NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
1.
Organization, Description of the Business and Liquidity
Oncocyte
Corporation (“Oncocyte”), incorporated in 2009 in the state of California, is a molecular diagnostics company focused on
developing and commercializing proprietary laboratory-developed tests (“LDTs”) to serve unmet medical needs across the cancer
care continuum. Oncocyte’s mission is to provide actionable information to physicians and patients at critical decision points
to optimize diagnosis and treatment decisions, improve patient outcomes, and reduce overall cost of care. Oncocyte has prioritized lung
cancer as its first indication. Lung cancer remains the leading cause of cancer death in the United States, despite the availability
of molecular testing and novel therapies to treat patients.
Oncocyte’s
first product for commercial release is a proprietary treatment stratification test called DetermaRx™ that identifies which patients
with early-stage non-small cell lung cancer may benefit from chemotherapy, resulting in a significantly higher, five-year survival rate.
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 is now the sole shareholder
of Razor. The acquisition of the remaining equity interests has been 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 has been 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 LDT development pipeline the TheraSure™-CNI Monitor, a patented, blood-based
test for immunotherapy monitoring which Oncocyte expects to market as DetermaCNITM in the United States, and TheraSure™
Transplant Monitor, a 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.
ONCOCYTE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Liquidity
Oncocyte
has incurred operating losses and negative cash flows since inception and had an accumulated deficit of $187.8
million as of December 31, 2021. 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 for that period. Oncocyte finances its operations primarily through the sale of shares of
its common stock.
As
of December 31, 2021, Oncocyte had $35.6 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 $0.9
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 consolidated financial statements included in this Report.
On
March 20, 2020, Oncocyte entered into an Equity Distribution Agreement with Piper Sandler & Co as “Sales Agent” (“ATM
Agreement”) which Oncocyte may utilize in the future to raise up to $25 million of additional equity capital through the sale of
shares of its common stock in “at the market” transactions. Oncocyte raised $69.6 million of additional capital through sales
of its common stock during January and February 2021, which included sales through the ATM Agreement. A portion of the capital raised
was used to purchase the outstanding Razor common stock form Razor stockholders.
On
April 23, 2020, Oncocyte obtained a U.S. Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”)
loan in the principal amount of $1,140,930 from Silicon Valley Bank (the “Bank”). The PPP loan bore interest at a rate of
1% per annum (see Note 12) and was scheduled to mature on April 23, 2022. During May 2021, the principal amount and accrued interest
on the PPP loan was forgiven by the Bank through the SBA under the provisions of the PPP loan program. Although Oncocyte was obligated
to make monthly payments of principal and interest on the PPP loan commencing in November 2020, each in such equal amount required to
fully amortize the principal amount outstanding by the maturity date, Oncocyte was not billed or charged for any payments for the PPP
loan during its loan forgiveness application. The forgiven principal amount of $1,140,930 is recognized as gain on extinguishment of
debt in the accompanying consolidated statements of operations.
On
June 11, 2021, Oncocyte entered into an at-the-market sales agreement with BTIG, LLC as sales agent and/or principal (the “Agent”)
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 December 31, 2021, Oncocyte sold 1,108,650 shares of common stock at an average offering price of $5.63 per share, for
gross proceeds of approximately $6.24 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 LDTs and other tests and performing Pharma Services to
cover its operating expenses.
Presently,
Oncocyte is devoting substantially all of its efforts on initial commercialization efforts for DetermaRx™ and 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; and continuing
development and planning commercialization of DetermaTxTM. Oncocyte has also begun to transfer the technology related to TheraSure™-CNI
Monitor to its laboratory in Nashville, Tennessee. While Oncocyte plans to primarily market its LDTs 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 LDTs 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.
ONCOCYTE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 diagnostic tests that Oncocyte may develop or acquire.
The
availability of financing and Oncocyte’s ability to generate revenues from operating activities may be adversely impacted by the
ongoing COVID-19 pandemic which could continue to cause deferrals of cancer surgeries that might otherwise have resulted in the utilization
of DetermaRx™ and 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 favorable terms, if at all.
2.
Basis of Presentation and Summary of Significant Accounting Policies
Basis
of presentation
The consolidated
financial statements include the accounts Oncocyte and our wholly-owned subsidiaries. All significant intercompany transactions and
balances have been eliminated in consolidation.
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).
ONCOCYTE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The
accompanying consolidated 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 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 consolidated financial statements, and the
reported amounts of revenues and expenses during the reporting period. On an ongoing basis, management evaluates estimates which are
subject to significant judgment, including, but not limited to, valuation methods used, assumptions requiring the use of judgment to
prepare financial projections, timing of potential commercialization of acquired in-process intangible assets, applicable discount rates,
probabilities of the likelihood of multiple outcomes of certain events related to contingent consideration, comparable companies or transactions,
determination of fair value of the assets acquired and liabilities assumed including those relating to contingent consideration, assumptions
related to the going concern assessments, allocation of direct and indirect expenses, useful lives associated with long-lived intangible
assets, key assumptions in operating and financing leases including incremental borrowing rates, loss contingencies, valuation allowances
related to deferred income taxes, and assumptions used to value debt and stock-based awards and other equity instruments. Actual results
may differ materially from those estimates.
Similarly,
Oncocyte assessed certain accounting matters that generally require consideration of forecasted financial information. The accounting
matters assessed included, but were not limited to, Oncocyte’s equity investments, the carrying value of goodwill, acquired in-process
intangible assets and other long-lived assets. Those assessments as well as other estimates referenced above were made in the context
of information reasonably available to Oncocyte. While Oncocyte considered known or expected impacts of COVID-19 in making its assessments
and estimates, the future impacts of COVID-19 are not presently determinable and could cause actual results to differ materially from
Oncocyte’s estimates and assessments. Oncocyte’s future analysis or forecast of COVID-19 impacts could lead to changes in
Oncocyte’s future estimates and assessments which could result in material impacts to Oncocyte’s consolidated financial statements
in future reporting periods.
Going
concern assessment
In
accordance with the Financial Accounting Standards Board’s (“FASB”) standard on going concern, Accounting Standard
Update, or ASU No. 2014-15, Oncocyte assesses going concern uncertainty in its consolidated financial statements to determine if it has
sufficient cash, cash equivalents and working capital on hand, including marketable equity securities, and any available borrowings on
loans, to operate for a period of at least one year from the date the consolidated financial statements are issued, which is referred
to as the “look-forward period” as defined by ASU No. 2014-15. As part of this assessment, based on conditions that are known
and reasonably knowable to Oncocyte, it will consider various scenarios, forecasts, projections, estimates and will make certain key
assumptions, including the timing and nature of projected cash expenditures or programs, and its ability to delay or curtail expenditures
or programs, if necessary, among other factors. Based on this assessment, as necessary or applicable, Oncocyte makes certain assumptions
around implementing curtailments or delays in the nature and timing of programs and expenditures to the extent Oncocyte deems probable
those implementations can be achieved and it has the proper authority to execute them within the look-forward period in accordance with
ASU No. 2014-15.
ONCOCYTE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Business
combinations and fair value measurements
Oncocyte
accounts for business combinations in accordance with ASC 805, which requires the purchase consideration transferred to be measured at
fair value on the acquisition date in accordance with ASC 820, Fair Value Measurement. ASC 820 establishes a single authoritative
definition of fair value, sets out a framework for measuring fair value and expands on required disclosures about fair value measurement.
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the
principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement
date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable
inputs to the extent possible. ASC 820 describes a fair value hierarchy based on three levels of inputs, of which the first two are considered
observable and the last unobservable, that may be used to measure fair value, which are the following:
|
● |
Level
1 – Quoted prices in active markets for identical assets and liabilities. |
|
|
|
|
● |
Level
2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted market prices for similar
assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by
observable market data for substantially the full term of the assets or liabilities. |
|
|
|
|
● |
Level
3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of
the assets or liabilities. |
When
a part of the purchase consideration consists of shares of Oncocyte common stock, Oncocyte calculates the purchase price attributable
to those shares, a Level 1 security, by determining the fair value of those shares quoted on the NYSE American as of the acquisition
date. Oncocyte recognizes estimated fair values of the tangible assets and identifiable intangible assets acquired, including IPR&D,
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, amounts due to Lineage and other affiliates, 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, and the carrying amount of the PPP loan approximates fair value because of the SBA guarantee on the terms of the loan and the relatively
recent funding date of the loan (see Note 12).
Cash
and cash equivalents
Cash
equivalents typically consist of money market fund investments for capital preservation, with maturities of three months or less when
purchased. At December 31, 2021 and 2020, Oncocyte’s cash and cash equivalents balances totaled $35.6 million and $7.1 million,
respectively.
Financial
instruments that potentially subject Oncocyte to credit risk consist principally of cash and cash equivalents. Oncocyte maintains cash
and cash equivalent balances at financial institutions in excess of amounts insured by United States government agencies. Oncocyte places
its cash and cash equivalents with high credit quality financial institutions.
Accounts
receivable and allowance for doubtful accounts
Accounts receivable are
stated at the amount we expect to collect. Our evaluation of the collectability of customer accounts receivable is based on various factors,
including the length of time the receivables are past due, our history of bad debts and general industry conditions. Accounts that are
deemed uncollectible are written off against the allowance for doubtful accounts. As of December 31, 2021 and December 31, 2020, Oncocyte
has not recorded any losses or allowance for doubtful accounts on its account receivables.
ONCOCYTE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Accounting
for Lineage and AgeX shares of common stock
Oncocyte
accounts for the Lineage and AgeX shares of common it holds as marketable equity securities in accordance with ASC 320-10-25, Investments
– Debt and Equity Securities, as amended by Accounting Standards Update (“ASU”) 2016-01, Financial Instruments–Overall:
Recognition and Measurement of Financial Assets and Financial Liabilities, as the shares have a readily determinable fair value quoted
on the NYSE American and are held principally to meet future working capital purposes, as necessary. The securities are measured at fair
value and reported as current assets on the consolidated balance sheets based on the closing trading price of the security as of the
date being presented.
As
of 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 $904,000.
Prepaid
expenses and other current assets
As
of December 31, 2021 and 2020, prepaid expenses and other current assets were comprised of the following (in thousands):
Schedule of Prepaid Expenses and Other Current Assets
| |
2021 | | |
2020 | |
| |
| | |
| |
Prepaid vendors, deposits, and service agreements | |
| 365 | | |
| 646 | |
Supplies inventory | |
| 304 | | |
| - | |
Prepaid insurance | |
| 243 | | |
| 264 | |
Note receivable | |
| 200 | | |
| - | |
Other | |
| 85 | | |
| 295 | |
Total prepaid expenses and other current assets | |
| 1,197 | | |
| 1,205 | |
Restricted
cash
Oncocyte
classifies cash that has contractual or legal restrictions imposed by third parties as restricted cash, which is restricted as to withdrawal
or use except for the specified purpose under a contract. Oncocyte includes the restricted cash consistent with the nature of the underlying
contract and classifies it as part of current assets if the restricted cash will be released in the next twelve months from the balance
sheet date, or in deposits and other noncurrent assets if it will be restricted for longer than twelve months from the balance sheet
date.
Oncocyte
adopted ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, which requires that the statement of cash flows explain
the change during the period in the total of cash, cash equivalents and restricted cash, and that restricted cash be included with cash
and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statements of cash flows.
