allocations on
a periodic basis and believes that this basis for allocation is reasonable.
2.
Summary of Significant Accounting Policies
Research
and development expenses
Research
and development expenses include both direct expenses incurred by OncoCyte and indirect overhead costs allocated by BioTime that
benefit or support OncoCyte’s research and development functions. Direct research and development expenses consist primarily
of personnel costs and related benefits, including stock-based compensation, consulting fees, and obligations incurred to suppliers.
Indirect research and development expenses allocated by BioTime to OncoCyte under the Shared Facilities Agreement (see Note 4),
are primarily based on headcount or space occupied, as applicable, and include laboratory supplies, laboratory expenses, rent
and utilities, common area maintenance, telecommunications, property taxes and insurance
.
Research and development costs are expensed as incurred.
General
and administrative expenses
General
and administrative expenses include both direct expenses incurred by OncoCyte and indirect overhead costs allocated by BioTime
that benefit or support OncoCyte’s general and administrative functions. Direct general and administrative expenses consist
primarily of compensation and related benefits, including stock-based compensation, for executive and corporate personnel, and
professional and consulting fees. Indirect general and administrative expenses allocated by BioTime to OncoCyte under the Shared
Facilities Agreement (
see Note 4
) are primarily based on headcount or space occupied,
as applicable, and include costs for financial reporting and compliance, rent and utilities, common area maintenance, telecommunications,
property taxes and insurance.
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. Indirect sales and marketing expenses allocated by BioTime,
primarily based on OncoCyte’s headcount or space occupied, as applicable, include costs for rent and utilities, common area
maintenance, telecommunications, property taxes and insurance, incurred by BioTime and allocated to us under the Shared Facilities
Agreement.
Accounting
for shares of BioTime and AgeX common stock
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,
OncoCyte accounts for the BioTime and AgeX shares it holds as marketable equity securities, 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 shares are measured at fair value and reported as current assets on the balance sheet based on the closing trading
price of the shares as of the date being presented.
Beginning
on January 1, 2018, with the adoption of ASU 2016-01 discussed below, the BioTime and AgeX shares held by OncoCyte are now referred
to as “marketable equity securities,” and unrealized holding gains and losses on those shares are reported in the
statements of operations in other income and expenses, net. Prior to January 1, 2018 and the adoption of ASU 2016-01, the BioTime
shares held were called “available-for-sale securities” and unrealized holding gains and losses were reported in other
comprehensive income or loss, net of tax, and were a component of the accumulated other comprehensive income or loss on the balance
sheet. Realized gains and losses on BioTime shares are also included in other income and expenses, net, in the condensed statements
of operations. The shares of AgeX common stock OncoCyte holds were received from BioTime as a dividend-in-kind on November 28,
2018.
OncoCyte did not sell any shares of BioTime
or AgeX stock during the three months ended March 31, 2019 or the three months ended March 31, 2018. As of March 31, 2019, OncoCyte
held 353,264
and 35,326 shares of common stock of
BioTime and AgeX, respectively,
as marketable equity securities with a combined fair market value of $606,000.
On
January 1, 2018, in accordance with the adoption of ASU 2016-01, OncoCyte recorded a cumulative-effect adjustment for the BioTime
shares as available-for-sale-securities to reclassify the unrealized loss of $888,000 included in accumulated other comprehensive
loss to the accumulated deficit balance.
For
the three months ended March 31, 2019 and 2018, OncoCyte recorded an unrealized gain of $178,000 and
$190,000
,
respectively, included in other income and expenses, net, due to the increase in fair market value of the marketable equity securities
from the respective balance sheet dates.
Net
loss per common share
All
potentially dilutive common stock equivalents are antidilutive because OncoCyte reported a net loss for all periods presented.
The following common stock equivalents were excluded
from the computation of diluted net loss per share of common stock for the periods presented because including them would have
been antidilutive (in thousands):
|
|
Three
Months Ended March 31,
|
|
|
|
(unaudited)
|
|
|
|
2019
|
|
|
2018
|
|
Stock
options
|
|
|
3,971
|
|
|
|
1,652
|
|
Warrants
|
|
|
4,035
|
|
|
|
2,779
|
|
Recently
adopted accounting pronouncements
Leases
In
February 2016, the FASB issued a new standard related to leases to increase transparency and comparability among organizations
by requiring the recognition of right-of-use (“ROU”) assets and lease liabilities on the balance sheet. Most prominent
among the changes in the standard is the recognition of ROU assets and lease liabilities by lessees for those leases classified
as operating leases. Under the standard, disclosures are required to meet the objective of enabling users of financial statements
to assess the amount, timing, and uncertainty of cash flows arising from leases.
On
January 1, 2019, OncoCyte adopted Accounting Standards Update 2016-02,
Leases
(Topic 842, “ASC 842”)
and its subsequent amendments affecting OncoCyte: (i) ASU 2018-10,
Codification Improvements to Topic 842, Leases,
and (ii) ASU 2018-11,
Leases (Topic 842): Targeted improvements,
using the modified retrospective method. OncoCyte
management determines if an arrangement is a lease at inception. Leases are classified as either financing or operating,
with classification affecting the pattern of expense recognition in the statements of operations. When determining whether a
lease is a finance lease or an operating lease, ASC 842 does not specifically define criteria to determine “major part
of remaining economic life of the underlying asset” and “substantially all of the fair value of the
underlying asset.” For lease classification determination, OncoCyte continues to use (i) 75% or
greater to determine whether the lease term is a major part of the remaining economic life of the underlying asset and (ii)
90% or greater to determine whether the present value of the sum of lease payments is substantially of the fair value of
the underlying asset. OncoCyte uses either the rate implicit in the lease or its incremental borrowing rate as the discount
rate in lease accounting, as applicable.
