The accompanying notes are an integral part of these unaudited condensed financial statements.
The accompanying notes are an integral part of these unaudited condensed financial statements.
The accompanying notes are an integral part of these unaudited condensed financial statements.
The accompanying notes are an integral part of these unaudited interim financial statements.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
|
1.
|
Organization, Basis of Presentation and Liquidity
|
OncoCyte Corporation (“OncoCyte”) was incorporated in 2009 in the state of California and at December 31, 2016 was a majority-owned subsidiary of BioTime, Inc. (“BioTime”), a publicly traded biotechnology company focused in the field of regenerative medicine. Beginning on February 17, 2017, OncoCyte ceased to be a subsidiary of BioTime for financial reporting purposes when BioTime’s percentage ownership of outstanding OncoCyte common stock declined below 50% as a result of the issuance of additional OncoCyte common stock to certain investors who exercised OncoCyte stock purchase warrants (see Note 6).
OncoCyte is developing molecular cancer diagnostics utilizing a discovery platform that focuses on identifying genetic markers that are differentially expressed in certain types of cancers. OncoCyte is presently focusing its efforts on developing diagnostic tests for use in detecting a variety of cancers including lung, bladder, and breast cancers.
Basis of presentation
The financial statements presented herein, and discussed below, have been prepared on a stand-alone basis. The accompanying unaudited condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities Exchange Commission. In accordance with those rules and regulations certain information and footnote disclosures normally included in comprehensive financial statements have been condensed or omitted pursuant to such rules and regulations. The balance sheet as of December 31, 2016 was derived from the audited financial statements at that date, but does not include all the information and footnotes required by GAAP. These 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, 2016.
The accompanying interim condensed 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 results of operations are not necessarily indicative of the results to be expected for any other interim period or for the entire year.
Prior to February 17, 2017, BioTime consolidated the results of OncoCyte into BioTime’s consolidated results based on BioTime’s ability to control OncoCyte’s operating and financial decisions and policies through its majority ownership of OncoCyte common stock. BioTime owned 51.1% of the outstanding common stock of OncoCyte at December 31, 2016. Beginning on February 17, 2017, BioTime’s percentage ownership of the outstanding OncoCyte common stock declined below 50%, resulting in a loss of “control” of OncoCyte under GAAP and as a result BioTime deconsolidated OncoCyte’s financial statements from BioTime’s consolidated financial statements. As a result of this deconsolidation, OncoCyte is no longer considered a subsidiary of BioTime under GAAP as of February 17, 2017. OncoCyte remains an affiliate of BioTime based on BioTime’s retained share ownership in OncoCyte which is sufficient to allow BioTime to exert significant influence over the operations and management of OncoCyte.
To the extent OncoCyte does not have its own employees or human resources for its operations, BioTime or BioTime subsidiaries provide certain employees for administrative or operational services, as necessary, for the benefit of OncoCyte (see Note 4). Accordingly, BioTime allocates expenses such as salaries and payroll related expenses incurred and paid on behalf of OncoCyte based on the amount of time that particular employees devote to OncoCyte affairs. Other expenses such as legal, accounting, travel, and entertainment expenses are allocated to OncoCyte to the extent that those expenses are incurred by or on behalf of OncoCyte. BioTime also allocates certain overhead expenses such as insurance, internet and telephone expenses based on a percentage determined by management. These allocations are made based upon activity-based allocation drivers such as headcount, time spent, percentage of square feet of office or laboratory space used, and percentage of personnel devoted to OncoCyte’s operations or management. Management evaluates the appropriateness of the percentage allocations on a quarterly basis and believes that this basis for allocation is reasonable.
OncoCyte previously granted stock options to employees of BioTime, or employees of other BioTime subsidiaries who perform services for OncoCyte, and OncoCyte recorded stock-based compensation expense in the accompanying statements of operations for these services performed in the periods presented.
Liquidity
For all periods presented, OncoCyte had generated no revenues. Since inception, OncoCyte has financed its operations through the sale of its common stock and warrants to its shareholders, including BioTime, loans from BioTime and other BioTime affiliates, warrant exercises, and a bank loan (see Note 5), and sales of BioTime common shares that OncoCyte holds as available-for-sale securities. OncoCyte has incurred operating losses and negative cash flows since inception, and had an accumulated deficit of $40.0 million and $35.3 million as March 31, 2017 and December 31, 2016, respectively.