The
following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the balance sheet dates that
comprise the total of the same such amounts shown in the statements of cash flows in accordance with ASU 2016-18 (in thousands):
Schedule of Reconciliation of Cash, Cash Equivalents, and Restricted Cash
| |
2021 | | |
2020 | |
| |
December 31, | |
| |
2021 | | |
2020 | |
Cash and cash equivalents | |
$ | 35,605 | | |
$ | 7,143 | |
Restricted cash included in deposits and other noncurrent assets (see Note 10) | |
| 1,700 | | |
| 1,700 | |
Total cash, cash equivalents, and restricted cash as shown in the statements of cash flows | |
$ | 37,305 | | |
$ | 8,843 | |
ONCOCYTE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Goodwill
and intangible assets
In
accordance with ASC 350, Intangibles – Goodwill and Other, 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 December 31, 2021, there has been no impairment of goodwill and intangible assets.
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 diagnostic tests, as applicable, or annual minimum royalties to certain licensors, as provided in the applicable
agreements. The fair value of such liabilities is determined using unobservable inputs. These inputs include the estimated amount and
timing of projected cash flows and the risk-adjusted discount rate used to present value the cash flows. 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 revenues generated from DetermaIO™ and Insight Pharma Services over their respective useful life.
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 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 consolidated financial statements. See Note 3 for a full discussion of these liabilities.
ONCOCYTE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Investments
in capital stock of privately held companies
Oncocyte
evaluates whether investments held in common stock of other companies require consolidation of the company under, first, the variable
interest entity (“VIE”) model, and then under the voting interest model in accordance with accounting guidance for consolidations
under Accounting Standards Codification (“ASC”) 810-10. If consolidation of the entity is not required under either the VIE
model or the voting interest model, Oncocyte determines whether the equity method of accounting should be applied in accordance with
ASC 323, Investments – Equity Method and Joint Ventures. The equity method applies to investments in common stock or in-substance
common stock if Oncocyte exercises significant influence over, but does not control, the entity, where significant influence is typically
represented by ownership of 20% or more, but less than majority ownership, of the voting interests of a company.
Oncocyte
initially records equity method investments at fair value on the date of the acquisition with subsequent adjustments to the investment
balance based on Oncocyte’s share of earnings or losses from the investment. The equity method investment balance is shown in noncurrent
assets on the consolidated balance sheets.
Oncocyte
reviews investments accounted for under the equity method for impairment whenever events or changes in circumstances indicate that the
carrying amount of the investment may not be fully recoverable. If a determination is made that an “other-than-temporary”
impairment exists, Oncocyte writes down its investment to fair value. On September 30, 2019, Oncocyte acquired a 25% ownership interest
in Razor accounted for under the equity method of accounting as further discussed in Note 3.
On
February 24, 2021, Oncocyte acquired the remaining 75% ownership interest in Razor (see Note 3).
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 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 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 consolidated balance sheets. Financing leases are included in machinery and equipment, and
in financing lease liabilities, current and long-term, in the 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 consolidated
statements of cash flows.
On
January 1, 2019, the adoption date of ASC 842, and based on the available practical expedients under the 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 consolidated financial statements because Oncocyte did not have
any significant operating leases at the time of adoption. During the years ended December 31, 2021 and 2020, 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 (previously referred to as “capital leases”) remained substantially unchanged.
ONCOCYTE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Machinery
and equipment, construction in progress
Machinery
and equipment are stated at cost, less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated
useful lives of the assets, generally over a period of 3 to 10 years. For equipment purchased under financing leases, Oncocyte depreciates
the equipment based on the shorter of the useful life of the equipment or the term of the lease, ranging from 3 to 5 years, depending
on the nature and classification of the financing lease. Maintenance and repairs are expensed as incurred whereas significant renewals
and betterments are capitalized. When assets are retired or otherwise disposed of, the cost and the related accumulated depreciation
are removed from the respective accounts and any resulting gain or loss is reflected in Oncocyte’s results of operations.
Construction
in progress, comprised primarily of leasehold improvements under construction, is not depreciated until the underlying asset is placed
into service.
Long-lived
intangible assets
Long-lived
intangible assets, consisting of acquired Razor asset and 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 Note 3).
Impairment
of long-lived assets
Oncocyte
assesses the impairment of long-lived assets, which consist primarily of right-of-use assets for operating leases, customer relationships
and machinery and equipment, whenever events or changes in circumstances indicate that such assets might be impaired and the carrying
value may not be recoverable. If events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable
and the expected undiscounted future cash flows attributable to the asset are less than the carrying amount of the asset, an impairment
loss equal to the excess of the asset’s carrying value over its fair value is recorded.
As
part of Oncocyte’s impairment assessment of its long-lived assets, Oncocyte determined that certain assets, mainly comprised of
machinery and equipment and related prepaid service agreements used in the development of DetermaDx™ were impaired as of June 30,
2020, because Oncocyte determined to discontinue the development of that diagnostic test. Accordingly, Oncocyte recorded a noncash charge
of $422,000 representing the net book value of those assets as of that date and included that charge in research and development expenses
for the year ended December 31, 2020 (see Note 9). As of December 31, 2021, there has been no other impairment of long-lived assets.
Accounting
for warrants
Oncocyte
determines the accounting classification of warrants it issues, as either liability or equity classified, by first assessing whether
the warrants meet liability classification in accordance with ASC 480-10, Accounting for Certain Financial Instruments with Characteristics
of both Liabilities and Equity, then in accordance with ASC 815-40, Accounting for Derivative Financial Instruments Indexed to,
and Potentially Settled in, a Company’s Own Stock. Under ASC 480, warrants are considered liability classified if the warrants
are mandatorily redeemable, obligate Oncocyte to settle the warrants or the underlying shares by paying cash or other assets, or warrants
that must or may require settlement by issuing variable number of shares. If warrants do not meet liability classification under ASC
480-10, Oncocyte assesses the requirements under 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. If the warrants do not require liability classification under ASC 815-40, and in order to conclude equity
classification, Oncocyte also assesses whether the warrants are indexed to its common stock and whether the warrants are classified as
equity under ASC 815-40 or other applicable GAAP. After all relevant assessments, Oncocyte concludes whether the warrants are classified
as liability or equity. Liability classified warrants require fair value accounting at issuance and subsequent to initial issuance with
all changes in fair value after the issuance date recorded in the statements of operations. Equity classified warrants only require fair
value accounting at issuance with no changes recognized subsequent to the issuance date. Oncocyte does not have any liability classified
warrants as of any period presented (see Note 5).
ONCOCYTE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Income
taxes
Oncocyte
and its subsidiaries file a consolidated U.S. federal income tax return and combined California state return for the years ended December
31, 2021 and 2020. Oncocyte accounts for income taxes in accordance with ASC 740, Income Taxes, which prescribes the use of the
asset and liability method, whereby deferred tax asset or liability account balances are calculated at the balance sheet date using current
tax laws and rates in effect. Valuation allowances are established when necessary to reduce deferred tax assets when it is more likely
than not that a portion or all of the deferred tax assets will not be realized. Oncocyte’s judgments regarding future taxable income
may change over time due to changes in market conditions, changes in tax laws, tax planning strategies or other factors. If Oncocyte’s
assumptions and consequently its estimates change in the future, the valuation allowance may be increased or decreased, which may have
a material impact on Oncocyte’s statements of operations.
The
guidance also prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement
of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not
sustainable upon examination by taxing authorities. Oncocyte will recognize accrued interest and penalties related to unrecognized tax
benefits as income tax expense. No
amounts were accrued for the payment of
interest and penalties as of December 31, 2021 and 2020. Oncocyte is not aware of any uncertain tax positions that could result in significant
additional payments, accruals, or other material deviation for the years ended December 31, 2021 and 2020. Oncocyte is currently unaware
of any tax issues under review.
On
March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “Cares Act”) was enacted. The CARES Act included
loans and grants to certain businesses, and temporary amendments to the Internal Revenue Code which changed net loss carryforward and
back provisions and the business interest expenses limitation. Under the CARES Act provisions, the most relevant income tax considerations
to Oncocyte relate to the amounts received under the Paycheck Protection Program loan program and the possible forgiveness of those loans
by the SBA.
On
December 21, 2020, the U.S. president has signed into law the “Consolidated Appropriations Act, 2021” which includes further
COVID-19 economic relief and extension of certain expiring tax provisions. The relief package includes a tax provision clarifying that
businesses with forgiven PPP loans can deduct regular business expenses that are paid for with the loan proceeds for federal tax purposes.
Additional pandemic relief tax measures include an expansion of the employee retention credit, enhanced charitable contribution deductions,
and a temporary full deduction for business expenses for food and beverages provided by a restaurant (see Note 12).
Revenue
recognition
Prior
to January 1, 2020, Oncocyte generated no revenues. Effective on January 1, 2020, Oncocyte adopted the revenue recognition standard ASC
Topic 606, Revenue from Contracts with Customers (ASC) 606. Pursuant to ASC 606, revenues are recognized when control of services
performed is transferred to customers, in an amount that reflects the consideration Oncocyte expects to be entitled to in exchange for
those services. ASC 606 provides for a five-step model that includes, (i) identifying the contract with a customer, (ii) identifying
the performance obligations in the contract, (iii) determining the transaction price, (iv) allocating the transaction price to the performance
obligations, and (v) recognizing revenue when, or as, an entity satisfies a performance obligation.
ONCOCYTE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DetermaRx™
testing revenue
In the first quarter of 2020,
Oncocyte commercially launched DetermaRx™ and commenced performing tests on clinical samples through orders received from physicians,
hospitals and other healthcare providers. In determining whether all of the revenue recognition criteria (i) through (v) above are met
with respect to DetermaRx™ tests, each test result is considered a single performance obligation and is generally 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 take into account the novelty of the test, the uncertainty of
receiving payment, or being subject to claims for 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 on a cash basis
until it has a sufficient history to reliably estimate payment patterns or has contractual reimbursement arrangements, or both, in place.
In September 2020, Oncocyte received a final pricing decision for DetermaRx™ from CMS, and with Medicare coverage in effect,
Oncocyte commenced recognizing revenue when DetermaRx™ tests are performed for Medicare patients, or when payment was approved
by Medicare in the case of certain tests performed prior to September 2020.
The Company invoices third party payors, which include Medicare and Medicare
Advantage, for its laboratory testing services upon providing test results to ordering physicians. As such, the Company takes assignment
of benefits and risk of collection with third party payors. The Company continues to monitor the collection history for third party payors.
Medicare and Medicare Advantage reimbursement programs are complex and ambiguous, and are continuously being evaluated and modified by
the CMS. Our ability to receive timely reimbursements from third-party payors is dependent on our ability to correct and complete missing
and incorrect billing information. Missing and incorrect information on reimbursement submissions slows down the billing process and increases
the aging of accounts receivable. While we have receivables due from Medicare and Medicare Advantage, we do not believe that such receivables
represent a credit risk since the related healthcare programs are funded by federal and state governments, and payment is primarily dependent
upon submitting appropriate documentation. As such, as of December 31, 2021 and December 31, 2020, Oncocyte has not recorded any losses
or allowance for doubtful accounts on its account receivables from Medicare and Medicare Advantage covered DetermaRx™ tests.
As
of December 31, 2021, Oncocyte had accounts receivable of $1.1
million from Medicare and Medicare Advantage
covered DetermaRx™ tests (see Note 7). As of December 31, 2020, Oncocyte had accounts receivable of $0.1 million
from Medicare covered DetermaRx™ tests.
