ONCOCYTE CORPORATION The matters addressed in this Item 2 that are not historical information
constitute "forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, including statements about any of the following: uncertainties
associated with the ongoing coronavirus (COVID-19) pandemic, including its
possible effects on our operations, the demand for our diagnostic tests and
other LDTs and Pharma Services, and our ability to raise capital to finance our
operations; our ability to efficiently and flexibly manage our business amid
uncertainties related to COVID-19; any projections of earnings, revenue, cash,
effective tax rate, use of net operating losses, or any other financial items;
the plans, strategies and objectives of management for future operations or
prospects for achieving such plans, and any statements of assumptions underlying
any of the foregoing. Any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements. Without limiting
the foregoing, the words "believes," "anticipates," "plans," "expects," "seeks,"
"estimates," and similar expressions are intended to identify forward-looking
statements. While
The following discussion should be read in conjunction with
Critical Accounting Policies
This Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses and analyzes data in our unaudited condensed consolidated
interim financial statements, which we have prepared in accordance with
An accounting policy is deemed critical if it requires an accounting estimate to
be made based on assumptions about matters that are highly uncertain at the time
the estimate is made, if different estimates reasonably could have been used, or
if changes in the estimate are reasonably likely to occur, that could materially
impact the financial statements. Management believes that there have been no
significant changes during the three months ended
Results of Operations
The ongoing global outbreak of COVID-19, and the various attempts throughout the
world to contain it, have created significant financial volatility, economic
uncertainty, and changes to the way
48
The consequences of the COVID-19 pandemic have led to uncertainties related to
our growth and our ability to forecast the demand for our diagnostic testing and
Pharma Services and resulting revenues, as we have not had time to establish a
base of customers, revenues or other relevant trends prior to the outbreak of
COVID-19. We had no commercial revenues until the first quarter of 2020 when we
launched our first commercial diagnostic test, DetermaRx™, and acquired the
Pharma Services business of Insight. We had expected that initial DetermaRx™
revenues would be constrained by the lack of Medicare coverage. CMS Medicare
reimbursement pricing approval for DetermaRx™ did not become effective until
The pandemic is affecting our revenue-generating activities. During the COVID-19 pandemic, we have not been, and may not be, able to maintain our preferred level of physician or customer outreach and marketing of our diagnostic testing and Pharma Services, which could negatively impact our potential new customers' interest in our tests and services. Even if government and other COVID-19 related restrictions are relaxed and lung cancer surgeries are performed at or close to pre-pandemic levels, any growth and anticipated adoption of our diagnostic tests may not occur. Although we have not yet experienced COVID-19 related supply chain disruptions impacting our testing capacity, if the vendors of equipment and reagents used in our diagnostic laboratories experience supply, operational, or financial disruptions due to the COVID-19 pandemic, we could experience supply constraints in the future that could cause increased costs or delays in performing DetermaRx™ tests and Pharma Services and in continuing the development of new diagnostic tests.
The full extent to which the COVID-19 pandemic and the various responses might impact our business, operations and financial results will depend on numerous evolving factors that we will not be able to accurately predict, including: the duration and scope of the pandemic; governmental, business and individuals' actions that have been and continue to be taken in response to the pandemic; the availability and cost to access COVID-19 tests, vaccines and therapies; the effect on our potential customers and their demand for our diagnostic testing and Pharma Services; the effect on our suppliers and their ability to provide the necessary equipment and materials to support our tests and services; disruptions or restrictions on our employees' ability to work and travel; interruptions or restrictions related to the distribution of our tests in foreign markets, including impacts on logistics of shipping and receiving patient samples; and any stoppages, disruptions or increased costs associated with development, production and marketing of our diagnostic tests. In addition to the direct impacts to our business operations, the global economy is likely to continue to be significantly weakened as a result of actions taken in response to the COVID-19 pandemic and to the extent that such a weakened global economy impacts customers' ability or willingness to purchase and pay for our tests, our business and results of operation could be negatively impacted. Due to the uncertain scope and duration of the COVID-19 pandemic and uncertain timing of any recovery or normalization, we are currently unable to estimate the resulting impacts on our operations and financial results. We will continue to actively monitor the issues raised by the COVID-19 pandemic and may take further actions that alter our operations, as may be required by federal, state, local or foreign authorities, or that we determine are in the best interests of our employees, our customers, and our shareholders.
