Insight Molecular Diagnostics Inc. quarterly report, Q3 FY2019

Business Context and Reporting Period

This is OncoCyte Corporation’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2019. The request metadata names Insight Molecular Diagnostics Inc., but the filing identifies the registrant as OncoCyte Corporation (NYSE American: OCX). OncoCyte is developing lung cancer diagnostic and prognostic tests, including DetermaVu and the Razor assay. It reported no revenue in the periods presented.

Financial Results and Liquidity

Amounts are in millions of dollars, except per-share data. No gross margin was reported because the company had no revenue.

For the nine months, operating cash use was $14.409 million, investing cash use was $11.199 million, and financing provided $37.018 million. Cash and cash equivalents rose to $19.444 million at September 30, 2019 from $8.034 million at December 31, 2018. Marketable equity securities were valued at $0.415 million. Current assets were $20.277 million and current liabilities were $3.043 million.

At September 30, 2019, the balance sheet reported $0.577 million of current bank debt and $0.645 million of financing lease and right-of-use liabilities in total. Total liabilities were $3.435 million. The filing also describes an embedded operating lease related to the Razor laboratory. OncoCyte had an accumulated deficit of $85.791 million.

Material Changes Versus Prior Period

• Q3 net loss increased to $5.225 million from $2.971 million; nine-month net loss increased to $14.472 million from $11.255 million.
• Nine-month general and administrative expense more than doubled, primarily reflecting personnel and management-transition costs, stock-based compensation, investment banking, investor-relations, and professional-service expenses.
• Nine-month R&D expense declined 15.7%, primarily due to lower stock compensation, laboratory, and personnel costs. Sales and marketing expense fell 18.3% for the nine months, but increased sharply in Q3 as marketing and consulting activity rose.
• Financing included $40.250 million of gross proceeds from common-stock sales, offset by $3.252 million in issuance costs; the company also received $0.943 million from option exercises. Shares outstanding increased from 40.664 million at year-end 2018 to 51.973 million at September 30, 2019.
• On September 30, OncoCyte acquired a 25% interest in Razor for $10 million and recorded an equity-method investment of $11.245 million, including a $1 million preliminary coverage milestone payment and transaction expenses.

Outlook, Risks, and Notable Items

• Management expects continuing operating losses and negative cash flows, and said cash, cash equivalents, and marketable securities were expected to fund current operations for at least 12 months from the financial statements’ issuance date. The company also said it will need additional capital to develop and commercialize its tests.
• On November 13, 2019, OncoCyte agreed to sell 5,058,824 shares for approximately $8.6 million, subject to customary closing conditions. The filing expected closing on November 15.
• On October 17, 2019, the company refinanced its Silicon Valley Bank loan through a new secured facility: $3 million was available under Tranche 1, with a potential additional $2 million subject to financing and Razor reimbursement milestones. The new facility matures March 31, 2022 and includes a $200,000 final payment fee.
• Razor-related potential obligations include a further $10 million in cash and $5 million in OncoCyte stock to acquire the remaining shares, a $3 million stock milestone upon completion of clinical-trial enrollment, and a $4 million cash payment if Razor receives final positive CMS/MolDx coverage. OncoCyte may also bear clinical-trial costs above Razor’s $4 million reserve; its share of the approved budget was estimated at up to $12 million. These contingent amounts were not recorded at September 30 because none was considered probable.
• Commercial success depends in part on test development, clinical evidence, and Medicare and private-payer reimbursement. Delays or inadequate financing could force the company to modify, delay, or curtail operations; further equity issuance could dilute shareholders.
• OncoCyte began moving away from Lineage-provided administrative services and planned to hire its own personnel, which management said could increase general and administrative costs. It also anticipated increased sales and marketing spending as commercialization efforts develop.
• The company disclosed no material litigation, no off-balance-sheet arrangements, and no material changes to previously reported risk factors other than the additional Razor-related risks. Management concluded disclosure controls were effective.

Key Facts for Investors to Verify

1. Confirm the registrant identity: the supplied metadata says Insight Molecular Diagnostics Inc., while the filing is for OncoCyte Corporation.
2. Track cash burn against the stated 12-month liquidity expectation, including the completion and proceeds of the November 2019 equity offering.
3. Review the Razor clinical-trial milestones, final CMS/MolDx coverage status, and resulting cash, share-issuance, and trial-cost obligations.
4. Assess the commercial and reimbursement progress of DetermaVu and the Razor assay, given the absence of revenue and dependence on external financing.
5. Monitor dilution, the terms and conditions of the secured bank facility, and the company’s rising standalone staffing and commercialization costs.