OncoCyte plans to continue to invest significant resources in research and development in the field of molecular cancer diagnostics. OncoCyte expects to continue to incur operating losses and negative cash flows. If results of OncoCyte’s research and development efforts, including the results of CLIA and validity studies of its lung cancer test, are successful to the point where it believes that a commercial product can be launched successfully, then additional capital will be required to continue to develop a sales and marketing team and to launch OncoCyte’s first diagnostic test. OncoCyte will also need to raise additional capital in subsequent years to develop and launch additional diagnostic tests, for working capital, and for other expenses, until such time as it is able to generate sufficient revenues from the commercialization of its diagnostic tests to finance its operations. The unavailability or inadequacy of financing or revenues to meet future capital needs could force OncoCyte to modify, curtail, delay, or suspend some or all aspects of its planned operations. Sales of additional equity securities could result in the dilution of the interests of its shareholders. OncoCyte cannot assure that adequate financing will be available on favorable terms, if at all.
At March 31, 2017, OncoCyte had $11.4 million of cash and cash equivalents and held BioTime common shares as available-for-sale securities valued at $1.6 million (see Notes 2 and 5). OncoCyte believes it has sufficient cash, cash equivalents, available for sale securities and working capital to carry out its current operations through at least twelve months from the issuance date of the financial statements included herein, but will need to raise additional capital if it determines to commercialize its lung cancer test during that time frame.
|
2.
|
Summary of Significant Accounting Policies
|
Adoption of ASU 2016-09
,
Improvements to Employee Share-Based Payment Accounting
In March 2016, the FASB issued ASU 2016-09,
Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
, which simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, forfeitures, classification of awards as either equity or liabilities, and classification on the statement of cash flows. OncoCyte adopted ASU 2016-09 beginning on January 1, 2017.
In connection with the adoption of ASU 2016-09, OncoCyte changed its accounting policies including how it accounts for excess tax benefits and deficiencies, if any, and forfeitures, as applicable. All excess tax benefits and tax deficiencies from stock based compensation awards accounted for under ASC 718 are recognized as income tax benefit or expense, respectively, in the statements of operations. Prior to the adoption of ASU 2016-09, OncoCyte recognized excess tax benefits, if any, in additional paid-in capital only if the tax deduction reduced cash income taxes payable and, excess tax deficiencies were recognized either as an offset to accumulated excess tax benefits, if any, on OncoCyte’s statements of operations. An excess income tax benefit arises when the tax deduction of a share-based award for income tax purposes exceeds the compensation cost recognized for financial reporting purposes and, a tax deficiency arises when the compensation cost exceeds the tax deduction. Because OncoCyte has a full valuation allowance for all periods presented (see Note 8) and an insignificant number of stock option exercises during the current quarter, there was no impact to OncoCyte statements of operations for any excess tax benefits or deficiencies, as any excess benefit or deficiency would be offset by the change in the valuation allowance.
Forfeitures are now accounted for as they occur instead of based on the number of awards that were expected to vest. Based on the nature and timing of OncoCyte’s grants, straight line expense attribution of stock based compensation for the entire award and the relatively low forfeiture rate on OncoCyte’s experience, the impact of adoption of ASU 2016-09 pertaining to forfeitures was not significant to OncoCyte’s financial statements.
Accounting for BioTime shares
OncoCyte accounts for the BioTime shares it holds as available-for-sale equity securities in accordance with ASC 320-10-25,
Investments – Debt and Equity Securities
, as the shares have a readily determinable fair value quoted on the NYSE MKT and are held principally for sale to meet future working capital needs. These shares are measured at fair value and reported as current assets on OncoCyte’s balance sheet based on the closing trading price of the shares as of the date being presented. Unrealized holding gains and losses are excluded from the statements of operations and are reported in equity as part of other comprehensive income or loss, net of income taxes, until realized. Prior to February 17, 2017, realized gains and losses for shares sold were reclassified out of accumulated other comprehensive income or loss and were included in equity, as an increase or decrease to equity in common stock consistent with, and pursuant to, ASC 805-50, transactions between entities under common control. As discussed in Note 1, on February 17, 2017 BioTime deconsolidated OncoCyte’s financial statements from its consolidated financial statements. Due to this deconsolidation, and based on BioTime no longer having “control” over OncoCyte under GAAP, any realized gains and losses OncoCyte generates from the sale of BioTime shares on or after February 17, 2017 will be included in its statements of operations.
