OncoCyte Corporation — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2017. The supplied filing identifies the registrant as OncoCyte Corporation, not Insight Molecular Diagnostics Inc. OncoCyte develops blood-based cancer diagnostics, including its DetermaVu lung cancer test. It reported no revenue in any period presented.
Financial results and liquidity
- Third quarter 2017: Operating expenses and operating loss were $6.835 million, versus $2.582 million in Q3 2016. Net loss was $6.906 million, compared with $2.595 million; basic and diluted loss per share was $0.22 versus $0.10.
- Nine months 2017: Operating expenses were $14.957 million, versus $8.046 million in the prior-year period. Net loss was $15.415 million, versus $8.065 million; loss per share was $0.52 versus $0.31.
- Expense mix, nine months: R&D was $5.667 million, G&A $7.447 million, and sales and marketing $1.843 million. There was no revenue, so revenue margins are not applicable.
- Cash flow, nine months: Cash used in operations was $10.041 million; investing activities provided $0.849 million, primarily from BioTime share sales; financing activities provided $10.042 million, mainly from warrant exercises and a bank loan. Cash increased $0.850 million to $11.024 million.
- Liquidity and balance sheet: At September 30, cash and equivalents were $11.024 million and available-for-sale BioTime shares were valued at $1.003 million. Current assets were $12.484 million and current liabilities $4.637 million. Accumulated deficit was $50.717 million.
- Debt and leases: The bank loan had a reported carrying value of $1.976 million, split between current and noncurrent amounts; capital lease liabilities totaled $0.625 million. The $2.0 million loan bears floating interest (5.00% at September 30), is secured by substantially all assets other than intellectual property, and begins monthly principal payments in November 2017.
Material changes and unusual items
- Operating expenses increased substantially year over year, particularly G&A and sales and marketing. Q3 G&A included approximately $3.0 million of noncash expense for warrants issued to induce warrant exercises; the comparable nine-month noncash charge was approximately $4.1 million.
- Warrant exercises generated $7.774 million of cash during the nine months. In July, OncoCyte received approximately $5.74 million gross from exercises and issued replacement warrants; the related noncash inducement charge was approximately $3.0 million. These transactions increased financing but also create potential dilution.
- BioTime’s ownership fell below 50% on February 17, 2017, and it deconsolidated OncoCyte. BioTime continues to provide facilities and services, and OncoCyte owed BioTime and affiliates $2.102 million at September 30.
- OncoCyte sold 266,442 BioTime shares for net proceeds of $0.934 million and recorded a $0.309 million loss. The company had 31.417 million common shares outstanding at September 30 and 2.779 million warrants outstanding.
Outlook, risks, and contingencies
- Management expects continued operating losses, negative cash flows, and significant R&D spending. It stated that available cash, securities, and working capital were sufficient for current operations for at least 12 months from issuance of the financial statements, but additional capital may be needed to expand DetermaVu development or commercialization and to develop other tests. Financing availability and terms are not assured.
- DetermaVu’s clinical validation study was delayed after inconsistent analytic results, which OncoCyte attributed to a variance in a lot of processing consumables. Completion necessary for a potential commercial launch was expected to be delayed into 2018, subject to resolving the issue; resolution would not ensure a successful study.
- Sales and marketing spending was increasing in preparation for a possible DetermaVu launch. Future spending and demand depend on validation results, available financing, and potential Medicare or private-insurance reimbursement.
- The bank loan includes default provisions, a 5.8% final payment fee, and prepayment fees; the company reported compliance as of the filing. No material litigation or material claims likely to affect financial condition were reported. The filing also describes possible executive severance and broad contractual indemnification obligations.
Important facts for investors to verify
- Whether the DetermaVu analytic-consistency issue was resolved and whether the validation study was completed successfully.
- Cash burn, the timing of required financing, and the assumptions behind management’s stated 12-month liquidity runway.
- Potential dilution from outstanding warrants and options, and the terms and effects of future warrant exercises.
- Bank-loan repayment, interest, collateral, and covenant/default exposure, alongside continuing obligations to BioTime.
- Whether reimbursement coverage and commercial demand can support launch economics, given the company’s lack of revenue and continued losses.