Upon
adoption of ASC 842 and based on the available practical expedients under that standard, OncoCyte did not reassess any expired
or existing contracts, reassess the lease classification for any expired or existing leases and reassess initial direct costs
for exiting leases. OncoCyte also elected not to capitalize leases that have terms of twelve months or less.
The
adoption of ASC 842 did not have a material impact to OncoCyte’s financial statements because OncoCyte does not have any
significant operating leases. OncoCyte’s accounting for financing leases (previously referred to as “capital leases”)
remained substantially unchanged. Financing leases are included in machinery and equipment, and in financing lease liabilities,
current and noncurrent, in OncoCyte’s condensed balance sheets (see Note 9).
Stock
Based Compensation
In
June 2018, the FASB issued ASU 2018-07,
Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based
Payment Accounting
, which simplifies the accounting for non-employee share-based payment transactions. The new standard expands
the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from non-employees. ASU 2018-07
is effective for fiscal years beginning after December 15, 2018 (including interim periods within that fiscal year). OncoCyte
adopted ASU 2018-07 on January 1, 2019. As OncoCyte does not have a significant number of outstanding and unvested non-employee
share-based awards, the application of the new standard did not have a material impact on its financial statements.
Recently
Issued Accounting Pronouncements Not Yet Adopted
The
recently issued accounting pronouncements applicable to OncoCyte that are not yet effective should be read in conjunction with
the recently issued accounting pronouncements, as applicable and disclosed in OncoCyte’s Annual Report on Form 10-K for
the year ended December 31, 2018.
In
August 2018, the FASB issued ASU 2018-13,
Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure
Requirements for Fair Value Measurement
, which modifies certain disclosure requirements for reporting fair value measurements.
ASU 2018-13 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early
adoption is permitted. OncoCyte will adopt this standard on January 1, 2020 and is currently evaluating the disclosure requirements
and its effect on the financial statements.
3.
Selected Balance Sheet Components
Prepaid
expenses and other current assets
As
of March 31, 2019 and December 31, 2018, prepaid expenses and other current assets were comprised of the following (in thousands):
|
|
March
31, 2019
|
|
|
December
31, 2018
|
|
|
|
(unaudited)
|
|
|
|
|
Prepaid
insurance
|
|
$
|
502
|
|
|
$
|
102
|
|
Prepaid
advisory services
|
|
|
369
|
|
|
|
-
|
|
Other
|
|
|
259
|
|
|
|
78
|
|
Total
prepaid expenses and other current assets
|
|
$
|
1,130
|
|
|
$
|
180
|
|
Accrued
expenses and other current liabilities
As
of March 31, 2019 and December 31, 2018, accrued expenses and other current liabilities were comprised of the following (in thousands):
|
|
March
31, 2019
|
|
|
December
31, 2018
|
|
|
|
(unaudited)
|
|
|
|
|
Accrued
compensation
|
|
$
|
342
|
|
|
$
|
1,303
|
|
Accrued
vendors and other expenses
(1)
|
|
|
1,615
|
|
|
|
806
|
|
Total
accrued expenses and other current liabilities
|
|
$
|
1,957
|
|
|
$
|
2,109
|
|
(1)
Includes
$286,000 in accrued financing costs completed in February 2019 as of March 31, 2019 (see Note 6).
Machinery
and equipment, net
As
of March 31, 2019 and December 31, 2018, machinery and equipment, primarily comprised of assets purchased under financing leases
discussed in Notes 2 and 9, were as follows (in thousands):
|
|
March
31, 2019
|
|
|
December
31, 2018
|
|
|
|
(unaudited)
|
|
|
|
|
Machinery
and equipment
|
|
$
|
1,112
|
|
|
$
|
1,562
|
|
Accumulated
depreciation
|
|
|
(626
|
)
|
|
|
(948
|
)
|
Machinery
and equipment, net
|
|
$
|
486
|
|
|
$
|
614
|
|
Depreciation
expense amounted to $110,000 and $103,000 for the three months ended March 31, 2019 and 2018, respectively.
4.
Related Party Transactions
Shared
Facilities Agreement
On
October 8, 2009, OncoCyte and BioTime executed the Shared Facilities Agreement. Under the terms of the Shared Facilities Agreement,
BioTime agrees to permit OncoCyte to use BioTime’s premises and equipment located in Alameda, California for the purpose
of conducting business. BioTime provides accounting, billing, bookkeeping, payroll, treasury, payment of accounts payable, and
other similar administrative services to OncoCyte. BioTime may also provide the services of attorneys, accountants, and other
professionals who may also provide professional services to BioTime and its other subsidiaries. BioTime may also provide OncoCyte
with the services of BioTime laboratory and research personnel, including BioTime employees and contractors, for the performance
of research and development work for OncoCyte at the premises.
BioTime
charges OncoCyte a Use Fee for services received and usage of facilities, equipment, and supplies. For each billing period, BioTime
prorates and allocates costs incurred, as applicable, to OncoCyte. Such costs include services of BioTime employees, equipment,
insurance, lease, professional, software, supplies and utilities. Allocation depends on key cost drivers including actual documented
use, square footage of facilities used, time spent, costs incurred by or for OncoCyte, or upon proportionate usage by BioTime
and OncoCyte, as reasonably estimated by BioTime (collectively “Use Fees”). BioTime charges OncoCyte a 5% markup on
such allocated costs as permitted by the Shared Facilities Agreement.