In March 2017, OncoCyte sold 141,844 shares of BioTime stock for net proceeds of $502,000 and used those proceeds to pay down amounts due to BioTime and affiliates (see Note 5). OncoCyte recognized a $155,000 loss from the sale of the BioTime shares included in other income and expenses, net, for the three months ended March 31, 2017. As of March 31, 2017, OncoCyte held 477,862 BioTime common shares as available-for-sale securities with a fair market value of $1.6 million. Proceeds from the sale of BioTime shares may only be used to repay amounts due to BioTime and affiliates (see Note 5).
Net loss per common share
The computations of basic and diluted net loss per share of common stock are as follows (in thousands, except per share amounts):
|
|
|
Three Months Ended March 31,
(Unaudited)
|
|
|
|
|
2017
|
|
|
2016
|
|
|
Net loss
|
|
|
$(4,704)
|
|
|
|
$(2,928)
|
|
|
Weighted average common shares outstanding – basic and diluted
|
|
|
28,965
|
|
|
|
25,396
|
|
|
Net loss per share – basic and diluted
|
|
|
$(0.16)
|
|
|
|
$(0.12)
|
|
The following common stock equivalents were excluded from the computation of diluted net loss per share of common stock for the periods presented because including them would have been antidilutive (in thousands):
|
|
|
Three Months Ended March 31,
(Unaudited)
|
|
|
|
|
2017
|
|
|
2016
|
|
|
Stock options
|
|
|
3,263
|
|
|
|
2,848
|
|
|
Warrants
|
|
|
3,049
|
|
|
|
-
|
|
Certain reclassifications from general and administrative expenses have been made to present sales and marketing expenses in the statements of operations for the three months ended March 31, 2016 to conform and be comparable to the three months ended March 31, 2017 presentation. These reclassifications had no impact to loss from operations or net loss as reported in the statements of operations and had no impact on cash flows or the balance sheets for any period presented.
|
3.
|
Selected Balance Sheet Components
|
Prepaid expenses and other current assets
As of March 31, 2017 and December 31, 2016, prepaid expenses and other current assets were comprised of the following (in thousands):
|
|
|
March 31, 2017
(Unaudited)
|
|
|
December 31, 2016
|
|
|
Insurance
|
|
|
$229
|
|
|
|
$182
|
|
|
Other prepaid expenses and current asset
|
|
|
222
|
|
|
|
103
|
|
|
Prepaid expenses and other current assets
|
|
|
$451
|
|
|
|
$285
|
|
Accrued expenses
As of March 31, 2017 and December 31, 2016, accrued expenses were comprised of the following (in thousands):
|
|
|
March 31, 2017
(Unaudited)
|
|
|
December 31, 2016
|
|
|
Accrued compensation
|
|
|
$345
|
|
|
|
$549
|
|
|
Accrued vendor payables
|
|
|
662
|
|
|
|
236
|
|
|
Other accrued expenses
|
|
|
186
|
|
|
|
12
|
|
|
Accrued expenses
|
|
|
$1,193
|
|
|
|
$797
|
|
Intangible assets, net
As of March 31, 2017 and December 31, 2016, intangible assets, consisting primarily of
acquired patents, patent applications, and licenses to use certain patents,
were as follows (in thousands):
|
|
|
March 31, 2017
(Unaudited)
|
|
|
December 31, 2016
|
|
|
Intangible assets
|
|
|
$2,419
|
|
|
|
$2,419
|
|
|
Accumulated amortization
|
|
|
(1,492)
|
|
|
|
(1,431)
|
|
|
Intangible assets, net
|
|
|
$927
|
|
|
|
$988
|
|
Amortization expense amounted to $61,000 for the three months ended March 31, 2017 and 2016, respectively.
Equipment and furniture, net
As of March 31, 2017 and December 31, 2016, equipment and furniture were comprised of the following (in thousands):
|
|
|
March 31, 2017
(Unaudited)
|
|
|
December 31, 2016
|
|
|
Equipment and furniture
|
|
|
$1,023
|
|
|
|
$1,007
|
|
|
Accumulated depreciation
|
|
|
(387)
|
|
|
|
(319)
|
|
|
Equipment and furniture, net
|
|
|
$636
|
|
|
|
$688
|
|
Depreciation expense amounted to $67,000 and $10,000 for the three months ended March 31, 2017 and 2016, respectively.
|
4.
