| Basis of Presentation and Summary of Significant Accounting Policies | 2. Basis of Presentation and Summary of Significant Accounting
Policies Basis of 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”) Prior to January 1, 2020,
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 8). 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, utilities, property taxes, insurance, and 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. Principles of consolidation On January 31, 2020, with
the consummation of the Merger, Insight became Oncocyte’s wholly owned subsidiary and on that date Oncocyte began consolidating
Insight’s operations and results with its own operations and results (see Note 5). The accompanying 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 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 The preparation of financial
statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets
and liabilities, and contingent assets and liabilities, at the date of the consolidated financial statements, and the reported
amounts of revenues and expenses during the reporting period. On an ongoing basis, management evaluates estimates which are subject
to significant judgment, including, but not limited to, valuation methods used, assumptions requiring the use of judgment to prepare
financial projections, timing of potential commercialization of acquired in-process intangible assets, applicable discount rates,
probabilities of the likelihood of multiple outcomes of certain events related to contingent consideration, comparable companies
or transactions, determination of fair value of the assets acquired and liabilities assumed including those relating to contingent
consideration, assumptions related to the going concern assessments, allocation of direct and indirect expenses, useful lives associated
with long-lived intangible assets, key assumptions in operating and financing leases including incremental borrowing rates, loss
contingencies, valuation allowances related to deferred income taxes, and assumptions used to value debt and stock-based awards
and other equity instruments. Actual results may differ materially from those estimates. Business Combinations and Fair Value Measurements Oncocyte accounts for business
combinations in accordance with ASC 805, which requires the purchase consideration transferred to be measured at fair value on
the acquisition date in accordance with ASC 820, Fair Value Measurement
● Level 1
● Level 2
● Level 3 When a part of the purchase
consideration consists of shares of Oncocyte common stock, Oncocyte calculates the purchase price attributable to those shares,
a Level 1 security, by determining the fair value of those shares quoted on the NYSE American as of the acquisition date. Oncocyte
recognizes estimated fair values of the tangible assets and identifiable intangible assets acquired, including 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. Goodwill and Intangible Assets In accordance with ASC
350, Intangibles – Goodwill and Other 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 5 and 6. As of
March 31, 2020, there has been no impairment of goodwill and intangible assets. Obligations related to royalties Certain of Oncocyte’s
asset and business acquisitions involve the potential for future payment of consideration to third-parties and former selling shareholders
that is contingent upon the royalty payments that would be due on future net revenues generated from diagnostic tests, subject
to annual minimums to the licensors, as defined in the applicable agreements. The fair value of such liabilities is determined
at the acquisition date 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 5 and 7). 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 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 condensed 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 7. Revenue
recognition Prior to January 1, 2020,
Oncocyte generated no revenues. Effective on January 1, 2020, Oncocyte adopted the revenue recognition standard ASC Topic 606,
Revenue from Contracts with Customers Pharma services revenue Revenues
recognized during the three months ended March 31, 2020, were generated primarily from pharma services performed by DetermaRx™ testing
revenue During the three months
ended March 31, 2020, Oncocyte commercially launched DetermaRx™ and commenced performing tests on clinical samples through
orders received from physicians, hospitals and other healthcare providers. In determining whether
all of the criteria (i) through (v) above are met with respect to DetermaRx™ tests, each test result is considered a single
performance obligation and is generally delivered or made available to the physician electronically and, as such, there
are no shipping or handling fees incurred by Oncocyte or billed to customers Oncocyte recognizes
revenue on a cash basis rather than accrual basis when it cannot conclude that all the revenue recognition criteria have been met.
Because there are no current reimbursement arrangements with government or third-party payers, the transaction price represents
variable consideration. Application of the constraint for variable consideration is an area that requires significant judgment.
Oncocyte currently is unable to conclude that significant reversal of revenue will not occur based on uncertainty of payment of
any amount. Oncocyte expects to recognize revenue on a cash basis until it has a sufficient history to reliably estimate payment
patterns or has contractual reimbursement arrangements, or both, in place. Costs of revenue Cost of revenues generally
consists of cost of materials, direct labor including benefits, bonus and stock-based compensation, equipment and infrastructure
expenses, and clinical sample related costs associated with performing pharma services and DetermaRx™ tests and license fees
due to third parties. Infrastructure expenses include depreciation of laboratory equipment, allocated rent costs, leasehold improvements
and allocated information technology costs, including amortization of acquired customer relationship intangibles. Costs associated
with performing diagnostic tests are recorded as the tests are performed regardless of whether revenue was recognized with respect
to that test. 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. As discussed above, Oncocyte
generated no revenues or cost of revenues prior to January 1, 2020. Research and development expenses Research
and development expenses are comprised of costs incurred to develop technology and include salaries and benefits, including stock-based
compensation, reagents and supplies used in research and development laboratory work, infrastructure expenses, including allocated
facility occupancy costs, contract services and other outside costs. For periods prior to January 1, 2020, indirect research and development expenses included
General and administrative expenses General and administrative
expenses include both direct expenses incurred by Oncocyte and, prior to January 1, 2020, 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. 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 ,
which was terminated as of December 31, 2019 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. Prior to January 1, 2020, a portion of the expenses allocated
by Lineage under the Shared Facilities Agreement were designated by Oncocyte as sales and marketing expenses to the extent Oncocyte
determined that such expenses were fairly allocable to sales and marketing functions, including overhead. Accounting for Lineage and AgeX shares of
common stock Oncocyte accounts for the
Lineage and AgeX sh ares of common it holds 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 As of March 31, 2020, Oncocyte
held 353,264 and 35,326 shares of common stock of Net loss per common share All potentially dilutive
common stock equivalents are antidilutive because Oncocyte reported a net loss for all periods presented. The following common
stock equivalents were excluded from the computation of diluted net loss per common share of common stock for the periods presented
because including them would have been antidilutive (in thousands):
Three Months Ended
2020 2019
Stock options 6,350 3,971
Warrants 3,384 4,035 Leases On January 1, 2019, Oncocyte
adopted Accounting Standards Update 2016-02, Leases 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 2019, Oncocyte entered into various operating leases and an embedded operating lease in
accordance with ASC 842 discussed in Note 13. Oncocyte’s accounting for financing leases (previously referred to as “capital
leases”) remained substantially unchanged. Financing leases are included in machinery and equipment, and in financing lease
liabilities, current and noncurrent, in Oncocyte’s condensed balance sheets (see Note 13). Recently issued accounting pronouncements
not yet adopted The recently issued accounting
pronouncements applicable to Oncocyte that are not yet effective are disclosed in Oncocyte’s Annual Report on Form 10-K
for the year ended December 31, 2019. |
