UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended ~~June~~September 30, 2023

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

For the transition period from ___________ to __________

Commission file number 1-37648

Oncocyte Corporation

(Exact name of registrant as specified in its charter)

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

15 Cushing

Irvine, California 92618

(Address of principal executive offices) (Zip Code)

(949) 409-7600

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Exchange Act:

Title of each class		Trading Symbol		Name of each exchange on which registered
Common Stock, no par value		OCX		The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐	Accelerated filer ☐
Non-accelerated filer ☒	Smaller reporting company ☒
	Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No

The number of shares of common stock outstanding as of ~~August 3,~~November 2, 2023 was ~~8,240,928~~8,260,762.

ONCOCYTE CORPORATION

TABLE OF CONTENTS

For the quarterly period ended September 30, 2023

	Page
CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS	3

PART 1—FINANCIAL INFORMATION	4

Item 1. Financial Statements	4
CONDENSED CONSOLIDATED BALANCE SHEETS	4
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS	5
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS	6
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY	7
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS	9
NOTES TO UNAUDITED CONDENSED CONSOLIDATED ~~INTERIM~~ FINANCIAL STATEMENTS	10

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	4643

Item 3. Quantitative and Qualitative Disclosures about Market Risk	5350

Item 4. Controls and Procedures	5350

PART II - OTHER INFORMATION	5451

Item 1. Legal Proceedings	5451

Item 1A. Risk Factors	5451

Item 2. Unregistered Sales of Equity Securities, ~~and~~ Use of Proceeds, and Issuer Purchases of Equity Securities	5452

Item 3. Default Upon Senior Securities	5452

Item 4. Mine Safety Disclosures	5452

Item 5. Other Information	5524

Item 6. Exhibits	5553

SIGNATURES	5654

CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS

This Report on Form 10-Q (“Report”) contains forward-looking statements that involve risks and uncertainties. We make such forward-looking statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and other federal securities laws. All statements other than statements of historical facts contained in this Report are forward-looking statements. In some cases, you can identify forward-looking statements by words such as “anticipate,” “believe,” “contemplate,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “seek,” “should,” “target,” “will,” “would,” or the negative of these words or other comparable terminology.

Any forward-looking statements in this Report reflect our current views with respect to future events or to our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. Factors that may cause actual results to differ materially from current expectations include, among other things, those discussed in this Report under Item 1 of the Notes to ~~Condensed~~ Consolidated ~~Interim~~ Financial Statements, under Risk Factors in this Report and those Risk Factors in Part I, Item 1A of our most recent Annual Report on Form 10-K as filed with the Securities and Exchange Commission (“SEC”). Given these uncertainties, you should not place undue reliance on these forward-looking statements. Except as required by law, we assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future.

The forward-looking statements in this Report also include, among other things, statements about:

	●	the timing and potential achievement of future milestones;
	●	the timing and our ability to obtain and maintain coverage and reimbursements from the Centers for Medicare and Medicaid Services and other third-party payers;
	●	our plans to pursue research and development of diagnostic tests;
	●	the potential commercialization of our diagnostic tests currently in development;
	●	the timing and success of future clinical trials and the period during which the results of the clinical trials will become available;
	●	the potential receipt of revenue from future sales of our diagnostic tests or diagnostic tests in development;
	●	our assumptions regarding obtaining reimbursement and reimbursement rates;
	●	our estimates regarding future orders of tests and our ability to perform a projected number of tests;
	●	our estimates and assumptions around patient populations, market size and price points for reimbursement for our diagnostic tests;
	●	our estimates regarding future revenues and operating expenses, and future capital requirements;
	●	our intellectual property position;
	●	the impact of government laws and regulations; and
	●	our competitive position.

Unless the context otherwise requires, all references to “Oncocyte,” the “Company,” “we,” “us,” “our,” or similar words refer to Oncocyte Corporation, together with our consolidated subsidiaries.

The description or discussion, in Report, of any contract or agreement is a summary only and is qualified in all respects by reference to the full text of the applicable contract or agreement.

DetermaIO™, DetermaCNI™, and VitaGraft™ are trademarks of Oncocyte Corporation, regardless of whether the “^™” symbol accompanies the use of or reference to the applicable trademark in this Report.

PART 1—FINANCIAL INFORMATION

Item 1. Financial Statements

ONCOCYTE CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In ~~thousands)~~thousands, except per share data)

	June 30,			December 31,
	2023			2022			September 30, 2023			December 31, 2022
	(unaudited)						(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	17,368		$	19,993		$	13,783		$	19,993
Accounts receivable, net of allowance of $178 and $154, respectively		1,716			2,012
Accounts receivable, net of allowance for credit losses of $178 and $154, respectively								1,882			2,012
Marketable equity securities		530			433			441			433
Prepaid expenses and other current assets		1,179			977			672			977
Assets held for sale		191			-			139			-
Current assets of discontinuing operations		-			2,121			-			2,121
Total current assets		20,984			25,536			16,917			25,536

NONCURRENT ASSETS
Right-of-use and financing lease assets, net		1,891			2,088			1,757			2,088
Machinery and equipment, net, and construction in progress		5,997			8,763			4,076			8,763
Intangible assets, net		56,639			61,633			56,617			61,633
Restricted cash		1,700			1,700			1,700			1,700
Other noncurrent assets		329			371			520			371
TOTAL ASSETS	$	87,540		$	100,091		$	81,587		$	100,091

LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable	$	875		$	1,253		$	1,136		$	1,253
Accrued compensation		1,301			1,771			1,722			1,771
Accrued royalties								1,116			2,022
Accrued expenses and other current liabilities		2,196			3,839			826			1,817
Accrued severance from acquisition		2,314			2,314			2,314			2,314
Accrued liabilities from acquisition		109			109			109			109
Right-of-use and financing lease liabilities, current		737			815			720			815
Current liabilities of discontinuing operations		135			2,005			90			2,005
Total current liabilities		7,667			12,106			8,033			12,106

NONCURRENT LIABILITIES
Right-of-use and financing lease liabilities, noncurrent		2,398			2,729			2,354			2,729
Contingent consideration liabilities		29,150			45,662			28,715			45,662

TOTAL LIABILITIES		39,215			60,497			39,102			60,497

Commitments and contingencies		-			-			-			-

Series A Redeemable Convertible Preferred Stock, no par value; stated value $1,000 per share; 5 and 6 shares issued and outstanding at June 30, 2023 and December 31, 2022, respectively; aggregate liquidation preference of $5,140 and $6,091 as of June 30, 2023 and December 31, 2022, respectively		4,725			5,302
Series A Redeemable Convertible Preferred Stock, no par value; stated value $1,000 per share; 5 and 6 shares issued and outstanding at September 30, 2023 and December 31, 2022, respectively; aggregate liquidation preference of $5,217 and $6,091 as of September 30, 2023 and December 31, 2022, respectively								4,923			5,302

SHAREHOLDERS’ EQUITY
Preferred stock, no par value, 5,000 shares authorized; no shares issued and outstanding		-			-			-			-
Common stock, no par value, 230,000 shares authorized; 8,241 and 5,932 shares issued and outstanding at June 30, 2023 and December 31, 2022, respectively		309,535			294,929
Common stock, no par value, 230,000 shares authorized; 8,261 and 5,932 shares issued and outstanding at September 30, 2023 and December 31, 2022, respectively								309,995			294,929
Accumulated other comprehensive income		41			39			32			39
Accumulated deficit		(265,976	)		(260,676	)		(272,465	)		(260,676	)
Total shareholders’ equity		43,600			34,292			37,562			34,292
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	87,540		$	100,091		$	81,587		$	100,091

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

ONCOCYTE CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

	2023			2022			2023			2022
	Three Months Ended						Six Months Ended						Three Months Ended						Nine Months Ended
	June 30,						June 30,						September 30,						September 30,
	2023			2022			2023			2022			2023			2022			2023			2022

Net revenue	$	463		$	237		$	760		$	617		$	429		$	67		$	1,189		$	684

Cost of revenues		169			183			434			288			159			314			593			602
Cost of revenues – amortization of acquired intangibles		22			23			44			51			22			22			66			73
Gross profit		272			31			282			278			248			(269	)		530			9

Operating expenses:
Research and development		2,435			2,444			4,562			4,451			2,185			1,472			6,747			5,923
Sales and marketing		805			127			1,500			393			713			405			2,213			798
General and administrative		3,531			5,445			6,943			11,092			2,487			5,702			9,430			16,794
Change in fair value of contingent consideration		1,795			(6,359	)		(16,512	)		(11,015	)		(435	)		(6,142	)		(16,947	)		(17,157	)
Impairment loss from intangible assets		-			-			4,950			-
Impairment losses														1,811			-			6,761			-
Loss on disposal and held for sale assets		-			-			1,283			-			-			-			1,283			-
Total operating expenses		8,566			1,657			2,726			4,921			6,761			1,437			9,487			6,358

Loss from operations		(8,294	)		(1,626	)		(2,444	)		(4,643	)		(6,513	)		(1,706	)		(8,957	)		(6,349	)

OTHER INCOME (EXPENSES), NET
Interest income (expenses), net		1			(21	)		(9	)		(51	)
Unrealized gain (loss) on marketable equity securities		(24	)		5			97			(325	)
Other income (expenses), net		(16	)		278			(18	)		242
Total other income (expenses), net		(39	)		262			70			(134	)

LOSS BEFORE INCOME TAXES		(8,333	)		(1,364	)		(2,374	)		(4,777	)
Other income (expenses):
Interest income (expense), net														117			(14	)		108			(65	)
Unrealized (loss) gain on marketable equity securities														(89	)		(160	)		8			(485	)
Other (expenses) income, net														(4	)		62			(22	)		304
Total other income (expenses)														24			(112	)		94			(246	)

Loss from continuing operations		(8,333	)		(1,364	)		(2,374	)		(4,777	)		(6,489	)		(1,818	)		(8,863	)		(6,595	)

Loss from discontinuing operations		-			(6,936	)		(2,926	)		(13,814	)		-			(7,515	)		(2,926	)		(21,329	)

NET LOSS	$	(8,333	)	$	(8,300	)	$	(5,300	)	$	(18,591	)
Net loss													$	(6,489	)	$	(9,333	)	$	(11,789	)	$	(27,924	)

LESS: DIVIDENDS AND ACCRETION OF SERIES A REDEEMABLE CONVERTIBLE PREFERRED STOCK	$	(311	)	$	(72	)	$	(541	)	$	(72	)
Less: dividends and accretion of Series A redeemable convertible preferred stock														(198	)		(294	)		(739	)		(294	)

NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS: BASIC AND DILUTED	$	(8,644	)	$	(8,372	)	$	(5,841	)	$	(18,663	)
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS: BASIC	$	(8,644	)	$	(8,372	)	$	(5,841	)	$	(18,663	)
Net loss attributable to common stockholders													$	(6,687	)	$	(9,627	)	$	(12,528	)	$	(28,218	)

Net loss from continuing operations per share: basic and diluted	$	(1.03	)	$	(0.24	)	$	(0.34	)	$	(0.93	)	$	(0.79	)	$	(0.31	)	$	(1.19	)	$	(1.22	)
Net loss from continuing operations per share: basic	$	(1.03	)	$	(0.24	)	$	(0.34	)	$	(0.93	)
Net loss from discontinuing operations per share: basic and diluted	$	-		$	(1.23	)	$	(0.42	)	$	(2.69	)	$	-		$	(1.27	)	$	(0.39	)	$	(3.94	)
Net loss from discontinuing operations per share: basic	$	-		$	(1.23	)	$	(0.42	)	$	(2.69	)
Net loss per share: basic and diluted	$	(1.07	)	$	(1.48	)	$	(0.83	)	$	(3.63	)
Net loss per share: basic	$	(1.07	)	$	(1.48	)	$	(0.83	)	$	(3.63	)
Net loss attributable to common stockholders per share: basic and diluted													$	(0.81	)	$	(1.62	)	$	(1.68	)	$	(5.22	)

Weighted average shares outstanding: basic and diluted		8,090			5,652			7,030			5,135			8,256			5,931			7,446			5,408

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

ONCOCYTE CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(In thousands)

2023 2022 2023 2022
Three Months Ended Six Months Ended
June 30, June 30,
2023 2022 2023 2022

NET LOSS $ (8,333 ) $ (8,300 ) $ (5,300 ) $ (18,591 )
Foreign currency translation adjustments (2 ) (7 ) 2 (6 )
COMPREHENSIVE LOSS $ (8,335 ) $ (8,307 ) $ (5,298 ) $ (18,597 )

Three Months Ended Nine Months Ended
September 30, September 30,
2023 2022 2023 2022

Net loss $ (6,489 ) $ (9,333 ) $ (11,789 ) $ (27,924 )
Foreign currency translation adjustments (9 ) (12 ) (7 ) (18 )
Comprehensive loss $ (6,498 ) $ (9,345 ) $ (11,796 ) $ (27,942 )
The accompanying notes are an integral part of these unaudited condensed consolidated ~~interim~~ financial statements.
6

ONCOCYTE CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(In thousands)

Shares Amount Shares Amount Comprehensive Income Deficit Equity Shares Amount Shares Amount Income
Deficit

Equity

Three Months Ended June 30, 2023 Three Months Ended September 30, 2023
Series A Redeemable Convertible Preferred Stock Common Stock Accumulated Other Accumulated Total
Shareholders’ Series A Redeemable Convertible Preferred Stock Common Stock
Accumulated Other
Comprehensive
Accumulated
Total
Shareholders’

Shares Amount Shares Amount Comprehensive Income Deficit Equity Shares Amount Shares Amount Income
Deficit

Equity

Balance at March 31, 2023 5,882 $ 5,532 5,964 $ 295,533 $ 43 $ (257,643 ) $ 37,933
Balance at June 30, 2023 5 $ 4,725 8,250 $ 309,535 $ 41 $ (265,976 ) $ 43,600
Net Loss - - - - - (8,333 ) (8,333 ) - - - - - (6,489 ) (6,489 )
Foreign currency translation adjustment - - - - (2 ) - (2 ) - - - - (9 ) - (9 )
Stock-based compensation - - - 834 - - 834 - - - 608 - - 608
Vesting of bonus awards - - - 58 - - 58 - - - 14 - - 14
Sale of common shares, net of financing costs - - 2,266 13,421 - - 13,421
Deemed dividend on Series A redeemable convertible preferred stock - - - (118 ) - - (118 )
Redemption of Series A redeemable convertible preferred stock (1,064 ) (1,000 ) - - - - -
Shares issued upon vesting of RSU - - 11 - - - - - 2 - - - -
Shares issued for consultant services - - 9 36 - - 36
Accretion of Series A convertible preferred stock to redemption value - 193 - (193 ) - - (193 ) - 198 - (198 ) - - (198 )
Balance at June 30, 2023 4,818 $ 4,725 8,241 $ 309,535 $ 41 $ (265,976 ) $ 43,600
Balance at September 30, 2023 5 $ 4,923 8,261 $ 309,995 $ 32 $ (272,465 ) $ 37,562
Three Months Ended June 30, 2022
Series A Redeemable Convertible Preferred Stock Common Stock Accumulated Other Accumulated Total
Shareholders’
Shares Amount Shares Amount Comprehensive Income Deficit Equity
Balance at March 31, 2022 - $ - 4,612 $ 254,994 $ 38 $ (198,065 ) $ 56,967
Net Loss - - - - - (8,300 ) (8,300 )
Foreign currency translation adjustment - - - - (7 ) - (7 )
Stock-based compensation - - - 2,232 - - 2,232
Issuance of common shares, including at-the-market transactions, net of financing costs and underwriting discounts - - 1,313 32,423 - - 32,423
Shares issued upon vesting of RSU, net of shares retired to pay employees’ taxes - - 5 - - - -
Issuance of Series A redeemable convertible preferred stock, net of financing costs 11,765 4,782 - - - - -
Accretion of Series A convertible preferred stock to redemption value - 72 - - - (72 ) (72 )
Balance at June 30, 2022 11,765 $ 4,854 5,930 $ 289,649 $ 31 $ (206,437 ) $ 83,243
7
Three Months Ended September 30, 2022
Series A Redeemable Convertible Preferred Stock Common Stock
Accumulated Other
Comprehensive
Accumulated
Total
Shareholders’

Shares Amount Shares Amount Income
Deficit

Equity

Balance at June 30, 2022 6 $ 4,854 5,930 $ 289,649 $ 31 $ (206,437 ) $ 83,243
Net Loss - - - - - (9,333 ) (9,333 )
Foreign currency translation adjustment - - - - (12 ) - (12 )
Stock-based compensation - - - 3,181 - - 3,181
Shares issued upon vesting of RSU, net of shares retired to pay employees’ taxes - - 1 - - - -
Accretion of Series A convertible preferred stock to redemption value - 222 - (294 ) - 72 (222 )
Balance at September 30, 2022 6 $ 5,076 $ 5,931 $ 292,536 $ 19 $ (215,698 ) $ 76,857
Six Months Ended June 30, 2023
Series A Redeemable Convertible Preferred Stock Common Stock Accumulated Other Accumulated Total
Shareholders’
Shares Amount Shares Amount Comprehensive Income Deficit Equity
Balance at December 31, 2022 5,882 $ 5,302 5,932 $ 294,929 $ 39 $ (260,676 ) $ 34,292
Net Loss - - - - - (5,300 ) (5,300 )
Foreign currency translation adjustment - - - - 2 - 2
Stock-based compensation - - - 1,668 - - 1,668
Vesting of bonus awards - - - 58 - - 58
Sale of common shares, net of financing costs - - 2,266 13,421 - - 13,421
Deemed dividend on Series A redeemable convertible preferred stock - - - (118 ) - - (118 )
Shares issued upon vesting of RSU - - 43 - - - -
Redemption of Series A redeemable convertible preferred stock (1,064 ) (1,000 ) - - - - -
Accretion of Series A convertible preferred stock to redemption value - 423 - (423 ) - - (423 )
Balance at June 30, 2023 4,818 $ 4,725 8,241 $ 309,535 $ 41 $ (265,976 ) $ 43,600
Six Months Ended June 30, 2022
Series A Redeemable Convertible Preferred Stock Common Stock Accumulated Other Accumulated Total
Shareholders’
Shares Amount Shares Amount Comprehensive Income Deficit Equity
Balance at December 31, 2021 - $ - 4,612 $ 252,954 $ 37 $ (187,774 ) $ 65,217
Balance - $ - 4,612 $ 252,954 $ 37 $ (187,774 ) $ 65,217
Net Loss - - - - - (18,591 ) (18,591 )
Foreign currency translation adjustment - - - - (6 ) - (6 )
Stock-based compensation - - - 4,242 - - 4,242
Issuance of common shares, including at-the-market transactions, net of financing costs and underwriting discounts - - 1,314 32,453 - - 32,453
Shares issued upon vesting of RSU, net of shares retired to pay employees’ taxes - - 4 - - - -
Issuance of Series A redeemable convertible preferred stock, net of financing costs 11,765 4,782 - - - - -
Accretion of Series A convertible preferred stock to redemption value - 72 - - - (72 ) (72 )
Balance at June 30, 2022 11,765 $ 4,854 5,930 $ 289,649 $ 31 $ (206,437 ) $ 83,243
Balance 11,765 4,854 5,930 289,649 $ 31 (206,437 ) 83,243
The accompanying notes are an integral part of these unaudited condensed consolidated ~~interim~~financial statements.
7
ONCOCYTE CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(In thousands)
Nine Months Ended September 30, 2023
Series A Redeemable Convertible Preferred Stock Common Stock
Accumulated Other
Comprehensive
Accumulated
Total
Shareholders’

Shares Amount Shares Amount Income
Deficit

Equity

Balance at December 31, 2022 6 $ 5,302 5,932 $ 294,929 $ 39 $ (260,676 ) $ 34,292
Net Loss - - - - - (11,789 ) (11,789 )
Foreign currency translation adjustment - - - - (7 ) - (7 )
Stock-based compensation - - - 2,276 - - 2,276
Vesting of bonus awards - - - 72 - - 72
Sale of common shares, net of financing costs - - 2,275 13,421 - - 13,421
Deemed dividend on Series A redeemable convertible preferred stock - - - (118 ) - - (118 )
Shares issued upon vesting of RSU - - 45 - - - -
Shares issued for consultant services - - 9 36 - - 36
Redemption of Series A redeemable convertible preferred stock (1 ) (1,000 ) - - - - -
Accretion of Series A convertible preferred stock to redemption value - 621 - (621 ) - - (621 )
Balance at September 30, 2023 5 $ 4,923 8,261 $ 309,995 $ 32 $ (272,465 ) $ 37,562
Nine Months Ended September 30, 2022
Series A Redeemable Convertible Preferred Stock Common Stock
Accumulated Other
Comprehensive
Accumulated
Total
Shareholders’

Shares Amount Shares Amount Income
Deficit

Equity

Balance at December 31, 2021 - $ - 4,612 $ 252,954 $ 37 $ (187,774 ) $ 65,217
Balance - $ - 4,612 $ 252,954 $ 37 $ (187,774 ) $ 65,217
Net Loss - - - - - (27,924 ) (27,924 )
Foreign currency translation adjustment - - - - (18 ) - (18 )
Stock-based compensation - - - 7,423 - - 7,423
Shares issued upon vesting of RSU, net of shares retired to pay employees’ taxes - - 5 - - - -
Issuance of common shares, including at-the-market transactions, net of financing costs and underwriting discounts - - 1,314 32,453 - - 32,453
Issuance of Series A redeemable convertible preferred stock, net of financing costs 6 4,782 - - - - -
Accretion of Series A convertible preferred stock to redemption value - 294 - (294 ) - - (294 )
Balance at September 30, 2022 6 $ 5,076 5,931 $ 292,536 $ 19 $ (215,698 ) $ 76,857
Balance 6 $ 5,076 5,931 $ 292,536 $ 19 $ (215,698 ) $ 76,857
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

8

ONCOCYTE CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
2023 2022
Six Months Ended Nine Months Ended
June 30, September 30,
2023 2022 2023 2022

CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (5,300 ) $ (18,591 ) $ (11,789 ) $ (27,924 )
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation expense 885 671
Depreciation and amortization expense 1,289 1,062
Amortization of intangible assets 44 1,904 66 2,880
Stock-based compensation 1,668 4,242 2,276 7,423
Equity compensation for bonus awards and consulting services 108 -
Unrealized (gain) loss on marketable equity securities (97 ) 325 (8 ) 485
Amortization of debt issuance costs - 11 - 12
Change in fair value of contingent consideration (16,512 ) (11,015 ) (16,947 ) (17,157 )
Change in fair value of Series A redeemable convertible preferred stock second tranche obligation - (305 ) - (352 )
Impairment loss from intangible assets 4,950 -
Impairment losses 6,761 -
Loss on disposal of discontinued operations 149 - 1,659 -
Loss on disposal and held for sale assets 1,283 - 1,283 -

Changes in operating assets and liabilities:
Accounts receivable 296 (365 ) 130 (553 )
Prepaid expenses and other assets 376 (773 ) 784 (745 )
Accounts payable and accrued liabilities (4,319 ) 239 (4,193 ) 422
Accrued severance and liabilities from Chronix Biomedical acquisition - (817 ) - (1,317 )
Lease liabilities (118 ) (50 )
Lease assets and liabilities (43 ) (156 )
Assets held for sale 191 - (139 ) -
Net cash used in operating activities (16,504 ) (24,524 ) (18,763 ) (35,920 )

CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of equipment 123 - 354 -
Construction in progress and purchases of furniture and equipment - (2,679 ) (17 ) (3,538 )
Net cash provided by (used in) investing activities 123 (2,679 )
Cash sold in discontinued operations (Note 13) (1,510 ) -
Net cash used in investing activities (1,173 ) (3,538 )

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common shares 13,848 32,812 13,848 32,812
Financing costs to issue common shares (427 ) (389 ) (427 ) (389 )
Proceeds from sale of redeemable convertible Series A preferred shares - 4,875 - 4,875
Redemption of redeemable convertible Series A preferred shares (1,118 ) - (1,118 ) -
Financing costs to issue redeemable convertible Series A preferred shares - (93 ) - (93 )
Proceeds from sale of common shares under at-the-market transactions - 31 - 31
Financing costs for at-the-market sales - (1 ) - (1 )
Repayment of loan payable - (750 ) - (1,325 )
Repayment of financing lease obligations (57 ) (51 ) (87 ) (4 )
Net cash provided by financing activities 12,246 36,434 12,216 35,906

NET CHANGE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH (4,135 ) 9,231
NET CHANGE IN CASH, CASH EQUIVALENTS (INCLUDES DISCONTINUED OPERATIONS) AND RESTRICTED CASH (7,720 ) (3,552 )

CASH, CASH EQUIVALENTS AND RESTRICTED CASH, BEGINNING 23,203 37,305
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, ENDING $ 19,068 $ 46,536
CASH, CASH EQUIVALENTS (INCLUDES DISCONTINUED OPERATIONS) AND RESTRICTED CASH, BEGINNING 23,203 37,305
CASH, CASH EQUIVALENTS (INCLUDES DISCONTINUED OPERATIONS) AND RESTRICTED CASH, ENDING $ 15,483 $ 33,753

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest $ - $ 21 $ - $ 24

SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING AND INVESTING ACTIVITIES
Construction in progress, machinery and equipment purchases included in accounts payable, accrued liabilities and landlord liability $ 16 $ 1,331
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Construction in progress, machinery and equipment purchases included in accounts payable and accrued liabilities $ 215 $ 1,032
The accompanying notes are an integral part of these unaudited condensed consolidated ~~interim~~ financial statements.
9

ONCOCYTE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED ~~INTERIM~~ FINANCIAL STATEMENTS
~~(UNAUDITED)~~

1. Organization, Description of the Business and Liquidity

Oncocyte Corporation (“Oncocyte,” the “Company,” “we” or “us”), incorporated in 2009 in the state of California, is a precision diagnostics company focused on developing and commercializing proprietary tests in three areas: VitaGraft is a blood-based solid organ transplantation monitoring test, 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~~had developed and licensed to Oncocyte the lung cancer treatment stratification laboratory test that Oncocyte iswas commercializing as DetermaRx. On February 24, 2021, Oncocyte completed the purchase of all the remaining issued and outstanding shares of common stock of Razor. As a result of the purchase of the Razor common stock, Oncocyte became the sole shareholder of Razor.