49
Operating Summary for the Three Months ended
Three Months Ended
March 31,
2022 2021 $ Change % Change
Revenues 1,424 1,124 300 27 %
Cost of revenues 1,957 1,045 912 87 %
Research and development expenses 5,128 3,361 1,767 53 %
Sales and marketing expenses 3,237 2,254 983 44 %
General and administrative expenses 5,653 4,764 889 19 %
Change in fair value of contingent
consideration (4,656 ) 1,060 (5,716 ) -539 %
Loss from operations (9,895 ) (11,360 ) 1,465 -13 %
Other expense (396 ) (123 ) (273 ) 222 %
Loss before income taxes (10,291 ) (11,483 ) 1,192 -10 %
Income tax benefit - 7,564 (7,564 ) -100 %
Net Loss (10,291 ) (3,919 ) (6,372 ) 163 %
Results of Operations - Three Months Ended
Revenues increased by
Loss before income taxes was
? DetermaRx™ testing revenue increased by
? Cost of revenue and amortization of acquired intangibles increased by
? Research and development expenses increased
? Sales and marketing expenses increased
? General and administrative expenses increased
? Change in fair value of contingent considerations decreased by
? Other expenses increased by
50
Revenues (amounts in thousands, except percentage changes)
Three Months Ended
March 31,
2022 2021 $ Change % Change
DetermaRx™ $ 1,004 $ 607 $ 397 66 %
Pharma Services 380 517 (137 ) -26 %
Licensing 40 - 40 n/a
Total $ 1,424 $ 1,124 $ 300 27 %
We recognize testing revenues for our services in accordance with the provisions
of ASC 606, Revenue from Contracts with Customersas further discussed in Note 2
of this Report. During the first quarter of 2020, we generated revenues for the
first time since our company's inception in 2009. We currently derive our
revenues from the sale of our novel lung cancer stratification test, DetermaRx™,
which we commercially launched in early 2020, and from Pharma Services generated
by our wholly owned subsidiaries, Insight and Chronix, which we acquired on
Under
Pharma Services are generally performed on a time and materials basis. Upon our completion of the service to the customer in accordance with the contract, we have the right to bill the customer for the agreed upon price (either on a per test or per deliverable basis) and recognize the Pharma Services revenue at that time, on an accrual basis.
51
Licensing revenues are generally recognized upon transfer of promised technology information and other contractual performance obligations to licensees in an amount that reflects the consideration we expect to receive in exchange. Licensing revenue is recognized at the point in time when the applicable performance obligations are satisfied and all other revenue recognition criteria have been met.
Pharma Services revenues are generated under discrete agreements for particular customer projects that generally expire with the completion or termination of the customer's project. Accordingly, different customers may account for greater or lesser portions of Pharma Services during different accounting periods, and Pharma Services revenues may exhibit a larger variance from accounting period to accounting period than other revenues such as DetermaRx™ testing revenues.
Licensing revenues for the three months ended
The following table presents the percentage of consolidated revenues by products or services classes:
Three Months Ended
March 31,
2022 2021
DetermaRx™ 70 % 54 %
Pharma Services 27 % 46 %
Licensing 3 % 0 %
Total 100 % 100 %
Cost of revenues
Cost of revenues generally consists of cost of materials; direct labor including
payroll, payroll taxes, bonus, benefit and stock-based compensation; equipment
and infrastructure expenses; clinical sample costs associated with performing
Pharma Services and the DetermaRx™ tests; license fees due to third parties, and
amortization of acquired intangible assets. Infrastructure expenses include
depreciation of laboratory equipment; allocated rent costs; leasehold
improvements; and allocated information technology costs for operations at our
CLIA laboratories in
We expect the cost of DetermaRx™ testing to generally increase in line with the increase in the number of tests we perform, even if we do not recognize corresponding revenues when Medicare, Medicare Advantage, or other insurance coverage is not available. We expect that our cost per test to decrease modestly over time due to the efficiencies we may gain if testing volume increases, and from automation and other cost reductions. There can be no assurance, however, that any of these efficiencies or cost savings will be achieved. Cost of revenues for Pharma Services and licensing revenue will vary depending on the nature, timing, and scope of customer projects.