The
Use Fee is determined and invoiced to OncoCyte on a regular basis, generally monthly or quarterly. If the Shared Facilities Agreement
terminates prior to the last day of a billing period, the Use Fee will be determined for the number of days in the billing period
elapsed prior to the termination of the Shared Facilities Agreement. Each invoice will be payable in full by OncoCyte within 30
days after receipt. Any invoice, or portion thereof, not paid in full when due will bear interest at the rate of 15% per annum
until paid, unless the failure to make a payment is due to any inaction or delay in making a payment by BioTime employees from
OncoCyte funds available for such purpose, rather than from the unavailability of sufficient funds legally available for payment
or from an act, omission, or delay by any employee or agent of OncoCyte. To date, BioTime has not charged OncoCyte any interest.
In
addition to the Use Fees, OncoCyte will reimburse BioTime for any out of pocket costs incurred by BioTime for the purchase of
office supplies, laboratory supplies, and other goods and materials and services for the account or use of OncoCyte, provided
that invoices documenting such costs are delivered to OncoCyte with each invoice for the Use Fee. BioTime has no obligation to
purchase or acquire any office supplies or other goods and materials or any services for OncoCyte, and if any such supplies, goods,
materials or services are obtained for OncoCyte, BioTime may arrange for the suppliers thereof to invoice OncoCyte directly.
The
Shared Facilities Agreement will remain in effect, unless either party gives the other party written notice stating that the Shared
Facilities Agreement will terminate on December 31 of that year, or unless the agreement otherwise is terminated under another
provision of the agreement. The Shared Facilities Agreement is not considered a lease under the provisions of ASC 842 discussed
in Note 2, because, among other factors, a significant part of the Shared Facilities Agreement is a contract for services, not
a tangible asset, and is cancelable by either party without penalty. BioTime’s lease of its principal office and research
facility will expire on January 31, 2023.
In
the aggregate, Use Fees charged to OncoCyte by BioTime are as follows (in thousands):
|
|
Three
Months Ended March 31,
|
|
|
|
(unaudited)
|
|
|
|
2019
|
|
|
2018
|
|
Research
and development
|
|
$
|
207
|
|
|
$
|
220
|
|
General
and administrative
|
|
|
118
|
|
|
|
73
|
|
Sales
and marketing
|
|
|
-
|
|
|
|
98
|
|
Total
Use Fees
|
|
$
|
325
|
|
|
$
|
391
|
|
As
of December 31, 2018, OncoCyte had $2.1 million outstanding and payable to BioTime and affiliates included in current liabilities
on account of Use Fees under the Shared Facilities Agreement. On February 15, 2019, OncoCyte paid the $2.1 million owed to BioTime
for prior services provided under the Shared Facilities Agreement. Use Fees are generally paid at the beginning of the month of
services to be rendered. The minimum fixed payments due under the Shared Facilities Agreement are approximately $108,000 per month.
As of March 31, 2019, no amounts were owed to BioTime under the Shared Facilities Agreement.
Financing
Transactions
As
further discussed in Note 6, in March 2018 OncoCyte sold shares to two investors who beneficially owned more than 5% of OncoCyte’s
outstanding common stock. The shares were sold under a securities purchase agreement that contains certain registration rights.
OncoCyte agreed to register the shares sold to the investors for resale under the Securities Act of 1933, as amended (the “Securities
Act”), not later than 60 days after the closing of the sale of the shares. OncoCyte also agreed to pay liquidated damages
calculated in the manner provided in the securities purchase agreement if OncoCyte did not file the registration statement in
a timely manner. Because the registration statement was not filed as required by the securities purchase agreement during the
year ended December 31, 2018, OncoCyte accrued $300,000 on account of liquidated damages owed and paid this amount during the
three months ended March 31, 2019.
5.
Loan Payable to Silicon Valley Bank
On
February 21, 2017, OncoCyte entered into a Loan and Security Agreement (the “Loan Agreement”) with Silicon Valley
Bank (the “Bank”) pursuant to which OncoCyte borrowed $2.0 million on March 23, 2017. Payments of interest only on
the principal balance were due monthly from the draw date through October 31, 2017, and, beginning on November 1, 2017, monthly
payments of principal of approximately $67,000 plus interest are due and payable. The outstanding principal balance of the loan
bears interest at a stated floating annual interest rate equal to the greater of (i) three-quarters of one percent (0.75%) above
the prime rate or (ii) four and one-quarter percent (4.25%). As of March 31, 2019, the latest published prime rate plus 0.75%
was 6.25% per annum.
The
outstanding principal amount plus accrued interest will be due and payable to the Bank at maturity on April 1, 2020. At maturity,
OncoCyte will also pay the Bank an additional final payment fee of 5.8% of the original principal borrowed. OncoCyte accrued the
$116,000 final payment fee included in the loan payable as a deferred financing cost on the March 23, 2017 draw date.
OncoCyte
may prepay in full the outstanding principal balance at any time, subject to a prepayment fee equal to 1.0% of the outstanding
principal balance. Any amounts borrowed and repaid may not be reborrowed. There are no amounts available to be borrowed on the
Loan Agreement.