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”).

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 ~~condensed~~ consolidated statements of operations for the periods ended ~~June~~September 30, 2022, to reflect the operations and cash flows of Razor as discontinued operations and the related assets and liabilities disposed. See Note 1613 for additional ~~information about assets held for sale and discontinued operations.~~information.

On February 16, 2023, Oncocyte completed the Razor Sale Transaction (the “Razor Closing”). 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 allowed 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 a full discussion of the Razor Sale Transaction.~~

~~On July 24, 2023, the Company implemented a~~ ~~1-for-20 reverse stock split~~ ~~of the outstanding shares of its common stock. The par value per share~~Liquidity and the authorized number of shares of common stock and preferred stock were not adjusted as a result of the reverse stock split. All common stock share and per-share amounts for all periods presented in these condensed financial statements have been adjusted to reflect the reverse stock split. The number of authorized shares of common stock remains at ~~230~~ ~~million shares.~~
10
~~Liquidity~~Going Concern

Oncocyte has incurred operating losses and negative cash flows since inception and had an accumulated deficit of $~~266.0~~272.5 million as of ~~June~~September 30, 2023. Oncocyte expects to continue to incur operating losses and negative cash flows for the foreseeable future. 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 ~~June~~September 30, 2023, Oncocyte had $~~17.4~~13.8 million of cash and cash ~~equivalents and~~equivalents. In addition, Oncocyte 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 $~~0.5~~441,000 ~~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” or “BTIG”) pursuant to which Oncocyte may sell up to an aggregate of $50,000,000of shares of Oncocyte common stock from time to time through the Agent (the “ATM Offering”).

10
Between July 1, 2021 and ~~June~~September 30, 2023, Oncocyte sold 56,167shares of common stock at an average offering price of $111.60 per share, for gross proceeds of approximately $6.27 million through the ATM Offering. The most recent sale of common stock through the ATM Offering took place in January 2022. 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 11,765shares of Series A Convertible Preferred Stock (the “Series A Preferred Stock”), which are convertible into a total of 384,477shares of common stock, at a conversion price of $30.60~~(the~~ (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 satisfaction 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 satisfaction 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 met the minimum bid price requirement of the Nasdaq continued listing requirements. Accordingly as of June 30, 2023, no additional proceeds are expected from the second closing of the Securities Purchase Agreement. On August 8, 2023, the Company received a letter from Nasdaq indicating that the Company had regained compliance with the minimum bid price requirement of the Nasdaq continued listing requirements. See Note 15 for additional information about the Series A Preferred Stock Offering.

Further, on April 13, 2022, Oncocyte entered into an underwriting agreement (the “Underwriting Agreement”) with BTIG, LLC, as representative of the underwriters named therein (the “Underwriters”), pursuant to which Oncocyte issued and sold to the Underwriters an aggregate of 1,313,320 shares of common stock, and 1,313,320 warrants to purchase up to 656,660 shares of common stock (“April 2022 Warrants”) (the “Underwritten ~~Offering,”~~Offering”). See Notes 8 and ~~collectively with~~11 for additional information about the Series A Preferred Stock Offering and Underwritten Offering.
In August 2022, the ~~“April~~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, ~~Offerings”).~~Oncocyte initiated an additional reduction in work force involving over 40% of its full-time employees. The ~~Underwritten Offering closed~~transition began on ~~April 19,~~December 16, 2022 and ~~Oncocyte received net proceeds~~was completed in February 2023. As of ~~approximately~~December 31, 2022, the Company incurred an aggregate of $~~32.8~~1.9 million ~~from the Underwritten Offering. See Note 15 for additional information about the Underwritten Offering.~~related to employee severance and benefits costs in connection with its reductions in force during fiscal year 2022.
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, the Company’s largest shareholder, relating to their purchase of an aggregate of up to 2,278,121 shares of its common stock at an offering price of $7.08 per share to board members and $6.03 per share to the other investors participating in the ~~offering. The~~ offering ~~was intended to be priced at-the-market~~(the “April 2023 Offering”). See Notes 8 and 11 for ~~purposes of complying with applicable Nasdaq Listing Rules. The aggregate gross proceeds from~~additional information about the ~~offering were approximately $13.9~~ ~~million. The Company used approximately $1.1~~ ~~million of the net proceeds to immediately redeem an aggregate of~~ ~~1,064shares of its Series A Preferred Stock and may thereafter elect to redeem additional shares.~~April 2023 Offering.

11
On April 12, 2023, Oncocyte announced a reduction in force involving approximately 20% of its workforce (the “April 2023 Reduction”), which management believes will extend Oncocyte’s cash runway into 2024. In connection with the April 2023 Reduction, we incurred approximately $300,000 related to employee severance and benefits costs during the second quarter of 2023.

As of ~~June~~September 30, 2023, Oncocyte is 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.

In accordance with Accounting Standards Codification (“ASC”) 205-40, Going Concern, we evaluated whether there are conditions and events, considered in the aggregate, that raise substantial doubt about our ability to continue as a going concern within one year after the date that the ~~unaudited condensed~~ consolidated ~~interim~~ financial statements included in this Report are issued. This evaluation initially does not take into consideration the potential mitigating effect of our plans that have not been fully implemented as of the date the ~~unaudited condensed~~ consolidated ~~interim~~ financial statements included in this Report are issued. When substantial doubt exists under this methodology, we evaluate whether the mitigating effect of ~~its~~our plans sufficiently alleviates substantial doubt about our ability to continue as a going concern. The mitigating effect of our plans, however, is only considered if both (1) it is probable that the plans will be effectively implemented within one year after the date that such financial statements are issued, and (2) it is probable that the plans, when implemented, will mitigate the relevant conditions or events that raise substantial doubt about our ability to continue as a going concern within one year after the date that such financial statements are issued. In performing this analysis, we excluded certain elements of our operating plan that cannot be considered probable.

11
Our expectation to generate operating losses and negative operating cash flows in the future and the need for additional funding to support our planned operations raise substantial doubt regarding our ability to continue as a going concern for a period of one year after the date that the consolidated financial statements are issued. Management intends to complete additional equity financings ~~and reduce~~while maintaining reduced spending ~~in the remainder of fiscal 2023 and in 2024.~~levels. However, due to several factors, including those outside management’s control, there can be no assurance that we will be able to complete additional equity financings. If we are unable to complete additional financings, management’s plans include further reducing or delaying operating expenses. We have concluded the likelihood that our plan to successfully obtain sufficient funding from one or more of these sources or adequately reduce expenditures, while reasonably possible, is less than probable. Accordingly, we have concluded that substantial doubt exists about our ability to continue as a going concern for a period of at least ~~twelve months~~one year from the date of issuance of these ~~unaudited condensed~~ consolidated ~~interim~~ financial statements.

The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the ordinary course of business. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of the uncertainties described above.

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.

12
The unavailability or inadequacy of financing or revenues to meet future capital needs could force Oncocyte to modify, curtail, delay, or suspend some or all aspects of planned operations. Sales of additional equity securities could result in the dilution of the interests of its shareholders. Oncocyte cannot assure that adequate financing will be available on favorable terms, if at all.

2. ~~Basis of Presentation and~~ Summary of Significant Accounting Policies

Accounting Principles
The consolidated financial statements and accompanying notes are prepared on the accrual basis of accounting in accordance with U.S. generally accepted accounting principles (“GAAP”).
Reclassifications
Certain prior period amounts in the consolidated financial statements and notes to consolidated financial statements have been reclassified to conform to the current period presentation. These changes had no impact on the previously reported consolidated financial condition, results of operations or cash flows.
Basis of ~~presentation~~Presentation

The unaudited condensed consolidated interim financial statements presented herein, and discussed below, have been prepared in accordance with ~~U.S. generally accepted accounting principles (“GAAP”)~~GAAP for ~~interim~~ financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. In accordance with those rules and regulations, certain information and footnote disclosures normally included in comprehensive consolidated financial statements have been condensed or omitted. The condensed consolidated balance ~~sheets~~sheet as of December 31, 2022 was derived from the audited consolidated financial statements at that date. These unaudited condensed consolidated ~~interim~~ financial statements should be read in conjunction with the audited financial statements and notes thereto included in Oncocyte’s Annual Report on Form 10-K for the year ended December 31, 2022. The accompanying unaudited condensed consolidated ~~interim~~ financial statements, ~~presented herein as~~in the opinion of ~~June 30, 2023 is~~management, include all adjustments of a normal recurring nature necessary for a fair presentation of Oncocyte’s financial condition and results of operations. The consolidated results of operations are not ~~representative~~necessarily indicative of the ~~full fiscal year~~results to be expected for any other interim period or ~~any future periods.~~for the entire year.
12
On July 24, 2023, the Company implemented a 1-for-20 reverse stock split of the outstanding shares of its common stock. The par value per share and the authorized number of shares of common stock and preferred stock were not adjusted as a result of the reverse stock split. All common stock share and per-share amounts for all periods presented in these consolidated financial statements have been adjusted to reflect the reverse stock split. The number of authorized shares of common stock remains at 230 million shares.

Principles of ~~consolidation~~Consolidation

On January 31, 2020, with the acquisition of Insight Genetics, Inc. (“Insight”) through a merger with a newly incorporated ~~wholly owned~~wholly-owned subsidiary of Oncocyte (the “Insight Merger”) under the terms of an Agreement and Plan of Merger (the “Insight Merger Agreement”), Insight became a ~~wholly owned~~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 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 became a ~~wholly owned~~wholly-owned subsidiary of Oncocyte (the “Chronix Merger”), and on that date Oncocyte began consolidating Chronix’s operations and results with Oncocyte’s operations and results (see Note 3).
We have reflected the operations of Razor as discontinued operations for all periods presented. See Note 1613 for further information. ~~Unless otherwise noted, amounts~~Amounts and disclosures throughout these Notes to ~~unaudited condensed~~ consolidated ~~interim~~ financial statements relate solely to continuing operations and exclude all discontinued operations. Discontinued operations comprise activities that were disposed of or discontinued 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 ASC Topic 205, Presentation of Financial Statements.

The accompanying unaudited condensed consolidated interim financial statements, in the opinion of management, include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of Oncocyte’s financial condition and results of operations. The unaudited condensed consolidated results of operations are not necessarily indicative of the results to be expected for any other interim period or for the entire year. All material intercompany accounts and transactions have been eliminated in consolidation.

Use of ~~estimates~~Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and contingent assets and liabilities, at the date of the ~~unaudited condensed~~ consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, management evaluates estimates which are subject to significant judgment, including, but not limited to, valuation methods used, assumptions requiring the use of judgment to prepare financial projections, timing of potential commercialization of acquired in-process intangible assets, applicable discount rates, probabilities of the likelihood of multiple outcomes of certain events related to contingent consideration, comparable companies or transactions, determination of fair value of the assets acquired and liabilities assumed including those relating to contingent consideration, assumptions related to going concern assessments, allocation of direct and indirect expenses, useful lives associated with long-lived intangible assets, key assumptions in operating and financing leases including incremental borrowing rates, loss contingencies, valuation allowances related to deferred income taxes, allowances for credit losses, and assumptions used to value debt and stock-based awards and other equity instruments. Actual results may differ materially from those estimates.
13

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, going concern assessment, 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.

13
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, 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.
Fair Value Measurements, Business ~~combinations~~Combinations and ~~fair value measurements~~Contingent Consideration Liabilities

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~~Presentation of Financial Statements. 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~~All material intercompany accounts and transactions have been eliminated in ~~active markets for identical assets and liabilities.~~consolidation.

● ~~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 termUse of ~~the assets or liabilities.~~Estimates

● ~~Level 3~~ ~~– Unobservable inputs~~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 ~~supported by little~~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 ~~no market activity and that are significant to the~~transactions, determination of fair value of the assets ~~or liabilities.~~acquired and liabilities assumed including those relating to contingent consideration, assumptions related to going concern assessments, allocation of direct and indirect expenses, useful lives associated with long-lived intangible assets, key assumptions in operating and financing leases including incremental borrowing rates, loss contingencies, valuation allowances related to deferred income taxes, allowances for credit losses, and assumptions used to value debt and stock-based awards and other equity instruments. Actual results may differ materially from those estimates.

~~When a part~~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 ~~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~~carrying value of ~~those shares as of the acquisition date based on prices quoted on the principal national securities exchange on which the shares traded. Oncocyte recognizes estimated fair values of the tangible~~goodwill, going concern assessment, acquired in-process intangible assets and ~~identifiable intangible assets acquired, including in-process research and development, and liabilities assumed, including any contingent consideration,~~other long-lived assets. Those assessments as well as other estimates referenced above were made in the context 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.information reasonably available to Oncocyte.

1413

~~In determining fair value,~~ 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, 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.
Fair Value Measurements, Business Combinations and Contingent Consideration Liabilities
Oncocyte ~~utilizes valuation techniques that maximize~~accounts for business combinations in accordance with ASC 805, which requires the ~~use of observable inputs and minimize the use of unobservable inputs~~purchase consideration transferred 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~~be measured at fair value on ~~a recurring basis, except for 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 June 30, 2023 (in thousands):
~~Schedule of Fair Value Measurement of Financial Assets and Liabilities~~
As of June 30, 2023
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 $ 530 $ 530 $ - $ -
Total $ 530 $ 530 $ - $ -

Liabilities:
Contingent consideration liabilities $ 29,150 $ - $ - $ 29,150
Total $ 29,150 $ - $ - $ 29,150
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):
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
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.
15
~~Cash, cash equivalents, and restricted cash~~
~~The Company’s reconciliation of cash and cash equivalents, and restricted cash reported within the unaudited condensed consolidated balance sheets that sum to the total of the same amounts shown~~acquisition date in ~~the unaudited condensed consolidated statements of cash flows were as follows (in thousands):~~
~~Schedule of Cash and Cash Equivalents and Restricted Cash~~
June 30, December 31,
2023 2022
Cash and cash equivalents $ 17,368 $ 19,993
Restricted cash 1,700 1,700
Cash from discontinuing operations - 1,510
Cash, cash equivalents and restricted cash shown in the statements of cash flows $ 19,068 $ 23,203
~~Assets Held for Sale and Discontinued Operations~~
As of June 30, 2023, the Company classified laboratory equipment previously presented in machinery and equipment as held for sale in current assets, in the unaudited condensed consolidated balance sheet, as all the criteria ofaccordance with ASC ~~subtopic 360-10, Property, Plant, and Equipment (“ASC 360-10”) have been met and the transaction was qualified as assets held for sale.~~
~~During the six months ended June 30, 2023, the Company entered into various agreements to sell laboratory equipment for an aggregate amount of $0.6~~ million. As a result, the Company classified the equipment as held for sale as current assets, in the unaudited condensed consolidated balance sheet, as all the criteria of ASC subtopic 360-10, Property, Plant, and Equipment (“ASC 360-10”) have been met and the transaction was qualified as assets held for sale. The equipment was written down to its fair value, less cost to sell, to $~~0.2~~ ~~million in the unaudited condensed consolidated balance sheet. As a result of the sale, the Company recorded an impairment loss of $1.3~~ ~~million on held-for-sale assets, in the unaudited condensed consolidated statement of operations.~~
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 unaudited condensed 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 or discontinued 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, 820, Presentation of Financial Statements.

~~Additional details surrounding~~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 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, allowances for credit losses, 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, going concern assessment, 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.
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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, 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.
Fair Value Measurements, Business Combinations and Contingent Consideration Liabilities
Oncocyte accounts for business combinations in accordance with ASC 805, which requires the purchase consideration transferred to be measured at fair value on the acquisition date in accordance with ASC 820, Fair Value Measurement. ASC 820 establishes a single authoritative definition of fair value, sets out a framework for measuring fair value and expands on required disclosures about fair value measurement. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. ASC 820 describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value, which are the following:
● Level 1 – Quoted prices in active markets for identical assets and liabilities.
● Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted market prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
● Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
When a part of the purchase consideration consists of shares of Oncocyte common stock, Oncocyte calculates the purchase price attributable to those shares, a Level 1 security, by determining the fair value of those shares as of the acquisition date based on prices quoted on the principal national securities exchange on which the shares traded. Oncocyte recognizes estimated fair values of the tangible assets and identifiable intangible assets acquired, including in-process research and development, and liabilities assumed, including any contingent consideration, as of the acquisition date. Goodwill is recognized as any amount of the fair value of the tangible and identifiable intangible assets acquired and liabilities assumed in excess of the consideration transferred. ASC 805 precludes the recognition of an assembled workforce as an asset, effectively subsuming any assembled workforce value into goodwill.
In determining fair value, Oncocyte utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible, and also considers counterparty credit risk in its assessment of fair value. For the periods presented, Oncocyte has no financial assets or liabilities recorded at fair value on a recurring basis, except for money market funds and marketable equity securities held by Oncocyte described below. These assets are measured at fair value using the period-end quoted market prices as a Level 1 input.
Certain of Oncocyte’s asset and business acquisitions involve the potential for future payment of consideration to third-parties and former selling shareholders in amounts determined as a percentage of future net revenues generated, or upon attainment of revenue milestones, from Pharma Services or laboratory tests, as applicable, or annual minimum royalties to certain licensors, as provided in the applicable agreements. The fair value of such liabilities is determined using unobservable inputs. These inputs include the estimated amount and timing of projected cash flows and the risk-adjusted discount rate used to present value the cash flows. These obligations are referred to as contingent consideration, which are carried at fair value based on Level 3 inputs.
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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 and additional Level 3 fair value disclosures.
The following tables present the Company’s assets and liabilities, ~~held for sale~~measured and ~~discontinued operations are included in Note 16.~~recognized at fair value on a recurring basis, classified under the appropriate level of the fair value hierarchy:

Schedule of Fair Value Measurement of Financial Assets and Liabilities
As of September 30, 2023
Fair value Level 1 Level 2 Level 3
(In thousands)
Assets:
Marketable equity securities $ 441 $ 441 $ - $ -
Total $ 441 $ 441 $ - $ -

Liabilities:
Contingent consideration liabilities (Note 3) $ 28,715 $ - $ - $ 28,715
Total $ 28,715 $ - $ - $ 28,715
As of December 31, 2022
Fair value Level 1 Level 2 Level 3
(In thousands)
Assets:
Marketable equity securities $ 433 $ 433 $ - $ -
Total $ 433 $ 433 $ - $ -

Liabilities:
Contingent consideration liabilities (Note 3) $ 45,662 $ - $ - $ 45,662
Total $ 45,662 $ - $ - $ 45,662
The carrying amounts of cash and cash equivalents, restricted cash, 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.
In accordance with GAAP, from time to time, the Company measures certain assets at fair value on a nonrecurring basis. The Company reviews the carrying value of goodwill, intangibles, including in-process research and development (“IPR&D”) (see Note 5), and other long-lived assets for indications of impairment at least annually. Refer to related discussions of impairments below.
Cash, Cash Equivalents and Restricted Cash
Oncocyte considers all highly liquid securities with original maturities of three months or less when purchased to be cash equivalents. For the periods presented, Oncocyte’s cash equivalents are comprised of investments in AAA rated money market funds that invest in first-tier only securities, which primarily include domestic commercial paper and securities issued or guaranteed by the U.S. government or its agencies. Restricted cash relates to a bank letter of credit required under our office lease arrangement, refer to Note 7 for additional information.
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Marketable Equity Securities
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, 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 or 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 September 30, 2023 and December 31, 2022, Oncocyte held 353,264 and 35,326 shares of common stock of Lineage and AgeX, respectively, as marketable equity securities, which had a combined fair market value of $441,000 and $433,000, respectively.
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 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.
From February 24, 2021, the date of Oncocyte’s acquisition of the remaining interests in Razor, through February 16, 2023 the date of its disposition, Razor entity’s financial statements were consolidated with Oncocyte. See Note 13 for additional information related to the discontinued operations of Razor.
Assets Held for Sale
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.
During the nine months ended September 30, 2023, the Company entered into various agreements to sell laboratory equipment. As a result, the Company classified the equipment as held for sale as current assets, in the consolidated balance sheet, as all the criteria of ASC subtopic 360-10, Property, Plant, and Equipment (“ASC 360-10”) have been met and the transactions were qualified as assets held for sale. The equipment was written down to its fair value, less cost to sell, the remainder of which was $139,000 as of September 30, 2023. As a result of these transactions, the Company recorded an impairment loss of $1.3 million on held for sale assets, in the consolidated statement of operations.
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Machinery and Equipment, Net, and 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.
Goodwill and ~~intangible assets~~Intangible Assets

In accordance with ASC 350, Intangibles – Goodwill and Other, ~~in-process research and development (“~~IPR~~&D”)~~&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)~~Note 5).
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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 4.5. As of ~~June~~September 30, 2023, goodwill has been fully impaired and acquired IPR&D has been partially impaired.

~~Long-lived intangible assets~~Long-Lived Intangible Assets

Long-lived intangible assets, consisting primarily of acquired customer relationships, are stated at acquired cost, less accumulated amortization. Amortization expense is computed using the straight-line method over the estimated useful life of 5 years (see ~~Notes 3 and 4)~~Note 5).
~~Contingent consideration liabilities~~
Certain of Oncocyte’s asset and business acquisitions involve the potential for future payment of consideration to third-parties and former selling shareholders in amounts determined as a percentage of future net revenues generated, or upon attainment of revenue milestones, from Pharma Services or laboratory tests, as applicable, or annual minimum royalties to certain licensors, as provided in the applicable agreements. The fair value of such liabilities is determined using unobservable inputs. These inputs include the estimated amount and timing of projected cash flows and the risk-adjusted discount rate used to present value the cash flows (see Notes 3 and 4). These obligations are referred to as contingent consideration.
ASC 805 requires that contingent consideration be estimated and recorded at fair value as of the acquisition date as part of the total consideration transferred. Contingent consideration is an obligation of the acquirer to transfer additional assets or equity interests to the selling shareholders in the future if certain future events occur or conditions are met, such as the attainment of product development milestones. Contingent consideration also includes additional future payments to selling shareholders based on achievement of components of earnings, such as “earn-out” provisions or percentage of future revenues, including royalties paid to the selling shareholders based on a percentage of certain revenues generated.
The fair value of contingent consideration after the acquisition date is reassessed by Oncocyte as changes in circumstances and conditions occur, with the subsequent change in fair value recorded in the condensed consolidated statements of operations. Changes in key assumptions can materially affect the estimated fair value of contingent consideration liabilities and, accordingly, the resulting gain or loss that Oncocyte records in its unaudited condensed consolidated interim financial statements. See Notes 3 and 4 for a full discussion of these liabilities.

