Insight Molecular Diagnostics Inc 10-K for FY2021
Insight Molecular Diagnostics Inc. (IMDX)
About this 10-K
Insight Molecular Diagnostics Inc filed this 10-K on March 11, 2022, covering the fiscal year ended December 31, 2021 (FY2021).
Headline figures
Fiscal year ended December 31, 2021, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $7.73M
- up 535.4% from $1.22M a year earlier
- Net loss
- $64.1M
- compared with a net loss of $29.93M a year earlier
UNITED STATES
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DOCUMENTS INCORPORATED BY REFERENCE
Oncocyte Corporation
Table of Contents
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PART I
Certain statements contained herein are forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, including, but not limited to, statements pertaining to future financial and/or operating results, future growth in research, technology, clinical development, and potential opportunities for Oncocyte, along with other statements about the future expectations, beliefs, goals, plans, or prospects expressed by management constitute forward-looking statements. Any statements that are not historical fact (including, but not limited to statements that contain words such as “anticipate,” “believe,” “can,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “project,” “seek,” “should,” “strategy,” “target,” “will,” “would”) should also be considered to be forward-looking statements. Forward-looking statements involve risks and uncertainties, including, without limitation, risks inherent in the development and/or commercialization of potential products, uncertainty in the results of clinical trials or regulatory approvals, need and ability to obtain future capital, and maintenance of intellectual property rights. Actual results may differ materially from the results anticipated in these forward-looking statements and as such should be evaluated together with the many uncertainties that affect the businesses of Oncocyte, particularly those mentioned in this Report under “Risk Factors”. Except as required by law, Oncocyte undertakes no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.
The forward-looking statements include, among other things, statements about:
| ● | the timing and potential achievement of future milestones; | |
| ● | the timing and our ability to obtain and maintain coverage and reimbursements from the Centers for Medicare and Medicaid Services and other third-party payers; | |
| ● | our plans to pursue research and development of diagnostic test candidates; | |
| ● | the potential commercialization of our diagnostic tests currently in development; | |
| ● | the timing and success of future clinical trials and the period during which the results of the clinical trials will become available; | |
| ● | the potential receipt of revenue from future sales of our diagnostic tests or tests in development; | |
| ● | our assumptions regarding obtaining reimbursement and reimbursement rates; | |
| ● | our estimates regarding future orders of tests and our ability to perform a projected number of tests; | |
| ● | our estimates and assumptions around patient populations, market size and price points for reimbursement for our diagnostic tests | |
| ● | our estimates regarding future revenues and operating expenses, and future capital requirements; | |
| ● | our intellectual property position; | |
| ● | the impact of government laws and regulations; | |
| ● | the uncertainties associated with the coronavirus (COVID-19) ongoing pandemic, including its possible effects on our operations and the demand for our diagnostic tests and Pharma Services; | |
| ● | our ability to efficiently and flexibly manage our business amid uncertainties related to COVID-19; and | |
| ● | our competitive position. |
Unless the context otherwise requires, all references to “Oncocyte,” “we,” “us,” “our,” “the Company” or similar words refer to Oncocyte Corporation, together with our consolidated subsidiaries.
The description or discussion, in this Form 10-K, of any contract or agreement is a summary only and is qualified in all respects by reference to the full text of the applicable contract or agreement.
DetermaRx™, DetermaIO™, DetermaTx™, DetermaMx™, DetermaCNI™, and DetermaDx™ are trademarks of Oncocyte Corporation, and TheraSure™ is a trademark of Chronix Biomedical, Inc., regardless of whether the “TM” symbol accompanies the use of or reference to the applicable trademark in this Report.
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INDUSTRY AND MARKET DATA
This Annual Report (“Report”) on Form 10-K contains market data and industry forecasts that were obtained from industry publications, third party market research and publicly available information. These publications generally state that the information contained therein has been obtained from sources believed to be reliable. While we believe that the information from these publications is reliable, we have not independently verified such information.
This Report also contains estimates and other statistical data made by independent parties and by us relating to market size and growth and other data about our industry. We obtained the industry and market data in this Report from our own research as well as from industry and general publications, surveys and studies conducted by third parties, some of which may not be publicly available. Such data involves a number of assumptions and limitations and contains projections and estimates of the future performance of the industries in which we operate that are subject to a high degree of uncertainty. We caution you not to give undue weight to such projections, assumptions and estimates.
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Item 1. Business
Development of Our Business
Oncocyte is a molecular diagnostics company focused on developing and commercializing proprietary tests, initially offered as laboratory-developed tests (“LDTs”), to serve unmet medical needs across the cancer care continuum. Our tests aim to provide actionable information to physicians and patients at critical decision points to optimize treatment decisions, including the selection of immunotherapy, targeted therapy and blood-based treatment monitoring to improve patient outcomes, and reduce overall cost of care.
We have completed three strategic asset and business acquisitions during 2019, 2020 and early 2021 that transformed Oncocyte into a company with a broad menu of laboratory-developed tests that physicians may use at different critical decision points in cancer diagnosis and treatment to support decision-making. In the cancer space, physicians utilize DNA and RNA based testing, also known as molecular testing, to inform treatment decisions for patients diagnosed with cancer. Increasingly, physicians are also performing blood-based molecular testing multiple times during the course of a patient’s treatment, also known as monitoring, to detect response or lack of response to therapy in order to make early and timely changes in patient management. We believe that our menu, which includes proprietary tests for treatment selection (DetermaIOTM), and blood-based monitoring detecting cell-free derived tumor DNA (DetermaCNI™), will enable the physician to better manage their patient’s disease from diagnosis through monitoring and deliver a significant source of corporate differentiation in the LDT space. We believe that our effort to provide clinically actionable tests for certain key decision points along the continuum of patient management (shown below) will mitigate the inherent risk of being a single product company and should lead to greater revenue opportunities in rapidly emerging markets in cancer treatment.
As part of the strategy to become relevant in the broader diagnostic continuum, we launched DetermaRxTM via our acquisition of in Razor Genomics, Inc. (“Razor”) in September 2019. DetermaRx™, is the first and only test to predict patient’s risk of cancer recurrence following surgery and response to chemotherapy in early-stage lung cancer, and is our first test to be commercialized and reimbursed by Medicare. DetermaRxTM serves an unmet clinical need by helping to guide treatment decisions given the 30-50% mortality rate in patients in the absence of timely chemotherapy treatment. During February 2021 we acquired all outstanding shares of Razor common stock which is now a wholly owned subsidiary of Oncocyte.
In January 2020, we acquired Insight Genetics, Inc. (“Insight”) which significantly expanded our product pipeline by adding DetermaIOTM, a proprietary gene expression assay that is designed to classify the tumor immune microenvironment and identify patients most likely to respond to immune checkpoint inhibition (ICI). The clinical utility of this test is supported by data in hundreds of patients across multiple cancers, including Lung, Breast, Bladder and Kidney cancers and using diverse ICI agents including Keytruda (pembrolizumab), Tecentriq (atezolizumab), Opdivo (nivolumab). This class of drugs are now approved for 16 different cancers and more than one million patients are estimated to be eligible annually in the United States alone. The worldwide market opportunity is 4.1 million patients. However, the response prediction based on treatment selection using currently available biomarkers like PD-L1 and TMB to ICI treatment is not very accurate. DetermaIOTM addresses the unmet need for a test that can improve upon the performance of these tests in better identifying responders and non-responders to immunotherapies. In clinical studies, DetermaIOTM has showed 41% higher response (PFS) compared to standard of care biomarker (PD-L1). Compared to TMB, DetermaIOTM identified up to 30% more patients and compared to PD-L1, DetermaIOTM identified up to 20% more patients who benefited from Immune Checkpoint Inhibitors (ICI). This test has now been commercialized via an Early Access Program.
During February 2021, we and our newly organized wholly owned subsidiary CNI Monitor Sub, Inc. entered into an Agreement and Plan of Merger (the “Chronix Merger Agreement”) pursuant to which, in April 2021, we acquired Chronix Biomedical, Inc. (“Chronix”) through a merger of Chronix with our subsidiary. By acquiring Chronix, we added Chronix’s TheraSure™-CNI Monitor to our diagnostic test pipeline. The CNI Monitor, which we plan to market as DetermaCNI™, is a patented, blood only test for treatment response monitoring. Oncocyte’s DetermaCNITM is a test used to measure and monitor cancer treatment success by detecting changes in circulating tumor DNA (ctDNA) levels, a minimally-invasive biomarker, during the course of treatment. The test is differentiated from other currently used methods because it does not require an upfront tissue sample, which can be hard to obtain, and also provides a genome-wide assessment as opposed to evaluating a subset of genes. Current tests that monitor Minimal Residual Disease measure the amount of cfDNA in a patient’s blood post-surgery to determine if there is a chance for recurrence, where as, DetermaCNITM measures Copy Number Instability to monitor whether the disease is progressing and help determine whether the treatment is having the intended impact on a patient’s tumor. The test converts cell-free DNA (cfDNA) next-generation sequencing (NGS) results into a proprietary genome-wide copy number instability (CNI) score which can be used to monitor and guide ongoing treatment decisions. This test is differentiated from other monitoring tests in two ways. The first is that it does not require tumor tissue upfront which can be hard or impossible to obtain. The second is that the test measures copy number variation across the whole genome as opposed to existing tests that focus on mutations identified in a patient’s diagnostic biopsy specimen. This test is supported by several publications including a publication for detecting progression on immunotherapy, and detecting recurrence in patients with ovarian cancer following surgery. Our initial focus will be to offer the CNI Monitor for research use and pharma trials. Our ultimate goal will be to establish the CNI Monitor for clinical use as a blood-based monitoring test.
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In addition to the CNI Monitor, Chronix has certain IP-protected organ transplant technology, which enables a precise quantification of donor-derived cell-free DNA (dd-cfDNA) using digital PCR. dd-cfDNA monitoring after solid organ transplantation is a well published technology that has been shown to aid in the early detection of transplant rejection. Chronix has published clinical validation in large cohorts of kidney, liver and heart recipients. Chronix has laboratory operations in Germany that can support the continued development and commercial launch of the Therasure ™ CNI Monitor, Therasure ™ Transplant Monitor and other tests, including our DetermaRx™ and DetermaIO™, in Germany and other EU member countries after the merger.
The Cancer Care Continuum
The cancer care continuum that is the focus of our business can be divided into three important components of information that physicians require to manage their patients through the full term of cancer care:
| 1. | Diagnosing cancer, including the type of cancer. | |
| 2. | Determining the best course of treatment for the patient. | |
| 3. | Once the patient is treated, monitoring for therapeutic efficacy and disease recurrence. |
This three-component continuum represents a large unmet total available market or TAM in the United States and the rest of the world as reflected in graphic below. Oncocyte’s mission is to address the second and third components of the continuum after cancer has been diagnosed, with the goal of ensuring that each patient has the best chance for disease free survival.
Since the advent of genomic scale characterization of cancer, oncologists have strived to apply genomic targeted testing to improvement in selection of treatment and management of disease progression. We are initially applying a comprehensive targeted approach to lung cancer where management paradigms are most mature and believe a similar approach will have utility across solid tumors grounded in their common features in responding to immune therapy. Our first indication for commercialization is lung cancer which remains the leading cause of cancer death in the United States and the rest of the world, making it one of the largest molecular diagnostic market opportunities.
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While our sales efforts currently focus on physicians managing patients with lung cancer, the pipeline of tests we plan to offer in the future will expand to all solid tumors and, strategically, our clinical studies and trials with pharma companies will not be limited to lung cancer given the early success of our test in other solid tumors. Our proprietary diagnostic tests are focused on the interrogation of RNA signatures, the coding component that converts DNA code into actual protein production within a cell, from tumor tissue or peripheral blood samples and target key clinical questions that are critical to better management of cancer, from treatment through monitoring of therapeutic efficacy and recurrence of certain cancers. As we expand the scope of our test offerings towards the goal of addressing more key clinical decision points in lung and other cancers, we remain technology agnostic, and aim to continue to identify tests that allow us to reduce to practice the findings from large scale genomic profiling leading to the best approach that addresses the needs of patients and physicians in a manner consistent with the need for rapid turnaround time and judicious use of precious tumor tissue or blood samples while delivering good health economic outcomes.
Our primary growth engines are tests that are novel and proprietary. Through our strategic acquisitions, we have added significant bioinformatics expertise in algorithm development and validation that we can use to analyze functional gene expression and other biological data in order to develop tests that address significant clinical challenges that have not been successfully addressed by currently available technologies. At the same time our tests are run on instruments with a high global installed base enabling decentralization of testing to labs worldwide.
Business Strategy
Why Treatment Selection in Cancer
Approximately 1.8 million people were diagnosed with cancer in 2020 in the United States, and an estimated 17 million worldwide, according to the American Cancer Society. Despite the advancements in therapeutics, cancer remains the second leading cause of death in the United States. Biomarkers are playing an increasingly important role in helping pharmaceutical companies and oncologists identify and select patients for established and new therapies to ensure the right patient gets the right treatment as early as possible post-diagnosis, in order to best improve patient outcomes.
We are building Oncocyte to be a “one stop lab” for treatment decisions for every patient diagnosed with a solid tumor, by delivering to the treating oncologist proprietary biomarker testing that offers incremental information to inform patient treatment and monitor response to therapy, in combination with the current standard of care testing they order today. Since DetermaRxTM and DetermaIOTM would only be offered by Oncocyte, our goal is to become the preferred lab for physicians for both our proprietary tests and more traditional tests otherwise offered by many different labs that we can perform in our CLIA laboratories. An example of this testing would be for a patient diagnosed with lung cancer, for whom standard of care targeting information on EGFR, ALK, PD-L1 would be offered, plus DetermaIOTM our proprietary test for informing immune therapy decisions, all using the same patient tumor or blood sample. This would allow informed selection of targeted immune-therapy and potentially the need for additional cytotoxic chemotherapy. For the course of treatment, we are developing blood-based monitoring tools to detect non-response or progression on therapy to inform timely treatment changes.
This “one-stop” approach offers several practical advantages. Today, the testing needs of physicians managing cancer patients are met by several specialty reference labs, meaning the physician or hospital must split the sample and send portions to several different labs to complete the various tests needed to accurately diagnose the cancer type and select a therapy. Not only does this process consume a large amount of sparse patient biopsy sample risking depletion of the sample before completing all testing, but also the process can take up to three weeks for the compilation of all the results to make it back to the treating physician to inform therapeutic decision making. All too often in the existing paradigm, patients are committed to a therapeutic approach before all the information is returned from the different clinical labs. Oncocyte’s consolidation of testing modalities will allow the judicious use of limited patient biopsy samples and deliver results to the ordering physician within a more expeditious time frame for optimizing the treatment regimen. Our survey of cancer physicians indicates a significant demand for the attributes of consuming a minimal portion of patient biopsy sample and faster turnaround of testing results.
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Our Laboratory Tests — Strategically Addressing Unmet Clinical Questions Across the Cancer Care Continuum
We are developing molecular LDTs that provide physicians information to enable the timely diagnosis and treatment of cancer with the ultimate goal of transforming this deadly cancer to a curable or chronic disease. We believe that the proprietary tests in our product pipeline will allow Oncocyte to be relevant in the early stage of decision making giving us unique access to the sample “tumor block” from the beginning of the diagnostic process, thus allowing us to offer other follow up tests without physicians needing to send patient samples to another laboratory. Although we may sometimes refer to our tests as “diagnostic tests,” our laboratory-developed tests are intended to support and help inform physician decision-making, but are not themselves diagnostic or prescriptive of treatment decisions.
DetermaRxTM – Treatment selection in early-stage lung cancer
Oncocyte’s first commercially available laboratory-developed test is DetermaRxTM, the only commercialized predictive molecular test for early-stage adenocarcinoma of the lung. This gene expression-based test provides information that a physician can use to help identify early-stage, surgically resected patients with Stage I and IIA non-squamous non-small cell lung cancer (NSCLC) who are at high-risk of recurrence and may benefit from chemotherapy.
NSCLC of the lung is the most common type of lung cancer accounting for 80% to 85% of incidence. Survival rates for patients diagnosed at an early stage are significantly higher than those for patients whose lung cancer is diagnosed at an advanced stage such as Stage III or Stage IV. Surgery is the standard of care for patients diagnosed with early-stage (Stage I and Stage IIA) lung cancer. Yet even after complete surgical resection, between 30% to 50% of those early-stage patients have a recurrence of the disease. Trials of chemotherapy treatment in early-stage disease have been inconclusive as to whether the early-stage treatment improves outcomes in un-stratified patients. Current guidelines suggest risk stratification and use of adjuvant (post-surgery) chemotherapy in “high-risk” patients. However, the recommendations for assessment of risk are subjective and lack clinical studies that validate their usefulness in informing the use of chemotherapy.
DetermaRx™ is a 14-gene molecular stratification test performed on surgically resected tissue and is indicated for patients with Stage I and Stage IIA NSCLC to help determine who may benefit from adjuvant chemotherapy. Typically, thoracic surgeons or medical oncologists order the test after surgical resection. These surgical samples are processed as formalin fixed and paraffin embedded (FFPE) tissue samples. We receive blocks or scrolls of FFPE samples for testing in our CLIA-certified laboratory. A test report is generated classifying patient risk of recurrence and returned to the ordering physician, generally within 10 business days. This turnaround time enables the treating physician to have the report in time for discussion of a treatment plan with the patient, usually a month after surgery.
The results from the prospective study published in Clinical Lung Cancer 2018 and presented at the North American Lung Conference (NA IASCLC) in 2020 were compelling. Patients who were identified as “high risk” and treated with double platinum chemotherapy had a 3% recurrence rate compared to a 30% cancer recurrence rate in high-risk patients who declined chemotherapy.
We believe that there is an annual U.S. market opportunity of approximately 40,000 patients or approximately $126 million for DetermaRx™ based on our reimbursement levels approved by CMS in 2021. This market is expected to grow as high-risk screening recommendations are adopted, resulting in more patients being screened through Low Dose CT (LDCT) scans and diagnosed at an early stage. The European market presents a similar number of patients per year, while China represents the largest patient population with over 250,000 early-stage lung cancer cases per year.
DetermaRxTM has been validated in three independent cohorts with close to 1,400 patients and test data has been published in top-tier peer reviewed publications including Lancet Oncology, JAMA, and the Journal of Thoracic Oncology. Importantly, the impact of the use of chemotherapy in high-risk patients was demonstrated in a paper published in Clinical Lung Cancer in 2017. We have also initiated an international prospective definitive clinical trial randomizing molecular high-risk patients to adjuvant chemotherapy or surgical intervention alone in order to gather the highest level of evidence supporting the predictive information of DetermaRxTM. If successful, this study will strongly support access to the entire global market, including countries whose regulatory entities require the most stringent evidence for test reimbursement or marketing.
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DetermaIOTM – Immunotherapy treatment selection
For patients diagnosed with cancer, immunotherapies, particularly immune checkpoint inhibitors (ICI’s) targeting PD-1 and PD-L1, drug class that helps recruit the body’s immune system to attack the growing tumor. ICIs are approved in 16 different tumor types and it is estimated that 4.1 million patients are eligible for these drugs in the US alone. Pharmaceutical companies are continuing to invest heavily in this space, with hundreds of clinical trials ongoing, and a number of drugs approved by the FDA for all solid tumors, including pembrolizumab (KeytrudaTM), nivolumab (OpdivoTM), and atezolizumab (TecentriqTM).
Through the acquisition of Insight in January 2020, Oncocyte has expanded its portfolio to include a novel gene expression-based test called DetermaIO™, which is being developed to identify patients most likely to respond to immunotherapy drugs. Current predictive biomarkers, including PD-L1 and Tumor Mutational Burden or TMB, have shown only limited ability to accurately predict which patients will respond to an immunotherapy. For example, according to published literature, more than half of PD-L1 positive patients do not respond to immune- checkpoint inhibitors, and 1 in 6 patients who will respond are missed (referred to as a “false negative”).
While ICIs represent a significant advancement in treatment options for patients diagnosed with advanced solid cancers, the response rates have been modest, based on treatment directed by the current standard of care biomarker PD-L1 immunohistochemistry. Depending on the solid tumor type, only approximately 15% to 40% of PD-L1 positive tumors respond to ICIs, while a significant number of PDL-1 negative patients do respond. Another issue with ICIs is that although ICI treatments can be highly effective in the right patients, ICI’s also have significant side effects which include exacerbation of latent autoimmune disorders. There is a compelling medical and health economic unmet need for a biomarker that can provide three improvements to the use of ICIs: (1) the identification of additional patients who may respond to the treatment and missed by the existing biomarkers, (2) enable additional or alterative treatment options for the 60% to 85% of patients who may receive these expensive drugs without benefit but while still facing the risk of side effects associated with ICIs, and (3) inform the use of ICI’s in combination with traditional cytotoxic chemotherapy to enhance response rates.
DetermaIOTM represents an opportunity to enter a very large market to help identify patients who will respond to immune therapy, with more than 750,000 U.S. patients eligible for ICI therapy annually and growing with expanding indications for this type of treatment. As depicted in the image below, analyst predict the ICI spend in the US alone will exceed $125 billion by 2025 meaning the healthcare system will deploy well over $60 billion on drug therapies that will offer no benefit to many of the patients who would receive ICI therapy.
DetermaIOTM is a proprietary molecular test that has proven in multiple clinical studies, including a gold-standard randomized clinical trial (RCT) to provide incremental utility beyond the current tests being used to identify patients who will have a response to ICIs, and represents a solid opportunity to provide better information for patient management leading to better patient outcomes as well as saving the healthcare systems in the US significant cost. The test has been successfully validated in four tumor types and across all four major ICIs (Keytruda, Opdivo, Tecentriq and Imfinizi). In clinical studies DetermaIOTM Showed 41% higher response (PFS) compared to standard of care biomarker (PD-L1). Compared to the other commonly used biomarker, Tumor Mutational Burden (TMB), DetermaIOTM identified up to 30% more patients, and compared to PD-L1, DetermaIOTM identified up to 20% more patients who benefited from Immune Checkpoint Inhibitors (ICI We completed the CLIA validation of DetermaIO™ in April 2020 and launched the test for research use. The test was launched via an Early Access Program in the fourth quarter of 2021. There are approximately 3,000 PD-1/PD-L1 targeted therapy clinical trials ongoing that are expected to recruit over 500,000 patients. This represents a potential $1 billion market opportunity for immune-therapy clinical trial services to pharma companies developing ICIs which could be addressed by our Pharma Services operations
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We also believe, based on our projected reimbursable pricing model, that the clinical use of DetermaIOTM will address a potential $3 billion TAM opportunity. The actual TAM for DetermaIO™ in medical practice will depend upon a variety of factors including our ability to demonstrate the efficacy and clinical utility of the test, the extent of physician acceptance of the test, whether the test will be approved for Medicare reimbursement, and, if reimbursement is approved, the actual approved reimbursement price.
How DetermaIOTM May Inform the Choice of Therapies
Despite the potential benefit of immunotherapy, the treatment is very costly, while only a fraction of patients respond, and the treatment is associated with side effects including emergence of autoimmune disorders. There is a pressing need to more accurately identify responders and non-responders to maximize optimize use of the therapies in responders while reducing its use in likely non-responders. DetermaIO™ was developed for that purpose. The test measures the expression level of twenty-seven selected genes which are interpreted through the use of a proprietary algorithm (patent pending) which computes a quantitative score that incorporates information from the immune inflammatory infiltrates within and around the tumor combined with information from the wound response surrounding the tumor. An established threshold is used to classify patients as likely responder or likely non-responder whose association with response to immune therapy has now been validated in several independent clinical studies in multiple different cancer types.
The diagram below reflects the importance of the biology of the tissue immune micro-environment and explains why we believe DetermaIOTM is an important breakthrough complimenting the current therapy decision process for physicians considering immune checkpoint inhibitors. The figure depicts that every individual forms tumor cells during their lifetime, but our immune system recognizes these abnormal cells and attacks and removes them keeping them from growing into a clinically relevant cancer. When the immune system is over-active and reacts to normal cells, it results in autoimmune disorders. The balance between killing these near normal tumor cells and normal cells is called immune homeostasis and is largely governed by biologic systems called immune checkpoints. When tumors cells disrupt these checkpoints and overwhelm the immune system, a cancer develops. One mechanism by which tumor and the immune system regulate the intensity of immune surveillance is through modulating expression of PD-1 and PD-L1 that together regulate the activity immune effector cells. ICI therapeutics have been developed that block these receptor sites and allow the immune system to once again “see” the tumor and attack and restore the immune system’s ability to kill cancer cells. Because these drugs work on immune cells regardless of their targets, the side effects of these drugs can be enhanced autoimmunity. Unfortunately, response rates to ICI’s are only approximately 15% to 40% depending upon tumor type. However, responses are often durable although resistance does evolve during treatment in some patients. The early success of these drugs has stimulated deeper investigation into the mechanism by which tumors evade the immune system which has revealed a complex interplay between tumor evasion strategies, the activity of immune effector cells and the tissue repair mechanisms that modulate anti-tumor activity. The balance between signal from the tumor, signals from the inflammatory cells invading the tumor, and signals from the wound response are now understood to account for resistance to ICI’s and are the target of second-generation therapeutic strategies to overcome resistance.
DetermaIOTM was developed to measure the status of the immune system in immune and wound response tissue surrounding tumors. It incorporates measurement of the complete microenvironment including activity of genes expressed in immune effector cells, genes expressed in activated wound response cells, and in some cases, genes expressed by the tumor itself. It is the combination of measurement of these three signals that we believe distinguishes DetermaIOTM from most other approaches. Current biomarkers being used to assess the likelihood of immune response have shown only modest ability to predict responses to ICI’s. PDL-1 immunohistochemistry looks at the presence of PDL-1 receptors and tumor mutation burden (TMB) at the number of mutations (neoantigens) in the tumor genome. We believe DetermaIOTM is a direct measure the status of the immune microenvironment and as such identifies those tumors poised to respond to the addition of ICI’s. We believe and now have data to support that the integration of the signal from the “Hot” component of the tumor with the “Cold” immune repressive features, and in some cases the exclusion of immune cells altogether, the immune desert, is superior to measuring any of these physiologies alone.
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The ability to accurately determine response to immunotherapies has important implications for both the patients themselves and the healthcare economy as a whole. For the patients that are likely to respond to immunotherapies, these drugs can be a much more effective and less toxic treatment option than standard chemotherapy. For the patients who are unlikely to respond, opting for a different course of treatment would eliminate exposure to potentially serious side effects such as autoimmune diseases, and could save payers in the healthcare industry use of extremely costly therapy regimens. The market continues to seek a test that is predictive, uses very little tissue, and can be performed rapidly. We believe DetermaIO™ meets all the important criteria for a precision medicine test that can be routinely use.
The origin of the gene expression classifier used in DetermaIO™ was work done to better classify triple negative breast cancer (TNBC) into four tumor cell subtypes that could be modified by the immune classifier. It started with a greater than 2200 gene unsupervised classifier that recognized both the physiological differences between tumor types within TNBC, and the activated immune and stromal signatures characteristic of advanced cancers. The original development team from Insight had success reducing the large gene signature to a 101-gene panel for classification of TNBC, and then recognized that the only twenty-seven RNAs from the tumor could provide the appropriate classification of the immune environment that has now matured into DetermaIO™, our CLIA certified PCR test for immune response classification. Since this immune classifier relies upon gene expression signatures derived primarily from inflammatory cells and activated stromal cells, there is no reason to assume that DetermaIOTM’s immune classification function would be limited to only these tissue types. This prompted our work in lung cancer where the unmodified classifier performed very similarly to breast cancer. We are working to validate the classification function and classifier threshold using publicly available gene expression datasets and testing the classifier as a predictor of response to ICI therapy in other solid tumor types.
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Blood Based Monitoring Opportunity
The next emerging opportunity in cancer diagnostics is in the area of therapy response monitoring Analysts have estimated a worldwide TAM ranging from $5 billion to $10 billion for monitoring for therapeutic efficacy and disease recurrence. Monitoring is a “repeat” testing opportunity and given the limitations of current standard of care, CT/MRI imaging, there is an emerging and potentially large market for a blood-based test that can inform a treating physician that a tumor is becoming resistant to a patient’s current treatment protocol before an imaging technique can detect whether there is shrinkage in a tumor. Our mission is to provide relevant, high value information from our menu of tests to treating physicians throughout the “patient journey” for people with lung cancer and other solid tumors. DetermaRxTM and DetermaIOTM were developed to help physicians choose the right therapy, and our entry into blood-based monitoring is a natural addition to our test menu to help physicians understand whether their therapeutic choice is working for their patient and to help them make appropriate changes to a patient’s protocol if the tumor is non-responsive. Once the patient’s tumor resolves and they become “Disease Free”, monitoring for recurrence 3 to 4 times a year using a simple blood test could become a way to help turn cancer into a chronic disorder versus a deadly disease, an important part of our corporate mission.
Most approaches to blood-based detection and quantitation of tumor load involve genome scale sequencing of a patient’s tumor to identify “personal” mutations in the tumor and then develop a custom NGS panel assay to monitor for those mutations in each patient’s blood. This process requires significant investment in time and money upfront and complicated infrastructure to manage these “tumor informed” personalized custom panels. We believe there is an opportunity to develop tests that do not require this personalization and therefore eliminate the burdensome tissue requirement and shorten the time to initiate therapeutic monitoring. With our acquisition of Chronix, we added to our test pipeline their Therapy Monitoring solution, TheraSure CNI, which we expect to market as DetermaCNITM in the United States. This new monitoring test does not require tumor sequencing prior to blood testing therefore is intended to be an alternative to the tumor informed approach that requires a tissue biopsy. Chronix also brings to Oncocyte a world class assay development team with deep experience and a portfolio of intellectual property in the field of digital-PCR based detection of DNA in blood that will be the foundation for development of our next generation tumor monitoring products.
We are currently in the process of transferring the technology to our CLIA lab in Nashville and expect to finalize the technology transfer in Q2 2022.
Through our acquisition of Chronix we gained access to two patents in the field of the detection and quantification of donor derived cell-free DNA (dd-cfDNA) in patients after organ transplantation. dd-cfDNA has been shown to be a very useful addition to the traditional surveillance of graft health after transplantation and is currently reimbursed in the United States under a blanket LCD document. In September 2020, the United States District Court for the District of Delaware declared three patents in the field of dd-cfDNA (US 8,703,652, 9,845,497 and 10,329,607) invalid, which cleared a year’s long patent infringement case and potentially removes barriers that we may face in the diagnostic field. In October 2021, our patent filing for the use of digital PCR to quantify dd-cfDNA was issued by the USPTO. The issuance of our final patent gave us confidence that we have a patent protected test that has advantages over the current tests in use today and since the assay is already clinically validated in the three major solid organ transplant types (kidney, liver and heart) by peer reviewed international publications, we also believe that we will receive reimbursement approval after a successful technology transfer to our laboratory in Nashville, which is planned to be finalized by the end of Q1 2022. Given the combination of reimbursement likelihood and patent protection, management and the board made the decision to go direct in the US market as an LDT test and seek a platform partner to ultimately provided a regulated, kitted product allowing greater decentralization and better patient access.
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Commercialization of our Molecular Diagnostic Tests
Our first commercial diagnostic test is DetermaRx™ which we began to commercialize in 2020. We are presently performing the DetermaRxTM tests at our CLIA certified laboratory in Irvine. We also have a CLIA certified laboratory and Pharma Services lab in Nashville, Tennessee, which is intended to serve as our Immune Diagnostic Center of Excellence, and, through the Chronix merger in April 2021, we acquired and operate our Blood Based Monitoring Center of Excellence from Göttingen, Germany.
As of December 31, 2021 we had a sales team of eleven that have been hired in the geographical regions with the highest volume of thoracic surgeries who have extensive experience selling high value oncology molecular tests, and a medical education team which includes a board-certified genetic counselor. The product was launched to seven Early Adopter Sites in February 2020 to establish and test our CLIA lab protocols and workflows, gain customer feedback on the final patient report and validate our logistical plan for sample transport. The decision was made to enter a full market launch in late February 2020 after successful validation of our processes, and full engagement started in early March. To expand our customer base for DetermaRx™, we have hired a limited sales force in focused regions of the country to identify and target hospitals and physicians that perform a high volume of surgical resections, which include large group practices (LGPs), as well as National Comprehensive Cancer Network (NCCN) and NCI cancer centers. Our primary call point is thoracic surgeons because they manage most early-stage lung cancer patients, and refer patients to medical oncologists for further treatment post-surgery as needed. Our sales representatives also call on medical oncologists who make the chemotherapy treatment decision for patients identified high-risk by the test. These are complimentary call points as often decisions to adopt a test are made by a multi-disciplinary team. Unfortunately, the world was facing the emergence of a pandemic of a Novel Coronavirus, called SARS- CoV2, which ultimately led to the COVID-19 pandemic that severely impacted our sales forces’ ability to engage new accounts and surgeons in person at the critical early phase of full market launch. In late March 2020, our medical education team pivoted to a virtual training program and began to offer Medical Education events over virtual calls and video meetings which allowed our sales representatives to set up virtual presentations to educate physicians about DetermaRxTM. We believe the program was successful because through the end of 2021, the virtual programs had reached over 5,000 healthcare professionals.
Since our broad commercial launch in March 2020, DetermaRxTM has now been ordered at more than 183 hospitals and by 213 physicians in the United States. The strategy we are pursuing to market DetermaRx™ is likely to be replicated in large measure for the market launch of our other cancer tests as we complete test development.
In December 2020, we entered into an Exclusive Sublicense Agreement in the PRC Territory (the “Sublicense Agreement”) with Burning Rock Biotech Limited (“Burning Rock”), Razor and Razor’s largest shareholder Encore Clinical Inc. pursuant to which rights to DetermaRx™ in the Peoples Republic of China, including Hong Kong, Macau, and Taiwan are sublicensed to Burning Rock. Under the Burning Rock Sublicense Agreement, we are entitled to receive certain payments (the “Initial Milestone Payments”) totaling $4 million subject to the successful transfer and installation of the DetermaRx™ technology on Burning Rock’s platforms, and additional payments if certain milestones are achieved and running royalties. As of December 31, 2021, we have received $3 million of the Initial Milestone Payments.
We are investing in physician education to drive demand for DetermaRx™. A central pillar of our physician education efforts is our Key Opinion Leader-led speaker program that is focused on peer-to-peer engagement. We have 16 community and academic speakers representing DetermaRx™ in commercial peer-to-peer programs. Our marketing and physician education efforts also include participation in lung cancer focused national and regional medical meetings and symposia, and grant support of accredited continuing medical education (CME) events. In 2021, we held six national-level KOL engagement activities and 85 speaker programs, including a CME event at the San Antonio Breast Cancer Symposium chaired by KOL Hope Rugo from UCSF, and Adam Brufsky, among others. Lastly, we held six Regional Perspectives In Early-stage Lung Cancer programs that bought together regional KOLs to discuss real-world use cases of DetermaRx™ and its impact on patient care.
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Market Access – Reimbursement
Billing, Coverage, and Reimbursement for our Diagnostic Tests
Currently DetermaRxTM is Oncocyte’s only commercialized clinical test. We expect that revenues from our clinical laboratory for this test will be derived from several different sources:
| ● | Third-party payers that provide coverage to the patient, such as an insurance company, a managed care organization, or a governmental payer program, including Medicare; | |
| ● | Physicians or other authorized parties, such as hospitals or independent laboratories, that order the test for patients or otherwise refer the testing services to us; | |
| ● | Patients, in cases where the patient has no insurance, has insurance that partially covers the testing, or owes a co-payment, co-insurance, or deductible amount; and/or | |
| ● | Payments due to us under the Burning Rock Sublicense Agreement. |
In August 2020, Noridian Healthcare Solutions, LLC, CMS’ Medicare Administrative Contractor (“MAC”) for laboratories located in California, delivered a final coverage and pricing decision. This decision and coverage by other MACs is important because approximately 70% of patients for whom the test is indicated are eligible for Medicare coverage. However, in the absence of reimbursement by a health insurance plan or Medicare, patients who would be candidates for the use of our tests may decline to use our tests, and physicians may be reluctant to prescribe our tests, due to the cost of the test to the patients. Because of this patient cost factor, revenues from any new cancer test that we market may experience slow growth until the test is approved for reimbursement by larger payer plans which cover many patients.
Medicare
For cancer diagnostics, Medicare or CMS reimbursement approval is critical. CMS relies on a network of Medicare Administrative Contractors (“MACs”) to make Local Coverage Decisions approving a test for reimbursement. The Molecular Diagnostics Services (“MolDx”) Program was developed by Palmetto GBA (the previous MAC for California) to identify and establish coverage and reimbursement for molecular diagnostics tests. The program has developed guidelines for the level of evidence of efficacy required to be obtained through clinical trials. Palmetto, which contracted with CMS to administer the MolDx, issues Local Coverage Determinations that affect coverage, coding, and billing of many molecular tests and the current MAC for California, Noridian Healthcare Solutions, LLC, has adopted the coverage policies from Palmetto. MACs also serve as the primary operational contact between the Medicare Fee-For-Service program, for paying Medicare claims, and approximately 1.5 million health care providers enrolled in the program. Delays in obtaining MAC approval, or any changes made related to any favorable Local Coverage Determinations, could have a material adverse impact on our business.
Private Third-Party Payers
In addition to seeking Medicare reimbursement approval, we will seek reimbursement approval from private payers such as health insurance companies and HMOs. Private payers generally will determine whether to approve a diagnostic test for reimbursement based on the published results of clinical validity and clinical utility studies, and may base their decision on whether to cover a test, and at what level to reimburse, on the MAC’s local coverage determination. Obtaining private payer medical coverage generally takes twelve to twenty-four months from the time that sufficient evidence is demonstrated. In the interim we will bill commercial payers and appeal any denials using the published clinical evidence supporting the utility of the test.
Reimbursement rates paid by private third-party payers can vary based on whether the provider is considered to be an “in-network” provider, a participating provider, a covered provider, an “out-of-network” provider or a non-participating provider. Currently, we are out-of-network with all commercial payers. These definitions can vary among payers. An in-network provider usually has a contract with the payer or benefits provider. This contract governs, among other things, service-level agreements and reimbursement rates. In certain instances, an insurance company may negotiate an in-network rate for our testing. An in-network provider may have rates that are lower per test than those that are out-of-network, and that rate can vary widely. Rates vary based on the payer, the testing type and often the specifics of the patient’s insurance plan. If a laboratory agrees to contract as an in-network provider, it generally expects to receive quicker payment and access to additional covered patients. However, it is likely that we will initially be considered an “out-of-network” or non-participating provider by payers who cover the vast majority of patients until we can negotiate contracts with the payers.
We cannot predict whether, or under what circumstances, payers will reimburse for patients for our tests or whether our efforts to appeal denied claims will be successful. While we have a rigorous process for prior authorization and appeals to overturn denials and to get contracted with commercial payers, full or partial denial of coverage by payers, or reimbursement at inadequate levels, would have a material adverse impact on our business and on market acceptance of our tests.
Billing and Collection
Where there is a private or governmental third-party payer coverage policy in place, we will bill the payer and the patient in accordance with the established policy. Our efforts in obtaining reimbursement based on individual claims, including pursuing appeals or reconsiderations of claims denials, could take a substantial amount of time, and bills may not be paid for many months, if at all. Furthermore, if a third-party payer denies coverage after final appeal, payment may not be received at all.
Where there is no coverage policy in place, we will pursue reimbursement on a case-by-case basis. In some cases, if not prohibited by law or regulation, we may bill physicians, hospitals and other laboratories directly for the services that they order. However, laws and regulations in certain states prohibit laboratories from billing physicians or other purchasers for testing that they order. Some states may allow laboratories to bill physicians directly but may prohibit the physician and, in some cases, other purchasers from charging more than the purchase price for the services, or may allow only for the recovery of acquisition costs, or may require disclosure of certain information on the invoice. An increase in the number of states that impose similar restrictions could adversely affect us by encouraging physicians to perform laboratory services in-house or by causing physicians to refer services to other laboratories that are not subject to the same restrictions. Adoption or expansion of laws and regulations that limit our ability to bill and obtain reimbursement for the full costs of our services would have a material adverse impact on our business and on market acceptance of our tests.
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Corporate Information
We were incorporated in September 2009 in the state of California. Our principal executive offices are located at 15 Cushing, Irvine, California 92618. Our telephone number is (949) 409-7600. Our website is www.Oncocyte.com. Information contained on, or that can be accessed through, our website, is not, and shall not be deemed to be, incorporated into or be considered a part of this Report.
Competition
Our industry is highly competitive and characterized by rapid technological change. Key competitive factors in our industry include, among others, the ability to successfully complete clinical studies, the ability to obtain any required regulatory approval, average selling prices of competing tests, CLIA laboratory capacity and costs, intellectual property and patent rights, and sales and marketing capabilities. We are an early-stage company with a limited operating history and many of our competitors have substantially more resources than we do, including financial, technical and sales resources. In addition, many of our competitors have more experience than we have in the development and commercialization of diagnostics. We are also competing with academic institutions, governmental agencies and private organizations that are conducting research in the field of diagnostics. Our competition will be determined in part by the potential indications for which our lead test candidates are developed and ultimately marketed. Additionally, the timing of market introduction of our diagnostic tests or of competitors’ tests may be an important competitive factor.
For the DetermaRx™ test, Oncocyte is not aware of any other diagnostic test currently on the market for the treatment stratification of patients with surgically resected Stage I and IIA NSCLC, therefore we do not believe there is a direct competitor to our DetermaRx™ test. Guidelines established by the NCCN include criteria for identifying patients at high risk of recurrence for resected Stage I and IIA NSCLC, but these criteria, to our knowledge, have not been validated to demonstrate accuracy or clinical benefit.
The DetermaIO™ test competes with multiple biomarkers already in clinical use or in development for predicting response to immunotherapy. The most commonly used clinical tests employed in the immunotherapy response market are PD-L1 expression testing and TMB. We believe, however, the current standard of care for PD-L1 testing has important limitations. According to published literature, more than half of PD-L1 positive patients do not respond to immune- checkpoint inhibitors, and 1 in 6 patients who will respond are missed (referred to as a “false negative”). Furthermore, data presented at recent oncology medical conferences suggests that TMB is not a reliable predictor of immunotherapy response. Further, data presented at SITC (discussed previously), suggested that DetermaIO™ outperformed both PD-L1 and TMB in predicting response to checkpoint inhibitors in patients with NSCLC. In 2021, we presented data at four major scientific conferences supporting the association of DetermaIOTM and response to checkpoint inhibitor therapy and comparing to PD-L1 and TMB. Notably data presented at both ESMO and SABCS demonstrated the predictive value of the test.
DetermaCNITM competes with tumor-informed tests that are on market for treatment monitoring as well as blood-only targeted panels. We believe we are differentiated from the former in that the test requires no tissue. DetermaCNITM is differentiated from targeted approaches because it assesses changes across the whole genome broadly as opposed to changes in a subset of genes and is applicable in both adjuvant and neo-adjuvant patient scenarios versus tests that monitor Minimal Residual Disease (MRD) which are typically only used when the tumor is removed.
Certain Razor Agreements
During February 2021 we acquired all of the shares of Razor common stock from its shareholders. Razor is now a wholly owned subsidiary of Oncocyte. Razor holds an exclusive worldwide license from The University of California San Francisco (“UCSF”) under certain patent rights applicable to DetermaRx™. The license agreement includes certain royalty payment, sublicense revenue sharing, and test development and commercialization milestone provisions. If the development and commercialization milestones are not met in a timely manner, UCSF could convert the license into a non-exclusive license. Royalties payable to the licensor will be in a mid-single digit percentage range depending on the source of revenue. The license agreement will remain in effect until the expiration or abandonment of the last of the licensed patent rights, but would terminate earlier if Oncocyte were to become subject to bankruptcy proceedings or if Oncocyte fails to perform or violates any term of the license agreement and does not cure the breach within the time allotted.
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During September 2019, we entered into a Sublicense and Distribution Agreement (“Razor Sublicense Agreement”) with Razor and its then principal shareholder Encore Clinical, Inc. (“Encore”) pursuant to which Razor granted us exclusive worldwide sublicenses under certain patent rights applicable to DetermaRx™ for purposes of commercialization and development of DetermaRx™. Although we have since acquired all of the shares of Razor from its former shareholders, Oncocyte remains obligated on the Razor Sublicense Agreement to pay all royalties and all revenue sharing and earnout payments owed by Razor to certain third parties with respect to DetermaRx™ revenues, including the licensor of the patent rights, but those payments will be deducted from gross revenues to determine net revenues for the purpose of paying royalties to the Razor shareholders. Total royalty and earnout payments to the Razor shareholders, the licensor, and other third parties will be a low double-digit percentage, and in addition certain milestone payments may become due if cumulative net revenue benchmarks are reached. Royalties and earnout payments will be payable on a quarterly basis.
Development Agreement
During September 2019, in connection with our initial investment in Razor, we entered into a Development Agreement that governs certain matters pertaining to a clinical trial of DetermaRxTM (“Clinical Trial”). The Development Agreement sets forth (i) certain obligations and responsibilities of Oncocyte, Encore, and Razor, with respect to the Clinical Trial, including the obligations of Oncocyte and Razor to pay Clinical Trial costs and expenses, (ii) Encore’s obligation to provide consulting services to Razor and Oncocyte in support of the Clinical Trial, (iii) Oncocyte’s obligation to make certain payments in cash to Encore , and to issue additional shares of Oncocyte common stock to Encore and the Minority Shareholders, upon the attainment of certain Clinical Trial milestones, and (iv) Encore’s entitlement to certain cash payments if certain Clinical Trial funding is received.
Upon completion of enrollment of the full number of patients for the Clinical Trial, Oncocyte will issue to Encore and the other former Razor shareholders shares of Oncocyte common stock with an aggregate market value at the date of issue equal to $3 million. If the issuance of shares of our common stock having a market value of $3 million would require us to issue a number of shares that, when combined with any shares we issued under the Purchase Agreement and the Minority Shareholder Purchase Agreements, would exceed 19.99% of the issued and outstanding shares of our common stock or the outstanding voting power of our shares as of the date of the Purchase Agreement, we may deliver a number of shares of our common stock that would not exceed that combined 19.99% limit and an amount of cash necessary to bring the combined value of cash and shares to $3 million.
If within a specified time frame Encore is substantially responsible for obtaining funding to Oncocyte or Razor for the Clinical Trial from any third-party pharmaceutical company, a portion of such additional funding amount will be paid to Encore, subject to a $3 million cap on the payment to Encore if the funding is provided by a designated pharmaceutical company.
Facilities
Oncocyte leases a building located at 15 Cushing in Irvine, California that serves as Oncocyte’s principal executive and administrative offices and laboratory facility. Oncocyte has constructed a clinical diagnostic laboratory and a research laboratory in the building and has received CLIA certification for the laboratory. Oncocyte also operates CLIA certified laboratories in Nashville, Tennessee. Through the acquisition of Chronix Biomedical, Oncocyte also has a research and development facility in Göttingen, Germany, which serves as the center of excellence for the company’s blood based monitoring program.
Materials
There is a limited number of manufacturers of molecular testing equipment and related chemical reagents necessary for the provision of our cancer tests. Additionally, the chemical reagents used with the testing equipment we chose are available only from the equipment manufacturer. This situation poses a risk to us. After encountering inconsistent results using testing equipment and reagents from one manufacturer, we switched to testing equipment from a different manufacturer. If issues were to arise with the testing equipment or with the reagents we are using, causing us to acquire different testing equipment again, we would need to conduct additional laboratory studies to determine whether our previous test results can be reproduced using the new equipment. If similar issues were to arise after commercialization of a test, we could experience a disruption for a period of time in providing the tests to patients and we would lose revenues and potentially market share as a result.
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Patents and Trade Secrets
We rely primarily on patents and contractual obligations with employees and third parties to protect our proprietary rights. We have sought, and intend to continue to seek, appropriate patent protection for important and strategic components of our proprietary technologies by filing patent applications in the United States and certain foreign countries. There can be no assurance that any of our patents will guarantee protection or market exclusivity for our diagnostic tests and diagnostic test candidates. We may also use license agreements both to access technologies developed by other companies and universities and to convey certain intellectual property rights to others. Our financial success will be dependent in part on our ability to obtain commercially valuable patent claims and to protect our intellectual property rights and to operate without infringing upon the proprietary rights of others.
We have certain exclusive rights to patents and patent applications co-owned by our subsidiary Razor and UCSF. The claims are directed to compositions of matter and methods useful for treating and detection of lung cancer using specific biomarkers or a panel of specific biomarkers. Patents covered by the exclusive rights have issued in the United States, Australia, Europe, and Hong Kong with projected expiration dates in 2032 and 2033.
We and Razor also have exclusive sublicense rights to certain patents and patent applications owned by UCSF. The claims are directed to compositions of matter and methods useful for treating and detection of lung cancer using specific biomarkers or a panel of specific biomarkers. Patents covered by the exclusive rights have issued in Australia, Europe, New Zealand, Japan, China, Canada, and Hong Kong and are pending in the United States with projected expiration dates in 2028.
Through our acquisition of Insight Genetics in January 2020 and Chronix in April 2021, we obtained exclusive rights to additional intellectual property, including trade secrets, registered trademarks, domain names, copyrights, issued and reissued patents and pending applications, and software material, and have since the Insight Genetics acquisition filed our own patents to protect DetermaIOTM.
Through our acquisition of Chronix in April 2021, we obtained intellectual property rights to 10 patent families in the field of detection of cell-free tumor DNA and quantification of donor derived cell-fee DNA, with numerous already issued patents in the United States and European Union, expiring between April 2031 and October 2034. In addition, we obtained trade secrets, registered trademarks, domain names, copyrights and proprietary software material.
In addition to relying on patents, we will rely on trade secrets, know-how, continuing technological advancement, and licensing opportunities to maintain our competitive position. The molecular diagnostics that we are developing use gene expression classifiers or algorithms, which are mathematical models that weight the biomarkers to produce a score. We will treat the mathematical models as trade secrets. We have entered into intellectual property, invention, and non-disclosure agreements with our employees, and it is our practice to enter into confidentiality agreements with our consultants. There can be no assurance, however, that these measures will prevent the unauthorized disclosure or use of our trade secrets and know-how, or that others may not independently develop similar trade secrets and know-how or obtain access to our trade secrets, know-how, or proprietary technology.
General Risks Related to Obtaining and Enforcing Patent Protection
Our patents and patent applications are directed to compositions of matter, formulations, methods of use and/or methods of manufacturing. The patent positions of pharmaceutical and biotechnology companies, including ours, are generally uncertain and involve complex legal and factual questions. Our business could be negatively impacted by any of the following:
| ● | The claims of any patents that are issued may not provide meaningful protection, may not provide a basis for commercially viable diagnostic tests or may not provide us with any competitive advantages; | |
| ● | Our patents may be challenged by competitors or other third parties and if the third parties are successful in their challenge, the patents could be invalidated, permitting third parties to use the patented inventions to compete with us; |
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| ● | Others may have patents that relate to our technology or business that may prevent us from marketing our diagnostic test candidates unless we are able to obtain a license to those patents; | |
| ● | Patent applications to which we have rights may not result in issued patents and the information disclosed in those applications could be used by our competitors; | |
| ● | Changes in government regulations or patent laws; and | |
| ● | We may not be successful in developing additional proprietary technologies that are patentable. |
In addition, others may independently develop similar or alternative technologies, duplicate any of our technologies and, if patents are licensed or issued to us, design around the patented technologies licensed to or developed by us. Moreover, we could incur substantial costs in litigation if we have to defend ourselves in patent lawsuits brought by third parties or if we initiate such lawsuits.
The United States Supreme Court’s decisions in Mayo Collaborative Services v. Prometheus Laboratories, Inc. and Association for Molecular Pathology v. Myriad Genetics may limit our ability to obtain patent protection on diagnostic methods that merely recite a correlation between a naturally occurring event and a diagnostic outcome associated with that event. Our cancer diagnostic tests are based on the presence of certain genetic markers for a variety of cancers. In Mayo Collaborative Services v. Prometheus Laboratories, Inc., the Supreme Court ruled that patent protection is not available for simple the use of a mathematical correlation of the presence of a well-known naturally occurring metabolite as a means of determining proper drug dosage. The claims in the contested patents that were the subject of that decision were directed to measuring the serum level of a drug metabolite and adjusting the dosing regimen of the drug based on the metabolite level. The Supreme Court said that a patent claim that merely claimed a correlation between the blood levels of a drug metabolite and the best dosage of the drug was not patentable subject matter because it did no more than recite a correlation that occurs in nature.
In Association for Molecular Pathology v. Myriad Genetics, the Supreme Court ruled that the discovery of the precise location and sequence of certain genes, mutations of which can dramatically increase the risk of breast and ovarian cancer, was not patentable. Knowledge of the gene location and sequences was used to determine the genes’ typical nucleotide sequence, which, in turn, enabled the development of medical tests useful for detecting mutations in these genes in a particular patient to assess the patient’s cancer risk. But the mere discovery of an important and useful gene did not render the genes patentable as a new composition of matter.
Also, in Ariosa Diagnostics, Inc. v. Sequenom, Inc., the Federal Circuit ruled that a method for detecting a paternally inherited nucleic acid of fetal origin performed on a maternal serum or plasma sample from a pregnant female was not patent eligible subject matter under the framework set forth in Mayo Collaborative Services v. Prometheus Laboratories, Inc. The court examined the elements of the claim to determine whether the claim contained an inventive concept sufficient to transform the claimed naturally occurring phenomenon into a patent eligible application and found that the method steps did not support patentability because they used conventional amplification and detection techniques. Although the claims can be distinguished from the claims at issue in Mayo Collaborative Services v. Prometheus Laboratories, Inc., the court was bound by the language of the Supreme Court decision to hold Sequenom’s claims unpatentable.
In Illumina, Inc. v. Ariosa Diagnostics, Inc., the Federal Circuit reversed and remanded the lower court and found that claims directed to methods of preparing plasma to isolate extracellular fetal DNA, based on the inventors’ discovery that fetal DNA strands in maternal plasma are relatively short compared to maternal DNA, were directed to patent-eligible subject matter. The majority reasoned that the claimed methods include process steps that lead to a DNA fraction that is different from the naturally-occurring fraction present in the mother’s blood due to enrichment of cell-free fetal DNA. Thus, the process achieves more than simply observing that fetal DNA is shorter than maternal DNA or detecting the presence of that phenomenon. The majority noted that the inclusion of specific techniques for carrying out the steps of the method, illustrated the concrete nature of the claimed process steps. These concrete process steps were used, not merely to observe the presence of the phenomenon that fetal DNA is shorter than maternal DNA, but to exploit that discovery in a method for preparation of a mixture enriched in fetal DNA and thus supported a finding of patent eligible subject matter.
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While the cases discussed above are instructive, the United States Patent and Trademark Office (the “USPTO”) has also issued guidelines in light of the Supreme Court decisions indicating that process claims having a natural principle as a limiting step will be evaluated to determine if the claim includes additional steps that practically apply the natural principle such that the claim amounts to significantly more than the natural principle itself. Because the diagnostic tests that we are developing combine an innovative methodology with newly discovered compositions of matter, we are hopeful that this Supreme Court decision will not preclude the availability of patent protection for our diagnostic tests. However, there is no guarantee that such pending patent applications will issue nor that our existing patents would survive a challenge in light of the above-referenced case law.
The USPTO has also issued multiple Subject Matter Eligibility Updates to provide further guidance in determining subject matter eligibility. The Subject Matter Eligibility Updates include new Subject Matter Eligibility Examples for the Life Sciences. These examples provide favorable exemplary subject matter eligibility analysis of hypothetical claims covering diagnostic tests and claims drawn from case law. This update from the USPTO does not change our opinion on our ability to obtain meaningful patent protection.
There is a risk that any patent applications that we file and any patents that we hold or later obtain could be challenged by third parties and declared invalid or infringing of third-party claims. A patent interference proceeding may be instituted with the USPTO when more than one person files a patent application covering the same technology, or if someone wishes to challenge the validity of an issued patent filed before March 16, 2013. At the completion of the interference proceeding, the USPTO will determine which competing applicant is entitled to the patent, or whether an issued patent is valid. Patent interference proceedings are complex, highly contested legal proceedings, and the USPTO’s decision is subject to appeal. This means that if an interference proceeding arises with respect to any of our patent applications, we may experience significant expenses and delay in obtaining a patent, and if the outcome of the proceeding is unfavorable to us, the patent could be issued to a competitor rather than to us. In addition to interference proceedings, the USPTO can review issued patents at the request of a third party seeking to have the patent invalidated. Currently an inter partes review proceeding will allow third parties to challenge the validity, based on issues of novelty and non-obviousness, in view of patents and printed publications, of an issued patent where there is a reasonable likelihood of invalidity. This means that patents owned or licensed by us may be lost if the outcome of the review is unfavorable to us.
Post Grant Review under the America Invents Act makes available opposition-like proceedings in the United States. As with the USPTO interference proceedings, Post Grant Review proceedings will be very expensive to contest and can result in invalidation of a recently issued patent. To invoke a post-grant review, a challenge must be filed within nine months of a patent’s issuance or reissuance. Post-grant review can be sought based on any grounds that can be used to challenge the validity of a patent claim, with the exception of failure to disclose the best mode. Also, a derivation proceeding may be instituted by the USPTO or an inventor alleging that a patent or application was derived from the work of another inventor.
Oppositions to the issuance of patents may be filed under European patent law and the patent laws of certain other countries. As with the USPTO interference proceedings, these foreign proceedings can be very expensive to contest and can result in significant delays in obtaining a patent or can result in a denial of a patent application.
The enforcement of patent rights often requires litigation against third party infringers, and such litigation can be costly to pursue. Even if we succeed in having new patents issued or in defending any challenge to issued patents, there is no assurance that our patents will be comprehensive enough to provide us with meaningful patent protection against our competitors. Further, should we sue a third party infringer for patent infringement, the infringer may assert counter claims and attempt to invalidate some or all of the asserted patent claims. There is always some risk that such a counter claim could result in invalidation of one or more claims of an asserted patent.
Government Regulation
CLIA—Clinical Laboratory Improvement Amendments of 1988 and State Regulation
We expect that DetermaRx™ and DetermaIO™ will be regulated under the Clinical Laboratory Improvements Amendment (“CLIA”) as laboratory developed tests or “LDTs”. In 1988, Congress enacted CLIA, which established quality standards for all laboratories that provide testing services to ensure the accuracy, reliability and timeliness of patient test results regardless of where the test is performed.
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Under CLIA, a laboratory is defined as any facility that performs laboratory testing on specimens derived from humans for the purpose of providing information for the diagnosis, prevention or treatment of disease, or the impairment of, or assessment of health of human beings. Because we meet this definition, CLIA requires that we hold a certificate applicable to the complexity of the categories of testing we perform and that we comply with certain standards. Laboratories performing high complexity testing are required to meet more stringent requirements than laboratories performing less complex tests. CLIA regulations require clinical laboratories like ours to comply with various operational, personnel, facilities administration, quality, and proficiency testing requirements intended to ensure that testing services are accurate, reliable and timely. CLIA certification is a prerequisite for reimbursement eligibility for services provided to state and federal health care program beneficiaries. CLIA is user-fee funded. Therefore, all costs of administering the program must be covered by the regulated facilities, including certification and survey costs.
