| 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 consolidated balance
sheets as of December 31, 2021 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, 2021. Principles
of consolidation On
January 31, 2020, with the consummation of the Insight Merger, Insight became a wholly owned subsidiary of Oncocyte, and on that date
Oncocyte began consolidating Insight’s operations and results with Oncocyte’s operations and results (see Note 3). On February
24, 2021, with the acquisition of the remaining equity interests in Razor, Razor became a wholly owned subsidiary of Oncocyte, and on
that date Oncocyte began consolidating Razor’s results with Oncocyte’s operations and results (see Note 3). On April 15,
2021, with the acquisition of Chronix, Chronix became a wholly owned subsidiary of Oncocyte, and on that date Oncocyte began consolidating
Chronix’s operations and results with Oncocyte’s operations and results (see Note 3). 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 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, the valuation of Series A redeemable convertible preferred stock second tranche obligation, revenue recognition, 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, 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. 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 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 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 September 30, 2022 (in thousands): Schedule of Fair
Value Measurement of Financial Assets and Liabilities
As of September 30, 2022
Total carrying and estimated fair value Quated prices in active markets Significant other observable inputs (Level 2) Significant other observable inputs
Assets:
Marketable equity securities $ 419 $ 419 $ - $ -
Total $ 419 $ 419 $ - $ -
Liabilities:
Contingent consideration liabilities $ 59,524 $ - $ - $ 59,524
Total $ 59,524 $ - $ - $ 59,524 The following
table presents the Company’s assets and liabilities, measured and recognized at fair value on a recurring basis, classified under
the appropriate level of the fair value hierarchy as of December 31, 2021 (in thousands):
As of December 31, 2021
Total carrying and estimated fair value Quated prices in active markets Significant other observable inputs (Level 2) Significant other observable inputs
Assets:
Marketable equity securities $ 904 $ 904 $ - $ -
Total $ 904 $ 904 $ - $ -
Liabilities:
Contingent consideration liabilities $ 76,681 $ - $ - $ 76,681
Total $ 76,681 $ - $ - $ 76,681 The
carrying amounts of prepaid expenses and other current assets, accounts payable, accrued expenses and other current liabilities approximate
fair values because of the short-term nature of these items. Cash,
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 in the unaudited condensed consolidated statements of cash flows were
as follows (in thousands): Schedule of Cash and Cash Equivalents and Restricted Cash
September 30, December 31,
2022 2021
Cash and cash equivalents $ 32,053 $ 35,605
Restricted cash 1,700 1,700
Cash, cash equivalents and restricted cash shown in the condensed statements of cash flows $ 33,753 $ 37,305 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 3 and
4. As of December 31, 2021 and September 30, 2022, there has been no impairment of goodwill and 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 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. 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 pro rata share of earnings or losses from the investment. Since
February 24, 2021, the date of Oncocyte’s acquisition of the remaining interests in Razor, the Razor entity’s financial statements
have been consolidated with Oncocyte (see Notes 3 and 4). Impairment
of 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. As of December 31, 2021 and September 30, 2022, there has been no Revenue
recognition Pursuant
to ASC 606, revenues are recognized when control of services performed is transferred to customers, in an amount that reflects the consideration
Oncocyte expects to be entitled to in exchange for those services. ASC 606 provides for a five-step model that includes: (i)
identifying the contract with a customer, (ii)
identifying the performance obligations in the contract, (iii)
determining the transaction price, (iv)
allocating the transaction price to the performance obligations, and (v)
recognizing revenue when, or as, an entity satisfies a performance obligation. Oncocyte
determines transaction prices based on the amount of consideration we expect to receive for transferring the promised goods or services
in the contract. Consideration may be fixed, variable, or a combination of both. The Company considers any constraints on the variable
consideration and includes in the transaction price variable consideration to the extent it is deemed probable that a significant reversal
in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently
resolved. DetermaRx™
testing revenue Oncocyte
generates revenue from performing DetermaRx™ tests on clinical samples through orders received from physicians, hospitals, and
other healthcare providers. In determining whether all the revenue recognition criteria (i) through (v) above are met with respect to
DetermaRx™ tests, each test result is considered a single performance obligation and is generally considered complete when the
test result is delivered or made available to the prescribing physician electronically, and, as such, there are no shipping or handling
fees incurred by Oncocyte or billed to customers. Although Oncocyte bills a list price for all tests ordered and completed for all payer
types, Oncocyte considers constraints on the variable consideration when recognizing revenue for DetermaRx™. Because DetermaRx™
is a novel test and there are no current reimbursement arrangements with third-party payers other than Medicare, the transaction price
represents variable consideration. Application of the constraint for variable consideration is an area that requires significant judgment.