52
Research and development expenses
A summary of the main drivers of the change in research and development expenses
for the periods presented, is as follows(amounts in thousands, except percentage
changes):
Three Months Ended
March 31,
2022 2021 $ Change % Change
Personnel-related expenses $ 2,115 $ 1,065 $ 1,050 99 %
Laboratory supplies and expenses 858 528 330 63 %
Clinical trials 770 101 669 662 %
Share-based compensation 426 257 169 66 %
Professional fees and outside services 410 1,241 (831 ) -67 %
Facilities and insurance 277 76 201 264 %
Depreciation 210 78 132 169 %
Other 62 15 47 313 %
Total $ 5,128 $ 3,361 $ 1,767 53 %
% of Net Revenue 360 % 299 % 61 %
We expect to continue to incur a significant amount of research and development
expenses during the foreseeable future. Although we have terminated development
work for our DetermaDx™ product line, we will continue development of
DetermaIO™, DetermaTx™, DetermaMx™ and TheraSureTM Transplant Monitor; clinical
trials to promote commercialization of DetermaRx™; and, with the recent
completion of the Chronix merger, the development of our planned DetermaCNI™
test. Our future research and development efforts and expenses will also depend
on the amount of capital that we are able to raise to finance those activities
and whether we acquire rights to any new diagnostic tests. A portion of our
costs for leasing and operating our CLIA laboratories in
The COVID-19 global pandemic has negatively impacted, and is expected to continue to negatively impact, patient recruitment for clinical trials necessary for us to promote the use of DetermaRx™ by physicians, and clinical trials of immunotherapies by pharma companies that may use DetermaIO™ in selecting patients for their trials. We believe that our planned DetermaRx™ clinical trials are critical to gaining physician adoption and driving favorable coverage decisions by private payers, and we expect our investment in the DetermaRx™ clinical trial to increase over time. We may also commence our own clinical trials of DetermaIO™ if we develop that diagnostic test to the point where we determine that its use as a clinical diagnostic appears to be feasible.
53
Sales and marketing expenses
A summary of the main drivers of the change in sales and marketing expenses for
the periods presented, is as follows (amounts in thousands, except percentage
changes):
Three Months Ended
March 31,
2022 2021 $ Change % Change
Personnel-related expenses $ 1,859 $ 1,412 $ 447 32 %
Professional fees and outside services 419 342 77 23 %
Marketing & Advertising 353 74 279 377 %
Share-based compensation 335 233 102 44 %
Facilities and insurance 77 30 47 157 %
Other 194 163 31 19 %
Total $ 3,237 $ 2,254 $ 983 44 %
% of Net Revenue 227 % 201 % 27 %
We expect to continue to incur a significant amount of sales and marketing expenses during the foreseeable future as we continue to market and sell DetermaRx™ and if we successfully complete product development and begin commercialization efforts for DetermaIO™ as a clinical test. Sales and marketing expenses will also increase if we successfully develop and begin commercializing DetermaCNI™, DetermaTx™, and DetermaMx™, or if we acquire and commercialize other diagnostic tests. Our commercialization efforts and expenses will also depend on the amount of capital that we are able to raise to finance commercialization of our tests. Our future expenditures on sales and marketing will also depend on the amount of revenue that those efforts are likely to generate. Because physicians are more likely to prescribe a test for their patients if the cost is covered by Medicare or health insurance, demand for our diagnostic and other tests and our expenditures on sales and marketing are likely to increase if our diagnostic or other tests qualify for reimbursement by Medicare or private health insurance companies.
General and administrative expenses
A summary of the main drivers of the change in general and administrative
expenses for the periods presented, is as follows (amounts in thousands, except
percentage changes):
Three Months Ended
March 31,
2022 2021 $ Change % Change
Personnel-related expenses and
board fees $ 2,337 $ 1,223 $ 1,114 91 %
Professional fees, legal, and
outside services 1,275 2,008 (733 ) -37 %
Share-based compensation 1,180 778 402 52 %
Facilities and insurance 698 722 (24 ) -3 %
Other 163 33 130 394 %
Total $ 5,653 $ 4,764 $ 889 19 %
% of Net Revenue 397 % 424 % -27 %
54
Change in fair value of contingent consideration
We will pay contingent consideration if various payment milestones are triggered
under the merger agreements through which we acquired Insight and Chronix. See
Note 3 to our condensed consolidated interim financial statements included in
this Report. Changes in the fair value of the contingent consideration will be
based on our reassessment of the key assumptions underlying the determination of
this liability as changes in circumstances and conditions occur from the Insight
and Chronix acquisition dates to the reporting period being presented, with the
subsequent change in fair value recorded as part of our consolidated loss from
operations for that period. For the three months ended
Other income and expenses, net
Other income and expenses, net, is primarily comprised of interest income and
interest expenses, net, and unrealized gains and losses on Lineage and AgeX
marketable equity securities we hold. Interest income is earned from money
market funds we hold for capital preservation. Interest expense was incurred
under our loan payable to the
Income taxes
In connection with the Razor acquisition discussed in Note 3 to our condensed
consolidated interim financial statements included elsewhere in this Report, a
change in the acquirer's valuation allowance that stems from the purchase of
assets should be recognized as an element of the acquirer's income tax benefit
in the period of the acquisition. Accordingly, for the three months ended
A valuation allowance is provided when it is more likely than not that some portion of the deferred tax assets will not be realized. Other than the partial releases discussed above, we established a full valuation allowance for all periods presented due to the uncertainty of realizing future tax benefits from our net operating loss carry-forwards and other deferred tax assets.