FDA Regulation of Diagnostic Tests
We have designed, developed, and are validating our tests as LDTs and consequently believe our tests are governed under the CLIA regulations, as administered by CMS, as well as by applicable state laws.
Historically, the FDA had exercised enforcement restraint with respect to most LDTs and had not required laboratories that offer LDTs to comply with FDA requirements for medical devices, such as registration, device listing, quality systems regulations, premarket clearance or premarket approval, and post-market controls.
In recent years, the FDA has stated it intends to end its policy of enforcement restraint and begin regulating certain LDTs as medical devices. In October 2014, the FDA issued two draft guidance documents, entitled “Framework for Regulatory Oversight of Laboratory Developed Tests (LDTs)” and “FDA Notification and Medical Device Reporting for Laboratory Developed Tests (LDTs)”, respectively, that set forth a proposed risk-based regulatory framework that would apply varying levels of FDA oversight to LDTs.
The FDA has indicated that it does not intend to modify its policy of enforcement restraint until the draft guidance documents are finalized. Subsequently, in January 2017, the FDA issued a Discussion Paper on LDTs (“Discussion Paper”), in which it outlined a substantially revised “possible approach” to the oversight of LTDs. The risk-based approach outlined focuses on new and significantly modified high and moderate risk LDTs and low risk LDTs, LDTs for rare diseases, traditional LDTs, LDTs intended solely for public health surveillance, certain LDTs used in CLIA certified labs, and LDTs intended solely for forensic use would not be expected to comply with premarket review, quality systems, and registration and listing requirements unless necessary to protect public health. With respect to the post-market surveillance of LDTs, the FDA’s Discussion Paper recommends that laboratories initially report serious adverse events for all tests except the exempted categories of tests, which include LDTs intended for public health surveillance, some stem cell/tissue/organ transplantation LDTs, and LDTs intended solely for forensic use. The Discussion Paper notes that it is not a final version of the 2014 draft guidance and that it does not intend to represent the FDA’s formal position but rather describes the evolution of the agency’s thinking about the regulatory framework for LDTs.
Responding to the COVID-19 pandemic, in August, 2020, the Department of Health and Human Services (“HHS”), the parent agency for FDA, formally rescinded FDA guidance and other informal statements concerning FDA’s premarket review of LDTs and announced that the FDA “will not require premarket review of [LDTs] absent notice-and comment rulemaking, as opposed through guidance documents, compliance manuals, website statements, or other informal issuances.” It is unclear at this time whether the Biden administration will revise or rescind this policy.
It is unclear at this time when or if the FDA will finalize its plans to end enforcement discretion, via notice and comment rulemaking or otherwise, and even then, new regulatory requirements are expected to be phased-in over time. Nevertheless, the FDA may attempt to regulate certain LDTs on a case-by-case basis at any time.
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On June 24, 2021, bi-partisan members of both the House and Senate re-introduced the Verifying Accurate, Leading-edge IVCT Development (“VALID”) Act, which features a precertification program. The term IVCT refers to in vitro clinical tests, a category that w comprises both test kits and lab-developed tests. The VALID Act includes precertification proposed by the FDA, a process through which diagnostic developers could receive premarket approval or clearance for one test representative of a group of tests using the same technology and have other elements in common. Approval of that representative test would precertify other tests in the group and allow the lab to launch them without premarket review. The VALID Act would also create a new system for labs and hospitals to use to submit their tests electronically to the FDA for approval, which is aimed at reducing the amount of time it takes for the agency to approve such tests, and establish a new program to expedite the development of diagnostic tests that can be used to address a current unmet need for patients. The introduced Valid Act also includes specific language designed to address public health emergencies, including COVID-19. If enacted, the impact of the VALID Act will be minimal for IVD manufacturers because of the alignment between the VALID Act and existing medical device statutory and regulatory requirements and the fact that such requirements have been enforced for IVD manufacturers for decades; however, it will have a significant impact on clinical laboratories as laboratories will need to comply with many new requirements, including: registration and listing with the FDA; quality requirements; investigational studies; premarket review and approval; adverse event reporting; and corrections and removals (recalls). While the VALID Act outlines a framework for these elements (among others), the law, if enacted, would direct the FDA to promulgate regulations and issue guidance documents within two (2) years of its enactment, and establishes an effective date for the new IVCT regulatory system as four (4) years after enactment, giving clinical laboratories and others ample opportunity to participate in shaping and preparing for the new IVCT regulatory program.
On May 18, 2021, Senator Rand Paul re-introduced a bill, called the Verified Innovative Testing in American Laboratories (“VITAL”) Act of 2021, which strikes a counterpoint to the proposed VALID Act. VITAL seeks to update existing federal lab standards under the CLIA, specifically stating that all aspects of lab-developed testing procedures would be regulated by the US Health and Human Services Secretary under the Public Health Services Act, and that no aspects of lab-developed testing procedures would be regulated under the Federal Food, Drug, and Cosmetic Act, including during a public health emergency.
While we cannot predict whether the either VALID Act or the VITAL Act as proposed, or any modified version of either act will be enacted into law, it is expected that some form of the acts will be incorporated into a broader health care legislative package. The likelihood that Congress will pass legislation and the extent to which such legislation may affect the FDA’s plans to regulate certain LDTs as medical devices is difficult to predict at this time. Until the VALID Act, VITAL Act, or other legislation is passed reforming the federal government’s regulation of LDTs, it is unknown how the FDA may regulate our tests in the future and what testing and data may be required to support any required clearance or approval.
If the FDA ultimately regulates certain LDTs, whether via final guidance, final regulation, or as instructed by Congress, our tests may be subject to certain additional regulatory requirements. Complying with the FDA’s requirements can be expensive, time-consuming, and subject us to significant or unanticipated delays. Insofar as we may be required to obtain premarket clearance or approval to perform or continue performing an LDT, we cannot assure that we will be able to obtain such authorization. Even if we obtain regulatory clearance or approval where required, such authorization may not be for the intended uses that we believe are commercially attractive or are critical to the commercial success of our tests. As a result, the application of the FDA’s requirements to our tests could materially and adversely affect our business, financial condition, and results of operations.
Notwithstanding the FDA’s current position with respect to oversight of our tests, we may voluntarily decide to pursue FDA pre-market review for our current tests and tests we may offer in the future if we determine that doing so would be appropriate from a strategic perspective.
Failure to comply with applicable FDA regulatory requirements may trigger a range of enforcement actions by the FDA including warning letters, civil monetary penalties, injunctions, criminal prosecution, recall or seizure, operating restrictions, partial suspension or total shutdown of operations, and denial of or challenges to applications for clearance or approval, as well as significant adverse publicity.
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State Laboratory Licensing
In addition to federal certification requirements of laboratories under CLIA, we are required to maintain licensure under California law for our laboratory in Irvine, California and under Tennessee law for our laboratory in Nashville, Tennessee. State laws generally include standards for the day-to-day operation of a clinical reference laboratory, including the training and skills required of personnel and quality control. In addition, those laws often mandate proficiency testing, which involves testing of specimens that have been specifically prepared for the laboratory.
Some states require licensure of out-of-state laboratories that accept specimens from those states. Our laboratories will need to pass various state inspections in order to get licensed to provide LDTs in each of state that requires licensure. CLIA provides that a state may adopt laboratory regulations that are more stringent than those under federal law, and two states, New York and Washington, have met that standard and therefore substitute for the federal CLIA program. In addition, some, but not all, states require a separate state license or permit, which must be obtained in addition to a CLIA certificate, and some states require a laboratory doing business in that state to be licensed even if the laboratory is located in another state.
Our laboratories are licensed by the appropriate state agencies in the states in which we do business, if such licensure is required. If a laboratory is out of compliance with state laws or regulations governing licensed laboratories, a state may impose penalties, which penalties vary from state to state but may include suspension, limitation, revocation or annulment of the license, assessment of financial penalties or fines, or imprisonment. We believe that we are in material compliance with all applicable licensing laws and regulations.
We may become aware from time to time of certain states that require out-of-state laboratories to obtain licensure to accept specimens from patients within the state. If we identify any other state with such requirements, or if we are contacted by any other state advising us of such requirements, we intend to follow all instructions from the state regulators regarding compliance with such requirements.
International Laboratory Licensing
We also maintain laboratory operations in Germany and could expand our laboratory operations to other foreign jurisdictions. Therefore, we are subject to laboratory quality regulations and accreditation standards in Germany, and will be subject to such regulations and standards in any other jurisdictions where we may operate. These requirements may vary by jurisdiction and differ from those in the United States, and may require us to implement additional compliance measures.
In Vitro Diagnostics
In the future, we may elect to develop IVDs, which are regulated by the FDA as medical devices. Medical devices marketed in the United States are subject to the regulatory controls under CLIA, the Federal Food, Drug, and Cosmetic Act, and regulations adopted by the FDA. Some requirements, known as premarket requirements, apply to medical devices before they are marketed, and other requirements, known as post-market requirements, apply to medical devices after they are marketed.
The particular premarket requirements that must be met to market a medical device in the United States will depend on the classification of the device under FDA regulations. Medical devices are categorized into one of three classes, based on the degree of risk they present. Devices that pose the lowest risk are designated as Class I devices; devices that pose moderate risk are designated as Class II devices and are subject to general controls and special controls; and the devices that pose the highest risk are designated as Class III devices and are subject to general controls and premarket approval.
A premarket submission to the FDA will be required for some Class I devices, most Class II devices; and all Class III devices. Most Class I and some Class II devices are exempt from premarket submission requirements. Some Class I and most Class II devices may be marketed after a 510(k) premarket notification, while a more extensive PMA is required to market Class III devices.
Until regulatory requirements suggested by the FDA or required by any new legislation are phased in, our current LDTs will not require FDA filing before launch and we will continue to follow the CLIA certification and inspection pathway.
If the new requirements are phased in or if we elect to develop IVDs, our future screenings diagnostics may require a 510(k) submission or a Premarket Approval (“PMA”) application to the FDA. In a 510(k) submission, the device sponsor must demonstrate that the new device is “substantially equivalent” to a predicate device in terms of intended use, technological characteristics, and performance testing. A 510(k) requires demonstration of substantial equivalence to another device that is legally marketed in the United States. Substantial equivalence means that the new device is at least as safe and effective as the predicate. A device is substantially equivalent if, in comparison to a predicate it (a) has the same intended use as the predicate and has the same technological characteristics as the predicate; or (b) has the same intended use as the predicate, has different technological characteristics, and the information submitted to the FDA does not raise new questions of safety and effectiveness, and is demonstrated to be at least as safe and effective as the legally marketed predicate device.
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A claim of substantial equivalence does not mean the new and predicate devices must be identical. Substantial equivalence is established with respect to intended use, design, energy used or delivered, materials, chemical composition, manufacturing process, performance, safety, effectiveness, labeling, biocompatibility, standards, and other characteristics. A device may not be marketed in the United States until the submitter receives a letter declaring the device substantially equivalent. If the FDA determines that a device is not substantially equivalent, the applicant may resubmit another 510(k) with new data, or request a Class I or II designation through the FDA’s de novo process that allows a new device without a valid predicate to be classified into Class I or II if it meets certain criteria, or file a reclassification petition, or submit a PMA.
A new 510(k) submission is required for changes or modifications to an existing approved device, where the modifications could significantly affect the safety or effectiveness of the device or the device is to be marketed for a new or different indication for use.
A PMA for Class III devices is the most stringent type of premarket submission. Before the FDA approves a PMA, the sponsor must provide valid scientific evidence demonstrating reasonable assurance of safety and effectiveness for the device’s intended use.
Health Insurance Portability and Accountability Act and Other Data Privacy and Security Laws
Under the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), as amended by the Health Information Technology for Economic and Clinical Health Act of 2009, also called HITECH, HHS has issued regulations to protect the privacy and security of protected health information (“PHI”) and to address breach notification requirements. HIPAA also regulates standardization of data content, codes and formats used in health care transactions and standardization of identifiers for health plans and providers. Penalties for violations of HIPAA regulations include civil and criminal penalties.
The HIPAA privacy regulations cover the use and disclosure of PHI by covered entities as well as business associates, which are persons or entities that perform certain functions for or on behalf of a covered entity that involve the creation, receipt, maintenance, or transmittal of PHI. Business associates are defined to include a subcontractor to whom a business associate delegates a function, activity, or service, other than in the capacity of the business associate’s workforce. As a general rule, a covered entity or business associate may not use or disclose PHI except as permitted or required under the privacy regulations. The privacy regulations also set forth certain rights that an individual has with respect to his or her PHI, including rights to access or amend certain records, to request restrictions on the use or disclosure of PHI, or to request an accounting of disclosures of his or her PHI.
Covered entities and business associates must also comply with HIPAA’s security regulations, which establish minimum requirements for safeguarding the confidentiality, integrity, and availability of PHI that is electronically transmitted or electronically stored. In addition, HITECH established, among other things, certain breach notification requirements with which covered entities and business associates must comply. In particular, a covered entity must notify any individual whose unsecured PHI is breached according to the specifications set forth in the breach notification rule. A covered entity must also notify the Secretary of the U.S. Department of Health and Human Services and, under certain circumstances, the media of a breach of unsecured PHI.
CMS and the Office of Civil Rights issued a final rule in February 2014 to amend both the HIPAA and CLIA regulations. The final rule amended the HIPAA privacy rule to remove the CLIA laboratory exceptions, and as a result, HIPAA-covered laboratories are now required to provide individuals, upon request, with access to their completed test reports. Under the 2014 rule, CLIA laboratories and CLIA-exempt laboratories may provide copies of a patient’s completed test reports that, using the laboratory’s authentication process, can be identified as belonging to that patient. These changes to the CLIA regulations and the HIPAA Privacy Rule were intended to provide individuals with a greater ability to access their health information. CLIA laboratories must create and maintain policies, procedures, and other documentation necessary to inform patients of the right to access laboratory test reports and how to exercise that right. In December 2020, aiming to remove regulations that impede communication and data exchange between providers and health plans and expand individuals’ rights to access their own digital health information, HHS proposed further changes to the HIPAA privacy rule. These most recently proposed updates of the HIPAA privacy rule are subject to public comment period until May 6, 2021.
The HIPAA privacy, security, and breach notification regulations establish a uniform federal “floor” and do not supersede state laws that are more stringent or provide individuals with greater rights with respect to the privacy or security of, and access to, their records containing PHI or insofar as such state laws apply to personal information that is broader in scope than PHI as defined under HIPAA. Thus, in addition to the federal privacy regulations, there are a number of state laws regarding the privacy and security of health information and personal data that are applicable to clinical laboratories, and more states are considering these laws. The compliance requirements of these laws, including additional breach reporting requirements, and the penalties for violation vary widely and new privacy and security laws in this area are evolving. For example, California has implemented comprehensive privacy laws and regulations. The California Confidentiality of Medical Information Act imposes restrictive requirements regulating the use and disclosure of health information and other personally identifiable information. In addition to fines and penalties imposed upon violators, some of these state laws also afford private rights of action to individuals who believe their personal information has been misused. California’s patient privacy laws, for example, provide for penalties of up to $250,000 and permit injured parties to sue for damages. In addition to the California Confidentiality of Medical Information Act, California also recently enacted the California Consumer Privacy Act of 2018, or CCPA, which became effective January 1, 2020. The CCPA establishes a comprehensive privacy framework for covered businesses in the State of California, by creating an expanded definition of personal information, establishing new data privacy rights for consumers imposing special rules on the collection of consumer data from minors, and creating a new and potentially severe statutory damages framework for violations of the CCPA and for businesses that fail to implement reasonable security procedures and practices to prevent data breaches. While data subject to HIPAA and federal regulations governing the conduct of clinical trials is exempt from CCPA, certain of our business activities may be subject to CCPA. The CCPA provides for civil penalties for violations, as well as a private right of action for data breaches that result from a business’ failure to implement and maintain reasonable data security procedures.
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State laws regarding the privacy and security of personal information are also evolving. For example, on November 3, 2020, California passed the California Privacy Rights Act (“CPRA”) through a ballot initiative. The CPRA will create a new California Privacy Protection Agency, an “independent watchdog” whose mission is both to “vigorously enforce” the CPRA and “ensure that businesses and consumers are well-informed about their rights and obligations.” Among other things, the CPRA will create a new category of “sensitive personal information” and offer consumers the right to limit processing of such information, impose purpose limitation, data minimization, data retention, and security compliance obligations on regulated businesses, and add or modify the rights available to consumers, including by providing a right to correct the information a business holds about them. The CPRA’s amendments to the CCPA will take effect on January 1, 2023, and will generally apply to personal information collected by businesses on or after January 1, 2022. Similarly, Colorado and Virginia have also passed comprehensive state privacy laws that are set to go into effect in 2023. In addition, every U.S. state has a data breach notification law that requires entities to report certain security breaches to affected consumers and, in some instances, state regulators and consumer reporting agencies. Failure to comply with applicable state laws that impose privacy, security, or breach notification requirements could result in significant civil or criminal penalties, administrative actions, or private causes of action by individuals, and adversely affect our business, results of operations and reputation.
Similar health care and data privacy laws and regulations exist in Europe and other jurisdictions, including reporting requirements detailing interactions with and payments to healthcare providers and requirements regarding the collection, distribution, use, security, and storage of personally identifiable information and other data relating to individuals, including the GDPR, which went into effect in May 2018. The GDPR applies to any company established in the EEA, as well as to those outside the EEA, if they collect and use personal data in connection with the offering of goods or services to individuals in the EEA or the monitoring of their behavior. Companies that must comply with the GDPR face increased compliance obligations and risk, including more robust regulatory enforcement of data protection requirements and potential fines for noncompliance of up to €20 million or 4% of the annual global revenues of the noncompliant company, whichever is greater. The GDPR provides that EU and EEA member states may introduce further conditions, including limitations, to the processing of genetic, biometric or health data, which could limit our ability to collect, use and share personal data, or could cause our compliance costs to increase, ultimately having an adverse impact on our business. Among other requirements, the GDPR regulates transfers of personal data subject to the GDPR to third countries that have not been found to provide adequate protection to such personal data, including the United States, and the efficacy and longevity of current transfer mechanisms between the European Union, or EU, and the United States remains uncertain. For example, in 2016, the EU and United States agreed to a transfer framework for data transferred from the EU to the United States, called the Privacy Shield, but the Privacy Shield was invalidated in July 2020 by the Court of Justice of the European Union.
Further, from January 1, 2021, companies have to comply with the GDPR and also the UK GDPR, which, together with the amended UK Data Protection Act 2018, retains the GDPR in UK national law. The UK GDPR mirrors the fines under the GDPR, e.g. fines up to the greater of €20 million (£17.5 million) or 4% of global turnover. On June 6, 2021, the European Commission implemented an adequacy decision enabling data transfers from EU member states to the United Kingdom without additional security measures. However, this adequacy decision includes a so-called “sunset-clause” stipulating that it will expire after four (4) years, and providing that the Commission will monitor the UK’s legal situation and could intervene at any point if it determines the UK has deviated from the level of protections in place at the time of the decision. The revocation or expiration of the Commission’s adequacy decision for the UK could require additional measures to ensure adequate protection and GDPR compliance and may lead to additional costs and increases our overall risk exposure.
Physician Referral Prohibitions
Under a federal law directed at “self-referral,” commonly known as the Stark Law, there are prohibitions, with certain exceptions, on Medicare and Medicaid payments for laboratory tests referred by physicians who personally, or through a family member, have a “financial relationship”—including an investment or ownership interest or a compensation arrangement—with the clinical laboratory performing the tests. Several Stark Law exceptions are relevant to arrangements involving clinical laboratories, including: (1) fair market value compensation for the provision of items or services; (2) payments by physicians to a laboratory for clinical laboratory services; (3) certain space and equipment rental arrangements that satisfy certain requirements, and (4) personal services arrangements that satisfy certain requirements. The laboratory cannot submit claims to the Medicare Part B program for services furnished in violation of the Stark Law, and Medicaid reimbursements may be at risk as well. Penalties for violating the Stark Law include the return of funds received for all prohibited referrals, fines, civil monetary penalties and possible exclusion from the federal health care programs. Many states have comparable laws that are not limited to Medicare and Medicaid referrals.
On November 20, 2020, CMS issued a final rule to modernize and clarify the regulations that interpret self-referral law. The final rule was issued in conjunction with the CMS Patients over Paperwork initiative and the HHS Regulatory Sprint to Coordinated Care and establishes exceptions to the physician self-referral law for certain value-based compensation arrangements between or among physicians, providers, and suppliers. It also establishes a new exception for certain arrangements under which a physician receives limited remuneration for items or services actually provided by the physician; establishes a new exception for donations of cybersecurity technology and related services; and amends the existing exception for electronic health records (EHR) items and services. While the final rule presents significant opportunities for new arrangements, it also necessitates revisions to current arrangements involving healthcare providers, others involved in the healthcare industry, and patients.
Corporate Practice of Medicine
A number of states, including California, do not allow business corporations to employ physicians to provide professional services. This prohibition against the “corporate practice of medicine” is aimed at preventing corporations such as us from exercising control over the medical judgments or decisions of physicians. The state licensure statutes and regulations and agency and court decisions that enumerate the specific corporate practice rules vary considerably from state to state and are enforced by both the courts and regulatory authorities, each with broad discretion. If regulatory authorities or other parties in any jurisdiction successfully assert that we are engaged in the unauthorized corporate practice of medicine, we could be required to restructure our contractual and other arrangements. In addition, violation of these laws may result in sanctions imposed against us and/or the professional through licensure proceedings, and we could be subject to civil and criminal penalties that could result in exclusion from state and federal health care programs.
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Federal and State Fraud and Abuse Laws
A variety of federal and state laws prohibit fraud and abuse. These laws are interpreted broadly and enforced aggressively by various state and federal agencies, including CMS, the Department of Justice, the Office of Inspector General for HHS, and various state agencies. In addition, the Medicare and Medicaid programs increasingly use a variety of contractors to review claims data and to identify improper payments as well as fraud and abuse. These contractors include Recovery Audit Contractors, Medicaid Integrity Contractors and Zone Program Integrity Contractors. In addition, CMS conducts Comprehensive Error Rate Testing audits, the purpose of which is to detect improper Medicare payments. Any overpayments identified must be repaid unless a favorable decision is obtained on appeal. In some cases, these overpayments can be used as the basis for an extrapolation, by which the error rate is applied to a larger universe of claims, and which can result in even higher repayments.
The federal Anti-Kickback Statute prohibits, among other things, knowingly and willfully offering, paying, soliciting, receiving, or providing remuneration, directly or indirectly, to induce or in return for either the referral of an individual, or the furnishing, recommending, or arranging for the purchase, lease or order of any health care item or service reimbursable, in whole or in part, under a federal health care program. The definition of “remuneration” has been broadly interpreted to include anything of value, including gifts, discounts, credit arrangements, payments of cash, ownership interests and providing anything at less than its fair market value. Recognizing that the Anti- Kickback Statute is broad and may technically prohibit many innocuous or beneficial arrangements within the health care industry, the Office of Inspector General for HHS has issued a series of regulatory “safe harbors.” These safe harbor regulations set forth certain requirements that, if met, will assure immunity from prosecution under the federal Anti-Kickback Statute. Although full compliance with these provisions ensures against prosecution under the federal Anti-Kickback Statute, the failure of a transaction or arrangement to fit within a specific safe harbor does not necessarily mean that the transaction or arrangement is illegal or that prosecution under the federal Anti-Kickback Statute will be pursued.
Federal civil and criminal false claims laws, including the False Claims Act, prohibit any person from knowingly presenting, or causing to be presented, a false claim for payment to the federal government or knowingly making, or causing to be made, a false statement to get a false claim paid. Violations of the False Claims Act can result in very significant monetary penalties and treble damages. Over the past few years, several healthcare companies have been prosecuted under these laws for a variety of alleged promotional and marketing activities, including without limitation, allegedly providing free trips, free goods, sham consulting fees and grants and other monetary benefits to prescribers. In addition, the government may assert that a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the federal False Claims Act. Most states also have statutes or regulations similar to the federal anti-kickback law and false claims laws, which apply to items and services reimbursed under Medicaid and other state programs, or, in several states, apply regardless of the payor.
Federal civil monetary penalties laws impose civil fines for, among other things, the offering or transfer of remuneration to a Medicare or state healthcare program beneficiary if the person knows or should know it is likely to influence the beneficiary’s selection of a particular provider, practitioner, or supplier of services reimbursable by Medicare or a state healthcare program, unless an exception applies.
The Eliminating Kickbacks in Recovery Act (“EKRA”) specifically targets laboratories, clinics, recovery centers, and other clinical treatment centers from accepting or paying kickbacks for referrals. EKRA is broader than the federal Anti-Kickback Statute because it applies to private health insurance plans in addition to the federal health care programs, and it prohibits arrangements that may otherwise be exempt from liability under the Anti-Kickback Statute’s safe harbors, including certain compensation arrangements with laboratory sales and marketing personnel.
HIPAA also created new federal crimes, including health care fraud and false statements relating to health care matters. The health care fraud statute prohibits knowingly and willfully executing a scheme to defraud any health care benefit program, including private third-party payers. A violation of this statute is a felony and may result in fines, imprisonment or exclusion from federal health care programs, such as the Medicare and Medicaid programs. The false statements statute prohibits knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false, fictitious or fraudulent statement in connection with the delivery of or payment for health care benefits, items or services. A violation of this statute is a felony and may result in fines, imprisonment or exclusion from federal health care programs.
Many states have laws similar to the federal laws described above, and state laws may be broader in scope and may apply regardless of payer.
Additionally, the U.S. Foreign Corrupt Practices Act (“FCPA”) prohibits U.S. corporations and their representatives from offering, promising, authorizing or making payments to any foreign government official, government staff member, political party or political candidate in an attempt to obtain or retain business abroad. The scope of the FCPA includes interactions with certain healthcare professionals in many countries. Other countries have enacted similar anti-corruption laws and/or regulations.
Other Regulatory Requirements
Our laboratory will be subject to federal, state and local regulations relating to the handling and disposal of regulated medical waste, hazardous waste and biohazardous waste, including chemical, biological agents and compounds, blood samples and other human tissue. Typically, we will use outside vendors who are contractually obligated to comply with applicable laws and regulations to dispose of such waste. These vendors will be licensed or otherwise qualified to handle and dispose of such waste.
The Occupational Safety and Health Administration has established extensive requirements relating to workplace safety for health care employers, including requirements to develop and implement programs to protect workers from exposure to blood-borne pathogens by preventing or minimizing any exposure through needle stick or similar penetrating injuries.
On May 1, 2020, the Office of the National Coordinator for Health Information Technology promulgated final regulations under the authority of the 21st Century Cures Act that impose new conditions to obtain and maintain certification of certified health information technology and prohibit certain covered actors, including operators of laboratories which are considered “health care providers” under the final regulation, from engaging in activities that are likely to interfere with the access, exchange, or use of electronic health information (information blocking). The final regulations further defined exceptions for activities that are permissible, even though they may have the effect of interfering with the access, exchange, or use of electronic health information. The information blocking effective date is April 5, 2021. Under the 21st Century Cures Act, health care providers that violate the information blocking prohibition will be subject to appropriate disincentives, which HHS services has yet to establish through required rulemaking. Developers of certified information technology and health information networks and health information exchanges, however, may be subject to civil monetary penalties of up to $1 million per violation. The HHS Office of Inspector General has the authority to impose such penalties and on April 24, 2020 published a proposed rule to codify its new authority in regulation, which the agency proposed would become effective 60 days after it issues a final rule, but in no event before November 2, 2020. HHS Office of Inspector General has not yet issued a final rule.
Employees
As of December 31, 2021, we employed 110 persons on a full-time basis and five persons on a part-time basis.
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Item 1A. Risk Factors
Our business is subject to various risks, including those described below. You should consider the following risk factors, together with all of the other information included in this Report, which could materially adversely affect our proposed operations, our business prospects, and financial condition, and the value of an investment in our business. There may be other factors that are not mentioned here or of which we are not presently aware that could also affect our business operations and prospects.
Summary of Risk Factors
Risks Related to Our Capital Resources
| ● | We may incur significant cash payment and common stock issuance obligations under our agreements arising from our investments in Razor, Insight and Chronix. | |
| ● | We have incurred operating losses since inception, and we do not know if we will attain profitability. | |
| ● | It is likely that we will need to issue additional equity or debt securities in order to raise additional capital needed to pay our operating expenses. | |
| ● | Our rights to receive and retain certain payments from Burning Rock Biotech Limited under our Sublicense Agreement with them are subject to certain conditions. |
Risks Related to Our Business Operations
| ● | Our revenues in the near term will depend on our ability to commercialize a small number of diagnostic tests and to grow our Pharma Services business. | |
| ● | The research and development work we are doing is costly, time consuming, and uncertain as to its results. | |
| ● | Sales of our diagnostic tests could be adversely impacted by the reluctance of physicians to adopt the use of our tests and by the availability of competing diagnostic tests. | |
| ● | We have limited capital, marketing, sales, and regulatory compliance resources for the commercialization of our diagnostic tests. | |
| ● | We may face technology transfer challenges and expenses in adding new tests to our portfolio and in expanding our reach into new geographical areas on new instrument platforms. | |
| ● | If our laboratory facilities become damaged or inoperable, or we are must vacate any facility, our ability to provide services and pursue our research and development and commercialization efforts may be jeopardized. | |
| ● | If we fail to meet our obligations under license agreements, we may lose our rights to key technologies on which our business depends. | |
| ● | There is a limited number of manufacturers of molecular diagnostic testing equipment and related chemical reagents necessary for the provision of our diagnostic tests. | |
| ● | If we fail to enter into and maintain successful strategic alliances for diagnostic tests that we elect to co-develop, co-market, or out-license, we may have to reduce or delay our diagnostic test development or increase our expenditures. | |
| ● | We may become dependent on possible future collaborations to develop and commercialize many of our diagnostic test candidates and to provide the manufacturing, regulatory compliance, sales, marketing and distribution capabilities required for the success of our business. | |
| ● | Failure to adequately protect, or disputes relating to, trademarks could harm our business. | |
| ● | Our business could be adversely affected if we lose the services of the key personnel upon whom we depend. | |
| ● | We have granted a security interest in substantially all of our assets to secure our obligations under a bank loan agreement. | |
| ● | Our business and operations could suffer in the event of system failures. | |
| ● | Security breaches and other disruptions could compromise our information and expose us to liability, and could cause our business and reputation to suffer. | |
| ● | Failure of our internal control over financial reporting could harm our business and financial results. | |
| ● | We are subject to laws and regulations governing corruption, which will require us to develop, maintain and implement costly compliance programs. | |
| ● | We may in the future be subject to litigation, which could harm our stock price, business, results of operations and financial condition. | |
| ● | We may undertake strategic acquisitions in the future, and difficulties integrating such acquisitions could damage our ability to achieve or sustain profitability. | |
| ● | We are subject to state laws in California that require gender and diversity quotas for boards of directors of public companies headquartered in California. |
Risks Related to Our Industry
| ● | Our operations as a clinical laboratory are subject to oversight by CMS under CLIA, as well as certain state agencies, and any failure to maintain our CLIA or applicable state permits and licenses may affect our ability to commercialize our diagnostic tests. | |
| ● | If the FDA takes the position that any of our tests are not within the scope of its policy on enforcement discretion for laboratory-developed tests, or otherwise determines that it will seek to actively regulate one or more of our diagnostic tests, responding to such a regulatory position could lead to delays in commercialization, or (if encountered after commercialization) requirements to halt the commercial provision of our tests until FDA marketing authorization is obtained. | |
| ● | We will also need to obtain FDA and other regulatory approvals for any IVDs that we may develop, in order to market those IVD tests. | |
| ● | Clinical trial failures can occur at any stage of the testing and we may experience numerous unforeseen events during, or as a result of, the clinical trial process that could delay or prevent commercialization of our current or future diagnostic tests. | |
| ● | The commercial success of our diagnostic tests depends on the availability and sufficiency of third-party payer coverage and reimbursement, which may be limited or unavailable. | |
| ● | Changes in healthcare laws and policies may have a material adverse effect on our financial condition, results of operations and cash flows. | |
| ● | Because of certain Medicare billing policies, we may not receive complete reimbursement for tests provided to Medicare patients. | |
| ● | Long payment cycles of Medicare, Medicaid and other third-party payers, or other payment delays, could hurt our cash flows and increase our need for working capital. | |
| ● | Private health insurance company policies may deny coverage or limit the amount they will reimburse us for the performance of our diagnostic tests. | |
| ● | We will be required to comply with federal and state laws governing the privacy of health information, and any failure to comply with these laws could result in material criminal and civil penalties. | |
| ● | If we are successful in commercializing our diagnostic tests, we will be obligated to comply with numerous additional federal and state statutes and regulations pertaining to our business and be subject to government oversight and scrutiny for our compliance with such laws. Laboratory and health care regulatory compliance efforts are expensive and time-consuming, and failure to maintain compliance with applicable laws could result in enforcement action which could be detrimental to our business. |
Risks Related to Intellectual Property
| ● | We rely on patents and trade secrets, and our financial success will depend, in part, on our ability to obtain commercially valuable patent claims, protect our intellectual property rights and operate without infringing upon the proprietary rights of others. | |
| ● | We may not be able to obtain patent protection for our diagnostic tests if our pending U.S. patent applications are found to be directed to unpatentable subject matter. | |
| ● | Changes to the patent laws in the United States and other jurisdictions could diminish the value of patents in general, thereby impairing our ability to protect our diagnostic tests. | |
| ● | Other companies or organizations may challenge our patent rights or may assert patent rights that prevent us from developing and commercializing our diagnostic tests. | |
| ● | If we are unable to protect the confidentiality of our trade secrets, the value of our technology could be materially adversely affected, and our business would be harmed. | |
| ● | We may become involved in lawsuits to protect or enforce our patents or other intellectual property, which could be expensive, time-consuming and unsuccessful. | |
| ● | We may not be able to enforce our intellectual property rights throughout the world. | |
| ● | If we are sued for infringing intellectual property rights of third parties, such litigation could be costly and time consuming and could prevent or delay us from developing or commercializing our diagnostic tests. | |
| ● | Patent terms may be inadequate to protect our competitive position on our diagnostic tests for an adequate amount of time. |
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Risks Related to the COVID-19 Pandemic
| · | The ongoing COVID-19 global pandemic and the worldwide attempts to contain it could harm our business and our results of operations and financial condition could be adversely impacted by such pandemic. |
| · | The COVID-19 pandemic has affected and continues to affect our ability to conduct clinical trial activities. |
Risks Related to Our Common Stock
| ● | The price of our stock may rise and fall rapidly. | |
| ● | A FASB accounting standard could increase the risk that our future financial statements could be qualified by going concern uncertainty. | |
| ● | Since we don’t pay dividends, our stock may not be a suitable investment for those needing dividend income. | |
| ● | Securities analysts may not initiate coverage or continue to cover our common stock, and this may have a negative impact on the market price of our shares. | |
| ● | You may experience dilution of your ownership interests if we issue additional shares of common stock or preferred stock. | |
| ● | Our former parent company may sell its Oncocyte shares to raise capital to finance its operations. |
Risks Related to Our Capital Resources
We may incur significant cash payment and common stock issuance obligations under our agreements arising from our investments in Razor, Insight and Chronix.
As described in Note 3 to our consolidated financial statements, we have entered into certain agreements with Razor and its shareholders, including a Purchase Agreement, Minority Holder Stock Purchase Agreements, and a Development Agreement, under which we may incur significant cash payment and common stock issuance obligations. As described in Note 3 to our consolidated financial statements, we paid the amounts due to Razor under the Purchase Agreement and Minority Holder Stock Purchase Agreements.
Under the Development Agreement, upon completion of enrollment of the full number of patients for DetermaRx™ Clinical Trial, Oncocyte will be obligated to issue to the Razor shareholders shares of Oncocyte common stock with an aggregate market value equal to $3 million at the date of issue.
The number of shares of Oncocyte common stock issuable under the Purchase Agreement, the Minority Holder Purchase Agreements, and the Development Agreement on a combined basis is limited to 19.99% of the issued and outstanding shares of Oncocyte common stock or the outstanding voting power of Oncocyte shares as of the date of the Purchase Agreement, and if that number of shares has a value of less than $3 million on the date the Development Agreement obligation must be met, we would need to pay an amount of cash necessary to bring the combined value of cash and shares to $3 million to satisfy the Development Agreement obligation. The number of shares that may become issuable to satisfy the $3 million obligations cannot presently be determined because the number of shares will depend upon the market price of our common stock when the shares become issuable. The issuance of those shares of common stock will dilute the interests of our other common stockholders.
Under the Development Agreement, we are also obligated to pay the expenses of DetermaRx™ Clinical Trial after Razor’s $4 million Clinical Trial Expense Reserve has been exhausted. If within a specified time frame Encore is substantially responsible for obtaining funding to Oncocyte or Razor for the Clinical Trial from any third-party pharmaceutical company, a portion of such additional funding amount will be paid to Encore, subject to a $3 million cap on the payment to Encore if the funding is provided by a designated pharmaceutical company.
In addition, under the Merger Agreement pursuant to which we acquired Insight, as described in Note 3 to the consolidated financial statements included elsewhere in this Report, we have agreed to pay contingent consideration of up to $6.0 million in any combination of cash or shares of Oncocyte common stock if certain milestones related to DetermaIO™ are achieved (the “Contingent Consideration”), which consist of (i) a $1.5 million clinical trial completion and data publication milestone, (ii) $3.0 million for an affirmative final local coverage determination from CMS for a specified lung cancer test, and (iii) up to $1.5 million for achieving certain CMS reimbursement milestones.
As additional consideration for the acquisition of Chronix, we have agreed to pay to holders of other classes and series of Chronix stock (i) up to $14 million in any combination of cash or Oncocyte common stock if certain milestones are achieved, (ii) earnout consideration of up to 15% of net collections for sales of specified tests and products during certain five to ten-year earnout periods, and (iii) up to 75% of net collections during a seven-year earnout period from the sale or license of Chronix’s patents to a third party for use in transplantation medicine.
To meet these various cash payment obligations, we may need to sell additional shares of our common stock or other securities to raise the cash needed, or we may have to divert cash on hand that we would otherwise use for other business and operational purposes which could cause us to delay or reduce activities in the development and commercialization of our cancer tests. Any shares of common stock or other securities we sell to raise cash to meet our cash payment obligations will dilute the interests of our common stockholders.
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We have incurred operating losses since inception, and we do not know if we will attain profitability.
Since our inception in September 2009, we have incurred operating losses and negative cash flows and we expect to continue to incur losses and negative cash flows in the future. Our net losses for the years ended December 31, 2021 and 2020 were $64.1 million and $29.9 million, respectively, and we had an accumulated deficit of $187.8 million as of December 31, 2021. We finance our operations primarily through sales of our common stock. There is no assurance that we will be able to obtain any additional financing that we may need, or that any such financing that may become available will be on terms that are favorable to us and our shareholders. Ultimately, our ability to generate sufficient operating revenue to earn a profit depends upon our success in developing and marketing or licensing our diagnostic tests and technology.
It is likely that we will need to issue additional equity or debt securities in order to raise additional capital needed to pay our operating expenses until such time as our revenues are sufficient to finance our operating expenses.
| ● | We plan to continue to incur substantial research and development expenses and we anticipate that we will be incurring significant sales and marketing costs as we develop and commercialize our diagnostic tests. Our research and development expenses may also increase if we work to develop tests for additional types of cancer or for other cancer related diagnostic purposes. The period of time for which our current cash and marketable securities will be sufficient to finance our operations will depend on the extent to which we expend funds on commercializing our tests and conducting new research and development programs. We will need to raise additional capital to pay operating expenses unless we are able to generate sufficient revenues from diagnostic test sales, royalties, and license fees to meet our operating expenses. | |
| ● | Our ability to raise additional equity or debt capital will depend not only on the successful completion of development of our diagnostic tests and receiving reimbursement approval from Medicare and other third-party payers for those tests, but also will depend on access to capital and conditions in the capital markets. Although we have received a Medicare reimbursement determination for DetermaRx™, obtaining Medicare reimbursement approval for our other diagnostic tests could take two to three years, and investors may be reluctant to provide us with additional capital until we obtain Medicare reimbursement approval for those tests or until we can demonstrate that private payers such as health insurance companies or HMOs are willing to pay for the use of our diagnostic tests at prices sufficient for us to earn a reasonable return on our investments in our diagnostic test portfolio. There is no assurance that we will be able to raise capital at times and in amounts needed to finance the development and commercialization of our diagnostic tests and general operations. Even if capital is available, it may not be available on terms that we or our shareholders would consider favorable. | |
| ● | Sales or other issuances of additional equity securities by us could result in the dilution of the interests of our shareholders. |
Our rights to receive and retain certain payments from Burning Rock Biotech Limited under our Sublicense Agreement with them are subject to certain conditions.
We have entered into the Sublicense Agreement with Burning Rock, Razor and Razor’s largest shareholder Encore Clinical Inc. pursuant to which rights to DetermaRx™ in the Peoples Republic of China, including Hong Kong, Macau, and Taiwan are sublicensed to Burning Rock. Under the Burning Rock Sublicense Agreement we are entitled to receive Initial Milestone Payments totaling $4 million subject to the successful transfer and installation of the DetermaRx™ technology on Burning Rock’s platforms, and additional payments if certain milestones are achieved. As of December 31, 2021, we have received $3 million of the Initial Milestone Payments, however, there is no assurance that the remaining transfer and installation of the DetermaRx™ technology will be successfully completed within the time required by the Burning Rock Sublicense Agreement or that any of the additional payment milestones will be achieved. Further, even if we do receive the remaining $1 million of the Initial Milestone Payments, we will be obligated to refund to Burning Rock all or a portion of the Initial Milestone Payments if certain subsequent events occur, including events that are not within our control. The refund obligation will lapse in installments of $250,000 every three months after the completion date of the technology installation required to launch the DetermaRx™ test, until the occurrence of an event trigger, the obligation to make a refund to Burning Rock or until March 31, 2025 when the refund obligation will expire in full.
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Risks Related to Our Business Operations
Our revenues in the near term will depend on our ability to commercialize a small number of diagnostic tests and to grow our Pharma Services business.
Our near-term commercial efforts will focus on maximizing the opportunities for DetermaRx™ and DetermaIO™ and DetermaCNI™, as well as increasing our Pharma Services business. Our reliance on a small group of diagnostic tests as sources of revenue could limit our future revenue, make it more difficult for us to finance our operations, and impair our prospects for profitability and growth. DetermaIO™ is currently available only for biopharma diagnostic development and research use. We plan to continue DetermaIO™ development, initially for use as a companion test in immunotherapy drug development to select patients for clinical trials, and subsequently as a full companion diagnostic for clinical use to help physicians determine which patients are most likely to have a sustained response to immunotherapies. We also plan to develop DetermaCNI™ for clinical use if complete the Chronix merger. However, there is no assurance that our development plans for DetermaIO™ or DetermaCNI™ will be successful or that we will be generate sufficient revenues from commercialization of our diagnostic tests and from performing Pharma Services to finance our operations and earn a profit.
The research and development work we are doing is costly, time consuming, and uncertain as to its results.
We incurred research and development expenses amounting to approximately $13.6 million and $9.8 million during years ended December 31, 2021 and 2020, respectively. The current focus of our research and development efforts is a clinical trial of DetermaRx™ and the development of DetermaIO™ for clinical use. Other tests planned for our development pipeline include DetermaTx™, DetermaMx™ and DetermaCNI™. If we are successful in developing a new technology or diagnostic tests for additional types of cancer, refinement of the new technology or diagnostic tests and definition of the practical applications and limitations of the technology or diagnostic tests may take years and require the expenditure of large sums of money. There is no assurance that we will be successful in completing the development of our current diagnostic tests or in developing additional diagnostic tests regardless of the amount of our expenditures.
Sales of our diagnostic tests could be adversely impacted by the reluctance of physicians to adopt the use of our tests and by the availability of competing diagnostic tests.
Physicians and hospitals may be reluctant to try a new diagnostic test due to the high degree of risk associated with the application of new technologies and diagnostic tests in the field of human medicine, especially if the new tests differ from the current standard of care for detecting cancer in patients. Competing tests for the initial diagnosis, reoccurrence diagnosis and optimal treatment of cancer are being manufactured and marketed by established companies and by other smaller biotechnology companies. In order to compete with other diagnostic tests, particularly any that sell at lower prices, our tests will have to provide medically significant advantages or be more cost effective. Even if we are able to overcome physician reluctance and compete with products that are currently on the market, our competitors may succeed in developing new safer, more accurate or more cost-effective diagnostic tests that could render our diagnostic tests and technologies obsolete or noncompetitive.
We have limited capital, marketing, sales, and regulatory compliance resources for the commercialization of our diagnostic tests.
We are building our own marketing and sales capability for our diagnostic tests, and are devoting significant financial and management resources to recruiting, training, and managing our sales force and building a health care regulatory compliance program. However, due to our limited capital resources, we may need to enter into marketing arrangements with other diagnostic companies for one or more of our tests in domestic or foreign markets. Under such marketing arrangements we may license marketing rights to one or more of our diagnostic tests to other diagnostic companies or to one or more joint venture companies that may be formed to market our tests, and we might receive only a royalty on sales or an equity interest in a joint venture company. As a result, our revenues from the sale of our tests through such arrangements may be substantially less than the amount of revenues and gross profits that we might receive if we were to market our tests ourselves.
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We may face technology transfer challenges and expenses in adding new tests to our portfolio and in expanding our reach into new geographical areas on new instrument platforms.
Our plan for expanding our business includes developing and acquiring additional tests that can be transferred into our current lab footprint in the US and/or onto molecular testing instrument platforms for distribution in ex-US markets. Due to differences in the hardware and software platforms available at different laboratories for running molecular tests, we may need to make adjustments to the configuration of the reagents that make up our LDTs in our US labs or as we convert them to kits, and there may be changes to the related software in order for the tests to be performed on particular hardware platforms. Making any such adjustments could take a considerable amount of time and expense, and there will be no assurance that we will succeed in running our tests on the hardware and software that we may encounter in different laboratories. To manage this issue and to attain uniformity among our laboratory locations, we may license or acquire our own instrument system and software from another company that has a platform that will be compatible with our tests. In addition to acquisition costs, operationally we will have to build out infrastructure for installing a new testing platform across multiple laboratory locations as well as support functions to help maintain these instrument systems in new customer labs, and we may also encounter unexpected technology issues in the process.
If our laboratory facilities become damaged or inoperable, or we are required to vacate any facility, our ability to provide services and pursue our research and development and commercialization efforts may be jeopardized.
We currently have clinical laboratory facilities in Irvine, California, and Nashville, Tennessee. We also acquired a laboratory in Germany through merger with Chronix. Our facilities and equipment could be harmed or rendered inoperable by natural or man-made disasters, including fire, flooding, hurricanes, tornadoes and power outages, which may render it difficult or impossible for us to perform our tests or provide laboratory services for some period of time. The inability to perform our tests or the backlog of tests that could develop if any of our facilities is inoperable for even a short period of time may result in the loss of customers or harm to our reputation or relationships with key researchers, collaborators, and customers, and we may be unable to regain those customers or repair our reputation in the future. Furthermore, our facilities and the equipment we use to perform our research and development work could be costly and time-consuming to repair or replace.
Additionally, a key component of our research and development process involves using biological samples and the resulting data sets and medical histories, as the basis for our diagnostic test development. In some cases, these samples are difficult to obtain. If the parts of our laboratory facilities where we store these biological samples are damaged or compromised, our ability to pursue our research and development projects, commercialization of our diagnostic tests, as well as our reputation, could be jeopardized. We carry insurance for damage to our property and the disruption of our business, but this insurance may not be sufficient to cover all of our potential losses and may not continue to be available to us on acceptable terms, if at all.
Further, if our laboratories become inoperable, we may not be able to license or transfer our proprietary technology to a third-party, with established state licensure and CLIA certification under the scope of which our diagnostic tests could be performed following validation and other required procedures, to perform the tests. Even if we find a third-party with such qualifications to perform our tests, such party may not be willing to perform the tests for us on commercially reasonable terms. Moreover, we believe our tests are currently subject to enforcement discretion by the FDA because we believe the tests currently qualify as LDTs. If, however, we are required to find a third-party laboratory to conduct our testing services, we believe this would change our status and the FDA would consider such tests offered through a third-party to then be a medical device subject to active FDA regulation and enforcement under its in vitro diagnostic authorities. In that case, we may be required to obtain premarket clearance or approval prior to offering our tests, which would be time-consuming and costly and could result in interruptions and delays in our ability to sell or offer our tests.
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If we fail to meet our obligations under license agreements, we may lose our rights to key technologies on which our business depends.
Razor has rights to commercialize DetermaRx™ under a license which imposes certain obligations, including payment obligations and obligations to pursue development and commercialization of diagnostic tests under the licensed patents and technology. If the licensor believes that Razor and Oncocyte as Razor’s sublicensee have failed to meet those contractual obligations it could seek to limit or terminate our license rights, which could lead to costly and time-consuming litigation and, potentially, a loss of the licensed rights. During the period of any such litigation our ability to continue marketing DetermaRx™, and our ability to raise any capital that we might then need, could be significantly and negatively affected. If our license rights were lost, we would not be able to continue to use the licenses needed for DetermaRx™ in our business. Even if the licensor were to elect to convert our exclusive license to non-exclusive rights rather than terminating our license as a result of our failure to meet a license agreement obligation, the loss of exclusivity might result in our loss of revenue to any competitors that might acquire rights from the licensor to use the licensed patents in competition with us.
There is a limited number of manufacturers of molecular diagnostic testing equipment and related chemical reagents necessary for the provision of our diagnostic tests.
After encountering inconsistent results using diagnostic testing equipment and reagents from one manufacturer, we switched to diagnostic testing equipment from a different manufacturer. The chemical reagents used with the diagnostic testing equipment are available only from the equipment manufacturer. If issues were to arise with the new equipment or if reagents we are using causing us to acquire different diagnostic testing equipment again, we would need to conduct validation and analytic studies to determine whether our previous test results can be reproduced using the new equipment. As a result, we could experience delays again in developing our diagnostic tests. If similar issues were to arise after commercialization of a diagnostic test, we could experience a disruption for a period of time in providing the diagnostic tests to patients and we would lose revenues and potentially market share as a result.
If we fail to enter into and maintain successful strategic alliances for diagnostic tests that we elect to co-develop, co-market, or out-license, we may have to reduce or delay our diagnostic test development or increase our expenditures.
In order to facilitate the development, manufacture and commercialization of our diagnostic tests we may enter into strategic alliances with diagnostic, pharmaceutical, or medical device companies to advance our programs and enable us to maintain our financial and operational capacity. We will face significant competition in seeking appropriate alliances. We may not be able to negotiate alliances on acceptable terms, if at all. If we fail to create and maintain suitable alliances, we may have to limit the size or scope of, or delay, one or more of our product development or research programs, or we will have to increase our expenditures and will need to obtain additional funding, which may be unavailable or available only on unfavorable terms.
If we are able to enter into development and marketing arrangements with diagnostic, pharmaceutical or medical device companies for our diagnostic tests, we may license product development, manufacturing, and marketing rights to the pharmaceutical or medical device company or to a joint venture company formed with the pharmaceutical or medical device company. Under such arrangements we might receive only a royalty on sales of the diagnostic tests developed or an equity interest in a joint venture company that develops the diagnostic test. As a result, our revenues from the sale of those diagnostic tests may be substantially less than the amount of revenues and gross profits that we might receive if we were to develop, manufacture, and market the diagnostic tests ourselves.
We may become dependent on possible future collaborations to develop and commercialize many of our diagnostic test candidates and to provide the manufacturing, regulatory compliance, sales, marketing and distribution capabilities required for the success of our business.
We may enter into various kinds of collaborative research and development, manufacturing, and diagnostic test marketing agreements to develop and commercialize our diagnostic tests. Any future milestone payments and cost reimbursements from collaboration agreements could provide an important source of financing for our research and development programs, thereby facilitating the application of our technology to the development and commercialization of our diagnostic tests, but there are risks associated with entering into collaboration arrangements.
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There is a risk that we could become dependent upon one or more collaborative arrangements for diagnostic test development or manufacturing or as a source of revenues from the sale of any diagnostic tests that may be developed by us alone or through one of the collaborative arrangements. A collaborative arrangement upon which we might depend might be terminated by our collaboration partner or they might determine not to actively pursue the development or commercialization of our diagnostic tests. A collaboration partner also may not be precluded from independently pursuing competing diagnostic tests or technologies.
There is a risk that a collaboration partner might fail to perform its obligations under the collaborative arrangements or may be slow in performing its obligations. In addition, a collaboration partner may experience financial difficulties at any time that could prevent it from having available funds to contribute to the collaboration. If a collaboration partner fails to conduct its diagnostic test development, manufacturing, commercialization, regulatory compliance, sales and marketing or distribution activities successfully and in a timely manner, or if it terminates or materially modifies its agreements with us, the development and commercialization of one or more diagnostic test candidates could be delayed, curtailed or terminated because we may not have sufficient financial resources or capabilities to continue diagnostic test development, manufacturing, and commercialization on our own.
Failure to adequately protect, or disputes relating to, trademarks, could harm our business.
We cannot be certain that the legal steps we are taking are sufficient to protect our trademark rights or that, notwithstanding legal protection, others will not infringe or misappropriate our intellectual property rights. In addition, we could come into conflict with third parties over trademark rights, which could result in disruptive and expensive litigation. Challenges to our trademarks could result in significant costs related to the prosecution or defense of the registrations of our trademarks or rebranding if we need to abandon or modify a trademark.
Our business could be adversely affected if we lose the services of the key personnel upon whom we depend.
We presently rely on a small senior management team to direct our diagnostics program and our initial commercial activities. Accordingly, the loss of the services of one or more of the members of that management team could have a material adverse effect on our business.
We have granted a security interest in substantially all of our assets to secure our obligations under a bank loan agreement.
We have entered into a Loan and Security Agreement with Silicon Valley Bank for a loan that is secured by substantially all of our assets, other than our patents and trade secrets, as collateral for the loan. If a default were to arise under the Loan and Security Agreement, the bank could foreclose on its security interest and we could lose our collateral, which could force us to discontinue our operations.
Our business and operations could suffer in the event of system failures.
We depend on information technology and telecommunications systems, including a combination of on-site systems, managed data center systems, cloud-based systems, and the Internet, for significant elements of our operations, including processing, transmitting, and storing a wide variety of business-critical information. Despite the implementation of security measures, our internal computer systems and those of our contractors and consultants are vulnerable to damage from computer viruses, ransomware, unauthorized access, natural disasters, terrorism, war and telecommunication and electrical failures. Such events could cause interruption of our operations, downtime of our information technology or telecommunications systems or those used by our third-party service providers, and have an adverse effect on our business and results of operations. For example, the loss of data for our diagnostic test candidates could result in delays in our regulatory filings and development efforts and significantly increase our costs. To the extent that any disruption or security breach results in a loss of or damage to our data, or inappropriate disclosure of confidential or proprietary information, we could incur liability under federal or state laws, be subject to litigation, and the development of our diagnostic test candidates could be delayed.
Security breaches and other disruptions could compromise our information and expose us to liability, and could cause our business and reputation to suffer.
In the ordinary course of business, we collect and store sensitive data, including intellectual property, our proprietary business information and that of our business partners, PHI, and personally identifiable information of patients and employees. We manage and maintain our applications and data utilizing a combination of on-site systems, managed data center systems and cloud-based systems. We also communicate PHI and other sensitive data through our various tools and platforms. In addition to storing and transmitting sensitive data that is subject to legal protections, these applications and data encompass a wide variety of business-critical information, including research and development information, commercial information, and business and financial information. The secure processing, maintenance, and transmission of this information is critical to our operations and business strategy.
We face a number of risks relative to protecting our information, including loss of access, inappropriate disclosure, inappropriate modification, and the risk of our being unable to adequately monitor and modify our controls over our critical information. Despite our security measures, our information technology and infrastructure are also vulnerable to attacks by hackers, viruses, ransomware or breaches due to employee error, technical error, malfeasance, or other disruptions.
These types of problems may be caused by a variety of factors, including infrastructure changes, intentional or accidental human actions or omissions, software errors, malware, security attacks, fraud, spikes in customer usage and denial of service issues. From time to time, large third-party web hosting providers have also experienced outages or other problems that have resulted in their systems being offline and inaccessible. In addition to data security risks, we also face privacy risks. Should we actually violate, or be perceived to have violated, any privacy promises we make to patients or consumers, we could be subject to a complaint from an affected individual or interested privacy regulator, such as the FTC or a state Attorney General. This risk is heightened given the sensitivity of the data we collect.
Any problems that may arise in connection with our data and systems, including those that are hosted by third-party providers, could result in interruptions to our business and operations or exposure to security vulnerabilities. Any such breach or interruption, whether of our systems or that of our third-party service providers or their subcontractors, could also compromise our networks, and the information stored there could be accessed, publicly disclosed, lost, or stolen. Any such access, disclosure, theft, or other loss of information or privacy or security compromise could result in legal claims or proceedings or liability under federal or state laws that protect the privacy or security of personal information, including HIPAA, HITECH, and state data security and data breach notification laws. Any data privacy or security event could also disrupt our operations and damage our reputation, any of which could adversely affect our business.
If a privacy or security event occurs, we may be required to comply with state breach notification laws and become subject to mandatory corrective action. Penalties for failure to comply with a requirement of HIPAA or HITECH vary significantly, and, depending on the knowledge and culpability of the HIPAA-regulated entity, may include civil monetary penalties of up to $1.5 million per calendar year for each provision of HIPAA that is violated. A person who knowingly obtains or discloses individually identifiable health information in violation of HIPAA may face a criminal penalty of up to $50,000 and up to one-year imprisonment. The criminal penalties increase if the wrongful conduct involves false pretenses or the intent to sell, transfer or use identifiable health information for commercial advantage, personal gain or malicious harm. Penalties for unfair or deceptive acts or practices under the FTC Act or state Unfair and Deceptive Acts and Practices statutes may also vary significantly.
Also, even if we do not incur an interruption of or our operations, fines, penalties, or financial liability to third parties from a security breach, we could suffer a loss of confidence in our services, which could adversely affect our business and competitive position. A security event could also result in the compromise of our trade secrets and other proprietary information, which could adversely affect our competitive position.
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Failure of our internal control over financial reporting could harm our business and financial results.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting for external purposes in accordance with accounting principles generally accepted in the U.S. Internal control over financial reporting includes maintaining records that in reasonable detail accurately and fairly reflect our transactions; providing reasonable assurance that transactions are recorded as necessary for preparation of our consolidated financial statements; providing reasonable assurance that receipts and expenditures of our assets are made in accordance with management authorization; and providing reasonable assurance that unauthorized acquisition, use or disposition of our assets that could have a material effect on the consolidated financial statements would be prevented or detected on a timely basis. Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that a misstatement of our consolidated financial statements would be prevented or detected. Our growth and entry into new diagnostic tests, technologies and markets will place significant additional pressure on our system of internal control over financial reporting. Any failure to maintain an effective system of internal control over financial reporting could limit our ability to report our financial results accurately and timely or to detect and prevent fraud. Because we are an emerging growth company and a smaller reporting company, we are exempt from the requirement of having our internal controls over financial reporting audited by our independent registered public accountants, which means that material weaknesses or significant deficiencies in our internal controls that might be detected by an audit may not be detected and remedied.