Pharma
Services revenue
Revenues
recognized during the year ended December 31, 2021 include Pharma Services performed by Oncocyte’s Insight subsidiary. Insight
provides a range of molecular diagnostic services to its pharmaceutical customers (referred to as “Pharma Services”) including
testing for biomarker discovery, assay design and development, clinical trial support, and a broad spectrum of biomarker tests in its
CLIA-certified laboratory. These Pharma Services are generally performed under individual scope of work (“SOW”) arrangements
with specific deliverables defined by the customer. Pharma Services are generally performed on a time and materials basis. Upon Insight’s
completion of the service to the customer in accordance with the SOW, Insight has the right to bill the customer for the agreed upon
price (either on a per test or per deliverable basis) and recognizes the pharma service revenue at that time. Insight identifies each
sale of its pharma service offering as a single performance obligation.
Completion
of the service and satisfaction of the performance obligation under a SOW is typically evidenced by access to the report or test made
available to the customer or any other form or applicable manner of delivery defined in the SOW. However, for certain SOWs under which
work is performed pursuant to the customer’s highly customized specifications, Insight has the enforceable right to bill the customer
for work completed, rather than upon completion of the SOW. For those SOWs, Insight recognizes revenue over a period of time during which
the work is performed using a formula that accounts for expended efforts, generally measured in labor hours, as a percentage of total
estimated efforts for the completion of the SOW. As Insight satisfies the performance obligation under the SOW, any amounts earned as
revenue and billed to the customer are included in accounts receivable. Any revenues earned but not yet billed to the customer as of
the date of Oncocyte’s consolidated financial statements are recorded as contract assets and are included in prepaids and other
current assets as of the financial statement date. Amounts recorded in contract assets are reclassified to accounts receivable in Oncocyte’s
consolidated financial statements when the customer is invoiced according to the billing schedule in the contract.
ONCOCYTE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Insight
establishes an allowance for doubtful accounts based on the evaluation of the collectability of its Pharma Services accounts receivables
after considering a variety of factors, including the length of time receivables are past due, significant events that may impair the
customer’s ability to pay, such as a bankruptcy filing or deterioration in the customer’s operating results or financial
position, and historical experience. If circumstances related to customers change, estimates of the recoverability of receivables would
be further adjusted. Insight continuously monitors collections and payments from customers and maintains a provision for estimated credit
losses and uncollectible accounts, if any, based upon its historical experience and any specific customer collection issues that have
been identified. Amounts determined to be uncollectible are written off against the allowance for doubtful accounts. As of December 31,
2021, Oncocyte has not recorded any losses or allowance for doubtful accounts on its account receivables from Pharma Services.
As
of December 31, 2021, Oncocyte had accounts receivable from Pharma Services customers of $364,000
(see Note 7).
Cost
of revenues
Cost
of revenues generally consists of cost of materials, direct labor including benefits, bonus and stock-based compensation, equipment and
infrastructure expenses, clinical sample related costs associated with performing Pharma Services and DetermaRx™ tests, and license
fees due to third parties, and also includes amortization of acquired customer relationship intangible assets. Infrastructure expenses
include depreciation of laboratory equipment, allocated rent costs, leasehold improvements and allocated information technology costs
for operations at Oncocyte’s CLIA laboratories in California and Tennessee. Costs associated with performing diagnostic tests and
Pharma Services are recorded as the tests or services are performed regardless of whether revenue was recognized with respect to that
test or pharma service. Royalties or revenue share payments for licensed technology calculated as a percentage of revenues generated
using the associated technology are recorded as expenses at the time the related revenues are recognized. Oncocyte generated no revenues
or cost of revenues prior to January 1, 2020.
Research
and development expenses
Research
and development expenses are comprised of costs incurred to develop technology, and include: salaries and benefits, including stock-based
compensation; laboratory expenses, including reagents and supplies used in research and development laboratory work; infrastructure expenses,
including allocated facility occupancy costs; and contract services and other outside costs. Indirect research and development expenses
are allocated primarily based on headcount, as applicable, and include rent and utilities, common area maintenance, telecommunications,
property taxes, and insurance. Research and development costs are expensed as incurred.
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.
Stock-based
compensation
Oncocyte
recognizes compensation expense related to employee option grants and restricted stock grants, if any, in accordance with FASB ASC 718,
Compensation – Stock Compensation (“ASC 718”).
All
excess tax benefits and tax deficiencies from stock-based compensation awards accounted for under ASC 718 are recognized as income tax
benefit or expense, respectively, in the statements of operations. An excess income tax benefit arises when the tax deduction of a share-based
award for income tax purposes exceeds the compensation cost recognized for financial reporting purposes and, a tax deficiency arises
when the compensation cost exceeds the tax deduction. Because Oncocyte has a full valuation allowance for all periods presented (see
Note 8), there was no impact to Oncocyte statements of operations for any excess tax benefits or deficiencies, as any excess benefit
or deficiency would be offset by the change in the valuation allowance. Forfeitures are accounted for as they occur.
ONCOCYTE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Oncocyte
estimates the fair value of employee stock-based payment awards on the grant-date and recognizes the resulting fair value over the requisite
service period. For stock-based awards that vest only upon the attainment of one or more performance goals set by Oncocyte at the time
of the grant (sometimes referred to as milestone vesting), compensation cost is recognized if and when Oncocyte determines that it is
probable that the performance condition or conditions will be, or have been, achieved. Oncocyte uses the Black-Scholes option pricing
model for estimating the fair value of options granted under Oncocyte’s equity plans. The fair value of each restricted stock grant,
if any, is determined based on the value of the common stock granted or sold. Oncocyte has elected to treat stock-based payment awards
with graded vesting schedules and time-based service conditions as a single award and recognizes stock-based compensation on a straight-line
basis over the requisite service period.
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. 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 consolidated financial statements.
The
Black-Scholes option pricing model requires Oncocyte to make certain assumptions including the expected option term, the expected volatility,
the risk-free interest rate and the dividend yield (see Note 6).
The
expected term of employee stock options represents the weighted-average period that the stock options are expected to remain outstanding.
Oncocyte estimates the expected term of options granted based on its own experience and, in part, based on upon the “simplified
method” provided under Staff Accounting Bulletin, Topic 14, or SAB Topic 14, as necessary. For the years ended December
31, 2021 and 2020, Oncocyte estimated the expected volatility using its own stock price volatility to the extent applicable or a combination
of its stock price volatility and the stock price volatility of peer companies, for a period equal to the expected term of the options.
The risk-free interest rate assumption is based upon observed interest rates on the United States government securities appropriate for
the expected term of Oncocyte’s stock options. The dividend yield assumption is based on Oncocyte’s history and expectation
of dividend payouts. Oncocyte has never declared or paid any cash dividends on its common stock, and Oncocyte does not anticipate paying
any cash dividends in the foreseeable future.
Net
loss per common share
Basic
net loss per common share is computed by dividing net loss by the weighted-average number of shares of common stock outstanding for the
period. Diluted net loss per share reflects the weighted-average number of shares of common stock outstanding plus the potential effect
of dilutive securities or contracts which are exercisable to common stock, such as stock options and warrants (using the treasury stock
method) and shares issuable in future periods, except in cases where the effect would be anti-dilutive. Because Oncocyte reported net
losses for all periods presented, all potentially dilutive common stock is antidilutive for those periods.
The
following common stock equivalents were excluded from the computation of diluted net loss per common share of common stock for the years
ended December 31, 2021 and 2020 because including them would have been antidilutive (in thousands):
Schedule
of Common Stock Equivalents Excluded from Computation of Diluted Net Loss Per Share of Common Stock
| |
Year Ended | |
| |
December 31, | |
| |
2021 | | |
2020 | |
Stock options | |
| 4,579 | | |
| 8,906 | |
Warrants | |
| 2,252 | | |
| 3,384 | |
ONCOCYTE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Segments
Oncocyte’s
executive management team, as a group, represents the entity’s chief operating decision makers. To date, Oncocyte’s executive
management team has viewed Oncocyte’s operations as one segment that includes the research, development and commercialization of
diagnostic tests for the detection of cancer, including molecular diagnostic services to pharmaceutical customers. As a result, the financial
information disclosed materially represents all of the financial information related to Oncocyte’s sole operating segment.
Recently
issued and adopted 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 August 2020, the Financial
Accounting Standards Board issued ASU No. 2020-06, Debt – Debt with Conversion and Other Options (subtopic 470-20) and Derivatives
and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40). This update simplifies the accounting for convertible
debt instruments and amends the accounting for certain contracts and freestanding financial instruments in an entity’s own equity,
including warrants and preferred stock. The new guidance modifies how particular convertible instruments and certain contracts that may
be settled in cash or shares impact the computation of diluted EPS. The amendments in this update are effective for fiscal years beginning
after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal
years beginning after December 15, 2020. Oncocyte does not expect a material impact of this guidance on its consolidated financial statements.
In December 2019, the
FASB issued ASU No. 2019-12 Income Taxes (Topic 740)—Simplifying the Accounting for Income Taxes, to remove certain exceptions
related to the approach for intraperiod tax allocation, recognition of deferred tax liabilities for outside basis differences and requiring
that an entity reflect the effect of an enacted change in tax laws or rates in the annual effective tax rate computation in the interim
period that includes the enactment date. The amendments in this update are effective for us beginning with fiscal year 2021. Most amendments
within the standard are required to be applied on a prospective basis, while certain amendments must be applied on a retrospective or
modified retrospective basis. The adoption of the amendments in this update did not have a material impact on our consolidated financial
position and results of operations as of and for the year ended December 31, 2021.
In October 2020, the FASB
issued ASU No. 2020-10 Codification Improvements, to make incremental improvements to GAAP and address stakeholder suggestions, including,
among other things, clarifying that the requirement to provide comparative information in the financial statements extends to the corresponding
disclosures section. The amendments in this update are effective for us beginning with fiscal year 2021. The amendments in this update
should be applied retrospectively and at the beginning of the period that includes the adoption date. The adoption of the amendments
in this update did not have a material impact on our financial disclosures as of and for the year ended December 31, 2021.
COVID-19
impact and related risks
The
ongoing global outbreak of COVID-19, and the various attempts throughout the world to contain it, have created significant volatility,
uncertainty and disruption. In response to government directives and guidelines, health care advisories and employee and other concerns,
Oncocyte has altered certain aspects of its operations. A number of Oncocyte’s employees have had to work remotely from home and
those on site have had to follow Oncocyte’s social distance guidelines, which could impact their productivity. COVID-19 could also
disrupt Oncocyte’s operations due to absenteeism by infected or ill members of management or other employees, or absenteeism by
members of management and other employees who cannot effectively work remotely but who elect not to come to work due to the illness affecting
others in Oncocyte’s office or laboratory facilities, or due to quarantines.
During
the COVID-19 pandemic, Oncocyte has not been able, and may continue to not be able, to maintain its preferred level of physician or customer
outreach and marketing of its diagnostic testing and Pharma Services, which may have negatively impacted and may continue to negatively
impact potential new customers’ interest in those tests and services. Because of COVID-19, travel, visits, and in-person meetings
related to Oncocyte’s business have been severely curtailed or canceled and Oncocyte has instead used on-line or virtual meetings
to meet with potential customers and others.