The
outstanding principal amount of the loan, with interest accrued, the final payment fee, and the prepayment fee may become due
and payable prior to the applicable maturity date if an “Event of Default” as defined in the Loan Agreement occurs
and is not cured within any applicable cure period. Upon the occurrence and during the continuance of an Event of Default, all
obligations due to the Bank will bear interest at a rate per annum which is 5% above the then applicable interest rate. An Event
of Default includes, among other events, failure to pay interest and principal when due, material adverse changes, which include
a material adverse change in OncoCyte’s business, operations, or condition (financial or otherwise), failure to provide
the bank with timely financial statements and copies of filings with the Securities and Exchange Commission, as required, legal
judgments or pending or threatened legal actions of $50,000 or more, insolvency, and delisting from the NYSE American. OncoCyte’s
obligations under the Loan Agreement are collateralized by substantially all of its assets other than intellectual property such
as patents and trade secrets that OncoCyte owns. Accordingly, if an Event of Default were to occur and not be cured, the Bank
could foreclose on its security interest in the collateral. OncoCyte was in compliance with the Loan Agreement as of the filing
date of this Report.
Under
the provisions of the Loan Agreement, as consented by the Bank, any proceeds received by OncoCyte from sales of BioTime shares
may be used by OncoCyte to fund its operations.
Bank
Warrants
On
February 21, 2017, and in conjunction with $2.0 million becoming available under the Loan Agreement, OncoCyte issued common stock
purchase warrants to the Bank (the “Bank Warrants”) entitling the Bank to purchase shares of OncoCyte common stock
in tranches related to the loan tranches under the Loan Agreement. In conjunction with the availability of the loan, the Bank
was issued warrants to purchase 8,247 shares of OncoCyte common stock at an exercise price of $4.85 per share, through February
21, 2027. On March 23, 2017, in conjunction with borrowing $2.0 million, the Bank was issued warrants to purchase an additional
7,321 common shares at an exercise price of $5.46 per share, through March 23, 2027. The Bank may elect to exercise the
Bank Warrants on a “cashless exercise” basis and receive a number of shares determined by multiplying the number of
shares for which the applicable tranche is being exercised by (A) the excess of the fair market value of the common stock over
the applicable exercise price, divided by (B) the fair market value of the common stock. The fair market value of the common stock
will be the last closing or sale price on a national securities exchange, interdealer quotation system, or over-the-counter market.
The
Bank Warrants are classified as equity since, among other factors, they are not mandatorily redeemable, cannot be settled in cash
or other assets and require settlement by issuing a fixed number of shares of common stock of OncoCyte. OncoCyte determined the
fair value of the Bank Warrants using the Black-Scholes option pricing model to be approximately $62,000, which was recorded as
a deferred financing cost against the loan payable balance. Aggregate deferred financing costs of $196,000, recorded against the
loan payable balance, are amortized to interest expense over the term of the loan using the effective interest method. As of March
31, 2019, unamortized deferred financing costs were $23,000.
6.
Shareholders’ Equity
Preferred
Stock
OncoCyte
is authorized to issue 5,000,000 shares of no par value preferred stock. As of March 31, 2019, no preferred shares were issued
or outstanding.
Common
Stock
OncoCyte
has 85,000,000 shares of common stock, no par value, authorized.
During
February 2019, OncoCyte sold 10,733,334 shares of its common stock for $37.3 million of net proceeds, after the payment of underwriting
fees and estimated offering expenses, through an underwritten public offering.
During
February 2019, OncoCyte received $0.9 million in proceeds from exercise of stock options to purchase 576,000 shares of OncoCyte
common stock.
On
July 31, 2018, OncoCyte raised approximately $3.3 million in net proceeds, after offering expenses, from the sale of 1,256,118
shares of its common stock and warrants (the “July 2018 Offering”). The shares of common stock and warrants were sold
in “Units” at a purchase price of $2.86 per Unit, with each Unit consisting of one share of common stock and one warrant
to purchase one share of its common stock (“July 2018 Offering Warrants”). The Units of common stock and warrants
were sold in a registered direct offering. OncoCyte’s Chief Executive Officer, the Chief Financial Officer, the Senior Vice
President of Research and Development, and certain members of OncoCyte’s Board of Directors purchased Units in the July
2018 Offering on the same terms as other investors.
On
March 28, 2018, OncoCyte entered into securities purchase agreements with two accredited investors for the private placement of
7,936,508 shares of OncoCyte’s common stock for $1.26 per share, for total gross proceeds of $10.0 million before deducting
offering expenses, $8.0 million of which was received in March 2018 and $2.0 million in May 2018. The securities purchase agreements
contain certain registration rights (see Note 4). The investors are Broadwood Partners, L.P. and George Karfunkel, who beneficially
own more than 5% of OncoCyte’s outstanding common stock.
As
of March 31, 2019 and December 31, 2018, respectively, OncoCyte had 51,972,830 and
40,664,496
shares of common stock
issued and outstanding.
Accounting
for Warrants
As
of
March 31, 2019
, OncoCyte has an aggregate of 4,035,339 warrants issued and outstanding,
including the Bank Warrants disclosed in Note 5, at exercise prices ranging from $3.00 to $5.50 per warrant.
July
2018 Offering Warrants
Each
July 2018 Offering Warrant has an initial exercise price of $3.00 per share, became exercisable six months after the date of issuance
and will expire five years from the date it became exercisable. Subject to limited exceptions, a holder of the warrants will not
have the right to exercise any portion of the warrants if the holder, together with its affiliates, would beneficially own in
excess of 4.99% of the number of shares of OncoCyte’s common stock outstanding immediately after the exercise.