We are subject to laws and regulations governing corruption, which will require us to develop, maintain, and implement costly compliance programs.
We must comply with a wide range of laws and regulations to prevent corruption, bribery, and other unethical business practices, including the Foreign Corrupt Practices Act or FCPA, anti-bribery and anti-corruption laws in other countries. The creation and implementation of international business practices compliance programs is costly and such programs are difficult to enforce, particularly where reliance on third parties is required.
Anti-bribery laws prohibit us, our employees, and some of our agents or representatives from offering or providing any personal benefit to covered government officials to influence their performance of their duties or induce them to serve interests other than the missions of the public organizations in which they serve. Certain commercial bribery rules also prohibit offering or providing any personal benefit to employees and representatives of commercial companies to influence their performance of their duties or induce them to serve interests other than their employers. The FCPA also obligates companies whose securities are listed in the U.S. to comply with certain accounting provisions requiring us to maintain books and records that accurately and fairly reflect all transactions of the corporation, including international subsidiaries, and devise and maintain an adequate system of internal accounting controls for international operations. The anti-bribery provisions of the FCPA are enforced primarily by the United States Department of Justice. The SEC is involved with enforcement of the books and records provisions of the FCPA.
Compliance with these anti-bribery laws is expensive and difficult, particularly in countries in which corruption is a recognized problem. In addition, the anti-bribery laws present particular challenges in the medical industry because in many countries including China, hospitals are state-owned or operated by the government, and doctors and other hospital employees are considered foreign government officials. Furthermore, in certain countries (China in particular), hospitals and clinics are permitted to sell pharmaceuticals to their patients and are primary or significant distributors of pharmaceuticals. Certain payments to hospitals in connection with clinical studies, procurement of pharmaceuticals and other work have been deemed to be improper payments to government officials that have led to vigorous anti-bribery law enforcement actions and heavy fines in multiple jurisdictions, particularly in the U.S. and China.
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It is not always possible to identify and deter violations, and the precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with such laws or regulations.
In the medical industry, corrupt practices include, among others, offering or accepting kickbacks, bribes or other illegal gains or benefits by the hospitals and medical practitioners from manufacturers of pharmaceutical or other products, distributors or their third-party agents in connection with the prescription of certain pharmaceuticals or sale of products. If our employees, affiliates, distributors or third-party marketing firms violate these laws or otherwise engage in illegal practices with respect to their sales or marketing of our products or other activities involving our products, we could be required to pay damages or heavy fines by multiple jurisdictions where we operate, which could materially and adversely affect our financial condition and results of operations. There have been recent occurrences in which certain hospitals have denied access to sales representatives from pharmaceutical companies because the hospitals wanted to avoid the perception of corruption. If this attitude becomes widespread among our potential customers, our ability to promote our products to hospitals may be adversely affected.
If we and our subsidiaries expand operations internationally, we will need to increase the scope of our compliance programs to address the risks relating to the potential for violations of the FCPA and other anti-bribery and anti-corruption laws and data protection laws. Our compliance programs will need to include policies addressing not only the FCPA, but also the provisions of a variety of anti-bribery and anti-corruption laws in multiple foreign jurisdictions, provisions relating to books and records that apply to us as a public company, and include effective training for our personnel throughout our organization. The creation and implementation of anti-corruption compliance programs is costly and such programs are difficult to enforce, particularly where reliance on third parties is required. Violation of the FCPA and other anti-corruption and data privacy laws can result in significant administrative and criminal penalties for us and our employees, including substantial fines, suspension or debarment from government contracting, prison sentences, or even the death penalty in extremely serious cases in certain countries. The SEC also may suspend or bar us from trading securities on U.S. exchanges for violation of the FCPA’s accounting provisions. Even if we are not ultimately punished by government authorities, the costs of investigation and review, distraction of our personnel, legal defense costs, and harm to our reputation could be substantial and could limit our profitability or our ability to develop or commercialize our product candidates. In addition, if any of our competitors are not subject to the FCPA, they may engage in practices that will lead to their receipt of preferential treatment from foreign hospitals and enable them to secure business from foreign hospitals in ways that are unavailable to us.
We may in the future be subject to litigation, which could harm our stock price, business, results of operations and financial condition.
We may be subject to litigation in the future. In the past, following periods of volatility in the market price of their stock, many companies, including us, have been the subjects of securities class action litigation. Any such litigation can result in substantial costs and diversion of management’s attention and resources and could harm our stock price, business results of operations and financial condition. As a result of these factors, holders of our common stock might be unable to sell their shares at or above the price they paid for such shares.
We may undertake strategic acquisitions in the future, and difficulties integrating such acquisitions could damage our ability to achieve or sustain profitability.
We may acquire businesses or assets that complement or augment our existing business. If we acquire businesses with promising products or technologies, we may not be able to realize the benefit of acquiring such businesses if we are unable to move one or more products through preclinical and/or clinical development to regulatory approval and commercialization. Integrating any newly acquired businesses or technologies could be expensive and time-consuming, resulting in the diversion of resources from our current business. We may not be able to integrate any acquired business successfully. We cannot assure that, following an acquisition, we will achieve revenues, specific net income or loss levels that justify the acquisition or that the acquisition will result in increased earnings, or reduced losses, for the combined company in any future period. Moreover, we may need to raise additional funds through public or private debt or equity financing to acquire any businesses, which would result in dilution for stockholders or the incurrence of indebtedness and may not be available on terms which would otherwise be acceptable to us. We may not be able to operate acquired businesses profitably or otherwise implement our growth strategy successfully.
We are subject to state laws in California that require gender and diversity quotas for boards of directors of public companies headquartered in California.
In September 2018, California enacted SB 826, requiring public companies headquartered in California to maintain minimum female representation on their boards of directors as follows: by December 31, 2019, public company boards must have a minimum of one female director; by December 31, 2021, public company boards with five members were required to have at least two female directors, and public company boards with six or more members were required to have at least three female directors.
Additionally, on September 30, 2020, California enacted AB 979, requiring public companies with principal executive offices in California to each have at least one director from an underrepresented community based on ethnicity and sexual orientation by December 31, 2021. A director from an “underrepresented community” means a director who self-identifies as Black, African American, Hispanic, Latino, Asian, Pacific Islander, Native American, Native Hawaiian, Alaska Native, gay, lesbian, bisexual or transgender. By December 31, 2022, each of these companies will be required to have at least two directors from such underrepresented communities if such company has more than four but fewer than nine directors, or at least three directors from underrepresented communities if the company has nine or more directors.
As of December 31, 2021, we have not yet met the requirement to have three female directors on our board. Although we intend to be in compliance on or before December 31, 2022, we cannot assure that we can recruit, attract and/or retain qualified members of the board and continue to meet gender and diversity quotas as required by California law (provided that such laws are not repealed before the compliance deadlines), which may cause certain investors to divert their holdings in our securities and expose us to financial penalties and/or reputational harm.
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Risks Related to Our Industry
Our operations as a clinical laboratory in the United States are subject to oversight by CMS under CLIA, as well as certain state agencies, and our operation of clinical laboratories in any foreign jurisdictions are subject to similar regulatory oversight. Any failure to maintain our CLIA or applicable state or international permits and licenses may affect our ability to commercialize our diagnostic tests.
We are subject to CLIA, a federal law regulating clinical laboratories that perform testing on specimens derived from humans for the purpose of providing information for the diagnosis, prevention or treatment of disease. Our clinical laboratories must be certified under CLIA in order for us to perform testing on human specimens. CLIA is intended to ensure the quality and reliability of clinical laboratories in the United States by mandating specific standards in the areas of personnel qualifications, administration, and participation in proficiency testing, patient test management, quality control, quality assurance and inspections. We have a current certificate under CLIA to perform routine chemistry. To renew these certificates, our diagnostic laboratories are subject to survey and inspection every two years. Moreover, CLIA inspectors may make periodic inspections of our clinical laboratories outside of the renewal process.
The law also requires us to maintain a state laboratory license to conduct testing in the states in which are laboratories are located. State laws establish standards for day-to-day operation of a clinical laboratory, including the training and skills required of personnel and quality control. In addition, several states require that we hold licenses to test specimens from patients in those states. We do not have immediate plans to market our tests for commercial use in the European Union and as a result, at this time we do not believe we are subject to EU or EU member state post-market regulations related to our tests.
If we were to lose our CLIA certification or a required state license for a laboratory, whether as a result of a revocation, suspension or limitation, we would no longer be able to offer our tests from the affected laboratory, which would limit our revenue and harm our business. If we were to lose our license in other states where we are required to hold licenses, we would not be able to test specimens from those states. If we perform testing on samples originating in a state where we require a license, but do not currently have one, we could be subject to fines, sanctions, and may be denied permits or licenses in the future.
We also maintain laboratory operations in Germany and could expand our laboratory operations to other foreign jurisdictions. Therefore, we are subject to laboratory quality regulations and accreditation standards in Germany, and will be subject to such regulations and standards in any other jurisdictions where we may operate. These requirements may vary by jurisdiction and differ from those in the United States, and may require us to implement additional compliance measures. If we fail to comply with any foreign jurisdiction’s applicable laboratory regulations and standards it could limit our revenue and harm or business and we could be subject to fines and other sanctions.
If the FDA takes the position that any of our tests are not within the scope of its policy on enforcement discretion for laboratory-developed tests, or otherwise determines that it will seek to actively regulate one or more of our diagnostic tests, responding to such a regulatory position could lead to delays in commercialization, or (if encountered after commercialization) requirements to halt the commercial provision of our tests until FDA marketing authorization is obtained.
Although the FDA has historically exercised enforcement discretion over most LDTs, it does not consider tests to be subject to this enforcement discretion if they were or are designed or manufactured completely, or partly, outside of the laboratory that offers and uses them, or if they are offered “over-the-counter” (as opposed to being available to patients only when prescribed by a health care provider). In recent years, however, the FDA has stated it intends to end its policy of general enforcement discretion and regulate certain LDTs as medical devices. To this end, on October 3, 2014, the FDA issued two draft guidance documents, entitled “Framework for Regulatory Oversight of Laboratory Developed Tests (LDTs)” and “FDA Notification and Medical Device Reporting for Laboratory Developed Tests (LDTs),” respectively, that set forth a proposed risk-based regulatory framework that would apply varying levels of FDA oversight to LDTs. Subsequently, on January 13, 2017, the FDA published a “discussion paper” in which it outlined a substantially revised “possible approach” to the oversight of LDTs.
In August 2020, the U.S. Department of Health and Human Services, the parent agency for FDA, announced that the FDA “will not require premarket review of LDTs absent notice-and-comment rulemaking, as opposed to through guidance documents, compliance manuals, website statements, or other informal issuances.” It is unclear at this time whether this policy will be retained the Biden Administration, and if so, when the FDA might seek to begin the notice and comment rulemaking process.
Legislative proposals addressing the FDA’s oversight of LDTs have been introduced in previous Congresses, and we expect that new legislative proposals may be introduced from time-to-time. The likelihood that Congress will pass such legislation and the extent to which such legislation may affect the FDA’s plans to regulate certain LDTs as medical devices is difficult to predict at this time.
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In March 2020, a bill titled the “Verifying Accurate Leading-edge IVCT Development Act of 2020,” or VALID Act, was officially introduced in Congress. The bill proposes a risk-based approach to regulate LDTs and creates a new in vitro clinical test, or IVCT, category of regulated products, which includes LDTs, and a regulatory structure under the FDA. As proposed, the bill grandfathers many existing tests from the proposed premarket approval, quality systems, and labeling requirements, respectively, but would require such tests to comply with other regulatory requirements (e.g., registration and listing, adverse event reporting). Later that month, Senator Paul introduced the Verified Innovative Testing in American Laboratories Act of 2020, or VITAL Act, which proposes that all aspects of “laboratory-developed testing procedures” be subject to regulation under CLIA, and that no aspects of such procedures be subject to regulation by the FDA. We cannot predict if either of these bills will be enacted in their current (or any other) form and cannot quantify the effect of these bills on our business.
If the FDA were to determine that our tests are not within the policy for LDTs for any reason, including new rules, policies, or guidance, or due to new legislation such as the proposed VALID Act, our tests may become subject to FDA requirements, including pre-market review. If required, the regulatory marketing authorization process may involve, among other things, successfully completing additional clinical trials and submitting a pre-market clearance (510(k)) submission or filing a de novo or pre-market approval application with the FDA. If pre-market review and approval is required by the FDA, we may need to incur additional expenses or require additional time to seek it, or we may be unable to satisfy FDA standards, and our tests may not be cleared or approved on a timely basis, if at all, and the labeling claims permitted by the FDA may not be consistent with our currently planned claims or adequate to support adoption of and reimbursement for our tests. Ongoing compliance with FDA regulations would increase the cost of conducting our business, and subject us to inspection by and the regulatory requirements of the FDA, for example registration and listing, adherence to good manufacturing practices under the Quality System Regulation, and medical device reporting, and enforcement action in the event we fail to comply with these requirements. Our laboratories are operating under CLIA and are not currently operating as device manufacturing facilities following FDA’s Quality System Regulation. Because these standards differ, we may face challenges establishing FDA-compliant quality systems or be unable to do so. If after commercialization under the LDT framework our tests are allowed to remain on the market but there is uncertainty about the regulatory status of our tests, including questions that may be raised if competitors object to our regulatory positioning as an LDT, we may encounter ongoing regulatory and legal challenges and related costs. Such challenges or related developments (for example if the labeling claims the FDA allows us to make are more limited than the claims we currently plan to make) may impact our commercialization efforts as orders or reimbursement may be less than anticipated. Any of these regulatory developments may cause our business to suffer.
We will also need to obtain FDA and other regulatory approvals for any IVDs that we may develop, in order to market those IVD tests.
If we decide to develop IVDs, we will need to obtain regulatory clearance or approval to market each new IVD test. This means that:
| ● | The IVDs that we may develop cannot be sold until the CMS or the FDA, and corresponding foreign regulatory authorities approve or authorize the laboratory tests or the IVDs for medical use. | |
| ● | We will have to conduct expensive and time-consuming clinical trials of new diagnostic tests. The full cost of conducting and completing clinical trials necessary to obtain FDA clearance or approval of IVD tests or for gaining reimbursement from health insurance companies, health maintenance organizations, Medicare, and other third-party payers cannot be presently determined but could exceed our financial resources. | |
| ● | Data obtained from preclinical and clinical studies is susceptible to varying interpretations that could delay, limit or prevent regulatory agency clearances or approvals. Delays or denials of the regulatory clearances or approvals may be encountered as a result of changes in regulatory agency policy, regulations, or laws. | |
| ● | A diagnostic test that is cleared or approved for marketing may be subject to restrictions on use. | |
| ● | The FDA can withdraw approval of an FDA regulated product if problems arise. |
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Clinical trial failures can occur at any stage of the testing and we may experience numerous unforeseen events during, or as a result of, the clinical trial process that could delay or prevent commercialization of our current or future diagnostic tests.
Clinical trial failures or delays can occur at any stage of the trials, and may be directly or indirectly caused by a variety of factors, including but not limited to:
| ● | Delays in securing clinical investigators or trial sites for our clinical trials; | |
| ● | Delays in obtaining Institutional Review Board and other regulatory approvals to commence a clinical trial; |
| ● | Slower than anticipated rates of patient recruitment and enrollment, or failing to reach the targeted number of patients due to competition for patients from other trials; | |
| ● | Limited or no availability of coverage, reimbursement and adequate payment from health maintenance organizations and other third-party payers for the use of our diagnostic test candidates in our clinical trials; | |
| ● | Negative or inconclusive results from clinical trials; | |
| ● | Approval and introduction of new diagnostic or changes in standards of practice or regulatory guidance that render our clinical trial endpoints or the targeting of our proposed indications obsolete; | |
| ● | Inability to monitor patients adequately during or after treatment or problems with investigator or patient compliance with the trial protocols; | |
| ● | Inability to replicate in large controlled studies safety and efficacy data obtained from a limited number of patients in uncontrolled trials; and | |
| ● | Inability or unwillingness of medical investigators to follow our clinical protocols. |
The commercial success of our diagnostic tests depends on the availability and sufficiency of third-party payer coverage and reimbursement, which may be limited or unavailable.
Our ability to successfully commercialize our diagnostic tests will depend, in significant part, on the extent to which appropriate reimbursement levels can be obtained for patients. Physicians will be hesitant to order a diagnostic test for a patient when they may be left with a large out-of-pocket fee through co-payments or co-insurance or unreimbursed balances. Third-party payers, including Medicare, Medicaid and private insurers, are increasingly challenging the prices charged for healthcare products and services. In addition, legislative proposals to reform health care or reduce government insurance programs may result in lower prices or the actual inability of prospective customers to purchase our tests. Furthermore, even if reimbursement is available, it may not be available at price levels sufficient for us to realize a positive return on our investment. We have never successfully obtained reimbursement for any test and may never be able to obtain reimbursement from any third-party payer; without such coverage and reimbursement, we may not achieve market acceptance of our test and may never be profitable.
The United States government and state legislatures have shown significant interest in implementing cost containment programs to limit the growth of government-paid healthcare costs, including price controls, restrictions on reimbursement and coverage. Adoption of government controls and measures, and tightening of restrictive policies in jurisdictions with existing controls and measures, could exclude or limit one or more of our diagnostic tests from coverage. Even if a diagnostic test receives coverage and reimbursement from third-party payers, such coverage policies and reimbursement rates may change at any time, might not be adequate, or less favorable coverage policies and reimbursement rates may be implemented in the future. If we are unable to obtain and maintain sufficient third-party coverage and adequate reimbursement for a diagnostic test, its commercial success may be greatly hindered, and our financial condition and results of operations may be materially and adversely affected.
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We may need to conduct additional studies in order to demonstrate the cost-effectiveness of our diagnostic tests to the satisfaction of our target customers and their third-party payers. Such studies might require us to commit a significant amount of management time and financial and other resources
Changes in healthcare laws and policies may have a material adverse effect on our financial condition, results of operations and cash flows.
We cannot predict whether future healthcare initiatives will be implemented at the federal or state level, or how any future legislation or regulation may affect us. For instance, the payment reductions imposed by the Affordable Care Act (“ACA”) and the expansion of the federal and state governments’ role in the U.S. healthcare industry as well as changes to the reimbursement amounts paid by payers for our tests and future tests and products may reduce our profits and have a materially adverse effect on our business, financial condition, results of operations and cash flows. Notably, Congress enacted legislation in 2017 that eliminated the ACA’s “individual mandate” beginning in 2019, which may significantly impact the number of covered lives participating in exchange plans. The U.S. Supreme Court is currently reviewing the constitutionality of the ACA, although it is unclear when a decision will be made. Further, it is possible that additional governmental action be taken in response to the ongoing COVID-19 public health emergency.
PAMA significantly altered the payment methodology under the Clinical Laboratory Fee Schedule that determines Medicare coverage for laboratory tests. Under PAMA (as amended by the Further Consolidated Appropriations Act, 2020 and the Coronavirus Aid, Relief, and Economic Security Act, respectively) and its implementing regulations, clinical laboratories must report to CMS private payer rates for clinical diagnostic laboratory tests. Laboratories that fail to timely report the required payment information may be subject to substantial civil money penalties. Medicare payments for clinical diagnostic laboratory tests are paid based upon these reported private payer rates. For certain clinical diagnostic laboratory tests that are not designated as advanced diagnostic laboratory tests, initial payment rates will be assigned by the cross-walk or gap-fill methodology. For laboratory tests that are designated as new advanced diagnostic laboratory tests initial payment rates will be based on the actual list charge for the laboratory test. On December 10, 2021 CMS reported that the payment rates calculated under PAMA will be held at 2020 levels during 2022, and then, where applicable based upon median private payer rates reported, reduced by up to 15% per test year in each of 2023 through 2025, with a second round of private payer rate reporting between January 1, 2022 and March 31, 2022 to establish the 2023 through 2025 rates. Thereafter, additional data collection and reporting obligations are scheduled to continue on an every third subsequent calendar year cycle to establish the payment rates.
Because of certain Medicare billing policies, we may not receive complete reimbursement for tests provided to Medicare patients.
Medicare has coverage policies that can be national or regional in scope. Coverage means that the test or assay is approved as a benefit for Medicare beneficiaries. If there is no coverage, neither the supplier nor any other party, such as a diagnostic laboratory, may receive reimbursement from Medicare for the service. Regional policies are directed by Medicare’s regional MACs. Reimbursement for our diagnostic testing may be negatively impacted by California MAC policies.
Long payment cycles of Medicare, Medicaid and other third-party payers, or other payment delays, could hurt our cash flows and increase our need for working capital.
Medicare and Medicaid have complex billing and documentation requirements that we will have to satisfy in order to receive payment. Failure to comply with these requirements and other laws applicable to billing may result in, among other things, non-payment, refunds, exclusion from government healthcare programs, and civil or criminal liabilities, any of which may have a material adverse effect on our revenues and earnings. Similarly, the failure of private health insurers or other private third-party payers to properly process our payment claims in a timely manner could delay our receipt of payment for our diagnostic tests and services, which may have a material adverse effect on our cash flows.
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Private health insurance company policies may deny coverage or limit the amount they will reimburse us for the performance of our diagnostic tests.
Patients who are not covered by Medicare will generally rely on health insurance provided by private health insurance companies. If we are considered a “non-contracted provider” by a third-party payer, that payer may not reimburse patients for diagnostic tests performed by us, or doctors within the payer’s network of covered physicians may not use our services to perform diagnostic tests for their patients. As a result, we may need to enter into contracts with health insurance companies or other private payers to provide diagnostic tests to their insured patients at specified rates of reimbursement which may be lower than the rates we might otherwise collect.
We will be required to comply with federal and state laws governing the privacy of health information, and any failure to comply with these laws could result in material criminal and civil penalties.
HIPAA sets forth security regulations that establish administrative, physical and technical standards for maintaining the confidentiality, integrity and availability of Protected Health Information in electronic form. We also may be required to comply with state laws that are more stringent than HIPAA or that provide individuals with greater rights with respect to the privacy or security of, and access to, their health care records. The Health Information Technology for Economic and Clinical Health Act (“HITECH”) established certain health information security breach notification obligations that require covered entities to notify each individual whose “protected health information” is breached.
We may incur significant compliance costs related to HIPAA and HITECH privacy regulations and varying state privacy regulations and varying state privacy and security laws. Given the complexity of HIPAA and HITECH and their overlap with state privacy and security laws, and the fact that these laws are rapidly evolving and are subject to changing and potentially conflicting interpretation, our ability to comply with the HIPAA, HITECH and state privacy requirements is uncertain and the costs of compliance are significant. The costs of complying with any changes to the HIPAA, HITECH and state privacy restrictions may have a negative impact on our operations. Noncompliance could subject us to criminal penalties, civil sanctions and significant monetary penalties as well as reputational damage.
If we are successful in commercializing our diagnostic tests, we will be obligated to comply with numerous additional federal and state statutes and regulations pertaining to our business and be subject to government oversight and scrutiny for our compliance with such laws. Laboratory and health care regulatory compliance efforts are expensive and time-consuming, and failure to maintain compliance with applicable laws could result in enforcement action which could be detrimental to our business.
If we are successful in commercializing any of our diagnostic tests, and particularly if payment becomes available from government or commercial payers for a test, we will be subject to extensive and frequently changing federal and state laws governing various aspects of our business. We will be subject to ongoing compliance with laws addressing our laboratory licensure and certification at the federal and state level; advertising and promotion (including laws enforced by the Federal Trade Commission); and laws intended to prevent fraud, waste, and abuse in healthcare programs (including among others the Anti-Kickback Statute, False Claims Act, the Eliminating Kickbacks in Recovery Act (EKRA), the Stark Law, and applicable state law equivalents).
These laws and regulations are complex and are subject to interpretation by the courts and by government agencies. If one or more such agencies alleges that we may be in violation of any of these requirements, regardless of the outcome, it could damage our reputation and adversely affect important business relationships with third parties. Any action brought against us for violation of these or other laws or regulations, even if we successfully defend against it, could cause us to incur significant legal expenses and divert our management’s attention from the operation of our business. If our operations are found to be in violation of any of these laws and regulations, we may be subject to any applicable penalty associated with the violation, including civil and criminal penalties, damages and fines, and in some circumstances we could be required to refund payments received by us from payers, or even be excluded from participation in healthcare programs. Any of the foregoing consequences could seriously harm our business and our financial results.
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We plan to adopt policies and procedures designed to comply with applicable laws and regulations. Developing a compliance infrastructure is costly and time-consuming, and even a well-designed and implemented compliance program cannot necessarily prevent all violations of relevant laws. We may be subject to enforcement action based on the actions or omissions of employees or contractors, including our anticipated sales force.
Risks Related to Intellectual Property
We rely on patents and trade secrets, and our financial success will depend, in part, on our ability to obtain commercially valuable patent claims, protect our intellectual property rights and operate without infringing upon the proprietary rights of others.
We rely primarily on patents and contractual obligations with employees and third parties to protect our proprietary rights. We have sought, and intend to continue to seek, appropriate patent protection for important and strategic components of our proprietary technologies by filing patent applications in the United States and certain foreign countries. We may also use license agreements both to access technologies developed by other companies and universities and to convey certain intellectual property rights to others. Our financial success will depend, in part, on our ability to obtain commercially valuable patent claims, protect our intellectual property rights and operate without infringing upon the proprietary rights of others.
We may not be able to obtain patent protection for our diagnostic test if our pending U.S. patent applications are found to be directed to unpatentable subject matter.
The U.S. Supreme Court has ruled on several patent cases in recent years, either narrowing the scope of patent protection available in certain circumstances or weakening the rights of patent owners in certain situations. For example, recent cases have held that diagnostic methods merely reciting a correlation between a naturally occurring event and a diagnostic outcome associated with that event is not patentable subject matter. If our pending U.S. patent applications are found to be directed to unpatentable subject matter by the USPTO, or any patents issuing from our pending patent applications are invalidated based on these decisions, we may be unable to prevent competitors from using the biomarkers or other subject matter disclosed in the patent applications to develop similar diagnostic tests that would compete with our tests. Additionally, there have been recent proposals for additional changes to the patent laws of the United States and other countries that, if adopted, could impact our ability to enforce our proprietary technology. Depending on future actions by the U.S. Congress, U.S. courts, the USPTO and the relevant law-making bodies in other countries, the laws and regulations governing patents could change in unpredictable ways that would weaken our ability to obtain new patents or to enforce our existing patents and patents that we might obtain in the future.
Changes to the patent laws in the United States and other jurisdictions could diminish the value of patents in general, thereby impairing our ability to protect our diagnostic tests.
Our success is heavily dependent on intellectual property, particularly patents. Obtaining and enforcing patents in the biopharmaceutical industry involves both technological and legal complexity and is costly, time-consuming and inherently uncertain. Patent reform legislation in the United States and other countries, including the Leahy-Smith America Invents Act, or the Leahy-Smith Act, signed into law in September 2011, could increase those uncertainties and costs. The Leahy-Smith Act includes a number of significant changes to U.S. patent law. These include provisions that affect the way patent applications are prosecuted, redefine prior art and provide more efficient and cost-effective avenues for competitors to challenge the validity of patents. In addition, the Leahy-Smith Act has transformed the U.S. patent system into a “first to file” system. The first-to-file provisions, however, only became effective in March 2013. Accordingly, it is not yet clear what, if any, impact the Leahy-Smith Act will have on the operation of our business. However, the Leahy-Smith Act and its implementation could make it more difficult to obtain patent protection for our inventions and increase the uncertainties and costs surrounding the prosecution of our or our collaboration partners’ patent applications and the enforcement or defense of our or our collaboration partners’ issued patents, all of which could harm our business, results of operations and financial condition.
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Other companies or organizations may challenge our patent rights or may assert patent rights that prevent us from developing and commercializing our diagnostic tests.
Any patent applications that we file and any patents that we hold or later obtain could be challenged by third parties and declared invalid or infringing of third-party claims. A patent interference proceeding may be instituted with the USPTO when more than one person files a patent application covering the same technology, or if someone wishes to challenge the validity of an issued patent filed before March 16, 2013. At the completion of the interference proceeding, the USPTO will determine which competing applicant is entitled to the patent, or whether an issued patent is valid. Patent interference proceedings are complex, highly contested legal proceedings, and the USPTO’s decision is subject to appeal. This means that if an interference proceeding arises with respect to any of our patent applications, we may experience significant expenses and delay in obtaining a patent, and if the outcome of the proceeding is unfavorable to us, the patent could be issued to a competitor rather than to us. In addition to interference proceedings, the USPTO can review issued patents at the request of a third party seeking to have the patent invalidated. An inter partes review proceeding allows third parties to challenge the validity of an issued patent where there is a reasonable likelihood of invalidity. This means that patents owned or licensed by us may be subject to administrative review and may be lost if the outcome of the review is unfavorable to us.
Post Grant Review under the Leahy-Smith Act makes available opposition-like proceedings in the United States. As with the USPTO interference proceedings, Post Grant Review proceedings will be very expensive to contest and can result in significant delays in obtaining patent protection or can result in a denial of a patent application. Further, a derivation proceeding may be instituted by the USPTO or an inventor alleging that a patent or application was derived from the work of another inventor.
Oppositions to the issuance of patents may be filed under European patent law and the patent laws of certain other countries. As with the USPTO interference proceedings, these foreign proceedings can be very expensive to contest and can result in significant delays in obtaining a patent or can result in a denial of a patent application.
The enforcement of patent rights often requires litigation against third party infringers, and such litigation can be costly to pursue. Even if we succeed in having new patents issued or in defending any challenge to issued patents, our patents may not be comprehensive enough to provide us with meaningful patent protection against our competitors.
If we are unable to protect the confidentiality of our trade secrets, the value of our technology could be materially adversely affected, and our business would be harmed.
In addition to patents, we rely on trade secrets, know-how, and continuing technological advancement to maintain our competitive position. The molecular diagnostics that we are developing use gene expression classifiers or algorithms, which are mathematical models that weight the biomarkers to produce a score. We will treat the mathematical models as trade secrets. We have entered into intellectual property, invention, and non-disclosure agreements with our employees, and it is our practice to enter into confidentiality agreements with our consultants. These measures, however, may not prevent the unauthorized disclosure or use of our trade secrets and know-how, or that others may not independently develop similar trade secrets and know-how or obtain access to our trade secrets, know-how, or proprietary technology.
We may become involved in lawsuits to protect or enforce our patents or other intellectual property, which could be expensive, time-consuming and unsuccessful.
Competitors may infringe our patents, trademarks, copyrights or other intellectual property. To counter infringement or unauthorized use, we may be required to file infringement claims, which can be expensive and time-consuming and divert the time and attention of our management and scientific personnel. Any claims we assert against perceived infringers could provoke these parties to assert counterclaims against us alleging that we infringe their patents, in addition to counterclaims asserting that our patents are invalid or unenforceable, or both. In any patent infringement proceeding, a court may decide that a patent of ours is invalid or unenforceable, in whole or in part, and that we do not have the right to stop the other party from using the invention at issue. Even if the validity of such patents is upheld, the court may construe the patent’s claims narrowly or decide that we do not have the right to stop the other party from using the invention at issue on the grounds that our patent claims do not cover the invention. An adverse outcome in a litigation or proceeding involving our patents could limit our ability to assert our patents against those parties or other competitors, and may curtail or preclude our ability to exclude third parties from making and selling similar or competitive products. Any of these occurrences could adversely affect our competitive business position, business prospects and financial condition. Similarly, if we assert trademark infringement claims, a court may determine that the marks we have asserted are invalid or unenforceable, or that the party against whom we have asserted trademark infringement has superior rights to the marks in question, in which case, we could ultimately be forced to cease use of such trademarks.
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Even if we establish infringement, the court may decide not to grant an injunction against further infringing activity and instead award only monetary damages, which may or may not be an adequate remedy. Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, some of our confidential information could be compromised by disclosure during litigation. There could also be public announcements of the results of hearings, motions or other interim proceedings or developments. If securities analysts or investors perceive these results to be negative, it could have a material adverse effect on the price of shares of our common stock. Moreover, we may not have sufficient financial or other resources to file and pursue such infringement claims, which typically last for years before they are concluded. Even if we ultimately prevail in such claims, the monetary cost of such litigation and the diversion of the attention of our management and scientific personnel could outweigh any benefit we receive as a result of the proceedings.
We may not be able to enforce our intellectual property rights throughout the world.
Filing, prosecuting and defending patents, if issued, on our diagnostic test candidate in all countries throughout the world would be prohibitively expensive. The requirements for patentability may differ in certain countries, particularly in developing countries. Competitors may use our technologies in jurisdictions where we have not obtained patent protection to develop their own products and, further, may export otherwise infringing products to territories where we may obtain patent protection, but where patent enforcement is not as strong as that in the United States. These products may compete with our diagnostic tests in jurisdictions where we do not have any issued or licensed patents or where any future patent claims or other intellectual property rights may not be effective or sufficient to prevent them from competing with us.
Moreover, our ability to protect and enforce our intellectual property rights may be adversely affected by unforeseen changes in foreign intellectual property laws. Additionally, laws of some countries outside of the United States and Europe do not afford intellectual property protection to the same extent as the laws of the United States and Europe. Many companies have encountered significant problems in protecting and defending intellectual property rights in certain foreign jurisdictions. The legal systems of some countries, including India, China and certain developing countries, do not favor the enforcement of patents and other intellectual property rights. This could make it difficult for us to stop the infringement of our patents or the misappropriation of our other intellectual property rights. For example, many foreign countries have compulsory licensing laws under which a patent owner must grant licenses to third parties. Consequently, we may not be able to prevent third parties from practicing our inventions in certain countries outside the United States and Europe. Competitors may use our technologies in jurisdictions where we have not obtained patent protection to develop their own products and, further, may export otherwise infringing products to territories where we have patent protection, if our ability to enforce our patents to stop infringing activities is inadequate. These products may compete with our diagnostic test, and our patents, if issued, or other intellectual property rights may not be effective or sufficient to prevent them from competing.
Proceedings to enforce our patent rights in foreign jurisdictions, whether or not successful, could result in substantial costs and divert our efforts and resources from other aspects of our business. Furthermore, while we intend to protect our intellectual property rights in major markets for our diagnostic test, we cannot ensure that we will be able to initiate or maintain similar efforts in all jurisdictions in which we may wish to market our diagnostic tests. Accordingly, our efforts to protect our intellectual property rights in such countries may be inadequate.
If we are sued for infringing intellectual property rights of third parties, such litigation could be costly and time consuming and could prevent or delay us from developing or commercializing our diagnostic tests.
There is a substantial amount of intellectual property litigation in the biotechnology and pharmaceutical industries, and we may become party to, or threatened with, litigation or other adversarial proceedings regarding intellectual property rights with respect to our current or future diagnostic test, including interference proceedings before the USPTO, misappropriation claims, or other allegations. The outcome of intellectual property litigation is subject to uncertainties that cannot be adequately quantified in advance. For example, the biotechnology and pharmaceutical industries have produced a significant number of patents, and it may not always be clear to industry participants, including us, which patents cover various types of products or methods of use. The coverage of patents is subject to interpretation by the courts, and the interpretation is not always uniform. If we were sued for patent infringement, we would need to demonstrate that our diagnostic tests or methods either do not infringe the patent claims of the relevant patent or that the patent claims are invalid or unenforceable, and we may not be able to do this. Proving invalidity is difficult. For example, in the United States, proving invalidity requires a showing of clear and convincing evidence to overcome the presumption of validity enjoyed by issued patents.
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In addition, several of our employees have executed proprietary rights, non-disclosure and non-competition agreements, or similar agreements with their previous employers, who may allege these employees have used or disclosed intellectual property, including trade secrets or other proprietary information. Even if we are successful in these proceedings, we may incur substantial costs, and the time and attention of our management and scientific personnel could be diverted in pursuing these proceedings, which could significantly harm our business and operating results. We may also not have sufficient resources to bring these actions to a successful conclusion.
If we are found to infringe a third party’s intellectual property rights, we may have to pay monetary damages, lose valuable intellectual property rights or personnel, or be forced to cease developing, manufacturing or commercializing the infringing diagnostic test. Alternatively, we may be required to obtain a license from such third party in order to use the infringing technology and continue developing, manufacturing or marketing the infringing diagnostic test. However, we may not be able to obtain any required license on commercially reasonable terms or at all. Even if we were able to obtain a license, it could be non-exclusive, thereby giving our competitors access to the same technologies licensed to us. In addition, we could be found liable for monetary damages, including treble damages and attorneys’ fees if we are found to have willfully infringed a patent. A finding of infringement could prevent us from commercializing our diagnostic tests or force us to cease some of our business operations, which could materially harm our business. Claims that we have misappropriated the confidential information or trade secrets of third parties could have a similar negative impact on our business.
Patent terms may be inadequate to protect our competitive position on our diagnostic tests for an adequate amount of time.
Given the amount of time required for the development, testing and regulatory review of new diagnostic tests, patents protecting such candidates might expire before or shortly after such candidates are commercialized. We expect to seek extensions of patent terms in the United States and, if available, in other countries where we are prosecuting patents. In the United States, the Drug Price Competition and Patent Term Restoration Act of 1984 permits a patent term extension of up to five years beyond the normal expiration of the patent, which is limited to the approved indication or any additional indications approved during the period of extension. However, the applicable authorities, including the FDA and the USPTO in the United States, and any equivalent regulatory authorities in other countries, may not agree with our assessment of whether such extensions are available, and may refuse to grant extensions to our patents, or may grant more limited extensions than we request. If this occurs, our competitors may be able to take advantage of our investment in development and clinical trials by referencing our clinical and preclinical data and launch their product earlier than might otherwise be the case.
Risks Related to the Covid-19 Pandemic
The ongoing COVID-19 global pandemic and the worldwide attempts to contain it could harm our business and our results of operations and financial condition could be adversely impacted by such pandemic.
The ongoing global outbreak of the coronavirus COVID-19, and the various attempts throughout the world to contain it, have created significant volatility, uncertainty and disruption. The COVID-19 pandemic has had, and may continue to have, significant effects on our operations, ability to generate revenues, and financing activities. In response to government directives and guidelines, health care advisories and employee and other concerns, we have altered certain aspects of our operations. A number of our employees have had to work remotely from home and those on site have had to follow our social distance guidelines, which could impact their productivity. COVID-19 could also disrupt our operations due to absenteeism by infected or ill members of management or other employees, or absenteeism by members of management and other employees who cannot effectively work remotely but who elect not to come to work due to the illness affecting others in our office or laboratory facilities, or due to quarantines. COVID-19 illness could also impact members of our Board of Directors resulting in absenteeism from meetings of the directors or committees of directors, and making it more difficult to convene the quorums of the full Board of Directors or its committees needed to conduct meetings for the management of our affairs.
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The pandemic is affecting our revenue-generating activities. During the COVID-19 pandemic, we have not been able, and may continue to not be able, to maintain our preferred level of physician or customer outreach and marketing of our diagnostic testing and Pharma Services, which may have negatively impacted, and may continue to negatively impact, our potential new customers’ interest in our tests and services. Because of COVID-19, travel, visits, and in-person meetings related to our business have been severely curtailed or canceled and we have instead used on-line or virtual meetings to meet with potential customers and others.
The concern over available hospital, staffing, equipment, and other resources, and the risk of exposure to the virus, has led to early-stage lung cancer surgeries being delayed, and the continued deferral of lung cancer surgeries could result in delayed or reduced use of DetermaRx™ in the near term. Even if COVID-19 related restrictions are relaxed and lung cancer surgeries are performed at or close to pre-pandemic levels, any growth and anticipated adoption of our diagnostic tests may not occur due to reasons other than COVID-19.
The consequences of the COVID-19 pandemic have led to uncertainties related to our business growth and our ability to forecast the demand for our diagnostic testing and Pharma Services and resulting revenues. We had no commercial revenues until the first quarter of 2020 when we launched of our first commercial diagnostic test, DetermaRxTM, and acquired the Pharma Services business of Insight. We had expected that initial DetermaRx™ revenues would be constrained by the lack of Medicare coverage. Medicare reimbursement pricing approval for DetermaRx™ did not become effective until September 2020. Deferrals in lung cancer surgeries due to COVID-19 may have reduced demand for DetermaRx™, but because of the lack of historical DetermaRx™ revenues, with or without Medicare reimbursement, it is difficult to determine the extent to which the deferral of those surgeries impacted our DetermaRx™ revenues. Resurgences in COVID-19 cases could cause additional deferrals of lung cancer surgeries during the course of the pandemic. The lack of in-person interaction with healthcare providers for our promotion of the use of DetermaRx™ has also placed a constraint on our ability to market that test, but we cannot determine the extent to which that has impacted our revenues due to the absence of historical revenues. Similarly, our Pharma Services revenues commenced with our acquisition of Insight during the first quarter of 2020 and because we do not have a prior history of Oncocyte marketed Pharma Services revenues it is difficult to assess how COVID-19 may have impacted those revenues, although we are aware that certain planned clinical trials of new pharmaceuticals for which we had expected to provide Pharma Services were delayed due to the pandemic.
Although we have experienced limited COVID-19 related supply chain disruptions which to date did not impact our testing capacity, if the vendors of equipment and reagents used in our diagnostic laboratories experience supply, operational, or financial disruptions due to the COVID-19 pandemic, we could experience supply constraints in the future that could cause increased costs or delays in performing DetermaRx™ tests and Pharma Services and in continuing the development of new diagnostic tests, including DetermaIO™.
Additionally, the anticipated economic consequences of the COVID-19 pandemic may adversely impact financial markets, resulting in high share price volatility, reduced market liquidity, and substantial declines in the market prices of the securities of some publicly traded companies. Volatile or declining markets for equities could adversely affect our ability to raise capital when needed through the sale of shares of common stock or other securities. Accordingly, we cannot assure that adequate financing will be available on favorable terms, if at all. If we are not able to raise the capital we need, we could be forced to modify, curtail, delay, or suspend some or all aspects of planned operations. Sales of additional equity securities could result in significant dilution of the interests of our shareholders.
It is possible that impacts of COVID-19 on Oncocyte’s operations or revenues or its access to capital could prevent Oncocyte from complying, or could result in a material noncompliance, with one or more obligations or covenants under material agreements to which Oncocyte is a party, with the result that Oncocyte would be in material breach of the applicable obligation, covenant, or agreement. Any such material breach could cause Oncocyte to incur material financial liabilities or an acceleration of the date for paying a financial obligation to the other party to the applicable agreement, or could cause Oncocyte to lose material contractual rights, such as rights to use leased equipment or laboratory or office space, or rights to use licensed patents or other intellectual property the use of which is material to Oncocyte’s business. Similarly, it is possible that impacts of COVID-19 on the business, operations, or financial condition of any third party with whom Oncocyte has a contractual relationship could cause the third party to be unable to perform its contractual obligations to Oncocyte, resulting in Oncocyte’s loss of the benefits of a contract that could be material to Oncocyte’s business.
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The full extent to which the COVID-19 pandemic and the various responses might impact our business, operations and financial results will depend on numerous evolving factors that we will not be able to accurately predict, including: the duration and scope of the pandemic; the development and spread of new strains, such as Delta and Omicron; governmental, business and individuals’ actions that have been and continue to be taken in response to the pandemic; the difficulty or delay in clinical site initiation; the diversion of healthcare resources away from the conduct of clinical trials; delays or difficulties in enrolling patients in clinical trials; interruption of key clinical trial activities; interruption or delays in the operations of regulatory agencies, which may impact review and approval times; the availability and cost to access COVID-19 tests, vaccines and therapies; the effect on our potential customers and their demand for our diagnostic testing and Pharma Services; the effects on delays in development programs; and the effect on our suppliers and their ability to provide the necessary equipment and materials to support our tests and services and the general global supply chain disruptions that may have lasting impacts and consequences that are difficult to predict. In addition to the direct impacts to our business operations, the global economy is likely to continue to be significantly weakened as a result of actions taken in response to the COVID-19 pandemic and to the extent that such a weakened global economy impacts customers’ ability or willingness to purchase and pay for our tests, our business and results of operation could be negatively impacted. Due to the uncertain scope and duration of the COVID-19 pandemic and uncertain timing of any recovery or normalization, we are currently unable to estimate the resulting impacts on our operations and financial results. We will continue to actively monitor the issues raised by the COVID-19 pandemic and may take further actions that alter our operations, as may be required by federal, state, local or foreign authorities, or that we determine are in the best interests of our employees, any customers and stockholders. It is not clear what the potential effects any such alterations or modifications may have on our business, including the effects on our financial results.
The COVID-19 pandemic has affected and continues to affect our ability to conduct clinical trial activities, causing delays in clinical site initiations and patient screening and enrollment in our clinical trials, and may delay and disrupt regulatory activities and our manufacturing and supply chain and have other adverse effects on our business and operations.
Like many other biopharmaceutical and diagnostic companies, we have experienced and continue to experience delays in clinical site initiations, as well as patient screening and enrollment in our clinical trials due to the COVID-19 pandemic. At the beginning of 2020, the pace of site opening and patient screening and enrollment was in line with our expectations. However, in the spring of 2020, the COVID-19 pandemic began to rapidly affect clinical trial sites around the world. The delays continued throughout 2021 due to new variant surges in the US and EU where all of our trials are executed. Many of our clinical sites established self-imposed holds on site initiations and enrollment during this period out of concern for patient exposure to COVID-19 and due to lack of available staff. As a result, we experienced significant delays in site initiations, as well as patient screening and enrollment. During the summer of 2020, as the number of COVID-19 cases declined due to public health safety measures, some clinical sites removed their self-imposed holds on site initiations and enrollment, which improved the momentum of patient enrollment. However, beginning in November 2020, another steep rise in COVID-19 cases again negatively impacted the pace of enrollment. The emergence of COVID-19 variants also continued throughout 2021, causing further unpredictability and uncertainty about the pace at which patients and healthcare workers would be able to return to clinical sites.
Since vaccine distribution has commenced in many countries, and we have begun to see the number of COVID-19 cases declining, we currently believe our clinical trial operations may normalize over the next several months. However, the pace at which any normalization may occur remains uncertain and unpredictable. Given the above factors, we expect there may continue to be delays in our clinical trials, in addition to delays and disruptions in regulatory activities as well as delays in manufacturing and supply chain that may continue to have adverse effects on our business.
Risks Related to Our Common Stock
Ownership of our common stock will entail certain risks associated with the limited history of the trading of our common stock, volatility of prices for our shares, and the fact that we do not pay dividends.
The price of our stock may rise and fall rapidly.
The market price of our common stock, like that of the shares of many biotechnology companies, may be highly volatile. The price of our common stock may rise or fall rapidly as a result of a number of factors, including:
| ● | Sales or potential sales of substantial amounts of our common stock; | |
| ● | Results of or delays in preclinical testing or clinical trials of our diagnostic test candidates; | |
| ● | Announcements about us or about our competitors, including clinical trial results, regulatory approvals, new diagnostic test introductions and commercial results; | |
| ● | The cost of our development programs; | |
| ● | The success of competitive diagnostic tests or technologies; | |
| ● | Litigation and other developments relating to our issued patents or patent applications or other proprietary rights or those of our competitors; | |
| ● | Conditions in the diagnostic, pharmaceutical or biotechnology industries; | |
| ● | Actual or anticipated changes in estimates as to financial results, development timelines or recommendations by securities analysts; | |
| ● | Variations in our financial results or those of companies that are perceived to be similar to us, including the failure of our earnings to meet analysts’ expectations; | |
| ● | General economic, industry and market conditions; and | |
| ● | Changes in payer coverage and or reimbursement. |
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Many of these factors are beyond our control. The stock markets in general, and the market for pharmaceutical and biotechnological companies in particular, have been experiencing extreme price and volume fluctuations which have affected the market price of the equity securities without regard to the operating performance of the issuing companies. Broad market fluctuations, as well as industry factors and general economic and political conditions, may adversely affect the market price of our common stock.
A FASB accounting standard could increase the risk that our future financial statements could be qualified by going concern uncertainty.
Under FASB accounting standard ASU No. 2014-15, “Presentation of Financial Statements-Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.” in connection with preparing financial statements for each annual and interim reporting period our management must evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the Oncocyte’s ability to continue as a going concern within one year after the date that the financial statements are issued (or within one year after the date that the financial statements are available to be issued when applicable). As a result of the implementation of ASU No. 2014-15, we will be required to have more cash, cash equivalents, and liquid investments on hand on the date we issue or file our financial statements than had been the case during prior years in order to avoid going a concern qualification in our auditor’s report and in the footnotes to our financial statements. If our financial statements were to become subject to a going concern qualification or uncertainty or if we are unable to alleviate substantial doubt as part of our going concern assessment, or both, the market price of our common stock could decline.
Because we do not pay dividends, our stock may not be a suitable investment for anyone who needs to earn dividend income.
We do not pay cash dividends on our common stock. For the foreseeable future we anticipate that any earnings generated in our business will be used to finance the growth of our business and will not be paid out as dividends to our shareholders. Under a Loan and Security Agreement with Silicon Valley Bank, we have agreed not to pay dividends or to make any distributions or to redeem or repurchase any capital stock without Silicon Valley Bank’s prior written consent while the Loan and Security Agreement remains in effect. This means that our stock may not be a suitable investment for anyone who needs to earn income from their investments.
Securities analysts may not initiate coverage or continue to cover our common stock, and this may have a negative impact on the market price of our shares.
The market for our common stock will depend, in part, on the research and reports that securities analysts publish about our business and our common stock. We do not have any control over these analysts. Certain securities analysts cover our shares and they could issue reports or recommendations that are unfavorable to the price of our shares, and they could downgrade a previously favorable report or recommendation, and in either case our share price could decline as a result of the report. If one or more of these analysts ceases to cover our shares or fails to publish regular reports on our business, we could lose visibility in the financial markets, which could cause our share price or trading volume to decline.
You may experience dilution of your ownership interests if we issue additional shares of common stock or preferred stock.
In the future, we may issue our authorized but previously unissued equity securities, resulting in the dilution of the ownership interests of our present shareholders. We are currently authorized to issue an aggregate of 235,000,000 shares of capital stock consisting of 230,000,000 shares of common stock and 5,000,000 “blank check” shares of preferred stock. At December 31, 2021, there were 92,231,917 shares of common stock outstanding, 2,251,576 shares of common stock reserved for exercise of warrants and 11,601,589 shares of common stock reserved for issuance upon the exercise of options under our employee stock option plans. No shares of preferred stock are presently outstanding.
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We may issue additional common stock or other securities that are convertible into or exercisable for common stock in order to raise additional capital, or in connection with hiring or retaining employees, directors, or consultants, or in connection with future acquisitions of licenses to technology or diagnostic tests in connection with future business acquisitions, or for other business purposes. The future issuance of any such additional common stock or other securities may create downward pressure on the trading price of our common stock.
We may also issue preferred stock having rights, preferences, and privileges senior to the rights of our common stock with respect to dividends, rights to share in distributions of our assets if we liquidate our company, or voting rights. Any preferred stock may also be convertible into common stock on terms that would be dilutive to holders of common stock.
Our former parent company may sell its Oncocyte shares to raise capital to finance its operations.
Prior to February 17, 2017, Oncocyte was a consolidated subsidiary of its former parent company Lineage Cell Therapeutics, Inc., formerly known as BioTime, Inc. (“Lineage”). Based on its most recent report of beneficial ownership on Schedule 13D, as of January 8, 2021 Lineage held 3,297,401 shares of Oncocyte common stock. Lineage has been periodically selling shares of Oncocyte common stock from its holdings and has announced its intention to continue to sell Oncocyte shares. The sale of such shares could have a depressing effect on the market value of Oncocyte common stock and the prices at which we can sell our own shares of common stock to raise capital to support our operations.
Item 1B. Unresolved Staff Comments
Not applicable.
Item 2. Properties
Our principal executive and administrative offices are located in an office and laboratory facility of leased space in Irvine, California. The Irvine lease expires in September 2027. At this Irvine, California location, we have a CLIA-certified laboratory, which is our primary clinical laboratory facility where cancer diagnostic tests are performed, and we are in the process of completing a separate R&D laboratory.
We also operate a CLIA-certified laboratory in Nashville, Tennessee and sublease laboratory space in Brisbane, California. The lease of the Nashville, Tennessee CLIA laboratory space will expire in April 2024, and our subleased Brisbane CLIA laboratory space sublease will expire in March 2023.
Item 3. Legal Proceedings
From time to time, we may be involved in routine litigation incidental to the conduct of our business. We are not presently involved in any material litigation or proceedings.
Item 4. Mine Safety Disclosures
Not applicable
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PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities
Market Information
Beginning on March 8, 2021, our common stock began trading on the NASDAQ Global Market under the symbol “OCX”, and prior to that date our common stock was traded on the NYSE American under the same symbol.
Dividends
We have not declared or paid any cash dividends on our common stock. Any future decision to declare or pay dividends will be at the sole discretion of our Board of Directors.
Holders
As of March 3, 2022, we had approximately 318 holders of record of our common stock. This number does not include shareholders whose shares of Oncocyte common stock are held in “street name” in accounts with securities broker-dealers or other financial institutions or fiduciaries.
Securities Authorized for Issuance under Equity Compensation Plans
The following table shows certain information concerning the options outstanding and available for issuance under all of our compensation plans and agreements as of December 31, 2021 (in thousands, except weighted average exercise price):
| Plan Category | Number of Shares to be Issued upon Exercise of Outstanding Options, Warrants and Rights (1) | Weighted Average Exercise Price of the Outstanding Options, Warrants and Rights (1) | Number of Shares Remaining Available for Future Issuance under Equity Compensation Plans (2) | |||||||||
| Oncocyte Stock Option Plans Approved by Shareholders | 11,602 | $ | 3.63 | 9,006 | ||||||||
| (1) | Includes both our 2010 Employee Stock Option Plan and our 2018 Equity Incentive Plan, as amended. |
| (2) | All shares remaining available for future issuance are under our 2018 Equity Incentive Plan, as amended. |
Additional information concerning our 2010 Employee Stock Option Plan and our 2018 Equity Incentive Plan (as amended) and stock options may be found in Note 6 to the consolidated financial statements found elsewhere in this Report.
Recent Sales of Unregistered Securities
None.
Item 6. [RESERVED.]
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations is intended to provide information necessary to understand our audited consolidated financial statements for the years ended December 31, 2021 and 2020, and highlight certain other information which, in the opinion of management, will enhance a reader’s understanding of our financial condition, changes in financial condition and results of operations. These historical consolidated financial statements may not be indicative of our future performance. This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains a number of forward-looking statements, all of which are based on our current expectations and could be affected by the uncertainties and risks described throughout this filing, particularly in “Risk Factors.”
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
We are a molecular diagnostics company focused on developing and commercializing proprietary laboratory-developed tests or LDTs to serve unmet medical needs across the cancer care continuum. We have prioritized lung cancer as our first indication. Lung cancer remains the leading cause of cancer death in the United States, despite the availability of molecular testing and novel therapies to treat patients.
Our first commercial diagnostic test is a proprietary treatment stratification test called DetermaRx™ that identifies which patients with early-stage non-small cell lung cancer may benefit from chemotherapy, resulting in a significantly higher, five-year survival rate. We are also developing multi-gene molecular, laboratory-developed diagnostic tests that we have branded as DetermaIO™. DetermaIO™ is a proprietary gene expression assay with promising data supporting its potential to help identify patients likely to respond to checkpoint inhibitor drugs. This new class of drugs modulate the immune response and show activity in multiple solid tumor types including non-small cell lung cancer (NSCLC), and triple negative breast cancer (TNBC). DetermaIO™ is presently available for research use through our Pharma Services operations but one of our goals is to complete development of that assay and to make it available for clinical use later this year. We also perform other assay development and clinical testing services for pharmaceutical and biotechnology companies through our Pharma Services operations.
Other tests in our development pipeline include DetermaTx™, a test that we are targeting for commercial launch later this year and that is intended to compliment DetermaIO™ by assessing the mutational status of a tumor to help identify the appropriate targeted therapy. We also plan to initiate the development of DetermaMx™ as a blood based test to monitor cancer patients for recurrence of their disease. We have added to our diagnostic test pipeline the DetermaCNI™, a patented, blood-based test from Chronix for immunotherapy monitoring.
The inherent uncertainties of developing and commercializing new diagnostic tests for medical use make it impossible to predict the amount of time and expense that will be required to complete the development and commercialization of those tests. There is no assurance that we will be successful in developing new technology or diagnostic tests, or that any technology or diagnostic tests that we may develop will be proven safe and effective in diagnosis of cancer in humans, or will be successfully commercialized.
We believe we have sufficient cash, cash equivalents, and marketable equity securities to carry out our current operations through at least twelve months from the issuance date of our consolidated financial statements included elsewhere in this Report. We expect that our operating expenses will continue to increase as we conduct our planned clinical trial of DetermaRx™, and if we successfully complete the development of DetermaIO™, DetermaTx™ and DetermaMx™ and commercialize those tests. We have hired a sales and marketing team. In addition to our CLIA-certified laboratory in Irvine, California, we are in the process of completing a separate R&D laboratory. We also acquired a laboratory in Germany through our completed merger with Chronix and we will incur additional expenses resulting from our continued investment in Chronix. We are continuing to seek other opportunities to acquire ownership of or marketing rights to additional cancer tests. Because of the expected time frame to apply for and receive Medicare reimbursement approval for our tests, our pre-Medicare approval revenues from commercialization of our tests and revenues from services we perform for pharmaceutical companies are not expected to cover our operating expenses. We will need to obtain additional financing for our operations until such time as we generate sufficient revenues from the commercialization of our tests to cover our operating expenses. Our determination as to when we will seek new financing and the amount of financing that we will need will be based on our evaluation of the progress we make in our research and development programs, any changes to or the expansion of the scope and focus of our research, progress and results of commercializing our tests after completion of development, progress in receiving Medicare and other payor reimbursement approval, and our projection of future costs. See “Liquidity and Capital Resources” for a discussion of our available capital resources, our need for future financing, and possible sources of capital.
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Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”), requires management to make estimates and assumptions that affect the reported amounts in our consolidated financial statements and related notes. Our significant accounting policies are described in Note 2 to our consolidated financial statements included elsewhere in this Report. We have identified below our critical accounting policies and estimates that we believe require the greatest amount of judgment. On an ongoing basis, we evaluate estimates which are subject to significant judgment, including those related to the going concern assessments of our consolidated financial statements, revenue recognition, allowance for doubtful accounts, business combination valuation, contingent consideration valuation, allocation of direct and indirect expenses, useful lives associated with long-lived intangible assets, machinery and equipment, loss contingencies, valuation allowances related to deferred income taxes, and assumptions used to value stock-based awards, debt or other equity instruments. Actual results could differ materially from those estimates. On an ongoing basis, we evaluate our estimates compared to historical experience and trends, which form the basis for making judgments about the carrying value of assets and liabilities. To the extent that there are material differences between our estimates and our actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected.
We believe the assumptions and estimates associated with the following have the greatest potential impact on our consolidated financial statements.
