| Summary of Significant Accounting Policies | 2. Summary
of Significant Accounting Policies Basis of presentation The
financial statements are presented in accordance with U.S. generally accepted accounting principles (“GAAP”). Prior
to February 17, 2017, Lineage consolidated the results of Oncocyte into Lineage’s consolidated results based on Lineage’s
ability to control Oncocyte’s operating and financial decisions and policies through its then majority ownership of Oncocyte
common stock. Beginning on February 17, 2017, Lineage’s percentage ownership of the outstanding Oncocyte common stock declined
below 50%, resulting in a loss of “control” of Oncocyte under GAAP and, as a result, Lineage deconsolidated Oncocyte’s
financial statements from Lineage’s consolidated financial statements. As a result of this deconsolidation, Oncocyte is no
longer considered a subsidiary of Lineage under GAAP with effect from February 17, 2017. As of December 31, 2019, because Lineage’s
ownership interest in Oncocyte decreased to below 20%, Lineage no longer exercises significant influence over the operations and
management of Oncocyte. As of the date of this Report, Lineage’s ownership interest in Oncocyte is below 10%. However, Oncocyte
may still be considered an affiliate of Lineage. Through the year ended
December 31, 2019, to the extent Oncocyte did not have its own employees or human resources for its operations, Lineage or Lineage
subsidiaries provided certain employees for administrative or operational services, as necessary, for the benefit of Oncocyte (see
Note 4). Accordingly, Lineage allocated expenses such as salaries and payroll related expenses incurred and paid on behalf of Oncocyte
based on the amount of time that particular employees devoted to Oncocyte affairs. Other expenses such as legal, accounting, human
resources, marketing, travel, and entertainment expenses were allocated to Oncocyte to the extent that those expenses were incurred
by or on behalf of Oncocyte. Lineage also allocated certain overhead expenses such as facilities rent and utilities, property taxes,
insurance, internet and telephone expenses based on a percentage determined by management. These allocations have been made based
upon activity-based allocation drivers such as time spent, percentage of square feet of office or laboratory space used, and percentage
of personnel devoted to Oncocyte’s operations or management. Management has evaluated the appropriateness of the percentage
allocations on a periodic basis and believes that this basis for allocation is reasonable. 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 disclosure of contingent assets and liabilities at the date of the 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 those related to the going concern assessments of Oncocyte financial statements, allocation of
direct and indirect expenses, useful lives associated with long-lived intangible assets, equipment and furniture, key assumptions
in operating and financing leases, including incremental borrowing rates, loss contingencies, valuation allowances related to deferred
income taxes, and assumptions used to value stock-based awards, debt or other equity instruments. Actual results could differ materially
from those estimates. Going concern assessment In accordance with FASB’s
standard on going concern, Accounting Standard Update, or ASU No. 2014-15, Oncocyte assesses going concern uncertainty in its financial
statements to determine if it has sufficient cash, cash equivalents and working capital on hand, including marketable equity securities,
and any available borrowings on loans, to operate for a period of at least one year from the date the financial statements are
issued, which is referred to as the “look-forward period” as defined by ASU No. 2014-15. As part of this assessment,
based on conditions that are known and reasonably knowable to Oncocyte, it will consider various scenarios, forecasts, projections,
estimates and will make certain key assumptions, including the timing and nature of projected cash expenditures or programs, and
its ability to delay or curtail expenditures or programs, if necessary, among other factors. Based on this assessment, as necessary
or applicable, Oncocyte makes certain assumptions around implementing curtailments or delays in the nature and timing of programs
and expenditures to the extent Oncocyte deems probable those implementations can be achieved and it has the proper authority to
execute them within the look-forward period in accordance with ASU No. 2014-15. Fair value measurements Oncocyte accounts for fair
value measurements in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification
(“ASC”) 820, Fair Value Measurements
● Level 1
● Level 2
● Level 3 In determining fair value,
Oncocyte utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to
the extent possible, and also considers counterparty credit risk in its assessment of fair value. For the periods presented, Oncocyte
has no financial assets or liabilities recorded at fair value on a recurring basis, except for cash and cash equivalents consisting
of money market funds and marketable equity securities of Lineage and AgeX common stock held by Oncocyte described below. These
assets are measured at fair value using the period-end quoted market prices as a Level 1 input. The carrying amounts of
cash equivalents, prepaid expenses and other current assets, amounts due to Lineage and other affiliates, accounts payable, accrued
expenses and other current liabilities approximate fair values because of the short-term nature of these items. The carrying amount of
the Loan Payable to Silicon Valley Bank approximates fair value because the loan bears interest at a floating market rate (see
Note 6). Cash and cash equivalents Cash equivalents typically
consist of money market fund investments for capital preservation Financial instruments that
