Oncocyte Corporation — Q3 2023 Form 10-Q
Entity note: The filing is for Oncocyte Corporation, not Insight Molecular Diagnostics Inc. It covers the quarter and nine months ended September 30, 2023; financial amounts below are in U.S. dollars.
Business context and reporting period
Oncocyte develops and commercializes precision diagnostics, including VitaGraft, DetermaIO and DetermaCNI, and provides Pharma Services. DetermaIO was available for biopharma research and clinical-trial use; the company was completing its clinical development and commercialization planning. In February 2023, Oncocyte divested control of Razor and the DetermaRx business, reporting Razor as discontinued operations.
Financial performance and liquidity
- Revenue: Q3 revenue was $429,000, up from $67,000 a year earlier. Nine-month revenue was $1.189 million, up 74% from $684,000. Pharma Services generated $423,000 in Q3 and $1.137 million year to date.
- Profitability and margins: Q3 gross profit was $248,000, a 58% gross margin, versus a $269,000 gross loss in Q3 2022. Nine-month gross profit was $530,000, a 45% margin, versus $9,000 a year earlier. Continuing-operations losses were $6.489 million in Q3 and $8.863 million for nine months. Net loss was $6.489 million and $11.789 million, respectively; basic and diluted loss per share attributable to common stockholders was $0.81 for Q3 and $1.68 for nine months.
- Expenses: Nine-month R&D was $6.747 million and sales and marketing was $2.213 million, both higher year over year. G&A declined to $9.430 million from $16.794 million, primarily due to lower stock compensation and personnel expenses.
- Cash flow: Net cash used in operating activities was $18.763 million for nine months, compared with $35.920 million in the prior-year period. Investing activities used $1.173 million; financing activities provided $12.216 million, including $13.4 million net proceeds from common-stock sales.
- Liquidity and obligations: September 30 cash and equivalents were $13.783 million; marketable equity securities were $441,000 and restricted cash was $1.7 million. Current assets were $16.917 million and current liabilities $8.033 million. The company reported $28.715 million of contingent-consideration liabilities and $2.935 million of operating and financing lease liabilities. No bank-loan balance remained. Series A preferred stock had a $5.217 million aggregate liquidation preference and is generally subject to cash redemption by April 8, 2024; its terms also require at least $8 million in unrestricted, unencumbered cash absent specified consent.
Material changes versus the prior comparable period
- Q3 continuing-operations loss increased from $1.818 million to $6.489 million, despite higher revenue. The comparison includes a $6.142 million contingent-consideration fair-value gain in Q3 2022 versus a $435,000 gain in Q3 2023, and a $1.811 million 2023 impairment charge.
- Nine-month net loss improved from $27.924 million to $11.789 million, substantially reflecting lower discontinued-operations losses after the Razor divestiture. Continuing-operations loss, however, rose from $6.595 million to $8.863 million.
- Year-to-date results included a $16.947 million gain from a lower estimated fair value of contingent consideration, offset in part by $6.761 million of impairment losses and a $1.283 million loss on disposal and held-for-sale assets. The impairment charges included acquired intangible assets and leasehold improvements.
- Oncocyte raised approximately $13.9 million gross in an April 2023 common-stock offering, redeemed approximately $1.1 million of Series A preferred stock, and implemented a 1-for-20 reverse stock split in July. Shares outstanding were 8.261 million at September 30, versus 5.932 million at December 31, 2022.
Outlook, risks and unusual items
- Going concern: Management concluded substantial doubt exists about the company’s ability to continue as a going concern for at least one year after issuance of the financial statements. It expects continuing operating losses and negative cash flows, plans further equity financing and reduced spending, and states that the likelihood of successfully raising sufficient funds or reducing expenses enough to alleviate the doubt is less than probable.
- Outlook: Management expects operating expenses to remain flat while managing available cash, but provides no numerical revenue, earnings or cash-flow guidance. Additional capital is needed to develop and commercialize tests; if unavailable, the company may delay, curtail or suspend planned operations.
- Commercial and reimbursement risks: Growth depends on test development, commercialization and reimbursement coverage, including from Medicare. Revenue remains small and concentrated: two Pharma Services customers represented 98% of Q3 revenue. Reimbursement delays or loss of customer activity could materially affect results.
- Other notable items: The Chronix acquisition earnout terms were amended in February 2023, eliminating certain milestone and royalty obligations and revising remaining earnout terms. The Irvine office sublease began to take effect in September 2023 and is expected to offset occupancy costs over time. The company reported no material litigation and no material change in internal controls.
Important facts for investors to verify
- Whether available cash and subsequent financing are sufficient to fund operations and meet the Series A preferred-stock redemption obligation due in 2024.
- Actual cash burn and cash runway, including how much reported operating cash use relates to continuing versus discontinued operations.
- Progress toward clinical validation, commercialization and reimbursement for DetermaIO, VitaGraft and DetermaCNI.
- Whether Pharma Services revenue can grow beyond a small base and remain resilient given customer concentration.
- The assumptions behind contingent-consideration valuations and impairment estimates, and the potential for further changes or charges.
- Potential dilution from future equity financing, preferred-stock conversion or redemption, and the effect of the reverse split on share liquidity.