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~~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.
From February 24, 2021, the date of Oncocyte’s acquisition of the remaining interests in Razor, through February 16, 2023 the date of its disposition, Razor entity’s financial statements have been consolidated with Oncocyte. See Notes 3, 4, and 16 for additional information.
Impairment of ~~long-lived assets~~Long-Lived Assets

Oncocyte assesses the impairment of long-lived assets whenever events or changes in circumstances indicate that such assets might be impaired and the carrying value may not be recoverable. Oncocyte’s long-lived assets consist primarily of intangible assets, right-of-use assets for operating leases, customer relationships, and machinery and equipment. If events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable and the expected undiscounted future cash flows attributable to the asset are less than the carrying amount of the asset, an impairment loss, equal to the excess of the carrying value of the asset over its fair value, is recorded. See ~~Notes 3,~~Note 4 ~~and 16~~ for additional information with respect to ~~impairments~~the impairment of ~~long-lived assets.~~leasehold improvements. See ~~Note 16~~“Assets held for ~~disclosure of machinery and equipment impairment.~~sale” above for additional impairment disclosures.

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 include our office leases and are also 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 in 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 prior years, Oncocyte entered into various operating leases and an embedded operating lease in accordance with ASC 842 as discussed in Note 7. Oncocyte’s accounting for financing leases remained substantially unchanged.
Revenue ~~recognition~~Recognition

Pursuant to ASC 606, revenues are recognized when control of services performed is transferred to customers, in an amount that reflects the consideration Oncocyte expects to be entitled to in exchange for those services. ASC 606 provides for a five-step model that includes:

(i) identifying the contract with a customer,
(ii) identifying the performance obligations in the contract,
(iii) determining the transaction price,
(iv) allocating the transaction price to the performance obligations, and
(v) recognizing revenue when, or as, an entity satisfies a performance obligation.

Oncocyte determines transaction prices based on the amount of consideration we expect to receive for transferring the promised goods or services in the contract. Consideration may be fixed, variable, or a combination of both. The Company considers any constraints on the variable consideration and includes in the transaction price variable consideration to the extent it is deemed probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved.

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~~DetermaRx testing revenue~~The following table presents consolidated revenues by service:

Prior to the Razor Sale Transaction, Oncocyte generated 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 has billed 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. ApplicationSchedule 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 has recognized revenue upon payment because it has had insufficient history to reliably estimate payment patterns or has had contractual reimbursement arrangements, or both, in place.Disaggregation Of Revenue
2023 2022 2023 2022
Three Months Ended Nine Months Ended
September 30, September 30,
2023 2022 2023 2022
(In thousands)
Pharma Services $ 423 $ 67 $ 1,137 $ 684
Laboratory developed test services 6 - 52 -
Total $ 429 $ 67 $ 1,189 $ 684

~~As of June 30, 2023, Oncocyte had accounts receivable of $1.6~~ ~~million from Medicare and Medicare Advantage covered DetermaRx tests (see Note 7).~~
We maintain an allowance for expected credit losses 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. During the first quarter of 2023, the Company adopted 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. Adoption of this standard did not have a material impact on the Company’s consolidated financial statements and related disclosures. As of June 30, 2023 and December 31, 2022, we had a credit loss reserve of $~~0.2~~ ~~million.~~
Pharma ~~services revenue~~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 ~~condensed~~ 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 ~~condensed~~ consolidated ~~financial statements~~balance sheets when the customer is invoiced according to the billing schedule in the contract.

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As of September 30, 2023 and December 31, 2022, Oncocyte had accounts receivable from Pharma Services customers of $557,000 and $257,000, respectively.

Allowance for Credit Losses
Oncocyte establishes an allowance for credit ~~loss reserve accounts~~losses based on the evaluation of the collectability of its Pharma Services accounts receivables after considering a variety of factors, including the length of time receivables are past due, significant events that may impair the customer’s ability to pay, such as a bankruptcy filing or deterioration in the customer’s operating results or financial position, reasonable and supportable forecast that affect the collectability of the reported amount, and historical experience. If circumstances related to customers change, estimates of the recoverability of receivables would be further adjusted. Oncocyte continuously monitors collections and payments from customers and maintains a provision for estimated credit losses and uncollectible accounts, if any, based upon its historical experience and any specific customer collection issues that have been identified. Amounts determined to be uncollectible are written off against the credit loss reserve accounts. As of ~~June 30, 2023, Oncocyte has not recorded any losses or credit loss reserve accounts on its account receivables from Pharma Services.~~
~~As of June 30, 2023, Oncocyte had accounts receivable from Pharma Services customers of $0.3~~ ~~million, as compared to $0.3~~ ~~million as of December 31, 2022 (see Note 7). As of June~~September 30, 2023 and December 31, 2022, we had no allowance for credit losses related to Pharma Services.
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Laboratory Developed Test Services
Prior to the Razor Sale Transaction, Oncocyte generated 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 has billed 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 ~~not reserved~~ a ~~credit loss reserve~~sufficient payment collection history or contractual reimbursement agreements. Accordingly, for ~~Pharma Services~~those payers, Oncocyte has recognized revenue upon payment because it has had insufficient history to reliably estimate payment patterns or has had contractual reimbursement arrangements, or both, in place.
As of September 30, 2023 and December 31, 2022, Oncocyte had accounts ~~receivables.~~receivable of $1.5 million and $1.9 million, respectively, from Medicare and Medicare Advantage covered DetermaRx tests.

Allowance for Credit Losses
We maintain an allowance for credit losses related to laboratory developed test services 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 debt write-offs have not been significant and have been within management expectations. As of September 30, 2023 and December 31, 2022, we had an allowance for credit losses of $178,000 and $154,000, respectively, related to laboratory developed test services.
Licensing ~~revenue~~Revenue

Revenues recognized include 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.

Disaggregation of Revenues and Concentrations of Credit Risk
The following table presents the percentage of consolidated revenues by service:
Schedule of Concentration Of Risk
2023 2022 2023 2022
Three Months Ended Nine Months Ended
September 30, September 30,
2023 2022 2023 2022
Pharma Services 99 % 100 % 96 % 100 %
Laboratory developed test services 1 % 0 % 4 % 0 %
Total 100 % 100 % 100 % 100 %
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The following table presents the percentage of consolidated revenues generated by unaffiliated customers, based on the respective periods presented, that individually represented greater than ten percent of consolidated revenues:
Schedule of Consolidated Revenues Generated by Unaffiliated Customers
2023 2022 2023 2022
Three Months Ended Nine Months Ended
September 30, September 30,
2023 2022 2023 2022
Pharma services - Company A 57 % 28 % 42 % 60 %
Pharma services - Company B 41 % 22 % 34 % 11 %
Pharma services - Company C -* 22 % -* -*
Pharma services - Company D -* 19 % -* -^*
* Less than 10%
The following table presents the percentage of consolidated revenues attributable to geographical locations:
Schedule of Percentage of Consolidated Revenues Attributable to Geographical Locations
2023 2022 2023 2022
Three Months Ended Nine Months Ended
September 30, September 30,
2023 2022 2023 2022
United States – Pharma Services 42 % 76 % 54 % 74 %
Outside of the United States – Pharma Services 57 % 24 % 41 % 26 %
United States – Laboratory developed test services 1 % 0 % 4 % 0 %
Total 100 % 100 % 100 % 100 %
Financial instruments that potentially subject the Company to concentrations of credit risk are cash equivalents and accounts receivable. The Company places its cash equivalents primarily in highly rated money market funds. Cash and cash equivalents are also invested in deposits with certain financial institutions and may, at times, exceed federally insured limits. The Company has not experienced any significant losses on its deposits of cash and cash equivalents.
Two Pharma Services customers individually represented approximately 54% and 45% of accounts receivable at September 30, 2023. Two Pharma Services customers individually represented approximately 59% and 30% of accounts receivable at December 31, 2022.
Cost of ~~revenues~~Revenues

Cost of revenues generally consists of cost of materials, direct labor including benefits, bonus and stock-based compensation, equipment and infrastructure expenses, clinical sample related costs associated with performing DetermaRx tests and Pharma Services, providing deliverables according to our licensing agreements, license fees due to third parties, and amortization of acquired intangible assets such as the ~~Razor asset and~~ customer relationship intangible assets. Infrastructure expenses include depreciation of laboratory equipment, allocated rent costs, leasehold improvements, and allocated information technology costs for operations at Oncocyte’s CLIA laboratories in California and Tennessee. Costs associated with generating the revenues are recorded as the tests or services are performed regardless of whether revenue was recognized. Royalties or revenue share payments for licensed technology calculated as a percentage of revenues generated using the associated technology are recorded as expenses at the time the related revenues are recognized.

Research and ~~development expenses~~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.

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Sales and ~~marketing expenses~~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.

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General and ~~administrative expenses~~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 in accordance with the Financial Accounting Standards Board (“FASB”) ASC 718, Compensation – Stock Compensation (“ASC 718”).
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 unit (“RSU”) or award 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. Forfeitures are accounted for as they occur. Refer to Note 9 for additional information.
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. 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. Oncocyte estimates 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.
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 10), 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.
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, 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. 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.
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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. Based on the above guidance and, among other factors, the fact that our warrants cannot be cash settled under any circumstance but require share settlement, all of our outstanding warrants meet the equity classification criteria and have been classified as equity. Refer to Notes 6 and 8 for details about our outstanding warrants.
Net ~~loss per common share~~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):~~stock:
Schedule of Common Stock Computation of Diluted Net Loss Per Share of Common Stock
2023 2022 2023 2022
Three Months Ended Six Months Ended
June 30, June 30,
2023 2022 2023 2022
Numerator:
Net loss attributable to Oncocyte Corporation $ (8,333 ) $ (8,300 ) $ (5,300 ) $ (18,591 )
Dividend on Series A redeemable convertible preferred stock (76 ) (29 ) (166 ) (29 )
Accretion of Series A redeemable convertible preferred stock (117 ) (43 ) (257 ) (43 )
Deemed dividend on Series A redeemable convertible preferred stock (118 ) - (118 ) -
Net loss attributable to common stockholders - Basic and Diluted $ (8,644 ) $ (8,372 ) $ (5,841 ) $ (18,663 )
Net loss attributable to common stockholders - Basic $ (8,644 ) $ (8,372 ) $ (5,841 ) $ (18,663 )

Denominator:
Weighted average shares used in computing net loss per share attributable to common stockholders - Basic and Diluted 8,090 5,652 7,030 5,135

Basic and diluted net loss per common share $ (1.07 ) $ (1.48 ) $ (0.83 ) $ (3.63 )
Basic net loss per common share $ (1.07 ) $ (1.48 ) $ (0.83 ) $ (3.63 )

Anti-dilutive potential common shares excluded from the computation of diluted net loss per common share:
Stock options 483 731 549 657
RSUs 7 - 10 -
Warrants 820 845 820 845
Series A redeemable convertible preferred stock 5 6 5 6
Total 1,315 1,582 1,384 1,508
Anti-dilutive potential common shares excluded from the computation of diluted net loss per common share 1,315 1,582 1,384 1,508

2023 2022 2023 2022
Three Months Ended Nine Months Ended
September 30, September 30,
2023 2022 2023 2022
(In thousands, except per share data)
Numerator:
Net loss attributable to Oncocyte Corporation $ (6,489 ) $ (9,333 ) $ (11,789 ) $ (27,924 )
Accretion of Series A redeemable convertible preferred stock (198 ) (294 ) (621 ) (294 )
Deemed dividend on Series A redeemable convertible preferred stock - - (118 ) -
Net loss attributable to common stockholders - basic and diluted $ (6,687 ) $ (9,627 ) $ (12,528 ) $ (28,218 )

Denominator:
Weighted average shares used in computing net loss per share attributable to common stockholders - basic and diluted 8,256 5,931 7,446 5,408

Basic and diluted net loss per common share $ (0.81 ) $ (1.62 ) $ (1.68 ) $ (5.22 )

Anti-dilutive potential common shares excluded from the computation of diluted net loss per common share:
Stock options 501 717 501 717
RSUs 5 29 5 29
Warrants 820 820 820 820
Series A redeemable convertible preferred stock 5 4 5 4
Total 1,331 1,570 1,331 1,570
Anti-dilutive potential common shares excluded from the computation of diluted net loss per common share 1,331 1,570 1,331 1,570

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~~Leases~~
~~Oncocyte accounts for leases in accordance with ASC 842,~~ ~~Leases~~. Oncocyte determines if an arrangement is a lease at inception. Leases are classified as either financing or operating, with classification affecting the pattern of expense recognition in the condensed consolidated statements of operations. Under the available practical expedients for the adoption of ASC 842, Oncocyte accounts for the lease and non-lease components as a single lease component. Oncocyte recognizes right-of-use (“ROU”) assets and lease liabilities for leases with terms greater than twelve months in the condensed consolidated balance sheet. ROU assets represent the right to use an underlying asset during the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most leases do not provide an implicit rate, Oncocyte uses an incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. Oncocyte uses the implicit rate when it is readily determinable. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. Lease terms may include options to extend or terminate the lease when it is reasonably certain that Oncocyte will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term. Operating leases are included as right-of-use assets in machinery and equipment, and ROU lease liabilities, current and long-term, in the condensed consolidated balance sheets. Financing leases are included in machinery and equipment, and in financing lease liabilities, current and long-term, in the condensed consolidated balance sheets. Oncocyte discloses the amortization of our ROU assets and operating lease payments as a net amount, “Amortization of right-of-use assets and liabilities”, on the condensed consolidated statements of cash flows. Based on the available practical expedients under the standard, Oncocyte elected not to capitalize leases that have terms of twelve months or less.
During prior years, Oncocyte entered into various operating leases and an embedded operating lease in accordance with ASC 842 discussed in Note 10. Oncocyte’s accounting for financing leases remained substantially unchanged.
~~Accounting for Lineage and AgeX shares of common stock~~
~~Oncocyte accounts for the shares of Lineage and AgeX common stock it holds as marketable equity securities in accordance with ASC 320-10-25,~~ ~~Investments – Debt and Equity Securities~~~~, as amended by Accounting Standards Update (“ASU”) 2016-01,~~ ~~Financial Instruments–Overall: Recognition and Measurement of Financial Assets and Financial Liabilities~~, as the shares have a readily determinable fair value quoted on the NYSE American and are held principally to meet future working capital purposes, as necessary. The securities are measured at fair value, with related gains and losses in the value of such securities recorded in the condensed consolidated statements of operations in other income (expense), and are reported as current assets on the condensed consolidated balance sheets based on the closing trading price of the security as of the date being presented.
~~As of June 30, 2023 and December 31, 2022, Oncocyte held~~ ~~353,264~~ ~~and~~ ~~35,326~~ ~~shares of common stock of Lineage and AgeX, respectively, as marketable equity securities had a combined fair market value of $0.5~~ ~~million and $0.4~~ ~~million, respectively.~~
Recent ~~accounting pronouncements~~Accounting Pronouncements

In June 2016, the ~~Financial Accounting Standards Board (“FASB”)~~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. Previously, U.S. GAAP required entities to write down credit losses only when losses are probable and loss reversals are not permitted. The Company adopted this ASU in the first quarter of 2023. Adoption of this standard did not have a material impact on the Company’s consolidated financial statements and related disclosures.

In October 2021, the FASB issued ASU No. 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, to provide specific guidance to eliminate diversity in practice on how to recognize and measure acquired contract assets and contract liabilities from revenue contracts from customers in a business combination consistent with revenue contracts with customers not acquired in an acquisition. The amendments in this update provide that the acquirer should consider the terms of the acquired contracts, such as timing of payment, identify each performance obligation in the contracts, and allocate the total transaction price to each identified performance obligation on a relative standalone selling price basis as of contract inception (that is, the date the acquiree entered into the contracts) or contract modification to determine what should be recorded at the acquisition date. ~~These amendments are effective for~~The Company adopted this ASU in the ~~Company beginning with fiscal year~~first quarter of 2023. ~~The~~Adoption of this standard did not have an 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~~Company’s consolidated financial statements and ~~beyond.~~related disclosures.
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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 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.

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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):~~liability:

Schedule of Fair Value of Contingent Consideration Liability
Fair Contractual Fair Value on the
Contractual Value on the Value Merger Date
Value Merger Date (In thousands)
Milestone 1 $ 1,500 $ 1,340 $ 1,500 $ 1,340
Milestone 2 3,000 1,830 3,000 1,830
Milestone 3 ^(a) 1,500 770
Royalty 1 ^(b) See(b) 5,980
Royalty 2 ^(b) See(b) 1,210
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 $ 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 Contingent Consideration after the Insight Merger Date is reassessed by Oncocyte as changes in circumstances and conditions occur, with the subsequent change in fair value recorded in Oncocyte’s ~~condensed~~ consolidated statements of operations. ~~As of June 30,~~Durning 2023, based on Oncocyte’s reassessment of ~~the~~ significant assumptions, ~~noted above,~~ there was a decrease of approximately $~~2.5~~3.1 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 ~~unaudited condensed~~ consolidated ~~statements~~statement of operations for the ~~six~~nine months ended ~~June~~September 30, 2023.

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Oncocyte uses a discounted cash flow valuation technique to determine the fair value of its Level 3 contingent consideration liabilities. The significant unobservable inputs used in Insight’s contingent consideration valuation on September 30, 2023, included: (i) a discount period, based on the expected milestone payment dates, ranging from 0.5 years to 1.5 years, (ii) a discount rate of 15.2% to 15.4%, and (iii) a management probability estimate of 15% to 50%.

The following tables reflect the activity for ~~Oncocyte’s~~the Insight Contingent Consideration ~~for the six months ended June 30, 2023 and 2022,~~ measured at fair value using Level 3 ~~inputs (in thousands):~~inputs:

Schedule of Contingent Consideration, Measured at Fair Value
Fair Value
Fair Value (In thousands)
Balance at December 31, 2021 $ 7,060 $ 7,060
Change in estimated fair value 1,400 420
Balance at June 30, 2022 $ 8,460
Balance at September 30, 2022 $ 7,480

Balance at December 31, 2022 $ 5,370
Change in estimated fair value (3,080 )
Balance at September 30, 2023 $ 2,290
Fair Value
Balance at December 31, 2022 $ 5,370
Change in estimated fair value (2,500 )
Balance at June 30, 2023 $ 2,870

Contingent consideration is not deductible for tax purposes, even if paid; therefore, no deferred tax assets related to the Contingent Consideration were recorded.

~~Asset acquisition of Razor Genomics, Inc.~~
~~On February 24, 2021, Oncocyte completed the purchase of all the issued and outstanding shares of common stock of Razor. As a result of Oncocyte is the sole shareholder of Razor.~~
~~On December 15, 2022, the Company entered into a Stock Purchase Agreement in which the Company agreed to sell approximately~~ 70~~% of the issued and outstanding equity interest of Razor on a fully-diluted basis. On February 16, 2023, the sale of Razor was completed.~~ ~~See Note 16 for additional information.~~
~~Development Agreement~~
~~On December 31, 2019, in connection with Oncocyte’s purchase~~ of 25~~% of the outstanding equity of Razor,~~ Oncocyte entered into a Development Agreement with Razor and Encore Clinical, Inc. (“Encore”), a former stockholder of Razor (the “Development Agreement”). Under the Development Agreement, Razor reserved as a “Clinical Trial Expense Reserve” $~~4.0~~ 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.
~~The Development Agreement was terminated on February 16, 2023 in connection with the Razor Stock Purchase Agreement. See Note 16 for more details regarding the Razor Stock Purchase Agreement.~~
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~~Sublicense Agreement~~
~~On December 31, 2019, in connection with Oncocyte’s purchase~~ of 25~~% of the outstanding equity of Razor,~~ Oncocyte entered into a Sublicense and Distribution Agreement with Razor and Encore Clinical, Inc. (“Encore”), a former stockholder of Razor (the “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.
~~The Sublicense Agreement was terminated on February 16, 2023 in connection with the Razor Stock Purchase Agreement. See Notes 16 for more details regarding the Razor Stock Purchase Agreement.~~
Acquisition of Chronix Biomedical, Inc.

On April 15, 2021 (the “Chronix Merger Date”), Oncocyte completed its acquisition of Chronix pursuant the Chronix Merger Agreement.
~~Contingent Consideration~~

As additional consideration for holders of certain classes and series of Chronix capital stock, the Chronix Merger Agreement originally required 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.

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On February 8, 2023, the Company and equity holder representative entered into Amendment No. 1 to the Merger Agreement (the “Chronix Amendment”), pursuant to which the parties agreed 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) the Chronix Milestone Payments, 15% Royalty Payments and Transplant Sale Payment obligations were eliminated.

The fair value of the Chronix Contingent Consideration after the Chronix Merger Date is reassessed by Oncocyte as changes in circumstances and conditions occur, with the subsequent change in fair value recorded in Oncocyte’s ~~condensed~~ consolidated statements of operations. ~~As of June 30,~~During 2023, based on Oncocyte’s reassessment of ~~the~~ significant assumptions, ~~noted above,~~ there was a decrease of approximately $~~14.0~~13.9 million to the fair value of the Contingent Consideration primarily attributable to revised estimates of the timing of the possible future payouts and, accordingly, this decrease was recorded as a change in fair value of contingent consideration in the ~~unaudited condensed~~ consolidated ~~statements~~statement of operations for the ~~six~~nine months ended ~~June~~September 30, 2023.

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Oncocyte uses a discounted cash flow valuation technique to determine the fair value of its Level 3 contingent consideration liabilities. The significant unobservable inputs used in Chronix’s contingent consideration valuation on September 30, 2023, included: (i) a discount period, based on the related patent expiration dates, ranging from 0.4 years to 12.2 years, (ii) a discount rate of 15.5% to 16.4%, and (iii) a payout percentage of 10% based on the earnout provision.

The following tables reflect the activity for ~~Oncocyte’s~~the Chronix Contingent Consideration ~~for the six months ended June 30, 2023 and June 30, 2022,~~ measured at fair value using Level 3 ~~inputs (in thousands):~~inputs:

Schedule of Contingent Consideration, Measured at Fair Value
Fair Value
Fair Value (In thousands)
Balance at December 31, 2021 $ 69,621 $ 69,621
Change in estimated fair value (12,415 ) (17,577 )
Balance at June 30, 2022 $ 57,206
Balance at September 30, 2022 $ 52,044

Balance at December 31, 2022 $ 40,292
Change in estimated fair value (13,867 )
Balance at September 30, 2023 $ 26,425
Fair Value
Balance at December 31, 2022 $ 40,292
Change in estimated fair value (14,012 )
Balance at June 30, 2023 $ 26,280

Goodwill ~~- Goodwill is~~was 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~~included 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 identified 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.~~2022 (see ~~Notes 2 and 4)~~Note 2).

4. Right-Of-Use and Financing Lease Assets, Machinery and Equipment, Net, and Construction in Progress
Right-of-use and financing lease assets, machinery and equipment, net, and construction in progress were as follows:
Schedule of Right-of-use Assets, Machinery and Equipment, Net, and Construction in Progress
September 30, 2023 December 31, 2022
(In thousands)
Right-of-use assets $ 4,036 $ 3,499
Machinery and equipment 6,908 9,408
Accumulated depreciation and amortization (5,819 ) (4,196 )
Right-of-use assets and machinery and equipment, net 5,125 8,711
Construction in progress 708 2,140
Right-of-use and financing lease assets, machinery and equipment, net, and construction in progress $ 5,833 $ 10,851
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Fixed asset depreciation and amortization expense amounted to $404,000 and $391,000 for the three months ended September 30, 2023 and 2022, respectively, and $1.3 million and $1.1 million for the nine months ended September 30, 2023 and 2022, respectively.
During the third quarter of 2023, in connection with a new sublease arrangement (see Note 7), the Company identified circumstances that indicated a potential impairment of certain leasehold improvements (included in construction in progress) and after a valuation was performed, management concluded that such leasehold improvements were impaired. Accordingly, the Company recorded an impairment of approximately $1.8 million.
5. Intangible Assets, ~~net~~Net

As part of the Insight and Chronix acquisitions ~~which were accounted for as business combinations under ASC 805,~~ completed on January 31, 2020, and April 15, 2021, respectively, the Company has acquired ~~in process research and development (“~~IPR~~&D”)~~&D and customer relationships.