ONCOCYTE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In
addition to operational adjustments, the consequences of the COVID-19 pandemic have led to uncertainties related to Oncocyte’s
business growth and ability to forecast the demand for its diagnostic testing and Pharma Services and resulting revenues. Concerns over
available hospital, staffing, equipment, and other resources, and the risk of exposure to the virus, has led to early-stage lung cancer
surgeries being delayed, and the continued deferral of lung cancer surgeries due to resurgence in COVID-19 cases could result in delayed
or reduced use of DetermaRx™.
It
is possible that impacts of COVID-19 on Oncocyte’s operations or revenues or its access to capital could prevent Oncocyte from
complying, or could result in a material noncompliance, with one or more obligations or covenants under material agreements to which
Oncocyte is a party, with the result that Oncocyte would be in material breach of the applicable obligation, covenant, or agreement.
Any such material breach could cause Oncocyte to incur material financial liabilities or an acceleration of the date for paying a financial
obligation to the other party to the applicable agreement, or could cause Oncocyte to lose material contractual rights, such as rights
to use leased equipment or laboratory or office space, or rights to use licensed patents or other intellectual property the use of which
is material to Oncocyte’s business. Similarly, it is possible that impacts of COVID-19 on the business, operations, or financial
condition of any third party with whom Oncocyte has a contractual relationship could cause the third party to be unable to perform its
contractual obligations to Oncocyte, resulting in Oncocyte’s loss of the benefits of a contract that could be material to Oncocyte’s
business.
The
full extent to which the COVID-19 pandemic and the various responses to it might impact Oncocytes’ business, operations and financial
results will depend on numerous evolving factors that are not subject to accurate prediction and that are beyond Oncocyte’s control.
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 will be released from escrow after the holdback period, less any shares that may be returned to Oncocyte on account of any
indemnity claims. Accordingly, on the 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 December 31, 2021, no
milestones have been met and no payments have
been made.
ONCOCYTE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 December 31, 2021, 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 canceled 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. |
ONCOCYTE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 | | |
| | |
ONCOCYTE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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).
ONCOCYTE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 favorable or unfavorable 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. |
ONCOCYTE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 7.5% 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 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 consolidated statements of operations. As of December 31,
2021, based on Oncocyte’s reassessment of the significant assumptions noted above, there was a decrease of approximately
$60,000 to
the fair value of the Contingent Consideration primarily attributable to revised estimates of the timing of the possible future payouts
and, accordingly, this decrease was recorded as an unrealized gain in the consolidated statements of operations for the year ended December
31, 2021.
The
following table reflects the activity for Oncocyte’s Contingent Consideration since the Insight Merger Date, measured at fair value
using Level 3 inputs (in thousands):
Schedule of Contingent Consideration, Measured at Fair Value
| |
Fair Value | |
Balance at January 31, 2020 | |
$ | 11,130 | |
Change in estimated fair value | |
| (4,010 | ) |
Balance at December 31, 2020 | |
$ | 7,120 | |
Change in estimated fair value | |
| (60 | ) |
Balance at December 31, 2021 | |
$ | 7,060 | |
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 December 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.
ONCOCYTE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 “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 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 enrollment of the full number of patients for the Clinical Trial, Oncocyte will issue to Encore and the Minority Shareholders
shares of Oncocyte common stock with an aggregate market value at the date of issue equal to $3 million (“Clinical Trial Milestone
Payment”). If the issuance of shares of 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.
ONCOCYTE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 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.
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 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.
ONCOCYTE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
As
of 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.
As
of 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 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 December 31,
2021, no contingent consideration payment was recorded as the Clinical Trial Milestone Payment was not deemed probable of achievement
as of that date.
ONCOCYTE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
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. During
the year ended December 31, 2021, Oncocyte incurred $700,000
in Chronix transaction costs, including advisory,
legal, accounting, valuation, and other professional and consulting fees, which were accounted for as “General and administrative”
expenses in the consolidated statement of operations.
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.
ONCOCYTE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 set off 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 TheraSure™-CNI Monitor and TheraSure™ Transplant Monitor. 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.
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 | |
ONCOCYTE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 TheraSure™-CNI Monitor and TheraSure™ Transplant Monitor. Oncocyte determined
the estimated aggregate fair value of the TheraSure™ 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.
ONCOCYTE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
To
calculate fair value of the TheraSure™ 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 TheraSure™ 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 TheraSure™ 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 8% 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 TheraSure™-CNI Monitor, 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 21%.
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 TheraSure™-Transplant Monitor,
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 12%.
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 consolidated statements of operations. As
of December 31, 2021, based on Oncocyte’s reassessment of the significant assumptions noted above, there was an increase of approximately
$27.3 million to the fair value of the Contingent Consideration primarily attributable to revised estimates of the timing of the possible
future payouts and, accordingly, this increase was recorded as an unrealized loss in the consolidated statements of operations for the
year ended December 31, 2021.
The following table reflects
the activity for Oncocyte’s Contingent Consideration since the Chronix Merger Date, 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 | |
| 27,326 | |
Balance at December 31, 2021 | |
$ | 69,621 | |
ONCOCYTE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 TheraSure™ 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).
4.
Goodwill and Intangible Assets, net
As
of December 31, 2021 and 2020, goodwill and intangible assets, net, consisted of the following (in thousands):
Schedule of Goodwill and Intangible Assets
| |
December 31, 2021 | | |
December 31, 2020 | |
Goodwill - Insight Merger(1) | |
$ | 9,194 | | |
$ | 9,187 | |
Goodwill - Chronix Merger(1) | |
| 9,490 | | |
| - | |
Total Goodwill | |
| 18,684 | | |
| 9,187 | |
| |
| | | |
| | |
Intangible assets: | |
| | | |
| | |
Acquired
IPR&D - DetermaIOTM (2) | |
$ | 14,650 | | |
$ | 14,650 | |
Acquired
IPR&D - TheraSure™ (3) | |
| 46,800 | | |
| - | |
| |
| | | |
| | |
Intangible assets subject to amortization: | |
| | | |
| | |
Acquired intangible assets - customer relationship – Insight (see Note
3) | |
| 440 | | |
| 440 | |
Acquired intangible assets - Razor(5) (see
Note 3) | |
| 32,797 | | |
| - | |
Total intangible assets | |
| 94,687 | | |
| 15,090 | |
Accumulated
amortization - customer relationship(4) | |
| (169 | ) | |
| (81 | ) |
Accumulated
amortization - Razor(4) | |
| (3,273 | ) | |
| - | |
Intangible assets, net | |
$ | 91,245 | | |
$ | 15,009 | |
(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 consolidated statements of operations in the current year because the intangible assets pertain directly to the revenues generated
from the acquired intangibles. |
(5) |
Razor intangible assets
represents acquired Razor assay. |
ONCOCYTE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Future
amortization expense is expected to be the following (in thousands):
Schedule of Intangible Assets Future Amortization Expense
| |
Amortization | |
Year ending December 31, | |
| | |
2022 | |
| 3,856 | |
2023 | |
| 3,904 | |
2024 | |
| 3,904 | |
2025 | |
| 3,823 | |
2026 | |
| 3,816 | |
Thereafter | |
| 10,493 | |
Total | |
$ | 29,796 | |
5.
Shareholders’ Equity
Preferred
Stock
Oncocyte
is authorized to issue up to 5,000,000 shares of no par value preferred stock. As of December 31, 2021 and 2020, no preferred shares
were issued or outstanding.
Common
Stock
Oncocyte
has 230,000,000
shares of no
par value common stock authorized. The holders
of Oncocyte’s common stock are entitled to receive ratably dividends when, as, and if declared by the Board of Directors out of
funds legally available. Upon liquidation, dissolution, or winding up, the holders of Oncocyte common stock are entitled to receive ratably
the net assets available after the payment of all debts and other liabilities and subject to the prior rights of Oncocyte outstanding
preferred shares, if any.
The
holders of common stock are entitled to one vote for each share held on all matters submitted to a vote of Oncocyte stockholders. The
holders of common stock have no preemptive, subscription, or redemption rights. The outstanding shares of common stock are fully paid
and non-assessable.
Under
the ATM Agreement, during the year ended December 31, 2020, Oncocyte sold 1,136,673 shares of common stock for net proceeds of approximately
$2.65 million in at-the-market transactions, of which $0.3 million was receivable from the Sales Agent for sales completed on the last
trading day of December 2020. On February 4, 2021, in connection with the offering completed on February 9, 2021, Oncocyte suspended
offering any shares of its common stock pursuant to the ATM Agreement and will not make any further sales of its common stock pursuant
to the ATM Agreement.
On June 11, 2021, Oncocyte
entered into an at-the-market sales agreement with BTIG, LLC as sales agent and/or principal (the “Agent”) 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”).
As
of December 31, 2021 and 2020, Oncocyte had 92,231,917
and 69,116,802
issued and outstanding shares of common stock,
respectively. See Note 11 with respect to certain financing transactions pursuant to which Oncocyte sold shares of common stock
and common stock purchase warrants during the years ended December 31, 2021 and 2020.
Common
Stock Purchase Warrants
As
of December 31, 2021, Oncocyte had an aggregate of 2,251,576
common stock purchase warrants issued and
outstanding with exercise prices ranging from $1.69
to $5.50
per warrant. The warrants will expire on various
dates through 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 CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
Stock
Option Exercises
During
the years ended December 31, 2021 and 2020, 924,000
and 680,308
shares of common stock, respectively, were issued
upon the exercise of stock options, from which Oncocyte received $2.6
million and $1.4
million in cash proceeds, respectively.
6.
Stock-Based Compensation
Stock
Option Plan
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 (as amended, 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.
On
July 24, 2021, Oncocyte amended the 2018 Equity Incentive Plan.
As of December 31, 2021, the 2018 Incentive Plan reserved 21,000,000
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. The 2018 Incentive Plan also permits Oncocyte to issue such other securities as its Board of Directors (the
“Board”) or the Compensation Committee (the “Committee”) administering the 2018 Incentive Plan may determine.
Awards of stock options, Restricted Stock, SARs, and Restricted Stock Units (“Awards”) may be granted under the 2018 Incentive
Plan to Oncocyte employees, directors, and consultants.
Awards
may vest and thereby become exercisable or have restrictions on forfeiture lapse on the date of grant or in periodic installments or
upon the attainment of performance goals, or upon the occurrence of specified events. Awards may not vest, in whole or in part, earlier
than one year from the date of grant. Vesting of an Award after the date of grant may be accelerated only in the limited circumstances
specified in the 2018 Incentive Plan. In the case of the acceleration of vesting of any performance-based Award, acceleration of vesting
shall be limited to actual performance achieved, pro rata achievement of the performance goal(s) on the basis for the elapsed portion
of the performance period, or a combination of actual and pro rata achievement of performance goals.
ONCOCYTE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
No
person shall be granted, during any one-year period, options to purchase, or SARs with respect to, more than 1,000,000 shares in the
aggregate, or any Awards of Restricted Stock or Restricted Stock Units with respect to more than 500,000 shares in the aggregate. If
an Award is to be settled in cash, the number of shares on which the Award is based shall not count toward the individual share limit.
No
Awards may be granted under the 2018 Incentive Plan more than ten years after the date upon which the 2018 Incentive Plan was adopted
by the Board, and no options or SARS granted under the 2018 Incentive Plan may be exercised after the expiration of ten years from the
date of grant.
