NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
1.
Organization, Description of the Business and Liquidity
Oncocyte
Corporation (“Oncocyte” or the “Company”), incorporated in 2009 in the state of California, is a precision diagnostics company focused on developing and commercializing proprietary tests in three areas: DetermaIO
is a gene expression test that assesses the tumor microenvironment to predict response to immunotherapies, VitaGraft is a blood-based
solid organ transplantation monitoring test and DetermaCNI is a blood-based monitoring tool for monitoring therapeutic efficacy in cancer
patients.
Oncocyte’s
first product for commercial release was 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.
On
December 15, 2022, the Company, entered into a Stock Purchase Agreement (the “Razor Stock Purchase Agreement”) with
Dragon Scientific, LLC, a Delaware limited liability company (“Dragon”) and Razor. Pursuant to the Razor Stock Purchase
Agreement, Oncocyte agreed to sell to Dragon, 3,188,181 shares of common stock of Razor, which constitutes approximately 70% of the
issued and outstanding equity interests of Razor on a fully-diluted basis, and transfer to Razor all of the assets and liabilities
related to DetermaRx (the “Razor Sale Transaction”). Following the closing of the Razor Sale Transaction (the
“Razor Closing”), Oncocyte will own approximately 30% of the issued and outstanding equity interests of Razor on a
fully-diluted basis. See Notes 16 and 17 for a full discussion of the Razor Sale Transaction.
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 VitaGraft-CNI Monitor, a patented, blood-based test
for immunotherapy monitoring which Oncocyte expects to market as DetermaCNI in the United States, and VitaGraft Transplant Monitor,
a solid organ transplantation monitoring test. See Note 3 for additional information about the Chronix Merger.
ONCOCYTE
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Certain
amounts in prior periods have been reclassified to reflect the impact of the discontinued operations treatment of Razor in order to conform
to the current period presentation.
As
a result of the divestiture of Razor, the Company has retrospectively revised the consolidated statements of operations for the year
ended December 31, 2021 and the consolidated balance sheet as of December 31, 2021, to reflect the operations and cash flows of
Razor as discontinued operations and the related assets and liabilities as held for sale. See Note 16 for additional information
about assets held for sale and discontinued operations.
Liquidity
In
accordance with Accounting Standards Update (“ASU”) No. 2014-15, Presentation of Financial Statements – Going
Concern (Subtopic 205-40), the Company’s management evaluates whether there are conditions or events, considered in the aggregate,
that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the
financial statements are issued.
Oncocyte
has incurred operating losses and negative cash flows since inception and had an accumulated deficit of $260.7
million as of December 31, 2022. Oncocyte
expects to continue to incur operating losses and negative cash flows for the foreseeable future. Oncocyte revenues during 2022 were
not sufficient to cover Oncocyte’s operating expenses for that period. Since its formation, Oncocyte has financed its operations
primarily through the sale of shares of its common stock, convertible preferred stock and warrants to acquire common stock.
As
of December 31, 2022, Oncocyte had $20.0 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 $0.4
million.
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, 2022, Oncocyte sold 1,123,337 shares of common stock at an average offering price of $5.58 per share, for
gross proceeds of approximately $6.27 million through the ATM Offering. Oncocyte will need to raise additional capital to finance its
operations, including the development and commercialization of its cancer diagnostic and other tests, until such time as it is able to
generate sufficient revenues from the commercialization of one or more of its laboratory tests and other tests and performing Pharma
Services to cover its operating expenses.
On
April 13, 2022, Oncocyte entered into a securities purchase agreement (the “Securities Purchase Agreement”) with institutional
accredited investors (the “Investors”), including Broadwood Partners, L.P. (“Broadwood”), Oncocyte’s largest
shareholder, in a registered direct offering of 11,765 shares of Series A Convertible Preferred Stock (the “Series A Preferred
Stock”), which are convertible into a total of 7,689,542 shares of common stock, at a conversion price of $1.53 (the “Series
A Preferred Stock Offering”). The purchase price of each share of Series A Preferred Stock was $850, which included an original
issue discount to the stated value of $1,000 per share. The Securities Purchase Agreement provides that the closing of the Series A Preferred
Stock Offering will occur, subject to the satisfactory of certain closing conditions, in two equal tranches of $5,000,000 each for aggregate
gross proceeds from both closings of $10,000,000. The first closing occurred on June 1, 2022, and Oncocyte received net proceeds of approximately
$4.9 million from the Series A Preferred Stock issued from the first tranche. The second closing would occur, subject to the satisfactory
of certain closing conditions (including but not limited to a requirement that the Company has not received, in the 12 months preceding
the second closing, a notice from The Nasdaq Stock Market LLC (“Nasdaq”) that the Company is not in compliance with the listing
and maintenance and listing requirements of Nasdaq), on the earlier of (a) the second trading day following the date that Oncocyte receives
notice from an Investor to accelerate the second closing and (b) a date selected by Oncocyte on or after October 8, 2022 and on or prior
to March 8, 2023. On August 9, 2022, Oncocyte received a letter from Nasdaq indicating that the Company no longer meets the minimum bid
price requirement of Nasdaq Listing Rule 5450(a)(1) of the Nasdaq continued listing requirements. Accordingly as of December 31, 2022,
no additional proceeds are expected from the second closing of the Security Purchase Agreement. See Note 15 for additional information
about the Series A Preferred Stock Offering.
ONCOCYTE
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Further,
on April 13, 2022, Oncocyte entered into an underwriting agreement (the “Underwriting Agreement”) with BTIG, LLC, as representative
of the underwriters named therein (the “Underwriters”), pursuant to which Oncocyte agreed to issue and sell to the Underwriters
an aggregate of 26,266,417 shares of common stock, and 26,266,417 warrants to purchase up to 13,133,208.5 shares of common stock (“April
2022 Warrants”) (the “Underwritten Offering,” and collectively with the Series A Preferred Stock Offering, the “April
2022 Offerings”). The Underwritten Offering closed on April 19, 2022. Pursuant to the Underwritten Offering, Broadwood acquired
from us (i) 5,220,654 shares of common stock, and (ii) 6,003,752 April 2022 Warrants to purchase up to 3,001,876 shares of common stock
at an exercise price of $1.53 per share. Pura Vida acquired from us (i) 4,984,093 shares of common stock, and (ii) 5,731,707 April 2022
Warrants to purchase up to 2,865,853 shares of common stock. On April 19, 2022, Oncocyte received net proceeds of approximately $32.4
million from the Underwritten Offering of 26,266,417 shares of common stock and 26,266,417 April 2022 Warrants to purchase up to 13,133,208.5
shares of common stock. See Note 15 for additional information about the Underwritten Offering.
As of December 31, 2022, Oncocyte
devoted substantially all of its efforts on initial commercialization efforts for DetermaRx, completing clinical development and planning
commercialization of DetermaIO, although DetermaIO is currently available for biopharma diagnostic development and research use only as
a companion test in immunotherapy drug development to select patients for clinical trials; and the clinical launch of VitaGraft. While
Oncocyte plans to primarily market its laboratory tests in the United States through its own sales force, it is also beginning to make
marketing arrangements with distributors in other countries. In order to reduce capital needs and to expedite the commercialization of
any new laboratory tests that may become available for clinical use, Oncocyte may also pursue marketing arrangements with other diagnostic
companies through which Oncocyte might receive licensing fees and royalty on sales, or through which it might form a joint venture to
market its tests and share in net revenues, in the United States or abroad.
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 laboratory tests that Oncocyte may develop or acquire.
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.
The
Company applied on January 24, 2023 to transfer the listing of its common stock, no par value, from The Nasdaq Global Market to The Nasdaq
Capital Market (the “Transfer”). Upon receiving confirmation that Nasdaq had approved the Transfer, the Company’s common
stock began trading on The Nasdaq Capital Market effective with the open of trading on February 7, 2023. The Company’s common stock
continues to trade under the symbol “OCX”. The Nasdaq Capital Market operates in substantially the same manner as The Nasdaq
Global Market, with issuers listed on The Nasdaq Capital Market tier required to meet certain financial and corporate governance requirements
to qualify for continued listing.
On
February 7, 2023, the Company received confirmation that Nasdaq has determined that the Company is eligible for an additional 180-calendar
day period to regain compliance by meeting the minimum bid price requirement. The minimum bid price requirement would be met if the Company’s
common stock has a minimum closing bid price of at least $1.00 per share for a minimum of 10 consecutive business days during the 180-calendar
day period.
On April 3, 2023 the Company
entered into an agreement with certain members of the Company’s board of directors, and several institutional and accredited investors,
including Broadwood Capital, L.P., the Company’s largest shareholder, relating to their purchase of an aggregate of up to 45,562,425
shares of its common stock at an offering price of $0.3544 per share to board members and $0.30168 per share to the other investors participating
in the offering. The offering is intended to be priced ‘at-the market’ for purposes of complying with applicable NASDAQ Listing
Rules. The aggregate gross proceeds from the offering were approximately $13.9 million before deducting offering expenses payable
by the Company.
Although it is difficult to predict
the Company’s liquidity requirements, management believe that it will have sufficient cash to meet its projected operating requirements
for at least the next 12 months following the issuance of the consolidated financial statements. The Company anticipates that it will
continue to incur net losses for the foreseeable future as it continues the development of its various programs and incurs additional
costs associated with being a public company.
2.
Basis of Presentation and Summary of Significant Accounting Policies
Basis
of presentation
The
consolidated financial statements presented herein, and discussed below, have been prepared in accordance with accounting principles
generally accepted in the United States of America (“GAAP”).
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).
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.
ONCOCYTE
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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
following table presents the Company’s assets and liabilities, measured and recognized at fair value on a recurring basis, classified
under the appropriate level of the fair value hierarchy as of December 31, 2022 (in thousands):
Schedule of Fair
Value Measurement of Financial Assets and Liabilities
| | |
As of December 31, 2022 | |
| | |
Total carrying and estimated fair value | | |
Quoted prices in active markets (Level 1) | | |
Significant other observable inputs
(Level 2) | | |
Significant other observable inputs (Level 3) | |
| Assets: | |
| | | |
| | | |
| | | |
| | |
| Marketable equity securities | |
$ | 433 | | |
$ | 433 | | |
$ | - | | |
$ | - | |
| Total | |
$ | 433 | | |
$ | 433 | | |
$ | - | | |
$ | - | |
| | |
| | | |
| | | |
| | | |
| | |
| Liabilities: | |
| | | |
| | | |
| | | |
| | |
| Contingent consideration liabilities | |
$ | 45,662 | | |
$ | - | | |
$ | - | | |
$ | 45,662 | |
| Total | |
$ | 45,662 | | |
$ | - | | |
$ | - | | |
$ | 45,662 | |
ONCOCYTE
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The
following table presents the Company’s assets and liabilities, measured and recognized at fair value on a recurring basis, classified
under the appropriate level of the fair value hierarchy as of December 31, 2021 (in thousands):
| | |
As of December 31, 2021 | |
| | |
Total carrying and estimated fair value | | |
Quoted prices in active markets (Level 1) | | |
Significant other observable inputs (Level 2) | | |
Significant other observable inputs (Level 3) | |
| Assets: | |
| | | |
| | | |
| | | |
| | |
| Marketable equity securities | |
$ | 904 | | |
$ | 904 | | |
$ | - | | |
$ | - | |
| Total | |
$ | 904 | | |
$ | 904 | | |
$ | - | | |
$ | - | |
| | |
| | | |
| | | |
| | | |
| | |
| Liabilities: | |
| | | |
| | | |
| | | |
| | |
| Contingent consideration liabilities | |
$ | 76,681 | | |
$ | - | | |
$ | - | | |
$ | 76,681 | |
| Total | |
$ | 76,681 | | |
$ | - | | |
$ | - | | |
$ | 76,681 | |
The
carrying amounts of prepaid expenses and other current assets, accounts payable, accrued expenses and other current liabilities approximate
fair values because of the short-term nature of these items.
Cash
and cash equivalents
The
Company’s reconciliation of cash and cash equivalents, and restricted cash reported within the audited consolidated balance sheets
that sum to the total of the same amounts shown in the audited consolidated statements of cash flows were as follows (in thousands):
Schedule of Cash and Cash Equivalents and Restricted Cash
| | |
| | | |
| | |
| | |
December 31, | |
| | |
2022 | | |
2021 | |
| Cash and cash equivalents | |
$ | 19,993 | | |
$ | 32,948 | |
| Restricted cash | |
| 1,700 | | |
| 1,700 | |
| Cash from discontinued operations | |
| 1,510 | | |
| 2,657 | |
| Cash, cash equivalents and restricted cash shown in the statements of cash flows | |
$ | 23,203 | | |
$ | 37,305 | |
Assets
Held for Sale and Discontinued Operations
On
December 16, 2022 the Company entered into the Razor Stock Purchase Agreement with Dragon and Razor, pursuant to which Oncocyte agreed
to transfer to Dragon 70% of its ownership of Razor and all of the assets and liabilities related to DetermaRx to Razor. The Razor Stock
Purchase Agreement provides that Oncocyte will retain 30% stake in Razor.