During the first quarter of 2023, due to changes in management and the economic condition of the Company, management shifted the Company’s business strategy to direct efforts on fewer studies and to transition from ~~test~~tests that are laboratory developed tests ~~(“LDT”)~~ to research use only ~~(“RUO”)~~ sales. Due to the change in strategy, the Company’s long range plan forecasts were updated and anticipated future benefits derived from the Company’s assets. The change in strategy represent a significant indicator for change in value of the Company’s ~~long lived~~long-lived assets.
The original IPR&D balance was reassessed based on the updated long range plan, ~~(“LRP”),~~ using the ~~multiple period~~multi-period excess earnings method (“MPEEM”) approach, the results of the valuation noted that the carrying value of the DetermaIO related IPR&D intangible assets was greater than the fair market value, whereas the CNI and VitaGraft related IPR&D intangible assets carrying value was lower than the fair market value. Accordingly, the Company recorded an impairment of approximately $5.0 million.

~~At June 30,~~The MPEEM valuation approach is a discounted cash flow valuation technique and was used to determine the Level 3 fair value of Insight’s IPR&D discussed above. The significant unobservable inputs used on March 31, 2023, included: (i) a discount period of 20.0 years, based on the expected life of patent, (ii) a royalty rate of 0.3%, (iii) a contributory asset rate of return of 30.0%, and ~~December 31, 2022, intangible~~(iv) a weighted average cost of capital rate of 30.0%. As market conditions change, the Company will re-evaluate assumptions used in the determination of fair value for IPR&D and is uncertain to the extent of the volatility in the unobservable inputs in the foreseeable future. Refer to Note 2, “Goodwill and Intangible Assets” for additional IPR&D information.
Intangible assets, net, consisted of the ~~following (in thousands):~~following:

Schedule of Goodwill and Intangible Assets
September 30, 2023 December 31, 2022
June 30, 2023 December 31, 2022 (In thousands)
Intangible assets:
Acquired IPR&D - DetermaIO ⁽¹⁾ $ 9,700 $ 14,650
Acquired IPR&D - DetermaCNI and VitaGraft ⁽²⁾ 46,800 46,800
Acquired IPR&D - DetermaIO^{TM (1)} $ 9,700 $ 14,650
Acquired IPR&D - DetermaCNI™ and VitaGraft™ ⁽²⁾ 46,800 46,800

Intangible assets subject to amortization:
Acquired intangible assets - customer relationship 440 440 440 440
Total intangible assets 56,940 61,890 56,940 61,890
Accumulated amortization - customer relationship⁽³⁾ (301 ) (257 )
Accumulated amortization - customer relationship⁽³⁾ (323 ) (257 )
Intangible assets, net $ 56,639 $ 61,633 $ 56,617 $ 61,633

⁽¹⁾ See Note 3 for information on the Insight Merger.
⁽²⁾ See Note 3 for information on the Chronix Merger.
⁽³⁾ Amortization of intangible assets is included in “Cost of revenues – amortization of acquired intangibles” on the ~~condensed~~ consolidated statements of operations because the intangible assets pertain directly to the revenues generated from the acquired intangibles.

Intangible asset amortization expense amounted to $22,000 and $976,000 for the three months ended September 30, 2023 and 2022, respectively, and $66,000 and $2.9 million for the nine months ended September 30, 2023 and 2022, respectively.
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Future amortization expense of intangible assets subject to amortization is expected to be the ~~following (in thousands):~~following:

Schedule of Intangible Assets Future Amortization Expense
Amortization
Amortization (In thousands)
Year ending December 31,
2023 $ 44 $ 22
2024 88 88
2025 7 7
Total $ 139 $ 117
6. Loan Payable to Silicon Valley Bank

5.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 September 30, 2023, Oncocyte had satisfied the Tranche 2 Milestone and was eligible to borrow the $2 million Tranche 2 funds. However, Oncocyte has not yet borrowed 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 has agreed to a deferral of principal payments, as discussed below. The outstanding principal balance of the loan will bear interest at a stated floating annual interest equal to the greater of (a) the prime rate or (b) 5% per annum. During August 2022, period in which the loan was paid off, 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. The Loan Deferral was accounted for as a modification of debt in accordance with ASC 470-50, Debt – Modifications and Extinguishments, thus there was no gain or loss recognized on the transaction.
At maturity of the loan, Oncocyte 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. Since August 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 412 shares of Oncocyte common stock at an exercise price of $97.00 per share, through February 21, 2027. On March 23, 2017, the Bank was issued warrants to purchase an additional 366 shares at an exercise price of $109.20 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, inter-dealer quotation system, or over-the-counter market. These warrants meet the equity classification criteria and have been classified as equity, refer to Note 2 “Accounting for Warrants” for additional information.
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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 4,928 shares of Oncocyte common stock at the initial “Warrant Price” of $33.80 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 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. These warrants meet the equity classification criteria and have been classified as equity, refer to Note 2 “Accounting for Warrants” for additional information. As of September 30, 2023, Oncocyte has not borrowed any funds under Tranche 2.
7. Commitments and Contingencies
Office and Facilities Leases
Irvine Office Lease
On December 23, 2019, Oncocyte and Cushing Ventures, LLC (“Landlord”) 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 serves as Oncocyte’s principal executive and administrative offices.
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 agreed to pay base monthly rent in the amount of $61,640 during the first 12 months of the Term. Base monthly rent increases annually, over the base monthly rent then in effect, by 3.5%. Oncocyte was entitled to an abatement of 50% of the base monthly rent during the first ten calendar months of the Term. If the Irvine Lease is terminated based on the occurrence of an “event of default,” Oncocyte will be obligated to pay the abated rent to the lessor.
If Oncocyte exercises its option to extend the Term, the initial base monthly rent during the Extended Term will be the greater of the base monthly rent in effect during the last year of the Term or the prevailing market rate. The prevailing market rate will be determined based on annual rental rates per square foot for comparable space in the area where the Premises are located. If Oncocyte does not agree with the prevailing market rate proposed by the lessor, the rate may be determined through an appraisal process. The base monthly rent during the Extended Term shall be subject to the same annual rent adjustment as applicable for base monthly rent during the Term.
In addition to base monthly rent, Oncocyte agreed to pay in monthly installments (a) all costs and expenses, other than certain excluded expenses, incurred by the lessor in each calendar year in connection with operating, maintaining, repairing (including replacements if repairs are not feasible or would not be effective) and managing the Premises and the building in which the Premises are located (“Expenses”), and (b) all real estate taxes and assessments on the Premises and the building in which the Premises are located, all personal property taxes for property that is owned by lessor and used in connection with the operation, maintenance and repair of the Premises, and costs and fees incurred in connection with seeking reductions in such tax liabilities (“Taxes”). Subject to certain exceptions, Expenses shall not be increased by more than 4% annually on a cumulative, compounded basis.
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Oncocyte was entitled to an abatement of its obligations to pay Expenses and Taxes while constructing improvements to the Premises constituting “Tenant’s Work” under the Irvine Lease prior to the Commencement Date, except that Oncocyte was obligated to pay 43.7% of Expenses and Taxes during the period prior to the Commencement Date for its use of the second floor of the Premises, which was already built out as office space.
The lessor provided Oncocyte with a “Tenant Improvement Allowance” in the amount of $1.3 million to pay for the plan, design, permitting, and construction of the improvements constituting Tenant’s Work. The lessor retained 1.5% of the Tenant Improvement Allowance as an administrative fee as provided in the Irvine Lease. As of June 2021, the lessor had provided $1.3 million of the total Tenant Improvement Allowance, which is being amortized over the Term.
Oncocyte has provided the lessor with a security deposit in the amount of $150,000 and a letter of credit in the amount of $1.7 million. The lessor may apply the security deposit, in whole or in part, for the payment of rent and any other amount that Oncocyte is or becomes obligated to pay under the Irvine Lease but fails to pay when due and beyond any cure period. The lessor may draw on the letter of credit from time to time to pay any amount that is unpaid and due, or if the original issuing bank notifies the lessor that the letter of credit will not be renewed or extended for the period required under the Irvine Lease and Oncocyte fails to timely provide a replacement letter of credit, or an event of default under the Irvine Lease occurs and continues beyond the applicable cure period, or if certain insolvency or bankruptcy or insolvency with respect to Oncocyte occur. Oncocyte is required to restore any portion of the security deposit that is applied by the lessor to payments due under the Irvine Lease, and Oncocyte is required to restore the amount available under the letter of credit to the required amount if any portion of the letter of credit is drawn by the lessor. The Irvine Lease provides that 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 has the right to cancel the letter of credit at any time if it meets certain market capitalization and balance sheets thresholds; provided, in each case, that Oncocyte is not in then default under the Irvine Lease beyond any applicable notice and cure period and the lessor has not determined that an event exists that would lead to an event of default.
To obtain the letter of credit, Oncocyte has provided the issuing bank with a restricted cash deposit that the bank will hold to cover its obligation to pay any draws on the letter of credit by the lessor. The restricted cash may not be used for any other purpose, accordingly, Oncocyte has reflected $1.7 million as restricted cash in the accompanying consolidated balance sheets.
Irvine Office Sublease
On August 8, 2023, Oncocyte and Induce Biologics USA, Inc. (“Subtenant”) entered into a Sublease Agreement (the “Sublease Agreement”), which subsequently became effective as of September 14, 2023, upon the execution and delivery by the Company, Subtenant, and Landlord, of that certain Landlord’s Consent to Sublease dated September 12, 2023 (the “Consent Agreement”), under which Landlord consented to the Sublease Agreement, on the terms and subject to the conditions set forth therein. The Sublease Agreement is subject and subordinate to the Irvine Lease.
Under the Sublease Agreement, the Company agreed to initially sublet to Subtenant a portion of the Premises consisting of approximately 13,400 square feet of rentable space for a term (the “Initial Period”) commencing on the date that is 120 days after the effective date of the Consent Agreement (the “Commencement Date”) and ending on the date that is 18 months following the Commencement Date or such earlier date as Subtenant may elect upon the exercise of its one-time option to accelerate such date upon 90 days prior written notice to the Company (the date on which the Initial Period ends, the “Expansion Date”). On the Expansion Date, the portion of the Premises that is subleased to Subtenant under the Sublease Agreement will automatically increase to include the remaining portion of the Premises, which consists of approximately 13,400 square feet of additional rentable space for a term (the “Expansion Period”) beginning on the Expansion Date through the expiration of the Irvine Lease on October 31, 2027, unless earlier terminated.
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The Sublease Agreement provides that, from and after the Commencement Date, Subtenant will pay to the Company monthly base rent in the following amounts: (i) $36,850.00 for rental periods beginning on the Commencement Date and ending on or before December 31, 2024 (subject to adjustment in the event that Subtenant exercises its option to accelerate the Expansion Date, such that the Expansion Period begins prior to December 31, 2024); (ii) $37,955.50 for rental periods beginning on or after January 1, 2025 and ending on or before June 20, 2025 (subject to adjustment in the event that Subtenant exercises its option to accelerate the Expansion Date, such that the Expansion Period begins prior to June 20, 2025); (iii) $75,844.00 for rental periods beginning on or after July 1, 2025 and ending on or before December 31, 2025; (iv) $78,188.33 for rental periods beginning on or after January 1, 2026 and ending on or before December 31, 2026; and (v) $80,533.98 for rental periods beginning on or after January 1, 2027 and ending on or before October 31, 2027.
Following the Commencement Date, Subtenant will be responsible for the payment of Additional Rent, including Expenses and Taxes (as each such term is defined in the Irvine Lease), provided that, with respect to the Initial Period, Subtenant will be responsible for only 50% of the Expenses and Taxes due. In addition, Subtenant will pay the Company a security deposit in the amount of $101,987.38 in connection with the transactions contemplated by the Sublease Agreement.
The Sublease Agreement contains customary provisions with respect to, among other things, Subtenant’s obligation to comply with the Irvine Lease and applicable laws, the payment of utilities and similar services utilized by Subtenant with respect its use of the Premises, the indemnification of the Company by Subtenant, and the right of the Company to terminate the Sublease Agreement in its entirety and retake the Premises if Subtenant fails to remedy certain defaults of its obligations under the Sublease Agreement within specified time periods.
Nashville Office Lease
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 commenced on October 1, 2021 and extends through April 9, 2024 and will serve as additional office space for Insight’s operations.
Embedded Operating Lease
On December 31, 2019, in connection with Oncocyte’s purchase of 25% of the outstanding equity of Razor, Oncocyte entered into a Laboratory Services Agreement with Razor and Encore Clinical, Inc. (“Encore”), a former stockholder of Razor (the “Laboratory Agreement”). Under the Laboratory Agreement (which expired on September 29, 2021), 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 expired 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. The Laboratory Agreement terminated on 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.
Our office leases are operating leases under ASC 842 and are included in the tables below. The tables below provide the amounts recorded in connection with the application of ASC 842 for Oncocyte’s operating and financing leases (see Note 2 for additional policy information).
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Financing Lease
As of September 30, 2023, Oncocyte has one financing lease remaining through December 2023 for certain laboratory equipment with aggregate remaining payments of approximately $30,000 shown in the table below. Oncocyte’s lease obligations are collateralized by the equipment financed under the lease schedule.
Operating and Financing Leases
The following table presents supplemental balance sheet information related to operating and financing leases:
Schedule of Supplemental Balance Sheet Information Related to Operating and Financing Leases
September 30, 2023 December 31, 2022
(In thousands)
Operating lease
Right-of-use assets, net $ 1,748 $ 2,088

Right-of-use lease liabilities, current $ 653 $ 698
Right-of-use lease liabilities, noncurrent 2,252 2,730
Total operating lease liabilities $ 2,905 $ 3,428

Financing lease
Machinery and equipment $ 537 $ 537
Accumulated depreciation (528 ) (446 )
Machinery and equipment, net $ 9 $ 91

Current liabilities $ 30 $ 117
Noncurrent liabilities - -
Total financing lease liabilities $ 30 $ 117

Weighted average remaining lease term
Operating lease 3.9 years 4.5 years
Financing lease 0.3 years 1.0 years

Weighted average discount rate
Operating lease 11.29 % 11.24 %
Financing lease 11.55 % 11.55 %
Future minimum lease commitments are as follows:
Schedule of Future Minimum Lease Commitments for Operating and Financing Leases
Operating Financing
Leases Leases
(In thousands)
Year Ending December 31,
2023 $ 255 $ 31
2024 903 -
2025 869 -
2026 899 -
2027 695 -
Total minimum lease payments 3,621 31
Less amounts representing interest (716 ) (1 )
Present value of net minimum lease payments $ 2,905 $ 30
The following table presents supplemental cash flow information related to operating and financing leases:
Schedule of Supplemental Cash Flow Information Related to Operating and Financing Lease
2023 2022
Nine Months Ended
September 30,
2023 2022
(In thousands)
Cash paid for amounts included in the measurement of financing lease liabilities:
Operating cash flows from operating leases $ 793 $ 854
Operating cash flows from financing leases $ 7 $ 77
Financing cash flows from financing leases $ 86 $ 4
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Litigation – General
Oncocyte may 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 September 30, 2023, Oncocyte accrued approximately $2.7 million in severance obligations for certain executive officers, in accordance with the severance benefit provisions of their respective employment and severance benefit agreements, primarily related to Oncocyte’s acquisition of Chronix 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 Razor Stock 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 Razor Stock Purchase Agreement. Oncocyte periodically enters into underwriting and securities sales agreements with broker-dealers in connection with the offer and sale of Oncocyte securities. The terms of those underwriting and securities sales agreements include indemnification provisions pursuant to which Oncocyte agrees to indemnify the broker-dealers from certain liabilities, including liabilities arising under the Securities Act, in connection with the offer and sale of Oncocyte securities. The potential future payments Oncocyte could be required to make under these indemnification agreements will generally not be subject to any specified maximum amounts. Historically, Oncocyte has not been subject to any claims or demands for indemnification. Oncocyte also maintains various liability insurance policies that limit Oncocyte’s financial exposure. As a result, Oncocyte management believes that the fair value of these indemnification agreements is minimal. Accordingly, Oncocyte has not recorded any liabilities for these agreements as of September 30, 2023 and December 31, 2022.
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8. 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 11,765shares of the Company’s Series A Preferred Stock, which shares of Series A Preferred Stock are convertible into a total of 384,477shares of common stock, at a conversion price of $30.60. The purchase price of each share of Series A Preferred Stock was $850, which included an original issue discount to the stated value of $1,000per 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 satisfaction of certain closing conditions, in two equal tranches of $5,000,000each 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 $4.9million from the Series A Preferred Stock issued from the first tranche. The second closing would occur, subject to the satisfaction 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 met the minimum bid price requirement of the Nasdaq continued listing requirements. Accordingly, the second closing did not occur and no additional ~~proceed~~sproceeds were received under the Securities Purchase Agreement. On August 8, 2023, the Company received a letter from Nasdaq indicating that the Company had regained compliance with the minimum bid price requirement of the Nasdaq continued listing requirements. ~~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. 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 20,000 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.

2834

~~ONCOCYTE CORPORATION~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

Shares of Series A Preferred Stock 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 are 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. On April 5, 2023, the Company redeemed 1,064 shares of the Series A Preferred Stock for approximately $1.1 million.

~~As of June 30, 2023, Oncocyte had~~ ~~4,818~~ 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 in the prior year since the second closing was not completed.
~~Common Stock~~
~~As of June 30, 2023 and December 31, 2022, Oncocyte has~~ ~~230,000,000~~ ~~shares of common stock,~~ no~~-par value, authorized. As of June 30, 2023 and December 31, 2022, Oncocyte had~~ ~~8,240,928~~ ~~and~~ ~~5,932,191~~ ~~shares of common stock issued and outstanding, respectively.~~
~~Common Stock Purchase Warrants~~
~~As of June 30, 2023, Oncocyte had an aggregate of~~ ~~819,767~~ ~~common stock purchase warrants issued and outstanding with exercise prices ranging from $30.60~~ ~~to $109.20~~ 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.
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~~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~~ ~~260,000~~ 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~~.
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~~In May 2022, the Company approved amendments to vesting conditions of~~ ~~61,875~~ ~~performance-based and~~ ~~12,500~~ ~~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 TheraSureTransplant Monitor) for one organ no later than December 31, 2022 and (ii)~~ 50% will vest on December 31, 2023 if DetermaIO or DetermaCNI (formerly TheraSure - CNI Monitor) submission for LCD is completed no later than December 31, 2022. Additional performance-based restricted stock unit (“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) one laboratory test product in the US; (ii) two laboratory test products in US, and (iii) three 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 $ 22.60
~~In July 2022, the Company approved amendments to vesting conditions of~~ ~~23,750~~ ~~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 DetermaCNI 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.
~~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, 2022 - 30 $ 80.78
Options exercised - - $ -
Options forfeited, cancelled and expired - (1 ) $ -
Balance at June 30, 2023 - 29 $ 80.58
Exercisable at June 30, 2023 29 $ 80.58
~~As of June 30, 2023,~~ ~~1,050,000~~ 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 RSUs. Oncocyte may also grant stock appreciation rights under the 2018 Incentive Plan.
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~~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, 2022 442 428 22 $ 59.23
RSUs vested - - (11 ) $ -
RSUs granted (10 ) - 5 $ -
Options granted (178 ) 178 - $ 7.72
Options forfeited/cancelled 150 (150 ) - $ -
RSUs forfeited/cancelled 2 - (1 ) $ -
Performance RSUs forfeited/cancelled 15 - (8 ) $ -
Balance at June 30, 2023 421 456 7 $ 38.33
Options exercisable at June 30, 2023 199 $ 89.54
Oncocyte recorded stock-based compensation expense in the following categories on the accompanying condensed consolidated statements of operations for the three and six months ended June 30, 2023 and 2022 (unaudited and in thousands):
~~Summary of Stock-based Compensation Expense~~
2023 2022 2023 2022
Three Months Ended Six Months Ended
June 30, June 30,
2023 2022 2023 2022
Cost of revenues $ 2 $ - $ 12 $ -
Research and development 309 201 632 381
Sales and marketing 62 - 139 29
General and administrative 461 1,283 867 2,463
Discontinuing operations - 748 18 1,369
Total stock-based compensation expense $ 834 $ 2,232 $ 1,668 $ 4,242
~~The assumptions that were used to calculate the grant date fair value of Oncocyte’s employee and non-employee stock option grants for the six months ended June 30, 2023 and 2022 were as follows:~~
~~Schedule of Assumptions Used to Calculate Fair Value of Stock Options~~
Six Months Ended
June 30,
2023 2022
Expected life (in years) 6.25 6.01
Risk-free interest rates 3.76 % 2.24 %
Volatility 105.99 % 106.98 %
Dividend yield 0 % 0 %
The determination of stock-based compensation is inherently uncertain and subjective and involves the application of valuation models and assumptions requiring the use of judgment. If Oncocyte had made different assumptions, its stock-based compensation expense and net loss for the three and six months ended June 30, 2023, and 2022 may have been significantly different.
~~Oncocyte does not recognize deferred income taxes for incentive stock option compensation expense and records a tax deduction only when a disqualified disposition has occurred.~~
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7. ~~Disaggregation of Revenues and Concentration Risk~~
~~The following table presents the percentage of consolidated revenues generated by unaffiliated customers that individually represent greater than ten percent of consolidated revenues:~~
~~Schedule of Consolidated Revenues Generated by Unaffiliated Customers~~
Three Months Ended Six Months Ended
June 30, June 30,
2023 2022 2023 2022
Pharma services - Company A 68 % -* 27 % -*
Pharma services - Company B -* -* 14 % -*
Discontinuing operations -* 89 % 38 % 82 %
* ~~Less than 10%~~
~~The following table presents the percentage of consolidated revenues by products or services classes:~~
~~Schedule of Consolidated Revenues Attributable to Products or Services~~
Three Months Ended Six Months Ended
June 30, June 30,
2023 2022 2023 2022
Pharma Services 94 % 11 % 62 % 18 %
DetermaRx™ 6 % 0 % 3 % 0 %
Discontinuing operations 0 % 89 % 35 % 82 %
Total 100 % 100 % 100 % 100 %
~~The following table presents the percentage of consolidated revenues attributable to geographical locations:~~
~~Schedule of Percentage of Consolidated Revenues Attributable to Geographical Locations~~
2023 2022 2023 2022
Three Months Ended Six Months Ended
June 30, June 30,
2023 2022 2023 2022
United States – Pharma Services 74 % 50 % 39 % 65 %
Outside of the United States – Pharma Services 20 % 2 % 23 % 5 %
DetermaRx™ 6 % 0 % 3 % 0 %
Discontinuing operations – Outside of the United States – Licensing 0 % 48 % 0 % 30 %
Discontinuing operations – United States – DetermaRx™ 0 % 0 % 35 % 0 %
Total 100 % 100 % 100 % 100 %
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8. ~~Income Taxes~~
~~The provision for income taxes for interim periods is determined using an estimated annual effective tax rate in accordance with ASC 740-270,~~ ~~Income Taxes, Interim Reporting~~. The effective tax rate may be subject to fluctuations during the year as new information is obtained, which may affect the assumptions used to estimate the annual effective tax rate, including factors such as valuation allowances against deferred tax assets, the recognition or de-recognition of tax benefits related to uncertain tax positions, if any, and changes in or the interpretation of tax laws in jurisdictions where Oncocyte conducts business.
~~Oncocyte did not record any provision or benefit for income taxes for the six months ended June 30, 2023 and 2022, as Oncocyte had a full valuation allowance for the periods presented.~~
A valuation allowance is provided when it is more likely than not that some portion of the deferred tax assets will not be realized. Oncocyte established a full valuation allowance for all periods presented due to the uncertainty of realizing future tax benefits from its net operating loss carry-forwards and other deferred tax assets.
9. ~~Right-of-use assets, machinery and equipment, net, and construction in progress~~
~~As of June 30, 2023 and December 31, 2022, right-of-use assets, machinery and equipment, net, and construction in progress were as follows (in thousands):~~
~~Schedule of Right-of-use Assets, Machinery and Equipment, Net, and Construction in Progress~~
June 30, 2023
(unaudited) December 31, 2022