The
July 2018 Offering Warrants
are not mandatorily redeemable, cannot be settled in cash or
other assets and require settlement by issuing a fixed number of shares of common stock of OncoCyte. The July 2018 Offering Warrants
may be exercised on a net “cashless exercise” basis, meaning that the value of a portion of warrant shares
may be used to pay the exercise price (rather than payment in cash), if a registration statement for the July 2018 Offering Warrants
and underlying shares of common stock is not effective under the Securities Act of 1933, as amended (the “Securities Act”)
or a prospectus in the registration statement is not available for the issuance of shares upon the exercise of the July 2018 Offering
Warrants. The exercise price and the number of warrant shares will be adjusted to account for certain transactions, including
stock splits, dividends paid in common stock, combinations or reverse splits of common stock, or reclassifications of common stock.
Under
certain provisions of the July 2018 Offering Warrants, in the event of a Fundamental Transaction, as defined in the July 2018
Offering Warrants, OncoCyte will use reasonable best efforts for the acquirer, or any successor entity other than OncoCyte, to
assume the July 2018 Offering Warrants. If the acquirer does not assume the OncoCyte July 2018 Offering Warrants, and provided
that the Fundamental Transaction is not within OncoCyte’s control, including not approved by OncoCyte’s Board of Directors,
then the holders of the July 2018 Offering Warrants shall solely be entitled to receive, at a defined Black Scholes value, the
same type or form of consideration, and in the same proportion, that is being offered and paid to all the holders of OncoCyte
common stock in connection with the Fundamental Transaction.
OncoCyte
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, the July 2018 Offering Warrants meet all the equity classification criteria and have been classified as
equity.
2016
Warrants and New Warrants
On
August 29, 2016, OncoCyte sold an aggregate of 3,246,153 immediately separable units, with each unit consisting of one share of
OncoCyte common stock and one warrant to purchase one share of OncoCyte common stock (the “2016 Warrants”), at a price
of $3.25 per unit (the “Offering”). The sales were made pursuant to the terms and conditions of certain Purchase Agreements
between OncoCyte and the purchasers in the Offering.
The
2016 Warrants have an exercise price of $3.25 per Warrant Share and may be exercised until the close of business on October 16,
2021. The 2016 Warrants may be exercised on a net “cashless exercise” basis, meaning that the value of a portion of
Warrant Shares may be used to pay the exercise price (rather than payment in cash), in certain circumstances. The exercise price
and the number of Warrant Shares will be adjusted to account for certain transactions, including stock splits, dividends paid
in common stock, combinations or reverse splits of common stock, or reclassifications of common stock.
Under
certain provisions of the 2016 Warrants, in the event of a Fundamental Transaction, as defined in the 2016 Warrants, OncoCyte
will use reasonable best efforts for the acquirer, or any successor entity other than OncoCyte, to assume the 2016 Warrants. If
the acquirer does not assume the OncoCyte 2016 Warrant obligations, then the acquirer shall pay the holders of 2016 Warrants an
amount equal to the aggregate value equal to the Black Scholes Value, as defined in the 2016 Warrants. The payment of the Black
Scholes Value shall be made in cash or such other consideration as the acquirer paid to the other OncoCyte shareholders in the
Fundamental Transaction.
OncoCyte
is not required to net cash settle the 2016 Warrants under any circumstance.
OncoCyte
considered the guidance in ASC 815-40, 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. Since solely an acquirer, and not OncoCyte itself, may be required to net cash settle the 2016 Warrants
in the event of a Fundamental Transaction, the 2016 Warrants are classified as equity.
On
February 17, 2017, certain OncoCyte investors exercised 2016 Warrants to acquire 625,000 shares of common stock at an exercise
price of $3.25 per warrant for total exercise cash proceeds of $2.0 million (the “Warrant exercise”). In order to
induce the investors to complete the Warrant exercise and, in conjunction with the Warrant exercise, OncoCyte issued new warrants
to those investors (the “New Warrants”). Certain investors received New Warrants to purchase 200,000 shares of common
stock at an exercise price of $5.50 per share and one investor received New Warrants to purchase 212,500 shares of common stock
at an exercise of $3.25 per share. The New Warrants are exercisable at any time for five years from February 17, 2017.
The
New Warrants are classified as equity as their terms are consistent with the 2016 Warrants.
On
July 21, 2017, OncoCyte entered into three forms of Warrant Exercise Agreements (each, an “Exercise Agreement”) with
certain holders of the 2016 Warrants providing for the cash exercise of their 2016 Warrants and the issuance of new warrants (the
“July 2017 Warrants”) to them.
Pursuant
to one form of Exercise Agreement, two investors exercised 2016 Warrants to purchase 226,923 shares of OncoCyte’s common
stock at the exercise price of $3.25 per share, and OncoCyte issued to them July 2017 Warrants expiring five years from the date
of issue, to purchase 226,923 shares of common stock at an exercise price of $5.50 per share.
Pursuant
to a second form of Exercise Agreement, one investor exercised 2016 Warrants to purchase 540,000 shares of common stock at the
exercise price of $3.25 per share, and OncoCyte issued to the investor a July 2017 Warrant, expiring five years from the date
of issue, to purchase 270,000 shares of common stock at an exercise price of $3.25 per share. In this alternative form of Exercise
Agreement, OncoCyte also agreed to use
commercially reasonable efforts to
file with
the SEC a registration statement covering the resale of the shares of common stock issuable upon exercise of the July 2017 Warrant
and to keep it continuously effective for up to five years, subject to conditions set forth in the Exercise Agreement.