For all payers other than Medicare, Oncocyte must consider the novelty of the test, the uncertainty of receiving payment, or being subject
to claims for a refund, from payers with whom it does not have a sufficient payment collection history or contractual reimbursement agreements.
Accordingly, for those payers, Oncocyte expects to continue to recognize revenue upon payment until it has a sufficient history to reliably
estimate payment patterns or has contractual reimbursement arrangements, or both, in place. During
the three months ended March 31, 2021, after accumulating additional history of cash receipts and other factors considered by management
for Medicare Advantage covered tests, including the recently published Medicare rate which management believes entitles Oncocyte to get
reimbursed for Medicare Advantage covered tests at the Medicare rate, Oncocyte commenced recognizing Medicare Advantage covered tests
on an accrual basis when the test result is delivered or made available to the prescribing physician electronically, upon considering
no further constraints on the variable consideration, at the Medicare rate. As
of September 30, 2022, Oncocyte had accounts receivable of $ 1.9 1.1 Pharma
services revenue Revenues
recognized include Pharma Services performed by Oncocyte’s Insight and Chronix subsidiaries for its pharmaceutical customers, including
testing for biomarker discovery, assay design and development, clinical trial support, and a broad spectrum of biomarker tests. These
Pharma Services are generally performed under individual scope of work (“SOW”) arrangements or license agreements (together
with SOW the “Pharma Services Agreements”) with specific deliverables defined by the customer. Pharma Services are performed
on a (i) time and materials basis or (ii) per test completed basis. Upon completion of the service to the customer in accordance with
a Pharma Services Agreement, Oncocyte has the right to bill the customer for the agreed upon price (either on a per test or per deliverable
basis) and recognizes Pharma Service revenue at that time. Insight identifies each sale of its Pharma Service offering as a single performance
obligation. Chronix identifies the processing of test samples as a separate performance obligation (considered a series) within license
agreements with customers. Completion
of the service and satisfaction of the performance obligation is typically evidenced by access to the report or test made available to
the customer or any other form or applicable manner of delivery defined in the Pharma Services Agreements. However, for certain SOWs
under which work is performed pursuant to the customer’s highly customized specifications, Oncocyte has the enforceable right to
bill the customer for work completed, rather than upon completion of the SOW. For those SOWs, Oncocyte recognizes revenue over a period
during which the work is performed using a formula that accounts for expended efforts, generally measured in labor hours, as a percentage
of total estimated efforts for the completion of the SOW. As performance obligations are satisfied under the Pharma Services Agreements,
any amounts earned as revenue and billed to the customer are included in accounts receivable. Any revenues earned but not yet billed
to the customer as of the date of Oncocyte’s consolidated financial statements are recorded as contract assets and are included
in prepaids and other current assets as of the financial statement date. Amounts recorded in contract assets are reclassified to accounts
receivable in Oncocyte’s consolidated financial statements when the customer is invoiced according to the billing schedule in the
contract. Oncocyte
establishes an allowance for doubtful accounts based on the evaluation of the collectability of its Pharma Services accounts receivables
after considering a variety of factors, including the length of time receivables are past due, significant events that may impair the
customer’s ability to pay, such as a bankruptcy filing or deterioration in the customer’s operating results or financial
position, reasonable and supportable forecast that affect the collectability of the reported amount, and historical experience. If circumstances
related to customers change, estimates of the recoverability of receivables would be further adjusted. 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 allowance for doubtful accounts. As of September 30, 2022, Oncocyte has not recorded any losses or allowance
for doubtful accounts on its account receivables from Pharma Services. As
of September 30, 2022, Oncocyte had accounts receivable from Pharma Services customers of $ 0.1 0.4 Licensing
revenue Revenues
recognized includes licensing revenue derived from agreements with customers for exclusive rights to market Oncocyte’s proprietary
testing technology. Under the agreements, Oncocyte grants exclusive rights to certain trademarks and technology of Oncocyte for the purpose
of marketing Oncocyte’s tests within a defined geographic territory. A license agreement may specify milestone deliverables or
performance obligations, for which Oncocyte recognizes revenue when its licensee confirms the completion of Oncocyte’s performance
obligation. A licensing agreement may also include ongoing sales support from Oncocyte and typically includes non-refundable licensing
fees and per-test Pharma Services revenues discussed above, for which Oncocyte treats the licensing of the technology, trademarks, and
ongoing support as a single performance obligation satisfied by the passage of time over the term of the agreement. Cost
of revenues Cost
of revenues generally consists of cost of materials, direct labor including benefits, bonus and stock-based compensation, equipment and