Right-of-use assets ⁽¹⁾ 4,036 3,499
Machinery and equipment 8,644 9,408
Accumulated depreciation and amortization (5,310 ) (4,196 )
Right-of-use assets, machinery and equipment, net 7,370 8,711
Construction in progress 518 2,140
Right-of-use assets, machinery and equipment, net, and construction in progress 7,888 10,851
Right-of-use assets, machinery and equipment, net, and construction in progress from discontinuing operations - 211
Right-of-use assets, machinery and equipment, net, and construction in progress 7,888 11,062
~~(1)~~ ~~Oncocyte recorded certain right-of-use assets and liabilities for operating leases in accordance with ASC 842 (see Note 10).~~
~~Depreciation expense amounted to $435,000~~ ~~and $384,000~~ ~~for the three months ended June 30, 2023 and 2022, respectively, and $885,000~~ ~~and $671,000~~ ~~for the six months ended June 30, 2023 and 2022, respectively.~~
~~10.~~ ~~Commitments and Contingencies~~
~~Oncocyte has certain commitments other than discussed in Note 3.~~
~~Office Lease Agreement~~
~~On December 23, 2019, Oncocyte entered into an Office Lease Agreement (the “Irvine Lease”) of a building containing approximately~~ ~~26,800~~ square feet of rentable space located at 15 Cushing in Irvine, California (the “Premises”) that will serve as Oncocyte’s new principal executive and administrative offices and laboratory facility. Oncocyte completed the relocation of its offices to the Premises in January 2020 and subsequently constructed a laboratory at the Irvine facility to perform cancer diagnostic tests.
The Irvine Lease has an initial term of 89 calendar months (the “Term”), which commenced on June 1, 2020 (the “Commencement Date”). Oncocyte has an option to extend the Term for a period of five years (the “Extended Term”).
~~Oncocyte agreed to pay base monthly rent in the amount of $61,640~~ ~~during the first 12 months of the Term. Base monthly rent increases annually, over the base monthly rent then in effect, by~~ ~~3.5%. Oncocyte was entitled to an abatement of~~ 50% of the base monthly rent during the first ten calendar months of the Term. If the Irvine Lease is terminated based on the occurrence of an “event of default,” Oncocyte will be obligated to pay the abated rent to the lessor.
If Oncocyte exercises its option to extend the Term, the initial base monthly rent during the Extended Term will be the greater of the base monthly rent in effect during the last year of the Term or the prevailing market rate. The prevailing market rate will be determined based on annual rental rates per square foot for comparable space in the area where the Premises are located. If Oncocyte does not agree with the prevailing market rate proposed by the lessor, the rate may be determined through an appraisal process. The base monthly rent during the Extended Term shall be subject to the same annual rent adjustment as applicable for base monthly rent during the Term.
In addition to base monthly rent, Oncocyte agreed to pay in monthly installments (a) all costs and expenses, other than certain excluded expenses, incurred by the lessor in each calendar year in connection with operating, maintaining, repairing (including replacements if repairs are not feasible or would not be effective) and managing the Premises and the building in which the Premises are located (“Expenses”), and (b) all real estate taxes and assessments on the Premises and the building in which the Premises are located, all personal property taxes for property that is owned by lessor and used in connection with the operation, maintenance and repair of the Premises, and costs and fees incurred in connection with seeking reductions in such tax liabilities (“Taxes”). Subject to certain exceptions, Expenses shall not be increased by more than 4% annually on a cumulative, compounded basis.
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Oncocyte was entitled to an abatement of its obligations to pay Expenses and Taxes while constructing improvements to the Premises constituting “Tenant’s Work” under the Irvine Lease prior to the Commencement Date, except that Oncocyte was obligated to pay ~~43.7% of Expenses and Taxes during the period prior to the Commencement Date for its use of the second floor of the Premises, which was already built out as office space.~~
~~The lessor provided Oncocyte with a “Tenant Improvement Allowance” in the amount of $1.3~~ ~~million to pay for the plan, design, permitting, and construction of the improvements constituting Tenant’s Work. The lessor retained~~ ~~1.5% of the Tenant Improvement Allowance as an administrative fee as provided in the Irvine Lease. As of June 30, 2023, the lessor had provided $1.3~~ ~~million of the total Tenant Improvement Allowance.~~
~~Oncocyte has provided the lessor with a security deposit in the amount of $150,000~~ ~~and a letter of credit in the amount of $1.7~~ million. The lessor may apply the security deposit, in whole or in part, for the payment of rent and any other amount that Oncocyte is or becomes obligated to pay under the Irvine Lease but fails to pay when due and beyond any cure period. The lessor may draw on the letter of credit from time to time to pay any amount that is unpaid and due, or if the original issuing bank notifies the lessor that the letter of credit will not be renewed or extended for the period required under the Irvine Lease and Oncocyte fails to timely provide a replacement letter of credit, or an event of default under the Irvine Lease occurs and continues beyond the applicable cure period, or if certain insolvency or bankruptcy or insolvency with respect to Oncocyte occur. Oncocyte is required to restore any portion of the security deposit that is applied by the lessor to payments due under the Irvine Lease, and Oncocyte is required to restore the amount available under the letter of credit to the required amount if any portion of the letter of credit is drawn by the lessor. The Irvine Lease provides that 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 has the right to cancel the letter of credit at any time if it meets certain market capitalization and balance sheets thresholds; provided, in each case, that Oncocyte is not in then default under the Irvine Lease beyond any applicable notice and cure period and the lessor has not determined that an event exists that would lead to an event of default.
To obtain the letter of credit, Oncocyte has provided the issuing bank with a restricted cash deposit that the bank will hold to cover its obligation to pay any draws on the letter of credit by the lessor. The restricted cash may not be used for any other purpose.
~~On August 27, 2021, Oncocyte entered into a lease agreement to add an additional suite to its Nashville office space, containing approximately~~ ~~1,928~~ square feet of rentable space located at 2 International Plaza, Suite 103, Nashville TN. The term of the lease commences on October 1, 2021 and extends through April 9, 2024 and will serve as additional office space for Insight’s 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 six months ended June 30, 2023, for Oncocyte’s operating and financing leases (see Note 2).
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~~On December 31, 2019, in connection with Oncocyte’s purchase~~ of 25~~% of the outstanding equity of Razor,~~ Oncocyte entered into a Laboratory Services Agreement with Razor and Encore Clinical, Inc. (“Encore”), a former stockholder of Razor (the “Laboratory Agreement”). Under the Laboratory Agreement (which expired on September 29, 2021), 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 expired 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. The Laboratory Agreement terminated on March 31, 2023. Oncocyte determined that the Laboratory Agreement contains an embedded operating lease for the Brisbane Facility and Oncocyte allocated the aggregate payments to this lease component for purposes of calculating the net present value of the right-of-use asset and liability as of the inception of the Laboratory Agreement in accordance with ASC 842, as shown in the table below.
~~Financing lease~~
~~As of June 30, 2023, Oncocyte has one financing lease remaining through December 2023 for certain laboratory equipment with aggregate remaining payments of $62,000~~ ~~shown in the table below. Oncocyte’s lease obligations are collateralized by the equipment financed under the lease schedule.~~
~~Operating and Financing leases~~
~~The following table presents supplemental cash flow information related to operating and financing leases for the six months ended June 30, 2023 and 2022 (in thousands):~~
~~Schedule of Supplemental Cash Flow Information Related to Operating and Financing Lease~~
2023 2022
Six Months Ended
June 30,
2023 2022
Cash paid for amounts included in the measurement of financing lease liabilities:
Operating cash flows from operating leases $ 538 $ 564
Operating cash flows from financing leases $ 5 $ 12
Financing cash flows from financing leases $ 57 $
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The following table presents supplemental balance sheets information related to operating and financing leases as of June 30, 2023 and June 30, 2022 (in thousands, except lease term and discount rate):
~~Schedule of Supplemental Balance Sheet Information Related to Operating and Financing Leases~~
June 30, 2023 June 30, 2022
Operating lease
Right-of-use assets, net $ 1,855 $ 2,343

Right-of-use lease liabilities, current $ 677 $ 728
Right-of-use lease liabilities, noncurrent 2,398 3,075
Total operating lease liabilities $ 3,075 $ 3,803

Financing lease
Machinery and equipment $ 536 $ 537
Accumulated depreciation (500 ) (391 )
Machinery and equipment, net $ 36 $ 146
Current liabilities $ 60 $ 110
Noncurrent liabilities - 60
Total financing lease liabilities $ 60 $ 170

Weighted average remaining lease term
Operating lease 4.1 years 4.9 years
Financing lease 0.5 years 1.5 years

Weighted average discount rate
Operating lease 11.28 % 11.20 %
Financing lease 11.55 % 11.55 %
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~~Future minimum lease commitments are as follows (in thousands):~~
~~Schedule of Future Minimum Lease Commitments for Operating and Financing Leases~~
Operating Financing
Leases Leases
Year Ending December 31,
2023 $ 510 $ 62
2024 $ 903 $ -
2025 $ 869 $ -
2026 $ 899 $ -
2027 $ 695 $ -
Total minimum lease payments $ 3,876 $ 62
Less amounts representing interest $ (801 ) $ (2 )
Present value of net minimum lease payments $ 3,075 $ 60
~~Litigation – General~~
Oncocyte may be subject to various claims and contingencies in the ordinary course of its business, including those related to litigation, business transactions, employee-related matters, and other matters. When Oncocyte is aware of a claim or potential claim, it assesses the likelihood of any loss or exposure. If it is probable that a loss will result and the amount of the loss can be reasonably estimated, Oncocyte will record a liability for the loss. If the loss is not probable or the amount of the loss cannot be reasonably estimated, Oncocyte discloses the claim if the likelihood of a potential loss is reasonably possible and the amount involved could be material.
~~Tax Filings~~
Oncocyte tax filings are subject to audit by taxing authorities in jurisdictions where it conducts business. These audits may result in assessments of additional taxes that are subsequently resolved with the authorities or potentially through the courts. Management believes Oncocyte has adequately provided for any ultimate amounts that are likely to result from these audits; however, final assessments, if any, could be significantly different than the amounts recorded in the unaudited condensed consolidated interim financial statements.
~~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 June 30, 2023, Oncocyte accrued approximately $~~3.1~~ million in severance obligations for certain executive officers, in accordance with the severance benefit provisions of their respective employment and severance benefit agreements, primarily related to Oncocyte’s acquisition of Chronix in 2021.
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~~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 Razor Stock 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 Razor Stock Purchase Agreement. Oncocyte periodically enters into underwriting and securities sales agreements with broker-dealers in connection with the offer and sale of Oncocyte securities. The terms of those underwriting and securities sales agreements include indemnification provisions pursuant to which Oncocyte agrees to indemnify the broker-dealers from certain liabilities, including liabilities arising under the Securities Act, in connection with the offer and sale of Oncocyte securities. 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 June 30, 2023 and December 31, 2022.
~~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.~~
On April 12, 2023, Oncocyte announced a reduction in force involving approximately 20% of its workforce (the “April 2023 Reduction”), which management believes will extend Oncocyte’s cash runway into 2024. In connection with the April 2023 Reduction, we incurred approximately $~~0.3~~ ~~million related to employee severance and benefits costs during the second quarter of 2023.~~
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~~12.~~ ~~Related Party Transactions~~
~~Financing Transactions~~
~~On April 13, 2022, Oncocyte entered into the Securities Purchase Agreement with the Investors, including Broadwood~~and John Peter Gutfreund, a former 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)~~ ~~261,032~~ ~~shares of common stock, and (ii)~~ ~~300,187~~ ~~April 2022 Warrants to purchase up to~~ ~~150,093~~ ~~shares of common stock at an exercise price of $30.60~~ ~~per share. However, the total number of shares of common stock that Broadwood purchased in the Underwritten Offering was~~ ~~300,187, of which~~ ~~39,154~~ ~~existing shares were acquired by the underwriters in the open market and re-sold to Broadwood. Pura Vida acquired from us (i)~~ ~~249,204~~ ~~shares of common stock, and (ii)~~ ~~286,585~~ ~~April 2022 Warrants to purchase up to~~ ~~143,292~~ ~~shares of common stock. However, the total number of shares of common stock that Pura Vida purchased in the Underwritten Offering was~~ ~~286,585, of which~~ ~~37,380~~ ~~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)~~ ~~309,976~~ ~~shares of common stock, and (ii)~~ ~~356,472~~ ~~2022 Warrants to purchase up to~~ ~~178,236~~ 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 ~~356,472, of which~~ ~~46,496~~ ~~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.~~
On April 3, 2023, Oncocyte entered into a securities purchase agreement (the “2023 Securities Purchase Agreement”) with certain investors, including Broadwood, Pura Vida and entities affiliated with AWM, and certain individuals, including our Chairman Andrew Arno and former director John Peter Gutfreund (and certain of their affiliated parties), which provides for the sale and issuance by the Company of an aggregate of ~~2,274,709~~ ~~shares of common stock at an offering price of:~~ (i) $6.03 to investors who are not considered to be “insiders” of the Company pursuant to Nasdaq Listing Rules (“Insiders”), which amount reflects the average closing price of the Common Stock on Nasdaq during the five trading day period immediately prior to pricing, and (ii) $7.08 to Insiders, which amount reflects the final closing price of the Common Stock on Nasdaq on the last trading day immediately prior to pricing (the “2023 Registered Direct Offering”)~~. Broadwood purchased~~ ~~1,341,381~~ ~~shares of common stock for $8,093,361.84, Pura Vida purchased~~ ~~33,150~~ ~~shares of common stock for $200,013.84~~ ~~and entities affiliated with AVM purchased~~ ~~472,354~~ ~~shares of common stock for $2,849,999.92. Mr. Arno and his affiliated parties purchased~~ ~~21,162~~ ~~shares of common stock for $150,000.51, and Mr. Gutfreund and his affiliated parties purchased~~ ~~85,250~~ ~~for $604,252.00~~.
~~On April 5, 2023, Oncocyte redeemed all of the~~ ~~588.23529~~ ~~shares of Series A Preferred Stock held by Mr. Gutfreund for $618,672.34. Mr. Gutfreund is no longer a related party as of June 23, 2023.~~
~~Company Employee(s)~~
As of June 30, 2023, the Company employed the son of Andrew Arno, Chairman of the Board as its Senior Manager, Investor Relations, Corporate Planning & Development. As of June 30, 2023, the total compensation paid by the Company to Mr. Arno’s son since January 1, 2022 is approximately $~~0.2~~ ~~million. Mr. Arno’s son is no longer an employee of the Company as of July 28, 2023.~~
~~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 June 30, 2023, Oncocyte had satisfied the Tranche 2 Milestone and was eligible to borrow the $2 ~~million Tranche 2 funds. However, Oncocyte has not yet borrowed any funds under Tranche 2.~~
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Payments of interest only on the principal balance were due monthly from the draw date through March 31, 2020, followed by 24 monthly payments of principal and interest, but the Bank has agreed to a deferral of principal payments, as discussed below. The outstanding principal balance of the loan will bear interest at a stated floating annual interest equal to the greater of (a) the prime rate or (b) 5~~% per annum. During August 2022, period in which the loan was paid off, 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. The Loan Deferral was accounted for as a modification of debt in accordance with ASC 470-50,~~ ~~Debt – Modifications and Extinguishments~~~~, thus there was no gain or loss recognized on the transaction.~~
~~At maturity of the loan, Oncocyte 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 June 30, 2023, 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 ~~412~~ ~~shares of Oncocyte common stock at an exercise price of $97.00~~ ~~per share, through February 21, 2027. On March 23, 2017, the Bank was issued warrants to purchase an additional~~ ~~366~~ ~~shares at an exercise price of $109.20~~ 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, inter-dealer 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 ~~4,928~~ ~~shares of Oncocyte common stock at the initial “Warrant Price” of $33.80~~ 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 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 June 30, 2023, Oncocyte has not borrowed any funds under Tranche 2.
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~~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 Torrent^TM ~~Genexus~~^TM ~~Integrated Sequencer and LTC’s Ion Torrent~~^TM ~~Genexus~~^TM~~Purification System (“Genexus system”) in order to obtain~~ ~~in vitro~~ diagnostic (“IVD”) regulatory approval. On February 7, 2023, Oncocyte entered into a Termination Agreement (the “Termination Agreement”) with LTC, pursuant to which the parties terminated the LTC Agreement.
~~As of June 30, 2023, Oncocyte was responsible for reimbursing LTC for $749,000~~ ~~of certain development costs under the terms of the LTC Agreement.~~
~~15.~~ ~~Equity 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~~ ~~384,477~~ ~~shares of our common stock, at a conversion price of $30.60. 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 satisfaction 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 satisfaction 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 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 met the minimum bid price requirement of the Nasdaq continued listing requirements. Accordingly, the second closing did not occur and no additional proceeds were received under the Securities Purchase Agreement. On August 8, 2023, the Company received a letter from Nasdaq indicating that the Company had regained compliance with the minimum bid price requirement of the Nasdaq continued listing requirements.
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~~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. 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 20,000 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 SEC 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.

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~~ONCOCYTE CORPORATION~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~
~~As part of the registered direct offering in April 2023, the Company used approximately $1.1~~ ~~million of the net proceeds to immediately redeem an aggregate of~~ ~~1,064~~ ~~shares of its Series A Preferred Stock and may thereafter elect to redeem additional shares.~~
The Series A Preferred Stock dividend for all issued and outstanding shares is set at6 6%% per annum per share. As of ~~June~~September 30, 2023, the Company elected to accrete dividends of $~~321,000~~399,000, net of the April 2023 redemption, with respect to shares of Series A Preferred Stock.

As of ~~June~~September 30, 2023 and December 31, 2022, Oncocyte had4,818 and5,882, shares issued and ~~outstanding.~~outstanding, respectively. The future right or obligation associated with the Series A Preferred Stock to be issued in the second closing was written off in the prior year since the second closing was not ~~received as of June 30, 2023.~~completed.

Common Stock
As of September 30, 2023 and December 31, 2022, Oncocyte has 230,000,000 shares of common stock, no-par value, authorized. As of September 30, 2023 and December 31, 2022, Oncocyte had8,260,762 and 5,932,191 shares of common stock issued and outstanding, respectively.
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 of1,313,320 shares of common stock and 1,313,320 April 2022 Warrants to purchase up to 656,660 shares of common stock. Each share of common stock and the accompanying April 2022 Warrant was sold at a combined offering price of $26.65, representing an offering price of $26.45per share of common stock and $0.20 per accompanying April 2022 Warrant, before underwriting discounts and commissions.
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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 196,998 shares of common stock and 196,998 April 2022 Warrants to purchase98,499 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 $24.85 per share, and April 2022 Warrants at a price of $0.20 per April 2022 Warrant. On April 14, 2022, the Underwriters exercised their option to purchase the 196,998 April 2022 Warrants pursuant to the over-allotment option but did not exercise their option to purchase the additional 196,998 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. Refer to Note 11 for additional information.

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 SEC 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.

~~Registered Direct~~April 2023 Offering

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, 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 2,278,121shares of its common stock at an offering price of $7.08 per share to board members and $6.03 per share to the other investors participating in the ~~offering.~~April 2023 Offering. The ~~offering~~April 2023 Offering was intended to be priced at-the-market for purposes of complying with applicable Nasdaq Listing Rules. The Company issued an aggregate of 2,274,709 shares of common stock from this offering, as further discussed in Note 11. 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 Preferred Stock and may thereafter elect to redeem additional shares.

Common Stock Purchase Warrants
As of September 30, 2023, Oncocyte had an aggregate of 819,767 common stock purchase warrants issued and outstanding with exercise prices ranging from $30.60 to $109.20 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 (see Note 6) 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. All of the outstanding warrants meet the equity classification criteria and have been classified as equity, refer to Note 2 for additional information.
9. Stock-Based Compensation
Equity Incentive Plans
Oncocyte had a 2010 Stock Option Plan (the “2010 Plan”) under which 260,000 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.
4336

~~16.~~As of September 30, 2023, ~~Assets Held~~1,050,000 shares of common stock were reserved under the 2018 Incentive Plan for ~~Sale~~the grant of stock options or the sale of restricted stock or for the settlement of RSUs. Oncocyte may also grant stock appreciation rights under the 2018 Incentive Plan. As of September 30, 2023, 387,000 shares are available for grant under the 2018 Incentive Plan.
2022 Equity Awards
During the year ended December 31, 2022, the Company awarded executive share-based payment awards under the 2018 Plan to certain executive officers and ~~Discontinued Operations~~employees with time-based, market-based and performance-based vesting conditions (“2022 equity awards”).
The fair value of the RSU 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 RSU 2022 equity awards with market-based and time-based vesting conditions were 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.
2022 Modifications
In May 2022, the Company approved amendments to vesting conditions of 61,875 performance-based and 12,500 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 TheraSure 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 TheraSure - 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) one laboratory test product in the US; (ii) two laboratory test products in US, and (iii) three 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, with the incremental increase in fair value representing additional stock-based compensation expense. The following assumptions were used in calculating the fair value of the market-based options on the date of modification: estimated risk-free interest rate of 2.72 percent, term of 2.6 years, expected volatility of 95.0 percent and expected dividend yield of 0 percent.
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In July 2022, the Company approved amendments to vesting conditions of 23,750 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 DetermaCNI 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.
2010 Plan Activity
A summary of Oncocyte’s 2010 Plan activity and related information follows:
Summary of Stock Option Activity
Shares Number Weighted
Available of Options Average
Options for Grant Outstanding Exercise Price
(In thousands, except weighted average exercise price)
Balance at December 31, 2022 - 30 $ 80.78
Exercised - - $ -
Cancelled - (20 ) $ -
Balance at September 30, 2023 - 10 $ 73.22
Exercisable at September 30, 2023 10 $ 73.22
2018 Plan Activity
A summary of Oncocyte’s 2018 Incentive Plan activity and related information follows:
Summary of Stock Option Activity

Shares
Available
for Grant

Number
of Options
Outstanding

Number
of RSUs
Outstanding

Weighted
Average
Exercise Price

(In thousands, except weighted average exercise price)
Balance at December 31, 2022 442 428 22 $ 59.23
RSUs vested - - (14 ) $ -
RSUs granted (9 ) - 5 $ -
Options granted (298 ) 298 - $ 5.96
Options forfeited/expired 235 (235 ) - $ -
RSUs forfeited/expired 2 - (1 ) $ -
Performance RSUs forfeited/expired 15 - (7 ) $ -
Balance at September 30, 2023 387 491 5 $ 27.31
Options exercisable at September 30, 2023 140 $ 98.80
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During the nine months ended September 30, 2023, the Company granted 178,000 employee and non-employee stock option awards. The assumptions used to calculate the Black-Scholes grant date fair value of such awards were as follows:
Schedule of Assumptions Used to Calculate Fair Value of Stock Options
Nine Months Ended
September 30,
2023 2022
Expected life (in years) 6.25 5.98
Risk-free interest rates 3.76 % 2.29 %
Volatility 105.99 % 106.85 %
Dividend yield 0 % 0 %
In August 2023, the Company awarded 120,000 stock option grants with market-based and time-based vesting conditions to certain executives. The fair value of such awards 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 executives through December 31, 2025. These awards vest only to the extent that the market-based conditions are satisfied as specified in the vesting conditions. 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 4.81 percent; term of 6.19 years; expected volatility of 91.0 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. Based on the market-based conditions, the grant date fair values of these awards ranged from $1.09 to $1.74, amounting to a total fair value of approximately $156,000.
Oncocyte recorded stock-based compensation expense in the following categories on the accompanying consolidated statements of operations:
Summary of Stock-based Compensation Expense
2023 2022 2023 2022
Three Months Ended Nine Months Ended
September 30, September 30,
2023 2022 2023 2022
(In thousands)
Cost of revenues $ (2 ) $ 94 $ 10 $ 239
Research and development 294 521 931 1,416
Sales and marketing 64 942 216 1,681
General and administrative 252 1,624 1,119 4,087
Total $ 608 $ 3,181 $ 2,276 $ 7,423
In August 2023, the Company issued 9,091 restricted stock awards in connection with a consulting service arrangement for a total fair value of $36,000.
The determination of stock-based compensation is inherently uncertain and subjective and involves the application of valuation models and assumptions requiring the use of judgment. If Oncocyte had made different assumptions, its stock-based compensation expense and net loss for the three and nine months ended September 30, 2023, and 2022 may have been significantly different. Refer to Note 2 for additional information.
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.
10. Income Taxes

The provision for income taxes for interim periods is determined using an estimated annual effective tax rate in accordance with ASC 740-270, Income Taxes, Interim Reporting. The effective tax rate may be subject to fluctuations during the year as new information is obtained, which may affect the assumptions used to estimate the annual effective tax rate, including factors such as valuation allowances against deferred tax assets, the recognition or de-recognition of tax benefits related to uncertain tax positions, if any, and changes in or the interpretation of tax laws in jurisdictions where Oncocyte conducts business.
39
Oncocyte did not record any provision or benefit for income taxes for the nine months ended September 30, 2023 and 2022, as Oncocyte had a full valuation allowance for the periods presented.
A valuation allowance is provided when it is more likely than not that some portion of the deferred tax assets will not be realized. Oncocyte established a full valuation allowance for all periods presented due to the uncertainty of realizing future tax benefits from its net operating loss carry-forwards and other deferred tax assets.
11. Related Party Transactions
Financing Transactions
On April 13, 2022, Oncocyte entered into the Securities Purchase Agreement with the Investors, including Broadwood and John Peter Gutfreund, a former 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 8 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) 261,032 shares of common stock, and (ii) 300,187 April 2022 Warrants to purchase up to 150,093 shares of common stock at an exercise price of $30.60 per share. However, the total number of shares of common stock that Broadwood purchased in the Underwritten Offering was 300,187, of which 39,154 existing shares were acquired by the underwriters in the open market and re-sold to Broadwood. Pura Vida acquired from us (i) 249,204 shares of common stock, and (ii) 286,585 April 2022 Warrants to purchase up to 143,292 shares of common stock. However, the total number of shares of common stock that Pura Vida purchased in the Underwritten Offering was 286,585, of which 37,380 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) 309,976 shares of common stock, and (ii) 356,472 2022 Warrants to purchase up to 178,236 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 356,472, of which 46,496 existing shares were acquired by the underwriters in the open market and re-sold to Halle Special Situations Fund LLC. See Note 8 for additional information about the Underwritten Offering.
On April 3, 2023, Oncocyte entered into a securities purchase agreement (the “2023 Securities Purchase Agreement”) with certain investors, including Broadwood, Pura Vida and entities affiliated with AWM, and certain individuals, including our Chairman Andrew Arno and former director John Peter Gutfreund (and certain of their affiliated parties), which provides for the sale and issuance by the Company of an aggregate of 2,274,709 shares of common stock at an offering price of: (i) $6.03 to investors who are not considered to be “insiders” of the Company pursuant to Nasdaq Listing Rules (“Insiders”), which amount reflects the average closing price of the Common Stock on Nasdaq during the five trading day period immediately prior to pricing, and (ii) $7.08 to Insiders, which amount reflects the final closing price of the Common Stock on Nasdaq on the last trading day immediately prior to pricing (the “2023 Registered Direct Offering”). Broadwood purchased 1,341,381 shares of common stock for $8,093,361.84, Pura Vida purchased 33,150 shares of common stock for $200,013.84 and entities affiliated with AVM purchased 472,354 shares of common stock for $2,849,999.92. Mr. Arno and his affiliated parties purchased 21,162 shares of common stock for $150,000.51, and Mr. Gutfreund and his affiliated parties purchased 85,250 for $604,252.00.
On April 5, 2023, Oncocyte redeemed all of the 588.23529 shares of Series A Preferred Stock held by Mr. Gutfreund for $618,672.34. Mr. Gutfreund is no longer a related party as of June 23, 2023.
40
Company Employee
The Company previously employed the son of Andrew Arno, Chairman of the Board as its Senior Manager, Investor Relations, Corporate Planning & Development. The total compensation paid by the Company to Mr. Arno’s son since January 1, 2022 is approximately $200,000. Mr. Arno’s son is no longer an employee of the Company as of July 28, 2023.
12. 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 and Oncocyte’s DetermaIO assay for use with LTC’s Ion Torrent^TMGenexus^TM Integrated Sequencer and LTC’s Ion Torrent^TM Genexus^TMPurification System (“Genexus system”) in order to obtain in vitro diagnostic regulatory approval. On February 7, 2023, Oncocyte entered into a Termination Agreement with LTC, pursuant to which the parties terminated the LTC Agreement. As of the termination date, Oncocyte was responsible for reimbursing LTC for $749,000 of certain development costs under the terms of the LTC Agreement, which have been fully paid.
13. Discontinued Operations of Razor ~~Disposal~~

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. On February 16, 2023, Oncocyte completed the Razor Sale Transaction. 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.