|
Related Party Transactions
|
Shared Facilities and Service Agreement
On October 8, 2009, OncoCyte and BioTime entered into a Shared Facilities and Services Agreement (“Shared Facilities Agreement”). Under the terms of the Shared Facilities Agreement, BioTime allows OncoCyte to use BioTime’s premises and equipment located at Alameda, California for the sole purpose of conducting business. BioTime also provides accounting, billing, bookkeeping, payroll, treasury, payment of accounts payable, and other similar administrative services to OncoCyte. BioTime may also provide the services of attorneys, accountants, and other professionals who may also provide professional services to BioTime and its other subsidiaries. BioTime also has provided OncoCyte with the services of laboratory and research personnel, including BioTime employees and contractors, for the performance of research and development work for OncoCyte at the premises.
BioTime charges OncoCyte a “Use Fee” for services provided and usage of BioTime facilities, equipment, and supplies. For each billing period, BioTime prorates and allocates to OncoCyte costs incurred, including costs for services of Bio Time employees and use of equipment, insurance, leased space, professional services, software licenses, supplies and utilities. The allocation of costs depends on key cost drivers, including actual documented use, square footage of facilities used, time spent, costs incurred by BioTime for OncoCyte, or upon proportionate usage by BioTime and OncoCyte, as reasonably estimated by BioTime. BioTime, at its discretion, has the right to charge OncoCyte a 5% markup on such allocated costs although BioTime elected not to charge this markup from the inception of the Shared Facilities Agreement through December 31, 2015. For allocated costs incurred beginning on January 1, 2016, BioTime is charging the 5% markup. The allocated cost of BioTime employees and contractors who provide services is based upon records maintained of the number of hours of such personnel devoted to the performance of services.
The Use Fee is determined and invoiced to OncoCyte on a quarterly basis for each calendar quarter of each calendar year. If the Shared Facilities Agreement terminates prior to the last day of a billing period, the Use Fee will be determined for the number of days in the billing period elapsed prior to the termination of the Shared Facilities Agreement. Each invoice will be payable in full by OncoCyte within 30 days after receipt. Any invoice, or portion thereof, not paid in full when due will bear interest at the rate of 15% per annum until paid, unless the failure to make a payment is due to any inaction or delay in making a payment by BioTime employees from OncoCyte funds available for such purpose, rather than from the unavailability of sufficient funds legally available for payment or from an act, omission, or delay by any employee or agent of OncoCyte. Through March 31, 2017, BioTime has not charged OncoCyte any interest.
In addition to the Use Fees, OncoCyte will reimburse BioTime for any out of pocket costs incurred by BioTime for the purchase of office supplies, laboratory supplies, and other goods and materials and services for the account or use of OncoCyte, provided that invoices documenting such costs are delivered to OncoCyte with each invoice for the Use Fee. BioTime will have no obligation to purchase or acquire any office supplies or other goods and materials or any services for OncoCyte, and if any such supplies, goods, materials or services are obtained for OncoCyte, BioTime may arrange for the suppliers to invoice OncoCyte directly.
The Shared Facilities Agreement will remain in effect, unless either party gives the other party written notice stating that the Shared Facilities Agreement will terminate on December 31 of that year, or unless the agreement is otherwise terminated under another provision of the agreement.
For the three months ended March 31, 2017 and 2016, Use Fees of approximately $79,000 and $178,000, respectively, are included in general and administrative expenses, and Use Fees of approximately $317,000 and $229,000, respectively, are included in research and development expenses in OncoCyte’s statements of operations.
As of March 31, 2017 and December 31, 2016, OncoCyte had $2.6 million and $2.9 million outstanding and payable to BioTime and affiliates included in current liabilities on account of Use Fees under the Shared Facilities Agreement. Since these amounts are due and payable within 30 days of being invoiced, the payables are classified as current liabilities for all periods presented.
|
5.
|
Loan Payable to Silicon Valley Bank
|
On February 21, 2017, OncoCyte entered into a Loan and Security Agreement (the “Loan Agreement”) with Silicon Valley Bank (the “Bank”) pursuant to which OncoCyte borrowed $2 million, (the “First Tranche”) on March 23, 2017. The loan may be increased by $3 million (the “Contingent Tranche”) on or after May 1, 2017 if OncoCyte obtains at least $20 million of additional equity capital and launches its initial lung cancer diagnostic test, and is not in default under the Loan Agreement. Payments of interest only on the principal balance are due monthly from the draw date through October 31, 2017, and, beginning on November 1, 2017, monthly payments of principal of approximately $67,000 plus interest will be due and payable. The outstanding principal balance of the loan bears interest at a stated floating annual interest rate equal to the greater of (i) three-quarters of one percent (0.75%) above the prime rate or (ii) four and one-quarter percent (4.25%). As of March 31, 2017, the prime rate plus 0.75% was 4.75% per annum.