Pursuant
to a third form of Exercise Agreement, one investor exercised 2016 Warrants to purchase 1,000,000 shares of common stock at the
exercise price of $3.25 per share, and OncoCyte issued to the investor (i) a July 2017 Warrant, expiring two years from the date
of issue, to purchase 500,000 shares of common stock at an exercise price of $5.50 per share, and (ii) a July 2017 Warrant, expiring
two years from the date of issue, to purchase 500,000 shares of common stock at an exercise price of $3.25 per share. In this
alternative form of Exercise Agreement, OncoCyte also agreed to use commercially reasonable efforts to file with the SEC a registration
statement covering the resale of the shares of common stock issuable upon exercise of the July 2017 Warrant and to keep it continuously
effective for up to five years, subject to conditions set forth in the Exercise Agreement.
In
the aggregate, upon the exercise of 2016 Warrants under the Exercise Agreements, OncoCyte received gross proceeds of approximately
$5.74 million and issued July 2017 Warrants to purchase 1,496,923 shares of common stock at a weighted average price of $4.34
per share.
The July 2017 Warrants are classified as equity as their terms are consistent
with the 2016 Warrants.
Stock
option exercises
During
the three months ended
March 31, 2019
, 576,000 shares of common stock were issued
upon the exercise of stock options, from which OncoCyte received approximately $0.9 million in cash proceeds.
Reconciliation
of Changes in Shareholders’ Equity
The
following tables provide the activity in shareholders’ equity for the periods from December 31, 2017 to March 31, 2018 and
December 31, 2018 to March 31, 2019 (unaudited and in thousands).
|
|
Common
Stock
|
|
|
Accumulated
Other
Comprehensive
|
|
|
Accumulated
|
|
|
Total
Shareholders’
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Loss
|
|
|
Deficit
|
|
|
Equity
|
|
BALANCE
AT DECEMBER 31, 2017
|
|
|
31,452
|
|
|
$
|
59,968
|
|
|
$
|
(888
|
)
|
|
$
|
(54,677
|
)
|
|
$
|
4,403
|
|
Net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,778
|
)
|
|
|
(3,778
|
)
|
Cumulative-effect
adjustment for adoption of ASU 2016-01 on January 1, 2018
|
|
|
-
|
|
|
|
-
|
|
|
|
888
|
|
|
|
(888
|
)
|
|
|
-
|
|
Stock-based
compensation
|
|
|
-
|
|
|
|
347
|
|
|
|
-
|
|
|
|
-
|
|
|
|
347
|
|
Sale
of common shares and warrants
|
|
|
6,349
|
|
|
|
8,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
8,000
|
|
Exercise
of stock options
|
|
|
17
|
|
|
|
51
|
|
|
|
-
|
|
|
|
-
|
|
|
|
51
|
|
BALANCE
AT MARCH 31, 2018
|
|
|
37,818
|
|
|
$
|
68,366
|
|
|
$
|
-
|
|
|
$
|
(59,343
|
)
|
|
$
|
9,023
|
|
|
|
Common
Stock
|
|
|
Accumulated
Other
Comprehensive
|
|
|
Accumulated
|
|
|
Total
Shareholders’
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Loss
|
|
|
Deficit
|
|
|
Equity
|
|
BALANCE
AT DECEMBER 31, 2018
|
|
|
40,664
|
|
|
$
|
74,742
|
|
|
$
|
-
|
|
|
$
|
(71,319
|
)
|
|
$
|
3,423
|
|
Net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,864
|
)
|
|
|
(3,864
|
)
|
Stock-based
compensation
|
|
|
-
|
|
|
|
686
|
|
|
|
-
|
|
|
|
-
|
|
|
|
686
|
|
Sale of
common shares
|
|
|
10,733
|
|
|
|
40,250
|
|
|
|
-
|
|
|
|
-
|
|
|
|
40,250
|
|
Financing
costs paid to issue common shares
|
|
|
-
|
|
|
|
(3,251
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,251
|
)
|
Exercise
of stock options
|
|
|
576
|
|
|
|
943
|
|
|
|
-
|
|
|
|
-
|
|
|
|
943
|
|
BALANCE
AT MARCH 31, 2019
|
|
|
51,973
|
|
|
$
|
113,370
|
|
|
$
|
-
|
|
|
$
|
(75,183
|
)
|
|
$
|
38,187
|
|
7.
Stock-Based Compensation
Options
Granted
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.
The
2018 Incentive Plan reserved 5,000,000 shares of common stock for the grant of stock options or the sale of restricted stock (“Restricted
Stock”) or for the settlement of hypothetical units issued with reference to common stock (“Restricted Stock Units”).
OncoCyte may also grant stock appreciation rights (“SARs”) under the 2018 Incentive Plan.