Stock
Options
Options
granted under the 2018 Incentive Plan may be either “incentive stock options” within the meaning of Section 422(b) of the
Internal Revenue Code of 1986, as amended (the “Code”), or “non-qualified” stock options that do not qualify
incentive stock options. Incentive stock options may be granted only to Oncocyte employees and employees of subsidiaries. The exercise
price of stock options granted under the 2018 Incentive Plan must be equal to the fair market of Oncocyte common stock on the date the
option is granted. In the case of an optionee who, at the time of grant, owns more than 10% of the combined voting power of all classes
of Oncocyte stock, the exercise price of any incentive stock option must be at least 110% of the fair market value of the common stock
on the grant date, and the term of the option may be no longer than five years. The aggregate fair market value of common stock (determined
as of the grant date of the option) with respect to which incentive stock options become exercisable for the first time by an optionee
in any calendar year may not exceed $100,000.
The
exercise price of an option may be payable in cash or in common stock having a fair market value equal to the exercise price, or in a
combination of cash and common stock, or other legal consideration for the issuance of stock as the Board or Committee may approve.
Generally,
options will be exercisable only while the optionee remains an employee, director or consultant, or during a specific period thereafter,
but in the case of the termination of an employee, director, or consultant’s services due to death or disability, the period for
exercising a vested option shall be extended to the earlier of 12 months after termination or the expiration date of the option.
Restricted
Stock and Restricted Stock Units
In
lieu of granting options, Oncocyte may enter into purchase agreements with employees under which they may purchase or otherwise acquire
Restricted Stock or Restricted Stock Units subject to such vesting, transfer, and repurchase terms, and other restrictions. The price
at which Restricted Stock may be issued or sold will be not less than 100% of fair market value. Employees or consultants, but not executive
officers or directors, who purchase Restricted Stock may be permitted to pay for their shares by delivering a promissory note or an installment
payment agreement that may be secured by a pledge of their Restricted Stock. Restricted Stock may also be issued for services actually
performed by the recipient prior to the issuance of the Restricted Stock. Unvested Restricted Stock for which Oncocyte has not received
payment may be forfeited, or Oncocyte may have the right to repurchase unvested shares upon the occurrence of specified events, such
as termination of employment.
Subject
to the restrictions set with respect to the particular Award, a recipient of Restricted Stock generally shall have the rights and privileges
of a shareholder, including the right to vote the Restricted Stock and the right to receive dividends; provided that, any cash dividends
and stock dividends with respect to the Restricted Stock shall be withheld for the recipient’s account, and interest may be credited
on the amount of the cash dividends withheld. The cash dividends or stock dividends so withheld and attributable to any particular share
of Restricted Stock (and earnings thereon, if applicable) shall be distributed to the recipient in cash or, at the discretion of the
Board or Committee, in shares of common stock having a fair market value equal to the amount of such dividends, if applicable, upon the
release of restrictions on the Restricted Stock and, if the Restricted Stock is forfeited, the recipient shall have no right to the dividends.
The
terms and conditions of a grant of Restricted Stock Units shall be determined by the Board or Committee. No shares of common stock shall
be issued at the time a Restricted Stock Unit is granted. A recipient of Restricted Stock Units shall have no voting rights with respect
to the Restricted Stock Units. Upon the expiration of the restrictions applicable to a Restricted Stock Unit, Oncocyte will either issue
to the recipient, without charge, one share of common stock per Restricted Stock Unit or cash in an amount equal to the fair market value
of one share of common stock.
ONCOCYTE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At
the discretion of the Board or Committee, each Restricted Stock Unit (representing one share of common stock) may be credited with cash
and stock dividends paid in respect of one share (“Dividend Equivalents”). Dividend Equivalents shall be withheld for the
recipient’s account, and interest may be credited on the amount of cash Dividend Equivalents withheld. Dividend Equivalents credited
to a recipient’s account and attributable to any particular Restricted Stock Unit (and earnings thereon, if applicable) shall be
distributed in cash or in shares of common stock having a fair market value equal to the amount of the Dividend Equivalents and earnings,
if applicable, upon settlement of the Restricted Stock Unit. If a Restricted Stock Unit is forfeited, the recipient shall have no right
to the related Dividend Equivalents.
Equity
awards activity
A
summary of Oncocyte equity awards activity under the 2010 Plan 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, 2020 | |
| - | | |
| 1,218 | | |
$ | 3.55 | |
Options exercised | |
| - | | |
| (164 | ) | |
$ | 2.28 | |
Options forfeited, canceled and expired | |
| - | | |
| (131 | ) | |
$ | 4.11 | |
Balance at December 31, 2021 | |
| - | | |
| 923 | | |
$ | 3.65 | |
Exercisable at December 31, 2021 | |
| | | |
| 923 | | |
$ | 3.65 | |
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 (“Performance-Based Options”). During the year ended December 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. 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 year ended December 31, 2020, prior to the discontinuation of development
of DetermaDx™, certain performance conditions required for vesting were met, and, accordingly, 265,000 shares vested and $466,000
of stock-based compensation expense was recorded with regard to the Performance-Based Options during that period. As of December 31,
2021, there were no Performance-Based Options outstanding.
At
December 31, 2021 and 2020, Oncocyte had approximately $19.1
million and $8.1
million, respectively, of total unrecognized
compensation expense related to the 2010 Plan and 2018 Incentive Plan that will be recognized over a weighted-average period of approximately
2.7
years and 2.5
years, respectively.
ONCOCYTE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A
summary of 2018 Incentive Plan activity and related information follows (in thousands except weighted average exercise price):
Summary of Stock Option Activity
| |
Shares | | |
Number | | |
Number | | |
Weighted | |
| |
Available | | |
of Options | | |
of RSUs | | |
Average | |
| |
for Grant | | |
Outstanding | | |
Outstanding | | |
Exercise Price | |
| |
| | |
| | |
| | |
| |
Balance at December 31, 2020 | |
| 3,346 | | |
| 7,212 | | |
| 201 | | |
$ | 2.60 | |
RSUs vested | |
| - | | |
| - | | |
| (201 | ) | |
| n/a | |
RSUs granted | |
| (121 | ) | |
| - | | |
| 121 | | |
$ | - | |
Options increase from Plan Amendment | |
| 10,000 | | |
| - | | |
| - | | |
| n/a | |
Options granted | |
| (5,615 | ) | |
| 5,615 | | |
| - | | |
$ | 4.72 | |
Options exercised | |
| - | | |
| (760 | ) | |
| - | | |
$ | 2.96 | |
Options forfeited/cancelled | |
| 1,396 | | |
| (1,396 | ) | |
| - | | |
$ | 3.17 | |
Balance at December 31, 2021 | |
| 9,006 | | |
| 10,671 | | |
| 121 | | |
$ | 3.63 | |
Options exercisable at December 31, 2021 | |
| | | |
| 3,291 | | |
| | | |
$ | 2.52 | |
Additional
information regarding Oncocyte’s outstanding stock options and vested and exercisable stock options is summarized below:
Schedule of Stock Options Outstanding, Vested and Exercisable
| | |
Options Outstanding as of December 31, 2021 | |
Exercise Prices | | |
Number of Shares (in thousands) | | |
Weighted Average
Remaining Contractual
Life (Years) | | |
Weighted Average Exercise Price | |
$ | 2.12 - $3.80 | | |
| 1,163 | | |
| 8.98 | | |
$ | 3.05 | |
$ | 3.91 - $5.21 | | |
| 983 | | |
| 9.54 | | |
| 4.24 | |
$ | 5.31 - $6.50 | | |
| 3,469 | | |
| 8.58 | | |
| 5.42 | |
$ | 2.12 - $6.50 | | |
| 5,615 | | |
| 8.82 | | |
$ | 4.72 | |
Oncocyte
recorded stock-based compensation expense in the following categories on the accompanying consolidated statements of operations for the
years ended December 31, 2021 and 2020 (in thousands):
Summary of Stock-based Compensation Expense
| |
Year Ended | |
| |
December 31, | |
| |
2021 | | |
2020 | |
Cost of revenues | |
$ | 255 | | |
$ | 93 | |
Research and development | |
| 1,517 | | |
| 1,245 | |
Sales and marketing | |
| 1,296 | | |
| 541 | |
General and administrative | |
| 3,773 | | |
| 3,187 | |
Total stock-based compensation expense | |
$ | 6,841 | | |
$ | 5,066 | |
The
weighted-average estimated fair value of stock options with service-conditions granted during the years ended December 31, 2021 and 2020
was $3.66 and $2.42 per share, respectively, using the Black-Scholes option pricing model with the following weighted-average assumptions:
Schedule of Assumptions Used to Calculate Fair Value of Stock Options
| |
Year Ended | |
| |
December 31, | |
| |
2021 | | |
2020 | |
Expected life (in years) | |
| 6.00 | | |
| |
Risk-free interest rates | |
| 1.02 | % | |
| 1.08 | % |
Volatility | |
| 98.88 | % | |
| 103.73 | % |
Dividend yield | |
| - | % | |
| - | % |
The
determination of stock-based compensation is inherently uncertain and subjective and involves the application of valuation models and
assumptions requiring the use of judgment. If Oncocyte had made different assumptions, its stock-based compensation expense and net loss
for years ended December 31, 2021 and 2020 may have been significantly different.
ONCOCYTE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
tables present certain information concerning source of Oncocyte revenues for the years ended December 31, 2021 and December 31, 2020.
The
following table presents the percentage of consolidated revenues attributable to products or services classes that represent greater
than ten percent of consolidated revenues:
Schedule of Consolidated Revenues Attributable to Products or Services
| |
Year Ended | |
| |
December 31, | |
| |
2021 | | |
2020 | |
DetermaRx™ | |
| 32 | % | |
| 45 | % |
Pharma Services | |
| 19 | % | |
| 55 | % |
Licensing | |
| 49 | % | |
| - | |
Total | |
| 100 | % | |
| 100 | % |
The
following table presents the percentage of consolidated revenues received from unaffiliated customers that individually represent greater
than ten percent of consolidated revenues:
Schedule of Consolidated Revenues Generated by Unaffiliated Customers
| |
Year Ended | |
| |
December 31, | |
| |
2021 | | |
2020 | |
Medicare for DetermaRxTM | |
| 17 | % | |
| 40 | % |
Medicare Advantage for DetermaRxTM | |
| 14 | % | |
| - | * |
Pharma services Company A | |
| - | * | |
| 23 | % |
Pharma services Company B | |
| - | * | |
| 12 | % |
Licensing - Company D | |
| 40 | % | |
| - | * |
Licensing - Company B | |
| 10 | % | |
| - | * |
The
following table presents the percentage of consolidated revenues attributable to geographical locations:
Schedule of Percentage of Consolidated Revenues Attributable to Geographical Locations
| |
Year Ended | |
| |
December 31, | |
| |
2021 | | |
2020 | |
United States | |
| 45 | % | |
| 61 | % |
Outside of the United States – Pharma Services | |
| 6 | % | |
| 39 | % |
Outside of the United States – Licensing | |
| 49 | % | |
| - | |
Total | |
| 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
| |
December 31, 2021 | | |
December 31, 2020 | |
Medicare for DetermaRx™ | |
| 9 | % | |
| 45 | % |
Medicare Advantage for DetermaRx™ | |
| 65 | % | |
| * | |
Pharma Services Company A | |
| * | | |
| 35 | % |
ONCOCYTE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8.