In addition to the transfer of 70% of the equity interests of Razor, the Razor Stock Purchase Agreement provided that Dragon would purchase furniture, fixtures, and equipment from the Company for a cash consideration of $115,660. Upon the Razor Closing, the Company deconsolidated the assets and liabilities of Razor as control of Razor has transferred to Dragon.

The Company recorded the final adjustment related to the disposal, including final working capital adjustments, and recognized a loss of $1.3 million during the first quarter of 2023. Including the impairment losses we recognized as of December 31, 2022 related to this transaction, we recorded an overall loss of $27.2 million. The operating results for Razor have been recorded in discontinued operations of the accompanying ~~unaudited condensed~~ consolidated statements of operations for all periods presented, and we have reclassified their assets and liabilities as ~~held for sale for the year ended December 31, 2022.~~
~~Laboratory equipment sold and held for sale~~
~~On January 31, 2023, the Company entered into an agreement to sell laboratory equipment for $0.2~~ million. As of June 30, 2023, the Company classified the equipment not yet sold as held for sale in current assets in the unaudited condensed consolidated balance sheet, as all the criteria of ASC subtopic 360-10, Property, Plant, and Equipment (“ASC 360-10”) have been met and the transaction was qualified as assets held for sale. The balance included in current assets held for sale related to this transaction was $~~0.2~~ ~~million.~~
~~In March 2023, the Company entered into an agreement to auction equipment for $0.1~~ ~~million net proceeds. The auction was finalized on March 21, 2023, and the Company recorded a loss of $0.3~~ ~~million which is included in the loss on disposal and held-for-sale assets, on the unaudited condensed consolidated statement of operations.~~
~~On March 31, 2023, the Company entered into an agreement to sell laboratory equipment for $0.2~~ million. As a result, the Company classified the equipment as held for sale as current assets, in the unaudited condensed consolidated balance sheet, as all the criteria of ASC subtopic 360-10, Property, Plant, and Equipment (“ASC 360-10”) have been met and the transaction was qualified as assets held for sale. This equipment was written down to its fair value, less cost to sell, to $~~0.2~~ ~~million in the unaudited condensed consolidated balance sheet. As a result of the expected sale, the Company recorded an impairment loss and loss on disposal of $1.0~~ ~~million on held-for-sale assets, in the unaudited condensed consolidated statement of operations.~~
~~The Company classified its results of operations as~~ discontinued operations ~~for all periods presented~~ in the accompanying ~~unaudited condensed consolidated statements of operations.~~balance sheets. We have retrospectively adjusted the amounts reported for the period ended ~~June~~September 30, 2022, in the following table to give effect to such reporting of discontinued operations. For the period ended ~~June~~September 30, 2023, discontinued operations reflect operating results of Razor up to the closing of the sale.

The Company’s ~~unaudited condensed~~ consolidated balance sheets and consolidated statements of operations report discontinued operations separate from continuing operations. Our ~~unaudited condensed~~ consolidated statements of comprehensive loss, statements of shareholders’ 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.

4441

~~ONCOCYTE CORPORATION~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

The following table represents the results of the discontinued ~~operation~~operations of ~~Razor (in thousands):~~Razor:

Schedule of Discontinued Operations
2023 2022 2023 2022
Three Months Ended Nine Months Ended
Three Months Ended Six Months Ended September 30, September 30,
June 30, June 30, 2023 2022 2023 2022
2023 2022 2023 2022 (In thousands)
Net revenue $ - $ 1,830 $ 421 $ 2,874 $ - $ 950 $ 421 $ 3,824

Cost of revenues - 2,175 507 3,999 - 1,855 507 5,854
Research and development - 3,130 702 6,251 - 2,949 702 9,200
Sales and marketing - 3,395 498 6,366 - 3,600 498 9,966
General and administrative - 66 329 72 - 61 329 133
Loss from impairment of held for sale assets - - 1,311 - - - 1,311 -
Net loss from discontinued operations $ - $ (6,936 ) $ (2,926 ) $ (13,814 ) $ - $ (7,515 ) $ (2,926 ) $ (21,329 )

The following table represents the carrying amounts of the ~~held for sale related assets and liabilities as of June 30, 2023 and carrying amounts of the held for sale related~~ assets and liabilities of the discontinued operations as of ~~December 31, 2022 (in thousands):~~Razor:
Schedule of Assets and Liabilities ~~of Disposal Group Held for Sale~~Discontinued Operations
June 30, December 31, September 30, December 31,
2023 2022 2023 2022
(In thousands)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ - $ 1,510 $ - $ 1,510
Prepaid expenses and other current assets - 346 - 346
Machinery and equipment, net, and construction in progress - 211 - 211
Intangible assets, net - 25,920 - 25,920
Impairment of held for sale assets - (25,866 ) - (25,866 )
TOTAL ASSETS $ - $ 2,121 $ - $ 2,121

LIABILITIES
LIABILITIES AND SHAREHOLDERS’ EQUITY
Accounts payable $ 135 $ 492 $ 90 $ 492
Accrued compensation - 248 - 248
Accrued expenses and other current liabilities - 1,265 - 1,265
Total current liabilities 135 2,005 90 2,005

TOTAL LIABILITIES $
135
$ 2,005 $ 90 $ 2,005

The following table summarizes cash used related to ~~Razor as~~the discontinued operations of ~~and for the six months ended June 30, 2023 and 2022 (in thousands):~~Razor:

2023 2022
Nine Months Ended
Six Months Ended September 30,
June 30, 2023 2022
2023 2022 (In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash used in operating activities $ (4,357 ) $ (10,549 ) $ (4,357 ) $ (15,744 )

CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash used in investing activities $ - $ (96 ) $ - $ (96 )

~~17.~~ ~~Subsequent Events~~
~~Reverse Stock Split~~
~~On July 24, 2023, the Company implemented a~~ ~~1-for-20 reverse stock split~~ of the outstanding shares of its common stock. The par value per share and the authorized number of shares of common stock and preferred stock were not adjusted as a result of the reverse stock split. All common stock share and per-share amounts for all periods presented in these condensed financial statements have been adjusted to reflect the reverse stock split. The number of authorized shares of common stock remains at ~~230~~ ~~million shares.~~

4542

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The matters addressed in this Item 2 that are not historical information constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, including statements about any of the following: any projections of earnings, revenue, cash, effective tax rate, use of net operating losses, or any other financial items; the plans, strategies and objectives of management for future operations or prospects for achieving such plans, and any statements of assumptions underlying any of the foregoing. Any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words “believes,” “anticipates,” “plans,” “expects,” “seeks,” “estimates,” and similar expressions are intended to identify forward-looking statements. While Oncocyte may elect to update forward-looking statements in the future, it specifically disclaims any obligation to do so, even if the Oncocyte estimates change and readers should not rely on those forward-looking statements as representing Oncocyte views as of any date subsequent to the date of the filing of this Report. Although we believe that the expectations reflected in these forward-looking statements are reasonable, such statements are inherently subject to risks and Oncocyte can give no assurances that its expectations will prove to be correct. Actual results could differ materially from those described in this report because of numerous factors, many of which are beyond the control of Oncocyte. A number of important factors could cause the results of the company to differ materially from those indicated by such forward-looking statements, including those detailed under the heading “Risk Factors” in our Form 10-K for the year ended December 31, 2022, and our other reports filed with the SEC from time to time.

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

Recent Developments

Reverse Stock Split

At a special meeting of our shareholders, held on July 24, 2023, our shareholders approved a proposal granting the Company’s board of directors the authority to exercise its discretion to amend the Articles of Incorporation of the Company, as currently in effect, to effect a reverse stock split of the outstanding shares of the Company’s common stock at any time within one year after the date such shareholder approval was obtained at the special meeting and at any of certain specified reverse split ratios that were approved by the shareholders of the Company in connection therewith. On July 24, 2023, our board of directors approved the reverse stock split at a ratio of 1-for-20, and on that date, we filed a Certificate of Amendment of Articles of Incorporation with the Secretary State of the State of California to effect the reverse stock split.

Unless otherwise noted, all share and per share amounts set forth in this Report have been adjusted to reflect the impact of the reverse stock split.

~~Critical Accounting Policies and Estimates~~Irvine Office Sublease Agreement

~~This Management’s Discussion~~On August 8, 2023, Oncocyte and ~~Analysis~~Subtenant entered into the Sublease Agreement, which subsequently became effective as of ~~Financial Condition~~September 14, 2023, upon the execution and ~~Results of Operations discusses~~delivery by the Company, Subtenant, and ~~analyzes data in our unaudited condensed consolidated interim financial statements, which we have prepared in accordance with U.S. generally accepted accounting principles. Preparation~~Landlord, of the ~~financial statements requires management~~Consent Agreement, under which Landlord consented to ~~make estimates~~the Sublease Agreement, on the terms and ~~assumptions that affect~~subject to the ~~reported amounts of assets, liabilities, revenue~~conditions set forth therein. The Sublease Agreement is subject and ~~expenses, and related disclosure of contingent assets and liabilities. Management bases its estimates on historical experience and on various other assumptions that it believes~~subordinate to ~~be reasonable under~~ the ~~circumstances, the results of which form the basis for making judgments~~Irvine Lease. For additional information about the carrying values of assets and liabilities that are not readily apparent from other sources. Senior management has discussed the development, selection and disclosure of these estimates with the Audit Committee of our Board of Directors. Actual conditions may differ from our assumptions and actual results may differ from our estimates.
An accounting policy is deemed critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, if different estimates reasonably could have been used, or if changes in the estimate are reasonably likely to occur, that could materially impact the financial statements. Management believes that there have been no significant changes during the six months ended June 30, 2023 to the matters that we disclosed as our critical accounting policies and estimates in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2022, except as disclosed inSublease Agreement, see Note 27 to our ~~unaudited condensed~~ consolidated ~~interim~~ financial statements included elsewhere in this Report.
For a summary of our critical accounting policies and estimates, refer to Management’s Discussion and Analysis section of our Annual Report on Form 10-K for the year ended December 31, 2022, which we filed with the SEC. There have been no material changes to our critical accounting policies and estimates during the six months ended June 30, 2023.

4643

Results of Operations

~~Operating~~ Summary ~~for the Three and Six Months ended June 30, 2023 and 2022 (amounts in thousands, except percentage changes)~~Results of Operations
Three Months Ended Six Months Ended
June 30, June 30,
2023 2022
$
Change
% Change 2023 2022
$
Change
% Change
Revenues 463 237 226 95 % 760 617 143 23 %
Cost of revenues and amortization of acquired intangibles 191 206 (15 ) -7 % 478 339 139 41 %
Research and development expenses 2,435 2,444 (9 ) 0 % 4,562 4,451 111 2 %
Sales and marketing expenses 805 127 678 534 % 1,500 393 1,107 282 %
General and administrative expenses 3,531 5,445 (1,914 ) -35 % 6,943 11,092 (4,149 ) -37 %
Change in fair value of contingent consideration 1,795 (6,359 ) 8,154 -128 % (16,512 ) (11,015 ) (5,497 ) 50 %
Impairment loss from intangible assets - - - n/a 4,950 - 4,950 100 %
Loss on disposal and held for sale assets - - - n/a 1,283 - 1,283 100 %
Loss from operations (8,294 ) (1,626 ) (6,668 ) 410 % (2,444 ) (4,643 ) 2,150 -47 %
Total other income (expense) (39 ) 262 (301 ) -115 % 70 (134 ) 204 -152 %
Loss before income taxes (8,333 ) (1,364 ) (6,969 ) 511 % (2,374 ) (4,777 ) 2,403 -50 %
Loss from continuing operations (8,333 ) (1,364 ) (6,969 ) 511 % (2,374 ) (4,777 ) 2,403 -50 %
Loss from discontinued operations - (6,936 ) 6,936 -100 % (2,926 ) (13,814 ) 10,888 -79 %
Net Loss (8,333 ) (8,300 ) (33 ) 0 % (5,300 ) (18,591 ) 13,291 -71 %
Three Months Ended Nine Months Ended
September 30, September 30,
2023 2022 $ Change % Change 2023 2022 $ Change % Change
(In thousands, except percentage change values)
Net revenue $ 429 $ 67 $ 362 540 % $ 1,189 $ 684 $ 505 74 %
Cost of revenues 159 314 (155 ) -49 % 593 602 (9 ) -1 %
Cost of revenues – amortization of acquired intangibles 22 22 - 0 % 66 73 (7 ) -10 %
Research and development 2,185 1,472 713 48 % 6,747 5,923 824 14 %
Sales and marketing 713 405 308 76 % 2,213 798 1,415 177 %
General and administrative 2,487 5,702 (3,215 ) -56 % 9,430 16,794 (7,364 ) -44 %
Change in fair value of contingent consideration (435 ) (6,142 ) 5,707 -93 % (16,947 ) (17,157 ) 210 -1 %
Impairment losses 1,811 - 1,811 - 6,761 - 6,761 100 %
Loss on disposal and held for sale assets - - - - 1,283 - 1,283 100 %
Loss from operations (6,513 ) (1,706 ) (4,807 ) 282 % (8,957 ) (6,349 ) (2,608 ) 41 %
Total other income (expenses) 24 (112 ) 136 -121 % 94 (246 ) 340 -138 %
Loss from continuing operations (6,489 ) (1,818 ) (4,671 ) 257 % (8,863 ) (6,595 ) (2,268 ) 34 %
Loss from discontinuing operations - (7,515 ) 7,515 -100 % (2,926 ) (21,329 ) 18,403 -86 %
Net loss $ (6,489 ) $ (9,333 ) $ 2,844 -30 % $ (11,789 ) $ (27,924 ) $ 16,135 -58 %

Results of Operations – Three Months Ended ~~June~~September 30, 2023 Compared with the Three Months Ended ~~June~~September 30, 2022

Revenues increased to $429,000 for the three months ended September 30, 2023, as compared to $67,000 in the comparable prior year, due to increased revenues in Pharma Services.
Loss from continuing operations ~~increased by $0.3 million to $0.5~~was $6.5 million for the three months ended ~~June~~September 30, 2023, ~~as compared to $0.2 million in the comparable prior year quarter, due to increased revenues in pharma services.~~
~~Loss before income taxes was $8.3~~and $1.8 million for the three months ended ~~June 30, 2023, and $1.4 million for the three months ended June~~September 30, 2022. ~~Net~~The net change ~~before income taxes~~ was comprised primarily of the changes in operating expenses and other income and expenses from continuing operations as follows:

● Pharma Services revenue increased by ~~$0.2 million~~$356,000 due to an increased number of contracts performed during the period.
● Cost of ~~revenue and amortization of acquired intangibles remained at $0.2 million,~~revenues decreased by $155,000, primarily related to labor and allocated overhead associated with performing our Pharma ~~Services, as well as~~Services.
● Cost of revenues - amortization of acquired intangibles remained at $22,000, and relates to noncash amortization of acquired intangible assets such as our customer relationship intangible assets acquired as part of the Insight merger.
● Research and development expenses ~~remained at $2.4 million,~~increased by $713,000, as the Company continues development of DetermaIO, VitaGraft (formerly TheraSure Transplant Monitor), and DetermaCNI (formerly TheraSure - CNI Monitor). See below for additional details.
● Sales and marketing expenses increased by ~~$0.7~~$308,000, primarily attributable to continued ramp in sales and marketing activities related to the transplant business, as well as support the commercialization efforts within oncology. See below for additional details.
● General and administrative expenses decreased by $3.2 million, primarily due to decreased stock-based compensation and personnel expenses. See below for additional details.
● Change in fair value of contingent consideration decreased by $5.7 million, from a gain of $6.1 million to ~~$0.8~~a gain of $435,000, due to changes in discount rates and revised estimates on the timing of possible future payouts. Change is driven in part by the Chronix Amendment which amended the earnout considerations eliminated the Chronix Milestone Payments, 15% Royalty Payments and Sale Payment obligations (see Note 3 to our consolidated financial statements included elsewhere in this Report). See below for additional details.
44
● Impairment loss increased due to a 2023 asset impairment charge of $1.8 million related to leasehold improvements (see Note 4 to our consolidated financial statements included elsewhere in this Report).
● Total other income (expense) increased by $136,000, from an expense of $112,000 in the three months ended September 30, 2022 to an income of $24,000 in the three months ended September 30, 2023, primarily due to interest income and the change in unrealized gain/loss on marketable equity securities. See below for additional details.
Results of Operations – Nine Months Ended September 30, 2023 Compared with the Nine months ended September 30, 2022
Revenues increased to $1.2 million for the nine months ended September 30, 2023, as compared to $684,000 in the comparable prior year, due to increased revenues in Pharma Services.
Loss from continuing operations was $8.9 million for the nine months ended September 30, 2023, and $6.6 million for the nine months ended September 30, 2022. The net change was comprised primarily of the changes in operating expenses and other income and expenses from continuing operations as follows:
● Pharma Services revenue increased by $453,000 due to an increased number of contracts performed during the period.
● Cost of revenues decreased by $9,000, primarily related to labor and allocated overhead associated with performing our Pharma Services.
● Cost of revenues - amortization of acquired intangibles decreased by $7,000, and relates to noncash amortization of acquired intangible assets such as our customer relationship intangible assets acquired as part of the Insight merger.
● Research and development expenses increased by $824,000, as the Company continues development of DetermaIO, VitaGraft (formerly TheraSure Transplant Monitor), and DetermaCNI (formerly TheraSure - CNI Monitor). See below for additional details.
● Sales and marketing expenses increased by $1.4 million, primarily attributable to continued ramp in sales and marketing activities related to the transplant business, as well as support the commercialization efforts within oncology. See below for additional details.
● General and administrative expenses decreased by ~~$1.9 million to $3.6~~$7.4 million, primarily due to decreased ~~consulting,~~stock-based compensation and personnel expenses. See below for additional details.
● Change in fair value of contingent ~~considerations~~consideration decreased by ~~$8.2 million,~~$210,000, from a gain of ~~$6.4~~$17.2 million to a ~~loss~~gain of ~~$1.8~~$16.9 million, due to changes in discount rates and revised estimates on the timing of possible future payouts. Change driven in part by the Chronix Amendment which amended the earnout considerations eliminated the Chronix Milestone Payments, 15% Royalty Payments and Sale Payment obligations (see Note 3)3 to our consolidated financial statements included elsewhere in this Report). See below for additional details.
● Impairment losses relate to two 2023 assets impairment charges, including $5.0 million to intangible assets (see Note 5 to our consolidated financial statements included elsewhere in this Report) and $1.8 million to leasehold improvements (see Note 4).
● ~~Other~~Total other income ~~decreased~~(expense) increased by ~~$0.3 million,~~$340,000, from ~~a gain~~an expense of ~~$0.3 million~~$246,000 in the nine months ended September 30, 2022, to ~~a loss~~an income of ~~$39,000,~~$94,000 in the nine months ended September 30, 2023, primarily due to interest income and the change in unrealized ~~gain and~~ gain/loss on marketable equity securities.
~~Results of Operations – Six Months Ended June 30, 2023 Compared with the Six Months Ended June 30, 2022~~
Revenues from continuing operations increased by $0.2 million to $0.8 million for the six months ended June 30, 2023, as compared to $0.6 million in the comparable prior year quarter, due to increased revenues in pharma services.
Loss before income taxes was $2.4 million for the six months ended June 30, 2023, and $4.8 million for the six months ended June 30, 2022. Net change before income taxes was comprised primarily of the changes in operating expenses and other income and expenses from continuing operations as follows:
● ~~Pharma Services revenue increased by $0.1 million due to an increased number of contracts performed during the period.~~
● Cost of revenue and amortization of acquired intangibles increased $0.1 million to $0.5 million primarily due to increased labor and allocated overhead associated with performing our Pharma Services, as well as noncash amortization of acquired intangible assets such as our customer relationship intangible assets acquired as part of the Insight merger.
● Research and development expenses increased by $0.1 million to $4.6 million, primarily due to continued development of DetermaIO, VitaGraft (formerly TheraSure Transplant Monitor), and DetermaCNI (formerly TheraSure - CNI Monitor).
● Sales and marketing expenses increased by $1.1 million to $1.5 million primarily attributable to continued ramp in sales and marketing activities related to the transplant business, as well as support the commercialization efforts within oncology.
● ~~General and administrative expenses decreased by $4.1 million to $7.0 million, primarily due to decreased consulting, and personnel expenses.~~
● Change in fair value of contingent considerations increased by $5.5 million, from a gain of $11.0 million to a gain of $16.5 million, due to changes in discount rates and revised estimates on the timing of possible future payouts. Change driven in part by the Chronix Amendment which amended the earnout considerations eliminated the Chronix Milestone Payments, 15% Royalty Payments and Sale Payment obligations (see Note 3).
● ~~Other income was $0.1 million~~ See below for ~~the six months ended June 30, 2023 compared to an expense of $0.1 million for the six months ended June 30, 2022, primarily due to unrealized gain and loss on marketable equity securities.~~additional details.