potentially subject Oncocyte to credit risk consist principally of cash and cash equivalents. Oncocyte maintains cash and cash
equivalent balances at financial institutions in excess of amounts insured by United States government agencies. Oncocyte places
its cash and cash equivalents with high credit quality financial institutions. Restricted cash Oncocyte classifies cash
that has contractual or legal restrictions imposed by third parties as restricted cash, which is restricted as to withdrawal or
use except for the specified purpose under a contract. Oncocyte includes the restricted cash consistent with the nature of the
underlying contract and classifies it as part of current assets if the restricted cash will be released in the next twelve months
from the balance sheet date, or in deposits and other noncurrent assets if it will be restricted for longer than twelve months
from the balance sheet date. Oncocyte adopted ASU 2016-18,
Statement of Cash Flows (Topic 230): Restricted Cash The following table provides
a reconciliation of cash, cash equivalents, and restricted cash reported within the balance sheet dates that comprise the total
of the same such amounts shown in the statements of cash flows in accordance with ASU 2016-18 (in thousands):
December 31, 2019 December 31, 2018
Cash and cash equivalents $ 22,072 $ 8,034
Restricted cash included in deposits and other noncurrent assets (see Note 10) 1,700 -
Total cash, cash equivalents, and restricted cash as shown in the statements of cash flows $ 23,772 $ 8,034 Investments in common 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 Oncocyte initially records
equity method investments at fair value on the date of the acquisition with subsequent adjustments to the investment balance based
on Oncocyte’s share of earnings or losses from the investment. The equity method investment balance is shown in noncurrent
assets on the consolidated balance sheets. Oncocyte reviews investments
accounted for under the equity method for impairment whenever events or changes in circumstances indicate that the carrying amount
of the investment may not be fully recoverable. If a determination is made that an “other-than-temporary” impairment
exists, Oncocyte writes down its investment to fair value. On September 30, 2019, Oncocyte acquired a 25% ownership interest in
Razor accounted for under the equity method of accounting as further discussed in Note 5. Accounting for Lineage and AgeX shares of
common stock Oncocyte accounts for the
Lineage shares it holds, including the AgeX shares of common stock received as a dividend-in-kind
on November 28, 2018, as marketable equity securities in accordance with ASC 320-10-25, Investments – Debt and Equity
Securities Financial Instruments–Overall:
Recognition and Measurement of Financial Assets and Financial Liabilities On
November 28, 2018, distributed shares of AgeX common stock owned by to holders of common shares, on a pro
rata basis, in the ratio of one share of AgeX common stock for every ten common
shares owned. As a shareholder of common stock, Oncocyte received 35,326 shares
of AgeX common stock as its pro rata share and recorded a $96,000 dividend in other income and expenses for the year ended December
31, 2018. For
the year ended December 31, 2018, Oncocyte recorded an unrealized loss of $427,000, included in other income and expenses, net,
due to the decrease in fair market value of the shares from January 1, 2018
to December 31, 2018, and the decrease in the fair market value of the AgeX shares from November 28, 2018 to December 31, 2018. As of December 31, 2019,
Oncocyte held 353,264 and 35,326 shares of common stock of Machinery and equipment 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. Impairment of long-lived assets Oncocyte assesses the impairment
of long-lived assets, which consist primarily of long-lived intangible assets, machinery and equipment, whenever events or changes
in circumstances indicate that such assets might be impaired and the carrying value may not be recoverable. If events or changes
in circumstances indicate that the carrying amount of an asset may not be recoverable and the expected undiscounted future cash
flows attributable to the asset are less than the carrying amount of the asset, an impairment loss equal to the excess of the asset’s
carrying value over its fair value is recorded. As
part of Oncocyte’s impairment assessment of its intangible assets, Oncocyte determined that certain intangible assets, for therapeutic uses that Oncocyte no longer plans
to develop or commercialize, were impaired as of June 30, 2018 and, accordingly, Oncocyte recorded a noncash charge of $625,000
representing the net book value of those assets as of that date, and included that charge in research and development expenses
for the year ended December 31, 2018. 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 Accounting for Derivative Financial Instruments Indexed
to, and Potentially Settled in, a Company’s Own Stock Income taxes Oncocyte has filed a standalone
U.S. federal income tax return since its inception. For California purposes, Oncocyte activity for 2016 and for the period from
January 1, 2017 through February 16, 2017, the date immediately before Lineage owned less than 50% of Oncocyte outstanding common
stock, was included in Lineage’s California combined tax return. For periods beginning on February 17, 2017 and thereafter,
Oncocyte filed or will file a standalone California income tax return. The provision for state income taxes has been determined
as if Oncocyte had filed separate tax returns for the periods presented. Accordingly, the effective tax rate of Oncocyte in future
years could vary from its historical effective tax rates depending on the future legal structure of Oncocyte and related tax elections.