Income Taxes
A
deferred income tax benefit of $9.3 million ($8.1
million U.S. federal and $1.2
million state) and $1.3
million ($1.1
million federal and $0.2
million state) was recorded for the years
ended December 31, 2021 and December 31, 2020, respectively. Oncocyte has filed standalone U.S. federal income tax returns since its
inception and will file a consolidated return with its subsidiaries for the years ended December 31, 2021 and 2020.
Deferred
income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
The
primary components of the deferred tax assets and liabilities at December 31, 2021 and 2020 were as follows (in thousands):
Schedule
of Components of Deferred Tax Assets and Liabilities
| |
2021 | | |
2020 | |
Deferred tax assets/(liabilities): | |
|
| | |
| | |
Net operating loss carryforwards and capital loss carryforwards | |
$ |
51,051 | | |
$ | 29,203 | |
Research and development credit carryforwards | |
|
3,148 | | |
| 2,638 | |
Marketable equity securities | |
|
193 | | |
| 261 | |
Stock-based and other compensation | |
|
2,398 | | |
| 1,855 | |
Equity method investment in Razor | |
|
- | | |
| 404 | |
Right-of-use liability | |
|
949 | | |
| 1,064 | |
Other | |
|
- | | |
| 168 | |
Total deferred tax assets | |
|
57,739 | | |
| 35,593 | |
Valuation allowance | |
|
(37,167 | ) | |
| (31,752 | ) |
Deferred tax assets, net of valuation allowance | |
|
20,572 | | |
| 3,841 | |
Right-of-use asset | |
|
(591 | ) | |
| (712 | ) |
Intangibles and fixed assets | |
|
(19,981 | ) | |
| (3,129 | |
Total deferred tax liabilities | |
|
(20,572 | ) | |
| (3,841 | ) |
Net deferred tax assets | |
$ |
- | | |
$ | - | |
In
connection with the Merger discussed in Note 3 and in accordance with ASC 805, a change in the acquirer’s valuation allowance that
stems from a business combination should be recognized as an element of the acquirer’s income tax expense or benefit in the period
of the acquisition. Accordingly, for the year ended December 31, 2021, Oncocyte recorded a $9.3
million partial release of its valuation
allowance and a corresponding income tax benefit stemming from the DTLs generated by the IPR&D and customer relationships intangible
assets acquired in the Merger.
Schedule
of Income Tax Reconciliation
| |
2021 | | |
2020 | |
Computed tax benefit at federal statutory rate | |
| 21 | % | |
| 21 | % |
Permanent differences | |
| (1 | )% | |
| 2 | % |
State tax benefit | |
| 2 | % | |
| 4 | % |
Research and development credits | |
| - | % | |
| 1 | % |
Other | |
| - | % | |
| - | % |
Change in fair value consideration | |
| (8 | )% | |
| - | % |
Change in valuation allowance | |
| (1 | )% | |
| (24 | )% |
Income tax benefit percentage | |
| 13 | % | |
| 4 | % |
Income
taxes differed from the amounts computed by applying the applicable U.S. federal income tax rates indicated to pretax losses from operations
as a result of the following:
ONCOCYTE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As
of December 31, 2021, Oncocyte had net operating loss carryforwards of approximately $204.8
million for U.S. federal income tax purposes
and $95.5
million for state income tax purposes.
Federal net operating losses generated on or prior to December 31, 2017 expire in varying amounts between
2022 and 2037, while federal net operating
losses generated after December 31, 2017 carryforward indefinitely. The state net operating losses expire in varying amounts between
2022 and 2041. Oncocyte also has capital
loss carryforwards for federal and state income tax purposes of $0.3
million each which expire in 2022.
As
of December 31, 2021, Oncocyte has research and development credit carryforwards for federal and state purposes of $2.4
million and $2.1
million, respectively. The federal credits
will expire between
2030 and 2041, while the state credits
have no expiration.
A
valuation allowance is provided when it is more likely than not that some portion of the deferred tax assets will not be realized. Other
than the partial release discussed above, Oncocyte established a full valuation allowance for all periods presented due to the uncertainty
of realizing future tax benefits from its net operating loss carryforwards and other deferred tax assets. The change in the valuation
allowance was $5.4
million and $7.6
million for the years ended December 31,
2021 and 2020, respectively.
Oncocyte
has uncertain tax benefits (“UTBs”) totaling $1.4
million and $3.1
million as of December 31, 2021 and 2020,
respectively, which were netted against deferred tax assets subject to valuation allowance as shown below. The UTBs had no effect on
the effective tax rate and there would be no cash tax impact for any period presented. Oncocyte recognizes interest and penalties related
to UTBs, when they occur, as a component of income tax expense. There were no
interest or penalties recognized for the
years ended December 31, 2021 and 2020. In 2021, Oncocyte received approval for its petition for alternative apportionment in California
by the Franchise Tax Board. As a result, Oncocyte has derecognized its uncertain tax position of $2.2M
in the current year. There is no financial statement impact as the uncertain tax positions were previously offset against Oncocyte’s
California net operating losses, which would otherwise have a full valuation allowance. Oncocyte does not expect its UTBs to change significantly
over the next twelve months.
A
reconciliation of the beginning and ending unrecognized tax benefit amount is as follows (in thousands):
Schedule
of Unrecognized Tax Benefit
| |
2021 | | |
2020 | |
| |
December 31, | |
| |
2021 | | |
2020 | |
| |
(in thousands) | |
Balance at the beginning of the year | |
$ |
3,052 | | |
$ |
2,888 | |
Additions based on tax positions related to current year | |
|
511 | | |
|
149 | |
Adjustments based on tax positions related to prior years | |
|
- | | |
|
15 | |
Settlements | |
|
(2,173 | ) | |
|
| |
Balance at end of year | |
$ |
1,390 | | |
$ |
3,052 | |
Other
Income Tax Matters
Internal
Revenue Code Section 382 places a limitation (“Section 382 Limitation”) on the amount of taxable income that can be offset
by NOL carryforwards after a change in control (generally greater than 50% change in ownership within a three-year period) of a loss
corporation. California has similar rules. Generally,
after a change in control, a loss corporation cannot deduct NOL carryforwards in excess of the Section 382 Limitation. Due to these “change
in ownership” provisions, utilization of the NOL and tax credit carryforwards may be subject to an annual limitation regarding
their utilization against taxable income in future periods.
In
general, Oncocyte is no longer subject to tax examination by the Internal Revenue Service or state taxing authorities for years before
2017. Although the federal and state statutes are closed for purposes of assessing additional income tax in those prior years, the taxing
authorities may still make adjustments to the NOL and credit carryforwards used in open years. Therefore, the tax statutes should be
considered open as it relates to the NOL and credit carryforwards used in open years. For tax years that remain open to examination,
potential examinations may include questioning of the timing and amount of deductions, the nexus of income among various tax jurisdictions
and compliance with the Internal Revenue Code or state tax laws. Oncocyte’s management does not expect that the total amount of
unrecognized tax benefits will materially change over the next twelve months.
Oncocyte’s
practice is to recognize interest and penalties related to income tax matters in tax expense. As of December 31, 2021 and 2020, Oncocyte
has no accrued interest and penalties.
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 consolidated financial statements.
ONCOCYTE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9.
Right-of-use Assets, Machinery and Equipment, Net and Construction in Progress
As
of December 31, 2021 and 2020, rights-of-use assets, machinery and equipment, net, and construction in progress were comprised of the
following (in thousands):
Schedule of Right-of-use Assets, Machinery and Equipment, Net, and Construction in Progress
| |
December 31, 2021 | | |
December 31, 2020 | |
| |
| | |
| |
Right-of-use assets (1) | |
| 3,499 | | |
| 3,397 | |
Machinery and equipment | |
| 6,501 | | |
| 2,480 | |
Accumulated depreciation and amortization | |
| (2,715 | ) | |
| (1,440 | ) |
Right-of-use assets, machinery and equipment, net | |
| 7,285 | | |
| 4,437 | |
Construction in progress | |
| 1,242 | | |
| 2,087 | |
Right-of-use assets, machinery and equipment, net, and construction in progress | |
| 8,527 | | |
| 6,524 | |
(1) |
Oncocyte
recorded certain right-of-use assets and liabilities for operating leases in accordance with ASC 842 (see Note 10). |
Depreciation
expense amounted to approximately $844,000 and $313,000 for the years ended December 31, 2021 and 2020, respectively.
10.
Commitments and Contingencies
Oncocyte
has certain commitments other than those 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. Oncocyte has 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 will be entitled to an abatement of 50% of the base monthly rent during
the first ten calendar months of the Term. If the Lease is terminated based on the occurrence of an “event of default,” Oncocyte
will be obligated to pay the abated rent to the lessor.
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 Landlord and used in connection with the operation, maintenance and repair of the Premises, and costs
and fees incurred in connection with seeking reductions in such tax liabilities (“Taxes”). Subject to certain exceptions,
Expenses shall not be increased by more than 4% annually on a cumulative, compounded basis.
ONCOCYTE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 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 has agreed to provide Oncocyte with a “Tenant Improvement Allowance” in the amount of $1,340,000
to pay for the plan, design, permitting, and
construction of the improvements constituting Tenant’s Work. The lessor shall be entitled to retain 1.5%
of the Tenant Improvement Allowance as an administrative fee. As of December 31, 2021, 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 $1,700,000. The lessor
may apply the security deposit, in whole or in part, for the payment of rent and any other amount that Oncocyte is or becomes obligated
to pay under the Irvine Lease but fails to pay when due and beyond any cure period. The lessor may draw on the letter of credit from
time to time to pay any amount that is unpaid and due, or if the original issuing bank notifies the lessor that the letter of credit
will not be renewed or extended for the period required under the Irvine Lease and Oncocyte fails to timely provide a replacement letter
of credit, or an event of default under the Irvine Lease occurs and continues beyond the applicable cure period, or if certain insolvency
or bankruptcy or insolvency with respect to Oncocyte occur. Oncocyte is required to restore any portion of the security deposit that
is applied by the lessor to payments due under the Lease, and Oncocyte is required to restore the amount available under the letter of
credit to the required amount if any portion of the letter of credit is drawn by the lessor. Commencing on the 34th month of the Term,
(a) the amount of the letter of credit that Oncocyte is required to maintain shall be reduced on a monthly basis, in equal installments,
to amortize the required amount to zero at the end of the Term, and (b) Oncocyte will have the right to cancel the letter of credit at
any time if it meets certain market capitalization and balance sheet thresholds; provided, in each case, that Oncocyte is not in then
default under the Lease beyond any applicable notice and cure period and the lessor has not determined that an event exists that would
lead to an event of default.
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 year ended December 31, 2021, 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
December 31, 2021, the aggregate payments due to the landlord for early cancellation of the Brisbane Lease would be approximately $192,000
(aggregate payments from December 31, 2021 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.
ONCOCYTE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Financing
lease
As
of December 31, 2021, Oncocyte has one financing lease remaining through December 2023 for certain laboratory equipment with aggregate
remaining payments of $248,000 shown in the table below.
