| 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”) 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 balance sheet as of December
31, 2019 was derived from the audited consolidated financial statements at that date but does not include all the information and
footnotes required by GAAP. These 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,
2019. 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. COVID-19 impact and related risks The ongoing global outbreak
of COVID-19, and the various attempts throughout the world to contain it, have created significant volatility, uncertainty and
disruption. In response to government directives and guidelines, health care advisories and employee and other concerns, Oncocyte
has altered certain aspects of its operations. A number of Oncocyte’s employees have had to work remotely from home and those
on site have had to follow Oncocyte’s social distance guidelines, which could impact their productivity. COVID-19 could also
disrupt Oncocyte’s operations due to absenteeism by infected or ill members of management or other employees, or absenteeism
by members of management and other employees who cannot effectively work remotely but who elect not to come to work due to the
illness affecting others in Oncocyte’s office or laboratory facilities, or due to quarantines. During the COVID-19 pandemic,
Oncocyte may not be able to maintain its preferred level of physician or customer outreach and marketing of its diagnostic testing
and pharma services, which could negatively impact potential new customers’ interest in those tests and services. Because
of COVID-19, travel, visits, and in-person meetings related to Oncocyte’s business have been severely curtailed or canceled
and Oncocyte has instead used on-line or virtual meetings to meet with potential customers and others. In addition to operational
adjustments, the consequences of the COVID-19 pandemic have led to uncertainties related to Oncocyte’s business growth and
ability to forecast the demand for its diagnostic testing and pharma services and resulting revenues. Concerns over available hospital,
staffing, equipment, and other resources, and the risk of exposure to the virus, has led to early stage lung cancer surgeries being
delayed, and the continued deferral of lung cancer surgeries due to resurgence in COVID-19 cases could result in delayed or reduced
use of DetermaRx. It is possible that impacts
of COVID-19 on Oncocyte’s operations or revenues or its access to capital could prevent Oncocyte from complying, or could
result in a material noncompliance, with one or more obligations or covenants under material agreements to which Oncocyte is a
party, with the result that Oncocyte would be in material breach of the applicable obligation, covenant, or agreement. Any such
material breach could cause Oncocyte to incur material financial liabilities or an acceleration of the date for paying a financial
obligation to the other party to the applicable agreement, or could cause Oncocyte to lose material contractual rights, such as
rights to use leased equipment or laboratory or office space, or rights to use licensed patents or other intellectual property
the use of which is material to Oncocyte’s business. Similarly, it is possible that impacts of COVID-19 on the business,
operations, or financial condition of any third party with whom Oncocyte has a contractual relationship could cause the third party
to be unable to perform its contractual obligations to Oncocyte, resulting in Oncocyte’s loss of the benefits of a contract
that could be material to Oncocyte’s business. The full extent to which
the COVID-19 pandemic and the various responses to it might impact Oncocytes’ business, operations and financial results
will depend on numerous evolving factors that are not subject to accurate prediction and that are beyond Oncocyte’s control. Use of estimates The preparation of financial
statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets
and liabilities, and contingent assets and liabilities, at the date of the consolidated financial statements, and the reported
amounts of revenues and expenses during the reporting period. On an ongoing basis, management evaluates estimates which are subject
to significant judgment, including, but not limited to, valuation methods used, assumptions requiring the use of judgment to prepare
financial projections, timing of potential commercialization of acquired in-process intangible assets, applicable discount rates,
probabilities of the likelihood of multiple outcomes of certain events related to contingent consideration, comparable companies
or transactions, determination of fair value of the assets acquired and liabilities assumed including those relating to contingent
consideration, assumptions related to the going concern assessments, allocation of direct and indirect expenses, useful lives associated
with long-lived intangible assets, key assumptions in operating and financing leases including incremental borrowing rates, loss
contingencies, valuation allowances related to deferred income taxes, and assumptions used to value debt and stock-based awards
and other equity instruments. Actual results may differ materially from those estimates. Similarly, Oncocyte assessed
certain accounting matters that generally require consideration of forecasted financial information. The accounting matters assessed
included, but were not limited to, Oncocyte’s equity investments, the carrying value of goodwill, acquired in-process intangible
assets and other long-lived assets. Those assessments as well as other estimates referenced above were made in the context of information
reasonably available to Oncocyte. While Oncocyte considered known or expected impacts of COVID-19 in making its assessments and
estimates, the future impacts of COVID-19 are not presently determinable and could cause actual results to differ materially from
Oncocyte’s estimates and assessments. Oncocyte’s future analysis or forecast of COVID-19 impacts could lead to changes
in Oncocyte’s future estimates and assessments which could result in material impacts to Oncocyte’s consolidated financial
statements in future reporting periods. 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
September 30, 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
in amounts determined as a percentage of future net revenues generated, or upon attainment of net revenue milestones, from pharma
services or diagnostic tests, as applicable, or annual minimum royalties to certain licensors, as provided in the applicable agreements.