The historical deferred tax assets, including the operating losses and credit carryforwards generated by Oncocyte, will remain
with Oncocyte. Oncocyte accounts for income taxes in accordance with ASC 740, Income Taxes The guidance also prescribes
a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken
or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not sustainable
upon examination by taxing authorities. Oncocyte will recognize accrued interest and penalties related to unrecognized tax benefits
as income tax expense. No amounts were accrued for the payment of interest and penalties as of December 31, 2019 and 2018. Oncocyte
is not aware of any uncertain tax positions that could result in significant additional payments, accruals, or other material deviation
for the years ended December 31, 2019 and 2018. Oncocyte is currently unaware of any tax issues under review. On December 22, 2017, the
United States enacted major federal tax reform legislation, Public Law No. 115-97, commonly referred to as the 2017 Tax Cuts and
Jobs Act (“2017 Tax Act”), which enacted a broad range of changes to the Internal Revenue Code. Changes to taxes on
corporations impacted by the 2017 Tax Act include, but are not limited to, lowering the U.S. federal tax rates to a 21% flat tax
rate, eliminating the corporate alternative minimum tax (“AMT”), imposing additional limitations on the deductibility
of interest and net operating losses, allowing any net operating loss (“NOLs”) generated in tax years ending after
December 31, 2017 to be carried forward indefinitely and generally repealing carrybacks, reducing the maximum deduction for NOL
carryforwards arising in tax years beginning after 2017 to a percentage of the taxpayer’s taxable income, and allowing for
additional expensing of certain capital expenditures. (see Note 9). Research and development expenses Research and development
expenses include both direct expenses incurred by Oncocyte and indirect overhead costs incurred by Lineage and allocated to Oncocyte
under the Shared Facilities Agreement as expenses that benefited or supported Oncocyte’s research and development functions.
The Shared Facilities Agreement was terminated as of December 31, 2019 (see Note 4). Direct research and development expenses consist
primarily of personnel costs and related benefits, including stock-based compensation, consulting fees, and obligations incurred
to suppliers. Indirect research and development expenses allocated by Lineage to Oncocyte under the Shared Facilities Agreement
(see Note 4), were primarily based on headcount or space occupied, as applicable, and include laboratory supplies, laboratory expenses,
rent and utilities, common area maintenance, telecommunications, property taxes and insurance. Research and development costs are
expensed as incurred. General and administrative expenses General and administrative
expenses include both direct expenses incurred by Oncocyte and indirect overhead costs incurred by Lineage and allocated to Oncocyte
under the Shared Facilities Agreement as expenses that benefited or supported Oncocyte’s general and administrative functions
(see Note 4). Direct general and administrative expenses consist primarily of compensation and related benefits, including stock-based
compensation, for executive and corporate personnel, and professional and consulting fees. Indirect general and administrative
expenses allocated by Lineage to Oncocyte under the Shared Facilities Agreement (see Note 4) were primarily based on headcount
or space occupied, as applicable, and include costs for financial reporting and compliance, rent and utilities, common area maintenance,
telecommunications, property taxes and insurance. Sales and marketing
expenses Sales
and marketing expenses consist primarily of personnel costs and related benefits, including stock-based compensation, trade show
expenses, branding and positioning expenses, and consulting fees. Indirect sales and marketing expenses allocated by Lineage, were
primarily based on Oncocyte’s headcount or space occupied, as applicable, and include costs for rent and utilities, common
area maintenance, telecommunications, property taxes and insurance, incurred by Lineage and allocated to Oncocyte under the Shared
Facilities Agreement . Stock-based compensation Oncocyte recognizes compensation
expense related to employee option grants and restricted stock grants, if any, in accordance with FASB ASC 718, Compensation
– Stock Compensation 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 9), there was no impact to Oncocyte statements of operations for any excess tax benefits or deficiencies, as any excess
benefit or deficiency would be offset by the change in the valuation allowance. Forfeitures are accounted for as they occur. Oncocyte estimates the
fair value of employee stock-based payment awards on the grant-date and recognizes the resulting fair value over the requisite