Operating
and Financing leases
The
following table presents supplemental cash flow information related to operating and financing leases for the year ended December 31,
2021 (in thousands):
Schedule of Supplemental Cash Flow Information Related to Operating and Financing Lease
| |
2021 | | |
2020 | |
| |
Year Ended | |
| |
December 31, | |
| |
2021 | | |
2020 | |
Cash paid for amounts included in the measurement of financing lease liabilities: | |
| | | |
| | |
Operating cash flows from operating leases | |
| 1,042 | | |
| 552 | |
Operating cash flows from financing leases | |
| 147 | | |
| 9 | |
Financing cash flows from financing leases | |
| 34 | | |
| 71 | |
Right-of-use assets obtained in exchange for lease obligations | |
| | | |
| | |
Operating lease, including lease acquired in Insight Genetics business combination | |
| - | | |
| 536 | |
The
following table presents supplemental balance sheet information related to operating and financing leases as of December 31, 2021 (in
thousands, except lease term and discount rate):
Schedule of Supplemental Balance Sheet Information Related to Operating and Financing Leases
| |
December 31, 2021 | |
Operating lease | |
| | |
Right-of-use assets, net | |
$ | 2,579 | |
| |
| | |
Right-of-use lease liabilities, current | |
$ | 715 | |
Right-of-use lease liabilities, noncurrent | |
| 3,428 | |
Total operating lease liabilities | |
$ | 4,143 | |
| |
| | |
Financing lease | |
| | |
Machinery and equipment | |
$ | 537 | |
Accumulated depreciation | |
| (337 | ) |
Machinery and equipment, net | |
$ | 200 | |
| |
| | |
Current liabilities | |
$ | 104 | |
Noncurrent liabilities | |
| 117 | |
Total financing lease liabilities | |
$ | 221 | |
| |
| | |
Weighted average remaining lease term | |
| | |
Operating lease | |
| 5.3 years | |
Financing lease | |
| 2.0
years | |
| |
| | |
Weighted average discount rate | |
| | |
Operating lease | |
| 11.17 | % |
Financing lease | |
| 11.55 | % |
ONCOCYTE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The
following table presents future minimum lease commitments as of December 31, 2021 (in thousands):
Schedule of Future Minimum Lease Commitments for Operating and Financing Leases
| |
Operating | | |
Financing | |
| |
Leases | | |
Leases | |
Year Ending December 31, | |
| | | |
| | |
2022 | |
$ | 1,143 | | |
$ | 124 | |
2023 | |
| 1,048 | | |
| 124 | |
2024 | |
| 903 | | |
| - | |
2025 | |
| 869 | | |
| - | |
2026 | |
| 899 | | |
| - | |
Thereafter | |
| 695 | | |
| - | |
Total minimum lease payments | |
$ | 5,557 | | |
$ | 248 | |
Less amounts representing interest | |
| (1,413 | ) | |
| (28 | ) |
Present value of net minimum lease payments | |
$ | 4,144 | | |
$ | 220 | |
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.
Employment
Contracts
Oncocyte
has entered into employment and severance benefit contracts with certain executive officers. Under the provisions of the contracts, Oncocyte
may be required to incur severance obligations for matters relating to changes in control, as defined, and certain terminations of executives.
As of December 31, 2021, Oncocyte accrued approximately $2.4
million in severance obligations for certain
executive officers, in accordance with the severance benefit provisions of their respective employment and severance benefit agreements,
related to Oncocyte’s acquisition of Chronix Biomedical Inc. in 2021.
Indemnification
In
the normal course of business, Oncocyte may provide indemnification of varying scope under Oncocyte’s agreements with other companies
or consultants, typically Oncocyte’s clinical research organizations, investigators, clinical sites, suppliers and others. Pursuant
to these agreements, Oncocyte will generally agree to indemnify, hold harmless, and reimburse the indemnified parties for losses and
expenses suffered or incurred by the indemnified parties arising from claims of third parties in connection with the use or testing of
Oncocyte’s diagnostic tests. Indemnification provisions could also cover third party infringement claims with respect to patent
rights, copyrights, or other intellectual property pertaining to Oncocyte’s diagnostic tests. Oncocyte’s office and laboratory
facility leases also will generally contain indemnification obligations, including obligations for indemnification of the lessor for
environmental law matters and injuries to persons or property of others, arising from Oncocyte’s use or occupancy of the leased
property. The term of these indemnification agreements will generally continue in effect after the termination or expiration of the particular
research, development, services, lease, or license agreement to which they relate. The Purchase Agreement also contains provisions under
which Oncocyte has agreed to indemnify Razor and Encore from losses and expenses resulting from breaches or inaccuracy of Oncocyte’s
representations and warranties and breaches or nonfulfillment of Oncocyte’s covenants, agreements, and obligations under the Purchase
Agreement. 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 December 31, 2021 and 2020.
ONCOCYTE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11.
Related Party Transactions
Financing
Transactions
On
January 2, 2020, Oncocyte entered into Subscription Agreements with selected investors, including Broadwood Partners, L.P. (“Broadwood”)
and certain funds and accounts managed by Pura Vida Investments LLC (“Pura Vida”), in a registered direct offering of 3,523,776
shares of common stock, no par value, at an offering price of $2.156 per share, for an aggregate purchase price of approximately $7.6
million. Broadwood and Pura Vida each beneficially own more than 5% of the outstanding Oncocyte common stock.
During
April 2020, Oncocyte sold 4,733,700 shares of common stock, no par value, at an offering price of $2.27 per share, for an aggregate purchase
price of approximately $10.75 million, in a registered direct offering. Oncocyte paid no fees or commissions to broker-dealers or any
underwriting or finder’s fees. Broadwood and certain funds and accounts managed by Pura Vida purchased shares in the offering.
On
January 20, 2021, Oncocyte entered into Subscription Agreements with certain institutional investors for a registered direct offering
of 7,301,410 shares of common stock, no par value, at an offering price of $3.424 per share, for an aggregate purchase price of $25.0
million. The price per share was the average of the closing price of our common stock on the NYSE American for the five trading days
prior to the date on which we and the investors executed the Subscription Agreements. Oncocyte did not pay any fees or commissions to
broker-dealers or any finder’s fees, nor did it issue any stock purchase warrants, in connection with the offer and sale of the
shares. The investors included Broadwood and certain investment funds and accounts managed by Pura Vida.
On
February 9, 2021, Oncocyte completed an underwritten public offering of 8,947,000 shares of common stock at a public offering price of
$4.50 per share, before underwriting discounts and commissions (the “Offering”). Oncocyte received aggregate net proceeds
of approximately $37.5 million, after deducting commissions, discounts and estimated expenses related to the Offering. Broadwood purchased
600,000 shares in the Offering.
On
September 23, 2021, Oncocyte entered into a Warrant Exercise Agreement with Broadwood, pursuant to which (i) Oncocyte agreed to reduce
the exercise price of a common stock warrant held by Broadwood to purchase up to 573,461 shares of common stock from $3.25 per share
to $3.1525 per share; and (ii) Broadwood agreed to exercise the common stock warrant in full on or prior to September 30, 2021. Shortly
after executing the Warrant Exercise Agreement, Broadwood exercised the common stock warrant in full and received 573,461 shares in exchange
for payment to Oncocyte of $1,807,835.81.
Consulting
Services
During
the three months ended March 31, 2020, Oncocyte incurred consulting fees of $0.3 million to a consulting firm in which Oncocyte’s
current President and Chief Executive Officer, Ronald Andrews, and Oncocyte’s current Chief Scientific Officer (“CSO”),
Douglas Ross, were former partners. Mr. Andrews resigned from the firm as an active partner effective June 30, 2019, the date prior to
commencement of his employment by Oncocyte. Since Dr. Ross’ appointment as CSO in March 2020, and while he remains employed by
Oncocyte, Dr. Ross will no longer provide any services nor receive any payments for services from the consulting firm. Payments for the
three months ended March 31, 2021 were insignificant. No payments were made for the three and nine months ended December 31, 2021.
ONCOCYTE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12.
Loan Payable to Silicon Valley Bank
Amended
Loan Agreement
On
October 17, 2019, Oncocyte entered into a First Amendment to Loan and Security Agreement (the “Amended Loan Agreement”)
with the Bank pursuant to which Oncocyte obtained a new $3
million secured credit facility (“Tranche 1”), a portion of which was used to repay the remaining balance of
approximately $400,000
on outstanding loans from the Bank, plus a final payment of $116,000,
under the February 21, 2017 Loan Agreement. The credit line under the Amended Loan Agreement may be increased by an additional
$2
million (“Tranche 2”) if Oncocyte obtains at least $20
million of additional equity capital, as was the case with the original Loan Agreement, and a positive final coverage determination
is received from the Centers for Medicate and Medicaid Services for DetermaRxTM at a specified minimum price point per
test (the “Tranche 2 Milestone”), and Oncocyte is not in default under the Amended Loan Agreement.
Payments
of interest only on the principal balance were due monthly from the draw date through March 31, 2020, followed by 24 monthly payments
of principal and interest, but the Bank has agreed to a deferral of principal payments, as discussed below. The outstanding principal
balance of the loan will bear interest at a stated floating annual interest equal to the greater of (a) the prime rate or (b) 5% per
annum. As of December 31, 2021, the latest published prime rate was 3.25% per annum.
On
April 2, 2020, as part of the Bank’s COVID-19 pandemic relief program, Oncocyte and the Bank entered into a Loan Deferral Agreement
(“Loan Deferral”) with respect to the Amended Loan Agreement. Under the Loan Deferral Agreement, the Bank agreed to (i) extend
the scheduled maturity date of the Amended Loan Agreement from March 31, 2022 to September 30, 2022, and (ii) deferred the principal
payments by an additional 6 months whereby payments of interest only on the Bank loan principal balance will be due monthly from May
1, 2020 through October 1, 2020, followed by 23 monthly payments of principal and interest beginning on November 1, 2020, all provided
at no additional fees to Oncocyte. No other terms of the Amended Loan Agreement were changed or modified. The Loan Deferral was accounted
for as a modification of debt in accordance with ASC 470-50, Debt – Modifications and Extinguishments, thus there was no
gain or loss recognized on the transaction.
At
maturity of the loan, Oncocyte will also pay the Bank an additional final payment fee of $200,000, which was recorded as a deferred financing
charge in October 2019 and is being amortized to interest expense over the term of the loan using the effective interest method. As of
December 31, 2021, the unamortized deferred financing cost was $12,000.
Oncocyte
may prepay in full the outstanding principal balance at any time, subject to a prepayment fee equal to 2.0% of the outstanding principal
balance if prepaid more than one year but less than two years after October 17, 2019, or 1.0% of the outstanding principal balance if
prepaid two years or more after October 17, 2019. Any amounts borrowed and repaid may not be reborrowed.
The
outstanding principal amount of the loan, with interest accrued, the final payment fee, and the prepayment fee may become due and payable
prior to the applicable maturity date if an “Event of Default” as defined in the Amended Loan Agreement occurs. Oncocyte
was in compliance with the Amended Loan Agreement as of the filing date of this Report.
ONCOCYTE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Bank
Warrants
In
2017, in connection with the Loan Agreement, Oncocyte issued common stock purchase warrants to the Bank (the “2017 Bank Warrants”)
entitling the Bank to purchase shares of Oncocyte common stock in tranches related to the loan tranches under the Loan Agreement. In
conjunction with the availability of the loan, the Bank was issued warrants to purchase 8,247 shares of Oncocyte common stock at an exercise
price of $4.85 per share, through February 21, 2027. On March 23, 2017, the Bank was issued warrants to purchase an additional 7,321
shares at an exercise price of $5.46 per share, through March 23, 2027. The Bank may elect to exercise the 2017 Bank Warrants on a “cashless
exercise” basis and receive a number of shares determined by multiplying the number of shares for which the applicable tranche
is being exercised by (A) the excess of the fair market value of the common stock over the applicable exercise price, divided by (B)
the fair market value of the common stock. The fair market value of the common stock will be the last closing or sale price on a national
securities exchange, interdealer quotation system, or over-the-counter market.