A
summary of OncoCyte’s 2010 Plan activity and related information follows (in thousands except weighted average exercise
price):
Options
|
|
Shares
Available
for
Grant
|
|
|
Number
of
Options
Outstanding
|
|
|
Weighted
Average
Exercise
Price
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Balance at December 31, 2018
|
|
|
-
|
|
|
|
4,171
|
|
|
$
|
2.92
|
|
Options exercised
|
|
|
-
|
|
|
|
(575
|
)
|
|
|
1.64
|
|
Options forfeited,
canceled and expired
|
|
|
-
|
|
|
|
(301
|
)
|
|
|
3.42
|
|
Balance at March 31, 2019
|
|
|
-
|
|
|
|
3,295
|
|
|
$
|
3.10
|
|
Exercisable at March 31, 2019
|
|
|
|
|
|
|
1,925
|
|
|
$
|
3.09
|
|
Of
the stock options granted under the 2010 Plan, Oncocyte granted stock options to employees and consultants, 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
DetermaVu™ and obtaining Medicare reimbursement coverage
for that test (“Performance-Based Options”). As of March 31, 2019, there were 856,800 Performance-Based Options outstanding.
During the three months ended March 31, 2019 certain performance conditions required for vesting were met, and, accordingly, 47,500
shares vested and $101,000 of stock-based compensation expense was recorded with regard to the Performance-Based Options.
A
summary of OncoCyte’s 2018 Incentive Plan activity and related information follows (in thousands except weighted
average exercise price):
Options
|
|
Shares
Available
for
Grant
|
|
|
Number
of
Options
Outstanding
|
|
|
Weighted
Average
Exercise
Price
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Balance at December 31, 2018
|
|
|
4,639
|
|
|
|
361
|
|
|
$
|
2.21
|
|
Options granted
|
|
|
(1,462
|
)
|
|
|
1,462
|
|
|
|
3.53
|
|
RSUs granted
|
|
|
(40
|
)
|
|
|
20
|
|
|
|
-
|
|
Options exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Options forfeited
and canceled
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balance at March 31, 2019
|
|
|
3,137
|
|
|
|
1,843
|
|
|
$
|
3.27
|
|
Exercisable at March 31, 2019
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
OncoCyte
recorded stock-based compensation expense in the following categories on the accompanying condensed statements of operations for
the three months ended March 31, 2019 and 2018 (in thousands):
|
|
Three
Months Ended March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Research and development
|
|
$
|
130
|
|
|
$
|
(78
|
)
(1)
|
General and administrative
|
|
|
554
|
|
|
|
256
|
|
Sales and marketing
|
|
|
2
|
|
|
|
169
|
|
Total stock-based
compensation expense
|
|
$
|
686
|
|
|
$
|
347
|
|
(1)
|
The
negative stock-based compensation expense is primarily attributable to the decrease in the OncoCyte stock price from $4.65
per share at December 31, 2017 to $2.10 per share at March 31, 2018 for previously granted consultant stock options which
require mark-to-market adjustment each quarter for unvested shares.
|
The
assumptions that were used to calculate the grant date fair value of OncoCyte’s employee and non-employee stock option grants
for the three months ended March 31, 2019 and 2018 were as follows.
|
|
Three
Months Ended March 31,
|
|
|
|
2019
|
|
|
2018
(1)
|
|
Expected life (in years)
|
|
|
6.07
|
|
|
|
8.00
|
|
Risk-free interest rates
|
|
|
2.47
|
%
|
|
|
2.81
|
%
|
Volatility
|
|
|
79.18
|
%
|
|
|
72.70
|
%
|
Dividend yield
|
|
|
-
|
%
|
|
|
-
|
%
|
(1)
|
Although there were no new stock option grants
for the three months ended March 31, 2018, the assumptions shown in the table were used to compute the mark-to-market adjustments
for previously granted consultant stock options for unvested shares.
|
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 months ended March 31, 2019 and 2018 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.
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.
Due
to losses incurred for all periods presented, OncoCyte did not record any provision or benefit for income taxes.
A valuation allowance is provided when it is more likely than not that some portion of the deferred tax assets will not be realized.
OncoCyte established a full valuation allowance for all periods presented due to the uncertainty of realizing future tax benefits
from its net operating loss carryforwards and other deferred tax assets.
9.
Commitments and Contingencies
OncoCyte
has certain commitments other than those under the Shared Facilities agreement discussed in Note 4.
Master
Lease Line Agreement
On
April 7, 2016, OncoCyte entered into a Master Lease Line Agreement (“Lease Agreement No. 1”) with a financing company
for the purchase and financing of certain equipment. Lease Agreement No. 1, as amended, provided OncoCyte with a $881,000 line
of credit for purchases of equipment. Each lease schedule OncoCyte enters into under Lease Agreement No. 1 has a 36-month lease
term, is collateralized by the equipment financed, which are subject to lease schedules, and required OncoCyte to provide
a deposit for the first and last payment under that schedule. Monthly payments were determined using a lease factor approximating
an interest rate of 10% per annum. OncoCyte has the right at the end of each lease schedule under Lease Agreement No. 1, if no
default has occurred, to either return the equipment financed under the schedule for a restocking fee of 7.5% of the original
cost of the equipment or to purchase the equipment from the financing company at a fair value not less than 12.5% of the original
cost of the equipment.
On
April 7, 2016, OncoCyte entered into a lease schedule (“Lease Schedule No. 1”) under the Lease Agreement No. 1 for
certain equipment costing approximately $435,000 applied against the lease line, requiring payments of $14,442 per month over
36 months. In March 2019, upon termination of Lease Schedule No. 1, OncoCyte paid the 7.5% restocking fee and returned the equipment
to the financing company.