service period. For stock-based awards that vest only upon the attainment of one or more performance goals set by Oncocyte at the
time of the grant (sometimes referred to as milestone vesting), compensation cost is recognized if and when Oncocyte determines
that it is probable that the performance condition or conditions will be, or have been, achieved. Oncocyte uses the Black-Scholes
option pricing model for estimating the fair value of options granted under Oncocyte’s equity plans. The fair value of each
restricted stock grant, if any, is determined based on the value of the common stock granted or sold. Oncocyte has elected to treat
stock-based payment awards with graded vesting schedules and time-based service conditions as a single award and recognizes stock-based
compensation on a straight-line basis over the requisite service period. In June 2018, the FASB
issued ASU 2018-07, Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting The Black-Scholes option
pricing model requires Oncocyte to make certain assumptions including the expected option term, the expected volatility, the risk-free
interest rate and the dividend yield (see Note 8). The expected term of employee
stock options represents the weighted-average period that the stock options are expected to remain outstanding. Oncocyte estimates
the expected term of options granted based on its own experience and, in part, based on upon the “simplified method”
provided under Staff Accounting Bulletin, Topic 14 Net loss per common share Basic net loss per common
share is computed by dividing net loss by the weighted-average number of shares of common stock outstanding for the period. Diluted
net loss per share reflects the weighted-average number of shares of common stock outstanding plus the potential effect of dilutive
securities or contracts which are exercisable to common stock, such as stock options and warrants (using the treasury stock method)
and shares issuable in future periods, except in cases where the effect would be anti-dilutive. Because Oncocyte reported net losses
for all periods presented, all potentially dilutive common stock is antidilutive for those periods. The following common stock
equivalents were excluded from the computation of diluted net loss per common share of common stock for the years ended December
31, 2019 and 2018 because including them would have been antidilutive (in thousands):
Year Ended December 31,
2019 2018
Stock options 1,589 3,578
Warrants 3,384 4,035 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 and development of diagnostic
tests for the detection of cancer. As a result, the financial information disclosed materially represents all of the financial
information related to Oncocyte’s sole operating segment. Recently adopted accounting pronouncements In February 2016, the FASB
issued a new standard related to leases to increase transparency and comparability among organizations by requiring the recognition
of right-of-use (“ROU”) assets and lease liabilities on the balance sheet. Most prominent among the changes in the
standard is the recognition of ROU assets and lease liabilities by lessees for those leases classified as operating leases. Under
the standard, disclosures are required to meet the objective of enabling users of financial statements to assess the amount, timing,
and uncertainty of cash flows arising from leases. On January 1, 2019, Oncocyte
adopted Accounting Standards Update 2016-02, Leases Codification Improvements to Topic 842, Leases, Leases (Topic 842):
Targeted improvements, Upon adoption of ASC 842
and based on the available practical expedients under that standard, Oncocyte did not reassess any expired or existing contracts,
reassess the lease classification for any expired or existing leases and reassess initial direct costs for exiting leases. Oncocyte
also elected not to capitalize leases that have terms of twelve months or less. The adoption of ASC 842
did not have a material impact to Oncocyte’s financial statements because Oncocyte did not have any significant operating
leases at the time of adoption. During the year ended December 31, 2019, Oncocyte entered into various operating leases and an
embedded operating lease in accordance with ASC 842 discussed in Notes 5 and 10. Oncocyte’s accounting for financing leases
(previously referred to as “capital leases”) remained substantially unchanged. Financing leases are included in machinery
and equipment, and in financing lease liabilities, current and noncurrent, in Oncocyte’s balance sheets (see Note 10). Recently issued accounting pronouncements
not yet adopted The following accounting
standard, which is not yet effective, is presently being evaluated by Oncocyte to determine the impact that it might have on its
financial statements. In
December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. |