Going concern assessment
With the implementation of FASB’s standard on going concern, ASU No. 2014-15, we assess going concern uncertainty in our consolidated financial statements to determine if we have sufficient cash and cash equivalents on hand and working capital, including available loans or lines of credit, if any, to operate for a period of at least one year from the date our consolidated financial statements are issued, which is referred to as the “look-forward period” as defined by ASU No. 2014-15. As part of this assessment, based on conditions that are known and reasonably knowable to us, we consider various scenarios, forecasts, projections, and estimates, and we make certain key assumptions, including the timing and nature of projected cash expenditures or programs, and our ability to delay or curtail those expenditures or programs, if necessary, among other factors. Based on this assessment, as necessary or applicable, we make certain assumptions around implementing curtailments or delays in the nature and timing of programs and expenditures to the extent we deem probable those implementations can be achieved and we have the proper authority to execute them within the look-forward period in accordance with ASU No. 2014-15.
Business combinations
We account for business combinations in accordance with Accounting Standards Codification (“ASC”) Topic 805, Business Combinations, which requires the purchase price to be measured at fair value. When the purchase consideration consists, in part or entirely of our common shares, we calculate the purchase price by determining the fair value, as of the acquisition date, of shares issued in connection with the closing of the acquisition. We recognize estimated fair values of the tangible assets and intangible assets acquired, including in-process research and development (“IPR&D”), and liabilities assumed as of the acquisition date, and we record as goodwill any amount of the fair value of the tangible and intangible assets acquired and liabilities assumed in excess of the purchase price.
Contingent consideration liabilities
ASC 805 requires that contingent consideration be estimated and recorded at fair value as of the acquisition date as part of the total consideration transferred. Contingent consideration is an obligation of the acquirer to transfer additional assets or equity interests to the selling shareholders in the future if certain future events occur or conditions are met, such as the attainment of product development milestones. Contingent consideration also includes additional future payments to selling shareholders based on achievement of components of earnings, such as “earn-out” provisions or percentage of future revenues, including royalties paid to the selling shareholders based on a percentage of revenues generated over their respective useful life.
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The fair value of milestone-based contingent consideration was determined using a scenario analysis valuation method which incorporates our assumptions with respect to the likelihood of achievement of the milestones, as defined in the merger agreements, credit risk, timing of the contingent consideration payments and a risk-adjusted discount rate to estimate the present value of the expected payments, all of which require significant management judgment and assumptions. Since the contingent consideration payments are based on nonfinancial, binary events, management believes the use of the scenario analysis method is appropriate.
The fair value of royalty or revenue share-based contingent consideration was determined using a single scenario analysis method to value those payments. The single scenario method incorporates our assumptions with respect to specified future revenues generated over their respective useful lives, credit risk, and a risk-adjusted discount rate to estimate the present value of the expected royalty payments, all of which require significant management judgment and assumptions. Since the royalty-based contingent consideration payments are based on future revenues and linear payouts, management believes the use of the single scenario method is appropriate.
The fair value of all contingent consideration after the acquisition date is reassessed by us as changes in circumstances and conditions occur, with the subsequent change in fair value recorded in our consolidated statements of operations. Changes in key assumptions can materially affect the estimated fair value of contingent consideration liabilities and, accordingly, the resulting gain or loss that we record in our consolidated financial statements. See Note 3 to our consolidated financial statements included elsewhere in this Report.
Goodwill and intangible assets
In accordance with ASC 350, Intangibles – Goodwill and Other, IPR&D projects acquired in a business combination that are not complete as of the acquisition date are capitalized and accounted for as indefinite-lived intangible assets until completion or abandonment of the related research and development efforts. Upon successful completion of the project, the capitalized amount is amortized over its estimated useful life. If a project is abandoned, all remaining capitalized amounts are written off immediately. We consider various factors and risks for potential impairment of IPR&D assets, including the current legal and regulatory environment, uncertainties posed by the ongoing COVID-19 pandemic and the competitive landscape. Adverse clinical trial results, significant delays or inability to obtain local determination coverage (“LCD”) from the Centers for Medicare and Medicaid Services (“CMS”) for Medicare reimbursement for a diagnostic test, the inability to bring a diagnostic test to market and the introduction or advancement of competitors’ diagnostic tests could result in partial or full impairment of the related intangible assets. Consequently, the eventual realized value of the IPR&D project may vary from its fair value at the date of acquisition, and IPR&D impairment charges may occur in future periods. During the period between completion or abandonment, the IPR&D assets will not be amortized but will be tested for impairment on an annual basis and between annual tests if we become aware of any events occurring or changes in circumstances that would indicate a reduction in the fair value of the IPR&D projects below their respective carrying amounts.
Goodwill represents the excess of the purchase price over the fair value of net identifiable assets and liabilities. Goodwill, similar to IPR&D, is not amortized but is tested for impairment at least annually, or if circumstances indicate its value may no longer be recoverable. Qualitative factors considered in this assessment include industry and market conditions, overall financial performance, and other relevant events and factors affecting our business. Based on the qualitative assessment, if it is determined that the fair value of goodwill is more likely than not to be less than its carrying amount, the fair value of a reporting unit will be calculated and compared with its carrying amount and an impairment charge will be recognized for the amount that the carrying value exceeds the fair value. We continue to operate in one segment and considered to be the sole reporting unit and, therefore, goodwill is tested for impairment at the enterprise level.
Accounting for warrants
We determine the accounting classification of warrants we issue, as either liability or equity classified, by first assessing whether the warrants meet liability classification in accordance with ASC 480-10, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, then in accordance with ASC 815-40, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock. Under ASC 480, warrants are considered liability classified if the warrants are mandatorily redeemable, obligate us to settle the warrants or the underlying shares by paying cash or other assets, and warrants that must or may require settlement by issuing variable number of shares. If warrants do not meet the liability classification under ASC 480-10, we assess the requirements under ASC 815-40, which states that contracts that require or may require the issuer to settle the contract for cash are liabilities recorded at fair value, irrespective of the likelihood of the transaction occurring that triggers the net cash settlement feature. If the warrants do not require liability classification under ASC 815-40, in order to conclude equity classification, we also assess whether the warrants are indexed to our common stock and whether the warrants are classified as equity under ASC 815-40 or other GAAP. After all such assessments, we conclude whether the warrants are classified as liability or equity. Liability classified warrants require fair value accounting at issuance and subsequent to initial issuance with all changes in fair value after the issuance date recorded in the statements of operations. Equity classified warrants only require fair value accounting at issuance with no changes recognized subsequent to the issuance date. We do not have any liability classified warrants as of any period presented. See Note 5 to our consolidated financial statements included elsewhere in this Report.
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Stock-based compensation
We recognize compensation expense related to share-based payments in accordance with ASC 718, Compensation - Stock Compensation (“ASC 718”), which requires the measurement and recognition of compensation expense for share-based payment awards made to directors and employees based on estimated fair values. We estimate the fair value of employee stock-based payment awards on the grant-date and recognize the resulting fair value over the requisite service period on a straight-line basis. For stock-based awards that vest only upon the attainment of one or more performance goals, compensation cost is recognized if and when we determine that it is probable that the performance condition or conditions will be, or have been, achieved. We utilize the Black-Scholes option pricing model for determining the fair value of stock options. Our determination of fair value of share-based payment awards on the date of grant using an option-pricing model is affected by our stock price as well as assumptions regarding a number of complex and subjective variables. These variables include, but are not limited to, expected stock price volatility over the term of the awards, and actual and projected employee stock option exercise behaviors. For the years ended December 31, 2021 and 2020, we estimated the expected volatility using our own stock price volatility to the extent applicable or a combination of our stock price volatility and the stock price volatility of stock of peer companies, for a period equal to the expected term of the options. The expected term of options granted is based on our own experience and, in part, based upon the “simplified method” provided under Staff Accounting Bulletin, Topic 14, or SAB Topic 14, as necessary. The risk-free rate is based on the U.S. Treasury rates in effect during the corresponding period of grant. Although the fair value of employee stock options is determined in accordance with FASB guidance, the key inputs and assumptions may change as we develop our own company estimates, experience and key inputs including our expected term, and stock price volatility based on the trading history of our stock in the public market. Changes in these subjective assumptions can materially affect the estimated value of equity grants and the stock-based compensation that we record in our consolidated financial statements.
Leases
We account for leases in accordance with ASC 842, Leases. We determine if an arrangement is a lease at inception. Leases are classified as either financing or operating, with classification affecting the pattern of expense recognition in the consolidated statements of operations. Under the available practical expedients for the adoption of ASC 842, we account for the lease and non-lease components as a single lease component. We recognize right-of-use (“ROU”) assets and lease liabilities for leases with terms greater than twelve months in the consolidated balance sheet. ROU assets represent the right to use an underlying asset during the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most leases do not provide an implicit rate, we use an incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. We use the implicit rate when it is readily determinable. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. Lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term. Operating leases are included as right-of-use assets in machinery and equipment, and ROU lease liabilities, current and long-term, in the consolidated balance sheets. Financing leases are included in machinery and equipment, and in financing lease liabilities, current and long-term, in the consolidated balance sheets. We disclose the amortization of our ROU assets and operating lease payments as a net amount, “Amortization of right-of-use assets and liabilities”, on the consolidated statements of cash flows.
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On January 1, 2019, the adoption date of ASC 842, and based on the available practical expedients under the standard, we did not reassess any expired or existing contracts, reassess the lease classification for any expired or existing leases and reassess initial direct costs for exiting leases. We also elected not to capitalize leases that have terms of twelve months or less.
The adoption of ASC 842 did not have a material impact to our consolidated financial statements because we did not have any significant operating leases at the time of adoption. During the years ended December 31, 2021 and 2020, we entered into various operating leases and an embedded operating lease in accordance with ASC 842 discussed in Notes 9 and 10 to the consolidated financial statements included elsewhere in this Report. Our accounting for financing leases (previously referred to as “capital leases”) remained substantially unchanged.
Impairment of long-lived assets
We assess the impairment of long-lived assets, which consists primarily of long-lived intangible assets, machinery and equipment, whenever events or changes in circumstances indicate that such assets might be impaired and the carrying value may not be recoverable. If events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable and the expected undiscounted future cash flows attributable to the asset are less than the carrying amount of the asset, an impairment loss equal to the excess of the asset’s carrying value over its fair value is recorded.
Income taxes
We account for income taxes in accordance with ASC 740, Income Taxes, which prescribes the use of the asset and liability method, whereby deferred tax asset or liability account balances are calculated at the balance sheet date using current tax laws and rates in effect. Valuation allowances are established when necessary to reduce deferred tax assets when it is more likely than not that a portion or all of the deferred tax assets will not be realized. Our judgments regarding future taxable income may change over time due to changes in market conditions, changes in tax laws, tax planning strategies or other factors. If our assumptions and consequently our estimates change in the future, the valuation allowance may be increased or decreased, which may have a material impact on our statements of operations.
The guidance also prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not sustainable upon examination by taxing authorities. We will recognize accrued interest and penalties, if any, related to unrecognized tax benefits as income tax expense. No amounts were accrued for the payment of interest and penalties as of the financial statement periods presented herein. We account for uncertain tax positions by assessing all material positions taken in any assessment or challenge by relevant taxing authorities. We are currently unaware of any tax issues under review. See Note 8 to our consolidated financial statements included elsewhere in this Report.
Revenue recognition
Prior to January 1, 2020, we generated no revenues. Effective on January 1, 2020, we adopted the revenue recognition standard ASC Topic 606, Revenue from Contracts with Customers (ASC) 606. Pursuant to ASC 606, revenues are recognized when control of services performed is transferred to customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those services. ASC 606 provides for a five-step model that includes:
(i) identifying the contract with a customer,
(ii) identifying the performance obligations in the contract,
(iii) determining the transaction price,
(iv) allocating the transaction price to the performance obligations, and
(v) recognizing revenue when, or as, an entity satisfies a performance obligation.
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DetermaRx™ testing revenue
In the first quarter of 2020, Oncocyte commercially launched DetermaRx™ and commenced performing tests on clinical samples through orders received from physicians, hospitals, and other healthcare providers. In determining whether all the revenue recognition criteria (i) through (v) above are met with respect to DetermaRx™ tests, each test result is considered a single performance obligation and is generally considered complete when the test result is delivered or made available to the prescribing physician electronically, and, as such, there are no shipping or handling fees incurred by Oncocyte or billed to customers. Although Oncocyte bills a list price for all tests ordered and completed for all payer types, Oncocyte considers constraints on the variable consideration when recognizing revenue for DetermaRx™. Because DetermaRx™ is a novel test and there are no current reimbursement arrangements with third-party payers other than Medicare, the transaction price represents variable consideration. Application of the constraint for variable consideration is an area that requires significant judgment. For all payers other than Medicare and payers subscribed to Medicare Advantage, Oncocyte must consider the novelty of the test, the uncertainty of receiving payment, or being subject to claims for a refund, from payers with whom it does not have a sufficient payment collection history or contractual reimbursement agreements. Accordingly, for those payers, Oncocyte expects to continue to recognize revenue upon payment until it has a sufficient history to reliably estimate payment patterns or has contractual reimbursement arrangements, or both, in place. In September 2020, Oncocyte received a final pricing decision for DetermaRx™ from CMS, and with Medicare coverage in effect, Oncocyte commenced recognizing revenue when DetermaRx™ tests are performed for Medicare and Medicare Advantage patients, or when payment was approved by Medicare and Medicare Advantage in the case of certain tests performed prior to September 2020.
Pharma Services revenue
Through our Insight subsidiary we provide a range of molecular diagnostic services to pharmaceutical customers referred to as “Pharma Services” including testing for biomarker discovery, assay design and development, clinical trial support, and a broad spectrum of biomarker tests in Insight’s CLIA-certified laboratory. These Pharma Services are generally performed under individual scope of work (“SOW”) arrangements with specific deliverables defined by the customer. Pharma Services are generally performed on a time and materials basis. Upon completion of the service to the customer in accordance with the SOW, we have the right to bill the customer for the agreed upon price (either on a per test or per deliverable basis) and we recognize the pharma service revenue at that time. We generally identify each sale of its pharma service offering as a single performance obligation.
Completion of the service and satisfaction of the performance obligation under a SOW is typically evidenced by access to the report or test made available to the customer or any other form or applicable manner of delivery defined in the SOW. However, for certain SOWs under which work is performed pursuant to the customer’s highly customized specifications, we have the enforceable right to bill the customer for work completed, rather than upon completion of the SOW. For those SOWs, we recognize revenue over a period of time during which the work is performed using a formula that accounts for expended efforts, generally measured in labor hours, as a percentage of total estimated efforts for the completion of the SOW. As the performance obligation under the SOW is satisfied, any amounts earned as revenue and billed to the customer are included in accounts receivable. Any revenues earned but not yet billed to the customer as of the date of our consolidated financial statements are issued are recorded as contract assets and are included in prepaids and other current assets as of the financial statement date. Amounts recorded in contract assets are reclassified to accounts receivable in our consolidated financial statements when the customer is invoiced according to the billing schedule in the contract.
We establish an allowance for doubtful accounts based on the evaluation of the collectability of Pharma Services accounts receivables after considering a variety of factors, including the length of time receivables are past due, significant events that may impair the customer’s ability to pay, such as a bankruptcy filing or deterioration in the customer’s operating results or financial position, and historical experience. If circumstances related to customers change, estimates of the recoverability of receivables would be further adjusted. We continuously monitor collections and payments from customers and maintain a provision for estimated credit losses and uncollectible accounts, if any, based upon historical experience and any specific customer collection issues that have been identified. Amounts determined to be uncollectible are written off against the allowance for doubtful accounts. As of December 31, 2021, we have not recorded any losses or allowance for doubtful accounts on accounts receivables from Pharma Services.
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Licensing revenue
Revenues recognized includes licensing revenue derived from agreements with customers for exclusive rights to market Oncocyte’s proprietary testing technology. Under the agreements, Oncocyte grants exclusive rights to certain trademarks and technology of Oncocyte for the purpose of marketing Oncocyte’s tests within a defined geographic territory. A license agreement may specify milestone deliverables or performance obligations, for which Oncocyte recognizes revenue when its licensee confirms the completion of Oncocyte’s performance obligation. A licensing agreement may also include ongoing sales support from Oncocyte and typically includes non-refundable licensing fees and per-test Pharma Services revenues discussed above, for which Oncocyte treats the licensing of the technology, trademarks, and ongoing support as a single performance obligation satisfied by the passage of time over the term of the agreement.
Cost of revenues
Cost of revenues generally consists of cost of materials, direct labor including benefits, bonus and stock-based compensation, equipment and infrastructure expenses, clinical sample related costs associated with performing Pharma Services and DetermaRx™ tests, and license fees due to third parties, and also includes amortization of acquired customer relationship intangible assets. Infrastructure expenses include depreciation of laboratory equipment, allocated rent costs, leasehold improvements and allocated information technology costs for operations at our CLIA laboratories. Costs associated with performing diagnostic tests and Pharma Services are recorded as the tests or services are performed regardless of whether revenue was recognized with respect to that test or pharma service. Royalties or revenue share payments for licensed technology calculated as a percentage of revenues or determined based on achieving certain aggregated amounts of revenues generated using the associated technology are recorded as expenses at the time the related revenues are recognized.
Research and development expenses
Research and development expenses are comprised of costs incurred to develop technology, and include salaries and benefits (including stock-based compensation), laboratory expenses (including reagents and supplies used in research and development laboratory work), infrastructure expenses (including allocated facility occupancy costs), and contract services and other outside costs. Indirect research and development expenses are allocated primarily based on headcount, as applicable, and include rent and utilities, common area maintenance, telecommunications, property taxes, and insurance. Research and development costs are expensed as incurred.
Sales and marketing expenses
Sales and marketing expenses consist primarily of personnel costs and related benefits, including stock-based compensation, trade show expenses, branding and positioning expenses, and consulting fees. Sales and marketing expenses also include indirect expenses for applicable overhead allocated based on headcount, and include allocated costs for rent and utilities, common area maintenance, telecommunications, property taxes, and insurance.
General and administrative expenses
General and administrative expenses consist primarily of compensation and related benefits (including stock-based compensation) for executive and corporate personnel, professional and consulting fees, rent and utilities, common area maintenance, telecommunications, property taxes, and insurance.
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Results of Operations
The ongoing global outbreak of COVID-19, and the various attempts throughout the world to contain it, have created significant financial volatility, economic uncertainty, and changes to the way Oncocyte conducts certain aspects of its operations. The COVID-19 pandemic has had, and may continue to have, significant effects on our operations, ability to generate revenues, and financing activities. In response to government directives and guidelines, health care advisories and employee and other concerns, a number of our employees have had to work remotely from home and those on site have had to follow our social distance guidelines, which could impact their productivity. Although employee absenteeism due to COVID-19 illness has not had an adverse impact on our operations as of the date of this Report, we face the risk of losing, at least temporarily, the services of employees if they become ill.
The consequences of the COVID-19 pandemic have led to uncertainties related to our growth and our ability to forecast the demand for our diagnostic testing and Pharma Services and resulting revenues, as we have not had time to establish a base of customers, revenues or other relevant trends prior to the outbreak of COVID-19. We had no commercial revenues until the first quarter of 2020 when we launched our first commercial diagnostic test, DetermaRx™, and acquired the Pharma Services business of Insight. We had expected that initial DetermaRx™ revenues would be constrained by the lack of Medicare coverage. CMS Medicare reimbursement pricing approval for DetermaRx™ did not become effective until September 2020. Deferrals in lung cancer surgeries due to COVID-19 may have reduced demand for DetermaRx™, but because of the lack of historical DetermaRx™ revenues, with and without Medicare reimbursement, we are unable to determine the extent to which the deferral of those surgeries impacted our DetermaRx™ revenues. Resurgences in COVID-19 cases could cause additional deferrals of lung cancer surgeries during the course of the pandemic. The lack of in-person interaction with healthcare providers for our promotion of the use of DetermaRx™ has also placed a constraint on our ability to market that test, but we cannot determine the extent to which that has impacted our revenues due to the absence of historical revenues. Similarly, our Pharma Services revenues commenced with our acquisition of Insight during the first quarter of 2020, and because we do not have a prior history of Pharma Services revenues we cannot assess how COVID-19 may have impacted those revenues, although we are aware that certain planned clinical trials of new pharmaceuticals for which we had expected to provide Pharma Services were delayed due to the pandemic.
The pandemic is affecting our revenue-generating activities. During the COVID-19 pandemic, we have not been, and may not be, able to maintain our preferred level of physician or customer outreach and marketing of our diagnostic testing and Pharma Services, which could negatively impact our potential new customers’ interest in our tests and services. Even if government and other COVID-19 related restrictions are relaxed and lung cancer surgeries are performed at or close to pre-pandemic levels, any growth and anticipated adoption of our diagnostic tests may not occur. Although we have not yet experienced COVID-19 related supply chain disruptions impacting our testing capacity, if the vendors of equipment and reagents used in our diagnostic laboratories experience supply, operational, or financial disruptions due to the COVID-19 pandemic, we could experience supply constraints in the future that could cause increased costs or delays in performing DetermaRx™ tests and Pharma Services and in continuing the development of new diagnostic tests.
The full extent to which the COVID-19 pandemic and the various responses might impact our business, operations and financial results will depend on numerous evolving factors that we will not be able to accurately predict, including: the duration and scope of the pandemic; governmental, business and individuals’ actions that have been and continue to be taken in response to the pandemic; the availability and cost to access COVID-19 tests, vaccines and therapies; the effect on our potential customers and their demand for our diagnostic testing and Pharma Services; the effect on our suppliers and their ability to provide the necessary equipment and materials to support our tests and services; disruptions or restrictions on our employees’ ability to work and travel; interruptions or restrictions related to the distribution of our tests in foreign markets, including impacts on logistics of shipping and receiving patient samples; and any stoppages, disruptions or increased costs associated with development, production and marketing of our diagnostic tests. In addition to the direct impacts to our business operations, the global economy is likely to continue to be significantly weakened as a result of actions taken in response to the COVID-19 pandemic and to the extent that such a weakened global economy impacts customers’ ability or willingness to purchase and pay for our tests, our business and results of operation could be negatively impacted. Due to the uncertain scope and duration of the COVID-19 pandemic and uncertain timing of any recovery or normalization, we are currently unable to estimate the resulting impacts on our operations and financial results. We will continue to actively monitor the issues raised by the COVID-19 pandemic and may take further actions that alter our operations, as may be required by federal, state, local or foreign authorities, or that we determine are in the best interests of our employees, our customers, and our shareholders.
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Revenues for the Year Ended December 31, 2021
The year ended December 31, 2020 is the first year in which we generated revenues. We currently derive our revenues from the sale of our novel lung cancer stratification test, DetermaRx™, which we commercially launched in early 2020, and from Pharma Services generated by our wholly owned subsidiary, Insight, which we acquired on January 31, 2020. From 2021, we also recognized revenue from our DetermaRx™ and TheraSure™ technology licensing.
The following table shows our revenues for the years ended December 31, 2021 and 2020 (in thousands, except percentage change values).
| 2021 | 2020 | $ Change | % Change | |||||||||||||
| Revenues | $ | 7,727 | $ | 1,216 | $ | 6,511 | 535 | % | ||||||||
Under U.S. generally accepted accounting principles, we may not recognize revenues even if we have performed the diagnostic tests we have commercialized until we have contracts for reimbursement from third-party payers and a history of experience of cash collections for the tests we perform. Until we develop that experience or have the contracts in place with payers or Medicare or other insurance coverage for a test, we recognize revenue upon receipt of payment for the tests that we perform. In September 2020, we received a final pricing decision for our DetermaRx™ test from CMS and commenced recognizing revenue on an accrual basis when DetermaRx™ tests are performed for Medicare covered patients, or when payment was approved by Medicare in the case of certain tests performed prior to September 2020. During the three months ended March 31, 2021, after accumulating additional history of cash receipts and other factors considered by management for Medicare Advantage covered tests, including the recently published Medicare rate which management believes entitles Oncocyte to get reimbursed for Medicare Advantage covered tests at the Medicare rate, Oncocyte commenced recognizing Medicare Advantage covered tests upon satisfaction of the performance obligation, upon considering no further constraints on the variable consideration, at the Medicare rate. All other payers for the DetermaRx™ test are currently recognized on a cash basis. For financial accounting purposes, regardless of when, or whether, revenues may be recognized, we incurred and accrued costs of revenues and other operating expenses discussed below related to any services we perform. Our ability to increase our testing revenue for DetermaRx™ will depend on our ability to penetrate the market and obtain coverage from additional third-party payers.
Despite COVID adversely impacting the number of surgeries performed, DetermaRx™ testing volume grew quarter over quarter in 2020, its first year of launch, driven by our rapid pivot to virtual engagements of physicians via targeted educational programs, key opinion leader or KOL webinars, continuing medical education programs, and virtual molecular tumor boards attended by over 3000 medical professionals, including thoracic surgeons, medical oncologists, pathologists and nurse navigators. Following our commercial launch in the first quarter of 2020, DetermaRx™ tests ordered during the second, third and fourth quarter of 2020 were 64, 175 and 238, respectively. DetermaRx™ tests ordered during the first, second, third and fourth quarter of 2021 were 228, 281, 289, and 444, respectively.
Pharma Services revenues in the fourth quarter of 2021 were higher sequentially when compared to the fourth quarter of 2020 and the third quarter of 2021 due to delays in customer projects resulting from the COVID surge in prior periods. Pharma services are generally performed on a time and materials basis. Upon our completion of the service to the customer in accordance with the contract, we have the right to bill the customer for the agreed upon price (either on a per test or per deliverable basis) and recognize the pharma services revenue at that time.
Revenues recognized includes licensing revenue derived from agreements with customers for exclusive rights to market Oncocyte’s proprietary testing technology. Under the agreements, Oncocyte grants exclusive rights to certain trademarks and technology of Oncocyte for the purpose of marketing Oncocyte’s tests within a defined geographic territory. A license agreement may specify milestone deliverables or performance obligations, for which Oncocyte recognizes revenue when its licensee confirms the completion of Oncocyte’s performance obligation. A licensing agreement may also include ongoing sales support from Oncocyte and typically includes non-refundable licensing fees and per-test Pharma Services revenues discussed above, for which Oncocyte treats the licensing of the technology, trademarks, and ongoing support as a single performance obligation satisfied by the passage of time over the term of the agreement.
The following table presents the percentage of consolidated revenues attributable to products or services classes that represent greater than ten percent of consolidated revenues:
| Year Ended | ||||||||||||||||
| December 31, | ||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| DetermaRxTM | $ | 2,475 | $ | 545 | 32 | % | 45 | % | ||||||||
| Pharma Services | 1,460 | 671 | 19 | % | 55 | % | ||||||||||
| Licensing | 3,792 | - | 49 | % | - | |||||||||||
| Total | $ | 7,727 | $ | 1,216 | 100 | % | 100 | % | ||||||||
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The following table presents the percentage of consolidated revenues received from unaffiliated customers that individually represent greater than ten percent of consolidated revenues:
| Year Ended | ||||||||
| December 31, | ||||||||
| 2021 | 2020 | |||||||
| Medicare for DetermaRxTM | 17 | % | 40 | % | ||||
| Medicare Advantage for DetermaRxTM | 14 | % | * | |||||
| Pharma services Company A | * | 23 | % | |||||
| Pharma services Company B | * | 12 | % | |||||
| Licensing - Company D | 40 | % | * | |||||
| Licensing - Company B | 10 | % | * | |||||
| Total | 100 | % | 100 | % | ||||
*Less than 10%
Operating Summary
The following table shows our operating net loss for the years ended December 31, 2021 and 2020 (in thousands).
| Year Ended | ||||||||||||||||
| December 31, | ||||||||||||||||
| 2021 | 2020 | $ Change | % Change | |||||||||||||
| Revenues | 7,727 | 1,216 | 6,511 | 535 | % | |||||||||||
| Cost of revenues | 7,539 | 1,855 | 5,684 | 306 | % | |||||||||||
| Research and development expenses | 13,631 | 9,800 | 3,831 | 39 | % | |||||||||||
| Sales and marketing expenses | 11,167 | 6,494 | 4,673 | 72 | % | |||||||||||
| General and administrative expenses | 22,336 | 16,788 | 5,548 | 33 | % | |||||||||||
| Change in fair value of contingent consideration | 27,266 | (4,010 | ) | 31,276 | -780 | % | ||||||||||
| Loss from operations | (74,212 | ) | (29,711 | ) | (44,501 | ) | 150 | % | ||||||||
| Other income (expense) | 854 | (1,475 | ) | 2,329 | -158 | % | ||||||||||
| Loss before income taxes | (73,358 | ) | (31,186 | ) | (42,172 | ) | 135 | % | ||||||||
| Income tax benefit | 9,261 | 1,254 | 8,007 | 639 | % | |||||||||||
| Net Loss | (64,097 | ) | (29,932 | ) | (34,165 | ) | 114 | % | ||||||||
Cost of revenues
Cost of revenues generally consists of cost of materials; direct labor including payroll, payroll taxes, bonus, benefit and stock-based compensation; equipment and infrastructure expenses; clinical sample costs associated with performing Pharma Services and the DetermaRx™ tests; license fees due to third parties, and amortization of acquired intangible assets. Infrastructure expenses include depreciation of laboratory equipment; allocated rent costs; leasehold improvements; and allocated information technology costs for operations at our CLIA laboratories in California and Tennessee. Costs associated with performing the tests are recorded as the tests are performed regardless of whether revenue was recognized with respect to that test. Royalties payable by Oncocyte for licensed technology, calculated as a percentage of revenues generated using the associated technology, are recorded as expenses at the time the related revenues are recognized.
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We expect the cost of DetermaRx™ testing to generally increase in line with the increase in the number of tests we perform, even if we do not recognize corresponding revenues when Medicare, Medicare Advantage, or other insurance coverage is not available. We expect that our cost per test to decrease modestly over time due to the efficiencies we may gain if testing volume increases, and from automation and other cost reductions. There can be no assurance, however, that any of these efficiencies or cost savings will be achieved. Cost of revenues for Pharma Services and licensing revenue will vary depending on the nature, timing, and scope of customer projects.
Research and development expenses
A summary of the main drivers of the change in research and development expenses for the periods presented, is as follows:
| Year Ended | ||||||||||||||||
| December 31, | ||||||||||||||||
| 2021 | 2020 | $ Change | % Change | |||||||||||||
| Personnel-related expenses | $ | 5,143 | $ | 3,612 | $ | 1,531 | 42 | % | ||||||||
| Professional fees, legal, and outside services | 2,112 | 1,605 | 507 | 32 | % | |||||||||||
| Laboratory supplies and expenses | 2,056 | 1,706 | 350 | 21 | % | |||||||||||
| Share-based compensation | 1,612 | 1,201 | 411 | 34 | % | |||||||||||
| Depreciation | 697 | 591 | 106 | 18 | % | |||||||||||
| Clinical trials | 829 | 159 | 670 | 421 | % | |||||||||||
| Facilities and insurance | 367 | 326 | 41 | 13 | % | |||||||||||
| Severance | 233 | 374 | (141 | ) | -38 | % | ||||||||||
| Other | 582 | 226 | 356 | 158 | % | |||||||||||
| Total | $ | 13,631 | $ | 9,800 | $ | 3,831 | 39 | % | ||||||||
| % of Net Revenue | 176 | % | 806 | % | -630 | % | ||||||||||
We expect to continue to incur a significant amount of research and development expenses during the foreseeable future. Although we have terminated development work for our DetermaDx product line, we will continue development of DetermaIO™, DetermaTx™, and DetermaMx™, clinical trials to promote commercialization of DetermaRx™, and development of our planned DetermaCNI™ test from the Chronix merger. Our future research and development efforts and expenses will also depend on the amount of capital that we are able to raise to finance those activities and whether we acquire rights to any new diagnostic tests. A portion of our costs for leasing and operating our CLIA laboratories in California and Tennessee, and in Germany, will also be included in research and development expenses to the extent allocated to the development of our diagnostic tests.
The COVID-19 global pandemic has negatively impacted, and is expected to continue to negatively impact, patient recruitment for clinical trials necessary for us to promote the use of DetermaRx™ by physicians, and clinical trials of immunotherapies by pharma companies that may use DetermaIO™ in selecting patients for their trials. We believe that our planned DetermaRx™ clinical trials are critical to gaining physician adoption and driving favorable coverage decisions by private payers, and we expect our investment in the DetermaRx™ clinical trial to increase over time. We may also commence our own clinical trials of DetermaIO™ if we develop that diagnostic test to the point where we determine that its use as a clinical diagnostic appears to be feasible.
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Sales and marketing expenses
A summary of the main drivers of the change in sales and marketing expenses for the periods presented, is as follows:
| Year Ended | ||||||||||||||||
| December 31, | ||||||||||||||||
| 2021 | 2020 | $ Change | % Change | |||||||||||||
| Personnel-related expenses | $ | 6,314 | $ | 4,015 | $ | 2,299 | 57 | % | ||||||||
| Professional fees, legal, and outside services | 1,466 | 1,324 | 142 | 11 | % | |||||||||||
| Share-based compensation | 1,296 | 591 | 705 | 119 | % | |||||||||||
| Marketing & Advertising | 733 | 306 | 427 | 140 | % | |||||||||||
| Facilities and insurance | 156 | 124 | 32 | 26 | % | |||||||||||
| Other | 1,202 | 134 | 1,068 | 797 | % | |||||||||||
| Total | $ | 11,167 | $ | 6,494 | $ | 4,673 | 72 | % | ||||||||
| % of Net Revenue | 145 | % | 534 | % | -390 | % | ||||||||||
We expect to continue to incur a significant amount of sales and marketing expenses during the foreseeable future as we continue to market and sell DetermaRx™ and if we successfully complete product development and begin commercialization efforts for DetermaIO™ as a clinical test. Sales and marketing expenses will also increase if we successfully develop and begin commercializing DetermaCNI™, DetermaTx™, and DetermaMx™, or if we acquire and commercialize other diagnostic tests. Our commercialization efforts and expenses will also depend on the amount of capital that we are able to raise to finance commercialization of our tests. Our future expenditures on sales and marketing will also depend on the amount of revenue that those efforts are likely to generate. Because physicians are more likely to prescribe a test for their patients if the cost is covered by Medicare or health insurance, demand for our diagnostic and other tests and our expenditures on sales and marketing are likely to increase if our diagnostic or other tests qualify for reimbursement by Medicare or private health insurance companies
General and administrative expenses
A summary of the main drivers of the change in general and administrative expenses for the periods presented, is as follows:
| Year Ended | ||||||||||||||||
| December 31, | ||||||||||||||||
| 2021 | 2020 | $ Change | % Change | |||||||||||||
| Personnel-related expenses and board fees | $ | 6,137 | $ | 5,742 | $ | 395 | 7 | % | ||||||||
| Professional fees, legal, and outside services | 6,258 | 4,565 | 1,693 | 37 | % | |||||||||||
| Share-based compensation | 3,657 | 2,984 | 673 | 23 | % | |||||||||||
| Facilities and insurance | 3,197 | 2,529 | 668 | 26 | % | |||||||||||
| Severance - Chronix acquisition | 2,452 | - | 2,452 | n/a | ||||||||||||
| Severance | - | 834 | (834 | ) | n/a | |||||||||||
| Other | 635 | 134 | 501 | 374 | % | |||||||||||
| Total | $ | 22,336 | $ | 16,788 | $ | 5,548 | 33 | % | ||||||||
| % of Net Revenue | 289 | % | 1,381 | % | -1,092 | % | ||||||||||
Change in fair value of contingent consideration
We will pay contingent consideration if various payment milestones are triggered under the merger agreements through which we acquired Insight and Chronix. See Note 3 to our consolidated financial statements included in this Report. Changes in the fair value of the contingent consideration will be based on our reassessment of the key assumptions underlying the determination of this liability as changes in circumstances and conditions occur from the Insight acquisition date to the reporting period being presented, with the subsequent change in fair value recorded as part of our consolidated loss from operations for that period. For the year ended December 31, 2021 and December 31, 2020, we recorded an unrealized loss of approximately $27.3 million and an unrealized gain of approximately $4.0 million related to the decrease in the fair value of contingent consideration primarily attributable to a revised estimate on the timing of the possible future payouts, respectively.
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Other income and expenses, net
Other income and expenses, net, is primarily comprised of interest income and interest expenses, net, pro rata loss from our equity method investment in Razor prior to February 24, 2021, and unrealized gains and losses on Lineage and AgeX Therapeutics, Inc. (“AgeX”) marketable equity securities we hold. Interest income is earned from money market funds we hold for capital preservation. Interest expense was incurred under our loan payable to the Silicon Valley Bank, our loan from the U.S. Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) and under financing lease obligations. Interest expense, net, reflects the interest expense incurred on our loans and financing obligations in excess of interest income earned from money market accounts. During May 2021, Oncocyte’s PPP loan obligation was forgiven and the principal amount of $1,140,930 was recognized as gain on extinguishment of debt in the accompanying consolidated statement of operations. All previously accrued PPP loan interest expenses of $11,000 were reversed in the second quarter of 2021.
For the year ended December 31, 2021, we recorded interest expense, net, of $0.2 million from our loans and financing leases. For the year ended December 31, 2020, we recorded interest expense, net, of $0.3 million from our loans and financing leases. For the year ended December 31, 2021, we recorded $0.2 million of unrealized gain from the fair market value increase of the marketable equity securities we hold in shares of Lineage and AgeX common stock. We did not sell any marketable securities during any of the periods presented. As of December 31, 2021 and 2020, we held marketable equity securities with a total fair market value of $0.9 million and $0.7 million, respectively.
Income taxes
A summary of the income taxes and tax rates for the periods presented, is as follows:
| 2021 | 2020 | |||||||
| Income taxes (in thousands) | $ | 9,261 | $ | 1,254 | ||||
| Effective tax rate | -13 | % | -4 | % | ||||
In connection with the Chronix and Razor acquisitions discussed in Note 3 to our consolidated financial statements included else wherein this Report, a change in the acquirer’s valuation allowance that stems from the purchase of assets should be recognized as an element of the acquirer’s income tax benefit in the period of the acquisition. Accordingly, for the year ended December 31, 2021, we recorded a $9.3 million partial release of our valuation allowance and a corresponding income tax benefit stemming from the deferred tax liability generated by the Chronix and Razor intangible assets we acquired.
In connection with the acquisition of Insight discussed in Note 3 to our consolidated financial statements included elsewhere in this Report, and in accordance with business combination accounting standards, a change in the acquirer’s valuation allowance that stems from a business combination should be recognized as an element of the acquirer’s income tax expense or benefit in the period of the acquisition. Accordingly, for the year ended December 31, 2020, we recorded a $1.3 million partial release of our valuation allowance with a corresponding income tax benefit stemming from the deferred tax liabilities generated by the acquired Insight in-process research and development (IPR&D) and customer relationships intangible assets.
A valuation allowance is provided when it is more likely than not that some portion of the deferred tax assets will not be realized. Other than the partial release discussed above for the years ended December 31, 2021 and 2020, we established a full valuation allowance for all periods presented due to the uncertainty of realizing future tax benefits from our net operating loss carryforwards and other deferred tax assets. Accordingly, due to losses incurred for all periods presented, we did not record any provision or benefit for income taxes except for the tax benefit recorded in connection with the acquisitions discussed above.
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Liquidity and Capital Resources
We finance our operations primarily through the sale of our common stock. We have incurred operating losses and negative cash flows since inception and had an accumulated deficit of $187.8 million at December 31, 2021. We expect to continue to incur operating losses and negative cash flows for the near future.
At December 31, 2021, we had $35.6 million of cash and cash equivalents and held shares of Lineage and AgeX common stock as marketable equity securities valued at $0.9 million. Oncocyte believes that its current cash, cash equivalents and marketable equity securities are sufficient to carry out current operations through at least twelve months from the issuance date of the consolidated financial statements included in this Report.
On October 17, 2019, we refinanced our loan with Silicon Valley Bank (the “Bank”) as further discussed in Note 12 to our consolidated financial statements included elsewhere in this Report. On April 2, 2020, as part of the Bank’s COVID-19 pandemic relief program, Oncocyte and the Bank entered into a Loan Deferral Agreement (“Loan Deferral”) with respect to the Amended Loan Agreement. Under the Loan Deferral Agreement, the Bank agreed to (i) extend the scheduled maturity date of the Amended Loan Agreement from March 31, 2022 to September 30, 2022, and (ii) deferred the principal payments by an additional 6 months whereby payments of interest only on the Bank loan principal balance will be due monthly from May 1, 2020 through October 1, 2020, followed by 23 monthly payments of principal and interest beginning on November 1, 2020, all provided at no additional fees to Oncocyte. The outstanding principal amount of the loan, with interest accrued, the final payment fee, and the prepayment fee may become due and payable prior to the applicable maturity date if an “Event of Default” as defined in the Loan and Security Agreement, as amended governing the loan (the “Loan Agreement”) occurs and is not cured within any applicable cure period. Upon the occurrence and during the continuance of an Event of Default, all obligations due to the Bank will bear interest at a rate per annum which is 5% above the then applicable interest rate. An Event of Default includes, among other events, failure to pay interest and principal when due, material adverse changes, which include a material adverse change in Oncocyte’s business, operations, or condition (financial or otherwise), failure to provide the bank with timely consolidated financial statements and copies of filings with the SEC, as required, legal judgments or pending or threatened legal actions of $50,000 or more, insolvency, and delisting from the national securities exchange on which our common stock trades. Oncocyte’s obligations under the Loan Agreement are collateralized by substantially all of its assets other than intellectual property such as patents and trade secrets that Oncocyte owns. Accordingly, if an Event of Default were to occur and not be cured, the Bank could foreclose on its security interest in the collateral. We are in compliance with the Loan Agreement, as amended, as of the filing date of this Report.
On April 23, 2020, Oncocyte obtained a U.S. Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) loan in the principal amount of $1,140,930 from Silicon Valley Bank (the “Bank”). The PPP loan bore interest at a rate of 1% per annum (see Note 12) and was scheduled to mature on April 23, 2022. During May 2021, the principal amount and accrued interest on the PPP loan was forgiven by the Bank through the SBA under the provisions of the PPP loan program. Although Oncocyte was obligated to make monthly payments of principal and interest on the PPP loan commencing in November 2020, each in such equal amount required to fully amortize the principal amount outstanding by the maturity date, Oncocyte was not billed or charged for any payments for the PPP loan during its loan forgiveness application. The forgiven principal amount of $1,140,930 is recognized as gain on extinguishment of debt in the accompanying consolidated statements of operations.
On June 11, 2021, Oncocyte entered into an at-the-market sales agreement with BTIG, LLC as sales agent and/or principal (the “Agent”) pursuant to which Oncocyte may sell up to an aggregate of $50,000,000 of shares of Oncocyte common stock from time to time through the Agent (the “ATM Offering”).
Between July 1, 2021 and December 31, 2021, Oncocyte sold 1,108,650 shares of common stock at an average offering price of $5.63 per share, for gross proceeds of approximately $6.24 million through the ATM Offering. Oncocyte will need to raise additional capital to finance its operations, including the development and commercialization of its cancer diagnostic and other tests, until such time as it is able to generate sufficient revenues from the commercialization of one or more of its LDTs and other tests and performing Pharma Services to cover its operating expenses.
We expect that our operating expenses will increase as we build our marketing and sales force and add new equipment and personnel to our CLIA laboratories to commercialize DetermaRx™, followed by DetermaIO™ for clinical use and other diagnostic tests in our pipeline after development is completed, including DetermaCNITM. Although we intend to market our diagnostic tests in the United States through our own sales force, we are also beginning to make marketing arrangements with distributors in other countries. We may also explore a range of other commercialization options in order to enter overseas markets and to reduce our capital needs and expenditures, and the risks associated the timelines and uncertainty for attaining the Medicare reimbursement approvals that will be essential for the successful commercialization of additional cancer diagnostic tests. Those alternative arrangements could include marketing arrangements with other diagnostic companies through which we might receive a licensing fee and royalty on sales, or through which we might form a joint venture to market one or more tests and share in net revenues, in the United States or abroad.
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In addition to sales and marketing expenses we will incur expenses from leasing and improving our new office and laboratory facilities in Irvine California, from operating our CLIA laboratories in Nashville, Tennessee and our CLIA laboratory at our Irvine facility, and from leasing our facility in Brisbane, California.
We will need to continue to raise additional capital to finance our operations, including the development and commercialization of our diagnostic tests, and making payments that may become due under our obligations to Razor shareholders and Insight shareholders, until such time as we are able to generate sufficient revenues to cover our operating expenses. Delays in the development of DetermaIO™, or obtaining reimbursement coverage from Medicare for that diagnostic test and for the other diagnostic tests that we may develop or acquire, could prevent us from raising sufficient additional capital to finance the completion of development and commercial launch of those tests. Investors may be reluctant to provide us with capital until our tests are approved for reimbursement by Medicare or reimbursement by private healthcare insurers or healthcare providers, or until we begin generating significant amounts of revenue from performing those tests. The unavailability or inadequacy of financing or revenues to meet future capital needs could force us to modify, curtail, delay, or suspend some or all aspects of our planned operations. Sales of additional equity securities could result in the dilution of the interests of our shareholders. We cannot assure that adequate financing will be available on favorable terms, if at all.
Our ability to generate revenues from operating activities and the availability of financing may be adversely impacted by the COVID-19 pandemic which could continue to cause deferrals of cancer surgeries that might otherwise have resulted in the utilization of DetermaRx™, or could cause the deferral of clinical development of therapies that might otherwise have resulted in the utilization of DetermaIO™ or our Pharma Services. The commercial release of DetermaRx™ and our acquisition of the Insight Pharma Services business during the COVID-19 pandemic has rendered it more difficult for prospective investors to forecast the demand for our diagnostic testing and Pharma Services and to assess our opportunities for growth. Although the deployment of the recently developed vaccines may quell the impact of COVID-19, the pandemic could continue to depress national and international economies and disrupt capital markets, supply chains, and aspects of our operations for a period of time, all of which may render it more difficult for us to secure additional financing when needed. The extent to which the ongoing COVID-19 pandemic will ultimately impact our business, results of operations, financial condition, or cash flows is highly uncertain and difficult to predict because it will depend on many factors that are outside of our control, such as the duration, scope and severity of the pandemic, steps required or mandated by governments to mitigate the impact of the pandemic, and whether COVID-19 can be effectively prevented and contained by the new vaccines, and whether effective treatments may be developed. We do not yet know the extent to which COVID-19 will negatively impact our financial results or liquidity.
Cash used in operating activities
During the years ended December 31, 2021 and 2020, our total research and development expenses were $13.6 million and $9.8 million, respectively, our general and administrative expenses were $22.3 million and $16.8 million, respectively, and our sales and marketing expenses were $11.2 million and $6.5 million, respectively. We also incurred $7.5 million in cost of revenues, including $3.4 million amortization of intangible expenses, in the year ended 2021. Net loss for the years ended December 31, 2021 and 2020 amounted to $64.1 million and $30.0 million, respectively, and net cash used in operating activities amounted to $35.9 million and $26.0 million, respectively. Our cash used in operating activities during 2021 does not include the following noncash items: $27.3 million in loss from the change in fair value of contingent consideration; $9.3 million income tax benefit; $6.8 million in stock-based compensation; $4.3 million in depreciation and amortization expenses; $1.1 million gain on extinguishment of debt; $0.3 million in pro rata loss from our equity method investment in Razor; and $0.2 million in unrealized gain on marketable equity securities. Changes in operating assets and liabilities were approximately $0.1 million as an additional use of cash.
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Cash used in investing activities
During the year ended December 31, 2021, net cash used in investing activities was $14.0 million, primarily attributable to the acquisition of the remaining interests in Razor, net of cash acquired, of $6.6 million; $2.2 million paid for construction in progress and purchase of furniture and equipment; $0.6 million repayment of the Insight cash holdback; and $4.5 million for the acquisition of Chronix.
Cash provided by financing activities
During the year ended December 31, 2021, net cash provided by financing activities was $78.4 million, primarily attributable to $74.9 million of net cash proceeds from the sale of shares of common stock, including $12.3 million of net cash proceeds from at-the-market transactions, $2.6 million from exercises of warrants, and $2.6 million from exercises of stock options, offset by repayments of principal on loans payable and financing lease obligations of $1.5 million, and $0.2 million on common shares received and retired for employee taxes paid. See Note 12 to our consolidated financial statements included elsewhere in this Report.
Off-Balance Sheet Arrangements
As of December 31, 2021, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Under SEC rules and regulations, as a smaller reporting company, we are not required to provide the information required by this item.
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Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| Page | |
| Report of Independent Registered
Public Accounting Firm (PCAOB ID: |
66 |
| Report
of Independent Registered Public Accounting Firm (PCAOB ID: |
68 |
| Consolidated Balance Sheets | 69 |
| Consolidated Statements of Operations | 70 |
| Consolidated Statements of Comprehensive Loss | 71 |
| Consolidated Statements of Shareholders’ Equity | 72 |
| Consolidated Statements of Cash Flows | 73 |
| Notes to Consolidated Financial Statements | 74 |
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Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
Oncocyte Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of Oncocyte Corporation (the “Company”) as of December 31, 2021, the related consolidated statements of operations, comprehensive loss, shareholders’ equity, and cash flows for the year ended December 31, 2021, and the related consolidated notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2021, and the results of its operations and its cash flows for the year ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America.
The consolidated financial statements of the Company as of and for the year ended December 31, 2020 were audited by OUM & Co. LLP, who joined WithumSmith+Brown, PC on July 15, 2021, and rendered their opinion on such statements on March 19, 2021.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the Audit Committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements; and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Business Combination- Chronix BioMedical, Inc.
Description of the Matter
As described in Note 3 to the consolidated financial statements, the Company completed the acquisitions of Chronix BioMedical, Inc. (“Chronix”) on April 15, 2021. The acquisition was accounted for under the acquisition method of accounting for business combinations. Accordingly, the purchase price was allocated to the assets acquired and liabilities assumed based on their respective fair values.
Auditing the Company’s accounting for its acquisitions was complex due to the significant estimation uncertainty in the Company’s determination of the fair value of identified intangible assets of $46.8 million, which consists of in-process research and development technology (“IPR&D”). The significant estimation uncertainty was primarily due to the sensitivity of the respective fair values to underlying assumptions about the future performance of the acquired business. The Company used a multi period excess earnings model, a form of a discounted cash flow, to measure the IPR&D intangible assets. The significant assumptions used to estimate the value of the intangible assets included discount rates, contributory asset charges, and certain assumptions that form the basis of the forecasted results, including revenue growth rates and expected net operating income margins. These significant assumptions are forward looking and could be affected by future economic and market conditions.
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How We Addressed the Matter in Our Audit
For the Company’s acquisition, we read the purchase agreement, evaluated the significant assumptions and methods used in developing the fair value estimates, and tested the recognition of (1) the tangible assets acquired and liabilities assumed at fair value; (2) the identifiable intangible assets acquired at fair value; (3) the fair value of contingent consideration (as discussed below) and (4) goodwill measured as a residual.
To test the estimated fair value of the IPR&D intangible asset, we performed audit procedures that included, among others, evaluating the Company’s selection of the valuation methodology, evaluating the significant assumptions used by the Company, and evaluating the completeness and accuracy of the underlying data supporting the significant assumptions and estimates.
This includes comparing the significant assumptions to current industry, market and economic trends, to the assumptions used to value similar assets in other acquisitions, and to other guidelines used by companies within the same industry. We involved our valuation professionals to assist in our evaluation of the methodology used by the Company and significant assumptions included in the fair value estimates.
Valuation of Contingent Consideration
Description of the Matter
As described in Note 3 to the consolidated financial statements, the Company recognized contingent consideration liabilities at the estimated fair value on the acquisition date in connection with applying the acquisition method of accounting for business combinations. Subsequent changes to the fair value of the contingent consideration liabilities were recorded within the consolidated statement of earnings in the period of change. At December 31, 2021, the Company had $7.1 million and $69.6 million in contingent consideration liabilities, for the Company’s DetermaIO™ and TheraSure™ tests, respectively, which were associated with business combinations. These amounts represented a ‘Level 3’ fair value measurement in the fair value hierarchy due to the significant unobservable inputs used in determining the fair value and the use of management judgment about the assumptions market participants would use in pricing the liabilities.
Auditing the valuation of contingent consideration liabilities, consisting of milestone and royalty consideration, was complex and required significant auditor judgment due to the use of a scenario analysis valuation method and the high degree of subjectivity in evaluating certain assumptions required to estimate the fair value of the milestone contingent consideration and royalty contingent consideration. In particular, the royalty contingent consideration fair value measurement is based on future revenues, revenues for current services, and discount rates. The milestone contingent consideration fair value measurement is based on nonfinancial, binary events, therefore is reassessed as changes in circumstances and conditions occur. Management utilized its expertise within the industry, including commercial dynamics, trends and utilization, as well as knowledge of clinical development and regulatory approval processes to determine certain of these assumptions.
How We Addressed the Matter in Our Audit
To test the estimated fair value of contingent consideration liabilities, our audit procedures included, among others, inspecting the terms of the executed agreement, assessing the scenario analysis valuation method used and testing the key contractual inputs and significant assumptions discussed above. We evaluated the assumptions and judgments considering observable industry and economic trends and standards, external data sources and regulatory factors. Estimated amounts of future sales were evaluated for reasonableness in relation to internal and external analyses, clinical development progress and timelines, probability of success benchmarks, and regulatory notices. Our procedures included evaluating the data sources used by management in determining its assumptions and, where necessary, included an evaluation of available information that either corroborated or contradicted management’s conclusions. We involved our valuation specialists to assess the Company’s scenario analysis valuation and to perform corroborative fair value calculations.
/s/ Withum Smith+Brown, PC
We have served as the Company’s auditor since 2015.
March 11, 2022
PCAOB ID Number 100
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Stockholders and Board of Directors
Oncocyte Corporation
Irvine, California
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of Oncocyte Corporation (the “Company”) as of December 31, 2020, the related consolidated statements of operations, comprehensive loss, shareholders’ equity, and cash flows for the year ended December 31, 2020, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2020, and the results of its operations and its cash flows for the year ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion.
We served as the Company’s auditor since 2015.