Assets
and liabilities are classified as held for sale when all of the following criteria for a plan of sale have been met: (1)management, having
the authority to approve the action, commits to a plan to sell the assets; (2) the assets are available for immediate sale, in their
present condition, subject only to terms that are usual and customary for sales of such assets; (3) an active program to locate a buyer
and other actions required to complete the plan to sell the assets have been initiated; (4) the sale of the assets is probable and is
expected to be completed within one year; (5) the assets are being actively marketed for a price that is reasonable in relation to their
current fair value; and (6) actions required to complete the plan indicate that it is unlikely that significant changes to the plan will
be made or the plan will be withdrawn. When all of these criteria have been met, the assets and liabilities are classified as held for
sale in the consolidated balance sheet. Assets classified as held for sale are reported at the lower of their carrying value or fair
value less costs to sell. Depreciation and amortization of assets ceases upon designation as held for sale.
Discontinued
operations comprise activities that were disposed of, discontinued or held for sale at the end of the period, represent a separate major
line of business that can be clearly distinguished for operational and financial reporting purposes and represent a strategic business
shift having a major effect on the Company’s operations and financial results according to Accounting Standard Codification (“ASC”)
Topic 205, Presentation of Financial Statements.
Additional
details surrounding the Company’s assets and liabilities held for sale and discontinued operations are included in Note 16.
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, 2022, goodwill has been fully impaired and a loss was recorded, IPR&D assets are not impaired.
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 certain revenues generated.
The
fair value of contingent consideration after the acquisition date is reassessed by Oncocyte as changes in circumstances and conditions
occur, with the subsequent change in fair value recorded in the 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 pro rata share of earnings or losses from the investment.
Since
February 24, 2021, the date of Oncocyte’s acquisition of the remaining interests in Razor, the Razor entity’s financial statements
have been consolidated with Oncocyte (see Notes 3 and 4).
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. Based on the available practical expedients under the standard, Oncocyte elected not to capitalize leases that
have terms of twelve months or less.
During
2022 and 2021, Oncocyte entered into various operating leases and an embedded operating lease in accordance with ASC 842 discussed in
Note 10. Oncocyte’s accounting for financing leases remained substantially unchanged.
ONCOCYTE
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Accounting
for Lineage and AgeX shares of common stock
Oncocyte
accounts for the shares of Lineage and AgeX common stock it holds as marketable equity securities in accordance with ASC 320-10-25, Investments
– Debt and Equity Securities, as amended by Accounting Standards Update (“ASU”) 2016-01, Financial Instruments–Overall:
Recognition and Measurement of Financial Assets and Financial Liabilities, as the shares have a readily determinable fair value quoted
on the NYSE American and are held principally to meet future working capital purposes, as necessary. The securities are measured at fair
value, with related gains and losses in the value of such securities recorded in the consolidated statements of operations in other income
(expense) and are 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, 2022, Oncocyte held 353,264
and 35,326
shares of common stock of Lineage and AgeX, respectively,
as marketable equity securities with a fair market value of $0.4
million and $19
thousand, respectively.
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 of the asset over its fair value is recorded.
As
of December 31, 2022 and 2021, there has been no other
impairment of long-lived assets from continuing operations.
ONCOCYTE
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
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).
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, 2022 and 2021. 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, 2022 and 2021. 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, 2022 and 2021. Oncocyte is currently unaware of any tax issues under review.
On
December 21, 2020, the U.S. president 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).
In
accordance with the 2017 Tax Act, research and experimental (R&E) expenses under Internal Revenue Code Section 174 are required to
be capitalized beginning in 2022. R&E expenses are required to be amortized over a period of 5 years for domestic expenses and 15
years for foreign expenses.
The
Inflation Reduction Act of 2022 specifically introduces the topic of corporate alternative minimum tax (“CAMT”) on adjusted
financial statement income on applicable corporations for taxable years beginning after December 31, 2022. There is no impact to our
current tax provision.
Revenue
recognition
Pursuant
to ASC 606, revenues are recognized when control of services performed is transferred to customers, in an amount that reflects the consideration
Oncocyte expects to be entitled to in exchange for those services. ASC 606 provides for a five-step model that includes:
(i)
identifying the contract with a customer,
(ii)
identifying the performance obligations in the contract,
(iii)
determining the transaction price,
(iv)
allocating the transaction price to the performance obligations, and
(v)
recognizing revenue when, or as, an entity satisfies a performance obligation.
ONCOCYTE
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Oncocyte
determines transaction prices based on the amount of consideration we expect to receive for transferring the promised goods or services
in the contract. Consideration may be fixed, variable, or a combination of both. The Company considers any constraints on the variable
consideration and includes in the transaction price variable consideration to the extent it is deemed probable that a significant reversal
in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently
resolved.
DetermaRx
testing revenue
Oncocyte
generates revenue from performing DetermaRx tests on clinical samples through orders received from physicians, hospitals, and
other healthcare providers. In determining whether all the revenue recognition criteria (i) through (v) above are met with respect to
DetermaRx tests, each test result is considered a single performance obligation and is generally considered complete when the
test result is delivered or made available to the prescribing physician electronically, and, as such, there are no shipping or handling
fees incurred by Oncocyte or billed to customers. Although Oncocyte bills a list price for all tests ordered and completed for all payer
types, Oncocyte considers constraints on the variable consideration when recognizing revenue for DetermaRx. Because DetermaRx
is a novel test and there are no current reimbursement arrangements with third-party payers other than Medicare, the transaction price
represents variable consideration. Application of the constraint for variable consideration is an area that requires significant judgment.
For all payers other than Medicare, Oncocyte must consider the novelty of the test, the uncertainty of receiving payment, or being subject
to claims for a refund, from payers with whom it does not have a sufficient payment collection history or contractual reimbursement agreements.
Accordingly, for those payers, Oncocyte expects to continue to recognize revenue upon payment until it has a sufficient history to reliably
estimate payment patterns or has contractual reimbursement arrangements, or both, in place.
As
of December 31, 2022, Oncocyte had accounts receivable of $1.8 million from Medicare and Medicare Advantage covered DetermaRx
test. As of December 31, 2021, Oncocyte had accounts receivable of $1.1 million from Medicare covered DetermaRx tests. DetermaRx
accounts receivable balance has been included in the current assets from discontinued operations. (see Notes 16 and 17).
We
maintain an allowance for doubtful accounts at an amount we estimate to be sufficient to provide adequate protection against losses
resulting from extending credit to our customers. We base this allowance, in the aggregate, on historical collection experience, age
of receivables and general economic conditions. Our bad debts have not been material and have been within management expectations.
As of December 31, 2022, we had a bad debt allowance of $0.2 million.
As of December 31, 2021, we had no bad debt allowance.
Pharma
services revenue
Revenues
recognized include Pharma Services performed by Oncocyte’s Insight and Chronix subsidiaries for its pharmaceutical customers, including
testing for biomarker discovery, assay design and development, clinical trial support, and a broad spectrum of biomarker tests. These
Pharma Services are generally performed under individual scope of work (“SOW”) arrangements or license agreements (together
with SOW the “Pharma Services Agreements”) with specific deliverables defined by the customer. Pharma Services are performed
on a (i) time and materials basis or (ii) per test completed basis. Upon completion of the service to the customer in accordance with
a Pharma Services Agreement, Oncocyte has the right to bill the customer for the agreed upon price (either on a per test or per deliverable
basis) and recognizes Pharma Service revenue at that time. Insight identifies each sale of its Pharma Service offering as a single performance
obligation. Chronix identifies the processing of test samples as a separate performance obligation (considered a series) within license
agreements with customers.
Completion
of the service and satisfaction of the performance obligation is typically evidenced by access to the report or test made available to
the customer or any other form or applicable manner of delivery defined in the Pharma Services Agreements. However, for certain SOWs
under which work is performed pursuant to the customer’s highly customized specifications, Oncocyte has the enforceable right to
bill the customer for work completed, rather than upon completion of the SOW. For those SOWs, Oncocyte recognizes revenue over a period
during which the work is performed using a formula that accounts for expended efforts, generally measured in labor hours, as a percentage
of total estimated efforts for the completion of the SOW. As performance obligations are satisfied under the Pharma Services Agreements,
any amounts earned as revenue and billed to the customer are included in accounts receivable. Any revenues earned but not yet billed
to the customer as of the date of Oncocyte’s consolidated financial statements are recorded as contract assets and are included
in prepaids and other current assets as of the financial statement date. Amounts recorded in contract assets are reclassified to accounts
receivable in Oncocyte’s consolidated financial statements when the customer is invoiced according to the billing schedule in the
contract.
ONCOCYTE
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Oncocyte
establishes an allowance for doubtful accounts based on the evaluation of the collectability of its Pharma Services accounts receivables
after considering a variety of factors, including the length of time receivables are past due, significant events that may impair the
customer’s ability to pay, such as a bankruptcy filing or deterioration in the customer’s operating results or financial
position, reasonable and supportable forecast that affect the collectability of the reported amount, and historical experience. If circumstances
related to customers change, estimates of the recoverability of receivables would be further adjusted. Amounts determined to be uncollectible
are written off against the allowance for doubtful accounts. The Company has significant cash balances at financial institutions which throughout the year regularly exceed the
federally insured limit of $250,000. Any loss incurred or a lack of access to such funds could have a significant adverse impact on the
Company’s financial condition, results of operations, and cash flows. As of December 31, 2022 and 2021, Oncocyte has not recorded any losses or allowance
for doubtful accounts on its account receivables from Pharma Services.
As
of December 31, 2022, Oncocyte had accounts receivable from Pharma Services customers of $0.3 million, as compared to $0.4 million as
of December 31, 2021 (see Note 7).
Licensing
revenue
Revenues
recognized includes licensing revenue derived from agreements with customers for exclusive rights to market Oncocyte’s proprietary
testing technology. Under the agreements, Oncocyte grants exclusive rights to certain trademarks and technology of Oncocyte for the purpose
of marketing Oncocyte’s tests within a defined geographic territory. A license agreement may specify milestone deliverables or
performance obligations, for which Oncocyte recognizes revenue when its licensee confirms the completion of Oncocyte’s performance
obligation. A licensing agreement may also include ongoing sales support from Oncocyte and typically includes non-refundable licensing
fees and per-test Pharma Services revenues discussed above, for which Oncocyte treats the licensing of the technology, trademarks, and
ongoing support as a single performance obligation satisfied by the passage of time over the term of the agreement.
Cost
of revenues
Cost
of revenues generally consists of cost of materials, direct labor including benefits, bonus and stock-based compensation, equipment and
infrastructure expenses, clinical sample related costs associated with performing DetermaRx tests and Pharma Services, providing
deliverables according to our licensing agreements, license fees due to third parties, and amortization of acquired intangible assets.
Infrastructure expenses include depreciation of laboratory equipment, allocated rent costs, leasehold improvements, and allocated information
technology costs for operations at Oncocyte’s CLIA laboratories in California and Tennessee. Costs associated with generating the
revenues are recorded as the tests or services are performed regardless of whether revenue was recognized.
Research
and development expenses
Research
and development expenses are comprised of costs incurred to develop technology, which include salaries and benefits (including stock-based
compensation), laboratory expenses (including reagents and supplies used in research and development laboratory work), infrastructure
expenses (including allocated facility occupancy costs), and contract services and other outside costs. Indirect research and development
expenses are allocated primarily based on headcount, as applicable, and include rent and utilities, common area maintenance, telecommunications,
property taxes, and insurance. Research and development costs are expensed as incurred.
Sales
and marketing expenses
Sales
and marketing expenses consist primarily of personnel costs and related benefits, including stock-based compensation, trade show expenses,
branding and positioning expenses, and consulting fees. Sales and marketing expenses also include indirect expenses for applicable overhead
allocated based on headcount, and include allocated costs for rent and utilities, common area maintenance, telecommunications, property
taxes, and insurance.
ONCOCYTE
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
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
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.
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, 2022 and 2021, 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.
ONCOCYTE
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Net
loss per common share
Basic
loss per share is computed by dividing the net loss applicable to common stockholders after deducting cumulative unpaid dividends and
accretion of the preferred stock, by the weighted average number of shares of common stock outstanding during the year. Diluted loss
per share is computed by dividing the net loss applicable to common stockholders after deducting cumulative unpaid dividends and accretion
of the preferred stock, by the weighted average number of common shares outstanding plus the number of additional common shares that
would have been outstanding if all dilutive potential common shares had been issued, using the treasury stock method or the if-converted
method, or the two-class method for participating securities, whichever is more dilutive. Potential common shares are excluded from the
computation if their effect is antidilutive.