4745

Revenues ~~(amounts in thousands, except percentage changes)~~
As a result of the classification of the Company’s Razor’s operations to discontinued operations, all revenue derived from DetermaRx has been classified as discontinued operations. The remaining revenue for the periods presented below are derived from Pharma Services generated primarily by our wholly owned subsidiary, Insight.

The following table shows our ~~revenues for the six months ended June 30, 2023 and 2022 (in thousands, except percentage change values).~~service revenues:

Three Months Ended Six Months Ended
June 30, June 30,
2023 2022 $ Change % Change 2023 2022 $ Change % Change
Revenues from continuing operations $ 463 $ 237 226 95 % $ 760 $ 617 143 23 %
Revenues from discontinuing operations $ - $ 1,830 (1,830 ) -100 % $ 421 $ 2,874 (2,453 ) -85 %
Total $ 463 $ 2,067 $ (1,604 ) -78 % $ 1,181 $ 3,491 (2,310 ) -66 %
Three Months Ended Nine Months Ended
September 30, September 30,
2023 2022 $ Change % Change 2023 2022 $ Change % Change
(In thousands, except percentage change values)
Pharma Services $ 423 $ 67 $ 356 531 % $ 1,137 $ 684 $ 453 66 %
Laboratory developed test services 6 - 6 100 % 52 - 52 100 %
Total $ 429 $ 67 $ 362 540 % $ 1,189 $ 684 $ 505 74 %

Pharma Services are generally performed on a time and materials basis. Upon our completion of the service to the customer in accordance with the contract, we have the right to bill the customer for the agreed upon price (either on a per test or per deliverable basis) and recognize the Pharma Services revenue at that time, on an accrual basis.
Pharma Services revenues are generated under discrete agreements for particular customer projects that generally expire with the completion or termination of the customer’s project. Accordingly, different customers may account for greater or lesser portions of Pharma Services during different accounting periods, and Pharma Services revenues may exhibit a larger variance from accounting period to accounting period than other revenues such as DetermaRx testing revenues. Refer to Note 2 to our consolidated financial statements included elsewhere in this Report for additional revenue information.

Laboratory developed test services generally relate to payments received from sales prior to the Razor Sale Transaction (see Note 13 to our consolidated financial statements included elsewhere in this Report). Oncocyte generated revenue from performing DetermaRx tests on clinical samples through orders received from physicians, hospitals, and other healthcare providers. 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 has recognized revenue upon payment. Refer to Note 2 to our consolidated financial statements included elsewhere in this Report for additional revenue information.
Cost of ~~revenues~~Revenues

Cost of revenues generally consists of cost of materials; direct labor including payroll, payroll taxes, bonus, benefit and stock-based compensation; equipment and infrastructure expenses; clinical sample costs associated with performing Pharma Services; and amortization of acquired intangible assets. Infrastructure expenses include depreciation of laboratory equipment; allocated rent costs; and leasehold improvements.
Cost of revenues for Pharma Services varies depending on the nature, timing, and scope of customer projects.

48
Research and ~~development expenses~~Development Expenses

A summary of the main drivers of the change in research and development expenses ~~for the periods presented,~~ is as ~~follows~~ ~~(amounts in thousands, except percentage changes):~~follows:

Three Months Ended Six Months Ended Three Months Ended Nine Months Ended
June 30, June 30, September 30, September 30,
2023 2022 $ Change % Change 2023 2022 $ Change % Change 2023 2022 $ Change % Change 2023 2022 $ Change % Change
(In thousands, except percentage change values)
Personnel-related expenses $ 1,004 $ 904 $ 100 11 % $ 1,927 $ 1,719 $ 208 12 % $ 886 $ 719 $ 167 23 % $ 2,813 $ 2,438 $ 375 15 %
Depreciation 352 81 271 335 % 715 147 568 386 % 321 82 239 291 % 1,036 229 807 352 %
Share-based compensation 309 201 108 54 % 632 381 251 66 % 294 208 86 41 % 926 589 337 57 %
Laboratory supplies and expenses 333 362 (29 ) -8 % 575 715 (140 ) -20 % 380 304 76 25 % 955 1,019 (64 ) -6 %
Facilities and insurance 174 110 64 58 % 312 215 97 45 % 217 66 151 229 % 529 281 248 88 %
Professional fees, legal, and outside services 65 693 (628 ) -91 % 168 967 (799 ) -83 % 91 195 (104 ) -53 % 259 1,162 (903 ) -78 %
Severance 159 - 159 100 % 159 - 159 100 % (7 ) - (7 ) -100 % 152 - 152 100 %
Other 29 93 (65 ) -69 % 41 125 (84 ) -67 % 8 57 (49 ) -86 % 49 182 (133 ) -73 %
Clinical trials 10 - 10 100 % 33 182 (149 ) -82 % (5 ) (159 ) 154 -97 % 28 23 5 22 %
Total $ 2,435 $ 2,444 $ (9 ) 0 % $ 4,562 $ 4,451 $ 111 2 % $ 2,185 $ 1,472 $ 713 48 % $ 6,747 $ 5,923 $ 824 14 %
% of Net Revenue 526 % 1,031 % -505 % 600 % 721 % -121 % 509 % 2197 % -1688 % 567 % 866 % -298 %
46

We expect to continue to incur a significant amount of research and development expenses during the foreseeable future. As of ~~June~~September 30, 2023, we will continue development of DetermaIO and VitaGraft. Our future research and development efforts and expenses will also depend on the amount of capital that we are able to raise to finance those activities and whether we acquire rights to any new diagnostic tests. A portion of our costs for leasing and operating our CLIA laboratories in California and Tennessee, and in Germany with Chronix, will also be included in research and development expenses to the extent allocated to the development of our diagnostic tests.

We may commence clinical trials of DetermaIO if we develop that diagnostic test to the point where we determine that its use as a clinical diagnostic appears to be feasible.
49

Sales and ~~marketing expenses~~Marketing Expenses

A summary of the main drivers of the change in sales and marketing expenses ~~for the periods presented,~~ is as ~~follows~~ ~~(amounts in thousands, except percentage changes):~~follows:

Three Months Ended Six Months Ended Three Months Ended Nine Months Ended
June 30, June 30, September 30, September 30,
2023 2022 $ Change % Change 2023 2022 $ Change % Change 2023 2022 $ Change % Change 2023 2022 $ Change % Change
(In thousands, except percentage change values)
Personnel-related expenses $ 579 $ 49 $ 530 1082 % $ 1,008 $ 188 $ 820 436 % $ 486 $ 289 $ 197 68 % $ 1,494 $ 477 $ 1,017 213 %
Share-based compensation 62 - 62 100 % 139 29 110 379 % 64 39 25 64 % 203 68 135 199 %
Facilities and insurance 65 3 62 2067 % 116 9 107 1189 % 58 15 43 287 % 174 24 150 625 %
Professional fees, legal, and outside services 18 73 (55 ) -75 % 112 160 (48 ) -30 % 28 59 (31 ) -53 % 140 219 (79 ) -36 %
Marketing & Advertising 43 - 43 100 % 63 - 63 100 % 44 - 44 100 % 107 - 107 100 %
Other 38 2 36 1800 % 62 7 55 786 % 33 3 30 1000 % 95 10 85 850 %
Total $ 805 $ 127 $ 678 534 % $ 1,500 $ 393 $ 1,107 282 % $ 713 $ 405 $ 308 76 % $ 2,213 $ 798 $ 1,415 177 %
% of Net Revenue 174 % 54 % 120 % 197 % 64 % 133 % 166 % 604 % -438 % 186 % 117 % 69 %

We expect to continue to incur sales and marketing expenses during the foreseeable future as we complete product development and begin commercialization efforts for DetermaIO as a clinical test. Sales and marketing expenses will also increase if we successfully develop and begin commercializing DetermaCNI, and VitaGraft, or if we acquire and commercialize other diagnostic tests. Our commercialization efforts and expenses will also depend on the amount of capital that we are able to raise to finance commercialization of our tests. Our future expenditures on sales and marketing will also depend on the amount of revenue that those efforts are likely to generate. Because physicians are more likely to prescribe a test for their patients if the cost is covered by Medicare or health insurance, demand for our diagnostic and other tests and our expenditures on sales and marketing are likely to increase if our diagnostic or other tests qualify for reimbursement by Medicare or private health insurance companies.

General and ~~administrative expenses~~Administrative Expenses

A summary of the main drivers of the change in general and administrative expenses ~~for the periods presented,~~ is as ~~follows~~ ~~(amounts in thousands, except percentage changes):~~follows:

Three Months Ended Six Months Ended
June 30, June 30,
2023 2022 $ Change % Change 2023 2022 $ Change % Change

Personnel-related expenses and board fees $ 899 $ 2,220 $ (1,321 ) -60 % $ 2,090 $ 4,557 $ (2,467 ) -54 %
Professional fees, legal, and outside services 929 971 (42 ) -4 % 1,946 2,241 (295 ) -13 %
Facilities and insurance 546 641 (95 ) -15 % 1,219 1,339 (120 ) -9 %
Share-based compensation 460 1,283 (823 ) -64 % 867 2,463 (1,596 ) -65 %
Severance 481 124 357 288 % 481 124 357 288 %
Other 216 206 10 5 % 340 368 (28 ) -8 %
Total $ 3,531 $ 5,445 $ (1,914 ) -35 % $ 6,943 $ 11,092 $ (4,149 ) -37 %
% of Net Revenue 763 % 2,297 % -1,535 % 914 % 1,798 % -884 %
50
Three Months Ended Nine Months Ended
September 30, September 30,
2023 2022 $ Change % Change 2023 2022 $ Change % Change
(In thousands, except percentage change values)
Personnel-related expenses and board fees $ 756 $ 1,939 $ (1,183 ) -61 % $ 2,846 $ 6,496 $ (3,650 ) -56 %
Professional fees, legal, and outside services 774 642 132 21 % 2,720 2,883 (163 ) -6 %
Facilities and insurance 572 676 (104 ) -15 % 1,791 2,015 (224 ) -11 %
Share-based compensation 252 1,624 (1,372 ) -84 % 1,119 4,087 (2,968 ) -73 %
Severance 17 558 (541 ) -97 % 498 682 (184 ) -27 %
Other 116 263 (147 ) -56 % 456 631 (175 ) -28 %
Total $ 2,487 $ 5,702 $ (3,215 ) -56 % $ 9,430 $ 16,794 $ (7,364 ) -44 %
% of Net Revenue 580 % 8510 % -7931 % 793 % 2455 % -1662 %

Change in ~~fair value~~Fair Value of ~~contingent consideration~~Contingent Consideration

We will pay contingent consideration if various payment milestones are triggered under the merger agreements through which we acquired Insight and Chronix. See Note 3 to our ~~unaudited condensed~~ consolidated ~~interim~~ financial statements included elsewhere in this Report. Changes in the fair value of the contingent consideration will be based on our reassessment of the key assumptions underlying the determination of this liability as changes in circumstances and conditions occur from the Insight and Chronix acquisition dates to the reporting period being presented, with the subsequent ~~change~~changes in fair value recorded as part of our consolidated loss from operations for that period. ~~For the six months ended June 30, 2023, we recorded a gain of approximately $16.5 million related to the decrease in the fair value of contingent consideration primarily attributable to~~See above change ~~in discount rates~~explanations for additional information.
47
Other Income and ~~a revised estimate of the timing of the possible future payouts.~~Expenses

~~Other~~Total other income ~~and expenses, net~~
~~Other income and expenses, net,~~(expenses) is primarily comprised of interest income and ~~interest expenses, net,~~expense, and unrealized gains and losses on Lineage and AgeX marketable equity securities we ~~hold.~~hold (see Note 2 to our consolidated financial statements included elsewhere in this Report). Interest income is earned from money market funds we hold for capital preservation. In the prior year, interest expense was incurred under our loan payable to the Silicon Valley Bank, and under financing lease obligations. Interest ~~expense,~~income (expense), net, reflects the interest income earned from money market accounts in excess of interest expense incurred on our loans and financing ~~obligations in excess of interest income earned from money market accounts.~~obligations.

Income ~~taxes~~Taxes

Oncocyte did not record any provision or benefit for income taxes for the ~~six~~nine months ended ~~June~~September 30, 2023 and ~~June~~September 30, 2022, as Oncocyte had a full valuation allowance for the periods ~~presented.~~presented (see Note 10 to the consolidated financial statements included elsewhere in this Report).

A valuation allowance is provided when it is more likely than not that some portion of the deferred tax assets will not be realized. We established a full valuation allowance for all periods presented due to the uncertainty of realizing future tax benefits from our net operating loss carry-forwards and other deferred tax assets.

Liquidity and Capital Resources
Our foreseeable material cash requirements as of September 30, 2023, are recognized as liabilities or generally are otherwise described in Note 7, “Commitments and Contingencies,” to the consolidated financial statements included elsewhere in this Report. Cash requirements are generally derived from our operating and investing activities including expenditures for working capital, human capital, business development, investments in intellectual property, and business combinations. Our office lease obligations, net of sublease payments, and certain contingent obligations are further described in Note 3, “Business Combinations,” related to contingent consideration, and Note 7. Historically, we have not entered into any off-balance sheet arrangements.

Since formation, we have financed our operations primarily through the sale of our common stock, preferred stock and warrants. We have incurred operating losses and negative cash flows since inception and had an accumulated deficit of ~~$266.0~~$272.5 million at ~~June~~September 30, 2023. We expect to continue to incur operating losses and negative cash flows for the near future. Our expectation to generate operating losses and negative operating cash flows in the future and the need for additional funding to support our planned operations raise substantial doubt regarding our ability to continue as a going concern for a period of one year after the date that the financial statements are issued.

At ~~June~~September 30, 2023, we had ~~$17.4~~$13.8 million of cash and cash equivalents, and held shares of Lineage and AgeX common stock as marketable equity securities valued at ~~$0.5 million.~~$441,000. In 2022, we raised approximately $30,000 in net cash proceeds through sales of shares of our common stock through the ATM Offering. On June 1, 2022, Oncocyte received net proceeds of approximately $4.9 million from the Series A Preferred Stock issued from the first tranche of the Series A Preferred Stock Offering. On April 19, 2022, Oncocyte received net proceeds of approximately $32.8 million from the Underwritten Offering of 1,313,320 shares of common stock and 1,313,320 shares of April 2022 Warrants to purchase up to 656,660 shares of common stock.

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 2,278,121 shares of its common stock at an offering price of $7.08 per share to board members and $6.03 per share to the other investors participating in the offering. The offering was 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. 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. See Notes 1 and 158 to the consolidated financial statements included elsewhere in this Report for additional information about the Company’s going concern discussion and equity offerings.

5148

We expect that our operating expenses will remain flat as we continue to manage our available cash. Although we intend to market our diagnostic tests in the United States through our own sales force, we are also beginning to make marketing arrangements with distributors in other countries. We may also explore a range of other commercialization options in order to enter overseas markets and to reduce our capital needs and expenditures, and the risks associated the timelines and uncertainty for attaining the Medicare reimbursement approvals that will be essential for the successful commercialization of additional cancer diagnostic tests. Those alternative arrangements could include marketing arrangements with other diagnostic companies through which we might receive a licensing fee and royalty on sales, or through which we might form a joint venture to market one or more tests and share in net revenues, in the United States or abroad.

In addition to sales and marketing expenses, we will incur expenses from leasing and improving our ~~new office~~offices and laboratory facilities in Nashville, Tennessee. During the third quarter of 2023, we entered into a sublease arrangement for our main office (see “Irvine Office Sublease Agreement” discussion above).

We may need to meet significant cash payment or stock obligations to former Insight and Chronix shareholders in connection with our acquisition of those companies, as disclosed in Note 3 to the ~~unaudited condensed~~ consolidated ~~interim~~ financial statements included elsewhere in this Report. To meet the future cash payment obligations, we may have to utilize cash on hand that would otherwise be available to us for other business and operational purposes, which could cause us to delay or reduce activities in the development and commercialization of our cancer tests.

We will need to continue to raise additional capital to finance our operations, including the development and commercialization of our diagnostic tests, and making payments that may become due under our obligations to former Chronix shareholders and former Insight shareholders, until such time as we are able to generate sufficient revenues to cover our operating expenses. Delays in the development of DetermaIO, or obtaining reimbursement coverage from Medicare for that diagnostic test and for the other diagnostic tests that we may develop or acquire, could prevent us from raising sufficient additional capital to finance the completion of development and commercial launch of those tests. Investors may be reluctant to provide us with capital until our tests are approved for reimbursement by Medicare or reimbursement by private healthcare insurers or healthcare providers, or until we begin generating significant amounts of revenue from performing those tests. The unavailability or inadequacy of financing or revenues to meet future capital needs could force us to modify, curtail, delay, or suspend some or all aspects of our planned operations. Sales of additional equity securities could result in the dilution of the interests of our shareholders. We cannot assure that adequate financing will be available on favorable terms, if at all.

52
Cash ~~used~~Used in ~~operations~~Operations

During the ~~six~~nine months ended ~~June~~September 30, 2023, our total research and development expenses from continuing operations were ~~$4.6~~$6.7 million, our sales and marketing expenses were ~~$1.5~~$2.2 million, and our general and administrative expenses were ~~$7.0~~$9.4 million. We also incurred ~~$0.5 million~~$659,000 in cost of revenues, including ~~$44,000~~$66,000 amortization of intangible expenses, in the first ~~six~~nine months of 2023. Net loss for the ~~six~~nine months ended ~~June~~September 30, 2023 amounted to ~~$5.3~~$11.8 million and net cash used in operating activities amounted to ~~$16.5~~$18.8 million. Our cash used in operating activities during the ~~six~~nine months ended ~~June~~September 30, 2023 does not include the following noncash items: ~~$1.7~~$2.3 million in stock-based compensation; ~~$16.5~~$16.9 million in gain from change in fair value of contingent consideration; ~~$5.0~~$6.8 million loss from ~~intangible~~ asset ~~impairment; $0.1~~impairments; $1.7 million loss ofrelated to discontinued operations; $1.3 million loss on disposal and held for sale assets; ~~$0.9~~$1.4 million in depreciation and amortization expenses; $108,000 in other equity compensation expenses, and ~~$98,000~~$8,000 in unrealized gain on marketable equity securities. Changes in operating assets and liabilities were approximately ~~$3.6~~$3.5 million as an additional use of cash.
~~Cash used in investing activities~~
~~During the six months ended June 30, 2022, net cash provided by investing activities was $0.1 million, attributable to proceeds from sale of equipment.~~

Cash ~~provided by financing activities~~Used in Investing Activities

During the ~~six~~nine months ended ~~June~~September 30, 2023, net cash used in investing activities was $1.2 million, attributable to cash sold in discontinued operations, partially offset by proceeds from the sale of equipment.
49
Cash Provided by Financing Activities
During the nine months ended September 30, 2023, net cash provided by financing activities was $12.2 million, attributable to the $13.4 million of net cash proceeds from the sale of shares of common stock, offset by redemption of Series A Preferred Stock of $1.1 million and repayments of financing lease obligations of ~~$0.1 million.~~$87,000.

~~Off-Balance Sheet Arrangements~~Critical Accounting Estimates

AsThis Management’s Discussion and Analysis of ~~June~~Financial Condition and Results of Operations discusses and analyzes data in our consolidated financial statements, which we have prepared in accordance with U.S. generally accepted accounting principles. Preparation of the financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. Management bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Senior management has discussed the development, selection and disclosure of these estimates with the Audit Committee of our Board of Directors. Actual conditions may differ from our assumptions and actual results may differ from our estimates.
An accounting policy is deemed critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, if different estimates reasonably could have been used, or if changes in the estimate are reasonably likely to occur, that could materially impact the financial statements. Management believes that there have been no significant changes during the nine months ended September 30, 2023 to the matters that we disclosed as our critical accounting estimates in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, ~~2022, we did not have any off-balance sheet arrangements, as defined~~2022. Refer to additional discussion of “Significant Accounting Policies” in ~~Item 303(a)(4)(ii) of SEC Regulation S-K.~~Note 2 to our consolidated financial statements included elsewhere in this Report.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Under SEC rules and regulations, as a smaller reporting company, we are not required to provide the information required by this item.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

It is management’s responsibility to establish and maintain adequate internal control over all financial reporting pursuant to Rule 13a-15 under the Securities Exchange Act of 1934 (“Exchange Act”). Our management, including our principal executive officer and principal financial officer, have reviewed and evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Following this review and evaluation, the principal executive officer and principal financial officer determined that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act (i) is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to management, including our principal executive officer, and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

~~Previously Identified Material Weaknesses~~Changes in Internal ~~Control over Financial Reporting~~Controls

In connection with the audit as of and for the year ended December 31, 2022, we previously identified material weaknesses in our internal control over financial reporting. The material weaknesses were related to design and maintain effective controls to address the initial application of complex accounting standards and accounting treatment of non-routine, unusual or complex events and transactions.
~~In response to the material weaknesses, management completed the following remediation actions:~~
● We have designed and implemented controls to address the identification, accounting for, and review of non-routine, unusual or complex and initial applications of complex accounting standards, including the continued engagement of external consultants to provide support and to assist us in our evaluation of such transactions.
Our management assessed the effectiveness of our internal control over financial reporting as of June 30,2023, based on criteria established in the 2013 Internal Control - Integrated Framework issued by COSO. Based on this assessment, management believes that, as of that date, our internal control over financial reporting was effective.
~~Changes in Internal Controls~~
The material weaknesses identified above were identified in the prior period and are considered remediated as the applicable controls have operated for a sufficient period of time and management has concluded, through testing, that these controls surrounding non-routine, unusual or complex and initial applications of complex accounting standards are operating effectively. Therefore, ~~there~~There were no changes in our internal control over financial reporting that occurred during the period covered by this Report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

5350

PART II - OTHER INFORMATION

Item 1. Legal Proceedings.

From time to time, we may be involved in routine litigation incidental to the conduct of our business. We are not presently involved in any material litigation or proceedings, and to our knowledge no such litigation or proceedings are contemplated.

Item 1A. Risk Factors

Our business, financial condition, results of operations and future growth prospects are subject to various risks, including those described in Item 1A “Risk Factors” of our Annual Report on Form 10-K, filed with the Securities and Exchange Commission on April 12, 2023, which we encourage you to review. Other than as noted below, there have been no material changes from the risk factors disclosed in our most recent Annual Report on Form 10-K.

Our recently implemented reverse stock split may decrease the liquidity of our common stock and result in higher transaction costs.

The liquidity of our common stock may be negatively impacted by our implementation of a 1-for-20 reverse stock split on July 24, 2023, given the significantly reduced number of shares that are now issued and outstanding after the reverse stock split, and because our stock price did not increase commensurate with the ratio of the reverse stock split. In addition, as a result of our reverse stock split, we now have a greater number of shareholders who own “odd lots” of fewer than 100 shares of our common stock. Brokerage commission and other costs of transactions for the sale of odd lots are generally higher than the costs of transactions of more than 100 shares of common stock. Accordingly, a reverse stock split may not achieve the desired results of increasing marketability and liquidity of our common stock.

The effective increase in the authorized number of shares of our common stock as a result of our reverse stock split could have anti-takeover implications and result in further dilution to our existing shareholders.

In connection with the recent implementation of the reverse stock split, we maintained the total number of authorized shares of our common stock. The combination of a reverse stock split of our issued and outstanding shares, and maintaining the number of our authorized shares, has significantly increased our authorized shares relative to our issued and outstanding shares. This effective increase in the number of authorized shares will allow us to sell additional shares of our common stock (or securities convertible or exchangeable for our common stock), which would result in further dilution of our current shareholders. In addition, the effective increase in the number of authorized shares could, under certain circumstances, have anti-takeover implications. For example, the additional shares of common stock that have become available for issuance could be used by us to oppose a hostile takeover attempt or to delay or prevent changes in control or our management. Although our reverse stock split was prompted by business and financial considerations and not by the threat of any hostile takeover attempt, shareholders should be aware that our reverse stock split could facilitate future efforts by us to deter or prevent changes in control, including transactions in which our shareholders might otherwise receive a premium for their shares over then-current market prices.