March 19, 2021
PCAOB ID Number 252
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ONCOCYTE CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands)
| 2021 | 2020 | |||||||
| December 31, | ||||||||
| 2021 | 2020 | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable | ||||||||
| Marketable equity securities | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total current assets | ||||||||
| NONCURRENT ASSETS | ||||||||
| Right-of-use and financing lease assets, net | ||||||||
| Machinery and equipment, net, and construction in progress | ||||||||
| Equity method investment in Razor | - | |||||||
| Goodwill | ||||||||
| Intangible assets, net | ||||||||
| Restricted cash | ||||||||
| Other noncurrent assets | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
| CURRENT LIABILITIES | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued compensation | ||||||||
| Accrued expenses and other current liabilities | ||||||||
| Accrued severance from acquisition, current | - | |||||||
| Accrued liabilities from acquisition, current | - | |||||||
| Loans payable, net of deferred financing costs, current | ||||||||
| Right-of-use and financing lease liabilities, current | ||||||||
| Total current liabilities | ||||||||
| NONCURRENT LIABILITIES | ||||||||
| Loans payable, net of deferred financing costs, noncurrent | - | |||||||
| Right-of-use and financing lease liabilities, noncurrent | ||||||||
| Contingent consideration liabilities, noncurrent | ||||||||
| TOTAL LIABILITIES | ||||||||
| Commitments and contingencies (Note 10) | - | |||||||
| SHAREHOLDERS’ EQUITY | ||||||||
| Preferred stock, | - | - | ||||||
| Common stock, | ||||||||
| Accumulated other comprehensive loss | - | |||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total shareholders’ equity | ||||||||
| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | $ | $ | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
| 69 |
ONCOCYTE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
| 2021 | 2020 | |||||||
| December 31, | ||||||||
| 2021 | 2020 | |||||||
| Net revenue | $ | $ | ||||||
| Cost of revenues | ||||||||
| Cost of revenues – amortization of acquired intangibles | - | |||||||
| Gross profit | ( | ) | ||||||
| Operating expenses: | ||||||||
| Research and development | ||||||||
| Sales and marketing | ||||||||
| General and administrative | ||||||||
| Change in fair value of contingent consideration | ( | ) | ||||||
| Total operating expenses | ||||||||
| Loss from operations | ( | ) | ( | ) | ||||
| OTHER INCOME (EXPENSES), NET | ||||||||
| Interest expense, net | ( | ) | ( | ) | ||||
| Unrealized gain (loss) on marketable equity securities | ||||||||
| Pro rata loss from equity method investment in Razor | ( | ) | ( | ) | ||||
| Gain on extinguishment of debt (PPP loan) | - | |||||||
| Other income (expense), net | ( | ) | ||||||
| Total other income (expenses), net | ( | ) | ||||||
| LOSS BEFORE INCOME TAXES | ( | ) | ( | ) | ||||
| Income tax benefit | ||||||||
| NET LOSS | $ | ( | ) | $ | ( | ) | ||
| Net loss per share: basic and diluted | $ | ( | ) | $ | ( | ) | ||
| Weighted average shares outstanding: basic and diluted | ||||||||
The accompanying notes are an integral part of these consolidated financial statements.
| 70 |
ONCOCYTE CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
| 2021 | 2020 | |||||||
| Year Ended December 31, | ||||||||
| 2021 | 2020 | |||||||
| NET LOSS | $ | ( | ) | $ | ( | ) | ||
| Foreign currency translation adjustments | - | |||||||
| COMPREHENSIVE LOSS | $ | ( | ) | $ | ( | ) | ||
The accompanying notes are an integral part of these consolidated financial statements.
| 71 |
ONCOCYTE CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(In thousands)
| Shares | Amount | Comprehensive | Deficit | Equity | ||||||||||||||||
| Common Stock | Accumulated Other Comprehensive | Accumulated | Total Stockholders’ | |||||||||||||||||
| Shares | Amount | Income | Deficit | Equity | ||||||||||||||||
| Balance at December 31, 2019 | $ | $ | - | $ | ( | ) | $ | |||||||||||||
| Net Loss | - | - | - | ( | ) | ( | ) | |||||||||||||
| Stock-based compensation | - | - | - | |||||||||||||||||
| Sale of common shares | - | - | ||||||||||||||||||
| Financing costs paid to issue common shares | - | ( | ) | - | - | ( | ) | |||||||||||||
| Sale of common shares under at-the-market transactions | - | - | ||||||||||||||||||
| Financing costs for at-the-market transactions | - | ( | ) | - | - | ( | ) | |||||||||||||
| Exercise of stock options | - | - | ||||||||||||||||||
| Warrants exercised | ||||||||||||||||||||
| Warrants exercised, shares | ||||||||||||||||||||
| Shares issued upon vesting of RSU, net of shares retired to pay employees’ taxes | ( | ) | - | - | ( | ) | ||||||||||||||
| Issuance of common stock in lieu of cash for payment of board fees and deferred salaries | - | - | ||||||||||||||||||
| Issuance of common stock as partial consideration for Insight Genetics, Inc. acquisition | - | - | ||||||||||||||||||
| Issuance of common stock as consideration for Razor Genomics acquisition | ||||||||||||||||||||
| Issuance of common stock as consideration for Razor Genomics acquisition, shares | ||||||||||||||||||||
| Issuance of common stock as consideration for Chronix Biomedical acquisition | ||||||||||||||||||||
| Issuance of common stock as consideration for Chronix Biomedical acquisition, shares | ||||||||||||||||||||
| Foreign currency translation adjustment | ||||||||||||||||||||
| Balance at December 31, 2020 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Balance | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Net Loss | - | - | - | ( | ) | ( | ) | |||||||||||||
| Foreign currency translation adjustment | - | - | - | |||||||||||||||||
| Stock-based compensation | - | - | - | |||||||||||||||||
| Sale of common shares, including at-the-market transactions | - | - | ||||||||||||||||||
| Financing costs paid to issue common shares, including at-the-market transactions | - | ( | ) | - | - | ( | ) | |||||||||||||
| Stock options exercised | - | - | ||||||||||||||||||
| Warrants exercised | - | - | ||||||||||||||||||
| Shares issued upon vesting of RSU, net of shares retired to pay employees’ taxes | ( | ) | - | ( | ) | |||||||||||||||
| Issuance of common stock as consideration for Razor Genomics acquisition | - | - | ||||||||||||||||||
| Issuance of common stock as consideration for Chronix Biomedical acquisition | - | - | ||||||||||||||||||
| Balance at December 31, 2021 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Balance | $ | $ | $ | ( | ) | $ | ||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
| 72 |
ONCOCYTE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
| 2021 | 2020 | |||||||
| Year Ended | ||||||||
| December 31, | ||||||||
| 2021 | 2020 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation expense | ||||||||
| Amortization of intangible assets | ||||||||
| Impairment charge for long-lived assets | - | |||||||
| Pro rata loss from equity method investment in Razor | ||||||||
| Stock-based compensation | ||||||||
| Unrealized gain on marketable equity securities | ( | ) | ( | ) | ||||
| Amortization of debt issuance costs | ||||||||
| Change in fair value of contingent consideration | ( | ) | ||||||
| Deferred income tax benefit | ( | ) | ( | ) | ||||
| Gain on extinguishment of debt (PPP loan) | ( | ) | - | |||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ( | ) | ||||
| Lease liabilities | ||||||||
| Prepaid expenses and other assets | ( | ) | ||||||
| Accounts payable and accrued liabilities | ( | ) | ||||||
| Accrued severance from Chronix Biomedical acquisition | - | |||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Acquisition of Insight Genetics, net of cash acquired | ( | ) | ( | ) | ||||
| Acquisition of Razor Genomics asset, net of cash acquired | ( | ) | - | |||||
| Acquisition of Chronix Biomedical, net of cash acquired | ( | ) | ( | ) | ||||
| Equity method investment in Razor | - | ( | ) | |||||
| Construction in progress and purchases of furniture and equipment | ( | ) | ( | ) | ||||
| Security deposit and other | - | ( | ) | |||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Proceeds from exercise of stock options | ||||||||
| Proceeds from sale of common shares | ||||||||
| Financing costs to issue common shares | ( | ) | ( | ) | ||||
| Proceeds from sale of common shares under at-the-market transactions | ||||||||
| Financing costs for at-the-market sales | ( | ) | ( | ) | ||||
| Proceeds from exercise of warrants | - | |||||||
| Common shares received and retired for employee taxes paid | ( | ) | ( | ) | ||||
| Repayment of loan payable | ( | ) | ( | ) | ||||
| Repayment of financing lease obligations | ( | ) | ( | ) | ||||
| Proceeds from PPP loan | - | |||||||
| Net cash provided by financing activities | ||||||||
| NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH | ( | ) | ||||||
| CASH, CASH EQUIVALENTS AND RESTRICTED CASH, BEGINNING | ||||||||
| CASH, CASH EQUIVALENTS AND RESTRICTED CASH, ENDING | $ | $ | ||||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION | ||||||||
| Cash paid for interest | $ | $ | ||||||
| SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING AND INVESTING ACTIVITIES | ||||||||
| Common stock issued for acquisition of Razor Genomics assets | $ | $ | ||||||
| Deferred tax liability generated from the acquisition of Razor Genomics assets | - | |||||||
| Common stock issued for acquisition of Insight Genetics | - | |||||||
| Common stock issued for acquisition of Chronix Biomedical | - | |||||||
| Deferred tax liability generated from the acquisition of Chronix | - | |||||||
| Initial fair value of contingent consideration at acquisition date | ||||||||
| Assumed liability from Chronix Acquisition | - | |||||||
| Holdback liability | - | |||||||
| Construction in progress, machinery and equipment purchases included in accounts payable, accrued liabilities and landlord liability | ||||||||
| Accounts receivable from agent for at-the-market sales of common stock, net of financing costs | - | |||||||
| Issuance of common stock in lieu of cash for payment of board fees and deferred salaries | - | |||||||
| See Note 10 for additional disclosures around leases | ||||||||
The accompanying notes are an integral part of these consolidated financial statements.
| 73 |
ONCOCYTE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization, Description of the Business and Liquidity
Oncocyte Corporation (“Oncocyte”), incorporated in 2009 in the state of California, is a molecular diagnostics company focused on developing and commercializing proprietary laboratory-developed tests (“LDTs”) to serve unmet medical needs across the cancer care continuum. Oncocyte’s mission is to provide actionable information to physicians and patients at critical decision points to optimize diagnosis and treatment decisions, improve patient outcomes, and reduce overall cost of care. Oncocyte has prioritized lung cancer as its first indication. Lung cancer remains the leading cause of cancer death in the United States, despite the availability of molecular testing and novel therapies to treat patients.
Oncocyte’s
first product for commercial release is a proprietary treatment stratification test called DetermaRx™ that identifies which patients
with early-stage non-small cell lung cancer may benefit from chemotherapy, resulting in a significantly higher, five-year survival rate.
Beginning in September 2019 through February 23, 2021, Oncocyte held a
Oncocyte completed its acquisition of Insight Genetics, Inc. (“Insight”) on January 31, 2020 (the “Insight Merger Date”) through a merger with a newly incorporated wholly owned subsidiary of Oncocyte (the “Insight Merger”) under the terms of an Agreement and Plan of Merger (the “Insight Merger Agreement”). Prior to the Insight Merger, Insight was a privately held company specializing in the discovery and development of the multi-gene molecular, laboratory-developed diagnostic tests that Oncocyte has branded as DetermaIO™. DetermaIO™ is a proprietary gene expression assay with promising data supporting its potential to help identify patients likely to respond to checkpoint inhibitor drugs. Insight has a CLIA-certified diagnostic laboratory with the capacity to support clinical trials or assay design on certain commercially available analytic platforms that may be used to develop additional diagnostic tests. Insight also performs Pharma Services in its CLIA-certified laboratory for pharmaceutical and biotechnology companies, including testing for biomarker discovery, assay design and development, clinical trial support, and a broad spectrum of biomarker tests (“Pharma Services”). The Insight Merger has been accounted for using the acquisition method of accounting in accordance with ASC 805, which requires, among other things, that the assets and liabilities assumed be recognized at their fair values as of the acquisition date. See Note 3 for a full discussion of the Insight Merger.
On April 15, 2021 (the “Chronix Merger Date”), Oncocyte completed its acquisition of Chronix Biomedical, Inc. (“Chronix”) pursuant to an Agreement and Plan of Merger dated February 2, 2021, amended February 23, 2021, and amended and restated as of April 15, 2021 (as amended and restated, the “Chronix Merger Agreement”), by and among Oncocyte, CNI Monitor Sub, Inc., a Delaware corporation and wholly-owned subsidiary of Oncocyte (“Merger Sub”), Chronix, the stockholders party to the Chronix Merger Agreement and a party named as equity holder representative. Pursuant to the Chronix Merger Agreement, Merger Sub merged with and into Chronix, with Chronix surviving as a wholly owned subsidiary of Oncocyte (the “Chronix Merger”). Prior to the Chronix Merger, Chronix was a privately held molecular diagnostics company, developing blood tests for use in cancer treatment and organ transplantation. Through the Chronix Merger, Oncocyte has added to its LDT development pipeline the TheraSure™-CNI Monitor, a patented, blood-based test for immunotherapy monitoring which Oncocyte expects to market as DetermaCNITM in the United States, and TheraSure™ Transplant Monitor, a solid organ transplantation monitoring test. See Note 3 for additional information about the Chronix Merger.
Other tests in the development pipeline include DetermaTx™, a test intended to complement DetermaIO™ by assessing the mutational status of a tumor to help identify the appropriate targeted therapy. Oncocyte also plans to initiate the development of DetermaMx™ as a blood-based test to monitor cancer patients for recurrence of their disease.
| 74 |
ONCOCYTE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Liquidity
Oncocyte
has incurred operating losses and negative cash flows since inception and had an accumulated deficit of $
As
of December 31, 2021, Oncocyte had $
On
March 20, 2020, Oncocyte entered into an Equity Distribution Agreement with Piper Sandler & Co as “Sales Agent” (“ATM
Agreement”) which Oncocyte may utilize in the future to raise up to $
On
April 23, 2020, Oncocyte obtained a U.S. Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”)
loan in the principal amount of $
On
June 11, 2021, Oncocyte entered into an at-the-market sales agreement with BTIG, LLC as sales agent and/or principal (the “Agent”)
pursuant to which Oncocyte may sell up to an aggregate of $
Between
July 1, 2021 and December 31, 2021, Oncocyte sold shares of common stock at an average offering price of $ per share, for
gross proceeds of approximately $
Presently, Oncocyte is devoting substantially all of its efforts on initial commercialization efforts for DetermaRx™ and completing clinical development and planning commercialization of DetermaIO™, although DetermaIO™ is currently available for biopharma diagnostic development and research use only as a companion test in immunotherapy drug development to select patients for clinical trials; and continuing development and planning commercialization of DetermaTxTM. Oncocyte has also begun to transfer the technology related to TheraSure™-CNI Monitor to its laboratory in Nashville, Tennessee. While Oncocyte plans to primarily market its LDTs in the United States through its own sales force, it is also beginning to make marketing arrangements with distributors in other countries. In order to reduce capital needs and to expedite the commercialization of any new LDTs that may become available for clinical use, Oncocyte may also pursue marketing arrangements with other diagnostic companies through which Oncocyte might receive licensing fees and royalty on sales, or through which it might form a joint venture to market its tests and share in net revenues, in the United States or abroad.
| 75 |
ONCOCYTE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In addition to general economic and capital market trends and conditions, Oncocyte’s ability to raise sufficient additional capital to finance its operations from time to time will depend on a number of factors specific to Oncocyte’s operations such as operating revenues and expenses, progress in development of, or in obtaining reimbursement coverage from Medicare for, DetermaIO™ and other future diagnostic tests that Oncocyte may develop or acquire.
The availability of financing and Oncocyte’s ability to generate revenues from operating activities may be adversely impacted by the ongoing COVID-19 pandemic which could continue to cause deferrals of cancer surgeries that might otherwise have resulted in the utilization of DetermaRx™ and deferrals of drug development clinical trials that might have utilized Oncocyte’s Pharma Services. The COVID-19 pandemic also could continue to depress national and international economies and disrupt capital markets, supply chains, and aspects of Oncocyte’s operations. The extent to which the ongoing COVID-19 pandemic will ultimately impact Oncocyte’s business, results of operations, financial condition, or cash flows is highly uncertain and difficult to predict because it will depend on many factors that are outside Oncocyte’s control.
The unavailability or inadequacy of financing or revenues to meet future capital needs could force Oncocyte to modify, curtail, delay, or suspend some or all aspects of planned operations. Sales of additional equity securities could result in the dilution of the interests of its shareholders. Oncocyte cannot assure that adequate financing will be available on favorable terms, if at all.
2. Basis of Presentation and Summary of Significant Accounting Policies
Basis of presentation
The consolidated financial statements include the accounts Oncocyte and our wholly-owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation.
Principles of consolidation
On January 31, 2020, with the consummation of the Insight Merger, Insight became a wholly owned subsidiary of Oncocyte, and on that date Oncocyte began consolidating Insight’s operations and results with Oncocyte’s operations and results (see Note 3). On February 24, 2021, with the acquisition of the remaining equity interests in Razor, Razor became a wholly owned subsidiary of Oncocyte, and on that date Oncocyte began consolidating Razor’s results with Oncocyte’s operations and results (see Note 3). On April 15, 2021, with the acquisition of Chronix, Chronix became a wholly owned subsidiary of Oncocyte, and on that date Oncocyte began consolidating Chronix’s operations and results with Oncocyte’s operations and results (see Note 3).
| 76 |
ONCOCYTE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The accompanying consolidated financial statements, in the opinion of management, include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of Oncocyte’s financial condition and results of operations. The consolidated results of operations are not necessarily indicative of the results to be expected for any other interim period or for the entire year. All material intercompany accounts and transactions have been eliminated in consolidation.
Use of estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and contingent assets and liabilities, at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, management evaluates estimates which are subject to significant judgment, including, but not limited to, valuation methods used, assumptions requiring the use of judgment to prepare financial projections, timing of potential commercialization of acquired in-process intangible assets, applicable discount rates, probabilities of the likelihood of multiple outcomes of certain events related to contingent consideration, comparable companies or transactions, determination of fair value of the assets acquired and liabilities assumed including those relating to contingent consideration, assumptions related to the going concern assessments, allocation of direct and indirect expenses, useful lives associated with long-lived intangible assets, key assumptions in operating and financing leases including incremental borrowing rates, loss contingencies, valuation allowances related to deferred income taxes, and assumptions used to value debt and stock-based awards and other equity instruments. Actual results may differ materially from those estimates.
Similarly, Oncocyte assessed certain accounting matters that generally require consideration of forecasted financial information. The accounting matters assessed included, but were not limited to, Oncocyte’s equity investments, the carrying value of goodwill, acquired in-process intangible assets and other long-lived assets. Those assessments as well as other estimates referenced above were made in the context of information reasonably available to Oncocyte. While Oncocyte considered known or expected impacts of COVID-19 in making its assessments and estimates, the future impacts of COVID-19 are not presently determinable and could cause actual results to differ materially from Oncocyte’s estimates and assessments. Oncocyte’s future analysis or forecast of COVID-19 impacts could lead to changes in Oncocyte’s future estimates and assessments which could result in material impacts to Oncocyte’s consolidated financial statements in future reporting periods.
Going concern assessment
In accordance with the Financial Accounting Standards Board’s (“FASB”) standard on going concern, Accounting Standard Update, or ASU No. 2014-15, Oncocyte assesses going concern uncertainty in its consolidated financial statements to determine if it has sufficient cash, cash equivalents and working capital on hand, including marketable equity securities, and any available borrowings on loans, to operate for a period of at least one year from the date the consolidated financial statements are issued, which is referred to as the “look-forward period” as defined by ASU No. 2014-15. As part of this assessment, based on conditions that are known and reasonably knowable to Oncocyte, it will consider various scenarios, forecasts, projections, estimates and will make certain key assumptions, including the timing and nature of projected cash expenditures or programs, and its ability to delay or curtail expenditures or programs, if necessary, among other factors. Based on this assessment, as necessary or applicable, Oncocyte makes certain assumptions around implementing curtailments or delays in the nature and timing of programs and expenditures to the extent Oncocyte deems probable those implementations can be achieved and it has the proper authority to execute them within the look-forward period in accordance with ASU No. 2014-15.
| 77 |
ONCOCYTE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Business combinations and fair value measurements
Oncocyte accounts for business combinations in accordance with ASC 805, which requires the purchase consideration transferred to be measured at fair value on the acquisition date in accordance with ASC 820, Fair Value Measurement. ASC 820 establishes a single authoritative definition of fair value, sets out a framework for measuring fair value and expands on required disclosures about fair value measurement. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. ASC 820 describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value, which are the following:
| ● | Level 1 – Quoted prices in active markets for identical assets and liabilities. | |
| ● | Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted market prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. | |
| ● | Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. |
When a part of the purchase consideration consists of shares of Oncocyte common stock, Oncocyte calculates the purchase price attributable to those shares, a Level 1 security, by determining the fair value of those shares quoted on the NYSE American as of the acquisition date. Oncocyte recognizes estimated fair values of the tangible assets and identifiable intangible assets acquired, including IPR&D, and liabilities assumed, including any contingent consideration, as of the acquisition date. Goodwill is recognized as any amount of the fair value of the tangible and identifiable intangible assets acquired and liabilities assumed in excess of the consideration transferred. ASC 805 precludes the recognition of an assembled workforce as an asset, effectively subsuming any assembled workforce value into goodwill.
In determining fair value, Oncocyte utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible, and also considers counterparty credit risk in its assessment of fair value. For the periods presented, Oncocyte has no financial assets or liabilities recorded at fair value on a recurring basis, except for cash and cash equivalents consisting of money market funds and marketable equity securities of Lineage and AgeX common stock held by Oncocyte described below. These assets are measured at fair value using the period-end quoted market prices as a Level 1 input. Oncocyte also has certain contingent consideration liabilities which are carried at fair value based on Level 3 inputs (see Note 3).
The carrying amounts of cash equivalents, prepaid expenses and other current assets, amounts due to Lineage and other affiliates, accounts payable, accrued expenses and other current liabilities approximate fair values because of the short-term nature of these items.
The carrying amount of the Loan Payable to Silicon Valley Bank approximates fair value because the loan bears interest at a floating market rate, and the carrying amount of the PPP loan approximates fair value because of the SBA guarantee on the terms of the loan and the relatively recent funding date of the loan (see Note 12).
Cash and cash equivalents
Cash
equivalents typically consist of money market fund investments for capital preservation, with maturities of three months or less when
purchased. At December 31, 2021 and 2020, Oncocyte’s cash and cash equivalents balances totaled $
Financial instruments that potentially subject Oncocyte to credit risk consist principally of cash and cash equivalents. Oncocyte maintains cash and cash equivalent balances at financial institutions in excess of amounts insured by United States government agencies. Oncocyte places its cash and cash equivalents with high credit quality financial institutions.
Accounts receivable and allowance for doubtful accounts
Accounts receivable are stated at the amount we expect to collect. Our evaluation of the collectability of customer accounts receivable is based on various factors, including the length of time the receivables are past due, our history of bad debts and general industry conditions. Accounts that are deemed uncollectible are written off against the allowance for doubtful accounts. As of December 31, 2021 and December 31, 2020, Oncocyte has not recorded any losses or allowance for doubtful accounts on its account receivables.
| 78 |
ONCOCYTE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Accounting for Lineage and AgeX shares of common stock
Oncocyte accounts for the Lineage and AgeX shares of common it holds as marketable equity securities in accordance with ASC 320-10-25, Investments – Debt and Equity Securities, as amended by Accounting Standards Update (“ASU”) 2016-01, Financial Instruments–Overall: Recognition and Measurement of Financial Assets and Financial Liabilities, as the shares have a readily determinable fair value quoted on the NYSE American and are held principally to meet future working capital purposes, as necessary. The securities are measured at fair value and reported as current assets on the consolidated balance sheets based on the closing trading price of the security as of the date being presented.
As
of December 31, 2021, Oncocyte held and shares of common stock of Lineage and AgeX, respectively, as marketable equity
securities with a combined fair market value of $
Prepaid expenses and other current assets
As of December 31, 2021 and 2020, prepaid expenses and other current assets were comprised of the following (in thousands):
Schedule of Prepaid Expenses and Other Current Assets
| 2021 | 2020 | |||||||
| Prepaid vendors, deposits, and service agreements | ||||||||
| Supplies inventory | - | |||||||
| Prepaid insurance | ||||||||
| Note receivable | - | |||||||
| Other | ||||||||
| Total prepaid expenses and other current assets | ||||||||
Restricted cash
Oncocyte classifies cash that has contractual or legal restrictions imposed by third parties as restricted cash, which is restricted as to withdrawal or use except for the specified purpose under a contract. Oncocyte includes the restricted cash consistent with the nature of the underlying contract and classifies it as part of current assets if the restricted cash will be released in the next twelve months from the balance sheet date, or in deposits and other noncurrent assets if it will be restricted for longer than twelve months from the balance sheet date.
Oncocyte adopted ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, which requires that the statement of cash flows explain the change during the period in the total of cash, cash equivalents and restricted cash, and that restricted cash be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statements of cash flows.
The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the balance sheet dates that comprise the total of the same such amounts shown in the statements of cash flows in accordance with ASU 2016-18 (in thousands):
Schedule of Reconciliation of Cash, Cash Equivalents, and Restricted Cash
| 2021 | 2020 | |||||||
| December 31, | ||||||||
| 2021 | 2020 | |||||||
| Cash and cash equivalents | $ | $ | ||||||
| Restricted cash included in deposits and other noncurrent assets (see Note 10) | ||||||||
| Total cash, cash equivalents, and restricted cash as shown in the statements of cash flows | $ | $ | ||||||
| 79 |
ONCOCYTE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Goodwill and intangible assets
In accordance with ASC 350, Intangibles – Goodwill and Other, IPR&D projects acquired in a business combination that are not complete as of the acquisition date are capitalized and accounted for as indefinite-lived intangible assets until completion or abandonment of the related research and development efforts. Upon successful completion of the project, the capitalized amount is amortized over its estimated useful life. If a project is abandoned, all remaining capitalized amounts are written off immediately. Oncocyte considers various factors and risks for potential impairment of IPR&D assets, including the current legal and regulatory environment and the competitive landscape. Adverse clinical trial results, significant delays or inability to obtain local determination coverage (“LCD”) from the Centers for Medicare and Medicaid Services (“CMS”) for Medicare reimbursement for a diagnostic test, the inability to bring a diagnostic test to market and the introduction or advancement of competitors’ diagnostic tests could result in partial or full impairment of the related intangible assets. Consequently, the eventual realized value of the IPR&D project may vary from its fair value at the date of acquisition, and IPR&D impairment charges may occur in future periods. During the period between completion or abandonment, the IPR&D assets will not be amortized but will be tested for impairment on an annual basis and between annual tests if Oncocyte becomes aware of any events occurring or changes in circumstances that would indicate a reduction in the fair value of the IPR&D projects below their respective carrying amounts (see Notes 3 and 4).
Goodwill represents the excess of the purchase price over the fair value of net identifiable assets and liabilities. Goodwill, similar to IPR&D, is not amortized but is tested for impairment at least annually, or if circumstances indicate its value may no longer be recoverable. Qualitative factors considered in this assessment include industry and market conditions, overall financial performance, and other relevant events and factors affecting Oncocyte’s business. Based on the qualitative assessment, if it is determined that the fair value of goodwill is more likely than not to be less than its carrying amount, the fair value of a reporting unit will be calculated and compared with its carrying amount and an impairment charge will be recognized for the amount that the carrying value exceeds the fair value. Oncocyte continues to operate in one segment and considered to be the sole reporting unit and, therefore, goodwill is tested for impairment at the enterprise level.
Oncocyte
does not have intangible assets with indefinite useful lives other than goodwill and the acquired IPR&D discussed in Notes 3 and
4. As of December 31, 2021, there has been
Contingent consideration liabilities
Certain of Oncocyte’s asset and business acquisitions involve the potential for future payment of consideration to third-parties and former selling shareholders in amounts determined as a percentage of future net revenues generated, or upon attainment of revenue milestones, from Pharma Services or diagnostic tests, as applicable, or annual minimum royalties to certain licensors, as provided in the applicable agreements. The fair value of such liabilities is determined using unobservable inputs. These inputs include the estimated amount and timing of projected cash flows and the risk-adjusted discount rate used to present value the cash flows. These obligations are referred to as contingent consideration.
ASC 805 requires that contingent consideration be estimated and recorded at fair value as of the acquisition date as part of the total consideration transferred. Contingent consideration is an obligation of the acquirer to transfer additional assets or equity interests to the selling shareholders in the future if certain future events occur or conditions are met, such as the attainment of product development milestones. Contingent consideration also includes additional future payments to selling shareholders based on achievement of components of earnings, such as “earn-out” provisions or percentage of future revenues, including royalties paid to the selling shareholders based on a percentage of revenues generated from DetermaIO™ and Insight Pharma Services over their respective useful life.
The fair value of contingent consideration after the acquisition date is reassessed by Oncocyte as changes in circumstances and conditions occur, with the subsequent change in fair value recorded in the consolidated statements of operations. Changes in key assumptions can materially affect the estimated fair value of contingent consideration liabilities and, accordingly, the resulting gain or loss that Oncocyte records in its consolidated financial statements. See Note 3 for a full discussion of these liabilities.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Investments in capital stock of privately held companies
Oncocyte evaluates whether investments held in common stock of other companies require consolidation of the company under, first, the variable interest entity (“VIE”) model, and then under the voting interest model in accordance with accounting guidance for consolidations under Accounting Standards Codification (“ASC”) 810-10. If consolidation of the entity is not required under either the VIE model or the voting interest model, Oncocyte determines whether the equity method of accounting should be applied in accordance with ASC 323, Investments – Equity Method and Joint Ventures. The equity method applies to investments in common stock or in-substance common stock if Oncocyte exercises significant influence over, but does not control, the entity, where significant influence is typically represented by ownership of 20% or more, but less than majority ownership, of the voting interests of a company.
Oncocyte initially records equity method investments at fair value on the date of the acquisition with subsequent adjustments to the investment balance based on Oncocyte’s share of earnings or losses from the investment. The equity method investment balance is shown in noncurrent assets on the consolidated balance sheets.
Oncocyte
reviews investments accounted for under the equity method for impairment whenever events or changes in circumstances indicate that the
carrying amount of the investment may not be fully recoverable. If a determination is made that an “other-than-temporary”
impairment exists, Oncocyte writes down its investment to fair value. On September 30, 2019, Oncocyte acquired a
On
February 24, 2021, Oncocyte acquired the remaining
Leases
Oncocyte accounts for leases in accordance with ASC 842, Leases. Oncocyte determines if an arrangement is a lease at inception. Leases are classified as either financing or operating, with classification affecting the pattern of expense recognition in the consolidated statements of operations. Under the available practical expedients for the adoption of ASC 842, Oncocyte accounts for the lease and non-lease components as a single lease component. Oncocyte recognizes right-of-use (“ROU”) assets and lease liabilities for leases with terms greater than twelve months in the consolidated balance sheet. ROU assets represent the right to use an underlying asset during the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most leases do not provide an implicit rate, Oncocyte uses an incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. Oncocyte uses the implicit rate when it is readily determinable. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. Lease terms may include options to extend or terminate the lease when it is reasonably certain that Oncocyte will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term. Operating leases are included as right-of-use assets in machinery and equipment, and ROU lease liabilities, current and long-term, in the consolidated balance sheets. Financing leases are included in machinery and equipment, and in financing lease liabilities, current and long-term, in the consolidated balance sheets. Oncocyte discloses the amortization of our ROU assets and operating lease payments as a net amount, “Amortization of right-of-use assets and liabilities”, on the consolidated statements of cash flows.
On January 1, 2019, the adoption date of ASC 842, and based on the available practical expedients under the standard, Oncocyte did not reassess any expired or existing contracts, reassess the lease classification for any expired or existing leases and reassess initial direct costs for exiting leases. Oncocyte also elected not to capitalize leases that have terms of twelve months or less.
The adoption of ASC 842 did not have a material impact to Oncocyte’s consolidated financial statements because Oncocyte did not have any significant operating leases at the time of adoption. During the years ended December 31, 2021 and 2020, Oncocyte entered into various operating leases and an embedded operating lease in accordance with ASC 842 discussed in Note 10. Oncocyte’s accounting for financing leases (previously referred to as “capital leases”) remained substantially unchanged.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Machinery and equipment, construction in progress
Machinery
and equipment are stated at cost, less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated
useful lives of the assets, generally over a period of
Construction in progress, comprised primarily of leasehold improvements under construction, is not depreciated until the underlying asset is placed into service.
Long-lived intangible assets
Long-lived
intangible assets, consisting of acquired Razor asset and customer relationships, are stated at acquired cost, less accumulated
amortization. Amortization expense is computed using the straight-line method over the estimated useful life of
Impairment of long-lived assets
Oncocyte assesses the impairment of long-lived assets, which consist primarily of right-of-use assets for operating leases, customer relationships and machinery and equipment, whenever events or changes in circumstances indicate that such assets might be impaired and the carrying value may not be recoverable. If events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable and the expected undiscounted future cash flows attributable to the asset are less than the carrying amount of the asset, an impairment loss equal to the excess of the asset’s carrying value over its fair value is recorded.
As
part of Oncocyte’s impairment assessment of its long-lived assets, Oncocyte determined that certain assets, mainly comprised of
machinery and equipment and related prepaid service agreements used in the development of DetermaDx™ were impaired as of June 30,
2020, because Oncocyte determined to discontinue the development of that diagnostic test. Accordingly, Oncocyte recorded a noncash charge
of $
Accounting for warrants
Oncocyte determines the accounting classification of warrants it issues, as either liability or equity classified, by first assessing whether the warrants meet liability classification in accordance with ASC 480-10, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, then in accordance with ASC 815-40, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock. Under ASC 480, warrants are considered liability classified if the warrants are mandatorily redeemable, obligate Oncocyte to settle the warrants or the underlying shares by paying cash or other assets, or warrants that must or may require settlement by issuing variable number of shares. If warrants do not meet liability classification under ASC 480-10, Oncocyte assesses the requirements under ASC 815-40, which states that contracts that require or may require the issuer to settle the contract for cash are liabilities recorded at fair value, irrespective of the likelihood of the transaction occurring that triggers the net cash settlement feature. If the warrants do not require liability classification under ASC 815-40, and in order to conclude equity classification, Oncocyte also assesses whether the warrants are indexed to its common stock and whether the warrants are classified as equity under ASC 815-40 or other applicable GAAP. After all relevant assessments, Oncocyte concludes whether the warrants are classified as liability or equity. Liability classified warrants require fair value accounting at issuance and subsequent to initial issuance with all changes in fair value after the issuance date recorded in the statements of operations. Equity classified warrants only require fair value accounting at issuance with no changes recognized subsequent to the issuance date. Oncocyte does not have any liability classified warrants as of any period presented (see Note 5).
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Income taxes
Oncocyte and its subsidiaries file a consolidated U.S. federal income tax return and combined California state return for the years ended December 31, 2021 and 2020. Oncocyte accounts for income taxes in accordance with ASC 740, Income Taxes, which prescribes the use of the asset and liability method, whereby deferred tax asset or liability account balances are calculated at the balance sheet date using current tax laws and rates in effect. Valuation allowances are established when necessary to reduce deferred tax assets when it is more likely than not that a portion or all of the deferred tax assets will not be realized. Oncocyte’s judgments regarding future taxable income may change over time due to changes in market conditions, changes in tax laws, tax planning strategies or other factors. If Oncocyte’s assumptions and consequently its estimates change in the future, the valuation allowance may be increased or decreased, which may have a material impact on Oncocyte’s statements of operations.
The
guidance also prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement
of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not
sustainable upon examination by taxing authorities. Oncocyte will recognize accrued interest and penalties related to unrecognized tax
benefits as income tax expense.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “Cares Act”) was enacted. The CARES Act included loans and grants to certain businesses, and temporary amendments to the Internal Revenue Code which changed net loss carryforward and back provisions and the business interest expenses limitation. Under the CARES Act provisions, the most relevant income tax considerations to Oncocyte relate to the amounts received under the Paycheck Protection Program loan program and the possible forgiveness of those loans by the SBA.
On December 21, 2020, the U.S. president has signed into law the “Consolidated Appropriations Act, 2021” which includes further COVID-19 economic relief and extension of certain expiring tax provisions. The relief package includes a tax provision clarifying that businesses with forgiven PPP loans can deduct regular business expenses that are paid for with the loan proceeds for federal tax purposes. Additional pandemic relief tax measures include an expansion of the employee retention credit, enhanced charitable contribution deductions, and a temporary full deduction for business expenses for food and beverages provided by a restaurant (see Note 12).
Revenue recognition
Prior to January 1, 2020, Oncocyte generated no revenues. Effective on January 1, 2020, Oncocyte adopted the revenue recognition standard ASC Topic 606, Revenue from Contracts with Customers (ASC) 606. Pursuant to ASC 606, revenues are recognized when control of services performed is transferred to customers, in an amount that reflects the consideration Oncocyte expects to be entitled to in exchange for those services. ASC 606 provides for a five-step model that includes, (i) identifying the contract with a customer, (ii) identifying the performance obligations in the contract, (iii) determining the transaction price, (iv) allocating the transaction price to the performance obligations, and (v) recognizing revenue when, or as, an entity satisfies a performance obligation.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DetermaRx™ testing revenue
In the first quarter of 2020, Oncocyte commercially launched DetermaRx™ and commenced performing tests on clinical samples through orders received from physicians, hospitals and other healthcare providers. In determining whether all of the revenue recognition criteria (i) through (v) above are met with respect to DetermaRx™ tests, each test result is considered a single performance obligation and is generally considered complete when the test result is delivered or made available to the prescribing physician electronically and, as such, there are no shipping or handling fees incurred by Oncocyte or billed to customers. Although Oncocyte bills a list price for all tests ordered and completed for all payer types, Oncocyte considers constraints on the variable consideration when recognizing revenue for DetermaRx™. Because DetermaRx™ is a novel test and there are no current reimbursement arrangements with third-party payers other than Medicare, the transaction price represents variable consideration. Application of the constraint for variable consideration is an area that requires significant judgment. For all payers other than Medicare, Oncocyte must take into account the novelty of the test, the uncertainty of receiving payment, or being subject to claims for refund, from payers with whom it does not have a sufficient payment collection history or contractual reimbursement agreements. Accordingly, for those payers, Oncocyte expects to continue to recognize revenue on a cash basis until it has a sufficient history to reliably estimate payment patterns or has contractual reimbursement arrangements, or both, in place. In September 2020, Oncocyte received a final pricing decision for DetermaRx™ from CMS, and with Medicare coverage in effect, Oncocyte commenced recognizing revenue when DetermaRx™ tests are performed for Medicare patients, or when payment was approved by Medicare in the case of certain tests performed prior to September 2020.
The Company invoices third party payors, which include Medicare and Medicare Advantage, for its laboratory testing services upon providing test results to ordering physicians. As such, the Company takes assignment of benefits and risk of collection with third party payors. The Company continues to monitor the collection history for third party payors. Medicare and Medicare Advantage reimbursement programs are complex and ambiguous, and are continuously being evaluated and modified by the CMS. Our ability to receive timely reimbursements from third-party payors is dependent on our ability to correct and complete missing and incorrect billing information. Missing and incorrect information on reimbursement submissions slows down the billing process and increases the aging of accounts receivable. While we have receivables due from Medicare and Medicare Advantage, we do not believe that such receivables represent a credit risk since the related healthcare programs are funded by federal and state governments, and payment is primarily dependent upon submitting appropriate documentation. As such, as of December 31, 2021 and December 31, 2020, Oncocyte has not recorded any losses or allowance for doubtful accounts on its account receivables from Medicare and Medicare Advantage covered DetermaRx™ tests.
As
of December 31, 2021, Oncocyte had accounts receivable of $
Pharma Services revenue
Revenues recognized during the year ended December 31, 2021 include Pharma Services performed by Oncocyte’s Insight subsidiary. Insight provides a range of molecular diagnostic services to its pharmaceutical customers (referred to as “Pharma Services”) including testing for biomarker discovery, assay design and development, clinical trial support, and a broad spectrum of biomarker tests in its CLIA-certified laboratory. These Pharma Services are generally performed under individual scope of work (“SOW”) arrangements with specific deliverables defined by the customer. Pharma Services are generally performed on a time and materials basis. Upon Insight’s completion of the service to the customer in accordance with the SOW, Insight has the right to bill the customer for the agreed upon price (either on a per test or per deliverable basis) and recognizes the pharma service revenue at that time. Insight identifies each sale of its pharma service offering as a single performance obligation.
Completion of the service and satisfaction of the performance obligation under a SOW is typically evidenced by access to the report or test made available to the customer or any other form or applicable manner of delivery defined in the SOW. However, for certain SOWs under which work is performed pursuant to the customer’s highly customized specifications, Insight has the enforceable right to bill the customer for work completed, rather than upon completion of the SOW. For those SOWs, Insight recognizes revenue over a period of time during which the work is performed using a formula that accounts for expended efforts, generally measured in labor hours, as a percentage of total estimated efforts for the completion of the SOW. As Insight satisfies the performance obligation under the SOW, any amounts earned as revenue and billed to the customer are included in accounts receivable. Any revenues earned but not yet billed to the customer as of the date of Oncocyte’s consolidated financial statements are recorded as contract assets and are included in prepaids and other current assets as of the financial statement date. Amounts recorded in contract assets are reclassified to accounts receivable in Oncocyte’s consolidated financial statements when the customer is invoiced according to the billing schedule in the contract.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Insight establishes an allowance for doubtful accounts based on the evaluation of the collectability of its Pharma Services accounts receivables after considering a variety of factors, including the length of time receivables are past due, significant events that may impair the customer’s ability to pay, such as a bankruptcy filing or deterioration in the customer’s operating results or financial position, and historical experience. If circumstances related to customers change, estimates of the recoverability of receivables would be further adjusted. Insight continuously monitors collections and payments from customers and maintains a provision for estimated credit losses and uncollectible accounts, if any, based upon its historical experience and any specific customer collection issues that have been identified. Amounts determined to be uncollectible are written off against the allowance for doubtful accounts. As of December 31, 2021, Oncocyte has not recorded any losses or allowance for doubtful accounts on its account receivables from Pharma Services.
As
of December 31, 2021, Oncocyte had accounts receivable from Pharma Services customers of $
Cost of revenues
Cost of revenues generally consists of cost of materials, direct labor including benefits, bonus and stock-based compensation, equipment and infrastructure expenses, clinical sample related costs associated with performing Pharma Services and DetermaRx™ tests, and license fees due to third parties, and also includes amortization of acquired customer relationship intangible assets. Infrastructure expenses include depreciation of laboratory equipment, allocated rent costs, leasehold improvements and allocated information technology costs for operations at Oncocyte’s CLIA laboratories in California and Tennessee. Costs associated with performing diagnostic tests and Pharma Services are recorded as the tests or services are performed regardless of whether revenue was recognized with respect to that test or pharma service. Royalties or revenue share payments for licensed technology calculated as a percentage of revenues generated using the associated technology are recorded as expenses at the time the related revenues are recognized. Oncocyte generated no revenues or cost of revenues prior to January 1, 2020.
Research and development expenses
Research and development expenses are comprised of costs incurred to develop technology, and include: salaries and benefits, including stock-based compensation; laboratory expenses, including reagents and supplies used in research and development laboratory work; infrastructure expenses, including allocated facility occupancy costs; and contract services and other outside costs. Indirect research and development expenses are allocated primarily based on headcount, as applicable, and include rent and utilities, common area maintenance, telecommunications, property taxes, and insurance. Research and development costs are expensed as incurred.
Sales and marketing expenses
Sales and marketing expenses consist primarily of personnel costs and related benefits, including stock-based compensation, trade show expenses, branding and positioning expenses, and consulting fees. Sales and marketing expenses also include indirect expenses for applicable overhead allocated based on headcount, and include allocated costs for rent and utilities, common area maintenance, telecommunications, property taxes, and insurance.
General and administrative expenses
General and administrative expenses consist primarily of compensation and related benefits (including stock-based compensation) for executive and corporate personnel, professional and consulting fees, rent and utilities, common area maintenance, telecommunications, property taxes, and insurance.
Stock-based compensation
Oncocyte recognizes compensation expense related to employee option grants and restricted stock grants, if any, in accordance with FASB ASC 718, Compensation – Stock Compensation (“ASC 718”).
All excess tax benefits and tax deficiencies from stock-based compensation awards accounted for under ASC 718 are recognized as income tax benefit or expense, respectively, in the statements of operations. An excess income tax benefit arises when the tax deduction of a share-based award for income tax purposes exceeds the compensation cost recognized for financial reporting purposes and, a tax deficiency arises when the compensation cost exceeds the tax deduction. Because Oncocyte has a full valuation allowance for all periods presented (see Note 8), there was no impact to Oncocyte statements of operations for any excess tax benefits or deficiencies, as any excess benefit or deficiency would be offset by the change in the valuation allowance. Forfeitures are accounted for as they occur.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Oncocyte estimates the fair value of employee stock-based payment awards on the grant-date and recognizes the resulting fair value over the requisite service period. For stock-based awards that vest only upon the attainment of one or more performance goals set by Oncocyte at the time of the grant (sometimes referred to as milestone vesting), compensation cost is recognized if and when Oncocyte determines that it is probable that the performance condition or conditions will be, or have been, achieved. Oncocyte uses the Black-Scholes option pricing model for estimating the fair value of options granted under Oncocyte’s equity plans. The fair value of each restricted stock grant, if any, is determined based on the value of the common stock granted or sold. Oncocyte has elected to treat stock-based payment awards with graded vesting schedules and time-based service conditions as a single award and recognizes stock-based compensation on a straight-line basis over the requisite service period.
In June 2018, the FASB issued ASU 2018-07, Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, which simplifies the accounting for non-employee share-based payment transactions. The new standard expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from non-employees. Oncocyte adopted ASU 2018-07 on January 1, 2019. As Oncocyte does not have a significant number of outstanding and unvested non-employee share-based awards, the application of the new standard did not have a material impact on its consolidated financial statements.
The Black-Scholes option pricing model requires Oncocyte to make certain assumptions including the expected option term, the expected volatility, the risk-free interest rate and the dividend yield (see Note 6).
The expected term of employee stock options represents the weighted-average period that the stock options are expected to remain outstanding. Oncocyte estimates the expected term of options granted based on its own experience and, in part, based on upon the “simplified method” provided under Staff Accounting Bulletin, Topic 14, or SAB Topic 14, as necessary. For the years ended December 31, 2021 and 2020, Oncocyte estimated the expected volatility using its own stock price volatility to the extent applicable or a combination of its stock price volatility and the stock price volatility of peer companies, for a period equal to the expected term of the options. The risk-free interest rate assumption is based upon observed interest rates on the United States government securities appropriate for the expected term of Oncocyte’s stock options. The dividend yield assumption is based on Oncocyte’s history and expectation of dividend payouts. Oncocyte has never declared or paid any cash dividends on its common stock, and Oncocyte does not anticipate paying any cash dividends in the foreseeable future.
Basic net loss per common share is computed by dividing net loss by the weighted-average number of shares of common stock outstanding for the period. Diluted net loss per share reflects the weighted-average number of shares of common stock outstanding plus the potential effect of dilutive securities or contracts which are exercisable to common stock, such as stock options and warrants (using the treasury stock method) and shares issuable in future periods, except in cases where the effect would be anti-dilutive. Because Oncocyte reported net losses for all periods presented, all potentially dilutive common stock is antidilutive for those periods.
Schedule of Common Stock Equivalents Excluded from Computation of Diluted Net Loss Per Share of Common Stock
| Year Ended | ||||||||
| December 31, | ||||||||
| 2021 | 2020 | |||||||
| Stock options | ||||||||
| Warrants | ||||||||
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Segments
Oncocyte’s executive management team, as a group, represents the entity’s chief operating decision makers. To date, Oncocyte’s executive management team has viewed Oncocyte’s operations as one segment that includes the research, development and commercialization of diagnostic tests for the detection of cancer, including molecular diagnostic services to pharmaceutical customers. As a result, the financial information disclosed materially represents all of the financial information related to Oncocyte’s sole operating segment.
Recently issued and adopted accounting pronouncements not yet adopted
The following accounting standards, which are not yet effective, are presently being evaluated by Oncocyte to determine the impact that it might have on its consolidated financial statements.
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments and subsequent amendments to the initial guidance under ASU 2018-19, ASU 2019-04, ASU 2019-05 and ASU 2019-10, which amends the current approach to estimate credit losses on certain financial assets, including trade and other receivables. Generally, this amendment requires entities to establish a valuation allowance for the expected lifetime losses of these certain financial assets. Upon the initial recognition of such assets, which will be based on, among other things, historical information, current conditions, and reasonable supportable forecasts. Subsequent changes in the valuation allowance are recorded in current earnings and reversal of previous losses are permitted. Currently, U.S. GAAP requires entities to write down credit losses only when losses are probable and loss reversals are not permitted. The update will be effective for Oncocyte in the first quarter of 2023. Early adoption is permitted. Oncocyte is currently evaluating the impact the adoption of this standard will have on its consolidated financial statements and related disclosures.
In August 2020, the Financial Accounting Standards Board issued ASU No. 2020-06, Debt – Debt with Conversion and Other Options (subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40). This update simplifies the accounting for convertible debt instruments and amends the accounting for certain contracts and freestanding financial instruments in an entity’s own equity, including warrants and preferred stock. The new guidance modifies how particular convertible instruments and certain contracts that may be settled in cash or shares impact the computation of diluted EPS. The amendments in this update are effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020. Oncocyte does not expect a material impact of this guidance on its consolidated financial statements.
In December 2019, the FASB issued ASU No. 2019-12 Income Taxes (Topic 740)—Simplifying the Accounting for Income Taxes, to remove certain exceptions related to the approach for intraperiod tax allocation, recognition of deferred tax liabilities for outside basis differences and requiring that an entity reflect the effect of an enacted change in tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date. The amendments in this update are effective for us beginning with fiscal year 2021. Most amendments within the standard are required to be applied on a prospective basis, while certain amendments must be applied on a retrospective or modified retrospective basis. The adoption of the amendments in this update did not have a material impact on our consolidated financial position and results of operations as of and for the year ended December 31, 2021.
In October 2020, the FASB issued ASU No. 2020-10 Codification Improvements, to make incremental improvements to GAAP and address stakeholder suggestions, including, among other things, clarifying that the requirement to provide comparative information in the financial statements extends to the corresponding disclosures section. The amendments in this update are effective for us beginning with fiscal year 2021. The amendments in this update should be applied retrospectively and at the beginning of the period that includes the adoption date. The adoption of the amendments in this update did not have a material impact on our financial disclosures as of and for the year ended December 31, 2021.
COVID-19 impact and related risks
The ongoing global outbreak of COVID-19, and the various attempts throughout the world to contain it, have created significant volatility, uncertainty and disruption. In response to government directives and guidelines, health care advisories and employee and other concerns, Oncocyte has altered certain aspects of its operations. A number of Oncocyte’s employees have had to work remotely from home and those on site have had to follow Oncocyte’s social distance guidelines, which could impact their productivity. COVID-19 could also disrupt Oncocyte’s operations due to absenteeism by infected or ill members of management or other employees, or absenteeism by members of management and other employees who cannot effectively work remotely but who elect not to come to work due to the illness affecting others in Oncocyte’s office or laboratory facilities, or due to quarantines.
During the COVID-19 pandemic, Oncocyte has not been able, and may continue to not be able, to maintain its preferred level of physician or customer outreach and marketing of its diagnostic testing and Pharma Services, which may have negatively impacted and may continue to negatively impact potential new customers’ interest in those tests and services. Because of COVID-19, travel, visits, and in-person meetings related to Oncocyte’s business have been severely curtailed or canceled and Oncocyte has instead used on-line or virtual meetings to meet with potential customers and others.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In addition to operational adjustments, the consequences of the COVID-19 pandemic have led to uncertainties related to Oncocyte’s business growth and ability to forecast the demand for its diagnostic testing and Pharma Services and resulting revenues. Concerns over available hospital, staffing, equipment, and other resources, and the risk of exposure to the virus, has led to early-stage lung cancer surgeries being delayed, and the continued deferral of lung cancer surgeries due to resurgence in COVID-19 cases could result in delayed or reduced use of DetermaRx™.
It is possible that impacts of COVID-19 on Oncocyte’s operations or revenues or its access to capital could prevent Oncocyte from complying, or could result in a material noncompliance, with one or more obligations or covenants under material agreements to which Oncocyte is a party, with the result that Oncocyte would be in material breach of the applicable obligation, covenant, or agreement. Any such material breach could cause Oncocyte to incur material financial liabilities or an acceleration of the date for paying a financial obligation to the other party to the applicable agreement, or could cause Oncocyte to lose material contractual rights, such as rights to use leased equipment or laboratory or office space, or rights to use licensed patents or other intellectual property the use of which is material to Oncocyte’s business. Similarly, it is possible that impacts of COVID-19 on the business, operations, or financial condition of any third party with whom Oncocyte has a contractual relationship could cause the third party to be unable to perform its contractual obligations to Oncocyte, resulting in Oncocyte’s loss of the benefits of a contract that could be material to Oncocyte’s business.
The full extent to which the COVID-19 pandemic and the various responses to it might impact Oncocytes’ business, operations and financial results will depend on numerous evolving factors that are not subject to accurate prediction and that are beyond Oncocyte’s control.
3. Business Combinations
Acquisition of Insight Genetics, Inc.
On January 31, 2020 (the “Insight Merger Date”), Oncocyte completed its acquisition of Insight pursuant to the Insight Merger Agreement.
Merger Consideration at Closing
Under
the terms of the Insight Merger Agreement, Oncocyte agreed to pay $
In March 2021, in accordance with the Insight Merger Agreement, the Cash Holdback was paid and the Stock Holdback was released from escrow to the selling shareholders.
Milestone Payments (Milestone Contingent Consideration)
In
addition to the Initial Merger Consideration, Oncocyte may also pay contingent consideration of up to $
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Revenue Share (Royalty Contingent Consideration)
As additional consideration for Insight’s shareholders, the Insight Merger Agreement provides for Oncocyte to pay a revenue share of not more than ten percent of net collected revenues for current Insight pharma service offerings over a period of ten years, and a tiered revenue share percentage of net collected revenues through the end of the technology lifecycle if certain new cancer tests are developed and commercialized using Insight technology (“Royalty Contingent Consideration”). As of December 31, 2021, the royalty contingent consideration has not been met and no payments have been made.
Registration Rights
Pursuant to the Insight Merger Agreement, Oncocyte filed a registration statement with the SEC to register the resale of the shares of common stock under the Securities Act of 1933, as amended (the “Securities Act”) issued in connection with the Insight Merger, which the SEC declared effective in August 2020.
Workforce
In connection with the closing of the Insight Merger, Oncocyte did not assume sponsorship of the Insight Equity Incentive Plan. Accordingly, the Insight Equity Incentive Plan and all related stock options to purchase shares of Insight common stock outstanding immediately prior to the Insight Merger were canceled on the Insight Merger Date for no consideration. At the Insight Merger Date, all of Insight’s employees ceased employment with Insight, and Oncocyte offered employment to certain of those former Insight employees, principally in laboratory roles and certain administrative roles (“New Oncocyte Employees”), and granted new equity awards to the New Oncocyte Employees under the Oncocyte 2018 Equity Incentive Plan. All Oncocyte stock option awards granted to the New Oncocyte Employees have vesting terms and conditions consistent with stock options granted to most other Oncocyte employees.
Aggregate Merger Consideration and Purchase Price Allocation
The calculation of the aggregate merger consideration, consisting of the Initial Merger Consideration, Milestone Contingent Consideration and Royalty Contingent Consideration (the “Aggregate Merger Consideration”) transferred on January 31, 2020, at fair value, is shown in the following table (in thousands, except for share and per share amounts). The Milestone Contingent Consideration and the Royalty Contingent Consideration are collectively referred to as “Contingent Consideration”.
Schedule of Fair Value of Aggregate Merger Consideration
| Cash consideration | $ | (1) | ||
| Stock consideration | ||||
| Shares of Oncocyte common stock issued on the Merger Date | (2) | |||
| Closing price per share of Oncocyte common stock on the Merger Date | $ | |||
| Market value of Oncocyte common stock issued | $ | |||
| Contingent Consideration | $ | (3) | ||
| Total fair value of consideration transferred on the Merger Date | $ |
| (1) |
| (2) |
| (3) |
| 89 |
ONCOCYTE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Aggregate Merger Consideration allocation
Oncocyte allocated the Aggregate Merger Consideration transferred to tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values as of the Insight Merger Date. The fair values of the identifiable intangible assets acquired and the liabilities assumed was determined based on inputs that were unobservable and significant to the overall fair value measurement, which is also based on estimates and assumptions made by management at the time of the Insight Merger. As such, this was classified as Level 3 fair value hierarchy measurements and disclosures in accordance with ASC 820, Fair Value Measurement.
The following table sets forth the allocation of the Aggregate Merger Consideration transferred to Insight’s tangible and identifiable intangible assets acquired and liabilities assumed on the Insight Merger Date, with the excess recorded as goodwill (in thousands):
Schedule of Intangible Assets Acquired and Liabilities Assumed
| January 31, | ||||
| 2020 | ||||
| Assets acquired: | ||||
| Cash and cash equivalents | $ | |||
| Accounts receivable and other current assets | ||||
| Right-of-use assets, machinery and equipment | ||||
| Long-lived intangible assets - customer relationships | ||||
| Acquired in-process research and development | ||||
| Total identifiable assets acquired (a) | ||||
| Liabilities assumed: | ||||
| Accounts payable | ||||
| Right-of-use liabilities - operating lease | ||||
| Long-term deferred income tax liability | ||||
| Total identifiable liabilities assumed (b) | ||||
| Net assets acquired, excluding goodwill (a) - (b) = (c) | ||||
| Total cash, contingent consideration, and stock consideration transferred (d) | ||||
| Goodwill (d) - (c) | ||||
The valuation of identifiable intangible assets and applicable estimated useful lives are as follows (in thousands, except for useful life):
Schedule of Identifiable Intangible Assets and Estimated Useful Life
| Estimated Assets | Useful Life | |||||||
| Fair Value | (Years) | |||||||
| In process research and development (“IPR&D”) | $ | n/a | ||||||
| Customer relationships | ||||||||
| $ | ||||||||
| 90 |
ONCOCYTE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following is a discussion of the valuation methods and significant assumptions used to determine the fair value of Insight’s material assets and liabilities in connection with the Insight Merger:
Acquired
In-Process Research and Development and Deferred Income Tax Liability – The fair value of identifiable IPR&D intangible
assets consists of $
Oncocyte determined the estimated aggregate fair value of DetermaIO™ using the Multi-Period Excess Earnings Method (“MPEEM”) under the income approach. MPEEM calculates the economic benefits by determining the income attributable to an intangible asset after the returns are subtracted for contributory assets such as working capital, assembled workforce, and fixed assets. The resulting after-tax net earnings are discounted at a rate commensurate with the risk inherent in the economic benefit projections of the assets.
To
calculate fair value of DetermaIO™ under MPEEM, Oncocyte used probability-weighted, projected cash flows discounted at a rate considered
appropriate given the significant inherent risks associated with similar assets. Cash flows were calculated based on projections of revenues
and expenses related to the asset and were assumed to extend through a multi-year projection period. Revenues from commercialization
of DetermaIO™ were based on the estimated market potential for the indications for use which may include tests for the treatment
of certain lung cancers and tests for the treatment of certain breast cancers. The expected cash flows from DetermaIO™ were then
discounted to present value using a weighted-average cost of capital for companies with profiles substantially similar to that of Oncocyte
and the risk inherent in the economic benefit projections of similar assets, which Oncocyte believes represents the rate that market
participants would use to value those assets. The discount rate used to value DetermaIO™ was approximately
Because
the IPR&D (prior to completion or abandonment of the research and development) is considered an indefinite-lived asset for accounting
purposes but is not recognized for tax purposes, the fair value of the IPR&D on the acquisition date generated a deferred income
tax liability (“DTL”) in accordance with ASC 740, Income Taxes. This DTL is computed using the fair value of the IPR&D
assets on the acquisition date multiplied by Oncocyte’s federal and state effective income tax rates. While this DTL would reverse
on impairment or sale or commencement of amortization of the related intangible assets, ASC 740 allows Oncocyte to treat acquired available
deferred tax assets (“DTAs”), such as Insight’s net operating loss carryforwards (“NOLs”) (subject to the
annual limitation under Section 382 of the Internal Revenue Code) as available DTAs to offset against the DTLs, as the DTLs are expected
to reverse within the NOL carryforward period. Any excess DTAs over those DTLs would be assessed for a valuation allowance in accordance
with ASC 740. This accounting treatment is acceptable if, at the time of the acquisition, Oncocyte can both reasonably estimate a timeline
to commercialization and the economic useful life of the IPR&D assets upon commercialization, which will be amortized during the
carryforward period of the offsetting DTAs. On the Insight Merger Date, Oncocyte estimated and recorded a net DTL of $
Customer
relationships – Insight provided a range of Pharma Services to its pharmaceutical customers. None of the Pharma Services are
related to DetermaIO™. The Pharma Service customer relationships are considered separate long-lived intangible assets under ASC
805 and were valued primarily using the MPEEM discussed above, and will be amortized over their useful life, estimated to be
Customer relationships generate similar DTLs to IPR&D as Oncocyte records this asset for accounting purposes but not for tax purposes. Accordingly, Oncocyte has offset all the acquired DTLs associated with the customer relationships with available acquired NOLs and included in the amount recorded discussed above (see Note 8).
| 91 |
ONCOCYTE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Right-of-use
assets and liabilities, machinery and equipment – Insight is a lessee under an operating lease with a third-party lessor for
its facilities, including its laboratory, in Nashville, Tennessee (the “Nashville Lease”). In April 2019, the Nashville lease
was renewed by Insight for a five-year term and is classified as an operating lease under ASC 842. In accordance with ASC 805, when a
company acquired in a business combination is a lessee, the acquirer initially measures the lease liability and the right-of-use asset
for an acquired operating lease as if the lease is new at the acquisition date. In other words, the lease liability is measured at the
present value of the remaining lease payments as of the acquisition date and the right-of-use asset is generally measured at an amount
equal to the lease liability, adjusted for favorable or unfavorable terms of the lease when compared with market terms. Since the Nashville
Lease was renewed by Insight in proximity to the Insight Merger Date, the terms of the Nashville Lease were considered by Oncocyte to
be market terms at the Insight Merger Date. Accordingly, Oncocyte measured the net present value of the remaining contractual Nashville
Lease payments as of the Insight Merger Date using an incremental borrowing rate consistent with Oncocyte’s other operating leases
and recorded a right-of-use liability and a corresponding right-of-use asset of $
Contingent consideration liabilities – ASC 805 requires that contingent consideration be estimated and recorded at fair value as of the acquisition date as part of the total consideration transferred. Contingent consideration is an obligation of the acquirer to transfer additional assets or equity interests to the selling shareholders in the future if certain future events occur or conditions are met, such as the attainment of product development milestones. Contingent consideration also includes additional future payments to selling shareholders based on achievement of components of earnings, such as “earn-out” provisions or percentage of future revenues, including royalties paid to the selling shareholders based on a percentage of revenues generated from DetermaIO™ and Insight Pharma Services over their respective useful life. Accordingly, Oncocyte determined there are two types of contingent consideration in connection with the Insight Merger, the Milestone Contingent Consideration and the Royalty Contingent Consideration discussed below, which are collectively referred to as the “Contingent Consideration”.
There are three milestones comprising the Milestone Contingent Consideration, collectively referred to as the Milestones, in connection with the Insight Merger which Oncocyte valued and recorded as part of Contingent Consideration as of the Insight Merger Date (see table below), which consist of (i) a payment for clinical trial completion and related data publication (“Milestone 1”), (ii) a payment for an affirmative final local coverage determination from CMS for a specified lung cancer test (“Milestone 2”), and (iii) a payment for achieving specified CMS reimbursement milestones (“Milestone 3”). If achieved, any respective Milestone will be paid at the contractual value shown below, with the payment made either in cash or in shares of Oncocyte common stock as determined by Oncocyte. There can be no assurance that any of the Milestones will be achieved.