In
December 2016, OncoCyte entered into another lease schedule (“Lease Schedule No. 2”) for certain equipment costing
approximately $161,000, requiring payments of $5,342 per month over 36 months. In April 2017, OncoCyte entered into a third and
final lease schedule (“Lease Schedule No. 3”) for certain equipment costing approximately $285,000, requiring payments
of $9,462 per month over 36 months. After the last tranche, Lease Agreement No. 1 was closed with no remaining financing available
.
On
May 11, 2017, OncoCyte entered into another Master Lease Line Agreement (“Lease Agreement No. 2”) with the same finance
company on terms similar to Lease Agreement No. 1. On July 2, 2018, OncoCyte entered into a lease schedule under the Lease
Agreement No. 2 for certain equipment costing approximately $209,000, requiring payments of $6,709 per month over 36 months, a
$116,000 prepaid maintenance contract for the duration of the lease, and requiring 12 monthly payments of $10,238, including imputed
interest. After the financing of this equipment and the prepaid maintenance contract, there was approximately $502,000 of financing
remaining available under Lease Agreement No. 2 as of March 31, 2019.
OncoCyte
had accounted for these leases as capital leases in accordance with ASC 840 due to the net present value of the payments under
the lease approximating the fair value of the equipment at inception of the lease. As discussed in Note 2, upon adoption of ASC
842, the accounting for these leases was substantially unchanged and these leases are referred to as financing leases under
ASC 842. The payments under the lease schedules will be amortized to financing lease obligations and interest expense
using the interest method at an imputed rate of approximately 10% per annum.
Adoption
of ASC 842
The
tables below provide the amounts recorded in connection with the adoption of ASC 842 as of, and during, the three months
ended March 31, 2019, for OncoCyte’s financing leases (see Note 2).
The
following table presents supplemental
cash flow information
related to financing leases for the three months ended March 31, 2019 (in thousands):
Cash paid for amounts included in the
measurement of lease liabilities:
|
|
|
|
Operating
cash flows from financing leases
|
|
$
|
12
|
|
Financing
cash flows from financing leases
|
|
|
134
|
|
Right-of-use assets
obtained in exchange for lease obligations:
|
|
|
|
|
Financing leases
|
|
|
-
|
|
The
following table presents supplemental
balance sheet information
related to financing leases as of March 31, 2019 (in thousands, except lease term and discount rate):
Financing Leases
|
|
|
|
Machinery
and equipment, gross
|
|
$
|
758
|
|
Accumulated depreciation
|
|
|
(390
|
)
|
Machinery
and equipment, net
|
|
$
|
368
|
|
|
|
|
|
|
Current liabilities
|
|
$
|
304
|
|
Noncurrent liabilities
|
|
|
134
|
|
Total
financing lease liabilities
|
|
$
|
438
|
|
|
|
|
|
|
Weighted average remaining lease term
|
|
|
|
|
Financing leases
|
|
|
1.6
years
|
|
Weighted average discount rate
|
|
|
|
|
Financing leases
|
|
|
9.6
|
%
|
The
following table presents future
minimum lease commitments as
of March 31, 2019 (in thousands):
|
|
Financing
Lease Payments
|
|
Year Ending December
31,
|
|
|
|
2019
|
|
$
|
274
|
|
2020
|
|
|
140
|
|
2021
|
|
|
60
|
|
Total minimum lease payments
|
|
|
474
|
|
Less amounts
representing interest
|
|
|
(36
|
)
|
Present value
of net minimum lease payments
|
|
$
|
438
|
|
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.
In
February 2019, following the announcement of OncoCyte’s public offering discussed in Note 6, OncoCyte received a letter
from Chardan Capital Markets, LLC (“Chardan”) claiming entitlement to certain fees pursuant to an engagement letter
unrelated to the public offering. OncoCyte believes Chardan’s claims are without merit and intends to vigorously defend
all claims asserted. It is not possible at this time to assess whether the outcome of this matter will have a material adverse
effect on OncoCyte’s results of operations, cash flows or financial position.
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. OncoCyte has not received any notice from any taxing authority that any of its tax returns
are being audited, and OncoCyte has not provided for any additional tax related obligations that are likely to result from any
future audits.
Employment
Contracts
OncoCyte
has entered into employment contracts with certain executive officers. Under the provisions of the contracts, OncoCyte may be
required to incur severance obligations for matters relating to terminations of employment under certain circumstances.
Indemnification
In
the normal course of business, OncoCyte may provide indemnification of varying scope under OncoCyte’s agreements with other
companies or consultants, typically OncoCyte’s clinical research organizations, investigators, clinical sites, suppliers
and others. Pursuant to these agreements, OncoCyte will generally agree to indemnify, hold harmless, and reimburse the indemnified
parties for losses and expenses suffered or incurred by the indemnified parties arising from claims of third parties in connection
with the use or testing of OncoCyte’s diagnostic tests. Indemnification provisions could also cover third party infringement
claims with respect to patent rights, copyrights, or other intellectual property pertaining to OncoCyte’s diagnostic tests.
The term of these indemnification agreements will generally continue in effect after the termination or expiration of the particular
research, development, services, or license agreement to which they relate. The potential future payments OncoCyte could be required
to make under these indemnification agreements will generally not be subject to any specified maximum amounts. Historically, OncoCyte
has not been subject to any claims or demands for indemnification. OncoCyte also maintains various liability insurance policies
that limit OncoCyte’s financial exposure. As a result, OncoCyte management believes that the fair value of these indemnification
agreements is minimal. Accordingly, OncoCyte has not recorded any liabilities for these agreements as of March 31, 2019 and December
31, 2018.