Oncocyte Corporation — Q3 2021 Form 10-Q
Issuer note: The filing is for Oncocyte Corporation, not “Insight Molecular Diagnostics Inc.” It covers the quarter and nine months ended September 30, 2021. Financial statements are unaudited; amounts below are in U.S. dollars, generally millions unless stated otherwise.
Business context and reporting period
Oncocyte develops and commercializes molecular diagnostic tests and provides pharmaceutical services. Its commercial activities include DetermaRx for early-stage non-small cell lung cancer, Pharma Services, and licensing. During 2021, it acquired the remaining interests in Razor Genomics and acquired Chronix Biomedical, expanding its test pipeline and operations.
Financial performance and position
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $0.984 | $0.555 | $4.138 | $0.713 |
| Gross profit (loss) | $(0.866) | $(0.046) | $(1.181) | $(0.426) |
| Operating loss | $(13.604) | $(6.244) | $(38.532) | $(23.444) |
| Net loss | $(13.800) | $(6.783) | $(28.212) | $(23.623) |
| Net loss per share | $(0.15) | $(0.10) | $(0.32) | $(0.36) |
Reported gross margin was approximately negative 88% for Q3 and negative 29% for the first nine months of 2021, including acquired-intangible amortization. Revenue mix for the nine months was 40% DetermaRx, 23% Pharma Services, and 37% licensing. Q3 revenue fell 52% from Q2 2021 to $0.984 million, mainly because licensing revenue declined; DetermaRx revenue also decreased sequentially.
Operating expenses for the first nine months included $9.0 million research and development, $7.9 million sales and marketing, and $18.2 million general and administrative. The company recorded a $2.3 million loss from an increase in the fair value of contingent consideration. A $9.4 million income tax benefit helped reduce the nine-month net loss; it arose from a partial release of the valuation allowance associated with acquired deferred tax liabilities.
| Balance sheet / cash flow metric | September 30, 2021 | December 31, 2020 |
|---|---|---|
| Cash and cash equivalents | $43.340 | $7.143 |
| Marketable equity securities | $0.923 | $0.675 |
| Total current assets | $47.591 | $9.226 |
| Total current liabilities | $13.377 | $8.996 |
| Total liabilities | $68.992 | $21.936 |
| Accumulated deficit | $(151.889) | $(123.677) |
For the first nine months, operating cash use was $28.9 million, investing cash use was $13.6 million, and financing provided $78.6 million. Financing included approximately $75.0 million of net proceeds from common-stock sales and $2.6 million each from warrant and option exercises. Total loans payable were approximately $1.7 million at quarter-end; operating and financing lease liabilities totaled approximately $4.5 million. The company had $1.7 million of restricted cash, supporting a lease letter of credit.
Material changes versus prior comparable periods
- Nine-month revenue increased $3.4 million year over year, principally from higher DetermaRx activity, Pharma Services, and new licensing revenue. Q3 revenue grew 77% year over year, but remained below Q2 2021.
- Nine-month operating loss widened by $15.1 million. Costs rose with expanded commercial and development activity, acquisitions, and $2.4 million of acquired-intangible amortization.
- Cash increased substantially, primarily due to equity issuance; common shares outstanding rose from 69.1 million at December 31, 2020 to 92.2 million at September 30, 2021.
- Razor became wholly owned in February 2021 and Chronix was acquired in April 2021. At September 30, goodwill was $18.4 million and net intangible assets were $92.7 million, including $46.8 million of Chronix in-process research and development.
Outlook, risks, contingencies, and unusual items
Management said available cash, cash equivalents, and marketable securities were expected to fund current operations for at least twelve months from issuance of the financial statements. It also expects continued operating losses and negative cash flows and stated that additional capital will be needed until revenues can cover expenses. No specific revenue, earnings, or test-volume guidance was provided.
Key risks include obtaining Medicare and other payer coverage and reimbursement, commercial adoption of tests, clinical and development outcomes, and the ability to raise capital without substantial dilution. COVID-19 could defer cancer surgeries and clinical trials, constrain marketing and operations, and affect demand, financing, and supply chains. The company stated that the full impact was uncertain.
Potential acquisition-related payments are significant: Chronix consideration includes milestone payments of up to $14 million, royalties, and possible transplant-related payments; Insight arrangements include milestones and revenue shares. Total contingent consideration liabilities were $51.7 million on the balance sheet, including $42.3 million initially recognized for Chronix and $9.4 million for Insight at quarter-end. The amount depends on future milestones, revenues, and valuation assumptions. The PPP loan was forgiven in May 2021, producing a $1.1 million gain. Management reported no material litigation, no material changes to previously disclosed risk factors, and effective disclosure controls. No subsequent events were reported.
Important facts for investors to verify
- Cash runway assumptions, operating cash burn, and the company’s ability to raise further capital; additional equity financing could dilute shareholders.
- Medicare Advantage and other payer collections, reimbursement coverage, and the trend in DetermaRx test volumes; revenue recognition differs by payer.
- Whether licensing and Pharma Services revenue are repeatable, given project timing and customer concentration.
- Milestone and royalty obligations from the Insight and Chronix acquisitions, and changes in their fair values or cash-payment prospects.
- Clinical, commercialization, and impairment risks for acquired and developing tests, particularly the substantial acquired intangible-asset balances.