There are two separate components of the Royalty Contingent Consideration, collectively referred to as the Royalty Payments, in connection with the Insight Merger which Oncocyte valued and recorded as part of Contingent Consideration as of the Insight Merger Date (see table below); Royalty Payments consist of (i) revenue share payments based on a percentage of future sales generated from DetermaIO™ (“Royalty 1”), and (ii) revenue share payments based on percentage of future sales generated from current Insight Pharma Service offerings, as defined in the Insight Merger Agreement (“Royalty 2”). There can be no assurance that any revenues on which the Royalty Payments are based will be generated from DetermaIO™ or Pharma Service offerings.
The following table shows the Insight Merger Date contractual payment amounts, as applicable, and the corresponding fair value of each respective Contingent Consideration liability (in thousands):
Schedule of Fair Value of Contingent Consideration Liability
| Fair | ||||||||
| Contractual | Value on the | |||||||
| Value | Merger Date | |||||||
| Milestone 1 | $ | $ | ||||||
| Milestone 2 | ||||||||
| Milestone 3 (a) | ||||||||
| Royalty 1 (b) | See(b) | |||||||
| Royalty 2 (b) | See(b) | |||||||
| Total | $ | $ | ||||||
| (a) |
| (b) |
| 92 |
ONCOCYTE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The
fair value of the Milestone Contingent Consideration was determined using a scenario analysis valuation method which incorporates Oncocyte’s
assumptions with respect to the likelihood of achievement of the Milestones, credit risk, timing of the Milestone Contingent Consideration
payments and a risk-adjusted discount rate to estimate the present value of the expected payments. The discount rate was estimated at
approximately
The
fair value of the Royalty Contingent Consideration was determined using a single scenario analysis method to value the Royalty Payments.
The single scenario method incorporates Oncocyte’s assumptions with respect to specified future revenues generated from DetermaIO™
and current Insight Pharma Services over their respective useful lives, credit risk, and a risk-adjusted discount rate to estimate the
present value of the expected royalty payments. The credit and risk-adjusted discount rate was estimated at approximately
The
fair value of the Contingent Consideration after the Insight Merger Date is reassessed by Oncocyte as changes in circumstances and conditions
occur, with the subsequent change in fair value recorded in Oncocyte’s consolidated statements of operations. As of December 31,
2021, based on Oncocyte’s reassessment of the significant assumptions noted above, there was a decrease of approximately
$
The following table reflects the activity for Oncocyte’s Contingent Consideration since the Insight Merger Date, measured at fair value using Level 3 inputs (in thousands):
Schedule of Contingent Consideration, Measured at Fair Value
| Fair Value | ||||
| Balance at January 31, 2020 | $ | |||
| Change in estimated fair value | ( | ) | ||
| Balance at December 31, 2020 | $ | |||
| Change in estimated fair value | ( | ) | ||
| Balance at December 31, 2021 | $ | |||
Contingent consideration is not deductible for tax purposes, even if paid; therefore, no deferred tax assets related to the Contingent Consideration were recorded.
Goodwill
– Goodwill is calculated as the difference between the acquisition date fair value of the consideration transferred and the
values assigned to the assets acquired and liabilities assumed, including Contingent Consideration. Goodwill also includes the $
Goodwill and identifiable intangible assets are not amortizable or deductible for tax purposes since these assets are not recognized for tax purposes.
| 93 |
ONCOCYTE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Asset acquisition of Razor Genomics, Inc.
On
September 30, 2019, Oncocyte completed the purchase of shares of Razor Series A Convertible Preferred Stock, par value $
per share (the “Preferred Stock”), representing
Purchase Option
The
Purchase Agreement and Minority Shareholder Agreements granted Oncocyte the option to acquire the balance of the outstanding shares of
Razor common stock from Encore under the Purchase Agreement and from the Minority Shareholders under the Minority Purchase Agreements
(the “Option”) for an additional $
On
January 29, 2021, the principal shareholder of Razor informed Oncocyte that the milestone requiring Oncocyte to purchase the outstanding
shares of Razor common stock had been attained under the Purchase Agreement and Minority Shareholder Purchase Agreements. On February
24, 2021, Oncocyte exercised the Option and completed the purchase of all the issued and outstanding shares of common stock of Razor
and paid the selling shareholders in total $
Development Agreement
Under
the Development Agreement, Razor reserved as a “Clinical Trial Expense Reserve” $
On
February 24, 2021, upon the completion of the outstanding shares of Razor common stock and consolidation of Razor’s accounts, Oncocyte
obtained control of approximately $
Upon completion of enrollment of the full number of patients for the Clinical Trial, Oncocyte will issue to Encore and the Minority Shareholders shares of Oncocyte common stock with an aggregate market value at the date of issue equal to $ million (“Clinical Trial Milestone Payment”).
| 94 |
ONCOCYTE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
If,
within a specified time frame, Encore is substantially responsible for obtaining funding to Oncocyte or Razor for the Clinical Trial
from any third-party pharmaceutical company, a portion of such additional funding amount will be paid to Encore, subject to a $
Sublicense Agreement
Under the Sublicense Agreement, Razor granted to Oncocyte an exclusive worldwide sublicense under certain patent rights applicable to DetermaRx™ in the field of use covered by the applicable license held by Razor for purposes of commercialization and development of DetermaRx™.
Pursuant to the Razor Sublicense Agreement, Oncocyte will pay all royalties and all revenue sharing and earnout payments owed by Razor to certain third parties with respect to DetermaRx™ revenues, including the licensor of the patent rights sublicensed to Oncocyte, but those payments will be deducted from gross revenues to determine net revenues for the purpose of paying royalties to the former Razor shareholders. Total royalty and earnout payments to the former Razor shareholders, the licensor, and other third parties will be a low double-digit percentage, and in addition certain milestone payments may become due if cumulative net revenue benchmarks are reached. Royalties and earnout payments will be payable on a quarterly basis. This payment obligation will continue after Oncocyte’s purchase of the Razor common stock from Encore and the Minority Shareholders.
Laboratory Agreement
Under
the Laboratory Agreement, Oncocyte has assumed Razor’s Laboratory Agreement payment obligations of $
Accounting for the Razor Investment
Beginning on the Initial Closing and through February 23, 2021, Oncocyte has accounted for the Razor investment under the equity method of accounting under ASC 323 because prior to the Additional Purchase Payment discussed above Oncocyte exercised significant influence over, but did not control, the Razor entity. Oncocyte did not control Razor because, among other factors, Oncocyte was entitled to designate one person to serve on a three-member board of directors of Razor, with the other two members designated by Encore. Also, any deadlocked decisions by a Steering Committee of Oncocyte and Encore representatives that makes decisions with respect to the Clinical Trial, other than with respect to the Clinical Trial budget, will be resolved by a member designated by Encore.
Prior
to February 24, 2021, the aggregate Razor acquisition payments of $
The Initial Closing equity method investment in Razor and the Additional Purchase Payment for the remaining interests in Razor are both considered an asset acquisition, rather than a business combination, because, among other factors, Razor had no workforce, no commercial product (Razor had granted all commercial rights to Oncocyte), no revenues, no distribution system and no facilities. Substantially all of the fair value of Razor’s assets at the Initial Closing and on February 24, 2021 was concentrated in Razor’s intangible asset, the DetermaRx™ patent and related know-how, thus satisfying the requirements of the practical screen test to be considered an asset acquisition in accordance with ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. Accordingly, no goodwill may be recognized in an asset acquisition in accordance with ASC 805-50.
| 95 |
ONCOCYTE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As Razor became a wholly owned subsidiary of Oncocyte on February 24, 2021, the DTA associated with the previous equity method investment was reversed. There is no tax effect of this reversal as the DTA had been fully offset by a valuation allowance (see Note 8). However, upon payment of the Additional Purchase Payment, Oncocyte recorded an additional step-up to fair value for the Razor intangible asset under ASC 805-50 for financial reporting purposes but this “step-up” is not recognized for income tax purposes. As a result, the fair value adjustment of the Razor intangible asset on the acquisition date generated a DTL in accordance with ASC 740. This DTL is computed using the fair value of the intangible assets on the acquisition date multiplied by Oncocyte’s federal and state effective income tax rates, using the simultaneous equations method for asset acquisitions under the guidance provided in ASC 740-10-25-51, which requires that the DTL be recognized as part of the investment of the acquired asset instead of any immediate income tax expense or benefit arising from the recognition of the DTL. Furthermore, ASC 740 allows Oncocyte to treat acquired available deferred tax assets, such as Razor’s NOLs (subject to the annual limitation under Section 382 of the Internal Revenue Code) as available DTAs to offset against the DTLs, as the DTLs are expected to reverse within the NOL carryforward period. Any excess DTAs over those DTLs would be assessed for a valuation allowance in accordance with ASC 740.
As
of February 24, 2021, Oncocyte estimated and recorded
a net DTL of $
As of February 24, 2021, upon Oncocyte’s acquisition of the outstanding common stock of Razor, the Razor intangible asset balance recorded on the acquisition date and included in Intangible Assets was as follows (in thousands):
Schedule of Acquisition Intangible Assets
| As of February 24, | ||||
| 2021 | ||||
| Razor intangible asset recorded on the acquisition date: | ||||
| Equity method investment carrying value | $ | |||
| Cash paid as Additional Purchase Payment for the Razor asset | ||||
| Oncocyte common stock issued ( shares issued at market value) as Additional Purchase Payment | ||||
| Less: cash balance received from Razor for Clinical Trial expenses | ( | ) | ||
| Deferred tax liability generated from the Razor asset | ||||
| Other | ||||
| Total Razor investment asset balance as of February 24, 2021 (a) | $ | |||
| (a) |
Under ASC 805-50, for asset acquisitions, the remaining Clinical Trial Milestone Payment will be recorded only if the consideration is both probable (milestone has been achieved) and estimable in accordance with ASC 450, Contingencies, and as of December 31, 2021, no contingent consideration payment was recorded as the Clinical Trial Milestone Payment was not deemed probable of achievement as of that date.
| 96 |
ONCOCYTE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Summarized standalone financial data for Razor from January 1, 2021 through February 23, 2021
The unaudited standalone results of operations for Razor prior to being consolidated with Oncocyte is summarized below (in thousands):
Schedule of Condensed Statement of Operations
| For the period from | ||||
| January 1, 2021 through | ||||
| February 23, 2021 | ||||
| Condensed Statement of Operations (1) | (unaudited) | |||
| Research and development expense | $ | |||
| General and administrative expense | ||||
| Loss from operations | ( | ) | ||
| Net loss | $ | ( | ) | |
| (1) |
Acquisition of Chronix Biomedical, Inc.
On
April 15, 2021, the Chronix Merger Date, Oncocyte completed its acquisition of Chronix pursuant the Chronix Merger Agreement. During
the year ended December 31, 2021, Oncocyte incurred $
Merger Consideration at Closing
Pursuant
to the Chronix Merger Agreement, Oncocyte agreed to deliver closing consideration consisting of approximately (i) shares of Oncocyte
common stock (the “Closing Shares”), which represents approximately $
Contingent Consideration
As
additional consideration for holders of certain classes and series of Chronix capital stock, the Chronix Merger Agreement also provides
for Oncocyte to pay “Chronix Contingent Consideration” consisting of (i) “Chronix Milestone Payments” of up to
$
The Chronix Closing Consideration and Chronix Contingent Consideration include amounts payable to certain directors, officers and employees of Chronix, including officers and employees who are expected to continue to provide services to Chronix following the Chronix Merger.
| 97 |
ONCOCYTE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Liabilities
Pursuant
to the Chronix Merger Agreement, to the extent that Oncocyte or any of its subsidiaries, including Chronix, pays, performs or discharges
an amount of liabilities of Chronix in excess of $
Deferred
Revenue - In June 2018 and subsequently amended in June 2019, Chronix and a medical diagnostic service company in Germany (“the
German customer”) entered into a licensing and testing service agreement (“the German agreement”) for intellectual
property related to TheraSure™-CNI Monitor and TheraSure™ Transplant Monitor. Under the terms of the agreement, Chronix received
from the German customer an upfront payment of €
Registration Rights
Pursuant to the Chronix Merger Agreement, Oncocyte filed a registration statement with the SEC to register the resale of the shares of common stock under the Securities Act issued in connection with the Chronix Merger, which the SEC declared effective in July 2021.
Workforce
At the Chronix Merger Date, all of Chronix’s employees ceased employment with Chronix, and Oncocyte offered employment to certain of those former Chronix employees, principally in laboratory roles and certain administrative roles in Germany, and granted new equity awards to them under the Oncocyte 2018 Equity Incentive Plan. All these Oncocyte stock option awards granted have vesting terms and conditions consistent with stock options granted to most other Oncocyte employees.
Aggregate Chronix Merger Consideration and Purchase Price Allocation
Measurement period adjustments reflect new information obtained about facts and circumstances that existed as of the acquisition date. Final determination of the fair values may result in further adjustments to the values presented. To the extent that significant changes occur in the future, Oncocyte will disclose such changes in the reporting period in which they occur.
The calculation of the aggregate merger consideration, consisting of the Closing Consideration and Chronix Contingent Consideration (the “Aggregate Chronix Merger Consideration”), at fair value, is shown in the following table (in thousands, except for share and per share amounts). In accordance with ASC 805, the Chronix Contingent Consideration, at fair value, is part of the total considered transferred on the Chronix Merger Date, as further discussed below.
Schedule of Fair Value of Aggregate Merger Consideration
| Cash consideration | $ | |||
| Settlement of acquirer/acquiree activity pre-combination, net | $ | |||
| Stock consideration | ||||
| Shares of Oncocyte common stock issued on the Merger Date | ||||
| Closing price per share of Oncocyte common stock on the Merger Date | $ | |||
| Market value of Oncocyte common stock issued | $ | |||
| Contingent Consideration | $ | |||
| Total fair value of consideration transferred on the Merger Date | $ |
| 98 |
ONCOCYTE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Pursuant to ASC 805, Business Combinations (“ASC 805”), Oncocyte accounted for the Chronix acquisition as a business combination using the acquisition method of accounting. Identifiable assets and liabilities of Chronix, including identifiable intangible assets, were recorded based on their fair values as of the date of the closing of the acquisition. The excess of the purchase price over the fair value of the net assets acquired was recorded as goodwill.
Upon further review of the assets acquired and liabilities assumed, it was determined that the amount previously reported as assumed liabilities were not properly reflected. The following has been updated to reflect the assets acquired and liabilities as of the date of acquisition. The following table sets forth the allocation of the Aggregate Chronix Merger Consideration transferred to Chronix’s tangible and identifiable intangible assets acquired and liabilities assumed (in thousands):
Schedule of Intangible Assets Acquired and Liabilities Assumed
| April 15, 2021 | ||||
| Assets acquired: | ||||
| Cash and cash equivalents | $ | |||
| Accounts receivable and other current assets | ||||
| Long-term assets | ||||
| Acquired in-process research and development | ||||
| Total identifiable assets acquired (a) | ||||
| Liabilities assumed: | ||||
| Deferred revenue | ||||
| Assumed liability | ||||
| Long-term deferred income tax liability | ||||
| Total identifiable liabilities assumed (b) | ||||
| Net assets acquired, excluding goodwill (a) - (b) = (c) | ||||
| Total cash, contingent consideration, and stock consideration transferred (d) | ||||
| Goodwill (d) - (c) | $ | |||
All tangible assets and liabilities were valued at their respective carrying amounts as management believes that these amounts approximated their acquisition date fair values.
The following is a discussion of the valuation methods and significant assumptions used to determine the fair value of Chronix’s material assets and liabilities in connection with the Chronix Merger:
Acquired
In-Process Research and Development and Deferred Income Tax Liability – The fair value of identifiable IPR&D intangible
assets consists of $
| 99 |
ONCOCYTE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
To
calculate fair value of the TheraSure™ test assets under MPEEM, Oncocyte used probability-weighted, projected cash flows discounted
at a rate considered appropriate given the significant inherent risks associated with similar assets. Cash flows were calculated based
on projections of revenues and expenses related to the asset and were assumed to extend through a multi-year projection period. The discount
rate used to value TheraSure™ test assets was approximately
Because
the IPR&D is considered an indefinite-lived asset for accounting purposes but is not recognized for tax purposes, the fair value
of the IPR&D on the acquisition date generated a DTL in accordance with ASC 740, Income Taxes. This DTL is computed using the
fair value of the IPR&D assets on the acquisition date multiplied by Oncocyte’s federal and state effective income tax
rates. ASC 740 allows Oncocyte to treat acquired available DTAs, such as Chronix’s NOLs (subject to the annual limitation
under Section 382 of the Internal Revenue Code) as available DTAs to offset against the DTLs, as the DTLs are expected to reverse
within the NOL carryforward period. Any excess DTAs over those DTLs would be assessed for a valuation allowance in accordance with
ASC 740. This accounting treatment is acceptable if, at the time of the acquisition, Oncocyte can both reasonably estimate a
timeline to commercialization and the economic useful life of the IPR&D assets upon commercialization, which will be amortized
during the carryforward period of the offsetting DTAs. Oncocyte estimated and recorded a net DTL of $
Contingent consideration liabilities – ASC 805 requires that contingent consideration be estimated and recorded at fair value as of the acquisition date as part of the total consideration transferred. Contingent consideration is an obligation of the acquirer to transfer additional assets or equity interests to the selling shareholders in the future if certain future events occur or conditions are met, such as the attainment of product development milestones. Contingent consideration also includes additional future payments to selling shareholders based on achievement of components of earnings, such as “earn-out” provisions or percentage of future revenues, including royalties paid to the former Chronix shareholders based on a percentage of revenues generated from TheraSure™ tests over the useful life of the assets. Accordingly, Oncocyte determined there are three types of contingent consideration in connection with the Chronix Merger: the Milestone Payments, the Royalty Payments, and Transplant Sale Payments, discussed below, which comprise the “Chronix Contingent Consideration”.
The
fair value of the Milestone Payments was determined using a scenario analysis valuation method which incorporates Oncocyte’s assumptions
with respect to the likelihood of achievement of the milestones defined in the Chronix Merger Agreement, credit risk, timing of the Milestone
Payments and a risk-adjusted discount rate to estimate the present value of the expected payments. The discount rate was estimated at
approximately
The
fair value of the Royalty Payments was determined using a single scenario analysis method. The single scenario method incorporates Oncocyte’s
assumptions with respect to specified future revenues generated from TheraSure™-CNI Monitor, over its estimated useful life, taking
into account credit risk and a risk-adjusted discount rate to estimate the present value of the expected Royalty Payments. The credit
and risk-adjusted discount rate was estimated at approximately
The
fair value of the Transplant Sale Payments was determined using a single scenario analysis method. The single scenario method incorporates
Oncocyte’s assumptions with respect to specified future licensing revenues generated from TheraSure™-Transplant Monitor,
over its estimated useful life, taking into account credit risk and a risk-adjusted discount rate to estimate the present value of the
expected Transplant Sale Payments. The credit and risk-adjusted discount rate was estimated at approximately
The
fair value of the Chronix Contingent Consideration after the Chronix Merger Date is reassessed by Oncocyte as changes in circumstances
and conditions occur, with the subsequent change in fair value recorded in Oncocyte’s consolidated statements of operations. As
of December 31, 2021, based on Oncocyte’s reassessment of the significant assumptions noted above, there was an increase of approximately
$
The following table reflects the activity for Oncocyte’s Contingent Consideration since the Chronix Merger Date, measured at fair value using Level 3 inputs (in thousands):
Schedule of Contingent Consideration, Measured at Fair Value
| Fair Value | ||||
| Balance at April 15, 2021 | $ | |||
| Change in estimated fair value | ||||
| Balance at December 31, 2021 | $ | |||
| 100 |
ONCOCYTE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Goodwill
- Goodwill is calculated as the difference between the acquisition date fair value of the Aggregate Chronix Merger Consideration
transferred and the values assigned to the assets acquired and liabilities assumed. Goodwill also includes the $
None of the goodwill recognized is expected to be deductible for income tax purposes. Goodwill is not amortized but is tested for impairment at least annually, or more frequently if circumstances indicate potential impairment (see Notes 2 and 4).
4. Goodwill and Intangible Assets, net
As of December 31, 2021 and 2020, goodwill and intangible assets, net, consisted of the following (in thousands):
Schedule of Goodwill and Intangible Assets
| December 31, 2021 | December 31, 2020 | |||||||
| Goodwill - Insight Merger(1) | $ | $ | ||||||
| Goodwill - Chronix Merger(1) | ||||||||
| Total Goodwill | ||||||||
| Intangible assets: | ||||||||
| Acquired IPR&D - DetermaIOTM (2) | $ | $ | ||||||
| Acquired IPR&D - TheraSure™ (3) | ||||||||
| Intangible assets subject to amortization: | ||||||||
| Acquired intangible assets - customer relationship – Insight (see Note 3) | ||||||||
| Acquired intangible assets - Razor(5) (see Note 3) | ||||||||
| Total intangible assets | ||||||||
| Accumulated amortization - customer relationship(4) | ( | ) | ( | ) | ||||
| Accumulated amortization - Razor(4) | ( | ) | ||||||
| Intangible assets, net | $ | $ | ||||||
| (1) | |
| (2) | |
| (3) | |
| (4) | |
| (5) |
| 101 |
ONCOCYTE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Future amortization expense is expected to be the following (in thousands):
Schedule of Intangible Assets Future Amortization Expense
| Amortization | ||||
| Year ending December 31, | ||||
| 2022 | ||||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| Thereafter | ||||
| Total | $ | |||
5. Shareholders’ Equity
Preferred Stock
Oncocyte
is authorized to issue up to shares of
Common Stock
Oncocyte
has shares of
The holders of common stock are entitled to one vote for each share held on all matters submitted to a vote of Oncocyte stockholders. The holders of common stock have no preemptive, subscription, or redemption rights. The outstanding shares of common stock are fully paid and non-assessable.
Under
the ATM Agreement, during the year ended December 31, 2020, Oncocyte sold shares of common stock for net proceeds of approximately
$
On June 11, 2021, Oncocyte
entered into an at-the-market sales agreement with BTIG, LLC as sales agent and/or principal (the “Agent”) pursuant to which
Oncocyte may sell up to an aggregate of $
As of December 31, 2021 and 2020, Oncocyte had and issued and outstanding shares of common stock, respectively. See Note 11 with respect to certain financing transactions pursuant to which Oncocyte sold shares of common stock and common stock purchase warrants during the years ended December 31, 2021 and 2020.
Common Stock Purchase Warrants
As
of December 31, 2021, Oncocyte had an aggregate of
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ONCOCYTE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Oncocyte has considered the guidance in ASC 815-40, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock, which states that contracts that require or may require the issuer to settle the contract for cash are liabilities recorded at fair value, irrespective of the likelihood of the transaction occurring that triggers the net cash settlement feature. This liability classification guidance also applies to financial instruments that may require cash or other form of settlement for transactions outside of the company’s control and, in which the form of consideration to the warrant holder may not be the same as to all other shareholders in connection with the transaction. However, if a transaction is not within the company’s control but the holder of the financial instrument can solely receive the same type or form of consideration as is being offered to all the shareholders in the transaction, then equity classification of the financial instrument is not precluded, if all other applicable equity classification criteria are met. Based on the above guidance and, among other factors, the fact that the warrants cannot be cash settled under any circumstance but require share settlement, all of the outstanding warrants meet the equity classification criteria and have been classified as equity.
Stock Option Exercises
During
the years ended December 31, 2021 and 2020, and shares of common stock, respectively, were issued
upon the exercise of stock options, from which Oncocyte received $
Stock Option Plan
Oncocyte had a 2010 Stock Option Plan (the “2010 Plan”) under which shares of common stock were authorized for the grant of stock options or the sale of restricted stock.
On August 27, 2018, Oncocyte shareholders approved a new Equity Incentive Plan (as amended, the “2018 Incentive Plan”) to replace the 2010 Plan. In adopting the 2018 Incentive Plan, Oncocyte terminated the 2010 Plan and will not grant any additional stock options or sell any stock under restricted stock purchase agreements under the 2010 Plan; however, stock options issued under the 2010 Plan will continue in effect in accordance with their terms and the terms of the 2010 Plan until the exercise or expiration of the individual options.
On July 24, 2021, Oncocyte amended the 2018 Equity Incentive Plan. As of December 31, 2021, the 2018 Incentive Plan reserved shares of common stock for the grant of stock options or the sale of restricted stock (“Restricted Stock”) or for the settlement of hypothetical units issued with reference to common stock (“Restricted Stock Units”). Oncocyte may also grant stock appreciation rights (“SARs”) under the 2018 Incentive Plan. The 2018 Incentive Plan also permits Oncocyte to issue such other securities as its Board of Directors (the “Board”) or the Compensation Committee (the “Committee”) administering the 2018 Incentive Plan may determine. Awards of stock options, Restricted Stock, SARs, and Restricted Stock Units (“Awards”) may be granted under the 2018 Incentive Plan to Oncocyte employees, directors, and consultants.
Awards may vest and thereby become exercisable or have restrictions on forfeiture lapse on the date of grant or in periodic installments or upon the attainment of performance goals, or upon the occurrence of specified events. Awards may not vest, in whole or in part, earlier than one year from the date of grant. Vesting of an Award after the date of grant may be accelerated only in the limited circumstances specified in the 2018 Incentive Plan. In the case of the acceleration of vesting of any performance-based Award, acceleration of vesting shall be limited to actual performance achieved, pro rata achievement of the performance goal(s) on the basis for the elapsed portion of the performance period, or a combination of actual and pro rata achievement of performance goals.
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ONCOCYTE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
No person shall be granted, during any one-year period, options to purchase, or SARs with respect to, more than shares in the aggregate, or any Awards of Restricted Stock or Restricted Stock Units with respect to more than shares in the aggregate. If an Award is to be settled in cash, the number of shares on which the Award is based shall not count toward the individual share limit.
No Awards may be granted under the 2018 Incentive Plan more than ten years after the date upon which the 2018 Incentive Plan was adopted by the Board, and no options or SARS granted under the 2018 Incentive Plan may be exercised after the expiration of ten years from the date of grant.
Stock Options
Options
granted under the 2018 Incentive Plan may be either “incentive stock options” within the meaning of Section 422(b) of the
Internal Revenue Code of 1986, as amended (the “Code”), or “non-qualified” stock options that do not qualify
incentive stock options. Incentive stock options may be granted only to Oncocyte employees and employees of subsidiaries. The exercise
price of stock options granted The aggregate fair market value of common stock (determined
as of the grant date of the option) with respect to which incentive stock options become exercisable for the first time by an optionee
in any calendar year may not exceed $
The exercise price of an option may be payable in cash or in common stock having a fair market value equal to the exercise price, or in a combination of cash and common stock, or other legal consideration for the issuance of stock as the Board or Committee may approve.
Generally, options will be exercisable only while the optionee remains an employee, director or consultant, or during a specific period thereafter, but in the case of the termination of an employee, director, or consultant’s services due to death or disability, the period for exercising a vested option shall be extended to the earlier of 12 months after termination or the expiration date of the option.
Restricted Stock and Restricted Stock Units
In lieu of granting options, Oncocyte may enter into purchase agreements with employees under which they may purchase or otherwise acquire Restricted Stock or Restricted Stock Units subject to such vesting, transfer, and repurchase terms, and other restrictions. Employees or consultants, but not executive officers or directors, who purchase Restricted Stock may be permitted to pay for their shares by delivering a promissory note or an installment payment agreement that may be secured by a pledge of their Restricted Stock. Restricted Stock may also be issued for services actually performed by the recipient prior to the issuance of the Restricted Stock. Unvested Restricted Stock for which Oncocyte has not received payment may be forfeited, or Oncocyte may have the right to repurchase unvested shares upon the occurrence of specified events, such as termination of employment.
Subject to the restrictions set with respect to the particular Award, a recipient of Restricted Stock generally shall have the rights and privileges of a shareholder, including the right to vote the Restricted Stock and the right to receive dividends; provided that, any cash dividends and stock dividends with respect to the Restricted Stock shall be withheld for the recipient’s account, and interest may be credited on the amount of the cash dividends withheld. The cash dividends or stock dividends so withheld and attributable to any particular share of Restricted Stock (and earnings thereon, if applicable) shall be distributed to the recipient in cash or, at the discretion of the Board or Committee, in shares of common stock having a fair market value equal to the amount of such dividends, if applicable, upon the release of restrictions on the Restricted Stock and, if the Restricted Stock is forfeited, the recipient shall have no right to the dividends.
The terms and conditions of a grant of Restricted Stock Units shall be determined by the Board or Committee. No shares of common stock shall be issued at the time a Restricted Stock Unit is granted. A recipient of Restricted Stock Units shall have no voting rights with respect to the Restricted Stock Units. Upon the expiration of the restrictions applicable to a Restricted Stock Unit, Oncocyte will either issue to the recipient, without charge, one share of common stock per Restricted Stock Unit or cash in an amount equal to the fair market value of one share of common stock.
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ONCOCYTE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At the discretion of the Board or Committee, each Restricted Stock Unit (representing one share of common stock) may be credited with cash and stock dividends paid in respect of one share (“Dividend Equivalents”). Dividend Equivalents shall be withheld for the recipient’s account, and interest may be credited on the amount of cash Dividend Equivalents withheld. Dividend Equivalents credited to a recipient’s account and attributable to any particular Restricted Stock Unit (and earnings thereon, if applicable) shall be distributed in cash or in shares of common stock having a fair market value equal to the amount of the Dividend Equivalents and earnings, if applicable, upon settlement of the Restricted Stock Unit. If a Restricted Stock Unit is forfeited, the recipient shall have no right to the related Dividend Equivalents.
Equity awards activity
Summary of Stock Option Activity
| Shares | Number | Weighted | ||||||||||
| Available | of Options | Average | ||||||||||
| Options | for Grant | Outstanding | Exercise Price | |||||||||
| Balance at December 31, 2020 | $ | |||||||||||
| Options exercised | ( | ) | $ | |||||||||
| Options forfeited, canceled and expired | ( | ) | $ | |||||||||
| Balance at December 31, 2021 | $ | |||||||||||
| Exercisable at December 31, 2021 | $ | |||||||||||
In 2018, under the 2010 Plan, Oncocyte granted certain stock options with exercise prices ranging from $ per share to $ per share, that will vest in increments upon the attainment of specified performance conditions related to the development of DetermaDx™ and obtaining Medicare reimbursement coverage for that test (“Performance-Based Options”). During the year ended December 31, 2019, certain performance conditions required for vesting were met, and, accordingly, shares vested and $ of stock-based compensation expense was recorded with regard to the Performance-Based Options. The Medicare reimbursement conditions will not be met as Oncocyte has determined not to pursue commercialization of DetermaDx™. Approximately stock options granted in May 2018 contain a hybrid vesting condition which vest on the earlier to occur of three years of service from the grant date or achieving a defined Performance-Based Option milestone with respect to DetermaDx™ local decision coverage. These stock options are considered to be service-based awards for financial accounting purposes with the fair value of the options being recognized in stock-based compensation expense over an effective three-year service period. During the year ended December 31, 2020, prior to the discontinuation of development of DetermaDx™, certain performance conditions required for vesting were met, and, accordingly, shares vested and $ of stock-based compensation expense was recorded with regard to the Performance-Based Options during that period. As of December 31, 2021, there were Performance-Based Options outstanding.
At December 31, 2021 and 2020, Oncocyte had approximately $million and $million, respectively, of total unrecognized compensation expense related to the 2010 Plan and 2018 Incentive Plan that will be recognized over a weighted-average period of approximately years and years, respectively.
| 105 |
ONCOCYTE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Summary of Stock Option Activity
| Shares | Number | Number | Weighted | |||||||||||||
| Available | of Options | of RSUs | Average | |||||||||||||
| for Grant | Outstanding | Outstanding | Exercise Price | |||||||||||||
| Balance at December 31, 2020 | $ | |||||||||||||||
| RSUs vested | ( | ) | n/a | |||||||||||||
| RSUs granted | ( | ) | $ | |||||||||||||
| Options increase from Plan Amendment | n/a | |||||||||||||||
| Options granted | ( | ) | $ | |||||||||||||
| Options exercised | ( | ) | $ | |||||||||||||
| Options forfeited/cancelled | ( | ) | $ | |||||||||||||
| Balance at December 31, 2021 | $ | |||||||||||||||
| Options exercisable at December 31, 2021 | $ | |||||||||||||||
Additional information regarding Oncocyte’s outstanding stock options and vested and exercisable stock options is summarized below:
Schedule of Stock Options Outstanding, Vested and Exercisable
| Options Outstanding as of December 31, 2021 | ||||||||||||||
| Exercise Prices | Number of Shares (in thousands) | Weighted Average Remaining Contractual Life (Years) | Weighted Average Exercise Price | |||||||||||
| $ | - $ | $ | ||||||||||||
| $ | - $ | |||||||||||||
| $ | - $ | |||||||||||||
| $ | - $ | $ | ||||||||||||
Summary of Stock-based Compensation Expense
| Year Ended | ||||||||
| December 31, | ||||||||
| 2021 | 2020 | |||||||
| Cost of revenues | $ | $ | ||||||
| Research and development | ||||||||
| Sales and marketing | ||||||||
| General and administrative | ||||||||
| Total stock-based compensation expense | $ | $ | ||||||
The weighted-average estimated fair value of stock options with service-conditions granted during the years ended December 31, 2021 and 2020 was $ and $ per share, respectively, using the Black-Scholes option pricing model with the following weighted-average assumptions:
| Year Ended | ||||||||
| December 31, | ||||||||
| 2021 | 2020 | |||||||
| Expected life (in years) | ||||||||
| Risk-free interest rates | % | % | ||||||
| Volatility | % | % | ||||||
| Dividend yield | % | % | ||||||
The determination of stock-based compensation is inherently uncertain and subjective and involves the application of valuation models and assumptions requiring the use of judgment. If Oncocyte had made different assumptions, its stock-based compensation expense and net loss for years ended December 31, 2021 and 2020 may have been significantly different.
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ONCOCYTE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Oncocyte does not recognize deferred income taxes for incentive stock option compensation expense and records a tax deduction only when a disqualified disposition has occurred.
7. Disaggregation of Revenues and Concentration Risk
The tables present certain information concerning source of Oncocyte revenues for the years ended December 31, 2021 and December 31, 2020.
The following table presents the percentage of consolidated revenues attributable to products or services classes that represent greater than ten percent of consolidated revenues:
Schedule of Consolidated Revenues Attributable to Products or Services
| Year Ended | ||||||||
| December 31, | ||||||||
| 2021 | 2020 | |||||||
| DetermaRx™ | % | % | ||||||
| Pharma Services | % | % | ||||||
| Licensing | % | |||||||
| Total | % | % | ||||||
The following table presents the percentage of consolidated revenues received from unaffiliated customers that individually represent greater than ten percent of consolidated revenues:
Schedule of Consolidated Revenues Generated by Unaffiliated Customers
| Year Ended | ||||||||
| December 31, | ||||||||
| 2021 | 2020 | |||||||
| Medicare for DetermaRxTM | % | % | ||||||
| Medicare Advantage for DetermaRxTM | % | * | ||||||
| Pharma services Company A | * | % | ||||||
| Pharma services Company B | * | % | ||||||
| Licensing - Company D | % | * | ||||||
| Licensing - Company B | % | * | ||||||
| * |
The following table presents the percentage of consolidated revenues attributable to geographical locations:
Schedule of Percentage of Consolidated Revenues Attributable to Geographical Locations
| Year Ended | ||||||||
| December 31, | ||||||||
| 2021 | 2020 | |||||||
| United States | % | % | ||||||
| Outside of the United States – Pharma Services | % | % | ||||||
| Outside of the United States – Licensing | % | |||||||
| Total | % | % | ||||||
The following table presents accounts receivable, as a percentage of total consolidated accounts receivables, from third-party payers and other customers that provided in excess of 10% of Oncocyte’s total accounts receivable.
Schedule of Percentage of Total Consolidated Accounts Receivables
| December 31, 2021 | December 31, 2020 | |||||||
| Medicare for DetermaRx™ | % | % | ||||||
| Medicare Advantage for DetermaRx™ | % | * | ||||||
| Pharma Services Company A | * | % | ||||||
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ONCOCYTE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. Income Taxes
A
deferred income tax benefit of $
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.
The primary components of the deferred tax assets and liabilities at December 31, 2021 and 2020 were as follows (in thousands):
Schedule of Components of Deferred Tax Assets and Liabilities
| 2021 | 2020 | |||||||
| Deferred tax assets/(liabilities): | ||||||||
| Net operating loss carryforwards and capital loss carryforwards | $ | $ | ||||||
| Research and development credit carryforwards | ||||||||
| Marketable equity securities | ||||||||
| Stock-based and other compensation | ||||||||
| Equity method investment in Razor | - | |||||||
| Right-of-use liability | ||||||||
| Other | - | |||||||
| Total deferred tax assets | ||||||||
| Valuation allowance | ( | ) | ( | ) | ||||
| Deferred tax assets, net of valuation allowance | ||||||||
| Right-of-use asset | ( | ) | ( | ) | ||||
| Intangibles and fixed assets | ( | ) | ( | |||||
| Total deferred tax liabilities | ( | ) | ( | ) | ||||
| Net deferred tax assets | $ | $ | ||||||
In
connection with the Merger discussed in Note 3 and in accordance with ASC 805, a change in the acquirer’s valuation allowance that
stems from a business combination should be recognized as an element of the acquirer’s income tax expense or benefit in the period
of the acquisition. Accordingly, for the year ended December 31, 2021, Oncocyte recorded a $
Schedule of Income Tax Reconciliation
| 2021 | 2020 | |||||||
| Computed tax benefit at federal statutory rate | % | % | ||||||
| Permanent differences | ( | )% | % | |||||
| State tax benefit | % | % | ||||||
| Research and development credits | - | % | % | |||||
| Other | - | % | - | % | ||||
| Change in fair value consideration | ( | )% | - | % | ||||
| Change in valuation allowance | ( | )% | ( | )% | ||||
| Income tax benefit percentage | % | % | ||||||
Income taxes differed from the amounts computed by applying the applicable U.S. federal income tax rates indicated to pretax losses from operations as a result of the following:
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ONCOCYTE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As
of December 31, 2021, Oncocyte had net operating loss carryforwards of approximately $
As
of December 31, 2021, Oncocyte has research and development credit carryforwards for federal and state purposes of $
A
valuation allowance is provided when it is more likely than not that some portion of the deferred tax assets will not be realized. Other
than the partial release discussed above, Oncocyte established a full valuation allowance for all periods presented due to the uncertainty
of realizing future tax benefits from its net operating loss carryforwards and other deferred tax assets. The change in the valuation
allowance was $
Oncocyte
has uncertain tax benefits (“UTBs”) totaling $
A reconciliation of the beginning and ending unrecognized tax benefit amount is as follows (in thousands):
| 2021 | 2020 | |||||||
| December 31, | ||||||||
| 2021 | 2020 | |||||||
| (in thousands) | ||||||||
| Balance at the beginning of the year | $ | $ | ||||||
| Additions based on tax positions related to current year | ||||||||
| Adjustments based on tax positions related to prior years | - | |||||||
| Settlements | ( | ) | ||||||
| Balance at end of year | $ | $ | ||||||
Other Income Tax Matters
In general, Oncocyte is no longer subject to tax examination by the Internal Revenue Service or state taxing authorities for years before 2017. Although the federal and state statutes are closed for purposes of assessing additional income tax in those prior years, the taxing authorities may still make adjustments to the NOL and credit carryforwards used in open years. Therefore, the tax statutes should be considered open as it relates to the NOL and credit carryforwards used in open years. For tax years that remain open to examination, potential examinations may include questioning of the timing and amount of deductions, the nexus of income among various tax jurisdictions and compliance with the Internal Revenue Code or state tax laws. Oncocyte’s management does not expect that the total amount of unrecognized tax benefits will materially change over the next twelve months.
Oncocyte’s practice is to recognize interest and penalties related to income tax matters in tax expense. As of December 31, 2021 and 2020, Oncocyte has no accrued interest and penalties.
Tax Filings
Oncocyte tax filings are subject to audit by taxing authorities in jurisdictions where it conducts business. These audits may result in assessments of additional taxes that are subsequently resolved with the authorities or potentially through the courts. Management believes Oncocyte has adequately provided for any ultimate amounts that are likely to result from these audits; however, final assessments, if any, could be significantly different than the amounts recorded in the consolidated financial statements.
| 109 |
ONCOCYTE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. Right-of-use Assets, Machinery and Equipment, Net and Construction in Progress
As of December 31, 2021 and 2020, rights-of-use assets, machinery and equipment, net, and construction in progress were comprised of the following (in thousands):
| December 31, 2021 | December 31, 2020 | |||||||
| Right-of-use assets (1) | ||||||||
| Machinery and equipment | ||||||||
| Accumulated depreciation and amortization | ( | ) | ( | ) | ||||
| Right-of-use assets, machinery and equipment, net | ||||||||
| Construction in progress | ||||||||
| Right-of-use assets, machinery and equipment, net, and construction in progress | ||||||||
| (1) |
Depreciation
expense amounted to approximately $
10. Commitments and Contingencies
Oncocyte has certain commitments other than those discussed in Note 3.
Office Lease Agreement
On
December 23, 2019, Oncocyte entered into an Office Lease Agreement (the “Irvine Lease”) of a building containing approximately
The Irvine Lease has an initial term of 89 calendar months (the “Term”), which commenced on June 1, 2020 (the “Commencement Date”). Oncocyte has an option to extend the Term for a period of five years (the “Extended Term”).
Oncocyte
will pay base monthly rent in the amount of $
If Oncocyte exercises its option to extend the Term, the initial base monthly rent during the Extended Term will be the greater of the base monthly rent in effect during the last year of the Term or the prevailing market rate. The prevailing market rate will be determined based on annual rental rates per square foot for comparable space in the area where the Premises are located. If Oncocyte does not agree with the prevailing market rate proposed by the lessor, the rate may be determined through an appraisal process. The base monthly rent during the Extended Term shall be subject to the same annual rent adjustment as applicable for base monthly rent during the Term.
In addition to base monthly rent, Oncocyte will pay in monthly installments (a) all costs and expenses, other than certain excluded expenses, incurred by the lessor in each calendar year in connection with operating, maintaining, repairing (including replacements if repairs are not feasible or would not be effective) and managing the Premises and the building in which the Premises are located (“Expenses”), and (b) all real estate taxes and assessments on the Premises and the building in which the Premises are located, all personal property taxes for property that is owned by Landlord and used in connection with the operation, maintenance and repair of the Premises, and costs and fees incurred in connection with seeking reductions in such tax liabilities (“Taxes”). Subject to certain exceptions, Expenses shall not be increased by more than 4% annually on a cumulative, compounded basis.
| 110 |
ONCOCYTE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Oncocyte
was entitled to an abatement of its obligations to pay Expenses and Taxes while constructing improvements to the Premises constituting
“Tenant’s Work” under the Lease prior to the Commencement Date, except that Oncocyte was obligated to pay
The
lessor has agreed to provide Oncocyte with a “Tenant Improvement Allowance” in the amount of $
Oncocyte
has provided the lessor with a security deposit in the amount of $
To obtain the letter of credit, Oncocyte has provided the issuing bank with a restricted cash deposit that the bank will hold to cover its obligation to pay any draws on the letter of credit by the lessor. The restricted cash may not be used for any other purpose.
On August 27, 2021, Oncocyte
entered into a lease agreement to add an additional suite to its Nashville office space, containing approximately
Application of leasing standard, ASC 842
The Irvine Lease is an operating lease under ASC 842 included in the tables below. The tables below provide the amounts recorded in connection with the application of ASC 842 as of, and during, the year ended December 31, 2021, for Oncocyte’s operating and financing leases (see Note 2).
Under
the Laboratory Agreement discussed in Note 3, Oncocyte assumed all of Razor’s Laboratory Agreement payment obligations. Although
Oncocyte is not a party to any lease agreement with Razor or Encore, under the terms of the Laboratory Agreement, Oncocyte received the
landlord’s consent for the use of the laboratory at Razor’s Brisbane, California location (the “Brisbane Facility”)
under the terms of a sublease to which Encore is the sublessee. The sublease expires on
| 111 |
ONCOCYTE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Financing lease
As
of December 31, 2021, Oncocyte has one financing lease remaining through December 2023 for certain laboratory equipment with aggregate
remaining payments of $
Operating and Financing leases
The following table presents supplemental cash flow information related to operating and financing leases for the year ended December 31, 2021 (in thousands):
Schedule of Supplemental Cash Flow Information Related to Operating and Financing Lease
| 2021 | 2020 | |||||||
| Year Ended | ||||||||
| December 31, | ||||||||
| 2021 | 2020 | |||||||
| Cash paid for amounts included in the measurement of financing lease liabilities: | ||||||||
| Operating cash flows from operating leases | ||||||||
| Operating cash flows from financing leases | ||||||||
| Financing cash flows from financing leases | ||||||||
| Right-of-use assets obtained in exchange for lease obligations | ||||||||
| Operating lease, including lease acquired in Insight Genetics business combination | - | |||||||
The following table presents supplemental balance sheet information related to operating and financing leases as of December 31, 2021 (in thousands, except lease term and discount rate):
Schedule of Supplemental Balance Sheet Information Related to Operating and Financing Leases
| December 31, 2021 | ||||
| Operating lease | ||||
| Right-of-use assets, net | $ | |||
| Right-of-use lease liabilities, current | $ | |||
| Right-of-use lease liabilities, noncurrent | ||||
| Total operating lease liabilities | $ | |||
| Financing lease | ||||
| Machinery and equipment | $ | |||
| Accumulated depreciation | ( | ) | ||
| Machinery and equipment, net | $ | |||
| Current liabilities | $ | |||
| Noncurrent liabilities | ||||
| Total financing lease liabilities | $ | |||
| Weighted average remaining lease term | ||||
| Operating lease | ||||
| Financing lease | ||||
| Weighted average discount rate | ||||
| Operating lease | % | |||
| Financing lease | % | |||
| 112 |
ONCOCYTE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents future minimum lease commitments as of December 31, 2021 (in thousands):
Schedule of Future Minimum Lease Commitments for Operating and Financing Leases
| Operating | Financing | |||||||
| Leases | Leases | |||||||
| Year Ending December 31, | ||||||||
| 2022 | $ | $ | ||||||
| 2023 | ||||||||
| 2024 | ||||||||
| 2025 | ||||||||
| 2026 | ||||||||
| Thereafter | ||||||||
| Total minimum lease payments | $ | $ | ||||||
| Less amounts representing interest | ( | ) | ( | ) | ||||
| Present value of net minimum lease payments | $ | $ | ||||||
Litigation – General
Oncocyte will be subject to various claims and contingencies in the ordinary course of its business, including those related to litigation, business transactions, employee-related matters, and other matters. When Oncocyte is aware of a claim or potential claim, it assesses the likelihood of any loss or exposure. If it is probable that a loss will result and the amount of the loss can be reasonably estimated, Oncocyte will record a liability for the loss. If the loss is not probable or the amount of the loss cannot be reasonably estimated, Oncocyte discloses the claim if the likelihood of a potential loss is reasonably possible and the amount involved could be material.
Employment Contracts
Oncocyte
has entered into employment and severance benefit contracts with certain executive officers. Under the provisions of the contracts, Oncocyte
may be required to incur severance obligations for matters relating to changes in control, as defined, and certain terminations of executives.
As of December 31, 2021, Oncocyte accrued approximately $
Indemnification
In the normal course of business, Oncocyte may provide indemnification of varying scope under Oncocyte’s agreements with other companies or consultants, typically Oncocyte’s clinical research organizations, investigators, clinical sites, suppliers and others. Pursuant to these agreements, Oncocyte will generally agree to indemnify, hold harmless, and reimburse the indemnified parties for losses and expenses suffered or incurred by the indemnified parties arising from claims of third parties in connection with the use or testing of Oncocyte’s diagnostic tests. Indemnification provisions could also cover third party infringement claims with respect to patent rights, copyrights, or other intellectual property pertaining to Oncocyte’s diagnostic tests. Oncocyte’s office and laboratory facility leases also will generally contain indemnification obligations, including obligations for indemnification of the lessor for environmental law matters and injuries to persons or property of others, arising from Oncocyte’s use or occupancy of the leased property. The term of these indemnification agreements will generally continue in effect after the termination or expiration of the particular research, development, services, lease, or license agreement to which they relate. The Purchase Agreement also contains provisions under which Oncocyte has agreed to indemnify Razor and Encore from losses and expenses resulting from breaches or inaccuracy of Oncocyte’s representations and warranties and breaches or nonfulfillment of Oncocyte’s covenants, agreements, and obligations under the Purchase Agreement. The potential future payments Oncocyte could be required to make under these indemnification agreements will generally not be subject to any specified maximum amounts. Historically, Oncocyte has not been subject to any claims or demands for indemnification. Oncocyte also maintains various liability insurance policies that limit Oncocyte’s financial exposure. As a result, Oncocyte management believes that the fair value of these indemnification agreements is minimal. Accordingly, Oncocyte has not recorded any liabilities for these agreements as of December 31, 2021 and 2020.
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ONCOCYTE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. Related Party Transactions
Financing Transactions
On
January 2, 2020, Oncocyte entered into Subscription Agreements with selected investors, including Broadwood Partners, L.P. (“Broadwood”)
and certain funds and accounts managed by Pura Vida Investments LLC (“Pura Vida”), in a registered direct offering of
shares of common stock, no par value, at an offering price of $per share, for an aggregate purchase price of approximately $
During
April 2020, Oncocyte sold shares of common stock, no par value, at an offering price of $ per share, for an aggregate purchase
price of approximately $
On
January 20, 2021, Oncocyte entered into Subscription Agreements with certain institutional investors for a registered direct offering
of shares of common stock,
On
February 9, 2021, Oncocyte completed an underwritten public offering of shares of common stock at a public offering price of
$ per share, before underwriting discounts and commissions (the “Offering”). Oncocyte received aggregate net proceeds
of approximately $
On
September 23, 2021, Oncocyte entered into a Warrant Exercise Agreement with Broadwood, pursuant to which (i) Oncocyte agreed to reduce
the exercise price of a common stock warrant held by Broadwood to purchase up to shares of common stock from $
Consulting Services
During
the three months ended March 31, 2020, Oncocyte incurred consulting fees of $
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ONCOCYTE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. Loan Payable to Silicon Valley Bank
Amended Loan Agreement
On October 17, 2019, Oncocyte entered into a First Amendment to Loan and Security Agreement (the “Amended Loan Agreement”) with the Bank pursuant to which Oncocyte obtained a new $ million secured credit facility (“Tranche 1”), a portion of which was used to repay the remaining balance of approximately $ on outstanding loans from the Bank, plus a final payment of $, under the February 21, 2017 Loan Agreement. The credit line under the Amended Loan Agreement may be increased by an additional $ million (“Tranche 2”) if Oncocyte obtains at least $ million of additional equity capital, as was the case with the original Loan Agreement, and a positive final coverage determination is received from the Centers for Medicate and Medicaid Services for DetermaRxTM at a specified minimum price point per test (the “Tranche 2 Milestone”), and Oncocyte is not in default under the Amended Loan Agreement.
Payments
of interest only on the principal balance were due monthly from the draw date through March 31, 2020, followed by 24 monthly payments
of principal and interest, but the Bank has agreed to a deferral of principal payments, as discussed below. The outstanding principal
balance of the loan will bear interest at a stated floating annual interest equal to the greater of (a) the prime rate or (b) % per
annum. As of December 31, 2021, the latest published prime rate was
On
April 2, 2020, as part of the Bank’s COVID-19 pandemic relief program, Oncocyte and the Bank entered into a Loan Deferral Agreement
(“Loan Deferral”) with respect to the Amended Loan Agreement.
At
maturity of the loan, Oncocyte will also pay the Bank an additional final payment fee of $
The outstanding principal amount of the loan, with interest accrued, the final payment fee, and the prepayment fee may become due and payable prior to the applicable maturity date if an “Event of Default” as defined in the Amended Loan Agreement occurs. Oncocyte was in compliance with the Amended Loan Agreement as of the filing date of this Report.
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ONCOCYTE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Bank Warrants
In
2017, in connection with the Loan Agreement, Oncocyte issued common stock purchase warrants to the Bank (the “2017 Bank Warrants”)
entitling the Bank to purchase shares of Oncocyte common stock in tranches related to the loan tranches under the Loan Agreement. In
conjunction with the availability of the loan, the Bank was issued warrants to purchase
On
October 17, 2019, in conjunction with Tranche 1 becoming available under the Amended Loan Agreement, Oncocyte issued a common stock purchase
warrant to the Bank (the “2019 Bank Warrant”) entitling the Bank to purchase
13. Quarterly Financial Data (unaudited)
The following table sets forth unaudited consolidated statements of operations data for the eight quarters in the period ended December 31, 2021. This information has been derived from Oncocyte’s unaudited condensed consolidated financial statements that have been prepared on the same basis as the audited consolidated financial statements and, in the opinion of management, include all adjustments, consisting of normal recurring adjustments, necessary for a fair statement of the information when read in conjunction with the audited consolidated financial statements and related notes thereto. Oncocyte’s quarterly results have been, and may in the future be, subject to significant fluctuations. As a result, Oncocyte believes that results of operations for interim periods should not be relied upon as any indication of the results to be expected in any future periods.
Schedule of Quarterly Financial Information
| Mar.
31, 2020 | Jan.
30, 2020 | Sep.
30, 2020 | Dec.
31, 2020 | Mar.
31, 2021 | Jan.
30, 2021 | Sep.
30, 2021 | Dec.
31, 2021 | |||||||||||||||||||||||||
| Quarter Ended | ||||||||||||||||||||||||||||||||
| Mar.
31, 2020 | Jun.
30, 2020 | Sep.
30, 2020 | Dec.
31, 2020 | Mar.
31, 2021 | Jun.
30, 2021 | Sep.
30, 2021 | Dec.
31, 2021 | |||||||||||||||||||||||||
| Revenues | ||||||||||||||||||||||||||||||||
| Cost of revenues | ||||||||||||||||||||||||||||||||
| Research and development expenses | | | | | | | | | ||||||||||||||||||||||||
| Sales and marketing expenses | ||||||||||||||||||||||||||||||||
| General and administrative expenses | ||||||||||||||||||||||||||||||||
| Change in fair value of contingent consideration | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Loss from operations | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||
| Other income (expense) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| Loss before income taxes | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||
| Income tax benefit | - | - | - | ( | ) | |||||||||||||||||||||||||||
| Net Loss | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||
14. Subsequent Events
Co-Development Agreement with Life Technologies Corporation
On January 13, 2022, Oncocyte entered into a Collaboration Agreement (the “LTC Agreement”) with Life Technologies Corporation, a Delaware corporation and subsidiary of Thermo Fisher Scientific (“LTC” and together with Oncocyte, the “Parties” or individually, a “Party”), in order to partner in the development and collaborate in the commercialization of Thermo Fisher Scientific’s existing Oncomine Comprehensive Assay Plus (“OCA Plus”) and Oncocyte’s Determa IO assay for use with LTC’s Ion TorrentTM GenexusTM Integrated Sequencer and LTC’s Ion TorrentTM GenexusTM Purification System (“Genexus system”) in order to obtain in vitro diagnostic (“IVD”) regulatory approval.
Development
Under the terms of the LTC Agreement, Oncocyte will clinically validate LTC’s OCA Plus assay, which is LTC’s proprietary NGS-based assay designed to be run on the Genexus system as an IVD assay (the “Collaboration LTC Product”) and Oncocyte’s Determa IO assay, which is a multivariate gene expression test performed on FFPE biopsy specimens, as an IVD assay run on the Genexus system (the “Collaboration Determa Product”), paving the way toward regulatory approval for use in tumor profiling and guidance of therapy selection for solid tumor cancers in humans. LTC retains the exclusive right to partner with therapeutics companies to develop the Collaboration LTC Product as a companion diagnostic. Oncocyte retains the exclusive right to partner with therapeutics companies to develop the Collaboration Determa Product as a companion diagnostic. All development work will be conducted pursuant to development plans agreed by the Parties through a series of governance committees that will oversee the collaboration.
Costs Associated with Product Development
Oncocyte will be responsible for all costs associated with Oncocyte activities under the LTC product development budget. Oncocyte and LTC will share development costs associated with LTC activities under the LTC product development budget. LTC will be responsible for costs associated with the performance of research and development activities for the RUO-labeled OCA Plus and related components as is necessary to enable the development of the Collaboration LTC Product as contemplated by the LTC product development plan. Oncocyte will be responsible for all costs associated with activities of both Parties under the Determa product development budget. LTC will be responsible, at LTC’s own cost, for the performance of research and development activities for the RUO-labeled OCA Plus and related components as is necessary to enable the development of the Collaboration LTC Product as contemplated by the development plan for the Collaboration LTC Product.
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ONCOCYTE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Commercialization
LTC will be responsible for the commercialization of the Collaboration LTC Product throughout the world, but the Parties will co-market it in the United States, Canada, the United Kingdom, European Union, Switzerland, Australia, and New Zealand (the “LTC Product Territory”). Oncocyte will be responsible for the commercialization of the Collaboration Determa Product in the United States (the “Determa Product Territory”), and LTC will be responsible for commercializing it in the rest of the world. All commercialization activities for the Collaboration LTC Product and the Collaboration Determa Product will be conducted pursuant to commercialization plans agreed by the Parties through the collaboration’s governance committees.
Economic Terms
Under the LTC Agreement, LTC will pay Oncocyte a percentage of revenue received by LTC on sales of the Collaboration LTC Product throughout the world and on sales of the Collaboration Determa Product outside the United States. The revenue share percentage for the Collaboration LTC Product will vary based on the timing of the sale, the territory of the sale, and the degree to which consumables, reagents, and other products are included in the kit being sold, but the Company estimates that the average revenue share percentage that it will receive under the LTC Agreement will likely range from the low teens to the low twenties. The revenue share percentage LTC will pay to Oncocyte on sales of the Collaboration Determa Product will vary based on the timing of the sale, and the degree to which consumables, reagents, and other products are included in the kit being sold, but the Company estimates that the average revenue share that it will receive under the LTC Agreement will likely range in the low twenties. Oncocyte will pay LTC a mid single-digit percentage of its revenue on sales of the Collaboration Determa Product in the United States. Oncocyte will also receive up to two milestone payments in the low seven figures if LTC successfully commercializes the OCA Plus IVD assay as a companion diagnostic with certain claims.
Exclusivity
During the term of the LTC Agreement, (a) LTC will not enter into any agreement or arrangement with any third party with respect to the development or commercialization of OCA Plus on the Genexus system in the field of distributed IVD assay kits for the tumor profiling of and guidance of therapy selection for solid tumor cancers in humans (the “LTC Field”) in the LTC Product Territory, (b) Oncocyte will not partner with any third-party NGS equipment manufacturer with respect to the development and commercialization of a comprehensive genomic profiling assay on an instrument platform similar to or competitive with LTC’s NGS systems in the LTC Field in the LTC Product Territory, and (c) LTC will not develop, market or sell a new panel or other substantially similar comprehensive genomic profiling assay that would compete with the Collaboration LTC Product in the LTC Field in the LTC Product Territory on the Genexus system.