All
common stock equivalents are antidilutive because Oncocyte reported a net loss for all periods presented. The following table presents
the calculation of basic and diluted loss per share of common stock (in thousands):
Schedule
of Common Stock Computation of Diluted Net Loss Per Share of Common Stock
| | |
| | | |
| | |
| | |
Year Ended | |
| | |
December 31, | |
| | |
2022 | | |
2021 | |
| Numerator: | |
| | | |
| | |
| Net loss attributable to Oncocyte Corporation, from continuing operations | |
$ | (18,612 | ) | |
$ | (43,610 | ) |
| Net loss attributable to Oncocyte Corporation, from discontinuing operations | |
$ | (54,290 | ) | |
$ | (20,487 | ) |
| Accretion of Series A redeemable convertible preferred stock | |
| (520 | ) | |
| - | |
| Net loss at attributable to common stockholders - Basic and Diluted | |
$ | (73,422 | ) | |
$ | (64,097 | ) |
| | |
| | | |
| | |
| Denominator: | |
| | | |
| | |
| Weighted average shares used in computing net loss per share attributable to common stockholders - Basic and Diluted | |
| 110,800 | | |
| 88,920 | |
| | |
| | | |
| | |
| Basic and diluted from continuing operations, net loss | |
$ | (0.17 | ) | |
$ | (0.49 | ) |
| Basic and diluted from discontinuing operations, net loss | |
$ | (0.49 | ) | |
$ | (0.23 | ) |
| Basic and diluted net loss per common share | |
$ | (0.66 | ) | |
$ | (0.72 | ) |
| | |
| | | |
| | |
| Anti-dilutive potential common shares excluded from the computation of diluted net loss per common share: | |
| | | |
| | |
| Stock options | |
| 13,665 | | |
| 4,579 | |
| RSUs | |
| 36 | | |
| - | |
| Warrants | |
| 16,395 | | |
| 2,252 | |
| Series A redeemable convertible preferred stock | |
| 3,845 | | |
| - | |
| Total | |
| 33,941 | | |
| 6,831 | |
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 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. This guidance will become effective for the Company beginning January 1, 2023. The Company evaluated
the guidance and determined the overall impact of the adoption will have an immaterial impact on
our consolidated financial statements.
In
October 2021, the FASB issued ASU No. 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities
from Contracts with Customers, to provide specific guidance to eliminate diversity in practice on how to recognize and measure acquired
contract assets and contract liabilities from revenue contracts from customers in a business combination consistent with revenue contracts
with customers not acquired in an acquisition. The amendments in this update provide that the acquirer should consider the terms of the
acquired contracts, such as timing of payment, identify each performance obligation in the contracts, and allocate the total transaction
price to each identified performance obligation on a relative standalone selling price basis as of contract inception (that is, the date
the acquiree entered into the contracts) or contract modification to determine what should be recorded at the acquisition date. These
amendments are effective for the Company beginning with fiscal year 2023. The impact of the adoption of the amendments in this update
will depend on the magnitude of any customer contracts assumed in a business combination in 2023 and beyond.
COVID-19
impact and related risks
The
recent global outbreak of COVID-19, and the various attempts throughout the world to contain it, have created significant volatility,
uncertainty and disruption. In response to government directives and guidelines, health care advisories and employee and other concerns,
Oncocyte has altered certain aspects of its operations. A number of Oncocyte’s employees have had to work remotely from home and
those on site have had to follow Oncocyte’s social distance guidelines, which could impact their productivity. COVID-19 could also
disrupt Oncocyte’s operations due to absenteeism by infected or ill members of management or other employees, or absenteeism by
members of management and other employees who cannot effectively work remotely but who elect not to come to work due to the illness affecting
others in Oncocyte’s office or laboratory facilities, or due to quarantines.
In
addition to operational adjustments, the consequences of the COVID-19 pandemic have led to uncertainties related to Oncocyte’s
business growth and ability to forecast the demand for its laboratory tests and Pharma Services and resulting revenues. Concerns over
available hospital, staffing, equipment, and other resources, and the risk of exposure to the virus, have led to delays in clinical trials of drugs under development by pharma companies, and
the continued deferral of drug development clinical trials due to resurgence in COVID-19 cases could continue to result in delayed or
reduced use of Oncocyte’s Pharma Services.
ONCOCYTE
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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.
ONCOCYTE
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
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
| | |
Contractual | | |
Fair Value on the | |
| | |
Value | | |
Merger Date | |
| Milestone 1 | |
$ | 1,500 | | |
$ | 1,340 | |
| Milestone 2 | |
| 3,000 | | |
| 1,830 | |
| Milestone 3 (a) | |
| 1,500 | | |
| 770 | |
| Royalty 1 (b) | |
| See(b) | | |
| 5,980 | |
| Royalty 2 (b) | |
| See(b) | | |
| 1,210 | |
| Total | |
$ | 6,000 | | |
$ | 11,130 | |
| (a) |
Indicates the maximum payable
if the Milestone is achieved. |
| |
|
| (b) |
As defined, Royalty Payments
are based on a percentage of future revenues of DetermaIO and Pharma Services over their respective useful life, accordingly
there is no fixed contractual value for the Royalty Contingent Consideration. |
The
fair value of the Milestone Contingent Consideration was determined using a scenario analysis valuation method which incorporates Oncocyte’s
assumptions with respect to the likelihood of achievement of the Milestones, credit risk, timing of the Milestone Contingent Consideration
payments and a risk-adjusted discount rate to estimate the present value of the expected payments. The discount rate was estimated at
approximately 15.8%
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,
2022, based on Oncocyte’s reassessment of the significant assumptions noted above, there was a decrease of approximately $1.7 million
to the fair value of the Contingent Consideration primarily attributable to revised estimates of the timing of the possible future payouts
and, accordingly, this decrease was recorded as change in fair value of contingent consideration in the consolidated statements of operations
for the year ended December 31, 2022.
The
following tables reflect the activity for Oncocyte’s Contingent Consideration for the years ended December 31, 2022 and December
31, 2021, measured at fair value using Level 3 inputs (in thousands):
Schedule of Contingent Consideration, Measured at Fair Value
| | |
Fair Value | |
| Balance at December 31, 2020 | |
$ | 7,120 | |
| Change in estimated fair value | |
| (60 | ) |
| Balance at December 31, 2021 | |
$ | 7,060 | |
| Change in estimated fair value | |
| (1,690 | ) |
| Balance at December 31, 2022 | |
$ | 5,370 | |
Contingent
consideration is not deductible for tax purposes, even if paid; therefore, no deferred tax assets related to the Contingent Consideration
were recorded.
ONCOCYTE
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Asset
acquisition of Razor Genomics, Inc.
On
December 31, 2019, Oncocyte completed the purchase of 1,329,870 shares of Razor Series A Convertible Preferred Stock, par value $0.0001
per share (the “Razor Preferred Stock”), representing 25% of the outstanding equity of Razor on a fully diluted basis, for
$10 million in cash (the “Initial Closing”), pursuant to a Subscription and Stock Purchase Agreement (the “Purchase
Agreement”) dated September 4, 2019, among Oncocyte, Encore Clinical, Inc. (“Encore”), and Razor. Pursuant to the Purchase
Agreement, Oncocyte entered into Minority Holder Stock Purchase Agreements of like tenor (the “Minority Purchase Agreements”)
with the shareholders of Razor other than Encore (the “Minority Shareholders”) for the future purchase of the shares of Razor
common stock they own. Oncocyte has also entered into certain other agreements with Razor and Encore, including a Sublicense and Distribution
Agreement (the “Sublicense Agreement”), a Development Agreement (the “Development Agreement”), and an amendment
to a Laboratory Services Agreement (the “Laboratory Agreement”) pursuant to which Oncocyte became a party to that agreement.
Purchase
Option
The
Purchase Agreement and Minority Shareholder Agreements granted Oncocyte the option to acquire the balance of the outstanding shares of
Razor common stock from Encore under the Purchase Agreement and from the Minority Shareholders under the Minority Purchase Agreements
(the “Option”) for an additional $10 million in cash and Oncocyte common stock valued at $5 million in total (the “Additional
Purchase Payment”). Oncocyte agreed to exercise the Option if, within a specified time frame, certain milestones are met related
to the contracting of clinical trial sites for a clinical trial of DetermaRx.
On
January 29, 2021, the principal shareholder of Razor informed Oncocyte that the milestone requiring Oncocyte to purchase the outstanding
shares of Razor common stock had been attained under the Purchase Agreement and Minority Shareholder Purchase Agreements. On February
24, 2021, Oncocyte exercised the Option and completed the purchase of all the issued and outstanding shares of common stock of Razor
and paid the selling shareholders in total $10 million in cash and issued a total of 982,318 shares of Oncocyte common stock having a
market value of $5.7 million on that date. As a result of Oncocyte exercising the Option and purchasing the Razor common stock, Oncocyte
is now the sole shareholder of Razor.
Development
Agreement
Under
the Development Agreement, Razor reserved as a “Clinical Trial Expense Reserve” $4 million of the proceeds it received at
the Initial Closing from the sale of the Razor Preferred Stock to Oncocyte, to fund Razor’s share of costs incurred in connection
with a clinical trial of DetermaRx for purposes of promoting commercialization (“Clinical Trial”).
On
February 24, 2021, upon the completion of the outstanding shares of Razor common stock and consolidation of Razor’s accounts, Oncocyte
obtained control of approximately $3.4 million in cash from Razor, which was the remaining balance in the Clinical Trial Expense Reserve
account that Razor was using to pay for the Clinical Trial expenses. Beginning on February 24, 2021, this balance was transferred to
Oncocyte’s control as part of the acquisition date assets and liabilities recorded from the Razor entity shown below. Oncocyte
agreed to 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, it was agreed that 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.
The Development Agreement
was terminated on February 16, 2023 in connection with the Razor Stock Purchase Agreement. See Notes 16 and 17 for more details regarding
the Razor Stock Purchase Agreement.
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.
The Sublicense Agreement was terminated on February 16, 2023 in connection with the Razor Stock Purchase Agreement.
See Notes 16 and 17 for more details regarding the Razor Stock Purchase Agreement.
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
expired on September
29, 2021.
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.
On
February 24, 2021, Oncocyte estimated and recorded a net DTL of $7.1 million after offsetting the acquired available NOLs with the intangible
asset shown in the table below. See Note 8 for a discussion related to the partial release of Oncocyte’s valuation allowance pertaining
to the DTL generated above in accordance with ASC 740.
On
February 24, 2021, upon Oncocyte’s acquisition of the outstanding common stock of Razor, the Razor intangible asset balance recorded
on the acquisition date and included in Intangible Assets was as follows (in thousands):
Schedule of Acquisition Intangible Assets
| | |
As of
February 24, | |
| | |
2021 | |
| Razor intangible asset recorded on the acquisition date: | |
| | |
| Equity method investment carrying value | |
$ | 13,147 | |
| Cash paid as Additional Purchase Payment for the Razor asset | |
| 10,000 | |
| Oncocyte common stock issued (982,318 shares issued at market value) as Additional Purchase Payment | |
| 5,756 | |
| Less: cash balance received from Razor for Clinical Trial expenses | |
| (3,352 | ) |
| Deferred tax liability generated from the Razor asset | |
| 7,077 | |
| Other | |
| 169 | |
| | |
| | |
| Total Razor investment asset balance as of February 24, 2021 (a) | |
$ | 32,797 | |
| (a) |
This balance will be
amortized over the remaining useful life of the Razor asset, approximating 8.5 years, as of the February 24, 2021 acquisition date,
with the amortization expense included in “Cost of revenues – amortization of acquired intangibles” on the 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, 2022, 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 unaudited condensed
standalone statement of operations of Razor is provided for informational purposes only. Razor’s results for the period from
January 1, 2021 through February 23, 2021 are not included in Oncocyte’s consolidated results of operations because Razor was
not consolidated with Oncocyte’s financial statements but had been accounted for under the equity method of accounting since
the December 31, 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. |
On
December 15, 2022, the Company, entered into the Razor Stock Purchase Agreement with Dragon and Razor. Pursuant to the Razor Stock Purchase
Agreement, Oncocyte agreed to sell to Dragon, 3,188,181 shares of common stock of Razor, which constitutes approximately 70% of the issued
and outstanding equity interests of Razor on a fully-diluted basis, and transfer to Razor all of the assets and liabilities related to
DetermaRx. Following the Razor Closing, Oncocyte will own approximately 30% of the issued and outstanding equity interests of Razor on
a fully-diluted basis. See Notes 16 and 17 for more details.
Acquisition
of Chronix Biomedical, Inc.
On
April 15, 2021, the Chronix Merger Date, Oncocyte completed its acquisition of Chronix pursuant the Chronix Merger Agreement.
Merger
Consideration at Closing
Pursuant
to the Chronix Merger Agreement, Oncocyte agreed to deliver closing consideration consisting of approximately (i) 648,000 shares of Oncocyte
common stock (the “Closing Shares”), which represents approximately $1.43 million of Closing Shares issued to Chronix stockholders
and approximately $1.87 million of Closing Shares issued to payoff assumed liabilities, based on the $5.09 closing price per share of
Oncocyte common stock on the NYSE American on February 1, 2021; (ii) $4.0 million in cash; and (iii) $550,000 net settlement of acquirer/acquiree
pre-combination activity (collectively, the “Chronix Closing Consideration”).