Liquidity and Capital Resources
We finance our operations primarily through the sale of our common stock. We
have incurred operating losses and negative cash flows since inception and had
an accumulated deficit of
At
55
We expect that our operating expenses will increase as we build our marketing
and sales force and add new equipment and personnel to our CLIA laboratories to
commercialize DetermaRx™, followed by DetermaIO™ for clinical use and other
diagnostic tests in our pipeline after development is completed, including
TheraSureTM Transplant Monitor and DetermaCNI™ acquired through the Chronix
Merger. Although we intend to market our diagnostic tests in
In addition to sales and marketing expenses, we will incur expenses from leasing
and improving our new office and laboratory facilities in
We may need to meet significant cash payment obligations to former Insight and Chronix shareholders in connection with our acquisition of those companies, as disclosed in Note 3 to the condensed consolidated interim financial statements included elsewhere in this Report. To meet the future cash payment obligations, we may have to utilize cash on hand that would otherwise be available to us for other business and operational purposes, which could cause us to delay or reduce activities in the development and commercialization of our cancer tests.
We will need to continue to raise additional capital to finance our operations, including the development and commercialization of our diagnostic tests, and making payments that may become due under our obligations to former Chronix shareholders and former Insight shareholders, until such time as we are able to generate sufficient revenues to cover our operating expenses. Delays in the development of DetermaIO™, or obtaining reimbursement coverage from Medicare for that diagnostic test and for the other diagnostic tests that we may develop or acquire, could prevent us from raising sufficient additional capital to finance the completion of development and commercial launch of those tests. Investors may be reluctant to provide us with capital until our tests are approved for reimbursement by Medicare or reimbursement by private healthcare insurers or healthcare providers, or until we begin generating significant amounts of revenue from performing those tests. The unavailability or inadequacy of financing or revenues to meet future capital needs could force us to modify, curtail, delay, or suspend some or all aspects of our planned operations. Sales of additional equity securities could result in the dilution of the interests of our shareholders. We cannot assure that adequate financing will be available on favorable terms, if at all.
Our ability to generate revenues from operating activities and the availability of financing may be adversely impacted by the COVID-19 pandemic which could continue to cause deferrals of cancer surgeries that might otherwise have resulted in the utilization of DetermaRx™, or could cause the deferral of clinical development of therapies that might otherwise have resulted in the utilization of DetermaIO™ or our Pharma Services. The commercial release of DetermaRx™ and our acquisition of the Insight Pharma Services business during the COVID-19 pandemic has rendered it more difficult for prospective investors to forecast the demand for our diagnostic testing and Pharma Services and to assess our opportunities for growth. Although the deployment of the recently developed vaccines may quell the impact of COVID-19, the pandemic could continue to depress national and international economies and disrupt capital markets, supply chains, and aspects of our operations for a period of time, all of which may render it more difficult for us to secure additional financing when needed. The extent to which the ongoing COVID-19 pandemic will ultimately impact our business, results of operations, financial condition, or cash flows is highly uncertain and difficult to predict because it will depend on many factors that are outside of our control, such as the duration, scope and severity of the pandemic, steps required or mandated by governments to mitigate the impact of the pandemic, and whether COVID-19 can be effectively prevented and contained by the new vaccines, and whether effective treatments may be developed. We do not yet know the extent to which COVID-19 will negatively impact our financial results or liquidity.
56 Cash used in operations
During the three months ended
Cash used in investing activities
During the three months ended
Cash provided by financing activities
During the three months ended
57
Off-Balance Sheet Arrangements
As of
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