OncoCyte Corporation — Q2 2018 Form 10-Q
Entity note: The filing is for OncoCyte Corporation, although the request metadata names Insight Molecular Diagnostics Inc. The reporting period ended June 30, 2018; financial statements are unaudited. Amounts below are in millions unless otherwise stated.
Business context and financial results
OncoCyte develops blood-based cancer diagnostic tests and was devoting substantially all research and development resources to its lung cancer test, DetermaVu. The filing reports no revenue for the periods presented.
| Metric | Three months ended June 30, 2018 | Six months ended June 30, 2018 | Comparable 2017 period |
|---|---|---|---|
| Revenue | None reported | None reported | None reported |
| Research and development expense | $2.322 | $3.784 | $1.997 / $3.831 |
| General and administrative expense | $1.335 | $3.122 | $1.115 / $3.158 |
| Sales and marketing expense | $0.569 | $1.227 | $0.477 / $1.132 |
| Total operating expenses | $4.226 | $8.133 | $3.589 / $8.121 |
| Net loss | $4.505 | $8.284 | $3.804 / $8.509 |
| Basic and diluted loss per share | $0.12 | $0.24 | $0.13 / $0.29 |
| Net cash used in operating activities | Not presented by quarter | $6.710 | $6.571 |
Profitability and margins are not applicable given the absence of reported revenue and continuing losses. Q2 2018 operating loss was $4.226 million, versus $3.589 million a year earlier.
Liquidity, debt, and cash flow
- At June 30, cash and cash equivalents were $10.294 million; marketable BioTime shares were valued at $0.728 million. Current assets were $11.404 million and current liabilities $4.485 million.
- Cash increased $2.694 million in the first half of 2018. Operating cash use of $6.710 million and investing cash use of $0.022 million were offset primarily by $10.0 million of proceeds from a common-stock placement; financing cash flow was $9.426 million.
- Balance-sheet loan payable was $0.800 million current and $0.713 million noncurrent, net of deferred financing costs. Capital lease liabilities totaled $0.462 million. The bank loan matures April 1, 2020, is secured by substantially all assets other than intellectual property, and bears a floating rate reported at 5.75% as of June 30. The company reported compliance with the loan agreement.
- On July 31, 2018, after quarter-end, OncoCyte raised approximately $3.3 million net from a registered direct offering of shares and warrants.
Material changes and unusual items
- In March and May, the company received $10.0 million gross from a private placement of 7,936,508 shares at $1.26 per share. Shares outstanding rose to 39,407,566 at June 30, compared with 31,451,558 at year-end 2017.
- A $0.625 million noncash impairment charge was recorded in Q2 for therapeutic-use patents and related assets that the company no longer planned to use; intangible assets were reduced to zero.
- Q2 R&D expense rose 16.3% year over year, mainly due to the impairment charge, partly offset by lower laboratory and stock-compensation costs. First-half total operating expenses were nearly flat year over year; sales and marketing costs increased 8.4%.
- New accounting treatment for marketable equity securities moved unrealized gains and losses into earnings beginning January 1, 2018. The company reclassified a prior $0.888 million accumulated other comprehensive loss to accumulated deficit; Q2 included a $0.223 million unrealized loss on BioTime shares.
- On August 6, the company appointed a COO with a $340,000 annual salary and granted options for 250,000 shares, partly tied to DetermaVu milestones.
Outlook, risks, and contingencies
Management expects continued operating losses and negative cash flows and said available cash, marketable securities, and the subsequent financing were expected to fund current operations for at least 12 months from the financial statements’ issuance date. Additional capital will be needed to complete development and commercialize diagnostic tests. Management cited possible dilution, uncertain access to financing, and dependence on reimbursement decisions; Medicare reimbursement approval may take two to three years. Alternative commercialization arrangements, including partnerships or royalties, may reduce capital needs.
Development of DetermaVu was delayed after inconsistent results on the original testing platform. OncoCyte provisionally selected an alternative platform and planned R&D and analytical validation before clinical validation, targeting completion of clinical validation in the first half of 2019. The filing cautions that successful development and commercialization are not assured. It also disclosed no material litigation, no off-balance-sheet arrangements, and no material changes in market risk. Fixed Shared Facilities Agreement payments were approximately $131,000 per month; $2.1 million was payable to BioTime and affiliates at June 30.
Important facts for investors to verify
- Whether DetermaVu completes platform, analytical, and clinical validation on the stated timeline, and whether reimbursement and commercialization are achieved.
- Cash runway assumptions, subsequent financing terms, and the timing and terms of any further capital raises or resulting dilution.
- Outstanding and potentially dilutive shares, including warrants, options, and the July 2018 offering securities.
- Ongoing related-party service costs and amounts due to BioTime, as well as compliance with bank-loan terms and debt repayment requirements.
- The implications of the $0.625 million impairment and any further impairment or equipment costs if the original testing platform is discontinued.