The principal amount of the First Tranche plus accrued interest will be due and payable to the Bank at maturity on April 1, 2020. The principal amount of all draws under the Contingent Tranche, if any, plus accrued interest will be due and payable to the Bank at maturity on October 1, 2020. At maturity, OncoCyte will also pay the Bank an additional final payment fee of 5.8% of the original principal borrowed. OncoCyte accrued the $116,000 final payment fee included in the loan payable as a deferred financing cost on March 23, 2017 when it borrowed the First Tranche.
OncoCyte may prepay in full the outstanding principal balance at any time, subject to a prepayment fee equal to 3.0% of the outstanding principal balance if prepaid on or before February 21, 2018, 2.0% of the outstanding principal balance if prepaid after February 21, 2018 but not later than February 21, 2019, or 1.0% of the outstanding principal balance if prepaid after February 21, 2019. Any amounts borrowed and repaid may not be reborrowed.
The outstanding principal amount of the loan, with interest accrued, the final payment fee, and the prepayment fee may become due and payable prior to the applicable maturity date if an “Event of Default” as defined in the Loan Agreement occurs and is not cured within any applicable cure period. An Event of Default includes, among other events, failure to pay interest and principal when due, material adverse changes, which include a material adverse change in OncoCyte’s business, operations, or condition (financial or otherwise), failure to provide the bank with timely financial statements and copies of filings with the Securities and Exchange Commission, as required, legal judgments or pending or threatened legal actions of $50,000 or more, insolvency, and delisting from the NYSE MKT. OncoCyte’s obligations under the Loan Agreement are collateralized by substantially all of its assets other than intellectual property such as patents and trade secrets that OncoCyte owns. Accordingly, if an Event of Default were to occur and not be cured, the Bank could foreclose on its security interest in the collateral. OncoCyte was in compliance with the Loan Agreement as of the date of this report.
Under the provisions of the Loan Agreement, the proceeds received by OncoCyte from all sales of BioTime shares can only be used to pay the amounts due to BioTime and affiliates discussed in Note 4.
On February 21, 2017 and in conjunction with the $2 million First Tranche becoming available under the Loan Agreement, OncoCyte issued common stock purchase warrants to the Bank (the “Bank Warrants”) entitling the Bank to purchase shares of OncoCyte common stock in tranches related to the loan tranches under the Loan Agreement. In conjunction with the availability of the First Tranche, the Bank became entitled to purchase 8,247 shares of OncoCyte common stock at an exercise price of $4.85 per share, through February 21, 2027 (“Tranche 1 Warrant”). On March 23, 2017, in conjunction with borrowing the First Tranche, the Bank became entitled to purchase an additional 7,321 shares (“Tranche 2 Warrant”) at an exercise price of $5.46 per share, through March 23, 2027. The Bank will become entitled to purchase additional shares of OncoCyte common stock commencing on the date on which OncoCyte meets the conditions of the Contingent Tranche availability (“Tranche 3 Warrant”), and again on the date of the first draw, if any, on the Contingent Tranche (“Tranche 4 Warrant”). The number of additional shares issuable under the Tranche 3 and Tranche 4 Warrants, if any, will be equal to 2.0% of the Contingent Tranche divided by the then determined exercise price, as defined in the Bank Warrants. The exercise price will be determined with reference to the market price of OncoCyte common stock on the date the Contingent Tranche becomes available, or the date on which OncoCyte borrows funds under the Contingent Tranche, as applicable. The Bank may elect to exercise the Bank Warrants on a “cashless exercise” basis and receive a number of shares determined by multiplying the number of shares for which the applicable tranche is being exercised by (A) the excess of the fair market value of the common stock over the applicable exercise price, divided by (B) the fair market value of the common stock. The fair market value of the common stock will be last closing or sale price on a national securities exchange, interdealer quotation system, or over-the-counter market.
