Oncocyte Corporation — Q2 2022 Form 10-Q
Filing identity: The supplied filing is Oncocyte Corporation’s unaudited 10-Q for the quarter and six months ended June 30, 2022; this differs from the company name in the request metadata. Unless stated otherwise, dollar amounts below are in millions.
Business context and reporting period
Oncocyte develops and commercializes molecular diagnostic tests and provides pharmaceutical services. Its offerings include the commercial DetermaRx lung cancer test, Pharma Services, and licensing; it is also developing or preparing other tests, including DetermaIO, VitaGraft and DetermaCNI. The results are consolidated and reflect the company’s acquired subsidiaries. The filing was signed August 11, 2022.
Financial performance and liquidity
| Metric | Three months ended June 30, 2022 | Six months ended June 30, 2022 | Comparable 2021 period |
|---|---|---|---|
| Revenue | $2.07 | $3.49 | $2.03 quarter; $3.15 half-year |
| Gross profit (loss) | $(0.31) | $(0.85) | $(0.39) quarter; $(0.32) half-year |
| Operating loss | $(8.56) | $(18.46) | $(13.57) quarter; $(24.93) half-year |
| Net loss | $(8.30) | $(18.59) | $(10.49) quarter; $(14.41) half-year |
| Basic and diluted loss per share | $(0.07) | $(0.18) | $(0.12) quarter; $(0.17) half-year |
| Net cash used in operating activities | Not provided for the quarter | $(24.57) | $(17.89) half-year |
Gross margin was negative: approximately 15% for Q2 and 24% for the first half. Cost of revenue includes acquired-intangible amortization ($0.98 million in Q2; $1.91 million in the first half). The company reported no income tax benefit in 2022; the 2021 comparisons included tax benefits, including a $9.36 million first-half benefit.
At June 30, cash and cash equivalents were $44.84 million, marketable equity securities were $0.58 million, and restricted cash was $1.70 million. Total current assets were $49.37 million and current liabilities $14.15 million. Total liabilities were $82.95 million, including $65.67 million of contingent consideration liabilities. Loans payable, net of financing costs, were $0.57 million current; lease liabilities totaled approximately $3.97 million. The Silicon Valley Bank loan had a September 30, 2022 maturity; the company said it was in compliance and eligible, but had not drawn, an additional $2 million tranche.
Cash, cash equivalents and restricted cash increased $9.23 million in the first half, primarily because $36.48 million of financing cash inflows exceeded $24.57 million of operating cash use and $2.68 million of investing cash use. Financing included approximately $32.8 million net proceeds from an April common-stock-and-warrant offering and $4.9 million net proceeds from the first Series A preferred-stock tranche.
Material changes versus the prior comparable period
- Revenue rose 2% in Q2 and 11% in the first half. DetermaRx revenue increased 29% in Q2 and 47% in the first half; licensing revenue fell 18% and 15%, respectively. First-half Pharma Services revenue declined 10%.
- Research and development expense rose 120% in Q2 and 81% in the first half, while sales and marketing expense increased 32% and 37%. General and administrative expense declined 31% and 12%.
- Operating losses narrowed, but the improvement was substantially affected by an $11.02 million first-half gain from a reduction in the fair value of contingent consideration, compared with a $1.09 million expense in 2021. The company attributed the remeasurement mainly to revised timing estimates and discount rates. The gain is noncash and subject to estimates.
- Despite the smaller first-half operating loss, net loss increased from $14.41 million to $18.59 million, in part because the prior-year period included a $9.36 million income tax benefit.
- Common shares outstanding increased to 118.61 million from 92.23 million at year-end 2021. The April offering, preferred-stock financing and warrants create further potential dilution; the preferred shares are convertible into approximately 7.69 million common shares.
Outlook, management commentary and risks
Management said existing cash, cash equivalents and marketable securities were expected to fund current operations for at least 12 months from issuance of the interim financial statements. It also stated that additional capital would be needed until revenue can cover operating expenses. No numerical revenue or earnings guidance was provided.
On August 10, 2022, after quarter-end, Oncocyte announced a strategic realignment and workforce reduction expected to lower annual cash compensation costs by more than $4.5 million, before severance and benefits. The reduction was expected to be completed by September 30, with approximately $2.0 million of related charges in Q3 2022. Management also anticipated more than $12 million of annualized operating-expense reductions from cost programs, the workforce action and planned asset monetization; these are forward-looking estimates, not reported results.
Key risks include continued operating losses and cash burn; dependence on future financing and potential shareholder dilution; reimbursement and market adoption uncertainty for diagnostic tests; clinical, regulatory and commercialization risks; customer and licensing concentration; and possible COVID-19-related disruption to surgeries, clinical trials, Pharma Services demand, operations and capital markets. One licensing customer represented 48% of Q2 revenue. Series A preferred stock carries a 6% cumulative dividend, specified redemption rights including a 2024 date, and a $8 million minimum unrestricted-cash covenant while outstanding. Contingent payments to former acquisition stakeholders may also affect future cash needs. The filing reported no material litigation and no material changes to the risk factors in the 2021 Form 10-K.
Most important facts for investors to verify
- Whether operating cash burn declines after the announced restructuring, and whether the stated cost savings and asset monetization are achieved.
- Cash runway assumptions, the September 2022 bank-loan maturity and compliance with the preferred-stock cash-minimum covenant.
- Actual reimbursement, test volumes, collections and revenue mix—especially DetermaRx adoption and the sustainability of licensing revenue.
- Potential dilution and cash obligations from warrants, convertible preferred stock, preferred dividends/redemption, and acquisition-related contingent consideration.
- Progress, funding requirements and timelines for clinical development, reimbursement and commercialization of pipeline tests.