There is substantial doubt about our ability to continue as a going concern and management’s plans to alleviate this condition may be unsuccessful. We will need to raise additional funding, which may not be available on acceptable terms, or at all. Failure to obtain this necessary capital when needed may force us to delay, limit or terminate our operations.
Our expectation to generate operating losses and negative operating cash flows in the future and the need for additional funding to support our planned operations raise substantial doubt regarding our ability to continue as a going concern for a period of one year after the date that the financial statements are issued. See Part I, Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources” of this Report for a discussion of our cash position. Accordingly, we intend to complete additional equity financings and reduce spending in the remainder of fiscal 2023 and in 2024. However, due to several factors, including those outside management’s control, there can be no assurance that we will be able to complete additional equity financings. If we are unable to complete additional financings, management’s plans include further reducing or delaying operating expenses. We have concluded the likelihood that our plan to successfully obtain sufficient funding from one or more of these sources or adequately reduce expenditures, while reasonably possible, is less than probable. Accordingly, we have concluded that substantial doubt exists about our ability to continue as a going concern for a period of at least twelve months from the date of issuance of these ~~unaudited condensed~~ consolidated ~~interim~~ financial statements.
51

Our fundraising efforts to raise additional funding may divert our management from their day-to-day activities, which may adversely affect our ability to conduct operations. In addition, we cannot guarantee that financing will be available in sufficient amounts or on terms acceptable to us, if at all. Moreover, the terms of any financing may adversely affect the holdings or the rights of our shareholders and the issuance of additional securities, whether equity or debt, by us, or the possibility of such issuance, may cause the market price of our shares to decline. The sale of additional equity or convertible securities would dilute all of our shareholders. The incurrence of indebtedness would result in increased fixed payment obligations and we may be required to agree to certain restrictive covenants, such as limitations on our ability to incur additional debt, limitations on our ability to acquire assets and other operating restrictions that could adversely impact our ability to conduct our business. We could also be required to seek funds through arrangements with collaborative partners or otherwise at an earlier stage than otherwise would be desirable, which may result in terms unfavorable to us, any of which may have a material adverse effect on our business, operating results and prospects.
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.
If we are unable to obtain funding on a timely basis, or if revenues from collaboration arrangements or financing sources are less than we have projected, we may be required to further revise our business plan and strategy, which may result in us significantly curtailing, delaying or discontinuing portions or all of our operations, or may result in our being unable to expand our operations or otherwise capitalize on our business opportunities. As a result, our business, financial condition and results of operations could be materially affected.
Item 2. Unregistered Sales of Equity Securities, ~~and~~ Use of Proceeds, and Issuer Purchases of Equity Securities

~~None~~On August 23, 2023 we issued to PCG Advisory, Inc. 9,091 shares of our common stock (the “PCG Shares”). The PCG Shares were issued without registration under the Securities Act in reliance on the exemption from registration under Section 4(a)(2).

Item 3. Default Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

5452

Item 6. Exhibits

Exhibit Numbers Exhibit Description
3.1
Articles of Incorporation with all amendments (Incorporated by reference to Oncocyte Corporation’s Registration Statement on Form S-3 filed with the Securities and Exchange Commission on July 14, 2021)
3.2 Certificate of Determination of Preferences, Rights and Limitations of Series A Convertible Preferred Stock (Incorporated by reference to Oncocyte Corporation’s Current Report on Form 8-K filed with the Securities and Exchange Commission on April 13, 2022)
~~3.1~~
3.3
Certificate of Amendment of Articles of Incorporation of Oncocyte Corporation, as filed with the Secretary of State of the State of California on July 24, 2023
~~10.1~~
~~Securities Purchase Agreement, dated April 3, 2023, by and among Oncocyte Corporation and each purchaser identified on the signatures pages thereto~~ (Incorporated by reference to Oncocyte Corporation’s Current Report on Form 8-K filed with the Securities and Exchange Commission on ~~April 6,~~July 24, 2023)

3.4
Second Amended and Restated By-Laws (Incorporated by reference to Oncocyte Corporation’s Quarterly Report on Form 8-K filed with the Securities and Exchange Commission on November 9, 2022)
~~10.2~~10.1†

Amendment to 2018 Equity Incentive Plan (Incorporated by reference to Oncocyte Corporation’s Proxy Statement on Schedule 14A filed with the Securities and Exchange Commission on July 10, 2023)

~~10.3~~10.2†
Amended and Restated Employment Agreement, dated June 6, 2023, by and between Oncocyte Corporation and Joshua Riggs (Incorporated by reference to Oncocyte Corporation’s Current Report on Form 8-K filed with the Securities and Exchange Commission on June 9, 2023)
~~10.4~~
Amendment to Amended and Restated Employment Agreement, dated July 13, 2023, by and between Oncocyte Corporation and Joshua Riggs (Incorporated by reference to Oncocyte Corporation’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 14, 2023)
10.3* Sublease Agreement, dated August 8, 2023, by and between Oncocyte Corporation and Induce Biologics USA, Inc.

31.1* Certification of ~~Joshua Riggs, President and Chief~~Principal Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2022

31.2* Certification of ~~Anish John, Chief~~Principal Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2022

32.1** Certifications of ~~Joshua Riggs, President and Chief Financial~~Principal Executive Officer and ~~Anish John, Chief~~Principal Financial Officer, pursuant to U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2022

101* Interactive Data ~~Files~~
101.INS* Files. The following financial statements from the Company’s Quarterly Report on Form 10-Q for the three and nine months ended September 30, 2023 and 2022, formatted in Inline ~~XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document)~~
101.SCH* ~~Inline XBRL Taxonomy Extension Schema~~
101.CAL* ~~Inline XBRL Taxonomy Extension Calculation Linkbase~~
101.DEF* ~~Inline XBRL Taxonomy Extension Definition Document~~
101.LAB* ~~Inline XBRL Taxonomy Extension Label Linkbase~~
101.PRE* ~~Inline XBRL Taxonomy Extension Presentation Linkbase~~Extensible Business Reporting Language (iXBRL): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive Loss, (iv) Consolidated Statements of Shareholders’ Equity, (v) Consolidated Statements of Cash Flows and (vi) Notes to Consolidated Financial Statements, tagged as blocks of text and including detailed tags.

104* Cover Page Interactive Data File (formatted ~~as inline XBRL~~in iXBRL and ~~contained~~included in Exhibit 101)

* Filed ~~herewith~~herewith.

** This certification is not deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section. Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that the registrant specifically incorporates it by reference.

† The referenced exhibit is a management contract, compensatory plan or arrangement.
5553

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

ONCOCYTE CORPORATION

Date: ~~August 10,~~November 9, 2023 /s/ Joshua Riggs
Joshua Riggs

President and Chief Executive Officer
(Principal Executive Officer)

Date: ~~August 10,~~November 9, 2023 /s/ James Liu
James Liu

Controller, ~~and~~ Principal Accounting Officer and interim Principal Financial Officer
(Principal Financial Officer)

5654

	Shares			Amount			Shares		Amount			Comprehensive Income			Deficit			Equity			Shares		Amount		Shares		Amount			Income			Deficit			Equity
	Three Months Ended June 30, 2023																				Three Months Ended September 30, 2023
	Series A Redeemable Convertible Preferred Stock						Common Stock					Accumulated Other			Accumulated			Total Shareholders’			Series A Redeemable Convertible Preferred Stock				Common Stock					Accumulated Other Comprehensive			Accumulated			Total Shareholders’
	Shares			Amount			Shares		Amount			Comprehensive Income			Deficit			Equity			Shares		Amount		Shares		Amount			Income			Deficit			Equity
Balance at March 31, 2023		5,882		$	5,532			5,964	$	295,533		$	43		$	(257,643	)	$	37,933
Balance at June 30, 2023																						5	$	4,725		8,250	$	309,535		$	41		$	(265,976	)	$	43,600
Net Loss		-			-			-		-			-			(8,333	)		(8,333	)		-		-		-		-			-			(6,489	)		(6,489	)
Foreign currency translation adjustment		-			-			-		-			(2	)		-			(2	)		-		-		-		-			(9	)		-			(9	)
Stock-based compensation		-			-			-		834			-			-			834			-		-		-		608			-			-			608
Vesting of bonus awards		-			-			-		58			-			-			58			-		-		-		14			-			-			14
Sale of common shares, net of financing costs		-			-			2,266		13,421			-			-			13,421
Deemed dividend on Series A redeemable convertible preferred stock		-			-			-		(118	)		-			-			(118	)
Redemption of Series A redeemable convertible preferred stock		(1,064	)		(1,000	)		-		-			-			-			-
Shares issued upon vesting of RSU		-			-			11					-			-			-			-		-		2		-			-			-			-
Shares issued for consultant services																						-		-		9		36			-			-			36
Accretion of Series A convertible preferred stock to redemption value		-			193			-		(193	)		-			-			(193	)		-		198		-		(198	)		-			-			(198	)
Balance at June 30, 2023		4,818		$	4,725			8,241	$	309,535		$	41		$	(265,976	)	$	43,600
Balance at September 30, 2023																						5	$	4,923		8,261	$	309,995		$	32		$	(272,465	)	$	37,562

	Three Months Ended June 30, 2022
	Series A Redeemable Convertible Preferred Stock				Common Stock				Accumulated Other			Accumulated			Total Shareholders’
	Shares		Amount		Shares		Amount		Comprehensive Income			Deficit			Equity
Balance at March 31, 2022		-	$	-		4,612	$	254,994	$	38		$	(198,065	)	$	56,967
Net Loss		-		-		-		-		-			(8,300	)		(8,300	)
Foreign currency translation adjustment		-		-		-		-		(7	)		-			(7	)
Stock-based compensation		-		-		-		2,232		-			-			2,232
Issuance of common shares, including at-the-market transactions, net of financing costs and underwriting discounts		-		-		1,313		32,423		-			-			32,423
Shares issued upon vesting of RSU, net of shares retired to pay employees’ taxes		-		-		5		-		-			-			-
Issuance of Series A redeemable convertible preferred stock, net of financing costs		11,765		4,782		-		-		-			-			-
Accretion of Series A convertible preferred stock to redemption value		-		72		-		-		-			(72	)		(72	)
Balance at June 30, 2022		11,765	$	4,854		5,930	$	289,649	$	31		$	(206,437	)	$	83,243

	Three Months Ended September 30, 2022
	Series A Redeemable Convertible Preferred Stock				Common Stock					Accumulated Other Comprehensive			Accumulated			Total Shareholders’
	Shares		Amount		Shares		Amount			Income			Deficit			Equity
Balance at June 30, 2022		6	$	4,854		5,930	$	289,649		$	31		$	(206,437	)	$	83,243
Net Loss		-		-		-		-			-			(9,333	)		(9,333	)
Foreign currency translation adjustment		-		-		-		-			(12	)		-			(12	)
Stock-based compensation		-		-		-		3,181			-			-			3,181
Shares issued upon vesting of RSU, net of shares retired to pay employees’ taxes		-		-		1		-			-			-			-
Accretion of Series A convertible preferred stock to redemption value		-		222		-		(294	)		-			72			(222	)
Balance at September 30, 2022		6	$	5,076	$	5,931	$	292,536		$	19		$	(215,698	)	$	76,857

	Six Months Ended June 30, 2023
	Series A Redeemable Convertible Preferred Stock						Common Stock					Accumulated Other		Accumulated			Total Shareholders’
	Shares			Amount			Shares		Amount			Comprehensive Income		Deficit			Equity
Balance at December 31, 2022		5,882		$	5,302			5,932	$	294,929		$	39	$	(260,676	)	$	34,292
Net Loss		-			-			-		-			-		(5,300	)		(5,300	)
Foreign currency translation adjustment		-			-			-		-			2		-			2
Stock-based compensation		-			-			-		1,668			-		-			1,668
Vesting of bonus awards		-			-			-		58			-		-			58
Sale of common shares, net of financing costs		-			-			2,266		13,421			-		-			13,421
Deemed dividend on Series A redeemable convertible preferred stock		-			-			-		(118	)		-		-			(118	)
Shares issued upon vesting of RSU		-			-			43		-			-		-			-
Redemption of Series A redeemable convertible preferred stock		(1,064	)		(1,000	)		-		-			-		-			-
Accretion of Series A convertible preferred stock to redemption value		-			423			-		(423	)		-		-			(423	)
Balance at June 30, 2023		4,818		$	4,725			8,241	$	309,535		$	41	$	(265,976	)	$	43,600

	Six Months Ended June 30, 2022
	Series A Redeemable Convertible Preferred Stock				Common Stock				Accumulated Other			Accumulated			Total Shareholders’
	Shares		Amount		Shares		Amount		Comprehensive Income			Deficit			Equity
Balance at December 31, 2021		-	$	-		4,612	$	252,954	$	37		$	(187,774	)	$	65,217
Balance		-	$	-		4,612	$	252,954	$	37		$	(187,774	)	$	65,217
Net Loss		-		-		-		-		-			(18,591	)		(18,591	)
Foreign currency translation adjustment		-		-		-		-		(6	)		-			(6	)
Stock-based compensation		-		-		-		4,242		-			-			4,242
Issuance of common shares, including at-the-market transactions, net of financing costs and underwriting discounts		-		-		1,314		32,453		-			-			32,453
Shares issued upon vesting of RSU, net of shares retired to pay employees’ taxes		-		-		4		-		-			-			-
Issuance of Series A redeemable convertible preferred stock, net of financing costs		11,765		4,782		-		-		-			-			-
Accretion of Series A convertible preferred stock to redemption value		-		72		-		-		-			(72	)		(72	)
Balance at June 30, 2022		11,765	$	4,854		5,930	$	289,649	$	31		$	(206,437	)	$	83,243
Balance		11,765		4,854		5,930		289,649	$	31			(206,437	)		83,243

	Nine Months Ended September 30, 2023
	Series A Redeemable Convertible Preferred Stock						Common Stock					Accumulated Other Comprehensive			Accumulated			Total Shareholders’
	Shares			Amount			Shares		Amount			Income			Deficit			Equity
Balance at December 31, 2022		6		$	5,302			5,932	$	294,929		$	39		$	(260,676	)	$	34,292
Net Loss		-			-			-		-			-			(11,789	)		(11,789	)
Foreign currency translation adjustment		-			-			-		-			(7	)		-			(7	)
Stock-based compensation		-			-			-		2,276			-			-			2,276
Vesting of bonus awards		-			-			-		72			-			-			72
Sale of common shares, net of financing costs		-			-			2,275		13,421			-			-			13,421
Deemed dividend on Series A redeemable convertible preferred stock		-			-			-		(118	)		-			-			(118	)
Shares issued upon vesting of RSU		-			-			45		-			-			-			-
Shares issued for consultant services		-			-			9		36			-			-			36
Redemption of Series A redeemable convertible preferred stock		(1	)		(1,000	)		-		-			-			-			-
Accretion of Series A convertible preferred stock to redemption value		-			621			-		(621	)		-			-			(621	)
Balance at September 30, 2023		5		$	4,923			8,261	$	309,995		$	32		$	(272,465	)	$	37,562

	Nine Months Ended September 30, 2022
	Series A Redeemable Convertible Preferred Stock				Common Stock					Accumulated Other Comprehensive			Accumulated			Total Shareholders’
	Shares		Amount		Shares		Amount			Income			Deficit			Equity
Balance at December 31, 2021		-	$	-		4,612	$	252,954		$	37		$	(187,774	)	$	65,217
Balance		-	$	-		4,612	$	252,954		$	37		$	(187,774	)	$	65,217
Net Loss		-		-		-		-			-			(27,924	)		(27,924	)
Foreign currency translation adjustment		-		-		-		-			(18	)		-			(18	)
Stock-based compensation		-		-		-		7,423			-			-			7,423
Shares issued upon vesting of RSU, net of shares retired to pay employees’ taxes		-		-		5		-			-			-			-
Issuance of common shares, including at-the-market transactions, net of financing costs and underwriting discounts		-		-		1,314		32,453			-			-			32,453
Issuance of Series A redeemable convertible preferred stock, net of financing costs		6		4,782		-		-			-			-			-
Accretion of Series A convertible preferred stock to redemption value		-		294		-		(294	)		-			-			(294	)
Balance at September 30, 2022		6	$	5,076		5,931	$	292,536		$	19		$	(215,698	)	$	76,857
Balance		6	$	5,076		5,931	$	292,536		$	19		$	(215,698	)	$	76,857

	As of June 30, 2023
	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	$	530	$	530	$	-	$	-
Total	$	530	$	530	$	-	$	-

Liabilities:
Contingent consideration liabilities	$	29,150	$	-	$	-	$	29,150
Total	$	29,150	$	-	$	-	$	29,150

	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

	As of September 30, 2023
	Fair value		Level 1		Level 2		Level 3
	(In thousands)
Assets:
Marketable equity securities	$	441	$	441	$	-	$	-
Total	$	441	$	441	$	-	$	-

Liabilities:
Contingent consideration liabilities (Note 3)	$	28,715	$	-	$	-	$	28,715
Total	$	28,715	$	-	$	-	$	28,715

			Fair		Contractual		Fair Value on the
	Contractual		Value on the		Value		Merger Date
	Value		Merger Date		(In thousands)
Milestone 1	$	1,500	$	1,340	$	1,500	$	1,340
Milestone 2		3,000		1,830		3,000		1,830
Milestone 3 ^(a)		1,500		770
Royalty 1 ^(b)		See(b)		5,980
Royalty 2 ^(b)		See(b)		1,210
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	$	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.

	Fair Value
Balance at December 31, 2022	$	5,370
Change in estimated fair value		(2,500	)
Balance at June 30, 2023	$	2,870

	Fair Value
Balance at December 31, 2022	$	40,292
Change in estimated fair value		(14,012	)
Balance at June 30, 2023	$	26,280

							September 30, 2023			December 31, 2022
	June 30, 2023			December 31, 2022			(In thousands)
Intangible assets:
Acquired IPR&D - DetermaIO ⁽¹⁾	$	9,700		$	14,650
Acquired IPR&D - DetermaCNI and VitaGraft ⁽²⁾		46,800			46,800
Acquired IPR&D - DetermaIO^{TM (1)}							$	9,700		$	14,650
Acquired IPR&D - DetermaCNI™ and VitaGraft™ ⁽²⁾								46,800			46,800

Intangible assets subject to amortization:
Acquired intangible assets - customer relationship		440			440			440			440
Total intangible assets		56,940			61,890			56,940			61,890
Accumulated amortization - customer relationship⁽³⁾		(301	)		(257	)
Accumulated amortization - customer relationship⁽³⁾								(323	)		(257	)
Intangible assets, net	$	56,639		$	61,633		$	56,617		$	61,633

⁽¹⁾	See Note 3 for information on the Insight Merger.
⁽²⁾	See Note 3 for information on the Chronix Merger.
⁽³⁾	Amortization of intangible assets is included in “Cost of revenues – amortization of acquired intangibles” on the ~~condensed~~ consolidated statements of operations because the intangible assets pertain directly to the revenues generated from the acquired intangibles.

			Amortization
	Amortization		(In thousands)
Year ending December 31,
2023	$	44	$	22
2024		88		88
2025		7		7
Total	$	139	$	117

	Operating			Financing
	Leases			Leases
	(In thousands)
Year Ending December 31,
2023	$	255		$	31
2024		903			-
2025		869			-
2026		899			-
2027		695			-
Total minimum lease payments		3,621			31
Less amounts representing interest		(716	)		(1	)
Present value of net minimum lease payments	$	2,905		$	30

	2023		2022
	Nine Months Ended
	September 30,
	2023		2022
	(In thousands)
Cash paid for amounts included in the measurement of financing lease liabilities:
Operating cash flows from operating leases	$	793	$	854
Operating cash flows from financing leases	$	7	$	77
Financing cash flows from financing leases	$	86	$	4

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	$	22.60

	Shares		Number			Weighted
	Available		of Options			Average
Options	for Grant		Outstanding			Exercise Price

Balance at December 31, 2022		-		30		$	80.78
Options exercised		-		-		$	-
Options forfeited, cancelled and expired		-		(1	)	$	-
Balance at June 30, 2023		-		29		$	80.58
Exercisable at June 30, 2023				29		$	80.58

	June 30, 2023 (unaudited)			December 31, 2022

Right-of-use assets ⁽¹⁾		4,036			3,499
Machinery and equipment		8,644			9,408
Accumulated depreciation and amortization		(5,310	)		(4,196	)
Right-of-use assets, machinery and equipment, net		7,370			8,711
Construction in progress		518			2,140
Right-of-use assets, machinery and equipment, net, and construction in progress		7,888			10,851
Right-of-use assets, machinery and equipment, net, and construction in progress from discontinuing operations		-			211
Right-of-use assets, machinery and equipment, net, and construction in progress		7,888			11,062

	June 30, 2023			June 30, 2022
Operating lease
Right-of-use assets, net	$	1,855		$	2,343

Right-of-use lease liabilities, current	$	677		$	728
Right-of-use lease liabilities, noncurrent		2,398			3,075
Total operating lease liabilities	$	3,075		$	3,803

Financing lease
Machinery and equipment	$	536		$	537
Accumulated depreciation		(500	)		(391	)
Machinery and equipment, net	$	36		$	146
Current liabilities	$	60		$	110
Noncurrent liabilities		-			60
Total financing lease liabilities	$	60		$	170

Weighted average remaining lease term
Operating lease		4.1 years			4.9 years
Financing lease		0.5 years			1.5 years

Weighted average discount rate
Operating lease		11.28	%		11.20	%
Financing lease		11.55	%		11.55	%

	Shares Available for Grant			Number of Options Outstanding			Number of RSUs Outstanding			Weighted Average Exercise Price
	(In thousands, except weighted average exercise price)
Balance at December 31, 2022		442			428			22		$	59.23
RSUs vested		-			-			(14	)	$	-
RSUs granted		(9	)		-			5		$	-
Options granted		(298	)		298			-		$	5.96
Options forfeited/expired		235			(235	)		-		$	-
RSUs forfeited/expired		2			-			(1	)	$	-
Performance RSUs forfeited/expired		15			-			(7	)	$	-
Balance at September 30, 2023		387			491			5		$	27.31
Options exercisable at September 30, 2023					140					$	98.80

	Nine Months Ended
	September 30,
	2023			2022
Expected life (in years)		6.25			5.98
Risk-free interest rates		3.76	%		2.29	%
Volatility		105.99	%		106.85	%
Dividend yield		0	%		0	%


●	Cost of ~~revenue and amortization of acquired intangibles remained at $0.2 million,~~revenues decreased by $155,000, primarily related to labor and allocated overhead associated with performing our Pharma ~~Services, as well as~~Services.

●	Cost of revenues - amortization of acquired intangibles remained at $22,000, and relates to noncash amortization of acquired intangible assets such as our customer relationship intangible assets acquired as part of the Insight merger.


●	Research and development expenses ~~remained at $2.4 million,~~increased by $713,000, as the Company continues development of DetermaIO, VitaGraft (formerly TheraSure Transplant Monitor), and DetermaCNI (formerly TheraSure - CNI Monitor). See below for additional details.


●	Sales and marketing expenses increased by ~~$0.7~~$308,000, primarily attributable to continued ramp in sales and marketing activities related to the transplant business, as well as support the commercialization efforts within oncology. See below for additional details.

●	General and administrative expenses decreased by $3.2 million, primarily due to decreased stock-based compensation and personnel expenses. See below for additional details.

●	Change in fair value of contingent consideration decreased by $5.7 million, from a gain of $6.1 million to ~~$0.8~~a gain of $435,000, due to changes in discount rates and revised estimates on the timing of possible future payouts. Change is driven in part by the Chronix Amendment which amended the earnout considerations eliminated the Chronix Milestone Payments, 15% Royalty Payments and Sale Payment obligations (see Note 3 to our consolidated financial statements included elsewhere in this Report). See below for additional details.

●	Impairment loss increased due to a 2023 asset impairment charge of $1.8 million related to leasehold improvements (see Note 4 to our consolidated financial statements included elsewhere in this Report).

●	Total other income (expense) increased by $136,000, from an expense of $112,000 in the three months ended September 30, 2022 to an income of $24,000 in the three months ended September 30, 2023, primarily due to interest income and the change in unrealized gain/loss on marketable equity securities. See below for additional details.

●	Pharma Services revenue increased by $453,000 due to an increased number of contracts performed during the period.

●	Cost of revenues decreased by $9,000, primarily related to labor and allocated overhead associated with performing our Pharma Services.

●	Cost of revenues - amortization of acquired intangibles decreased by $7,000, and relates to noncash amortization of acquired intangible assets such as our customer relationship intangible assets acquired as part of the Insight merger.

●	Research and development expenses increased by $824,000, as the Company continues development of DetermaIO, VitaGraft (formerly TheraSure Transplant Monitor), and DetermaCNI (formerly TheraSure - CNI Monitor). See below for additional details.

●	Sales and marketing expenses increased by $1.4 million, primarily attributable to continued ramp in sales and marketing activities related to the transplant business, as well as support the commercialization efforts within oncology. See below for additional details.