OncoCyte considers each warrant tranche, as issued or issuable, to be a separate unit of accounting. The Tranche 1 and Tranche 2 Warrants are classified as equity since, among other factors, they are not mandatorily redeemable, cannot be settled in cash or other assets and require settlement by issuing a fixed number of shares of common stock of OncoCyte. OncoCyte determined the fair value of the warrants using the Black-Scholes option pricing model approximating $61,000, which was recorded as a deferred financing cost against the loan payable balance. Aggregate deferred financing costs of $196,000, recorded against the loan payable balance, will be amortized to interest expense using the effective interest method.
Preferred Stock
OncoCyte is authorized to issue up to 5,000,000 shares of no par value preferred stock. As of March 31, 2017, no preferred shares were issued or outstanding.
Issuance of common stock and warrants
On August 29, 2016, OncoCyte sold an aggregate of 3,246,153 immediately separable units, with each unit consisting of one share of OncoCyte common stock and one warrant to purchase one share of OncoCyte common stock (the “Offering Warrants”), at a price of $3.25 per unit (the “Offering”). The sales were made pursuant to the terms and conditions of certain Purchase Agreements between OncoCyte and the purchasers in the Offering. OncoCyte received $9.8 million in net proceeds after discounts, commissions and expenses from the Offering.
Pursuant to the terms of the Purchase Agreements, on September 26, 2016, OncoCyte filed a resale registration statement on Form S-1, referred to as the Resale Registration Statement, with the Securities and Exchange Commission (the “SEC”), to register for sale under the Securities Act of 1933, as amended (the “Securities Act”), the shares of OncoCyte common stock sold in the Offering and the shares of OncoCyte common stock that may be issued if the Warrants are exercised (the “Warrant Shares”),. The SEC declared the Resale Registration Statement effective on October 20, 2016. OncoCyte has agreed to use commercially reasonable efforts to maintain the effectiveness of the Resale Registration Statement under the Securities Act until the earlier of (i) the date that all shares of its common stock covered by the Resale Registration Statement have been sold or can be sold publicly without restriction or limitation under Rule 144 (including, without limitation, the requirement to be in compliance with Rule 144(c)(1)), or (ii) August 29, 2018.
OncoCyte was in compliance with the aforementioned terms of the Purchase Agreement as of the date of this report.
Offering Warrants and New Warrants
The Offering Warrants have an exercise price of $3.25 per Warrant Share, and may be exercised for five years from October 17, 2016, the date the Offering Warrants became exercisable. The Warrants may be exercised on a net “cashless exercise” basis, meaning that the value of a portion of Warrant Shares may be used to pay the exercise price (rather than payment in cash), in certain circumstances, including if the Resale Registration Statement is not effective when and as required by the Purchase Agreements. The exercise price and the number of Warrant Shares will be adjusted to account for certain transactions, including stock splits, dividends paid in common stock, combinations or reverse splits of common stock, or reclassifications of common stock.
Under certain provisions of the Offering Warrants, in the event of a Fundamental Transaction, as defined in the Offering Warrants, OncoCyte will use reasonable best efforts for the acquirer, or any successor entity other than OncoCyte, to assume the Offering Warrants. If the acquirer does not assume the OncoCyte Offering Warrant obligations, then the acquirer shall pay the holders of Offering Warrants an amount equal to the aggregate value equal to the Black Scholes Value, as defined in the Offering Warrants. The payment of the Black Scholes Value shall be made in cash or such other consideration as the acquirer paid to the other OncoCyte shareholders in the Fundamental Transaction.
OncoCyte is not required to net cash settle the Offering Warrants under any circumstance.
OncoCyte considered the guidance in ASC 815-40,
Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock
, which states that contracts that require or may require the issuer to settle the contract for cash are liabilities recorded at fair value, irrespective of the likelihood of the transaction occurring that triggers the net cash settlement feature. Since solely an acquirer, and not OncoCyte itself, may be required to net cash settle the Offering Warrants in the event of a Fundamental Transaction, the Offering Warrants are classified as equity.
On February 17, 2017, certain OncoCyte investors exercised 625,000 Offering Warrants at an exercise price of $3.25 per warrant for total exercise cash proceeds of $2.0 million (the “Warrant exercise”). In order to induce the investors to complete the Warrant exercise and, in conjunction with the Warrant exercise, OncoCyte issued new warrants to those investors (the “New Warrants”). Certain investors received 200,000 New Warrants with an exercise price of $5.50 per share and the other investor received 212,500 New Warrants with an exercise of $3.25 per share. The New Warrants are exercisable at any time for five years from February 17, 2017. After the Warrant exercise and issuance of the New Warrants to those investors, OncoCyte has an aggregate of 3,033,653 warrants, including the Offering Warrants and New Warrants, outstanding at exercise prices ranging from $3.25 and $5.50 per warrant.