The fair value of such liabilities is determined using unobservable inputs. These inputs include the estimated amount and timing
of projected cash flows and the risk-adjusted discount rate used to present value the cash flows (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 that is accounted for under the equity method of accounting as further discussed in Note 7. Impairment of long-lived assets Oncocyte assesses the impairment
of long-lived assets, which consist primarily of right-of-use assets for operating leases and machinery and equipment whenever
events or changes in circumstances indicate that such assets might be impaired and the carrying value may not be recoverable. If
events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable and the expected undiscounted
future cash flows attributable to the asset are less than the carrying amount of the asset, an impairment loss equal to the excess
of the asset’s carrying value over its fair value is recorded. As part of Oncocyte’s
impairment assessment of its long-lived assets, Oncocyte determined that certain assets, mainly comprised of machinery and equipment
and related prepaid service agreements used in the development of DetermaDx™ were impaired as of June 30, 2020 because Oncocyte
determined to discontinue the development of that diagnostic test. Accordingly, Oncocyte recorded a noncash charge of $422,000
representing the net book value of those assets as of that date and included that charge in research and development expenses for
the nine months ended September 30, 2020 (see Note 4). 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 and nine months ended September 30, 2020, were generated primarily from pharma services performed by Oncocyte’s
Insight subsidiary. Insight provides a range of molecular diagnostic services to its pharmaceutical customers (referred to as “pharma
services”) including testing for biomarker discovery, assay design and development, clinical trial support, and a broad spectrum
of biomarker tests in its CLIA-certified laboratory. These pharma services are generally performed under individual scope of work
(“SOW”) arrangements with specific deliverables defined by the customer. Pharma services are generally performed on
a time and materials basis. Upon Insight’s completion of the service to the customer in accordance with the SOW, Insight
has the right to bill the customer for the agreed upon price (either on a per test or per deliverable basis) and recognizes the
pharma service revenue at that time. Insight identifies each sale of its pharma service offering as a single performance obligation. Completion of the service
and satisfaction of the performance obligation under a SOW is typically evidenced by access to the report or test made available
to the customer or any other form or applicable manner of delivery defined in the SOW. However, for certain SOWs under which work
is performed pursuant to the customer’s highly customized specifications, Insight has the enforceable right to bill the customer
for work completed, rather than upon completion of the SOW. For those SOWs, Insight recognizes revenue over a period of time during
which the work is performed using a formula that accounts for expended efforts, generally measured in labor hours, as a percentage
of total estimated efforts for the completion of the SOW. As Insight satisfies the performance obligation under the SOW, any amounts
earned as revenue and billed to the customer are included in accounts receivable. Any revenues earned but not yet billed to the
customer as of the date of Oncocyte’s consolidated financial statements are recorded as contract assets and are included
in prepaids and other current assets as of the financial statement date. Amounts recorded in contract assets are reclassified to
accounts receivable in Oncocyte’s consolidated financial statements when the customer is invoiced according to the billing
schedule in the contract. Insight establishes an
allowance for doubtful accounts based on the evaluation of the collectability of its pharma services accounts receivables after
considering a variety of factors, including the length of time receivables are past due, significant events that may impair the
customer’s ability to pay, such as a bankruptcy filing or deterioration in the customer’s operating results or financial
position, and historical experience. If circumstances related to customers change, estimates of the recoverability of receivables
would be further adjusted. Insight continuously monitors collections and payments from customers and maintains a provision for
estimated credit losses and uncollectible accounts, if any, based upon its historical experience and any specific customer collection
issues that have been identified. Amounts determined to be uncollectible are written off against the allowance for doubtful accounts.