infrastructure expenses, clinical sample related costs associated with performing DetermaRx™ tests and Pharma Services, providing
deliverables according to our licensing agreements, license fees due to third parties, and amortization of acquired intangible assets
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 Research
and development expenses are comprised of costs incurred to develop technology, which include salaries and benefits (including stock-based
compensation), laboratory expenses (including reagents and supplies used in research and development laboratory work), infrastructure
expenses (including allocated facility occupancy costs), and contract services and other outside costs. Indirect research and development
expenses are allocated primarily based on headcount, as applicable, and include rent and utilities, common area maintenance, telecommunications,
property taxes, and insurance. Research and development costs are expensed as incurred. Sales
and marketing expenses Sales
and marketing expenses consist primarily of personnel costs and related benefits, including stock-based compensation, trade show expenses,
branding and positioning expenses, and consulting fees. Sales and marketing expenses also include indirect expenses for applicable overhead
allocated based on headcount, and include allocated costs for rent and utilities, common area maintenance, telecommunications, property
taxes, and insurance. General
and administrative expenses General
and administrative expenses consist primarily of compensation and related benefits (including stock-based compensation) for executive
and corporate personnel, professional and consulting fees, rent and utilities, common area maintenance, telecommunications, property
taxes, and insurance. Net
loss per common share Basic
loss per share is computed by dividing the net loss applicable to common stockholders after deducting cumulative unpaid dividends and
accretion of the preferred stock, by the weighted average number of shares of common stock outstanding during the year. Diluted loss
per share is computed by dividing the net loss applicable to common stockholders after deducting cumulative unpaid dividends and accretion
of the preferred stock, by the weighted average number of common shares outstanding plus the number of additional common shares that
would have been outstanding if all dilutive potential common shares had been issued, using the treasury stock method or the if-converted
method, or the two-class method for participating securities, whichever is more dilutive. Potential common shares are excluded from the
computation if their effect is antidilutive. All
common stock equivalents are antidilutive because Oncocyte reported a net loss for all periods presented. The following table presents
the calculation of basic and diluted loss per share of common stock (in thousands): Schedule
of Common Stock Computation of Diluted Net Loss Per Share of Common Stock
1 2 3 4
Three Months Ended Nine Months Ended
September 30, September 30,
2022 2021 2022 2021
Numerator:
Net loss attributable to Oncocyte Corporation $ (9,333 ) $ (13,800 ) $ (27,924 ) $ (28,212 )
Accretion of Series A redeemable convertible preferred stock (222 ) - (294 ) -
Net loss at attributable to common stockholders - Basic and Diluted $ (9,555 ) $ (13,800 ) $ (28,218 ) $ (28,212 )
Denominator:
Weighted average shares used in computing net loss per share attributable to common stockholders - Basic and Diluted 118,610 91,453 108,158 87,812
Basic and diluted net loss per common share $ (0.08 ) $ (0.15 ) $ (0.26 ) $ (0.32 )
Anti-dilutive potential common shares excluded from the computation of diluted net loss per common share:
Stock options 14,405 4,501 13,374 3,404
RSUs 452 60 48 -
Warrants 16,395 2,555 16,395 2,555
Series A redeemable convertible preferred stock 3,845 - 3,845 -
Total 35,097 7,116 33,662 5,959 Leases Oncocyte
accounts for leases in accordance with ASC 842, Leases During
2020 and 2021, Oncocyte entered into various operating leases and an embedded operating lease in accordance with ASC 842 discussed in
Note 10. Oncocyte’s accounting for financing leases remained substantially unchanged. 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 Financial Instruments–Overall:
Recognition and Measurement of Financial Assets and Financial Liabilities As
of September 30, 2022 and December 31, 2021, Oncocyte held 353,264 35,326 0.4 0.9 Recently
issued accounting pronouncements not yet adopted The
following accounting standards, which are not yet effective, are presently being evaluated by Oncocyte to determine the impact that it
might have on its consolidated financial statements. In
June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13,
Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments 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, 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. In
addition to operational adjustments, the consequences of the COVID-19 pandemic have led to uncertainties related to Oncocyte’s
business growth and ability to forecast the demand for its laboratory tests and Pharma Services and resulting revenues. Concerns over
available hospital, staffing, equipment, and other resources, and the risk of exposure to the virus, have led to delays in early-stage
lung cancer surgeries and clinical trials of drugs under development by pharma companies, and the continued deferral of lung cancer surgeries
and drug development clinical trials due to resurgence in COVID-19 cases could continue to result in delayed or reduced use of DetermaRx™
and Oncocyte’s Pharma Services. 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. |