The New Warrants are classified as equity as their terms are consistent with the Offering Warrants. For financial reporting purposes, the issuance of the New Warrants was treated as an inducement offer to certain shareholders to exercise their Offering Warrants. Accordingly, the fair value of the New Warrants, determined using the
Black-Scholes option pricing model,
approximating $1.1 million was recognized by OncoCyte as a noncash charge to shareholder expense included in general and administrative expenses and a corresponding increase to equity on February 17, 2017, the issuance date.
Stock option exercises
During the three months ended March 31, 2017, 5,484 shares of common stock were issued upon the exercise of stock options, from which OncoCyte received approximately $16,000 in cash proceeds.
|
7.
|
Stock-based Compensation
|
Options Granted
OncoCyte has adopted a Stock Option Plan (the “Plan”) under which 4,000,000 shares of common stock are authorized for the grant of stock options or the sale of restricted stock. The Plan also permits OncoCyte to issue such other securities as its Board of Directors or the Compensation Committee administering the Plan may determine.
As of March 31, 2017, 629,121 shares of common stock were available for future grants under the Plan.
A summary of OncoCyte stock option activity under the Plan and related information follows (in thousands except weighted average exercise price):
|
Options
|
|
Available for
Grant
|
|
|
Number of
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Outstanding at December 31, 2016
|
|
|
880
|
|
|
|
3,017
|
|
|
|
$2.52
|
|
|
Options granted
|
|
|
(432)
|
|
|
|
432
|
|
|
|
4.91
|
|
|
Options exercised
|
|
|
-
|
|
|
|
(5)
|
|
|
|
2.98
|
|
|
Options forfeited
|
|
|
181
|
|
|
|
(181)
|
|
|
|
2.90
|
|
|
Outstanding at March 31, 2017
|
|
|
629
|
|
|
|
3,263
|
|
|
|
$2.81
|
|
|
Exercisable at March 31, 2017
|
|
|
|
|
|
|
1,209
|
|
|
|
$1.76
|
|
There were 5,484 stock options exercised during the three months ended March 31, 2017.
OncoCyte recorded stock-based compensation expense in the following categories on the accompanying statements of operations for the three months ended March 31, 2017 and 2016 (in thousands):
|
|
|
Three Months Ended
March 31,
(Unaudited)
|
|
|
|
|
2017
|
|
|
2016
|
|
|
Research and development
|
|
|
$205
|
|
|
|
$37
|
|
|
General, administrative, sales and marketing
|
|
|
145
|
|
|
|
88
|
|
|
Total stock-based compensation expense
|
|
|
$350
|
|
|
|
$125
|
|
The assumptions that were used to calculate the grant date fair value of OncoCyte’s employee and non-employee stock option grants for the three months ended March 31, 2017 and 2016 were as follows.
|
|
|
2017
|
|
|
2016
|
|
|
Expected life (in years)
|
|
|
6.53
|
|
|
|
6.39
|
|
|
Risk-free interest rates
|
|
|
2.11 %
|
|
|
|
1.40 %
|
|
|
Volatility
|
|
|
57.29 %
|
|
|
|
71.22 %
|
|
|
Dividend yield
|
|
|
-
|
|
|
|
- %
|
|
The determination of stock-based compensation is inherently uncertain and subjective and involves the application of valuation models and assumptions requiring the use of judgment. If OncoCyte had made different assumptions, its stock-based compensation expense and net loss for the three months ended March 31, 2017 and 2016 may have been significantly different.
OncoCyte does not recognize deferred income taxes for incentive stock option compensation expense, and records a tax deduction only when a disqualified disposition has occurred.
The provision for income taxes is determined using an estimated annual effective tax rate. The effective tax rate may be subject to fluctuations during the year as new information is obtained, which may affect the assumptions used to estimate the annual effective tax rate, including factors such as valuation allowances against deferred tax assets, the recognition or de-recognition of tax benefits related to uncertain tax positions, if any, and changes in or the interpretation of tax laws in jurisdictions where OncoCyte conducts business. Due to losses incurred for all periods presented, OncoCyte did not record any provision or benefit for income taxes.