On
October 17, 2019, in conjunction with Tranche 1 becoming available under the Amended Loan Agreement, Oncocyte issued a common stock purchase
warrant to the Bank (the “2019 Bank Warrant”) entitling the Bank to purchase 98,574 shares of Oncocyte common stock at the
initial “Warrant Price” of $1.69 per share through October 17, 2029. The number of shares of common stock issuable upon the
exercise of the 2019 Bank Warrant will increase on the date of each draw, if any, on Tranche 2. The number of additional shares of common
stock issuable upon the exercise of the 2019 Bank Warrant will be equal to 0.02% of Oncocyte’s fully diluted equity outstanding
for each $1 million draw under Tranche 2. The Warrant Price for Tranche 2 warrant shares will be determined upon each draw of Tranche
2 funds and will be closing price of Oncocyte common stock on the NYSE American or other applicable market on the date immediately before
the applicable date on which Oncocyte borrows funds under Tranche 2. The Bank may elect to exercise the 2019 Bank Warrant on a “cashless
exercise” basis and receive a number of shares determined by multiplying the number of shares for which the 2019 Bank Warrant is
being exercised by (A) the excess of the fair market value of the common stock over the applicable Warrant Price, divided by (B) the
fair market value of the common stock. The fair market value of the common stock will be last closing or sale price on a national securities
exchange, interdealer quotation system, or over-the-counter market.
13.
Quarterly Financial Data (unaudited)
The
following table sets forth unaudited consolidated statements of operations data for the eight quarters in the period ended December 31,
2021. This information has been derived from Oncocyte’s unaudited condensed consolidated financial statements that have been prepared
on the same basis as the audited consolidated financial statements and, in the opinion of management, include all adjustments, consisting
of normal recurring adjustments, necessary for a fair statement of the information when read in conjunction with the audited consolidated
financial statements and related notes thereto. Oncocyte’s quarterly results have been, and may in the future be, subject to significant
fluctuations. As a result, Oncocyte believes that results of operations for interim periods should not be relied upon as any indication
of the results to be expected in any future periods.
Schedule
of Quarterly Financial Information
| |
Mar.
31, 2020 | | |
Jan.
30, 2020 | | |
Sep.
30, 2020 | | |
Dec.
31, 2020 | | |
Mar.
31, 2021 | | |
Jan.
30, 2021 | | |
Sep.
30, 2021 | | |
Dec.
31, 2021 | |
| |
Quarter
Ended | |
| |
Mar.
31, 2020 | | |
Jun.
30, 2020 | | |
Sep.
30, 2020 | | |
Dec.
31, 2020 | | |
Mar.
31, 2021 | | |
Jun.
30, 2021 | | |
Sep.
30, 2021 | | |
Dec.
31, 2021 | |
| |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Revenues | |
| 16 | | |
| 143 | | |
| 555 | | |
| 503 | | |
| 1,124 | | |
| 2,030 | | |
| 984 | | |
| 3,589 | |
Cost of revenues | |
| 173 | | |
| 365 | | |
| 601 | | |
| 716 | | |
| 1,045 | | |
| 2,424 | | |
| 1,850 | | |
| 2,220 | |
Research and development expenses | |
| 2,159 | | |
| 3,225 | | |
| 2,615 | | |
| 1,800 | | |
| 3,361 | | |
| 2,537 | | |
| 3,142 | | |
| 4,591 | |
Sales and marketing expenses | |
| 1,490 | | |
| 1,562 | | |
| 1,568 | | |
| 1,874 | | |
| 2,254 | | |
| 2,673 | | |
| 2,931 | | |
| 3,309 | |
General and administrative expenses | |
| 4,625 | | |
| 3,759 | | |
| 4,995 | | |
| 3,410 | | |
| 4,764 | | |
| 7,934 | | |
| 5,495 | | |
| 4,143 | |
Change in fair value of contingent consideration | |
| - | | |
| - | | |
| (2,980 | ) | |
| (1,030 | ) | |
| 1,060 | | |
| 30 | | |
| 1,170 | | |
| 25,006 | |
Loss from operations | |
| (8,431 | ) | |
| (8,768 | ) | |
| (6,244 | ) | |
| (6,267 | ) | |
| (11,360 | ) | |
| (13,568 | ) | |
| (13,604 | ) | |
| (35,680 | ) |
Other income (expense) | |
| (396 | ) | |
| (340 | ) | |
| (539 | ) | |
| (201 | ) | |
| (123 | ) | |
| 1,281 | | |
| (196 | ) | |
| (108 | ) |
Income tax benefit | |
| 1,095 | | |
| - | | |
| - | | |
| 159 | | |
| 7,564 | | |
| 1,794 | | |
| - | | |
| (97 | ) |
Net Loss | |
| (7,732 | ) | |
| (9,108 | ) | |
| (6,783 | ) | |
| (6,309 | ) | |
| (3,919 | ) | |
| (10,493 | ) | |
| (13,800 | ) | |
| (35,885 | ) |
14.
Subsequent
Events
Co-Development
Agreement with Life Technologies Corporation
On
January 13, 2022, Oncocyte entered into a Collaboration Agreement (the “LTC Agreement”) with Life Technologies Corporation,
a Delaware corporation and subsidiary of Thermo Fisher Scientific (“LTC” and together with Oncocyte, the “Parties”
or individually, a “Party”), in order to partner in the development and collaborate in the commercialization of Thermo Fisher
Scientific’s existing Oncomine Comprehensive Assay Plus (“OCA Plus”) and Oncocyte’s Determa IO assay for use
with LTC’s Ion TorrentTM GenexusTM Integrated Sequencer and LTC’s Ion TorrentTM GenexusTM
Purification System (“Genexus system”) in order to obtain in vitro diagnostic (“IVD”) regulatory
approval.
Development
Under
the terms of the LTC Agreement, Oncocyte will clinically validate LTC’s OCA Plus assay, which is LTC’s proprietary
NGS-based assay designed to be run on the Genexus system as an IVD assay (the “Collaboration LTC Product”) and Oncocyte’s
Determa IO assay, which is a multivariate gene expression test performed on FFPE biopsy specimens, as an IVD assay run on the Genexus
system (the “Collaboration Determa Product”), paving the way toward regulatory approval for use in tumor profiling and guidance
of therapy selection for solid tumor cancers in humans. LTC retains the exclusive right to partner with therapeutics companies to develop
the Collaboration LTC Product as a companion diagnostic. Oncocyte retains the exclusive right to partner with therapeutics companies
to develop the Collaboration Determa Product as a companion diagnostic. All development work will be conducted pursuant to development
plans agreed by the Parties through a series of governance committees that will oversee the collaboration.
Costs
Associated with Product Development
Oncocyte
will be responsible for all costs associated with Oncocyte activities under the LTC product development budget. Oncocyte and LTC will
share development costs associated with LTC activities under the LTC product development budget. LTC will be responsible for costs associated
with the performance of research and development activities for the RUO-labeled OCA Plus and related components as is necessary to enable
the development of the Collaboration LTC Product as contemplated by the LTC product development plan. Oncocyte will be responsible for
all costs associated with activities of both Parties under the Determa product development budget. LTC will be responsible, at LTC’s
own cost, for the performance of research and development activities for the RUO-labeled OCA Plus and related components as is necessary
to enable the development of the Collaboration LTC Product as contemplated by the development plan for the Collaboration LTC Product.
ONCOCYTE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Commercialization
LTC
will be responsible for the commercialization of the Collaboration LTC Product throughout the world, but the Parties will co-market it
in the United States, Canada, the United Kingdom, European Union, Switzerland, Australia, and New Zealand (the “LTC Product Territory”).
Oncocyte will be responsible for the commercialization of the Collaboration Determa Product in the United States (the “Determa
Product Territory”), and LTC will be responsible for commercializing it in the rest of the world. All commercialization activities
for the Collaboration LTC Product and the Collaboration Determa Product will be conducted pursuant to commercialization plans agreed
by the Parties through the collaboration’s governance committees.
Economic
Terms
Under the LTC Agreement,
LTC will pay Oncocyte a percentage of revenue received by LTC on sales of the Collaboration LTC Product throughout the world and on sales
of the Collaboration Determa Product outside the United States. The revenue share percentage for the Collaboration LTC Product will vary
based on the timing of the sale, the territory of the sale, and the degree to which consumables, reagents, and other products are included
in the kit being sold, but the Company estimates that the average revenue share percentage that it will receive under the LTC
Agreement will likely range from the low teens to the low twenties. The revenue share percentage LTC will pay to Oncocyte on sales of
the Collaboration Determa Product will vary based on the timing of the sale, and the degree to which consumables, reagents, and other
products are included in the kit being sold, but the Company estimates that the average revenue share that it will receive under the
LTC Agreement will likely range in the low twenties. Oncocyte will pay LTC a mid single-digit percentage of its revenue on sales
of the Collaboration Determa Product in the United States. Oncocyte will also receive up to two milestone payments in the low seven figures
if LTC successfully commercializes the OCA Plus IVD assay as a companion diagnostic with certain claims.
Exclusivity
During
the term of the LTC Agreement, (a) LTC will not enter into any agreement or arrangement with any third party with respect to the
development or commercialization of OCA Plus on the Genexus system in the field of distributed IVD assay kits for the tumor profiling
of and guidance of therapy selection for solid tumor cancers in humans (the “LTC Field”) in the LTC Product Territory, (b)
Oncocyte will not partner with any third-party NGS equipment manufacturer with respect to the development and commercialization of a
comprehensive genomic profiling assay on an instrument platform similar to or competitive with LTC’s NGS systems in the LTC Field
in the LTC Product Territory, and (c) LTC will not develop, market or sell a new panel or other substantially similar comprehensive genomic
profiling assay that would compete with the Collaboration LTC Product in the LTC Field in the LTC Product Territory on the Genexus system.
Manufacturing
LTC
is responsible for the manufacture and supply of all OCA Plus assays and Collaboration LTC products, among other consumables and reagents
required for the development of the Collaboration LTC Product. LTC will supply Oncocyte all consumables and reagents necessary for use
in developing the Collaboration LTC Product pursuant to the LTC product development plan.
In
addition, following the effective date of the LTC Agreement, the Parties will negotiate in good faith a supply agreement pursuant
to which LTC will supply Oncocyte with the Collaboration Determa Products for commercialization in the United States. LTC will also supply
Oncocyte with all Genexus instruments, consumables and reagents, necessary for use in developing Collaboration Determa Products pursuant
to the Determa product development plan.
Term;
Termination
Unless earlier terminated
as described in the LTC Agreement, the LTC Agreement will remain in effect until December 31, 2035. The LTC Agreement
may be (i) terminated for cause by either Party based on any uncured material breach or insolvency by the other Party, and (ii) terminated
by either Party with respect to specific termination events occurring for either the Collaboration LTC products or the Collaboration
Determa Products, including but not limited to, the failure to achieve certain milestones and failure to agree to initial development
or commercialization plans for the Collaboration Determa Product. If LTC fails to meet its certain product development milestones, the
term of the LTC Agreement shall be extended on a proportionate basis.