Contingent
Consideration
As
additional consideration for holders of certain classes and series of Chronix capital stock, the Chronix Merger Agreement also provides
for Oncocyte to pay “Chronix Contingent Consideration” consisting of (i) “Chronix Milestone Payments” of up to
$14 million in any combination of cash or Oncocyte common stock if certain milestones specified in the Chronix Merger Agreement are achieved,
(ii) “Royalty Payments” of up to 15% of net collections for sales of specified tests and products during the five-to-ten
year earnout periods, and (iii) “Transplant Sale Payments” of up to 75% of net collections from the sale or license to a
third party of Chronix’s patents for use in transplantation medicine during a seven-year earnout period.
The
Chronix Closing Consideration and Chronix Contingent Consideration include amounts payable to certain directors, officers and employees
of Chronix, including officers and employees who are expected to continue to provide services to Chronix following the Chronix Merger.
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 VitaGraft CNI Monitor and VitaGraft 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. Oncocyte amortized the deferred revenue and recorded revenue ratably over the remaining period
as the German customer’s refund rights expire. As of December 31, 2021, Oncocyte has fully amortized the deferred revenue and recorded
revenue of $738,000. As of December 31, 2022, no revenues were recorded as a result of amortized deferred revenue.
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 VitaGraft CNI Monitor and VitaGraft Transplant Monitor. Oncocyte determined
the estimated aggregate fair value of the VitaGraft 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 Test Assets under MPEEM, Oncocyte used probability-weighted, projected cash flows discounted at a rate considered
appropriate given the significant inherent risks associated with similar assets. Cash flows were calculated based on projections of revenues
and expenses related to the asset and were assumed to extend through a multi-year projection period. The discount rate used to value
Test Assets was approximately 12%. The projected cash flows were based on significant assumptions, including the time and resources needed
to complete development of the asset, timing and reimbursement rates from CMS, regulatory approvals, if any, to commercialize the asset,
estimates of the number of tests that might be performed, revenue and operating profit expected to be generated by the asset, the expected
economic life of the asset, market penetration and competition, and risks associated with achieving commercialization, including delay
or failure to obtain CMS and any required regulatory approval, failure of clinical trials, and intellectual property litigation.
Because
the IPR&D is considered an indefinite-lived asset for accounting purposes but is not recognized for tax purposes, the fair value
of the IPR&D on the acquisition date generated a DTL in accordance with ASC 740, Income Taxes. This DTL is computed using
the fair value of the IPR&D assets on the acquisition date multiplied by Oncocyte’s federal and state effective income tax
rates. ASC 740 allows Oncocyte to treat acquired available DTAs, such as Chronix’s NOLs (subject to the annual limitation under
Section 382 of the Internal Revenue Code) as available DTAs to offset against the DTLs, as the DTLs are expected to reverse within the
NOL carryforward period. Any excess DTAs over those DTLs would be assessed for a valuation allowance in accordance with ASC 740. This
accounting treatment is acceptable if, at the time of the acquisition, Oncocyte can both reasonably estimate a timeline to commercialization
and the economic useful life of the IPR&D assets upon commercialization, which will be amortized during the carryforward period of
the offsetting DTAs. Oncocyte estimated and recorded a net DTL of $2.2
million after offsetting the acquired available
NOLs with the IPR&D generated DTLs (see Note 8).
Contingent
consideration liabilities – ASC 805 requires that contingent consideration be estimated and recorded at fair value as of the
acquisition date as part of the total consideration transferred. Contingent consideration is an obligation of the acquirer to transfer
additional assets or equity interests to the selling shareholders in the future if certain future events occur or conditions are met,
such as the attainment of product development milestones. Contingent consideration also includes additional future payments to selling
shareholders based on achievement of components of earnings, such as “earn-out” provisions or percentage of future revenues,
including royalties paid to the former Chronix shareholders based on a percentage of revenues generated from VitaGraft 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 16.2% 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 DetermaCNI, 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 18.6%.
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 VitaGraft, 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 18.6%.
ONCOCYTE
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2022, based on Oncocyte’s reassessment of the significant assumptions noted above, there was a decrease of approximately
$29.3 million to the fair value of the Contingent Consideration primarily attributable to revised estimates of the timing of the possible
future payouts and, accordingly, this decrease was recorded as a change in fair value of the consolidated statements of operations for
the year ended December 31, 2022.
The
following tables reflect the activity for Oncocyte’s Contingent Consideration for the years ended December 31, 2022 and December
31, 2021, measured at fair value using Level 3 inputs (in thousands):
Schedule of Contingent Consideration, Measured at Fair Value
| | |
Fair Value | |
| Balance at April 15, 2021 | |
$ | 42,295 | |
| Change in estimated fair value | |
| 27,326 | |
| Balance at December 31, 2021 | |
$ | 69,621 | |
| Change in estimated fair value | |
| (29,329 | ) |
| Balance at December 31, 2022 | |
$ | 40,292 | |
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 VitaGraft 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. During 2022, the Company identify circumstances
that could indicate a potential impairment and after a valuation of the Company’s assets and liabilities was performed, management
concluded that Goodwill was impaired as of December 31, 2022. (see Notes 2 and 4).
4.
Goodwill and Intangible Assets, net
We
account for our historical acquisitions in accordance with ASC 805, Business Combinations. We recorded the amount exceeding the
fair value of net assets acquired and the date of acquisition as goodwill.
In
accordance with ASC 350, Intangible-Goodwill and Other, we review and evaluate our long-lived assets, including intangible assets
with finite lives, for impairment whenever events or changes in circumstances indicate that we may not recover their net book value.
We test goodwill for impairment on an annual basis in the fourth quarter of each year, and between annual tests, if indicators of potential
impairment exist, using a fair-value approach.
We
typically use an income method to estimate the fair value of these assets, which is based on forecasts of the expected future cash flows
attributable to the respective assets. Significant estimates and assumptions inherent in the valuations reflect a consideration of other
marketplace participants and include the amount and timing of future cash flows (including expected growth rates). Estimates utilized
in the projected cash flows include consideration of macroeconomic conditions, overall category growth rates, competitive activities,
cost containment and margin expansion, Company business plans, the underlying product or technology life cycles, economic barriers to
entry, and the discount rate applied to the cash flows. Unanticipated market or macroeconomic events and circumstances may occur, which
could affect the accuracy or validity of the estimates and assumptions.
During 2022, and upon the eminent sale of Razor Genomics,
the Company assessed its current environment and concluded that it was more likely than not that the fair value of the goodwill was less
than the carrying value. As such, the Company performed a quantitative test to estimate the fair value of the enterprise. Using the discounted
cash flow method and taking into consideration the loss of Razor’s future cash flows, the calculated enterprise fair value was lower
than carrying value. As a result, the Company recorded a goodwill impairment of $18.7 million as part of its operating expenses; as of
December 31, 2022. No impairment was noted for IPR&D assets.
We amortize intangible assets not considered to
have an indefinite useful life using the straight-line method over their estimated period of benefit, which generally ranges from one to nine years.
Each reporting period, we evaluate the estimated remaining useful life of intangible assets and assess whether events or changes in circumstances
warrant a revision to the remaining period of amortization or indicate that impairment exists.
At
December 31, 2022 and December 31, 2021, goodwill and intangible assets, net, consisted of the following (in thousands):
Schedule of Goodwill and Intangible Assets
| | |
December 31, 2022 | | |
December 31, 2021 | |
| Goodwill - Insight Merger(1) | |
$ | - | | |
$ | 9,194 | |
| Goodwill - Chronix Merger(1) | |
| - | | |
| 9,490 | |
| Total Goodwill | |
| - | | |
| 18,684 | |
| | |
| | | |
| | |
| Intangible assets: | |
| | | |
| | |
| Acquired IPR&D - DetermaIO (2) | |
$ | 14,650 | | |
$ | 14,650 | |
| Acquired IPR&D - DetermaCNI and VitaGraft (3) | |
| 46,800 | | |
| 46,800 | |
| | |
| | | |
| | |
| Intangible assets subject to amortization: | |
| | | |
| | |
| Acquired intangible assets - customer relationship | |
| 440 | | |
| 440 | |
| Total intangible assets | |
| 61,890 | | |
| 61,890 | |
| Accumulated amortization - customer relationship(4) | |
| (257 | ) | |
| (169 | ) |
| Intangible assets, net | |
$ | 61,633 | | |
$ | 61,721 | |
| (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). The Company recorded an impairment loss as of December 31,
2022 for the entire goodwill balance. |
| (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. |
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, | |
| | |
| 2023 | |
| 88 | |
| 2024 | |
| 88 | |
| 2025 | |
| 7 | |
| Total | |
| 183 | |
5.
Shareholders’ Equity
Series
A Redeemable Convertible Preferred Stock
On
April 13, 2022, the Company entered into the Securities Purchase Agreement with the Investors in a registered direct offering of 11,765
shares of the Company’s Series A Preferred Stock, which shares of Series A Preferred Stock are convertible into a total of 7,689,542
shares of common stock, at a conversion price of $1.53. The purchase price of each share of Series A Preferred Stock was $850, which
included an original issue discount to the stated value of $1,000 per share. The rights, preferences and privileges of the Series A Preferred
Stock are set forth in the Company’s Certificate of Determination, which the Company filed with the Secretary of State of the State
of California. The Securities Purchase Agreement provides that the closing of the Series A Preferred Stock Offering will occur, subject
to the satisfactory of certain closing conditions, in two equal tranches of $5,000,000 each for aggregate gross proceeds from both closings
of $10,000,000. The first closing occurred on June 1, 2022, and Oncocyte received net proceeds of approximately $4.9 million from the
Series A Preferred Stock issued from the first tranche. The second closing would occur, subject to the satisfactory of certain closing
conditions (including but not limited to a requirement that the Company has not received, in the 12 months preceding the second closing,
a notice from The Nasdaq Stock Market LLC (“Nasdaq”) that the Company is not in compliance with the listing and maintenance
and listing requirements of Nasdaq), on the earlier of (a) the second trading day following the date that Oncocyte receives notice from
an Investor to accelerate the second closing and (b) a date selected by Oncocyte on or after October 8, 2022 and on or prior to March
8, 2023. On August 9, 2022, Oncocyte received a letter from Nasdaq indicating that the Company no longer meets the minimum bid price
requirement of Nasdaq Listing Rule 5450(a)(1) of the Nasdaq continued listing requirements. Accordingly as of December 31, 2022, no additional
proceeds are expected from the second closing of the Security Purchase Agreement. See Note 15 for additional information about the Series
A Preferred Stock Offering.
The
Series A Preferred Stock is convertible into shares of the Company’s common stock at any time at the holder’s option. The
conversion price will be subject to customary anti-dilution adjustments for matters such as stock splits, stock dividends and other distributions
on our common stock, and recapitalizations. A holder is prohibited from converting shares of Series A Preferred Stock into shares of
common stock if, as a result of such conversion, the holder, together with its affiliates, would own more than 4.99% of the shares of
our common stock then issued and outstanding (provided a holder may elect, at the first closing, to increase such beneficial ownership
limitation solely as to itself up to 19.99% of the number of shares of our common stock outstanding immediately after giving effect to
the conversion, provided further that following the receipt of shareholder approval required by applicable Nasdaq rules with respect
to the issuance of common stock that would exceed the beneficial ownership limitation, such beneficial ownership limitation will no longer
apply to the holder if the holder notified the Company that the holder wishes the Company to seek such shareholder approval). On July
15, 2022, the Company received such shareholder approval to remove the beneficial ownership limitation with respect to the Series A Preferred
Stock held by Broadwood Partners, L.P. The Company may force the conversion of up to one-third of the shares of Series A Preferred Stock
originally issued, subject to customary equity conditions, if the daily volume weighted average price of our common stock for 20 out of 30 trading days exceeds 140% of the conversion price and on 20 out of the same 30 trading days the daily trading volume equals or exceeds 400,000 shares of our common stock. The Company may only effect one forced conversion during any 30-trading day period.
In
the event of the Company’s liquidation, dissolution, or winding up, holders of Series A Preferred Stock will receive a payment
equal to the stated value of the Series A Preferred Stock plus accrued but unpaid dividends and any other amounts that may have become
payable on the Series A Preferred Stock due to any failure or delay that may have occurred in issuing shares of common stock upon conversion
of a portion of the Series A Preferred Stock, before any distribution or payment to the holders of common stock or any of our other junior
equity.
ONCOCYTE
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Shares
of Series A Preferred Stock will generally have no voting rights, except as required by law and except that the consent of holders of
a majority of the outstanding Series A Preferred Stock will be required to amend any provision of our certificate of incorporation that
would have a materially adverse effect on the rights of the holders of the Series A Preferred Stock. Additionally, as long as any shares
of Series A Preferred Stock remain outstanding, unless the holders of at least 51% of the then outstanding shares of Series A Preferred
Stock shall have otherwise given prior written consent, we, on a consolidated basis with our subsidiaries, are not permitted to (1) have
less than $8 million of unrestricted, unencumbered cash on hand (“Cash Minimum Requirement”); (2) other than certain permitted
indebtedness, incur indebtedness to the extent that our aggregate indebtedness exceeds $15 million; (3) enter into any agreement (including
any indenture, credit agreement or other debt instrument) that by its terms prohibits, prevents, or otherwise limits our ability to pay
dividends on, or redeem, the Series A Preferred Stock in accordance with the terms of the Certificate of Determination; or (4) authorize
or issue any class or series of preferred stock or other capital stock of the Company that ranks senior or pari passu with the Series
A Preferred Stock.
