Business context and reporting period
This is OncoCyte Corporation’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2016. The filing describes a majority-owned BioTime subsidiary developing molecular cancer diagnostics, with efforts focused on lung, bladder, and breast cancer. The request metadata names Insight Molecular Diagnostics Inc., but the filing identifies the registrant as OncoCyte Corporation.
Financial results and position
Amounts below are in millions of dollars, except per-share data. OncoCyte reported no revenue in the periods presented.
| Metric | Three months ended Sep. 30, 2016 | Three months ended Sep. 30, 2015 | Nine months ended Sep. 30, 2016 | Nine months ended Sep. 30, 2015 |
|---|---|---|---|---|
| Research and development expense | $1.363 | $1.094 | $4.246 | $3.098 |
| General and administrative expense | $1.219 | $1.312 | $3.800 | $2.081 |
| Total operating expense | $2.582 | $2.406 | $8.046 | $5.179 |
| Net loss | $2.595 | $2.416 | $8.065 | $5.196 |
| Basic and diluted net loss per share | $0.10 loss | $0.12 loss | $0.31 loss | $0.26 loss |
- Operating and profit margins are not meaningful because the company had no revenue.
- For the first nine months of 2016, operating cash use was $5.008 million, versus $2.534 million in 2015. Financing provided $9.759 million; cash increased $4.678 million to $12.674 million.
- At September 30, cash and cash equivalents were $12.674 million; BioTime shares held as available-for-sale securities were valued at $2.417 million. Current assets were $15.282 million and current liabilities $3.968 million.
- Total liabilities were $4.179 million, including $384,000 of capital lease obligations. Amounts due to BioTime and affiliates totaled $2.256 million. Accumulated deficit was $32.199 million.
Material changes versus prior comparable periods
- Nine-month net loss increased to $8.065 million from $5.196 million. R&D expense rose 37.1% and G&A expense rose 82.6%.
- R&D spending shifted toward the lung cancer diagnostic: $2.313 million for the first nine months of 2016 versus $193,000 in 2015. Spending on bladder and breast programs declined.
- Management attributed higher R&D costs to laboratory expenses, outside research, clinical trials, business development, and scientific consulting. Higher nine-month G&A reflected staffing and compensation, BioTime allocations, and public-company compliance and related costs; quarterly G&A declined partly because 2015 included public-company registration audit costs.
- Cash increased from $7.996 million at year-end 2015, mainly following the August 2016 equity offering. Nine-month operating cash use was higher than in 2015.
Outlook, risks, contingencies, and unusual items
- Management expected available cash and liquid assets to fund operations through the third quarter of 2017, but said additional capital will be needed before diagnostics can generate sufficient revenue. Financing availability and terms are uncertain; further equity issuance could dilute shareholders, and insufficient funding could force operations to be curtailed or delayed.
- On August 29, 2016, OncoCyte sold 3,246,153 units, each comprising one common share and one warrant, at $3.25 per unit. Net proceeds were $9.8 million. BioTime’s ownership fell to 51.2%, while it retained control. The warrants have a $3.25 exercise price and a five-year term beginning October 17, 2016.
- A capital lease financed approximately $458,000 of equipment, with monthly payments of approximately $14,442 over 36 months and an imputed rate of about 10%. A further equipment lease schedule of approximately $259,000 was entered into on October 13, 2016.
- BioTime provides shared facilities, personnel, and administrative services and began charging a 5% markup on allocated costs in 2016. Related-party balances and allocations warrant attention.
- The company reported no current litigation, no off-balance-sheet arrangements, and no income tax provision or benefit; deferred tax assets were fully reserved. BioTime shares held by OncoCyte are exposed to market-price changes.
- Management stated disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether actual spending and available cash support the stated runway through Q3 2017, and the timing and terms of any additional financing.
- Progress, clinical validation, regulatory pathway, and commercialization prospects for the lung-focused diagnostic program and other tests.
- Effects of warrant exercises, future equity issuance, and related dilution; confirm current share count and ownership.
- Growth in operating cash use, BioTime-related payables and charges, and capital lease commitments.
- Market value and liquidity of the BioTime shares held, and the potential accounting effects of adopting ASU 2016-01.