As of September 30, 2020, Oncocyte has not recorded any losses or allowance for doubtful accounts on its account receivables from
pharma services. As of September 30, 2020,
Oncocyte had accounts receivable and contract assets from pharma services customers of $231,000 and $27,000, respectively (see
Note 13). DetermaRx testing revenue In the first quarter of
2020, Oncocyte commercially launched DetermaRx and commenced performing tests on clinical samples through orders received from
physicians, hospitals and other healthcare providers. In determining whether all of the revenue recognition criteria (i) through
(v) above are met with respect to DetermaRx tests, each test result is considered a single performance obligation and is generally
delivered or made available to the prescribing physician electronically and, as such, there are no shipping or handling fees incurred
by Oncocyte or billed to customers. Although Oncocyte bills a list price for all tests ordered and completed for all payer types,
Oncocyte recognizes realized 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 third-party payers other than Medicare, the
transaction price represents variable consideration. Application of the constraint for variable consideration is an area that requires
significant judgment. For all payers other than Medicare, Oncocyte must take into account the uncertainty of receiving payment,
or being subject to claims for refund, from payors with whom it does not have a sufficient payment collection history or contractual
reimbursement agreements. Accordingly, for those payers, Oncocyte expects to continue to recognize revenue on a cash basis until
it has a sufficient history to reliably estimate payment patterns or has contractual reimbursement arrangements, or both, in place.
In September 2020, Oncocyte received a final pricing decision for DetermaRx from CMS and with Medicare coverage in effect, Oncocyte
commenced recognizing revenue when DetermaRx tests are performed for Medicare patients, or when payment was approved by Medicare
in the case of certain tests performed prior to September 2020, rather than on a cash basis. As of September 30, 2020,
Oncocyte had accounts receivable from Medicare of $135,000 for completed DetermaRx tests (see Note 13). Cost of revenues Cost of revenues generally
consists of cost of materials, direct labor including benefits, bonus and stock-based compensation, equipment and infrastructure
expenses, clinical sample related costs associated with performing pharma services and DetermaRx tests, and license fees due to
third parties, and also includes amortization of acquired customer relationship intangible assets. Infrastructure expenses include
depreciation of laboratory equipment, allocated rent costs, leasehold improvements and allocated information technology costs for
operations at Oncocyte’s CLIA laboratories in California and Tennessee. Costs associated with performing diagnostic tests
and pharma services are recorded as the tests or services are performed regardless of whether revenue was recognized with respect
to that test or pharma service. Royalties or revenue share payments for licensed technology calculated as a percentage of revenues
generated using the associated technology are recorded as expenses at the time the related revenues are recognized. 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;
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. For periods prior to January 1, 2020, indirect
research and development expenses included overhead costs incurred and allocated by Lineage 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 8). 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; professional and consulting fees; rent and utilities;
common area maintenance; telecommunications; property taxes; and insurance. Indirect general and administrative expenses allocated
by Lineage to Oncocyte under the Shared Facilities Agreement, which was terminated as of December 31, 2019 (see Note 8), 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. 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. 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 shares 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 September 30, 2020
and December 31, 2019, Oncocyte held 353,264 and 35,326 shares of common stock of Lineage and AgeX, respectively, as marketable
equity securities with a combined fair market value of $361,000 and $379,000, respectively. 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 September 30, (Unaudited)
Nine Months Ended September 30, (Unaudited)
2020 2019 2020 2019
Stock options 9,256 2,146 8,583 3,158
Warrants 3,384 3,285 3,384 3,285 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 14. 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 14). 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, and as follows: In August 2020, the Financial
Accounting Standards Board issued ASU No. 2020-06, Debt – Debt with Conversion and Other Options (subtopic 470-20) and
Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40) |