Shares
of Series A Preferred Stock will be entitled to receive cumulative dividends at a rate per share (as a percentage of stated value) of
6% per annum, payable quarterly in cash or, at our option, by accreting such dividends to the stated value.
The
Company is required to redeem, for cash, the shares of Series A Preferred Stock on the earlier to occur of (1) April 8, 2024, (2) the
commencement of certain a voluntary or involuntary bankruptcy, receivership, or similar proceedings against the Company or its assets,
(3) a Change of Control Transaction (as defined herein) and (4) at the election and upon notice of 51% in interest of the holders, if
the Company fails to meet the Cash Minimum Requirement. A “Change of Control Transaction” means the occurrence of any of
(a) an acquisition by an individual or legal entity or “group” (as described in Rule 13d-5(b)(1) promulgated under the Exchange
Act) of effective control (whether through legal or beneficial ownership of capital stock of the Company, by contract or otherwise) of
in excess of 50% of the voting securities of the Company (other than by means of conversion of Series A Preferred Stock), (b) the Company
merges into or consolidates with any other person, or any person merges into or consolidates with the Company and, after giving effect
to such transaction, the stockholders of the Company immediately prior to such transaction own less than 50% of the aggregate voting
power of the Company or the successor entity of such transaction, or (c) the Company sells or transfers all or substantially all of its
assets to another person. Additionally, the Company has the right to redeem the Series A Preferred Stock for cash upon 30 days prior
notice to the holders; provided if the Company undertakes a capital raise in connection with such redemption, the Investors will have
the right to participate in such financing.
As
of December 31, 2022, Oncocyte had 11,765 preferred shares, no-par value, authorized, and 5,882.4 shares issued and outstanding. The
future right or obligation associated with the Series A Preferred Stock to be issued in the second closing of $0.4 million was written
off since the second closing is not expected as of December 31, 2022.
Common
Stock
As
of December 31, 2022 and December 31, 2021, Oncocyte has 230,000,000 shares of common stock, no-par value, authorized. As of December
31, 2022 and December 31, 2021, Oncocyte had 118,643,821 and 92,231,917 shares of common stock issued and outstanding, respectively.
Common
Stock Purchase Warrants
As
of December 31, 2022, Oncocyte had an aggregate of 16,395,343 common stock purchase warrants issued and outstanding with exercise prices
ranging from $1.53 to $5.46 per warrant. The warrants will expire on various dates ranging from February 2024 to October 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.
6.
Stock-Based Compensation
Oncocyte
had a 2010 Stock Option Plan (the “2010 Plan”) under which 5,200,000 shares of common stock were authorized for the grant
of stock options or the sale of restricted stock. On August 27, 2018, Oncocyte shareholders approved a new Equity Incentive Plan (the
“2018 Incentive Plan”) to replace the 2010 Plan. In adopting the 2018 Incentive Plan, Oncocyte terminated the 2010 Plan and
will not grant any additional stock options or sell any stock under restricted stock purchase agreements under the 2010 Plan; however,
stock options issued under the 2010 Plan will continue in effect in accordance with their terms and the terms of the 2010 Plan until
the exercise or expiration of the individual options.
During
the year ended December 31, 2022, the Company awarded executive share-based payment awards under the 2018 Plan to certain executive officers
and employees with time-based, market-based and performance-based vesting conditions (“2022 Equity Awards”).
The
fair value of the 2022 Equity Awards with performance-based vesting condition was estimated using the Black-Scholes option-pricing model
assuming that performance goals will be achieved. If such performance conditions are not met, no compensation cost is recognized and
any recognized compensation cost is reversed. The probability of 2022 equity awards performance-based vesting conditions will be evaluated
each reporting period and the Company will true-up the amount of cumulative cost recognized for the 2022 performance-based awards at
each reporting period based on the most up-to-date probability estimates. The Company will recognize the compensation expense for 2022
performance-based awards expected to vest on a straight-line basis over the respective service period for each separately vesting tranche.
The
fair value of the 2022 Equity Awards with market-based vesting condition was estimated using the Monte Carlo simulation model. Assumptions
and estimates utilized in the model include the risk-free interest rate, dividend yield, expected stock volatility and the estimated
period to achievement of the performance and market conditions, which are subject to the achievement of the market-based goals established
by the Company and the continued employment of the participant. These awards vest only to the extent that the market-based conditions
are satisfied as specified in the vesting conditions. Unlike the performance-based awards, the grant date fair value and associated compensation
cost of the market-based awards reflect the probability of the market condition being achieved, and the Company will recognize this compensation
cost regardless of the actual achievement of the market condition. Assumptions utilized in connection with the Monte Carlo valuation
technique included: estimated risk-free interest rate of 2.0 percent; term of 2.8 years; expected volatility of 100 percent; and expected
dividend yield of 0 percent. The risk-free interest rate was determined based on the yields available on U.S. Treasury zero-coupon issues.
The expected stock price volatility was determined using historical volatility. The expected dividend yield was based on expectations
regarding dividend payments. The total grant date fair value of the market-based awards was $117,625.
ONCOCYTE
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
In
May 2022, the Company approved amendments to vesting conditions of 1,237,500
performance-based and 250,000
market-based awards of certain executive officers
and employees. The performance-based awards were modified such that the stock awards will be eligible to vest as follows: (i) 50%
will vest on December 31, 2023 if the Company achieves LCD reimbursement for VitaGraft (formerly VitaGraft Transplant Monitor)
for one organ no later than December 31, 2022 and (ii) 50%
will vest on December 31, 2023 if DetermaIO or DetermaCNI (formerly VitaGraft - CNI Monitor) submission
for LCD is completed no later than December 31, 2022. Additional performance-based RSU awards were modified to be eligible to vest upon
the achievement by the
Company of average market capitalization minimum, target, and maximum goals of (i) $300 million; (ii) $400 million; and (iii) $500 million,
respectively, during the period beginning on January 1, 2022 and ending on December 31, 2024. The
market-based RSU awards were modified such that the awards will be eligible to vest upon the achievement of product commercial launch
minimum, target, and maximum goals as follows: (i) 1 laboratory test product in the US; (ii) 2 laboratory test products in US, and (iii)
3 laboratory test products in the US, respectively.
In
accordance with ASC 718, the Company calculated the fair value of the market-based awards on the date of modification, noting an increase
in the fair value of approximately $58,500 on the date of modification, with the incremental increase in fair value representing additional
unrecognized stock-based compensation expense. The following assumptions were used in calculating the fair value of the market-based
options on the date of modification:
Schedule of Assumptions Used to Calculate Fair Value of Stock Options
| Risk-free interest rates | |
| 2.72 | % |
| Expected term (in years) | |
| 2.6 | |
| Volatility | |
| 95.0 | % |
| Grant date fair value of awards granted during the period | |
$ | 1.13 | |
In
July 2022, the Company approved amendments to vesting conditions of 475,000 performance-based awards of certain executive officers and
employees. Certain performance-based awards were modified such that the stock awards will be eligible to vest as follows: (i) fifty percent
(50%) of the options will vest on December 31, 2023 (the “Vesting Date”), subject to Continuous Service through the Vesting
Date, if local coverage determination is issued and priced for VitaGraft (Transplant) with respect to one organ no later than December
31, 2022; and (ii) fifty percent (50%) of the options will vest on the Vesting Date, subject to Continuous Service through the Vesting
Date, if the Company submits a local coverage determination request for DetermaIO or DetermaCNI no later than December 31, 2022. Additional
performance-based stock awards were modified to be eligible to vest upon the achievement of performance minimum, target, and maximum
goals of (i) 90% of revenue goal; (ii) 100% of revenue goal; and (iii) exceed revenue goal by up to 150%, respectively, during fiscal
year 2022. These same awards contained budget performance goals which were modified to be eligible to vest upon the achievement of performance
minimum, target, and maximum goals of (i) complete fiscal year 2022 with sufficient cash to continue operations for 12 months; (ii) complete
fiscal year 2022 with sufficient cash to continue operations for 15 months; and (iii) complete fiscal year 2022 with sufficient cash
to continue operations for 16 months, respectively.
As
of December 31, 2022, 50% of the performance-based were forfeited since the Company did not achieve LCD reimbursement for VitaGraft.
The remaining 50% is eligible to vest on December 31, 2023, since the Company completed the LCD submission for Determa CNI on December
16, 2022.
During
the year ended December 31, 2022, the Company accelerated the vesting of certain equity awards in accordance with the 2018 Incentive
Plan after the departure of officers of the Company and the adoption of the workforce reduction plan. Due to the acceleration of such
awards all associated unrecognized compensation was accelerated and recognized in full.
ONCOCYTE
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
A
summary of Oncocyte’s 2010 Plan activity and related information follows (in thousands except weighted average exercise price):
Summary of Stock Option Activity
| | |
Shares | | |
Number | | |
Weighted | |
| | |
Available | | |
of Options | | |
Average | |
| Options | |
for Grant | | |
Outstanding | | |
Exercise Price | |
| | |
| | |
| | |
| |
| Balance at December 31, 2021 | |
| - | | |
| 923 | | |
$ | 3.65 | |
| Options exercised | |
| - | | |
| - | | |
$ | - | |
| Options forfeited, canceled and expired | |
| - | | |
| (316 | ) | |
$ | 2.76 | |
| Balance at December 31, 2022 | |
| - | | |
| 607 | | |
$ | 4.04 | |
| Exercisable at December 31, 2022 | |
| | | |
| 607 | | |
$ | 4.04 | |
As
of December 31, 2022, 21,000,000 shares of common stock were reserved under the 2018 Incentive Plan for the grant of stock options or
the sale of restricted stock or for the settlement of hypothetical units issued with reference to common stock (“RSUs”).
Oncocyte may also grant stock appreciation rights under the 2018 Incentive Plan.
A
summary of Oncocyte’s 2018 Incentive Plan activity and related information follows (in thousands except weighted average exercise
price):
Summary of Stock Option Activity
| | |
Shares | | |
Number | | |
Number | | |
Weighted | |
| | |
Available | | |
of Options | | |
of RSUs | | |
Average | |
| | |
for Grant | | |
Outstanding | | |
Outstanding | | |
Exercise Price | |
| | |
| | |
| | |
| | |
| |
| Balance at December 31, 2021 | |
| 9,006 | | |
| 10,679 | | |
| 121 | | |
$ | 3.63 | |
| RSUs vested | |
| 341 | | |
| - | | |
| (341 | ) | |
$ | - | |
| RSUs granted | |
| (511 | ) | |
| - | | |
| 511 | | |
$ | - | |
| Performance RSUs granted | |
| (1,150 | ) | |
| - | | |
| 1,150 | | |
$ | - | |
| Performance RSUs vested | |
| 425 | | |
| - | | |
| (425 | ) | |
$ | - | |
| Options granted | |
| (4,365 | ) | |
| 4,365 | | |
| - | | |
$ | 1.10 | |
| Options exercised | |
| - | | |
| - | | |
| - | | |
$ | - | |
| Options forfeited/cancelled | |
| 6,484 | | |
| (6,484 | ) | |
| - | | |
$ | 2.80 | |
| RSUs forfeited/cancelled | |
| 575 | | |
| - | | |
| (575 | ) | |
$ | - | |
| Balance at December 31, 2022 | |
| 10,805 | | |
| 8,560 | | |
| 441 | | |
$ | 2.96 | |
| Options exercisable at December 31, 2022 | |
| | | |
| 5,256 | | |
| | | |
$ | 4.76 | |
Oncocyte
recorded stock-based compensation expense in the following categories on the accompanying consolidated statements of operations for the
years ended December 31, 2022 and 2021 (in thousands):
Summary of Stock-based Compensation Expense
| | |
| | | |
| | |
| | |
Year Ended | |
| | |
December 31, | |
| | |
2022 | | |
2021 | |
| Cost of revenues | |
$ | 10 | | |
$ | 96 | |
| Research and development | |
| 773 | | |
| 378 | |
| Sales and marketing | |
| 261 | | |
| 114 | |
| General and administrative | |
| 5,435 | | |
| 3,773 | |
| Discontinued operations | |
| 3,563 | | |
| 2,480 | |
| Total stock-based compensation expense | |
$ | 10,042 | | |
$ | 6,841 | |
ONCOCYTE
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The
assumptions that were used to calculate the grant date fair value of Oncocyte’s employee and non-employee stock option grants for
the years ended December 31, 2022 and 2021 were as follows:
Schedule of Assumptions Used to Calculate Fair Value of Stock Options
| | |
Year Ended | |
| | |
December 31, | |
| | |
2022 | | |
2021 | |
| Expected life (in years) | |
| 6.01 | | |
| 6.00 | |
| Risk-free interest rates | |
| 2.43 | % | |
| 1.02 | % |
| Volatility | |
| 106.74 | % | |
| 98.88 | % |
| Dividend yield | |
| - | % | |
| - | % |
The
determination of stock-based compensation is inherently uncertain and subjective and involves the application of valuation models and
assumptions requiring the use of judgment. If Oncocyte had made different assumptions, its stock-based compensation expense and net loss
for the years ended December 31, 2022 and 2021 may have been significantly different.