Manufacturing
LTC is responsible for the manufacture and supply of all OCA Plus assays and Collaboration LTC products, among other consumables and reagents required for the development of the Collaboration LTC Product. LTC will supply Oncocyte all consumables and reagents necessary for use in developing the Collaboration LTC Product pursuant to the LTC product development plan.
In addition, following the effective date of the LTC Agreement, the Parties will negotiate in good faith a supply agreement pursuant to which LTC will supply Oncocyte with the Collaboration Determa Products for commercialization in the United States. LTC will also supply Oncocyte with all Genexus instruments, consumables and reagents, necessary for use in developing Collaboration Determa Products pursuant to the Determa product development plan.
Term; Termination
Unless earlier terminated as described in the LTC Agreement, the LTC Agreement will remain in effect until December 31, 2035. The LTC Agreement may be (i) terminated for cause by either Party based on any uncured material breach or insolvency by the other Party, and (ii) terminated by either Party with respect to specific termination events occurring for either the Collaboration LTC products or the Collaboration Determa Products, including but not limited to, the failure to achieve certain milestones and failure to agree to initial development or commercialization plans for the Collaboration Determa Product. If LTC fails to meet its certain product development milestones, the term of the LTC Agreement shall be extended on a proportionate basis.
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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
It is management’s responsibility to establish and maintain adequate internal control over all financial reporting pursuant to Rule 13a-15 under the Exchange Act. Our management, including our principal executive officer and our principal financial officer, have reviewed and evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2021. Following this review and evaluation, management collectively determined that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms; and (ii) is accumulated and communicated to management, including our chief executive officer and our chief financial officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the fourth quarter of our fiscal year ended December 31, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting, as defined in Exchange Act Rule 13a-15(f), is a process designed by, or under the supervision of, our principal executive officer, our principal operations officer, and our principal financial officer, and effected by our Board of Directors, management, and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
| ● | Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets; | |
| ● | Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and | |
| ● | Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements. |
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2021, based on criteria established in the 2013 Internal Control - Integrated Framework issued by COSO. Based on this assessment, management believes that, as of that date, our internal control over financial reporting was effective.
Item 9B. Other Information
None.
Item 9C. Disclosure Regarding Foreign Jurisdictions That Prevent Inspections
Not applicable.
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PART III
Item 10. Directors, Executive Officers, and Corporate Governance
The information required by this item will be contained in our Proxy Statement for our 2022 Annual Meeting of Shareholders, to be filed with the SEC within 120 days after December 31, 2021, and is incorporated herein by reference.
We have a written Code of Business Conduct and Ethics (“Code of Ethics”) that applies to our principal executive officer, our principal financial officer and principal accounting officer, our other executive officers, our other employees, and our directors. The purpose of the Code of Ethics is to deter wrongdoing and to promote (i) honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships; (ii) full, fair, accurate, timely, and understandable disclosure in reports and documents that we file with or submit to the SEC and in our other public communications; (iii) compliance with applicable governmental rules and regulations; (iv) prompt internal reporting of violations of the Code of Ethics to an appropriate person or persons identified in the Code; and (v) accountability for adherence to the Code. A copy of our Code of Ethics has been posted on our internet website and can be found at www.oncocyte.com. If we amend or waive a provision of our Code of Ethics that applies to our chief executive officer or chief financial officer, we will post the amended Code of Ethics or information about the waiver on our internet website.
Information about our compliance with Section 16(a) of the Securities Exchange Act of 1934 reported under the caption “Delinquent Section 16(a) Reports” in our Proxy Statement for our 2022 Annual Meeting of Shareholders, which will be filed no later than 120 days after December 31, 2021, and is incorporated herein by reference.
Item 11. Executive Compensation
Information about compensation of our executive officers reported under the caption “Executive Compensation,” and information about compensation of directors reported under the caption “Director Compensation,” in our Proxy Statement for our 2022 Annual Meeting of Shareholders is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management, and Related Stockholder Matters
The information required by this item will be contained in our Proxy Statement for our 2022 Annual Meeting of Shareholders, to be filed with the SEC within 120 days after December 31, 2021, and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this item will be contained in our Proxy Statement for our 2022 Annual Meeting of Shareholders, to be filed with the SEC within 120 days after December 31, 2021, and is incorporated herein by reference.
Item 14. Principal Accountant Fees and Services
The information required by this item will be contained in our Proxy Statement for our 2022 Annual Meeting of Shareholders, to be filed with the SEC within 120 days after December 31, 2021, and is incorporated herein by reference.
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PART IV
Item 15. Exhibit and Financial Statement Schedules
| (a-1) | Financial Statements. | |
| The following consolidated financial statements of Oncocyte Corporation are filed in the Form 10-K: | ||
| Consolidated Balance Sheets | ||
| Consolidated Statements of Operations | ||
| Consolidated Statements of Comprehensive Income | ||
| Consolidated Statements of Shareholders’ Equity | ||
| Consolidated Statements of Cash Flows |
1 Note: Please confirm if any of these exhibits are no longer applicable and should be removed.
| 120 |
| 121 |
| 122 |
*Filed herewith
**Furnished herewith
† Portions of this exhibit have been omitted because the omitted information is (i) not material and (ii) is the type that the registrant treats as private or confidential.
Item 16. Form 10-K Summary
None.
| 123 |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized on the 11th day of March 2022.
| ONCOCYTE CORPORATION | ||
| By: | /s/ Ronald Andrews | |
| Ronald Andrews | ||
| President and Chief Executive Officer | ||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
| Signature | Title | Date | ||
| /s/ Ronald Andrews | President and Chief Executive Officer and Director | March 11, 2022 | ||
| RONALD ANDREWS | (Principal Executive Officer) | |||
| /s/ Mitchell Levine | Chief Financial Officer | March 11, 2022 | ||
| MITCHELL LEVINE | (Principal Financial Officer) | |||
| /s/ Li Yu | Vice President and Controller |
March 11, 2022 | ||
| LI YU | (Principal Accounting Officer) | |||
| /s/ Melinda Griffith | Director | March 11, 2022 | ||
| MELINDA GRIFFITH | ||||
| /s/ Andrew Arno | Director | March 11, 2022 | ||
| ANDREW ARNO | ||||
| /s/ Alfred D. Kingsley | Director | March 11, 2022 | ||
| ALFRED D. KINGSLEY | ||||
| /s/ Andrew Last | Director | March 11, 2022 | ||
| ANDREW LAST | ||||
| /s/ Jennifer L Carter | Director | March 11, 2022 | ||
| JENNIFER L. CARTER | ||||
| /s/ Cavan Redmond | Director | March 11, 2022 | ||
| CAVAN REDMOND |
| 124 |
Exhibit 4.11
DESCRIPTION OF SECURITIES
The following description of certain terms of Oncocyte Corporation (“Oncocyte”) common stock is a summary and is qualified in its entirety by reference to (i) Oncocyte’s Articles of Incorporation, as amended, (ii) Oncocyte’s Amended and Restated Bylaw, and (iii) the California General Corporation Law.
Common Stock
The Oncocyte Articles of Incorporation currently authorize the issuance of up to 230,000,000 shares of common stock, no par value. Each holder of record of common stock is entitled to one vote for each outstanding share owned, on every matter properly submitted to the shareholders for their vote; provided, that if any shareholder entitled to vote at a meeting at which directors are to be elected gives timely notice of their intention to cumulate votes in the election of directors, shareholders may cumulate votes for the election of directors.
Subject to the dividend rights of holders of any preferred stock that may be issued from time to time, holders of common stock are entitled to any dividend declared by the Oncocyte Board of Directors out of funds legally available for that purpose.
Subject to the prior payment of the applicable liquidation preference to holders of any preferred stock that may be issued from time to time, holders of common stock are entitled to receive on a pro rata basis all remaining assets available for distribution to the holders of common stock in the event of the liquidation, dissolution, or winding up of Oncocyte’s operations.
Holders of common stock do not have any preemptive, subscription, redemption, or conversion rights. There are no redemption or sinking fund provisions applicable to the common stock. The rights, powers, preferences and privileges of holders of Oncocyte common stock will be subject to those of the holders of any shares of Oncocyte preferred stock that may be issued in the future.
Exhibit 10.43
EXECUTION VERSION
Certain information contained in this document, marked by brackets [***], has been omitted pursuant to Regulation S-K, Item 601(b)(10) because it is both (i) not material and (ii) is the type that the registrant treats as private or confidential.
COLLABORATION AGREEMENT
This Collaboration Agreement (“Agreement”), is made effective as of January 13, 2022 (the “Effective Date”) by and between Life Technologies Corporation, a Delaware corporation having a place of business at 5823 Newton Drive, Carlsbad, California 92008 (“LTC”); and Oncocyte Corporation, a California corporation having a place of business at 15 Cushing, Irvine, California 92618 (“Oncocyte”). Hereinafter, each of LTC and Oncocyte are referred to as a “Party” and collectively as the “Parties.”
BACKGROUND
LTC is engaged in business that includes the development, production and sale of in vitro diagnostic products and has existing technology that enables the sequencing of hundreds of genes simultaneously from tumor samples with high reproducibility and rapid turnaround times.
Oncocyte is engaged in business that includes the development and commercialization of diagnostic assay services and products to provide clear insights to physicians and their patients that inform critical decisions in the diagnosis, treatment, and monitoring of cancer.
Oncocyte and LTC wish to partner in the development and collaborate in the commercialization of Collaboration LTC Products (as defined below) and Collaboration Determa Products (as defined below), including Oncocyte’s validation of LTC’s OCA Plus assay and Oncocyte’s Determa IO assay and for use with the NGS Instrument in order to obtain IVD regulatory approval.
Now, therefore, the Parties hereby agree as follows:
Article 1
DEFINITIONS
Capitalized terms not defined in the text are defined below and have the meanings set forth therein whether used in singular or plural forms.
1.1 “AAA” has the meaning set forth in Section 15.4(a) ([***]).
1.2 “Activities” means the activities to be undertaken pursuant to the LTC Product Development Plan or LTC Product Commercialization Plan, as applicable, and, the Determa Product Development Plan and the Determa Product Commercialization Plan, as applicable, under this Agreement, on the terms contained herein.
| 1 |
1.3 “Affiliate” means any corporation or other business entity that is controlled by, controlling, or under common control with the affected Party or Third Party, wherein control means direct or indirect ownership of at least 50% (or such lesser percentage which is the maximum allowed to be owned by a foreign corporation in a particular jurisdiction) of the stock entitled to vote in the election of directors (or in the case of an entity that is not a corporation, for the election of the corresponding managing authority) or the power to direct or cause the direction of the management and policies of such corporation or other business entity, directly or indirectly, whether through ownership of voting securities, by contract or otherwise. For clarity, a corporation or other business entity is only considered an Affiliate for as long as such control exists.
1.4 “Agreement” has the meaning set forth in the preamble.
1.5 “AmpliSeq” means LTC’s AmpliSeq™ chemistry.
1.6 “AmpliSeq Terms” has the meaning set forth in Section 4.7 (AmpliSeq™ Terms and Conditions).
1.7 “Applicable Law” means all applicable laws, statutes, rules, regulations, court orders or injunctions having the effect of law of any federal, national, multinational, state, provincial, county, city or other political subdivision, agency or other body, domestic or foreign, including but not limited to any applicable rules, regulations, or other requirements of the Regulatory Authorities that may be in effect from time to time.
1.8 “Arising IP” means any Intellectual Property Rights invented or developed in the course of the performance of Activities under this Agreement, either solely by or on behalf of a Party or jointly by the Parties, and includes all Collaboration Data, LTC Product Arising IP, Oncocyte Product Arising IP and Other Arising IP; provided, however, that Arising IP does not include any Intellectual Property Rights arising from LTC’s research and development activities for RUO-labeled OCA Plus Assay and related components as provided in Section 4.5 (LTC Early Development).
1.9 “Background IP” means all Intellectual Property Rights other than Arising IP that are necessary for purposes of carrying out this Agreement and that are Controlled by a Party on or after the Effective Date. For clarity, to the extent a Party obtains Control of Relevant Third Party IP after the Effective Date, such rights will be included in such Party’s Background IP.
1.10 “Biomarker” means a measurable substance in an organism whose presence is indicative of some phenomenon such as disease, infection, or environmental exposure.
1.11 “[***]” means a Regulatory Submission to a Regulatory Authority that claims the Collaboration LTC Product may be used [***]
1.12 “CCPA” has the meaning set forth in Section 1.25 (De-identified).
| 2 |
1.13 “Change of Control” means (a) the consummation of a reorganization, merger or consolidation of Oncocyte with one or more other persons, other than a transaction immediately following which more than 50% of the stock or other equity of the entity resulting from such transaction are beneficially owned (in each case within this definition, within the meaning of Rule 13d-3 promulgated under the Exchange Act) by persons who, immediately prior to such transaction, beneficially owned more than 50% of the outstanding equity ownership interests in Oncocyte; (b) the acquisition of all or substantially all of the assets of Oncocyte or the acquisition of beneficial ownership of more than 50% of the outstanding securities of Oncocyte entitled to vote generally in the election of directors by any person or by any persons acting in concert other than a transaction described in clause (a) above; (c) a complete liquidation or dissolution of Oncocyte, in each case, whether accomplished in a single transaction or series of related transactions; or (d) the acquisition or merger of Oncocyte by or with a publicly traded special purpose acquisition company (“SPAC”) in which the shareholders of Oncocyte receive shares of the SPAC as consideration; provided, however, that in no event will a Change of Control be deemed to have occurred as a result of any acquisition of securities or assets of Oncocyte or a subsidiary of Oncocyte, by Oncocyte or any subsidiary of Oncocyte, or by any employee benefit plan maintained by any of them; and provided further that a sale of securities by Oncocyte for capital raising purposes that does not satisfy clause (b) above will not be a Change of Control. Notwithstanding the foregoing, [***] For purposes of this definition, the term “person” will have the meaning assigned to it under sections 13(d)(3) or 14(d)(2) of the Exchange Act.
1.14 “Claim” means any claim, demand, lawsuit or legal action brought against a Party.
1.15 “Collaboration Data” means any results, information, data, presentations, summaries, and analyses that are generated during the Activities or result from the performance of the Activities, whether developed by a Party’s or its Affiliates’ or subcontractors’ employees, agents, or independent contractors, or any Persons contractually required to assign or license such data to a Party or any Affiliate of a Party; provided that “Collaboration Data” will not include any LTC Product Arising IP, Oncocyte Product Arising IP, any results, information, data, presentations, summaries, and analyses developed by Oncocyte which may be provided to LTC during the Term or, for the avoidance of doubt, any Intellectual Property Rights arising from LTC’s research and development activities under Section 4.5 (LTC Early Development).
1.16 “Collaboration Determa Products” means the Determa Assay product running on the NGS Instrument that (a) utilizes a proprietary set of AmpliSeqTM primers developed by LTC for amplifying the set of Biomarkers that are included in the panel from FFPE tissue samples or blood samples designed to be run on the NGS Instrument, and (b) has been developed and validated for RUO or IVD guidance of therapy selection claims pursuant to this Agreement.
1.17 “Collaboration LTC Product” means the OCA Plus product running on the NGS Instrument that (a) utilizes a proprietary set of AmpliSeqTM primers developed by LTC for amplifying the set of Biomarkers that are included in the panel from FFPE tissue samples designed to be run on the NGS Instrument, and (b) has been developed and validated for use in the Field pursuant to this Agreement.
1.18 “Combination Product” means (a) with respect to a Kitted LTC Product, an LTC product that is (i) sold in the form of a combination that contains or comprises a Kitted LTC Product together with one or more other products (other than an IVD-labeled Collaboration LTC Product, Library Preparation Reagent, Sample Preparation Reagent, or Core Consumable) (such other product, an “Other LTC Product”), and (ii) sold for a single invoice price, or (b) with respect to a Collaboration Determa Product or Kitted Determa Product, an Oncocyte product (in the Territory) or LTC product (outside the Territory) that is (i) sold in the form of a combination that contains or comprises a Collaboration Determa Product or Kitted Determa Product (as applicable) together with one or more other products (other than an RUO-labeled Collaboration Determa Product, an IVD-labeled Collaboration Determa Product, or Library Preparation Reagent) (such other product, an “Other Determa Product”), and (ii) sold for a single invoice price.
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1.19 “Commercialization Plans” means the LTC Product Commercialization Plan and the Determa Product Commercialization Plan.
1.20 “Commercially Reasonable Efforts” means, with respect to a Party, [***]
1.21 “Comprehensive Genomic Profiling Assay” means a tissue-based NGS assay that assesses both DNA and RNA, and that assesses at least 500 genes, microsatellite instability, and tumor mutational burden for the purpose of tumor profiling. OCA Plus is a Comprehensive Genomic Profiling Assay.
1.22 “Confidential Information” includes, but is not limited to, know-how, trade secrets, tools, methods, methodologies, processes, techniques, apparatus, designs, specifications, samples, technical descriptions, study proposals, study data, computer source code, customer lists, pricing information, product development plans, marketing plans, personnel information, financial information and business strategies, together with other information which a reasonable person would conclude is intended to remain confidential, due to its nature or the circumstances under which it is disclosed, and any other non-public information that the Disclosing Party designates as proprietary or confidential pursuant to the terms herein. Confidential Information also includes any reports, study data, notes, summaries, abstracts, or drafts of Confidential Information or oral presentations, reports, or discussions referring to, describing, elaborating upon, verifying or otherwise relating to the Disclosing Party’s Confidential Information that are created by the Receiving Party. For LTC, “Confidential Information” will also include any information relating to LTC’s nucleic acid sample preparation technology (including but not limited to LTC’s AmpliSeq™ technology and LTC’s library preparation or template preparation technologies), or LTC’s sequencing technologies, including but not limited to (1) LTC’s Ion Torrent™ technology, instruments, kits, chips, arrays, consumables, reagents (including primers, primer sequences and/or primer designs provided by LTC under this Agreement), protocols, primers, primer sequences, primer designs, and assay design methodologies, electronics, sensors, devices, platforms, workflows, software, and/or computer code; (2) design, configuration, composition, use, manufacturing, layout, or packaging of any of the foregoing; (3) extraction, manipulation, processing, analysis and/or storage of data related to any of the foregoing; and/or (4) business, research and/or development activities, products, and/or services related to any of the foregoing. Notwithstanding the foregoing, (a) Confidential Information does not include any item of information that: (i) is within the public domain prior to the time of the disclosure by the Disclosing Party or thereafter becomes within the public domain other than as a result of disclosure by the Receiving Party or any of its representatives in violation of this Agreement, (ii) was, on or before the date of disclosure, rightfully in the possession of the Receiving Party without burden of confidentiality (including, but not limited to any obligations of confidentiality under the Supply Agreement and any earlier supply agreement between the Parties), as evidenced by written records, however maintained, (iii) is acquired by the Receiving Party from a Third Party having the right to disclose without burden of confidentiality, or (iv) is hereafter independently developed by the Receiving Party without use of the Disclosing Party’s Confidential Information, as evidenced by written records, however maintained, and (b) Collaboration Data will be deemed the Confidential Information of both of the Parties.
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1.23 “Control” or “Controlled” means, with respect to any Intellectual Property Rights or other assets, possession by Oncocyte or its respective Affiliates or LTC or the LTC Subsidiaries, as of the time of inquiry, of the right (whether by ownership, license or otherwise, other than pursuant to this Agreement) to grant to the other Party access, ownership, a license, sublicense, or other right to or under such Intellectual Property Rights or assets for the specific purposes provided for herein without any payment obligation to any Third Party or conflict with any other obligation or violating the terms of any agreement or other arrangement with any Third Party.
1.24 [***]
1.25 “De-identified” means the process by which (a) health information no longer identifies an individual and with respect to which there is no reasonable basis to believe that the information can be used to identify or re-identify an individual, as set forth in §164.514 of the Privacy Rule of the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), (b) Personal Data (as that term is defined in Article 4 of the General Data Protection Regulations (“GDPR”)) that is subject to GDPR requirements is anonymized or, where not possible, pseudonymized as defined under the GDPR, and (c) personal information is deidentified (as those terms are defined in the California Consumer Privacy Act (“CCPA”)).
1.26 “Determa Algorithm” means Oncocyte’s proprietary algorithm, including as set forth in international patent application number PCT/US2021/044240, that combines mRNA gene expression data and interprets the physiology of both the tumor and its surrounding micro-environment in order to predict the response to immuno-oncology therapies.
1.27 “Determa Assay” means Oncocyte’s Determa IO Assay that is a multivariate gene expression test performed on FFPE biopsy specimens, and which measures the presence of subtypes of infiltrating inflammatory cells, and the presence or absence of a differentiated stromal microenvironment. In combination with the Determa Algorithm, the Determa Assay is used to predict the response to immuno-oncology therapies.
1.28 “Determa Product Commercialization Plan” has the meaning set forth in Section 5.3(b) (Collaboration Determa Products).
1.29 “Determa Product Development Budget” has the meaning set forth in Section 4.1(b) (Determa Product Development Plan).
1.30 “Determa Product Development Plan” has the meaning set forth in Section 4.1(b) (Determa Product Development Plan).
1.31 “Determa Product Territory” means the United States.
1.32 “Development” means activities relating to the development, optimization, validation, or clinical testing of any product or service, including activities relating to obtaining or maintaining Regulatory Approval of such product or service. When used as a verb, “Develop” means to engage in Development.
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1.33 “Development Budgets” means the LTC Product Development Budget and the Determa Product Development Budget.
1.34 “Development Plans” means the LTC Product Development Plan and the Determa Product Development Plan.
1.35 “Disclosing Party” means the Party disclosing its Confidential Information to the Receiving Party.
1.36 “Effective Date” has the meaning set forth in the preamble.
1.37 “[***]” has the meaning set forth in Section 15.8(b) (Transfer Event).
1.38 “Executive Officers” has the meaning set forth in Section 2.3(b) (Actions or Decisions).
1.39 “FDA” means the United States Food and Drug Administration.
1.40 “Field” means (a) with respect to Collaboration LTC Products, distributed IVD assay kits for the tumor profiling of and guidance of therapy selection for solid tumor cancers in humans, including use as a companion diagnostic test specified in the label of a therapeutic product approved by the applicable Regulatory Authority and run on an NGS Instrument, and (b) with respect to Collaboration Determa Products, (i) distributed in IVD assay kits for guidance of therapy selection for solid tumor cancers in humans to predict the response to immune-oncology therapies, including use as a companion diagnostic test specified in the label of a therapeutic product approved by the applicable Regulatory Authority and run on an NGS Instrument, and (ii) distributed assay kits sold with an RUO label for use on an NGS Instrument solely in accordance with the Determa Product Commercialization Plan for the purpose of demonstrating the capabilities of the Collaboration Determa Products as a potential IVD assay for guidance of therapy selection for solid tumor cancers in humans to predict the response to immune-oncology therapies. For the avoidance of doubt, assays kits for assessing other than solid tissue samples, including hematologic malignancies such as leukemia, lymphoma, and multiple myeloma, are excluded from the Field.
1.41 “First Commercial Sale” means, (a) for a Kitted LTC Product (worldwide) or Kitted Determa Product (outside the Determa Product Territory) and a country, the first sale for end use or consumption to a Third Party of such product in such country by LTC or its Affiliate, or any distributor of LTC or its Affiliates, after receipt of Regulatory Approval in the Field for use of the Kitted LTC Product or Kitted Determa Product by the relevant Regulatory Authority in such country, and (b) for a Collaboration Determa Product in the Determa Product Territory, the first sale for end use or consumption to a Third Party of such Collaboration Determa Product in such country by Oncocyte or its Affiliate in the Determa Product Territory, or any distributor of such Party or its Affiliates, after receipt of Regulatory Approval in the Field for use of the Collaboration Determa Product by the relevant Regulatory Authority in the Determa Product Territory. First Commercial Sale excludes any transfers of a product to Third Parties for use in a clinical trial or other development activities or any expanded access program, compassionate sales or use program (including any named patient program or single patient program), or indigent program; provided that such transfers are provided at no profit to the transferring Party and its Affiliates.
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1.42 “GCP” means the then-current good clinical practice standards, practices, and procedures promulgated or endorsed by the applicable Regulatory Authority as set forth in the guidelines imposed by such Regulatory Authority, as may be updated from time-to-time.
1.43 “GDPR” has the meaning set forth in Section 1.25 (De-identified).
1.44 “HIPAA” has the meaning set forth in Section 1.25 (De-identified).
1.45 “[***]” means a Regulatory Submission to a Regulatory Authority that claims the Collaboration LTC Product may be used [***]
1.46 “Indemnified Party” means the Party seeking indemnification.
1.47 “Indemnifying Party” means Party from which an Indemnified Party seeks indemnification.
1.48 “Intellectual Property Rights” means rights in and to all (a) Patents, (b) copyrights, whether registered or unregistered, (c) Know How, and (d) any other intellectual or other proprietary rights of any kind now known or hereafter recognized in any jurisdiction relating to technology, including the right to bring a claim with respect to any of the foregoing for past, present or future infringement, and any applications or registrations thereof, but excluding trademarks, service marks, trade names, trade dress, domain names and similar rights, including goodwill therein.
1.49 “IUO” means investigational use only.
1.50 “IVD” means in vitro diagnostic for human genetic testing, involving the detection of specific alleles, mutations, genotypes, karyotypes or epigenetic changes that are associated with heritable traits, diseases or predispositions to disease for the individual or their descendants.
1.51 “Joint Committee” means each of the JSC, JDC, and any Joint Subcommittee.
1.52 “Joint Development Committee” or “JDC” means a joint committee formed by the Parties, as more particularly described in Section 2.2 (Joint Development Committee).
1.53 “Joint Other Arising IP” means (a) Other Arising IP invented or developed jointly by the Parties, and (b) Collaboration Data.
1.54 “Joint Steering Committee” or “JSC” means a joint committee formed by the Parties, as more particularly described in Section 2.1 (Joint Steering Committee).
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1.55 “Joint Subcommittee” has the meaning set forth in Section 2.1(c) (Subcommittees).
1.56 “Kitted Determa Product” means any SKU that includes the Collaboration Determa Product with either (a) an IVD label that has been granted pre-market notification or pre-market authorization by the FDA (or the equivalent foreign Regulatory Approval) based upon a Regulatory Submission that includes or incorporates by reference the Collaboration Data, or (b) an RUO label, in each case ((a) or (b)), whether alone or in combination with one or more of the following: [***] For the avoidance of doubt, a Kitted Determa Product will not include any assay other than the Collaboration Determa Product, and any Kitted Determa Product sold with an assay other than the Collaboration Determa Product for a single invoice price will be treated as a Combination Product, with the non-Collaboration Determa Product treated as an Other Product.
1.57 “Kitted LTC Product” means any SKU sold by LTC that includes the Collaboration LTC Product with an IVD label that has been granted pre-market notification by the FDA (or the equivalent foreign Regulatory Approval) based upon a Regulatory Submission that includes or incorporates by reference the Collaboration Data, whether alone or in combination with one or more of the following: [***] For the avoidance of doubt, a Kitted LTC Product will not include any assay other than the Collaboration LTC Product, and any Kitted LTC Product sold with an assay other than the Collaboration LTC Product for a single invoice price will be treated as a Combination Product, with the non-Collaboration LTC Product treated as an Other Product.
1.58 “Know How” means any information and materials, including discoveries, inventions, improvements, processes, techniques, machines, manufactures, technical developments, methods, analysis, results, tools, models, systems, assays, designs, protocols, formulas, compositions, genetic constructs, sequences, data, databases, algorithms, software, know-how and trade secrets (in each case, patentable, copyrightable or otherwise), but excluding any Patent.
1.59 [***]
1.60 “Loss” means any liability, damage, cost, and expense of every kind and description, including penalties and reasonable attorney fees, other than consequential or speculative damages incurred by a Party based on lost sales of any product.
1.61 “LTC” has the meaning set forth in the preamble.
1.62 “LTC Indemnified Parties” means LTC and its Affiliates, and its and their respective officers, directors, employees, agents and representatives.
1.63 “LTC Materials” means the Materials owned or Controlled by LTC and provided by LTC to Oncocyte under this Agreement.
1.64 “LTC Product Arising IP” means Arising IP that (a) [***] or (b) [***]
1.65 “LTC Product Commercialization Plan” has the meaning set forth in Section 5.3(a) (Collaboration LTC Products).
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1.66 “LTC Product Development Budget” has the meaning set forth in Section 4.1(a) (LTC Product Development Plan).
1.67 “LTC Product Development Milestones” means development milestones and associated timelines set forth in the LTC Product Development Plan.
1.68 “LTC Product Development Plan” means the written plan for conducting activities with respect to the Collaboration LTC Product for use in the Field in the Territory as further described in Section 4.1(a) (LTC Product Development Plan).
1.69 “LTC Product Territory” means the United States, Canada, United Kingdom, European Union, Switzerland, Australia, and New Zealand.
1.70 “LTC Subsidiaries” means LTC Affiliates that are under the direct or indirect control of LTC.
1.71 “Manufacturer of Record” means the entity that is responsible for a product’s design, manufacture, packaging, labeling, distribution, and regulatory compliance (both pre-market and post-market compliance) regardless of whether these operations are carried out by the entity or on its behalf by another Person.
1.72 “Materials” means any specimens, samples or such other biological materials, including human tissue, blood, pre-extracted materials from human samples, cell lines, plasmids, controls, and other contrived samples, that are (i) furnished by one Party to the other Party under this Agreement, or (ii) procured through Third Party vendors under this Agreement.
1.73 “Net Sales” means gross receipts from the sale by LTC or its Affiliates of Kitted LTC Products (worldwide), or Kitted Determa Products (outside the Territory), or by Oncocyte or its Affiliates of Collaboration Determa Products (inside the Territory) (as applicable) to Third Parties in the Field, less deductions for:
(a) [***]
(b) [***]
(c) [***]
(d) [***] and
(e) [***]
Transfer by LTC of Kitted LTC Products (worldwide) or Kitted Determa Products (outside the Territory) or by Oncocyte of Collaboration Determa Products (in the Territory) (as applicable) to its Affiliate(s) for subsequent resale will not constitute sale to Third Parties. Only those revenues from sale of such Kitted LTC Products, Kitted Determa Products or Collaboration Determa Products (as applicable) to non-affiliated Third Parties, including but not limited to distributors, will be included in the determination of Net Sales.
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In the case of any Combination Product sold in a given country:
(i) Net Sales for the purpose of determining the Revenue Share Payment of such Combination Product in such country will be calculated by multiplying actual Net Sales of such Combination Product by the fraction A/(A+B), where A is the invoice price of the Kitted LTC Product, Kitted Determa Products or Collaboration Determa Product (as applicable) if sold separately in the same country, and B is the total invoice price of the Other Products in the Combination Product if sold separately in such country.
(ii) If the Kitted LTC Product, Kitted Determa Product, or Collaboration Determa Product (as applicable) is sold separately in such country, but the Other Products in the Combination Product are not sold separately in such country, then Net Sales for the purpose of determining the Revenue Share Payment of the Combination Product for such country will be calculated by multiplying actual Net Sales of the Combination Product by the fraction A/C, where A is the invoice price of the Kitted LTC Product, Kitted Determa Product or Collaboration Determa Product (as applicable) if sold separately in such country, and C is the invoice price of the Combination Product in such country.
(iii) If the Kitted LTC Product, Kitted Determa Product, or Collaboration Determa Product (as applicable) in the Combination Product is not sold separately in such country, but the Other Products included in the Combination Product are sold separately in such country, then Net Sales for the purpose of determining the Revenue Share Payment of the Combination Product for such country will be calculated by multiplying actual Net Sales of the Combination Product by the fraction 1-(B/C), where B is the invoice price of the Other Products included in such Combination Product if sold separately in such country, and C is the invoice price of the Combination Product in such country.
(iv) If neither the Kitted LTC Product, Kitted Determa Product, or Collaboration Determa Product (as applicable) nor the Other Products are sold separately in such country, then Net Sales will be calculated by mutual agreement of the Parties in good faith based on the relative economic value contributions of the Kitted LTC Product, Kitted Determa Product, or Collaboration Determa Product (as applicable) and each of the Other Products included in such Combination Product when sold in such country.
The gross receipts for the sale of a Kitted LTC Product or Kitted Determa Product (as applicable) will not include amounts received for the sale of any NGS Instrument sold in the same transaction. In the event that the Kitted LTC Product or Kitted Determa Product (as applicable) is sold in a bundle with an NGS Instrument for a single price, then LTC’s list price for such NGS Instrument in the country of sale will be deducted from its gross receipts for such sale in the calculation of Net Sales.
There will be no imputed Net Sales from free samples, free goods, or other marketing programs whereby assays are provided free of charge. In addition, Net Sales will not accrue for sales for use in a clinical trial or other development activities or any expanded access program, compassionate sales or use program (including named patient program or single patient program), or indigent program; provided that such transfers are provided at no profit to the selling Party and its Affiliates.
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1.74 “[***] ROFN Notice” has the meaning set forth in Section 3.8 ([***] Right of First Negotiation).
1.75 “[***] ROFN Exercise Notice” has the meaning set forth in Section 3.8 ([***] Right of First Negotiation).
1.76 “NGS” means next generation sequencing.
1.77 “NGS Consumable” means LTC’s or its Affiliates’ buffers, primers, probes, preamplification materials, and other reagents or consumables that are necessary for the NGS Workflow and any improvements or updates thereto.
1.78 “NGS Instrument” means LTC’s Ion TorrentTM GenexusTM Integrated Sequencer or LTC’s Ion TorrentTM GenexusTM Integrated Sequencer together with LTC’s Ion TorrentTM GenexusTM Purification System, as applicable.
1.79 “NGS Product” means, collectively, NGS Consumables, NGS Instruments and NGS Software.
1.80 “NGS Software” means LTC’s or its Affiliates’ software specific to the NGS Instrument that is needed to interpret data generated from an NGS Instrument that runs an OCA Plus assay and any improvements or updates thereto.
1.81 “NGS Workflow” means a workflow comprised of an NGS Instrument and, at a minimum, a Collaboration Determa Product or Collaboration LTC Product (as applicable), and which may also include NGS Software and NGS Consumables.
1.82 “OEM” means original equipment manufacturer.
1.83 “Oncocyte Indemnified Party” means Oncocyte and its Affiliates and its and their respective officers, directors, employees, agents and representatives.
1.84 “Oncocyte Materials” means the Materials owned or Controlled by Oncocyte and provided by Oncocyte to LTC under this Agreement.
1.85 “Oncocyte Product Arising IP” means Arising IP that relates [***]; provided, however, [***]
1.86 “Oncomine Comprehensive Assay Plus” or “OCA Plus” means LTC’s NGS-based assay utilizing a proprietary set of primers developed by LTC for amplifying the set of Biomarkers that are included in the panel from FFPE tissue samples designed to be run on the NGS Instrument.
1.87 “Other Arising IP” means Arising IP that is neither LTC Product Arising IP nor Oncocyte Product Arising IP.
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1.88 “Other Determa Product” has the meaning set forth in Section 1.18 (Combination Product).
1.89 “Other LTC Product” has the meaning set forth in Section 1.18 (Combination Product).
1.90 “Other Product” means an Other Determa Product or an Other LTC Product (as applicable).
1.91 “Party” or “Parties” has the meaning set forth in the preamble.
1.92 “Patents” means: (a) design and utility patents and patent applications in any country or jurisdiction, (b) all priority applications (including provisional and non-provisional applications), divisionals, continuations, and continuations-in-part of any of the foregoing, and (c) all patents issuing on any of the foregoing patent applications; together with all registrations, reissues, renewals, reexaminations, confirmations, supplementary protection certificates and extensions, and applications therefore, of any of (a), (b) or (c).
1.93 “Person” means any corporation, limited or general partnership, limited liability company, joint venture, trust, unincorporated association, governmental body, authority, bureau, or agency, or any other entity or body, or an individual.
1.94 “Platform Relevant IP” has the meaning set forth in Section 9.2(a) (Relevant Third Party IP).
1.95 “Project Manager” has the meaning set forth in Section 2.4(a) (Role).
1.96 “Publication” has the meaning set forth in Section 10.6 (Publications).
1.97 “QSR” means the applicable regulations set forth in FDA’s Quality System Regulations at 21 C.F.R. Part 820.
1.98 “Receiving Party” means any Party receiving another Party’s Confidential Information.
1.99 “Regulatory Approval” means, with respect to a product in each regulatory jurisdiction, the approvals, clearances, exemptions, product or establishment licenses, registrations, or authorizations necessary and sufficient for the marketing, distribution, and sale of such product in such jurisdiction in accordance with Applicable Law.
1.100 “Regulatory Authority” means the applicable governmental authority in a given regulatory jurisdiction that has responsibility for granting Regulatory Approvals.
1.101 “Regulatory Submission” means any formal regulatory applications, filings, registrations, or submissions, made to any Regulatory Authority in a jurisdiction.
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1.102 “Related Entities” has the meaning set forth in Section 4.7 (AmpliSeqTM Terms and Conditions).
1.103 “Relevant Third Party IP” means any U.S. or foreign Patents owned, licensed, or otherwise controlled by a Third Party that, assuming a specific claim construction, validity and enforceability, may be infringed by the activities or transactions performed by either Party pursuant to this Agreement.
1.104 “Revenue Share Payment” means the percentage of Net Sales payments that a Party owes to the other Party pursuant to Section 7.2 (Revenue Share Payments).
1.105 “RFN” means the right of first negotiation granted by Oncocyte to LTC in Section 15.9 (Right of First Negotiation).
1.106 “RFN Notice” has the meaning set forth in Section 15.9 (Right of First Negotiation).
1.107 “RFN Period” has the meaning set forth in Section 15.9 (Right of First Negotiation).
1.108 “Rules” has the meaning set forth in Section 15.4(a) (Arbitration).
1.109 “RUO” means research use only.
1.110 [***]
1.111 “Term” has the meaning set forth in Section 14.1 (Term).
1.112 “Territory” means the LTC Product Territory with respect to the Collaboration LTC Product and the Determa Product Territory with respect to the Collaboration Determa Product, as applicable
1.113 “Third Party” means any individual, partnership, corporation, limited liability company, or any other business entity that is not a Party to this Agreement or an Affiliate of a Party.
1.114 “Transfer Event” has the meaning set forth in Section 15.8(b) (Transfer Event).
1.115 “Transfer Event Date” has the meaning set forth in Section 15.8(b) (Transfer Event).
1.116 “[***]” has the meaning set forth in Section 15.8(b) (Transfer Event).
1.117 “Transition Period” means up to [***] (or a longer period mutually agreed by the Parties) following the effective date of termination if LTC terminates this Agreement pursuant to Section 14.2(b)(ii) ([***]).
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Article 2
GOVERNANCE
2.1 Joint Steering Committee.
(a) Formation and Function. The Parties will form a Joint Steering Committee promptly following the Effective Date. The JSC will serve as a coordinating body for strategic considerations related to the development and commercialization of the Collaboration LTC Product in and outside the Territory and of the Collaboration Determa Product in and outside the Territory. Among other things, the JSC will perform the following functions: (i) review and approve the Determa Product Development Plan (including the Determa Product Development Budget), (ii) review and approve the LTC Product Commercialization Plan and changes thereto, (iii) review and approve the Determa Product Commercialization Plan and changes thereto, (iv) receive and review updates on Activities contemplated by the Commercialization Plans, (v) serve as a forum for resolving disputes arising at the JDC or other Joint Subcommittees, and (vi) all other matters related to this Agreement expressly delegated to the authority of the JSC hereunder.
(b) Composition. The JSC will be composed of an equal number of representatives from each Party, with each Party designating up to three representatives. The JSC will be co-chaired by one co-chairperson designated by each of the Parties. Members of the JSC will service in such capacities, on such terms and conditions, and for such duration as determined by the Party appointing her or him. Each Party may designate an alternate member or co-chairperson to serve temporarily in the absence of a permanent member or co-chairperson designated by such Party. Each Party may from time to time, upon prior written notice to the other Party, change its co-chairperson or its representative members on the JSC. The Parties may agree to invite non-voting employees and consultants to attend meetings of the JSC; provided that each such non-employee invitee is subject to the confidentiality obligations consistent with those set forth in Article 10 (Confidential Information). The Project Managers will attend all JSC meetings and coordinate logistics for the JSC, including meeting schedules, agendas and minutes. For purposes of clarity, the Project Managers will not be counted as Party representatives.
(c) Subcommittees. The JSC may from time to time establish subcommittees to which the JSC may delegate certain responsibilities of the JSC hereunder (each a “Joint Subcommittee”); provided, however, that the JSC cannot delegate decision-making responsibilities to a subcommittee.
2.2 Joint Development Committee.
(a) Formation and Function. The Parties will form a Joint Development Committee promptly following the Effective Date. The JDC will perform the following functions: (i) review and approve amendments to the LTC Product Development Plan (including the LTC Product Development Budgets), (ii) review, discuss, and recommend to the JSC for approval the Determa Product Development Plan (including the Determa Product Development Budget), (iii) review and approve amendments to the Determa Product Development Plan (including the Determa Product Development Budget), (iv) receive and review updates on Activities contemplated by the Development Plans, (v) review any unforeseen technical, commercial or regulatory issues that could materially affect the LTC Product Development Plan (including the LTC Product Development Budget) or the Determa Product Development Plan (including the Determa Product Development Budget), (vi) ensure the cooperation and participation of the Parties in the performance of the Development Plans, (vii) determine successful achievement of activities as set forth in the LTC Product Development Plan and the Determa Product Development Plan, and (viii) all other matters related to this Agreement expressly delegated to the authority of the JDC hereunder.
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(b) Composition. The JDC will be composed of representatives from each Party, with each Party designating up to four representatives, but with each Party having only one vote for such Party on all decisions of the JDC. Each Party’s representatives may come from any of the following disciplines, but in any event will have the appropriate expertise and decision-making authority to fulfill their roles and perform their obligations hereunder: executive management and business development, sales and marketing, research and development, or regulatory and compliance, or as otherwise agreed by the Parties. The JDC will be co-chaired by one co-chairperson designated by each of the Parties. Members of the JDC will serve in such capacities, on such terms and conditions, and for such duration as determined by the Party appointing him or her. Each Party may designate an alternate member or co-chairperson to serve temporarily in the absence of a permanent member or co-chairperson designated by such Party. Each Party may, from time to time, upon prior written notice to the other Party, change its co-chairperson or its representative members on the JDC. The Parties may agree to invite non-voting employees and consultants to attend meetings of the JDC; provided that each such non-employee invitee is subject to the confidentiality obligations consistent with those set forth in Article 10 (Confidential Information). The Project Managers will attend all JDC meetings and coordinate logistics for the JDC, including meeting schedules, agendas and minutes. For purposes of clarity, the Project Managers will not be counted as Party representatives.
2.3 General Provisions Applicable to Joint Committees.
(a) Meetings. Each Joint Committee will establish a regular meeting schedule that will provide for meetings no less frequently than quarterly, or at such other frequency as the Parties agree. The Joint Committees may conduct meetings in person or by teleconference or video conference (as agreed by each Joint Committee) and may also act without a meeting through a written consent to an action or decision signed by all voting members of the Joint Committee. Each Joint Committee may establish procedures for its internal operation at meetings.
(b) Actions or Decisions.
(i) All actions or decisions of each Joint Committee made pursuant to this Agreement must be made by unanimous approval of the Parties, with each Party’s representatives on each Joint Committee collectively having only one vote. If the JDC or Joint Subcommittee members cannot reach a unanimous decision after using good faith reasonable efforts over [***] days to reach consensus, then either Party may submit such deadlock to the JSC for resolution. If the JSC members cannot reach a unanimous decision after using good faith reasonable efforts over [***] days to reach consensus, then either Party may submit such deadlock to Oncocyte’s Chief Executive Officer (or his or her nominee) and LTC’s President of the Clinical Next-Generation Sequencing Division (or his or her nominee) (the “Executive Officers”) for resolution.
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(ii) For decisions pertaining to the approval of the initial Determa Product Development Plan (including the Determa Product Development Budget) or the initial Determa Product Commercialization Plan for a Collaboration Determa Product, if the Executive Officers are unable to resolve a deadlock, then [***] If such deadlock regarding the approval of the initial Determa Product Development Plan or initial Determa Product Commercialization Plan for a Collaboration Determa Product is not resolved within [***] from the time first considered by a Joint Committee despite the Parties’ good faith efforts to resolve the deadlock, then [***]
(iii) If the Executive Officers are unable to resolve a deadlock with respect to any change to a Development Plan or a Commercialization Plan, then (A) LTC will have final decision-making authority over [***] and (B) Oncocyte will have final decision-making authority over [***]; provided that, in each case ((A) and (B)) neither Party may use its final decision-making authority to [***] Notwithstanding the foregoing, LTC may use its final decision-making authority to [***]
(c) Agendas. Each Party will notify the other Party at least [***] business days prior to the date of a meeting of a Joint Committee, proposing the agenda items it wishes to discuss at such meeting. Notwithstanding the foregoing, each Joint Committee is free to consider any matter related to this Agreement that is within the scope of its responsibilities and is brought to its attention by either Party at any meeting.
(d) Minutes. At each meeting, a Project Manager will prepare minutes promptly after such meeting, reporting in reasonable detail the actions and decisions taken by the Joint Committee during such meeting, issues requiring resolution, and resolutions of previously reported issues. Such minutes are to be reviewed, commented on if needed, and updated per the Joint Committee co-chairperson’s feedback prior to being circulated to the Joint Committee, and the Project Manager will revise such minutes as necessary. Such minutes will not become final until approved by both Joint Committee co-chairpersons or by the Joint Committee.
2.4 Project Managers.
(a) Role. Each Party will designate a single individual to serve as its manager under the Development Plan (each a “Project Manager”). The Project Managers are the principal point of contact for each Party for matters relating to that Party’s performance under the Development Plans and Commercialization Plans and are responsible for implementing and coordinating, on a day-to-day basis, all Activities and facilitating the exchange of information between the Parties regarding the performance of the Development Plans and Commercialization Plans. The Project Managers may delegate tasks and responsibilities to sub-managers or sub-program teams, working groups and other team members as they deem appropriate to efficiently and effectively perform their respective obligations hereunder. Each Party may replace its Project Manager at any time and for any reason upon written notice to the other Party. Either Party may submit to the JSC for resolution any disputes with respect to matters within the scope of authority of the Project Managers that cannot be resolved after good faith efforts.
(b) Meetings. The Project Managers will meet as soon as practicable after the Effective Date and thereafter at least [***] and at such additional times as the Project Managers or the JSC deem reasonably appropriate. Meetings of the Project Managers may be conducted in person or by teleconference or video conference as agreed by the Project Managers. Additionally, the Project Managers (or their designees) will maintain close regular communications with each other as to the status of the ongoing activities under the Development Plans and Commercialization Plans. Each Project Manager will keep accurate and complete records of their activities and meetings and will, from time to time as requested by the JSC, provide the JSC with appropriate updates and information to keep the JSC apprised of each Party’s performance under this Agreement.
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2.5 Authority. The Joint Committees and Project Managers do not have the right to amend this Agreement (which may only be amended or modified as provided in Section 15.12 (Waivers; Amendment)) or to make any decision or require any Party to take any action that conflicts with the terms of this Agreement or that is expressly reserved to the Parties hereunder.
2.6 Governance Expenses. Each Party is responsible for all expenses incurred by its representatives in connection with performing their duties under this Article 2 (Governance), including all costs of travel, lodging and meals in connection with meetings of the Joint Committees and Project Managers.
Article 3
License Grants; Exclusivity
3.1 LTC License Grants to Oncocyte.
(a) Subject to the terms and conditions of this Agreement, LTC hereby grants to Oncocyte, during the Term of this Agreement, a nonexclusive license, without the right to sublicense (including to an OEM), under the applicable Background IP Controlled by LTC and Arising IP Controlled by LTC to (i) perform Development Activities with respect to the Collaboration LTC Product pursuant to the LTC Product Development Plan, (ii) market Kitted LTC Products in the Field in the LTC Product Territory in accordance with the LTC Product Commercialization Plan, (iii) perform Development Activities with respect to the Collaboration Determa Product pursuant to the Determa Product Development Plan, (iv) sell, have sold, market and otherwise commercialize Collaboration Determa Products in the Field in the Determa Product Territory in accordance with the Determa Products Commercialization Plan, (v) sell, have sold, market and otherwise commercialize RUO-labeled Collaboration Determa Products in the Determa Product Territory for the purpose of demonstrating the capabilities of the Collaboration Determa Products as a potential IVD assay for the tumor profiling and guidance of therapy selection of solid tumor cancers in humans in accordance with the Determa Products Commercialization Plan, and (vi) otherwise perform its obligations under this Agreement. Such license includes the right to utilize Affiliates and approved subcontractors in accordance with Section 4.4 (Performance by Affiliates and Subcontractors). For clarity, except as expressly provided herein, the grant contained in this Section 3.1(a) (LTC License Grants to Oncocyte) does not grant Oncocyte any right to: (i) make or have made Collaboration Determa Products or Kitted Determa Products, or (ii) Develop, market, make, have made, use, have used, sell, have sold, offer for sale, export or import any NGS Workflow or NGS Products or any improvements thereto; provided that Oncocyte will have equivalent rights as any bona fide Third Party purchaser thereof, such equivalent rights being at all times subject to LTC’s terms and conditions of sale for the applicable products in effect at the time of purchase.
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(b) Subject to the terms and conditions of this Agreement, LTC hereby grants to Oncocyte a nonexclusive, perpetual, irrevocable, worldwide, royalty-free license (with the right to grant sublicenses through multiple tiers, including to an OEM), under any Arising IP Controlled by LTC that is related to any Oncocyte product or service to Develop, manufacture, commercialize and otherwise exploit such Oncocyte product or service.
(c) Subject to the terms and conditions of this Agreement, LTC hereby grants to Oncocyte a nonexclusive, perpetual, irrevocable, worldwide, royalty-free license (with the right to grant sublicenses through multiple tiers, including to an OEM), under any LTC Product Arising IP that is assigned to LTC by Oncocyte pursuant to Section 9.1(b)(i) (LTC Product Arising IP) to Develop, manufacture, commercialize, and otherwise exploit Oncocyte products and services.
3.2 Oncocyte License Grants to LTC.
(a) Subject to the terms and conditions of this Agreement, Oncocyte hereby grants to LTC, during the Term of this Agreement, a nonexclusive license, without the right to sublicense (including to an OEM), under the applicable Background IP Controlled by Oncocyte and Arising IP Controlled by Oncocyte to (i) perform development Activities with respect to the Collaboration LTC Product pursuant to the LTC Product Development Plan, (ii) make, have made, sell, have sold, market and otherwise commercialize Kitted LTC Products in the Field in the LTC Product Territory in accordance with the LTC Product Commercialization Plan and in the Field outside the LTC Product Territory, (iii) perform development Activities with respect to the Collaboration Determa Product pursuant to the Determa Product Development Plan, (iv) sell, have sold, market and otherwise commercialize Kitted Determa Products in the Field outside the Determa Product Territory in accordance with the Determa Product Commercialization Plan, (v) sell, have sold, market and otherwise commercialize RUO-labeled Collaboration Determa Products outside the Determa Product Territory for the purpose of demonstrating the capabilities of the Collaboration Determa Products as a potential IVD assay for the tumor profiling and guidance of therapy selection of solid tumor cancers in humans in accordance with the Determa Products Commercialization Plan, (vi) make and have made Collaboration Determa Products and Kitted Determa Products both for sale by LTC outside the Determa Product Territory and for supply to Oncocyte pursuant to the Determa Product Supply Agreement, and (vii) otherwise perform its obligations under this Agreement. Such license includes the right to utilize Affiliates and approved subcontractors in accordance with Section 4.4 (Performance by Affiliates and Subcontractors). For clarity, except as expressly provided herein, the grant contained in this Section 3.2 (Oncocyte License Grants to LTC) does not grant LTC or its Affiliates any right to develop, market, make, have made, use, have used, sell, have sold, offer for sale, export or import the Determa Assay or any laboratory developed test similar to the Determa Assay.
(b) Subject to the terms and conditions of this Agreement, Oncocyte hereby grants to LTC a nonexclusive, perpetual, irrevocable, worldwide, royalty-free license (with the right to grant sublicenses through multiple tiers, including to an OEM), under any Arising IP Controlled by Oncocyte that is related to any LTC product or service to develop, manufacture, commercialize and otherwise exploit such LTC product or service.
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(c) Subject to the terms and conditions of this Agreement, Oncocyte hereby grants to LTC a nonexclusive, perpetual, irrevocable, worldwide, royalty-free license (with the right to grant sublicenses through multiple tiers, including to an OEM), under any Oncocyte Product Arising IP that is assigned to Oncocyte by LTC pursuant to Section 9.1(b)(ii) (Oncocyte Product Arising IP) to develop manufacture, commercialize and otherwise exploit Oncocyte products and services.
3.3 Companion Diagnostic Claims.
(a) Reservation of Rights. Notwithstanding the exclusivity granted in Section 3.1 (LTC License Grants to Oncocyte) and Section 3.2 (Oncocyte License Grants to LTC), (a) LTC retains the exclusive right to partner with therapeutics companies to develop and commercialize the Collaboration LTC Product for companion diagnostic claims (and Oncocyte agrees not to do so), and (b) Oncocyte retains the exclusive right to partner with therapeutics companies to Develop and commercialize the Collaboration Determa Product for companion diagnostic claims (and LTC agrees not to do so).
(b) Preferred Companion Diagnostics Partner. Subject to [***] Schedule 3.3(b)(i) (Clinical Laboratory Site Qualification Questions), and [***] Schedule 3.3(b)(ii) (CRO Site Key Performance Indicators Assessment), as may be amended from time to time, LTC will recommend to its pharmaceutical company companion diagnostic partners on a partner-by-partner basis that Oncocyte is LTC’s preferred contract research organization for select Analytical and Clinical sample testing of the Collaboration LTC Product as a companion diagnostic in the LTC Product Territory in all appropriate LTC pitches, requests for proposals, and due diligence processes.
3.4 Use of Residual Knowledge for Research Purposes. Each Party acknowledges that the other Party’s personnel may retain in their unaided memories knowledge gained in the course of this Agreement. Use of such knowledge for research purposes will not be a misuse of the other Party’s Confidential Information or a violation of the confidentiality obligation in Article 10 (Confidential Information) so long as the other Party’s Confidential Information is not disclosed, commercialized, or specifically conveyed to others, and so long as the individual has not intentionally memorized the knowledge for the purpose of retaining it.
3.5 Affiliates. Each Party acknowledges and accepts that the other Party may exercise its rights, perform its obligations, and pursue its remedies under this Agreement either directly or through one or more of its Affiliates. A Party’s Affiliates will have the benefit of all rights (including all licenses) and remedies of such Party under this Agreement. Accordingly, in this Agreement “LTC” will be interpreted to mean “LTC or its Affiliates” and “Oncocyte” will be interpreted to mean “Oncocyte or its Affiliates” where necessary to give each Party’s Affiliates the benefit of the rights and remedies provided to such Party in this Agreement; provided, however, that in any event each Party will remain responsible for the acts and omissions, including financial liabilities, of its Affiliates.
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3.6 No Implied Licenses. Nothing in this Agreement will be construed as conferring, explicitly or by implication, estoppel or otherwise any license, right, or immunity under any Patents that a Party (or its successors, Affiliates or assigns, or successors, Affiliates or assigns of any of the foregoing) owns or Controls as of the Effective Date, or acquires or obtains Control of independent of its performance of its obligations under this Agreement, other than the rights set forth expressly in this Agreement regardless of whether such other Patents (or individual Patent claims) are dominant or subordinate to any Intellectual Property Rights developed under this Agreement or are required to exploit any Intellectual Property Rights developed under this Agreement. Furthermore, neither of the Parties has provided to the other Party and neither Party will provide to the other Party, and neither of the Parties have received from the other Party and neither Party will receive from the other Party, any consideration except that which is expressly provided herein for the specific rights expressly granted herein. LTC and LTC Subsidiaries do not represent or warrant that [***]
3.7 Exclusivity. During the Term of this Agreement, Oncocyte and LTC will have co-exclusive rights to market the Kitted LTC Product for use on the NGS Instrument in the Field in the LTC Product Territory, meaning they each have the right to do so, but will not grant any Third Party the right to do so. In addition: (a) LTC will not enter into any agreement or arrangement with any Third Party with respect to the Development or commercialization of OCA Plus for use on the NGS Instrument in the Field in the LTC Product Territory, (b) Oncocyte will not partner with any Third Party NGS equipment manufacturer with respect to the Development and commercialization of a Comprehensive Genomic Profiling Assay on an instrument platform similar to or competitive with LTC’s NGS systems in the Field in the LTC Product Territory, and (c) LTC will not [***] Notwithstanding the foregoing, the exclusivity covenant in this Section 3.7 (Exclusivity) would not prohibit either Party from engaging distributors to distribute the Collaboration LTC Product or Kitted LTC Products in the Field in the LTC Product Territory.
3.8 [***] Right of First Negotiation. During the Term, LTC will notify Oncocyte in writing if [***] If within [***] days after receiving such ROFN Notice Oncocyte notifies LTC in writing that [***] then LTC and Oncocyte will negotiate [***] to enter into [***] During the foregoing [***] period, [***]
Article 4
DEVELOPMENT
4.1 Development Plan.
(a) LTC Product Development Plan. LTC hereby appoints Oncocyte as LTC’s development partner to Develop the Collaboration LTC Product for use in the Field in accordance with the LTC Product Development Plan. The LTC Product Development Plan is attached hereto as Schedule 4.1 (LTC Product Development Plan) and describes the allocation of activities between the Parties for the validation of and application for IVD Regulatory Approval for the Collaboration LTC Product in the Field and in the Territory. The Parties agree to adhere to feedback and guidance provided by Regulatory Authorities and to amend the LTC Product Development Plan as necessary to adhere to such feedback and guidance. [***] LTC will perform the portion of the research and development activities allocated to it in the LTC Product Development Plan to complete the IVD development of the Collaboration LTC Product, including: [***] Oncocyte will fund and perform the Development activities allocated to it in the LTC Product Development Plan to complete the IVD development of the Collaboration LTC Product, including: [***] The Development Plan will at all times set forth the responsibilities, deliverables, expected timelines and budgets (the “LTC Product Development Budget”) of each of the Parties for such plan, including LTC Product Development Milestones. Either Party may propose amendments to the LTC Product Development Plan to the JDC for its review, discussion, and approval in accordance with Section 2.2 (Joint Development Committee).
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(b) Determa Product Development Plan. Within [***] days of the Effective Date, Oncocyte will develop a written plan for conducting activities with respect to the Development of such Collaboration Determa Product for use in the Field, which will set forth the responsibilities, deliverables, [***] expected timelines and budgets (such plan the “Determa Product Development Plan” and such budget the “Determa Product Development Budget”) of each of the Parties for such plan. Under the Determa Product Development Plan, Oncocyte will fund and perform the following activities to complete the IVD Development of the Collaboration Determa Product: [***] Under the Determa Product Development Plan, Oncocyte will fund and LTC will perform the following activities to complete the IVD Development of the Collaboration Determa Product: [***] Oncocyte will submit the proposed Determa Product Development Plan to the JDC for its review, discussion, and recommendation to the JSC for approval. Proposed amendments to the Determa Product Development Plan, including amendments to Develop for companion diagnostic claims, would be submitted by either Party to the JDC for its review, discussion, and approval.
