Business context and reporting period
This is OncoCyte Corporation’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2018. The request metadata names Insight Molecular Diagnostics Inc., but the filing is for OncoCyte Corporation. OncoCyte is developing blood-based cancer diagnostics and was concentrating substantially all research and development efforts on its lung cancer test, DetermaVu.
Financial performance and position
| Metric | Three months ended September 30, 2018 | Nine months ended September 30, 2018 | Comparable 2017 period |
|---|---|---|---|
| Revenue | No revenue reported | No revenue reported | No revenue reported |
| Research and development | $1.53 million | $5.31 million | $1.84 million; $5.67 million |
| General and administrative | $1.31 million | $4.43 million | $4.29 million; $7.45 million |
| Sales and marketing | $0.18 million | $1.41 million | $0.71 million; $1.84 million |
| Operating loss | $3.02 million | $11.16 million | $6.84 million; $14.96 million |
| Net loss | $2.97 million | $11.25 million | $6.91 million; $15.42 million |
| Basic and diluted loss per share | $0.07 | $0.30 | $0.22; $0.52 |
For the nine months, operating cash used was $9.19 million, investing cash used was $0.03 million, and financing cash provided was $12.45 million. Cash increased $3.22 million to $10.82 million. At September 30, cash and cash equivalents were $10.82 million and BioTime shares held as marketable equity securities were valued at $0.83 million. Current assets were $11.90 million and current liabilities $4.62 million.
Total liabilities were $5.38 million, including $2.11 million due to BioTime and affiliates, loan payable with a $1.33 million carrying value, and capital lease liabilities of $0.70 million. The bank loan bears floating interest and matures April 2020; substantially all assets other than intellectual property secure the loan. The company reported no revenue-based margins and no income tax provision or benefit.
Material changes versus the prior comparable periods
- Quarterly net loss fell to $2.97 million from $6.91 million; nine-month net loss fell to $11.25 million from $15.42 million. Lower expenses drove the improvement.
- General and administrative expense declined substantially, mainly because 2017 included noncash warrant-inducement charges—$3.0 million in the quarter and $4.1 million for nine months—not repeated in 2018. 2018 included higher legal, financing, patent, personnel, and stock-compensation costs.
- Research and development expense declined, but included a noncash impairment of intangible assets after the company discontinued therapeutic-use patents and licenses. The financial statement note and cash flow statement report a $625,000 charge; MD&A elsewhere describes $565,000, an inconsistency to verify.
- OncoCyte raised $10.0 million gross in a March private placement and approximately $3.3 million net in a July registered offering of shares and warrants. Common shares outstanding increased to 40.66 million from 31.45 million at year-end 2017.
- Adoption of accounting guidance effective January 1, 2018 moved unrealized BioTime-share gains and losses into earnings; 2018 included a $102,000 quarterly and $71,000 nine-month unrealized gain.
Outlook, risks and unusual items
Management expected available cash, cash equivalents, and marketable equity securities to fund current operations for at least 12 months from issuance of the financial statements. It also expected continuing operating losses and negative cash flows and stated that additional capital would be needed to develop and commercialize diagnostic tests. No assurance was given that financing would be available on acceptable terms.
The company targeted completion of DetermaVu clinical validation in the first half of 2019, following additional research and development and analytical validation studies on a selected testing platform. Prior inconsistent results on the original platform delayed development and increased costs. Successful studies, commercialization, and Medicare or private-payer reimbursement were uncertain; management noted Medicare reimbursement approval generally takes two to three years. Further delays could impair fundraising and commercialization plans.
Management was considering commercialization alternatives, including third-party marketing, licensing, or a joint venture, as building an internal sales force would require additional capital. Sales and marketing staff had been reduced, which could delay a launch. Potential future equity issuance could dilute shareholders. The company reported compliance with the bank loan agreement as of the filing date, no material litigation known to management, and no off-balance-sheet arrangements.
Important facts for investors to verify
- Confirm the issuer identity: the supplied filing is OncoCyte Corporation, not Insight Molecular Diagnostics Inc.
- Reconcile the intangible-asset impairment amount: $625,000 in the financial statements versus $565,000 in part of MD&A.
- Track DetermaVu validation milestones, platform performance, and the stated first-half 2019 clinical validation target.
- Assess cash runway against operating cash burn, future development costs, reimbursement timelines, and the need for additional financing.
- Review dilution and potential warrant exercises following the 2018 equity offerings; the filing reports 4.04 million warrants outstanding.
- Monitor related-party balances and service arrangements with BioTime, as well as the bank loan’s collateral, floating rate, and April 2020 maturity.