Oncocyte
does not recognize deferred income taxes for incentive stock option compensation expense and records a tax deduction only when a disqualified
disposition has occurred.
7.
Disaggregation of Revenues and Concentration Risk
The
following table presents the percentage of consolidated revenues 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, | |
| | |
2022 | | |
2021 | |
| Pharma Services | |
| 17 | % | |
| 19 | % |
| Licensing | |
| - | % | |
| 10 | % |
| Discontinued operations | |
| 83 | % | |
| 71 | % |
| 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, |
|
| |
|
2022 |
|
|
2021 |
|
| Pharma services - Company A |
|
|
43 |
% |
|
|
-* |
|
| Pharma services - Company B |
|
|
14 |
% |
|
|
-* |
|
| Pharma services - Company C |
|
|
11 |
% |
|
|
-* |
|
| Pharma services Other |
|
|
31 |
% |
|
|
66 |
% |
| Licensing - Company A |
|
|
-* |
|
|
|
34 |
% |
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, | |
| | |
2022 | | |
2021 | |
| United States – Pharma Services | |
| 13 | % | |
| 13 | % |
| Outside of the United States – Pharma Services | |
| 4 | % | |
| 6 | % |
| Outside of the United States – Licensing | |
| - | % | |
| 10 | % |
| Discontinued operations – Outside of the United States - Licensing | |
| 18 | % | |
| 40 | % |
| Discontinued operations – United States - DetermaRx | |
| 65 | % | |
| 31 | % |
| Total | |
| 100 | % | |
| 100 | % |
The
total consolidated accounts receivables, from third-party payers and other customers outstanding as of December 31, 2022 from continuing
operations are mainly related to Pharma Services.
ONCOCYTE
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
8.
Income Taxes
In 2022, the Company incurred $72.9 million of net operating losses in
the United States and $10 thousand of net operating income internationally. In 2021, the Company incurred $73.1 million of net operating
losses in the United States and $212 thousand of net operating loss internationally.
A
deferred income tax benefit of $0 and $9.3 million ($8.1 million federal and $1.2 million state) was recorded for the years ended December
31, 2022 and December 31, 2021, 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, 2022 and 2021.
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, 2022 and 2021 were as follows (in thousands):
Schedule
of Components of Deferred Tax Assets and Liabilities
| | |
| | | |
| | |
| | |
December 31, | |
| | |
2022 | | |
2021 | |
| Deferred tax assets/(liabilities): | |
| | | |
| | |
| Net operating loss carryforwards and capital loss carryforwards | |
$ | 52,302 | | |
$ | 51,051 | |
| Research and development credit carryforwards | |
| 3,680 | | |
| 3,148 | |
| Marketable equity securities | |
| 364 | | |
| 193 | |
| Stock-based and other compensation | |
| 5,067 | | |
| 2,398 | |
| Right-of-use liability | |
| 952 | | |
| 949 | |
| Razor Investment(1) | |
| 5,373 | | |
| - | |
| Capitalized R&D(2) | |
| 4,011 | | |
| - | |
| Other | |
| 49 | | |
| - | |
| Total deferred tax assets | |
| 71,798 | | |
| 57,739 | |
| Valuation allowance | |
| (54,408 | ) | |
| (37,167 | ) |
| Deferred tax assets, net of valuation allowance | |
| 17,390 | | |
| 20,572 | |
| Right-of-use asset | |
| (580 | ) | |
| (591 | ) |
| Intangibles and fixed assets | |
| (16,810 | ) | |
| (19,981 | ) |
| Total deferred tax liabilities | |
| (17,390 | ) | |
| (20,572 | ) |
| Net deferred tax assets | |
$ | - | | |
$ | - | |
| (1) | Relates
to outside basis difference for Razor which meets the criteria for held for sale as of December
31, 2022. |
| | |
| (2) | Relates
to Research and Development expenditures required to be capitalized as of December 31, 2022. |
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.
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:
Schedule
of Income Tax Reconciliation
| | |
| | | |
| | |
| | |
December 31, | |
| | |
2022 | | |
2021 | |
| Computed tax benefit at federal statutory rate | |
| 21 | % | |
| 21 | % |
| Permanent differences | |
| (14 | )% | |
| (1 | )% |
| State tax benefit | |
| 1 | % | |
| 2 | % |
| Research and development credits | |
| (3 | )% | |
| - | % |
| Change in fair value consideration | |
| 35 | % | |
| (8 | )% |
| Change in valuation allowance | |
| (19 | )% | |
| (1 | )% |
| Goodwill impairment | |
| (21 | )% | |
| - | % |
| Income tax benefit percentage | |
| - | % | |
| 13 | % |
ONCOCYTE
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
As
of December 31, 2022, Oncocyte had net operating loss carryforwards of approximately $209.9
million for U.S. federal income tax purposes
and $103.8
million for state income tax purposes. Federal
net operating losses generated on or prior to December 31, 2017 expire in varying amounts between
2023 and 2037, while federal net operating losses
generated after December 31, 2017 carryforward indefinitely. The state net operating losses expire in varying amounts between
2023 and 2042.
As
of December 31, 2022, Oncocyte has research and development credit carryforwards for federal and state purposes of $3.1 million and $2.4
million, respectively. The federal credits will expire between 2030 and 2042, 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 $17.2 million and $5.4 million for the years ended December 31, 2022 and 2021, respectively.
Oncocyte
has uncertain tax benefits (“UTBs”) totaling $1.9 million and $1.4 million as of December 31, 2022 and 2021, 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,
2022 and 2021. 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 $2.2 million in 2021. 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
| | |
| | | |
| | |
| | |
December 31, | |
| | |
2022 | | |
2021 | |
| | |
(in thousands) | |
| Balance at the beginning of the year | |
$ | 1,390 | | |
$ | 3,052 | |
| Additions based on tax positions related to current year | |
| 531 | | |
| 511 | |
| Adjustments based on tax positions related to prior years | |
| - | | |
| - | |
| Settlements | |
| - | | |
| (2,173 | ) |
| Balance at end of year | |
$ | 1,921 | | |
$ | 1,390 | |
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
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
9.
Right-of-use Assets, Machinery and Equipment, Net and Construction in Progress
As
of December 31, 2022 and 2021, 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, 2022 | | |
December 31, 2021 | |
| | |
| | |
| |
| Right-of-use assets (1) | |
| 3,499 | | |
| 3,499 | |
| Machinery and equipment | |
| 9,408 | | |
| 6,290 | |
| Accumulated depreciation and amortization | |
| (4,196 | ) | |
| (2,662 | ) |
| Right-of-use assets, machinery and equipment, net | |
| 8,711 | | |
| 7,127 | |
| Construction in progress | |
| 2,140 | | |
| 1,242 | |
| Right-of-use assets, machinery and equipment, net, and construction in progress from continuing operations | |
| 10,851 | | |
| 8,369 | |
| Right-of-use assets, machinery and equipment, net, and construction in progress from discontinuing operations | |
| 211 | | |
| 158 | |
| Right-of-use assets, machinery and equipment, net, and construction in progress | |
| 11,062
| | |
| 8,527 | |
| (1) |
Oncocyte recorded certain
right-of-use assets and liabilities for operating leases in accordance with ASC 842 (see Note 10). |
Depreciation
expense included in continuing operations amounted to approximately $1.5
million and $0.8
million for the years ended December 31, 2022 and 2021, respectively.
ONCOCYTE
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
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
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 $1.3 million 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 $1.7 million. The lessor
may apply the security deposit, in whole or in part, for the payment of rent and any other amount that Oncocyte is or becomes obligated
to pay under the Irvine Lease but fails to pay when due and beyond any cure period. The lessor may draw on the letter of credit from
time to time to pay any amount that is unpaid and due, or if the original issuing bank notifies the lessor that the letter of credit
will not be renewed or extended for the period required under the Irvine Lease and Oncocyte fails to timely provide a replacement letter
of credit, or an event of default under the Irvine Lease occurs and continues beyond the applicable cure period, or if certain insolvency
or bankruptcy or insolvency with respect to Oncocyte occur. Oncocyte is required to restore any portion of the security deposit that
is applied by the lessor to payments due under the 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.
ONCOCYTE
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
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’ operations.
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, 2022, for Oncocyte’s operating and financing leases
(see Note 2).
Under
the Laboratory Agreement discussed in Note 3, Oncocyte assumed all of Razor’s Laboratory Agreement payment obligations. Although
Oncocyte is not a party to any lease agreement with Razor or Encore, under the terms of the Laboratory Agreement, Oncocyte received the
landlord’s consent for the use of the laboratory at Razor’s Brisbane, California location (the “Brisbane Facility”)
under the terms of a sublease to which Encore is the sublessee. The sublease expires on March 31, 2023 (the “Brisbane Lease”).
The laboratory fee payments to Encore include both laboratory services and the use of the Brisbane Facility. Under the provisions of
the Laboratory Agreement, if Oncocyte terminates the Laboratory Agreement prior to the expiration of the Brisbane Lease, Oncocyte shall
assume the costs related to the subletting or early termination of the Brisbane Lease. If the Laboratory Agreement were to be terminated
on December 31, 2022, the aggregate payments due to the landlord for early cancellation of the Brisbane Lease would be approximately
$39,000 (aggregate payments from January 1, 2023 through March 31, 2023). Oncocyte determined that the Laboratory Agreement contains
an embedded operating lease for the Brisbane Facility and Oncocyte allocated the aggregate payments to this lease component for purposes
of calculating the net present value of the right-of-use asset and liability as of the inception of the Laboratory Agreement in accordance
with ASC 842, as shown in the table below.
Financing
lease
As
of December 31, 2022, Oncocyte has one financing lease remaining through December 2023 for certain laboratory equipment with aggregate
remaining payments of $124,000 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 years ended December 31,
2022 and 2021 (in thousands):
Schedule of Supplemental Cash Flow Information Related to Operating and Financing Lease
| | |
| | | |
| | |
| | |
Year Ended | |
| | |
December 31, | |
| | |
2022 | | |
2021 | |
| Cash paid for amounts included in the measurement of financing lease liabilities: | |
| | | |
| | |
| Operating cash flows from operating leases | |
| 1,143 | | |
| 1,042 | |
| Operating cash flows from financing leases | |
| 20 | | |
| 147 | |
| Financing cash flows from financing leases | |
| 104 | | |
| 34 | |
The
following table presents supplemental balance sheet information related to operating and financing leases as of December 31, 2022 and
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, 2022 | |
| Operating lease | |
| | |
| Right-of-use assets, net | |
$ | 2,088 | |
| | |
| | |
| Right-of-use lease liabilities, current | |
$ | 698 | |
| Right-of-use lease liabilities, noncurrent | |
| 2,730 | |
| Total operating lease liabilities | |
$ | 3,428 | |
| | |
| | |
| Financing lease | |
| | |
| Machinery and equipment | |
$ | 537 | |
| Accumulated depreciation | |
| (446 | ) |
| Machinery and equipment, net | |
$ | 91 | |
| | |
| | |
| Current liabilities | |
$ | 117 | |
| Noncurrent liabilities | |
| - | |
| Total financing lease liabilities | |
$ | 117 | |
| | |
| | |
| Weighted average remaining lease term | |
| | |
| Operating lease | |
| 4.5 years | |
| Financing lease | |
| 1.0 years | |
| | |
| | |
| Weighted average discount rate | |
| | |
| Operating lease | |
| 11.24 | % |
| Financing lease | |
| 11.55 | % |
ONCOCYTE
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The
following table presents future minimum lease commitments as of December 31, 2022 (in thousands):
Schedule of Future Minimum Lease Commitments for Operating and Financing Leases
| | |
Operating | | |
Financing | |
| | |
Leases | | |
Leases | |
| Year Ending December 31, | |
| | | |
| | |
| 2023 | |
$ | 1,048 | | |
$ | 124 | |
| 2024 | |
| 903 | | |
| - | |
| 2025 | |
| 869 | | |
| - | |
| 2026 | |
| 899 | | |
| - | |
| 2027 | |
| 694 | | |
| - | |
| Total minimum lease payments | |
$ | 4,413 | | |
$ | 124 | |
| Less amounts representing interest | |
| (985 | ) | |
| (7 | ) |
| Present value of net minimum lease payments | |
$ | 3,428 | | |
$ | 117 | |
Litigation
– General
Oncocyte
will be subject to various claims and contingencies in the ordinary course of its business, including those related to litigation, business
transactions, employee-related matters, and other matters. When Oncocyte is aware of a claim or potential claim, it assesses the likelihood
of any loss or exposure. If it is probable that a loss will result and the amount of the loss can be reasonably estimated, Oncocyte will
record a liability for the loss. If the loss is not probable or the amount of the loss cannot be reasonably estimated, Oncocyte discloses
the claim if the likelihood of a potential loss is reasonably possible and the amount involved could be material.