A valuation allowance is provided when it is more likely than not that some portion of the deferred tax assets will not be realized. OncoCyte established a full valuation allowance for all periods presented due to the uncertainty of realizing future tax benefits from its net operating loss carryforwards and other deferred tax assets.
|
9.
|
Commitments and Contingencies
|
Master Lease Line Agreement
On April 7, 2016, OncoCyte entered into a Master Lease Line Agreement (the “Lease Agreement”) with an unrelated financing company for the purchase and financing of certain equipment. OncoCyte may use up to $875,000 for purchases of equipment financed by the Lease Agreement from March 29, 2016 through May 31, 2017, the expiration date of the availability of funds under the Lease Agreement. Each lease schedule OncoCyte enters into under the Lease Agreement must be in minimum increments of $50,000 each with a 36-month lease term, collateralized by the equipment financed under the lease schedule. Each lease schedule requires a deposit for the first and last payment under that schedule. Monthly payments will be determined using a lease factor approximating an interest rate of 10% per annum. At the end of each lease schedule under the Lease Agreement, assuming no default has occurred, OncoCyte may either return the equipment financed under the schedule for a restocking fee of 7.5% of the original cost of the equipment or purchase the equipment from the financing company at a fair value not less than 12.5% of the original cost of the equipment.
On April 7, 2016, OncoCyte entered into a lease schedule under the Lease Agreement for certain equipment costing approximately $435,000 applied against the lease line, requiring payments of $14,442 per month over 36 months. In December 2016, OncoCyte entered into a lease schedule under the Lease Agreement for certain equipment costing approximately $161,000, requiring payments of $5,342 per month over 36 months. OncoCyte has accounted for these leases as a capital lease in accordance with ASC 840,
Leases
, due to the net present value of the payments under the lease approximating the fair value of the equipment at inception of the lease, or approximately $626,000. The payments under the lease schedules will be amortized to capital lease obligations and interest expense using the interest method at an imputed rate of approximately 10% per annum. As of March 31, 2017, there was approximately $279,000 available under the Lease Agreement for future purchases and financing of equipment (see Note 10).
Litigation – General
OncoCyte will be subject to various claims and contingencies in the ordinary course of its business, including those related to litigation, business transactions, employee-related matters, and other matters. When OncoCyte is aware of a claim or potential claim, it assesses the likelihood of any loss or exposure. If it is probable that a loss will result and the amount of the loss can be reasonably estimated, OncoCyte will record a liability for the loss. If the loss is not probable or the amount of the loss cannot be reasonably estimated, OncoCyte discloses the claim if the likelihood of a potential loss is reasonably possible and the amount involved could be material. OncoCyte is not aware of any claims likely to have a material adverse effect on its financial condition or results of operations.
Employment Contracts
OncoCyte has entered into employment contracts with certain executive officers. Under the provisions of the contracts, OncoCyte may be required to incur severance obligations for matters relating to changes in control, as defined, and involuntary terminations.
Indemnification
In the normal course of business, OncoCyte may provide indemnification of varying scope under OncoCyte’s agreements with other companies or consultants, typically OncoCyte’s clinical research organizations, investigators, clinical sites, suppliers and others. Pursuant to these agreements, OncoCyte will generally agree to indemnify, hold harmless, and reimburse the indemnified parties for losses and expenses suffered or incurred by the indemnified parties arising from claims of third parties in connection with the use or testing of OncoCyte’s diagnostic tests. Indemnification provisions could also cover third party infringement claims with respect to patent rights, copyrights, or other intellectual property pertaining to OncoCyte’s diagnostic tests. The term of these indemnification agreements will generally continue in effect after the termination or expiration of the particular research, development, services, or license agreement to which they relate. The potential future payments OncoCyte could be required to make under these indemnification agreements will generally not be subject to any specified maximum amounts. Historically, OncoCyte has not been subject to any claims or demands for indemnification. OncoCyte also maintains various liability insurance policies that limit OncoCyte’s financial exposure. As a result, OncoCyte management believes that the fair value of these indemnification agreements is minimal. Accordingly, OncoCyte has not recorded any liabilities for these agreements as of March 31, 2017 and December 31, 2016.
On April 13, 2017, OncoCyte entered into a lease schedule under the Lease Agreement for certain equipment costing approximately $285,000, requiring payments of $9,462 per month over 36 months. After this lease schedule, there is no remaining financing available under the Lease Agreement.