Tax
Filings
Oncocyte
tax filings are subject to audit by taxing authorities in jurisdictions where it conducts business. These audits may result in assessments
of additional taxes that are subsequently resolved with the authorities or potentially through the courts. Management believes Oncocyte
has adequately provided for any ultimate amounts that are likely to result from these audits; however, final assessments, if any, could
be significantly different than the amounts recorded in the consolidated financial statements.
Employment
Contracts
Oncocyte
has entered into employment and severance benefit contracts with certain executive officers. Under the provisions of the contracts, Oncocyte
may be required to incur severance obligations for matters relating to changes in control, as defined, and certain terminations of executives.
As of December 31, 2022, Oncocyte accrued approximately $4.4 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, 2022 and 2021.
ONCOCYTE
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
11.
Workforce Reduction
In
August 2022, the Company initiated a workforce reduction plan to strategically realign its operations and implement cost reduction programs
to prioritize near term revenue generators and to manage and preserve cash. In connection with the reduction, the Company eliminated
14 positions, implemented tighter expense controls, and ceased non-core activities.
Further,
on December 16, 2022, Oncocyte initiated an additional reduction in work force involving over 40% of its full-time employees. The transition
began on December 16, 2022 and was completed in February 2023. As of December 31, 2022, the Company incurred an aggregate of $1.9 million
related to employee severance and benefits costs in connection with its reductions in force during fiscal year 2022.
12.
Related Party Transactions
Financing
Transactions
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 Partners, L.P., the Company’s largest shareholder, and certain investment funds and accounts
managed by Pura Vida Investments, LLC (“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 “2021 Offering”). Oncocyte received aggregate net proceeds
of approximately $37.5 million, after deducting commissions, discounts and estimated expenses related to the 2021 Offering. Broadwood
purchased 600,000 shares in the 2021 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 December 31, 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.
On
April 13, 2022, Oncocyte entered into the Securities Purchase Agreement with Investors, including Broadwood and John Peter Gutfreund,
a director of Oncocyte, for the Series A Preferred Stock Offering. Each of Broadwood and Mr. Gutfreund has a direct material interest
in the Series A Preferred Stock Offering and agreed to purchase 5,882.35 and 1,176.48 shares, respectively, in the Series A Preferred
Stock Offering and on the same terms as other investors. Additionally, Halle Capital Management, L.P. received $85,000 from the Company
as reimbursement for its legal fees and expenses. Mr. Gutfreund is the Managing Partner of Halle Capital Management, L.P. See Note 15
for additional information about the Series A Preferred Stock Offering.
Further,
on April 13, 2022, Oncocyte entered into the Underwriting Agreement with the Underwriters for the Underwritten Offering. Pursuant to
the Underwritten Offering, Broadwood acquired from us (i) 5,220,654 shares of common stock, and (ii) 6,003,752 April 2022 Warrants to
purchase up to 3,001,876 shares of common stock at an exercise price of $1.53 per share. However, the total number of shares of common
stock that Broadwood purchased in the Underwritten Offering was 6,003,752, of which 783,098 existing shares were acquired by the underwriters
in the open market and re-sold to Broadwood. Pura Vida acquired from us (i) 4,984,093 shares of common stock, and (ii) 5,731,707 April
2022 Warrants to purchase up to 2,865,853 shares of common stock. However, the total number of shares of common stock that Pura Vida
purchased in the Underwritten Offering was 5,731,707, of which 747,614 existing shares were acquired by the underwriters in the open
market and re-sold to Pura Vida. Halle Special Situations Fund LLC purchased from us (i) 6,199,527 shares of common stock, and (ii) 7,129,456
2022 Warrants to purchase up to 3,564,728 shares of common stock. Mr. Gutfreund is the investment manager and a control person of Halle
Capital Partners GP LLC, the managing member of Halle Special Situations Fund LLC. However, the total number of shares of common stock
that Halle Special Situations Fund LLC purchased in the Underwritten was 7,129,456, of which 929,929 existing shares were acquired by
the underwriters in the open market and re-sold to Halle Special Situations Fund LLC. See Note 15 for additional information about the
Underwritten Offering.
ONCOCYTE
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
13.
Loan Payable to Silicon Valley Bank
Amended
Loan Agreement
On
October 17, 2019, Oncocyte entered into a First Amendment to Loan and Security Agreement (the “Amended Loan Agreement”) with
Silicon Valley Bank (“the Bank”) pursuant to which Oncocyte obtained a new $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 CMS for DetermaRx at
a specified minimum price point per test (the “Tranche 2 Milestone”), and Oncocyte is not in default under the Amended Loan
Agreement. As of December 31, 2022, Oncocyte had satisfied the Tranche 2 Milestone, however, did not borrow any funds under Tranche 2.
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 agreed to a deferral of principal payments, as discussed below. The outstanding
principal balance of the loan bore interest at a stated floating annual interest equal to the greater of (a) the prime rate or (b) 5%
per annum. During August 2022, period in which the loan was paid of, the published prime rate was 5.5%
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.
At
maturity of the loan, Oncocyte agreed to 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, 2022, there is no remaining unamortized deferred financing cost and the full principal balance of the loan in addition to
the final payment fee have been paid off.
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. As of December 31, 2022, Oncocyte has not borrowed any funds under
Tranche 2.
ONCOCYTE
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
14.
Co-Development Agreement with Life Technologies Corporation
On
January 13, 2022, Oncocyte entered into a Collaboration Agreement (the “LTC Agreement”) with Life Technologies Corporation,
a Delaware corporation and subsidiary of Thermo Fisher Scientific (“LTC” and together with Oncocyte, the “Parties”
or individually, a “Party”), in order to partner in the development and collaborate in the commercialization of Thermo Fisher
Scientific’s existing Oncomine Comprehensive Assay Plus (“OCA Plus”) and Oncocyte’s DetermaIO assay for use with
LTC’s Ion TorrentTM GenexusTM Integrated Sequencer and LTC’s Ion TorrentTM GenexusTM
Purification System (“Genexus system”) in order to obtain in vitro diagnostic (“IVD”) regulatory
approval.
Development
Under
the terms of the LTC Agreement, Oncocyte will clinically validate LTC’s OCA Plus assay, which is LTC’s proprietary NGS-based
assay designed to be run on the Genexus system as an IVD assay (the “Collaboration LTC Product”) and Oncocyte’s Determa
IO assay, which is a multivariate gene expression test performed on FFPE biopsy specimens, as an IVD assay run on the Genexus system
(the “Collaboration Determa Product”), paving the way toward regulatory approval for use in tumor profiling and guidance
of therapy selection for solid tumor cancers in humans. LTC retains the exclusive right to partner with therapeutics companies to develop
the Collaboration LTC Product as a companion diagnostic. Oncocyte retains the exclusive right to partner with therapeutics companies
to develop the Collaboration Determa Product as a companion diagnostic. All development work will be conducted pursuant to development
plans agreed by the Parties through a series of governance committees that will oversee the collaboration.
Costs
Associated with Product Development
Oncocyte
will be responsible for all costs associated with Oncocyte activities under the LTC product development budget. Oncocyte and LTC will
share development costs associated with LTC activities under the LTC product development budget. LTC will be responsible for costs associated
with the performance of research and development activities for the RUO-labeled OCA Plus and related components as is necessary to enable
the development of the Collaboration LTC Product as contemplated by the LTC product development plan. Oncocyte will be responsible for
all costs associated with activities of both Parties under the Determa product development budget. LTC will be responsible, at LTC’s
own cost, for the performance of research and development activities for the RUO-labeled OCA Plus and related components as is necessary
to enable the development of the Collaboration LTC Product as contemplated by the development plan for the Collaboration LTC Product.
Commercialization
LTC
will be responsible for the commercialization of the Collaboration LTC Product throughout the world, but the Parties will co-market it
in the United States, Canada, the United Kingdom, European Union, Switzerland, Australia, and New Zealand (the “LTC Product Territory”).
Oncocyte will be responsible for the commercialization of the Collaboration Determa Product in the United States (the “Determa
Product Territory”), and LTC will be responsible for commercializing it in the rest of the world. All commercialization activities
for the Collaboration LTC Product and the Collaboration Determa Product will be conducted pursuant to commercialization plans agreed
by the Parties through the collaboration’s governance committees.
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.
ONCOCYTE
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
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.
As
of December 31, 2022, the Company owned 10 Genexus Integrated Sequencers and 10 Genexus Purification Instruments in connection with submission
of an initial PO of $3.1 million by February 11, 2022. The Company may submit a second PO of $4.6 million for 15 Genexus Integrated Sequencers
and 15 Genexus Purification Instruments by March 1, 2023. As of December 31, 2022, the Company had received all Genexus systems valued
at $1.9 million for the initial purchase order.
As
of December 31, 2022, LTC has incurred $749,000 in development costs associated with LTC activities under the total LTC $5 million product
development budget that the Company is responsible for reimbursement.
On
February 7, 2023, Oncocyte entered into a Termination Agreement (the “Termination Agreement”) with LTC, pursuant to which
the parties terminated the LTC Agreement.
15.
April 2022 Offerings
Series
A Preferred Stock Offering
On
April 13, 2022, Oncocyte entered into the Securities Purchase Agreement with Investors, including Broadwood, in a registered direct offering
of 11,765 shares of our Series A Preferred Stock, which shares of Series A Preferred Stock are convertible into a total of 7,689,542
shares of our common stock, at a conversion price of $1.53. The purchase price of each share of Series A Preferred Stock was $850, which
included an original issue discount to the stated value of $1,000 per share. The rights, preferences and privileges of the Series A Convertible
Preferred Stock are set forth in the Company’s Certificate of Determination, which the Company filed with the Secretary of State
of the State of California. The Securities Purchase Agreement provides that the closing of the Series A Preferred Stock Offering will
occur, subject to the satisfactory of certain closing conditions, in two equal tranches of $5,000,000 each for aggregate gross proceeds
from both closings of $10,000,000. The first closing occurred on June 1, 2022, and Oncocyte received net proceeds of approximately $4.9
million from the Series A Preferred Stock issued from the first tranche. The second closing would occur, subject to the satisfactory
of certain closing conditions (including but not limited to a requirement that the Company has not received, in the 12 months preceding
the second closing, a notice from The Nasdaq Stock Market LLC (“Nasdaq”) that the Company is not in compliance with the listing
and maintenance and listing requirements of Nasdaq), on the earlier of (a) the second trading day following the date that Oncocyte receives
notice from an Investor to accelerate the second closing and (b) a date selected by Oncocyte on or after October 8, 2022 and on or prior
to March 8, 2023. On August 9, 2022, Oncocyte received a letter from Nasdaq indicating that the Company no longer meets the minimum bid
price requirement of Nasdaq Listing Rule 5450(a)(1) of the Nasdaq continued listing requirements. Accordingly as of December 31, 2022,
no additional proceeds are expected from the second closing of the Security Purchase Agreement.
ONCOCYTE
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The
Series A Preferred Stock is convertible into shares of common stock at any time at the holder’s option. The conversion price will
be subject to customary anti-dilution adjustments for matters such as stock splits, stock dividends and other distributions on common
stock, and recapitalizations. The holder will be prohibited from converting shares of Series A Preferred Stock into shares of common
stock if, as a result of such conversion, the holder, together with its affiliates, would own more than 4.99% of the shares of common
stock then issued and outstanding (provided a holder may elect, at the first closing, to increase such beneficial ownership limitation
solely as to itself up to 19.99% of the number of shares of common stock outstanding immediately after giving effect to the conversion, provided further that following the receipt of shareholder approval required by applicable Nasdaq rules with respect
to the issuance of common stock that would exceed the beneficial ownership limitation, such beneficial ownership limitation will no longer
apply to the holder if the holder notified the Company that the holder wishes the Company to seek such shareholder approval). On July
15, 2022, the Company received such shareholder approval to remove the beneficial ownership limitation with respect to the Series A Preferred
Stock held by Broadwood Partners, L.P.
Oncocyte may force the conversion of up to one-third of the shares of Series A Preferred Stock originally issued, subject to customary
equity conditions, if the daily volume weighted average price of our common stock for 20 out of 30 trading days exceeds 140% of the conversion price and on 20 out of the same 30 trading days the daily trading volume equals or exceeds 400,000 shares of our common stock. Oncocyte may only effect one forced conversion during any 30-trading day period.
In
the event of the Company’s liquidation, dissolution, or winding up, holders of Series A Preferred Stock will receive a payment
equal to the stated value of the Series A Preferred Stock plus accrued but unpaid dividends and any other amounts that may have become
payable on the Series A Preferred Stock due to any failure or delay that may have occurred in issuing shares of common stock upon conversion
of a portion of the Series A Preferred Stock, before any distribution or payment to the holders of common stock or any of Oncocyte’s
other junior equity.
Shares
of Series A Preferred Stock generally has no voting rights, except as required by law and except that the consent of holders of a majority
of the outstanding Series A Preferred Stock will be required to amend any provision of our certificate of incorporation that would have
a materially adverse effect on the rights of the holders of the Series A Preferred Stock. Additionally, as long as any shares of Series
A Preferred Stock remain outstanding, unless the holders of at least 51% of the then outstanding shares of Series A Preferred Stock shall
have otherwise given prior written consent, the Company, on a consolidated basis with its subsidiaries, is not permitted to (1) have
less than $8 million of unrestricted, unencumbered cash on hand (“Cash Minimum Requirement”); (2) other than certain permitted
indebtedness, incur indebtedness to the extent that our aggregate indebtedness exceeds $15 million; (3) enter into any agreement (including
any indenture, credit agreement or other debt instrument) that by its terms prohibits, prevents, or otherwise limits our ability to pay
dividends on, or redeem, the Series A Preferred Stock in accordance with the terms of the Certificate of Determination; or (4) authorize
or issue any class or series of preferred stock or other capital stock of the Company that ranks senior or pari passu with the Series
A Preferred Stock.
Shares
of Series A Preferred Stock will be entitled to receive cumulative dividends at a rate per share (as a percentage of stated value) of
6% per annum, payable quarterly in cash or, at our option, by accreting such dividends to the stated value.
The
Company is required to redeem, for cash, the shares of Series A Preferred Stock on the earlier to occur of (1) April 8, 2024, (2) the
commencement of certain a voluntary or involuntary bankruptcy, receivership, or similar proceedings against us or our assets, (3) a Change
of Control Transaction (as defined herein) and (4) at the election and upon notice of 51% in interest of the holders, if the Company
fails to meet the Cash Minimum Requirement. A “Change of Control Transaction” means the occurrence of any of (a) an acquisition
by an individual or legal entity or “group” (as described in Rule 13d-5(b)(1) promulgated under the Exchange Act) of effective
control (whether through legal or beneficial ownership of capital stock of the Company, by contract or otherwise) of in excess of 50%
of the voting securities of the Company (other than by means of conversion of Series A Preferred Stock), (b) the Company merges into
or consolidates with any other person, or any person merges into or consolidates with the Company and, after giving effect to such transaction,
the stockholders of the Company immediately prior to such transaction own less than 50% of the aggregate voting power of the Company
or the successor entity of such transaction, or (c) the Company sells or transfers all or substantially all of its assets to another
person. Additionally, the Company has the right to redeem the Series A Preferred Stock for cash upon 30 days prior notice to the holders;
provided if the Company undertakes a capital raise in connection with such redemption, the Investors will have the right to participate
in such financing.
The
issuance and sale of the Series A Preferred Stock was completed pursuant to the Company’s effective shelf registration statement
on Form S-3 (Registration No. 333-256650), filed with the Securities and Exchange Commission on May 28, 2021 and declared effective by
the SEC on June 8, 2021, and an accompanying prospectus dated June 8, 2021 as supplemented by a prospectus supplement dated April 13,
2022.
ONCOCYTE
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The
Series A Preferred Stock dividend for all issued and outstanding shares is set at 6% per annum per share. As of December 31, 2022, the
Company elected to accrete dividends of $209,000, with respect to shares of Series A Preferred Stock.
As
of December 31, 2022, Oncocyte had 5,882.4
shares issued and outstanding. The future right
or obligation associated with the Series A Preferred Stock to be issued in the second closing was written off since the second closing
is not expected as of December 31, 2022.
Underwritten
Offering
On
April 13, 2022, Oncocyte entered into the Underwriting Agreement with the Underwriters, pursuant to which the Company agreed to issue
and sell to the Underwriters an aggregate of 26,266,417 shares of common stock and 26,266,417 April 2022 Warrants to purchase up to 13,133,208.5
shares of common stock. Each share of common stock and the accompanying April 2022 Warrant was sold at a combined offering price of $1.3325,
representing an offering price of $1.3225 per share of common stock and $0.01 per accompanying April 2022 Warrant, before underwriting
discounts and commissions.
Under
the terms of the Underwriting Agreement, the Company also granted to the Underwriters an over-allotment option, exercisable in whole
or in part at any time for a period of 30 days from the date of the Underwriting Agreement, to purchase up to an additional 3,939,962
shares of common stock and 3,939,962 April 2022 Warrants to purchase 1,969,981 shares of common stock to cover over-allotments, if any.
The over-allotment option may be exercised separately for shares of common stock at a price to the underwriters of $1.24255 per share,
and April 2022 Warrants at a price of $0.01 per April 2022 Warrant. On April 14, 2022, the Underwriters exercised their option to purchase
the 3,939,962 April 2022 Warrants pursuant to the over-allotment option but did not exercise their option to purchase the additional
3,939,962 shares of common stock.
The
Company received net proceeds of approximately $32.8 million from the Underwritten Offering, which includes the April 2022 Warrants sold
upon the exercise of the Underwriters’ overallotment option. The Underwritten Offering closed on April 19, 2022.
The
Underwritten Offering was made pursuant to the Company’s effective “shelf” registration statement on Form S-3 (Registration
No. 333-256650) filed with the Securities and Exchange Commission on May 28, 2021 and declared effective by the SEC on June 8, 2021,
and an accompanying prospectus dated June 8, 2021 as supplemented by a prospectus supplement dated April 13, 2022.
16.
Assets Held for Sale and Discontinued Operations
On
December 15, 2022, the Company entered into the Razor Stock Purchase Agreement with Dragon and Razor. Pursuant to the Razor Stock Purchase
Agreement, Oncocyte agreed to sell, and Dragon agreed to purchase, 3,188,181
shares of common stock of Razor, which constitutes
approximately 70%
of the issued and outstanding equity interests
of Razor on a fully-diluted basis. The Razor Stock Purchase Agreement provides that following the closing of the transaction, Oncocyte
will own 1,366,364
shares of common stock of Razor, which will constitute
approximately 30%
of the issued and outstanding equity interests
of Razor on a fully-diluted basis. The transfer involves the transfer of all the assets and liabilities related to DetermaRx. Other than
the exchange of shares, the Agreement includes purchase of furniture, fixtures, and equipment by the buyer for a cash consideration of
$115,660. Upon closing of the sale, the Company will deconsolidate the assets and liabilities of Razor as control of the Razor entity
will transfer to Dragon.
As of December
31, 2022, Razor met the held for sale criteria and is reflected as a discontinued operation in the consolidated financial statements for all
periods presented. Additionally, the related assets and liabilities have been reported as assets and liabilities held for sale in
the Company’s consolidated balance sheets as of December 31, 2022 and December 31, 2021.
Because
the carrying value of the net assets of Razor exceeded the net proceeds included in the Agreement, we determined that Razor’s
held for sale net assets had been impaired. After performing quantitative testing, in which we used the consideration of $0.1
million as the fair value of the underlying net assets, we recorded a $25.9 million
impairment of the net assets. The impairment loss has been included in the results of discontinued operations in the accompanying
consolidated financial statements.
The
Company’s balance sheets and consolidated statements of operations report discontinued operations separate from continuing operations.
Our consolidated statements of comprehensive income, statement of equity and statements of cash flows combined continuing and discontinued
operations. A summary of financial information related to the Company’s discontinued operations is as follows.
ONCOCYTE
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The
following table represents the results of the discontinued operation of Razor (in thousands):
Schedule
of Discontinued Operation
| | |
| | | |
| | |
| | |
Year Ended December 31, | |
| | |
2022 | | |
2021 | |
| Net revenue | |
$ | 4,673 | | |
$ | 5,529 | |
| | |
| | | |
| | |
| Cost of revenues | |
| 7,930 | | |
| 6,761 | |
| Research and development | |
| 12,136 | | |
| 8,596 | |
| Sales and marketing | |
| 12,462 | | |
| 10,615 | |
| General and administrative | |
| 569 | | |
| 44 | |
| Loss from impairment of held for sale assets | |
| 25,866 | | |
| - | |
| Net loss from discontinued operations | |
$ | (54,290 | ) | |
$ | (20,487 | ) |
The
following table represents the carrying amounts of the assets and liabilities held for sale related to Razor as of December 31, 2022
and 2021 (in thousands):
Schedule
of Assets and Liabilities of Disposal Group Held for Sale
| | |
2022 | | |
2021 | |
| | |
December 31, | |
| | |
2022 | | |
2021 | |
| Carrying amounts of assets of disposal group held for sale | |
| | | |
| | |
| Current assets: | |
| | | |
| | |
| Cash and cash equivalents | |
$ | 1,510 | | |
$ | 2,657 | |
| Prepaid expenses and other current assets | |
| 346 | | |
| 296 | |
| Machinery and equipment, net, and construction in progress | |
| 211 | | |
| - | |
| Intangible assets, net | |
| 25,920 | | |
| - | |
| Impairment of held for sale assets | |
| (25,866 | ) | |
| - | |
| Total current assets of disposal group held for sale | |
| 2,121 | | |
| 2,953 | |
| Machinery and equipment, net, and construction in progress | |
| - | | |
| 158 | |
| Intangible assets, net | |
| - | | |
| 29,524 | |
| Total assets of disposal group held for sale | |
| 2,121 | | |
| 32,635 | |
| Current liabilities: | |
| | | |
| | |
| Accounts payable | |
| 492 | | |
| 637 | |
| Accrued compensation | |
| 248 | | |
| 549 | |
| Accrued expenses and other current liabilities | |
| 1,265 | | |
| 340 | |
| Total current liabilities of disposal group held for sale | |
| 2,005 | | |
| 1,526 | |
The following table summarizes cash used related to Razor as of and for the years ended December 31, 2022 and 2021
(in thousands):
| | |
Year Ended
December 31,
| |
| | |
2022 | | |
2021 | |
| | |
| | |
| |
| CASH FLOWS FROM OPERATING ACTIVITIES: | |
| | | |
| | |
| Net cash used in operating activities | |
| (20,790 | ) | |
| (13,643 | ) |
| | |
| | | |
| | |
| CASH FLOWS FROM INVESTING ACTIVITIES: | |
| | | |
| | |
| Net cash used in investing activities | |
| (91 | ) | |
| (188 | ) |
ONCOCYTE
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
17.
Subsequent Events
Razor
Genomics, Inc. Stock Purchase Agreement Closing
On
February 16, 2023, Oncocyte completed the Razor Sale Transaction, which involved, among other things, the. sale of 3,188,181
shares of common stock of the Company’s wholly owned subsidiary Razor, which constitutes approximately 70%
of the issued and outstanding equity interests of Razor on a fully diluted basis, pursuant to the Razor Stock Purchase Agreement
(the “SPA”) with Dragon and Razor.
In
connection with the Razor Closing, Oncocyte transferred to Razor all of the assets and liabilities related to DetermaRx. While no monetary
consideration was received for the sale of 70% of the equity interests of Razor, the transaction allows the Company to eliminate all
development and commercialization costs with respect to DetermaRx. Following the Razor Closing, Oncocyte continues to own 1,366,364 shares
of common stock of Razor, which constitutes approximately 30% of the issued and outstanding equity interests of Razor on a fully-diluted
basis. See Note 16 for more details.
As part of the SPA, the Company entered in a Bill of Sale to transfer certain assets as consideration for these assets,
the Company will receive a one time cash payment of $115,660.
Chronix
Biomedical, Inc. Amendment No. 1 to Amended and Restated Agreement and Plan of Merger
On
February 8, 2023, Oncocyte and the party named as equity holder representative in the Chronix Merger Agreement entered into
Amendment No. 1 to the Chronix Merger Agreement (the “Chronix Amendment”), pursuant to which the parties agreed to amend
the terms of the Chronix Contingent Consideration such that (i) Chronix’s equity holders will be paid earnout consideration of 10%
of net collections for sales of specified tests and products, until the expiration of intellectual property related to such tests
and products, (ii) Chronix’s equity holders will be paid 5%
of the gross proceeds received from any sale of all or substantially all of the rights, titles, and interests in and to
Chronix’s patents for use in transplantation medicine to such third party, and (iii) obligations related to the Chronix
Milestone Payments, Royalty Payments and Transplant Sale Payments were eliminated.
Termination
of Co-Development Agreement with Life Technologies Corporation
On
February 7, 2023, Oncocyte entered into the Termination Agreement with LTC, pursuant to which the Parties terminated the LTC
Agreement, by and between Oncocyte and LTC.
Public Offering of
Common Stock
On
April 3, 2023, Oncocyte entered into an agreement with certain members of the Company’s board of directors, and several
institutional and accredited investors, including Broadwood Capital, L.P., the Company’s largest shareholder, and certain
members of the Company’s board of directors (and certain of their affiliated parties), relating to their purchase of an
aggregate of up to 45,562,425
shares of its common stock at an offering price of $0.3544
per share to board members and $0.30168
per share to the other investors participating in the offering. The offering is intended to be priced at-the-market for purposes of
complying with applicable NASDAQ Listing Rules. The aggregate gross proceeds from the offering were approximately $13.9
million. The Company used approximately $1.1 million of the net proceeds to immediately redeem an aggregate of 1,064 shares
of its Series A Convertible Preferred Stock and may thereafter elect to redeem additional shares.
Workforce
Reduction
On
April 12, 2023, Oncocyte announced a reduction in force involving approximately 20% of its workforce (“Reduction”), which
management believes will extend Oncocyte’s cash runway in 2024. In connection with the Reduction, we estimate that we will incur
charges of approximately $0.3 million related to employee severance and benefits costs in the second quarter of 2023.