4.2 Development Plan Costs. Oncocyte will be responsible for all costs associated with Oncocyte Activities and will be responsible for up to [***] of LTC Activities under the LTC Product Development Budget. LTC will be responsible for costs associated with LTC Activities that exceed [***] under the LTC Product Development Budget. Oncocyte will be responsible for all costs associated with Activities of both Parties under the Determa Product Development Budget. LTC will invoice Oncocyte on a quarterly basis for its costs associated with LTC Activities under the LTC Product Development Budget for which Oncocyte is responsible pursuant to this Section 4.2 (Development Plan Costs), and Oncocyte will pay LTC such amount within 45 days of receiving such invoice, subject to the resolution of good faith disputes in accordance with Section 7.6 (Disputed Payments).
4.3 Performance of Activities. Each Party will perform all Activities in accordance with the terms and conditions of this Agreement, and will use Commercially Reasonable Efforts to start and complete all Activities pursuant to the applicable timelines set forth in the Development Plans and the applicable budgets set forth in the Development Budgets. In addition, each Party will use Commercially Reasonable Efforts to achieve LTC Product Development Milestones on the timelines specified in the LTC Product Development Plan. Each Party will provide reasonable updates to the other Party, through the JDC, on the status and progress of its Activities, and will promptly notify the other Party, in writing or via discussions during a JDC meeting, if material delays are likely or if such Party encounters any issue that has (or would reasonably be expected to have) a material impact on any Activities or budget items contemplated by the Development Plans. The Parties will perform the Activities with reasonable care and skill in accordance with GCP, QSR and all Applicable Laws.
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4.4 Performance by Affiliates and Subcontractors. (a) Oncocyte may delegate performance of Activities, or portions thereof, to (i) a Third Party subcontractor set forth in Schedule 4.4 (Approved Subcontractors) or an Affiliate without the prior written consent of LTC or (ii) to another Third Party subcontractor upon the prior written consent of LTC (such consent not to be unreasonably withheld, delayed, or conditioned) and (b) LTC may delegate performance of Activities, or portions thereof, to a Third Party subcontractor or an Affiliate; provided that, in each case ((a) and (b)), with respect to a Third Party subcontractor, such subcontractor must have entered into an appropriate written agreement with the Party utilizing such subcontractor that: (i) contains obligations of confidentiality and restrictions on use of any Confidential Information and any proprietary materials that are substantially as restrictive as the obligations set forth in Article 10 (Confidential Information) (including with respect to duration); and (ii) contains obligations to assign or exclusively license any intellectual property invented or developed by such authorized subcontractor in performing such Activities to the applicable Party utilizing such authorized subcontractor to enable such Party to comply with the provisions of Article 9 (Intellectual Property) regarding ownership and Control of Arising IP. Each Party is and remains solely and exclusively responsible for the conduct of Activities by any Affiliate or subcontractor under this Agreement as if such Affiliate’s or subcontractor’s actions were its own. For clarity, LTC may use Third Party subcontractors and Affiliates, in its sole discretion, to exercise its rights and perform its obligations (other than Activities) under this Agreement, and the above terms in this Section 4.4 (Performance by Affiliates and Subcontractors) will not apply to such activities.
4.5 LTC Early Development. LTC will be responsible, at LTC’s own cost, for the performance of [***] to enable the Development of the Collaboration LTC Product as contemplated by the LTC Product Development Plan. LTC will provide the JDC with a summary and timeline of such research and development activities and update the JDC regarding the progress of such activities, including notice of completion. [***] Without limiting the generality of the foregoing, [***]
4.6 Materials.
(a) Provision of Materials. Each Party will furnish Materials to the other Party to the extent provided under the Development Plan. If Materials are human samples, and such Materials and information related thereto are provided by one Party to the other Party (or its Affiliates or subcontractors under Section 4.4 (Performance by Affiliates and Subcontractors)), then the providing Party will ensure that such Materials and information are De-identified prior to providing them to the receiving Party (or its Affiliates or subcontractors under Section 4.4 (Performance by Affiliates and Subcontractors)). Each Party will comply with all Applicable Laws relating to the Materials, including HIPAA and other data privacy laws as applicable. Each receiving Party will handle the Materials of the providing Party in accordance with any applicable documentation and any relevant informed consent provided to the receiving Party by the providing Party in writing, applicable common scientific standards of care, and the providing Party’s written instructions. Each Party understands and agrees that the Materials may be experimental in nature and agrees to comply with Applicable Laws and use due care in the use, storage and handling of the Materials.
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(b) Use of Materials. Except as described in Section 4.4 (Performance by Affiliates and Subcontractors), each receiving Party will retain possession of the providing Party’s Materials and will not sell or otherwise provide such Materials to any Third Party without the prior written consent of the providing Party. Each receiving Party will only use the Materials of the providing Party for the purposes of performing the activities under this Agreement.
(c) Records of Use. Each receiving Party will keep records of its use of the providing Party’s Materials and upon completion of the activities for which the Materials have been provided, or upon expiration or termination of this Agreement, if earlier, each receiving Party will account for all use of such Materials and, at the option of the providing Party, either destroy or return to the providing Party all unused Materials, in accordance with Applicable Law and the instructions of the providing Party, if any.
(d) Ownership of Materials. Notwithstanding anything herein to the contrary, each Party will own and retain all rights, title, and interests in and to all Materials furnished by it pursuant to this Agreement.
4.7 AmpliSeqTM Terms and Conditions. To the extent Oncocyte or its Affiliates, or its or their respective officers, directors, employees, agents, representatives, or authorized subcontractors (collectively, the “Related Entities”) use of any of LTC’s proprietary primer designs, primer sequences, primer panels, or primers, including any AmpliSeqTM primer designs, primer sequences, primer panels or primers, in the performance of Oncocyte’s obligations and activities under this Agreement, Oncocyte acknowledges that such use is subject to the AmpliSeqTM Terms and Conditions attached hereto and incorporated herein as Schedule 4.7 (AmpliSeq Terms and Conditions) (the “AmpliSeq Terms”). Oncocyte and its Affiliates agree to abide by the AmpliSeq Terms and further, Oncocyte will have entered into an appropriate written agreement with any Related Entities who use any of LTC’s proprietary primer designs, primer sequences, primer panels, or primers, including any AmpliSeqTM or AmpliSeqTM primer designs, primer sequences, primer panels, or primers, obligating such Related Entities to agree to and abide by the obligations and restrictions set forth in the AmpliSeq Terms.
Article 5
MANUFACTURING AND CO-MARKETING
5.1 Manufacture and Supply of Products.
(a) Collaboration LTC Product. As between LTC and Oncocyte, LTC is responsible for the manufacture and supply of [***] necessary for the Development of the Collaboration LTC Product. LTC will supply [***] to Oncocyte for use in Developing Kitted LTC Products pursuant to the LTC Product Development Plan at [***].
(b) Collaboration Determa Products. Within [***] days following the Effective Date, the Parties will negotiate in good faith a supply agreement pursuant to which LTC will supply Oncocyte with the Collaboration Determa Products for commercialization in the Field in the Territory (“Determa Product Supply Agreement”). LTC will also supply Oncocyte with [***] necessary for use in Developing Collaboration Determa Products pursuant to the Determa Product Development Plan at [***]. The Determa Product Supply Agreement will include provisions under which LTC will be designated as Oncocyte’s “contract manufacturer” for the Collaboration Determa Product and, as such, will manufacture and label the Collaboration Determa Product at the [***] price set forth in the Determa Product Supply Agreement. The Determa Product Supply Agreement will also provide that, in the Determa Product Territory, [***]
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(c) Intended Use; Label. The Collaboration LTC Product will be labeled for use in pan-cancer tumor mutation profiling, translocation identification through the detection of RNA fusion transcripts, homologous recombination deficiency, tumor mutational burden, and microsatellite instability. Schedule 5.1(c) (Intended Use) provides an example of the intended use.
(d) Branding. Consistent with the brand guidelines of LTC and Oncocyte, the Collaboration LTC Product will be co-branded as “Determa Oncomine Comprehensive Dx Test.” The Collaboration Determa Product will be branded by Oncocyte, but will contain language on the label stating that the product is “Manufactured for Oncocyte by Thermo Fisher Scientific.”
5.2 Supply of the NGS Instrument and NGS Consumables.
(a) Collaboration LTC Product. To enable Oncocyte’s performance of its obligations under the LTC Product Development Plan, LTC will supply to Oncocyte: (a) [***] Genexus Integrated Sequencers at [***]; (b) [***] Genexus Purification Instruments at [***]; and (c) all necessary NGS Consumables to perform the NGS Workflow for the Collaboration LTC Product at [***], all under LTC’s standard terms and conditions of sale.
(i) Schedule 5.2(a)(i) (Genexus Price List) includes the list price of the Genexus Integrated Sequencer and the Genexus Purification Instrument as of the Effective Date, and forecasted cost for the necessary NGS Consumables to perform the NGS Workflow for the Collaboration LTC Product.
(ii) Schedule 5.2(a)(ii) (Initial Purchase Order Quote) includes the list price of the [***] Genexus Integrated Sequencer and [***] Genexus Purification Instrument as of the Effective Date, and [***] service contracts for each of these instruments. Oncocyte will submit a Purchase Order for these instruments in accordance with Schedule 5.2(a)(ii) (Initial Purchase Order Quote) by [***].
(iii) Schedule 5.2(a)(iii) (Second Purchase Order Quote) includes a purchase order quote for [***] Genexus Integrated Sequencers, [***] Genexus Purification Instruments, and [***] service contracts for each of these instruments. Oncocyte will submit a Purchase Order for these instruments in accordance with Schedule 5.2(a)(iii) (Second Purchase Order Quote) by[***].
(iv) For the avoidance of doubt, the prices included in Schedule 5.2(a)(ii) (Initial Purchase Order Quote) and Schedule 5.2(a)(iii) (Second Purchase Order Quote) are calculated as [***]. LTC reserves the right to change list prices at any time. Any increase or decrease to the list price of a product would result in a change to the [***] price shown. Pricing for service contracts for NGS Instruments used in Activities are discussed in Section 8.3 (Development Activities).
(b) Collaboration Determa Products. To enable Oncocyte’s performance of its obligations under the Determa Product Development Plan, LTC will supply to Oncocyte: (a) Genexus Integrated Sequencers at [***]; (b) Genexus Purification Instruments at [***]; and (c) all necessary NGS Consumables to perform the NGS Workflow for the Collaboration Determa Products at [***], all under LTC’s standard terms and conditions of sale. Following review of the approved Determa Product Development Plan, the JDC would determine the quantity of NGS Instruments and volume of NGS Consumables necessary for LTC to supply to Oncocyte to perform the activities thereunder.
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5.3 Commercialization of Products.
(a) Collaboration LTC Products. At a reasonable time prior to the commercial launch of the Kitted LTC Products, the Parties will develop and submit to the JSC for approval a plan for the co-marketing of the Kitted LTC Product, co-branded in accordance with Section 5.1(c) (Branding), in the Field and in the Territory (“LTC Product Commercialization Plan”) containing each Party’s responsibilities set forth in Schedule 5.3(a) (Kitted LTC Product Commercialization Responsibilities). Under the LTC Product Commercialization Plan, Oncocyte will be responsible for [***], and LTC will be responsible for [***]. Subject to both Parties completing their activities under the LTC Product Development Plan and achieving the LTC Product Development Milestones, following the Regulatory Approval of a Kitted LTC Product in the Field in a country in the Territory, each Party will use Commercially Reasonable Efforts to complete the Activities in the LTC Product Commercialization Plan in such country. Subject to the foregoing, LTC will make and book all sales of Kitted LTC Products in the Territory. Outside the Territory, LTC will be solely responsible for the marketing and commercialization of the co-branded Kitted LTC Product consistent with LTC’s standard practices.
(b) Collaboration Determa Products. Upon Regulatory Approval of a Collaboration Determa Product for IVD use, Oncocyte will be solely responsible for commercialization of the Collaboration Determa Products in the Field in the Determa Product Territory. At a reasonable time prior to Regulatory Approval of a Collaboration Determa Product for IVD use the Parties will develop and submit to the JSC for approval a plan for (i) Oncocyte to market and sell the RUO-labeled Collaboration Determa Products for the purpose of demonstrating the capabilities of the Collaboration Determa Products as a potential IVD assay for tumor profiling and guidance of therapy selection of solid tumor cancers in humans in accordance with the Determa Product Commercialization Plan, (ii) Oncocyte to market and sell the IVD-labeled Collaboration Determa Products in the Field in the Territory, and (iii) LTC to market and sell the Kitted Determa Products in the Field outside the Determa Product Territory (the “Determa Product Commercialization Plan”). Subject to both Parties completing their activities under the Determa Product Development Plan, following the Regulatory Approval of the Collaboration Determa Product in a relevant country, (i) Oncocyte will use Commercially Reasonable Efforts to complete the Activities in the Determa Product Commercialization Plan in such country in the Territory and (ii) LTC will use Commercially Reasonable Efforts to complete the Activities in the Determa Product Commercialization Plan in such country outside the Territory.
(c) Reimbursement Efforts. The Parties will collaborate to work with payers to support market access, health economics, and reimbursement activities as detailed in the LTC Product Commercialization Plan and Determa Product Commercialization Plan.
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5.4 Pricing. The Parties will mutually agree upon and submit to the JSC for approval a list price for the Kitted LTC Product and the Collaboration Determa Product in the Territory; provided, however, that if the Parties are unable to resolve their disagreement regarding pricing after using Commercially Reasonable Efforts and escalating the matter to the Executive Officers, then [***] and [***], and [***], in each case, after taking into account the price of comparable products in each relevant market. Each Party commits to price the Kitted LTC Products, the Kitted Determa Product, and the Collaboration Determa Product in accordance with its normal practices and will not discount the price of Kitted LTC Products, the Kitted Determa Products or the Collaboration Determa Product disproportionately as compared with its other similar products or otherwise use the Kitted LTC Products, the Kitted Determa Product or the Collaboration Determa Product as any kind of “loss leader” to facilitate the sale of other products.
Article 6
REGULATORY MATTERS
6.1 Collaboration LTC Products.
(a) General Responsibilities. LTC will be designated as the Manufacturer of Record for the Collaboration LTC Product and Kitted LTC Product and will be responsible for all attendant responsibilities, including: (i) all product specifications, design control, product submission activities, and manufacturing; and (ii) product maintenance such as documenting complaints and investigations, medical device review and reporting, recall review and reporting, labels and labeling, and for reviewing changes for product impact. LTC has the right to leverage registration data for the Collaboration LTC Product and Kitted LTC Product for IVD filings outside the Territory.
(b) Ownership of Regulatory Approvals. LTC or its designee will own all rights, title, and interests, in and to all Regulatory Submissions and Regulatory Approvals for the Collaboration LTC Product throughout the world; provided that nothing herein will be deemed to alter the ownership of any data (including Collaboration Data), results, Background IP, Arising IP or Confidential Information included in any Regulatory Submission or Regulatory Approval.
(c) Cooperation. As and to the extent reasonably requested by LTC, Oncocyte will, and will cause its Affiliates to, cooperate with LTC with respect to all regulatory matters relating to the Collaboration LTC Product, including the utilization of LTC product development process SOPs that support the program such as those for plans, protocols, reviews, and reports, LTCs preparation and filing of all Regulatory Submissions for any Collaboration LTC Product that are necessary to manufacture, use or commercialize the Kitted LTC Products. Without limiting the foregoing, as reasonably requested by LTC, Oncocyte will provide assistance to technical documentation and will assist LTC in preparing portions of Regulatory Submissions for the Collaboration LTC Product.
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(d) Regulatory Submissions and Approvals. LTC will be responsible for submitting all Regulatory Submissions (including all pre-submissions and applications for Regulatory Approval) to the Regulatory Authorities, all communications with Regulatory Authorities, and the maintenance of all Regulatory Approvals, in each case, relating to Development, manufacturing, use, or commercialization of Collaboration LTC Products throughout the world. Upon Oncocyte’s written request, LTC will provide Oncocyte with access to all draft Regulatory Submissions relating to the Collaboration LTC Product in the Field in the Territory. Oncocyte will provide comments, if any, back to LTC within [***] days for each document. LTC will consider in good faith any comments from Oncocyte regarding such draft Regulatory Submission and the final Regulatory Submissions relating to the Collaboration LTC Product. Each Party will use Commercially Reasonable Efforts to protect trade secret information that may be contained in Regulatory Approvals with respect to the Collaboration LTC Product.
(e) Written Communications. LTC will furnish to Oncocyte a copy of any substantive written communication received by LTC from Regulatory Authorities with respect to Regulatory Approval of the Collaboration LTC Product in the Field in the Territory; provided that, prior to furnishing such written communications to Oncocyte, LTC may redact (i) Confidential Information of a Third Party contained in such communication and (ii) any proprietary information of LTC, including regarding the NGS Products, that may be contained in such communications. Oncocyte will provide comments, if any, back to LTC no later than [***] days after receipt of the information. LTC reserves the right to respond to FDA prior to any Oncocyte’s comments as their will be times when same day or same hour response is required. LTC will consider in good faith any comments from Oncocyte.
(f) Meetings with Regulatory Authorities. Except as otherwise provided herein, LTC will remain solely responsible for all interactions with Regulatory Authorities throughout the world related to the Collaboration LTC Product; provided that, when possible, LTC will notify Oncocyte in advance of all applicable meetings with Regulatory Authorities relating to Regulatory Approvals of the Collaboration LTC Product in the Field in the Territory, whether in person or by telephone or videoconference and LTC and Oncocyte will use reasonable efforts to coordinate their schedules with respect to meeting dates with Regulatory Authorities. Oncocyte may attend and, if appropriate and permitted under Applicable Law, participate in all such meetings with Regulatory Authorities in the Field in the Territory; provided that LTC may require that the Oncocyte be excused from any discussions of LTC proprietary or confidential information, and Oncocyte may be excused from any discussions at the request of a Regulatory Authority.
6.2 Collaboration Determa Products.
(a) General Responsibilities. Oncocyte will be designated as the Manufacturer of Record for the Collaboration Determa Product and Kitted Determa Product and will be responsible for all attendant responsibilities, including: (i) all design control and product submission activities; and (ii) product maintenance such as documenting complaints and investigations, medical device review and reporting, recall review and reporting, labels and labeling, and for reviewing changes for product impact. LTC will serve as Oncocyte’s “contract manufacturer” with respect to the Collaboration Determa Product and Kitted Determa Product in accordance with the Determa Product Supply Agreement and quality agreement associated therewith.
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(b) Ownership of Regulatory Approvals. Oncocyte or its designee will own all rights, title, and interests, in and to all Regulatory Submissions and Regulatory Approvals for the Collaboration Determa Product and Kitted Determa Product throughout the world; provided that nothing herein will be deemed to alter the ownership of any data (including Collaboration Data), results, Background IP, Arising IP or Confidential Information included in any Regulatory Submission or Regulatory Approval.
(c) Cooperation. As and to the extent reasonably requested by Oncocyte, LTC will, and will cause its Affiliates to, provide reasonable assistance to Oncocyte with respect to interactions with Regulatory Authorities that require knowledge and expertise relating to the panel designed and manufactured by LTC.
(d) Regulatory Submissions and Approvals. Oncocyte will be responsible for writing and submitting all applications for Regulatory Approval to the Regulatory Authorities, all communications with Regulatory Authorities and the maintenance of all Regulatory Approvals, in each case, relating to the Development, manufacturing, use, or commercialization of such Collaboration Determa Product throughout the world. Upon LTC’s written request, Oncocyte will provide LTC with access to all draft Regulatory Submissions relating to the Collaboration Determa Product in the Field inside and outside the Territory. LTC will provide comments, if any, back to Oncocyte within [***] days for each document. Oncocyte will consider in good faith any comments from LTC regarding such draft Regulatory Submission, and the final Regulatory Submissions relating to the Collaboration Determa Product will be submitted by Oncocyte to the relevant Regulatory Authorities.
(e) Written Communications. Oncocyte will promptly provide to LTC a copy of any substantive written communication received by Oncocyte from Regulatory Authorities with respect to Regulatory Approval of the Collaboration Determa Products in the Field inside and outside the Territory; provided that, prior to furnishing such written communications to LTC, Oncocyte may redact (i) Confidential Information of a Third Party contained in such communication and (ii) any proprietary information of Oncocyte that may be contained in such communications. LTC will provide comments, if any, back to Oncocyte no later than [***] days prior to Oncocyte responding to such written communication from a Regulatory Authority. Oncocyte will consider in good faith any comments from LTC.
(f) Meetings with Regulatory Authorities. Except as otherwise provided herein, the Parties agree that Oncocyte will remain solely responsible for all interactions with the Regulatory Authorities throughout the world related to the Collaboration Determa Product; provided that Oncocyte will notify LTC in advance of all applicable meetings with Regulatory Authorities relating to Regulatory Approvals of the Collaboration Determa Product in the Field inside and outside the Territory, whether in person or by telephone or videoconference and LTC and Oncocyte will use reasonable efforts to coordinate their schedules with respect to meeting dates with Regulatory Authorities. LTC will be entitled to attend and, if appropriate and permitted under Applicable Law, participate in all such meetings with Regulatory Authorities in the Field inside and outside the Territory; provided that that either Party may require that the other Party be excused from any discussions of proprietary or confidential information of such Party, and either Party may be excused from any discussions at the request of a Regulatory Authority.
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6.3 Regulatory Diligence.
(a) Collaboration LTC Product. Subject to both Parties completing their activities under the LTC Product Development Plan and the LTC Product Development Milestones being achieved, each Party will use Commercially Reasonable Efforts to obtain Regulatory Approval for the Kitted LTC Product in the Field in the Territory. The Parties agree to [***] such costs associated with obtaining and maintaining such Regulatory Approval in the Field in the Territory. LTC will be solely responsible for obtaining and maintaining Regulatory Approval for Collaboration LTC Product or Kitted LTC Product in the Field outside the Territory, at its sole cost.
(b) Collaboration Determa Product. Oncocyte will use Commercially Reasonable Efforts to obtain Regulatory Approval for the Collaboration Determa Product and Kitted Determa Product in the Field in the Territory, and outside the Territory to the extent contemplated by the Determa Product Development Plan or Determa Product Commercialization Plan. Oncocyte will be solely responsible for obtaining and maintaining Regulatory Approval for the Collaboration Determa Product or the Kitted Determa Product, at its sole cost.
6.4 Records. The Parties will maintain complete and accurate records of all development Activities conducted and deliverables provided pursuant to this Agreement, and all results, data, and developments made in conducting such development Activities. Such records will reflect all work done and results achieved in sufficient detail and in good scientific manner appropriate for patent and regulatory purposes. Each Party agrees to retain all such records for the time required by Applicable Laws and will allow for auditing by Regulatory Authorities of all such records.
6.5 Right of Reference. LTC will and hereby does grant to Oncocyte a right of reference, which will provide Regulatory Authorities the ability to reference applicable LTC submission records in order to complete Oncocyte product submission reviews. The related IVD data generated under this Agreement are owned or Controlled by LTC and the right of reference is solely for the purpose of obtaining Regulatory Approval in the Field for the Collaboration Determa Products or the Kitted Determa Products. In furtherance of such right of reference, upon Oncocyte’s written request to LTC, LTC will send a letter to Oncocyte that authorizes the FDA and corresponding Regulatory Authorities in foreign jurisdictions to access the pre-market notification of the Collaboration LTC Product or other applicable regulatory filings, on behalf of Oncocyte for the purposes of obtaining Regulatory Approval in the Field for any Collaboration Determa Product or Kitted Determa Product. Such letters may be included in Oncocyte’s Regulatory Submissions. If needed, alternate mechanisms will be used by the Parties to achieve appropriate rights of reference or provide information not included in the Regulatory Submission to the required Regulatory Authorities.
6.6 Post-Market Activities.
(a) Collaboration LTC Product. LTC will conduct all pre- and post-market surveillance and other post-market activities with respect to the Collaboration LTC Product in and outside the Territory.
(b) Collaboration Determa Product. Oncocyte will conduct all pre- and post-market surveillance and other post-market activities with respect to the Collaboration Determa Product in and outside the Territory.
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Article 7
PAYMENTS
7.1 [***] Milestone Payment. If LTC enters into an agreement with a therapeutics company pursuant to [***], which diagnostic product has a [***], then, [***], LTC will pay to Oncocyte [***]. [***]. Accordingly, amounts owed by LTC to Oncocyte under this Section 3.3(b) [***] will not exceed [***]. For clarity, if the first such [***] containing a [***], then LTC will pay Oncocyte [***].
7.2 Revenue Share Payments.
(a) Kitted LTC Products In the Territory. On a country-by-country basis in the Territory, beginning on the First Commercial Sale of such Kitted LTC Product in the Field in such country and ending on the expiration of the Term or earlier termination of this Agreement with respect to Collaboration LTC Products and subject to the terms and conditions set forth in Section 14.3(d) [***], LTC will pay to Oncocyte a Revenue Share Payment on Net Sales of Kitted LTC Products in the Territory as follows:
| Product | [***] | [***] | [***] | |||||||||
| Kitted LTC Product comprising [***], that is sold by LTC under a single SKU | [***] | [***] | [***] | |||||||||
| Kitted LTC Product comprising [***], that is sold by LTC under a single SKU | [***] | [***] | [***] | |||||||||
| Kitted LTC Product comprising [***], that is sold by LTC under a single SKU | [***] | [***] | [***] |
Notwithstanding the foregoing, in no event will the foregoing calculation of Net Sales in any given calendar quarter result in the double counting of any sale of any individual unit of the Kitted LTC Product.
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(b) Kitted LTC Products Outside the Territory. On a country-by-country basis outside the Territory, beginning on the First Commercial Sale of such Kitted LTC Product in the Field in such country and ending on the expiration of the Term or earlier termination of this Agreement with respect to Collaboration LTC Products and subject to the terms and conditions set forth in Section 14.3(d) [***], LTC will pay to Oncocyte a Revenue Share Payment on Net Sales of Kitted LTC Products outside the Territory as follows:
| Product | Revenue Share Percentage | |||
| Kitted LTC Product comprising [***], that is sold by LTC under a single SKU | [***] | |||
| Kitted LTC Product comprising [***], that is sold by LTC under a single SKU | [***] | |||
| Kitted LTC Product comprising [***], that is sold by LTC under a single SKU | [***] |
provided that LTC will only pay to Oncocyte a Revenue Share Payment on Kitted LTC Products in the Field and outside the Territory to the extent [***]. Notwithstanding the foregoing, in no event will the foregoing calculation of Net Sales in any given calendar quarter result in the double counting of any sale of any individual unit of the Kitted LTC Product.
(c) Kitted Determa Products Outside the Territory. On a country-by-country basis outside the Territory, beginning on the First Commercial Sale of such Kitted Determa Product in the Field in such country and ending on the expiration of the Term or earlier termination of this Agreement with respect to Collaboration Determa Products and subject to the terms and conditions set forth in Section 14.3(d) [***], LTC will pay to Oncocyte a Revenue Share Payment on Net Sales of Kitted Determa Products outside the Territory as follows:
| Product | Revenue Share Percentage | |||
| Kitted Determa Product comprising [***], that is sold by LTC under a single SKU | [***] | |||
| Kitted Determa Product comprising [***], that is sold by LTC under a single SKU | [***] | |||
| Kitted Determa Product comprising [***], that is sold by LTC under a single SKU | [***] |
(d) Collaboration Determa Products In the Territory. Beginning on the First Commercial Sale of a Collaboration Determa Product in the Field in the Territory and ending on the expiration of the Term or earlier termination of this Agreement with respect to the Collaboration Determa Product and subject to the terms and conditions set forth in Section 14.3(d) [***], Oncocyte will pay to LTC a Revenue Share Payment equal to [***] of Net Sales of Collaboration Determa Products in the Territory.
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7.3 Third Party Payment Reductions. With respect to Net Sales during the Term, if the selling Party determines, on a country-by-country basis, in good faith, that Third Party intellectual property rights are necessary to develop, manufacture, commercialize or otherwise exploit the Collaboration LTC Product or Collaboration Determa Products (as applicable) in the country of sale, then the selling Party will have the right to obtain a license under such Third Party intellectual property rights in such country and to deduct [***] of the [***]; provided that in no event will the Revenue Share Payments, in aggregate, due to the other Party in any Calendar Year with respect to Net Sales to be reduced pursuant to this Section 7.3 (Third Party Payment Reduction) by more than [***] of the amount that would otherwise have been due under Section 7.2(a) (Kitted LTC Products in the Field in the Territory), Section 0 (Kitted LTC Products Outside the Territory), Section 7.2(c) (Kitted Determa Products Outside the Territory), or Section 7.2(d) (Collaboration Determa Products In the Territory); with respect to Net Sales. [***]
7.4 Revenue Share Statements and Payments.
(a) LTC Net Sales In the Territory. Within [***] days following the end of each calendar quarter, LTC will deliver to Oncocyte a report setting forth, for such calendar quarter, the following information, on a country-by-country basis: (a) Net Sales of the Kitted LTC Product in the Field and in the Territory [***], (b) the applicable percentage of Net Sales payable as part of the Revenue Share Payment, and (c) the Revenue Share Payment due to Oncocyte hereunder for the sale of such Kitted LTC Product in the Field in such country in the Territory. No such reports will be due for the Kitted LTC Product before the First Commercial Sale of the Kitted LTC Product in the Territory. The total Revenue Share Payment due for the sale of all Kitted LTC Products in the Field in the Territory during such calendar quarter will be remitted [***].
(b) LTC Net Sales Outside the Territory. Within [***] days of the end of each calendar quarter, LTC will deliver to Oncocyte a report setting forth, for such calendar quarter, the following information, on a country-by-country basis: (a) Net Sales of the Kitted LTC Product or Kitted Determa Products (as applicable) in the Field and outside the Territory [***], (b) the applicable percentage of Net Sales payable as part of the Revenue Share Payment, and (c) the Revenue Share Payment due to Oncocyte hereunder for the sale of the Kitted LTC Product or Kitted Determa Products (as applicable) in the Field in such country outside the Territory. No such reports will be due for any such Kitted LTC Product or Kitted Determa Products (as applicable) before the First Commercial Sale of the Kitted LTC Product or Kitted Determa Products (as applicable) outside the Territory. The total Revenue Share Payment due for the sale of all Kitted LTC Products or Kitted Determa Products (as applicable) in the Field outside the Territory during such calendar quarter will be remitted [***].
(c) Oncocyte Net Sales in the Territory. Within [***] days of the end of each calendar quarter, Oncocyte will deliver to LTC a report setting forth, for such calendar quarter, the following information, on a country-by-country basis: (a) Net Sales of the Collaboration Determa Product in the Field and in the Territory [***], (b) the applicable percentage of Net Sales payable as part of the Revenue Share Payment, and (c) the Revenue Share Payment due to LTC hereunder for the sale of the Collaboration Determa Product in the Field in such country in the Territory. No such reports will be due for any such Collaboration Determa Product before the First Commercial Sale of the Collaboration Determa Product in the Territory. The total Revenue Share Payment due for the sale of all Collaboration Determa Products in the Field in the Territory during such calendar quarter will be remitted [***].
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7.5 Late Payments. Any amount owed by a Party to the other Party under this Agreement that is not paid within the applicable time period set forth herein will accrue interest at the lesser of (a) [***], or (b) the highest rate permitted under Applicable Law.
7.6 Disputed Payments. If a Party disputes a payment under Section 7.4 (Revenue Share Statements and Payments) or Section 4.2 (Development Plan Costs), then the Party owing payment will timely pay the undisputed amount of such payment and the JSC will resolve such dispute in accordance with Section 2.3(b) (Actions or Decisions). The disputing Party will provide the JSC with a written notice setting forth in reasonable detail the nature and factual basis for such dispute and the JSC will seek to resolve such dispute within [***] days after the date such written notice is received. Any outstanding amounts due will be payable by the applicable Party within [***] days after the resolution of the dispute.
7.7 Taxes. Each Party will be responsible for its own taxes, duties, levies, imposts, assessments, deductions, fees, withholdings or similar charges imposed on or measured by net income or overall gross income (including branch profits), gross receipts, capital, ability or right to do business, property, and franchise or similar taxes pursuant to Applicable Law. Each Party may deduct and withhold from payments any amounts it is required to deduct and withhold pursuant to Applicable Law, which such amounts will be treated as having been paid hereunder.
7.8 Currency. All amounts payable and calculations under this Agreement will be in United States dollars. As applicable, Net Sales and any deductions will be translated into United States dollars at the average of the exchange rates published by Bloomberg (or if Bloomberg is unavailable, a comparable publication) on each business day of the calendar quarter to which such Revenue Share Payments relate.
7.9 Record Keeping. Each Party will keep and will cause its Affiliates to keep books and accounts of record in connection with the commercialization of the Kitted LTC Product, Kitted Determa Products, and Collaboration Determa Products in sufficient detail to permit accurate determination of all figures necessary for verification of Revenue Share Payments under this Agreement. Each Party and its Affiliates will maintain such records for the longer of (a) at least three years after the end of the calendar year in which they were generated or otherwise relevant and (b) as is required by Applicable Law.
7.10 Audits. Each Party will permit an independent certified public accounting firm of nationally recognized standing selected by the auditing Party and reasonably acceptable to the audited Party, to examine, at the auditing Party’s sole expense and upon reasonable prior notice, the relevant books and records of the audited Party and its Affiliates as may be reasonably necessary to verify the Net Sales amounts reported by the audited Party in accordance with Section 7.4 (Revenue Share Statements and Payments). An examination by the auditing Party under this Section 7.10 (Audits) (a) will be subject to standard confidentiality obligations, (b) will occur not more than once in any [***], (c) will be limited to the audited Party’s and its Affiliate’s pertinent books and records to the extent relevant to the calculation of Net Sales for any calendar year ending not more than three years before the date of the request, (d) will not exceed a period of [***] business days in duration, (e) may not unreasonably disrupt the operations of the audited Party or its Affiliates, and (f) may be reasonably delayed by the audited Party to the extent such examination conflicts with any previously scheduled audit of the audited Party. The accounting firm will be provided access to such books and records at the audited Party’s or its Affiliates’ facility(ies), or remotely, where such books and records are normally kept and such examination will be conducted during the audited Party’s normal business hours. Upon completion of the audit, the accounting firm will provide both LTC and Oncocyte a written report disclosing any discrepancies in (i) the reports submitted by the audited Party or (ii) the Revenue Share Payments or any other amounts paid by the audited Party under this Agreement, and, in each case, the specific details concerning any discrepancies.
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7.11 Underpayments/Overpayments. If such accounting firm concludes that additional amounts were due to the auditing Party, then the audited Party will pay to the auditing Party such additional amounts within [***] days of the date the audited Party receives such accountant’s written report. Further, if the amount of such underpayments exceeds more than [***] of the amounts that were properly payable to the auditing Party, then the audited Party will reimburse the auditing Party for its reasonable out-of-pocket costs in connection with the audit. If such accounting firm concludes that the audited Party made payments to the auditing Party under this Agreement in excess of the amounts due under this Agreement, then the auditing Party will refund such excess amount to the audited Party, within [***] days of the date the auditing Party receives such accountant’s report and all invoices for the audit.
Article 8
SERVICE AND SUPPORT
8.1 Collaboration LTC Product. LTC will be responsible for providing field-based training and customer support for Collaboration LTC Product customers in the Territory consistent with LTC’s standard practices and procedures.
8.2 Collaboration Determa Products.
(a) In the Territory. Oncocyte will be responsible for providing first level field-based training and customer support for Collaboration Determa Product to customers in the Territory. If any customer complaint remains unresolved for [***], then Oncocyte will share the complaint with LTC and LTC will be responsible for providing second level support services to Oncocyte in accordance with LTC’s Instrument Services Terms and Conditions set forth in Schedule 8.2 (LTC Instrument Services Terms and Conditions). If any customer complaint is specific to the NGS Instrument, Oncocyte will share the complaint with LTC within [***].
(b) Outside the Territory. LTC will be responsible for providing all field-based training and customer support for Kitted Determa Products to customers outside the Territory in accordance with the Determa Product Commercialization Plan. Oncocyte will provide “train-the-trainer” training to LTC personnel and contractors as reasonably necessary to enable LTC to provide such field-based training and customer support.
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8.3 Development Activities. In support of the NGS Instruments used by Oncocyte to perform its obligations under the LTC Product Development Plan and its obligations under the Determa Product Development Plan, LTC will supply to Oncocyte [***] service contracts at [***].
Article 9
INTELLECTUAL PROPERTY
9.1 Ownership of Intellectual Property.
(a) Background Intellectual Property. Each Party retains all rights, title, and interest in and to such Party’s Background IP. Each Party, in its sole discretion, is responsible for the filing, prosecution, maintenance, abandonment and enforcement of its own Background IP.
(b) Arising Intellectual Property. Inventorship of Arising IP will be determined in accordance with U.S. patent laws. Ownership, as well as responsibility for prosecution, maintenance, abandonment and enforcement of Arising IP will be as set forth below.
(i) LTC Product Arising IP. All rights, title, and interests in and to all LTC Product Arising IP, irrespective of inventorship, will vest in LTC. Oncocyte hereby assigns and transfers and will assign and transfer to LTC all rights, title, and interests that it may have in or to any LTC Product Arising IP. LTC, in its sole discretion, is responsible for the filing, prosecution, maintenance, abandonment and enforcement of LTC Product Arising IP.
(ii) Oncocyte Product Arising IP. All rights, title, and interests in and to all Oncocyte Product Arising IP, irrespective of inventorship, will vest in Oncocyte. LTC hereby assigns and transfer to Oncocyte all rights, title, and interests that it may have in or to any Oncocyte Product Arising IP. Oncocyte, in its sole discretion, is responsible for the filing, prosecution, maintenance, abandonment and enforcement of Oncocyte Product Arising IP.
(iii) Sole Ownership of Other Arising IP. Ownership of any Other Arising IP will be according to inventorship, with the inventor(s) owning the IP and inventorship determined in accordance with U.S. patent law. Subject to Section 9.1(b)(v) (Procedure), each Party, in its sole discretion, is responsible for the filing, prosecution, maintenance, abandonment and enforcement of Other Arising IP invented or developed solely by such Party.
(iv) Joint Other Arising IP. Subject to Section 9.1(b)(v) (Procedure For Patent Claiming Arising IP), the filing Party will provide the other Party with a reasonable opportunity to review and comment on its efforts to prepare, file, prosecute, and maintain Joint Other Arising IP, including by providing other Party with a copy of material communications from any patent authority in such country(ies) regarding any such Joint Other Arising IP, and by providing drafts of any material filings or responses to be made to such patent authorities in advance of submitting such filings or responses. Filing Party will consider other Party’s comments regarding such communications and drafts in good faith. For the avoidance of doubt, in no instance will any Joint Other Arising IP be abandoned without giving the other Party an opportunity to maintain a patent or pursue a patent application. The filing Party will provide to the other Party at least [***] days’ written notice prior to a final patent deadline of its intent to abandon such patent application or issued patent and will allow the other Party to directly pay the costs of preparing, filing, prosecuting, issuing, or maintaining such patent application or issued patent. Should other Party choose to directly pay such costs, filing Party will execute all documents and do all acts necessary to vest ownership of Joint Other Arising IP in the other Party. Subject to the terms and conditions of this Agreement, each Party will have the right to freely exploit and license the Joint Other Arising IP without the consent of or obligation to account to the other Party. To the extent that Applicable Law requires either Party to obtain the consent of the other Party to exploit or license its interest in the Joint Other Arising IP, each Party hereby grants and will grant such consent upon the request of the other Party.
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(v) Procedure for Patent Claiming Arising IP. Prior to either Party filing a patent application claiming Arising IP, each Party will notify the other Party of its intent to file such patent application, provide a draft of such patent application (which may be redacted to protect the Confidential Information of the filing Party), and allow the other Party a reasonable opportunity to comment on such patent application with respect to inventorship and ownership of any patent that would be granted if such patent application were approved. If the other Party notifies the filing Party that it does not agree with the filing Party’s view of inventorship and ownership of any patent that would be granted if such patent application were approved, then the Parties will endeavor in good faith to resolve such disagreement. Notwithstanding the foregoing, [***]; provided that [***].
(vi) Collaboration Data. All Collaboration Data generated in the Development of the Collaboration LTC Product will be solely owned by LTC. All Collaboration Data generated in the Development of the Collaboration Determa Product, including analytical validation data, will be jointly owned by the Parties and will be Joint Other Arising IP hereunder, and will be jointly owned by the Parties, subject to the terms and conditions of this Agreement, and each Party will have the right to freely exploit and license its interest in Collaboration Data as provided in Section 9.1(b)(iv) (Joint Other Arising IP). Each Party hereby assigns to the other Party an undivided one-half interest in and to the Collaboration Data owned by such Party.
(c) Defense of Joint Other Arising IP. Each Party will notify the other if becomes aware of any alleged or threatened assertion that the practice of Joint Other Arising IP infringes or misappropriates the Intellectual Property Rights of a Third Party. The Parties will discuss in good faith the defense of such assertion, including which Party shall have the right to conduct any related proceedings, and whether one or both Parties will bear the related costs and expenses.
(d) Cooperation. Each Party agrees to perform, during or after termination of this Agreement, such further acts as may be necessary or desirable to transfer, perfect, and defend the other Party’s worldwide ownership of their respective Arising IP as reasonably requested by a Party and to provide all assistance reasonably requested by a Party, at the requesting Party’s expense, in the establishment, preservation, and enforcement of a Party’s rights in its respective Arising IP as delineated in this Section 9.1(b) (Arising Intellectual Property), including by: [***].
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9.2 Relevant Third Party IP. During the Term, if either Party becomes aware of: (i) any Intellectual Property Rights that such Party determines may constitute Relevant Third Party IP that would materially affect the transactions contemplated by this Agreement, or (ii) any allegation that any Party infringes the Intellectual Property Rights of a Third Party related to its Activities or transactions under its Agreement; such Party will promptly notify the other Party. Upon any such notice, the Parties will enter into discussions and any necessary protective agreements to determine:
(a) Solely with respect to any Relevant Third Party IP that may be directly infringed by: [***] (“Platform Relevant IP”), whether a license to such Platform Relevant IP must be pursued. If a license to such Platform Relevant IP is to be pursued, [***]; provided [***]; and
(b) With respect to any Relevant Third Party IP other than Platform Relevant IP, [***].
9.3 Trademarks. Each Party will provide to the other Party a license to use its trademarks to the extent necessary to accomplish the commercialization of the Collaboration LTC Product and Collaboration Determa Product in a manner consistent with Section 5.1(d) (Branding). In addition, Oncocyte will provide to LTC a license to use its trademarks related to the Collaboration Determa Product to use in marketing and promotional materials in the Determa Product Territory in connection with marketing and promotion of the NGS Instrument for the sole purpose of indicating that the Collaboration Determa Product runs on the NGS Instrument.
Article 10
CONFIDENTIAL INFORMATION
10.1 Confidentiality Requirement. Each Party will (a) maintain the other Party’s Confidential Information in confidence during the Term and for [***] thereafter, (b) limit dissemination of the other Party’s Confidential Information to those of its employees who require such Confidential Information in order for such Party to perform its obligations and exercise its rights under this Agreement, and (c) use and disclose such Confidential Information only to the extent necessary for such Party to perform its obligations and exercise its rights under this Agreement.
10.2 Authorized Disclosure. Notwithstanding the obligations set forth in Section 10.1 (Confidentiality Requirement), Confidential Information may be disclosed by the Receiving Party to the extent such disclosure is required to comply with Applicable Law and a court order; provided that the Receiving Party gives prior notice to the Providing Party regarding such disclosure, and seeks, or cooperates with the Disclosing Party in obtaining, confidential treatment of such disclosure to the maximum extent permitted by Applicable Law. In addition, each Party will have the right to disclose Confidential Information belonging to the other Party in connection with a prospective acquisition, merger, financing, license or sublicense for such Party to potential or actual (a) acquirers or merger candidates, (b) Development or commercialization collaborators or partners for the Kitted LTC Product engaged in accordance with this Agreement, or (c) investors, lenders or financing sources, in each case, including any investment bank, placement agent, accountant or other financial or legal adviser in connection with any such actual or potential transaction; provided that, in each case, (i) such persons are bound by written obligations or other obligations of confidentiality and non-use with respect to such Confidential Information no less stringent than the confidentiality and non-use terms of this Agreement and (ii) any such disclosure is limited to the maximum extent practicable for the particular context in which it is being disclosed.
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10.3 Terms of this Agreement. The Parties acknowledge that the terms and contents of this Agreement (including any Exhibits attached hereto) will be treated as the Confidential Information of each Party, as appropriate.
10.4 Publicity. Except as otherwise required by Applicable Law, and only after compliance with this Section 10.4 (Publicity), no Party will issue a press release or make any other public disclosure of the existence or terms of this Agreement, without the prior written approval of such press release or disclosure by the other Party. However if, in the reasonable opinion of a Party’s counsel, a public disclosure is required by Applicable Law, or court order, including in a filing with the United States Securities and Exchange Commission, then such Party will provide copies of the disclosure reasonably in advance of such filing or other disclosure for the other Party’s prior review and comment, and the other Party will provide their comments as soon as practicable, provided that, with respect to a filing with the United States Securities and Exchange Commission and where such time permits, such comments will be provided no later than [***] prior to the filing deadline. No disclosure permitted by this Section 10.4 (Publicity) is allowed to contain any Confidential Information of the other Party unless otherwise permitted in accordance with this Article 10 (Confidential Information).
10.5 Use of Name. No right, express or implied, is granted to either Party by this Agreement to use in any manner any trademark, logo or trade name of either Party without the prior written consent of the owning Party. No Party will make, place or disseminate any advertising, public relations, marketing material or any material of any kind using the name of the other Party or any subsidiary or Affiliate of the other Party or use their trademark, logo or trade name, without the prior written approval of the owning Party.
10.6 Publications. The Parties will have the right to publish or present Collaboration Data or any portion thereof for their publication objectives (a “Publication”) in accordance with this Section 10.6 (Publications). For avoidance of doubt, the publishing Party will have no right to publish the non-publishing Party’s Confidential Information (not including Collaboration Data) without the prior affirmative written consent of the non-publishing Party. The publishing Party will provide the non-publishing Party with an advance copy of any Publication containing Collaboration Data or the non-publishing Party’s Confidential Information at least [***] days prior to such submission for publication or presentation for the non-publishing Party’s review and written consent. The non-publishing Party will have the right to (a) provide comments, which will be considered and reasonably incorporated by the publishing Party, or (b) remove any Confidential Information of the non-publishing Party (not including Collaboration Data). The non-publishing Party may request, and the publishing Party will not unreasonably deny, postponement of the Publication for up to [***] additional days to allow for filing or registration of Intellectual Property Rights protection. For clarity, (i) a non-publishing Party’s failure to redact any of its Confidential Information from a Publication, or silence around the same, and (ii) expiration of the review or postponement periods described herein, is not affirmative written consent by the non-publishing Party under this Section 10.6 (Publications).
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Article 11
REPRESENTATIONS, WARRANTIES, AND COVENANTS
11.1 Representations, Warranties and Covenants of LTC. LTC represents and warrants to and covenants with Oncocyte that:
(a) As of the Effective Date, LTC is a corporation duly organized, validly existing and in corporate good standing under the laws of the State of Delaware.
(b) LTC has the legal power and authority to execute, deliver and perform this Agreement.
(c) The execution, delivery and performance of this Agreement by LTC has been duly authorized by all necessary corporate action.
(d) Upon the execution and delivery of this Agreement, this Agreement constitutes the legal, valid and binding obligation of LTC, enforceable against LTC in accordance with its terms.
(e) The execution, delivery and performance of this Agreement will not cause or result in a violation of any Applicable Law.
(f) LTC has enforceable written agreements with all of its employees who receive Confidential Information of Oncocyte or perform activities under this Agreement assigning to LTC ownership of all Intellectual Property Rights created in the course of their employment.
(g) LTC will comply with all Applicable Laws and obtain all required governmental permits, licenses, and authorizations in the performance of its Activities under the Agreement.
(h) LTC represents that it is not debarred under subsections 306(a) or (b) of the US Federal Food Drug and Cosmetic Act US Generic Drug Enforcement Act of 1992, 21 USC 335a (a) or (b), and that it has not and will not use in any capacity the services of any person debarred under such law to conduct Activities. LTC further represents that none of its Affiliates in the US are excluded from any federal health care program, including but not limited to Medicare and Medicaid.
(i) [***]
(j) If LTC Materials are human specimens, such LTC Materials will be De-identified prior to transfer to Oncocyte (or its Affiliates or subcontractors under Section 4.4 (Performance by Affiliates and Subcontractors)), and LTC will not provide Oncocyte any Protected Health Information (as such term is defined under HIPAA) or Personal Information as defined under the GDPR, the CCPA, or similarly defined term in Applicable Law, about any human donors of LTC Materials or of the original tissues from which LTC Materials were derived. LTC has legal title, power and authority to provide all LTC Materials provided to Oncocyte under this Agreement, and with respect to human specimens, a legal, valid, and binding informed consent from the patient authorizing such provision of such LTC Materials has been obtained from the patient in accordance with Applicable Law.
(k) LTC has and will comply with all Applicable Laws and obtain all required governmental permits, licenses, and authorizations in the collection and handling of LTC Materials and the performance of its Activities under the Agreement.
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(l) LTC has legal right and title to LTC Materials and any uses of LTC Materials described in this Agreement (including the Development Plans) are within the scope of and consistent with the informed consents applicable to such LTC Materials or otherwise permissible under Applicable Law.
(m) To the extent that the LTC Materials include human specimens, LTC represents and warrants to Oncocyte that either it: (i) has obtained all informed consents and Institutional Review Board or Ethics Committee approvals required by Applicable Law with respect to such Materials, (ii) is not required under Applicable Law to obtain such informed consents, (iii) it has received a waiver for consent from an Institutional Review Board or Ethics Committee, or (iv) the use of the LTC Materials by Oncocyte in connection with this Agreement is within the scope of and consistent with the informed consents applicable to the LTC Materials.
11.2 Representations, Warranties, and Covenants of Oncocyte. Oncocyte represents and warrants to and covenants with LTC that:
(a) As of the Effective Date, Oncocyte is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction in which it is registered.
(b) Oncocyte has the legal power and authority to execute, deliver, and perform this Agreement.
(c) The execution, delivery and performance by Oncocyte of this Agreement has been duly authorized by all necessary corporate action.
(d) Upon the execution and delivery of this Agreement, this Agreement constitutes the legal, valid and binding obligation of Oncocyte, enforceable against Oncocyte in accordance with its terms.
(e) The execution, delivery and performance of this Agreement will not cause or result in a violation of any Applicable Law.
(f) Oncocyte has enforceable written agreements with all of its employees who receive Confidential Information of LTC or perform Activities under this Agreement assigning to Oncocyte ownership of all Intellectual Property Rights created in the course of their employment.
(g) If Oncocyte Materials are human specimens, such Oncocyte Materials will be De-identified prior to transfer to LTC (or its Affiliates or subcontractors under Section 4.4 (Performance by Affiliates and Subcontractors)), and Oncocyte will not provide LTC any Protected Health Information (as such term is defined under HIPAA) or Personal Information as defined under the GDPR, the CCPA, or similarly defined term in Applicable Law, about any human donors of Materials or of the original tissues from which Oncocyte Materials were derived. Oncocyte has legal title, power and authority to provide all Materials provided to LTC under this Agreement, and with respect to human specimens, a legal, valid, and binding informed consent from the patient authorizing such provision of such Oncocyte Materials has been obtained from the patient in accordance with Applicable Law.
(h) Any Oncocyte-provided software that runs on an NGS Instrument or interacts with NGS Software will not contain any time bomb, virus, worm, Trojan horse, back door, drop dead device, or any other software that would interfere with the normal operation of any NGS Software or NGS Instrument, would allow circumvention of security controls for the same, or that is intended to cause damage to any NGS Instrument, NGS Software or data.
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(i) [***]
(j) Oncocyte has and will comply with all Applicable Laws and obtain all required governmental permits, licenses, and authorizations in the collection and handling of Oncocyte Materials and the performance of its Activities under the Agreement.
(k) Oncocyte has legal right and title to Oncocyte Materials and any uses of Oncocyte Materials described in this Agreement (including the Development Plans) are within the scope of and consistent with the informed consents applicable to such Oncocyte Materials or otherwise permissible under Applicable Law.
(l) To the extent that the Oncocyte Materials include human specimens, Oncocyte represents and warrants to LTC that either it: (i) has obtained all informed consents and Institutional Review Board or Ethics Committee approvals required by Applicable Law with respect to such Oncocyte Materials, (ii) is not required under Applicable Law to obtain such informed consents, (iii) it has received a waiver for consent from an Institutional Review Board or Ethics Committee, or (iv) the use of the Oncocyte Materials by LTC in connection with this Agreement is within the scope of and consistent with the informed consents applicable to the Materials.
(m) Oncocyte represents that it is not debarred under subsections 306(a) or (b) of the US Federal Food Drug and Cosmetic Act US Generic Drug Enforcement Act of 1992, 21 USC 335a (a) or (b), and that it has not and will not use in any capacity the services of any person debarred under such law to conduct Activities. Oncocyte further represents that none of its Affiliates in the US are excluded from any federal health care program, including but not limited to Medicare and Medicaid.
Article 12
INDEMNIFICATION
12.1 Indemnification by LTC. LTC agrees to indemnify, defend, and hold harmless Oncocyte Indemnified Parties against all Losses to the extent resulting from Claims brought by a Third Party and arising from: (a) any gross negligence, recklessness or willful misconduct of the LTC Indemnified Parties in connection with this Agreement, (b) any breach by LTC of this Agreement (c) any violation of Applicable Law by LTC Indemnified Parties in connection with the performance of LTC’s obligations or Activities under this Agreement, (d) the LTC’s and its Affiliates’ development, commercialization, manufacture, or sale of NGS Products, including the Kitted LTC Product, (e) LTC’s and its Affiliates’ commercialization of the Collaboration Determa Product outside the Determa Product Territory; (e) LTC’s performance of its activities under the Development Plans or Commercialization Plans, or (f) any failure of any NGS Product to conform to its standard LTC specification. In all cases in (a) through (f) above, such indemnity will be reduced up to the amount and to the extent that Oncocyte is required to indemnify any of the LTC Indemnified Parties for the relevant Losses or Claims under Section 12.2 (Indemnification by Oncocyte).
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12.2 Indemnification by Oncocyte. Oncocyte agrees to indemnify, defend, and hold harmless LTC Indemnified Parties against all Losses to the extent resulting from Claims brought by a Third Party and arising from: (a) any gross negligence, recklessness, or willful misconduct of Oncocyte Indemnified Parties in connection with this Agreement, (b) any breach by Oncocyte of this Agreement, or (c) any violation of Applicable Law by Oncocyte Indemnified Parties in connection with the performance of Oncocyte’s obligations or Activities under this Agreement, (d) Oncocyte’s performance of its activities under the Development Plans or Commercialization Plans, or (e) Oncocyte’s and its Affiliates’ development, manufacture, performance, or sale of any Oncocyte product, service or software that includes or is performed using any NGS Product, including the Determa Assay or any Collaboration Determa Product, (except to the extent arising from (i) any defect in or failure of such NGS Product to conform to its standard warranty, or (ii) the commercialization of the Collaboration Determa Product by LTC outside the Determa Product Territory). In all cases in (a) through (e) above, such indemnity will be reduced up to the amount and to the extent that LTC is required to indemnify any of the Oncocyte Indemnified Parties for the relevant Losses or Claims under Section 12.1 (Indemnification by LTC).
12.3 Notice. Should any claim arise which could reasonably be expected to lead to a claim for indemnification, the Indemnified Party will promptly notify, in writing, the Indemnifying Party of the claim and the facts constituting the basis for such claim and will promptly provide the Indemnifying Party with such documents and information that are reasonably requested. An Indemnifying Party will have no obligation or liability under this Article 12 as to any claim for which settlement or compromise of such claim, or an offer of settlement or compromise of such claim, is made by an Indemnified Party without the prior written consent of the Indemnifying Party, which consent will not be unreasonably withheld. Further, the Indemnified Party will take such lawful action as the Indemnifying Party may reasonably request to mitigate Losses, subject to the indemnification obligations set forth in Article 12 (Indemnification).
12.4 Defense; Mitigation. The Indemnifying Party will assume exclusive control of the defense of any claim for which the Indemnified Party may be liable under Article 12 (Indemnification) at its sole cost and expense. The Indemnified Party will provide cooperation and assistance in the defense of such claim in the event the Indemnifying Party assumes the defense as set forth above. The Indemnifying Party will not settle or compromise any such claim without the prior written consent of the Indemnified Party, which consent will not be unreasonably withheld, conditioned or delayed; provided, however, that no consent is required to be obtained if: (a) the Indemnified Party is fully released of all liability without admission of liability or wrongdoing, and (b) the settlement is limited to a financial payment by the Indemnifying Party, and (c) the settlement does not otherwise adversely impact the Indemnified Party. Further, the Oncocyte Indemnified Parties and the LTC Indemnified Parties, as the case may be, will take such measures as are commercially reasonable to minimize risks and mitigate Losses related to any Claims under this Article 12 (Indemnification).
Article 13
LIMITATION OF LIABILITY AND DISCLAIMER OF WARRANTIES
13.1 Limitation of Liability. EXCEPT WITH RESPECT TO (A) THE GROSS NEGLIGENCE, RECKLESSNESS OR WILLFUL MISCONDUCT OF A PARTY, (B) A BREACH OF THE CONFIDENTIALITY OBLIGATIONS UNDER ARTICLE 10 (CONFIDENTIAL INFORMATION) BY A PARTY, OR (C) AMOUNTS SOUGHT BY THIRD PARTIES IN CLAIMS THAT ARE SUBJECT TO EACH PARTY’S RESPECTIVE INDEMNITY OBLIGATIONS UNDER ARTICLE 12 (INDEMNIFICATION), NEITHER PARTY WILL BE LIABLE WITH RESPECT TO ANY MATTER ARISING UNDER THIS AGREEMENT UNDER ANY CONTRACT, NEGLIGENCE, STRICT LIABILITY, OR OTHER LEGAL OR EQUITABLE THEORY FOR ANY PUNITIVE, EXEMPLARY, INCIDENTAL, INDIRECT OR CONSEQUENTIAL DAMAGES, INCLUDING BUT NOT LIMITED TO, LOSS OF BUSINESS OR GOOD WILL, LOSS OF REVENUE OR LOST PROFITS.
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13.2 Disclaimer of Warranties. EXCEPT FOR THE EXPRESS REPRESENTATIONS AND WARRANTIES SET FORTH IN THIS AGREEMENT, (A) NEITHER PARTY MAKES ANY WARRANTIES WITH RESPECT TO ANY PRODUCT, PATENT RIGHTS, GOODS, SERVICES, MATERIALS, KNOW-HOW OR ANY OTHER SUBJECT MATTER OF THIS AGREEMENT, AND (B) EACH PARTY HEREBY DISCLAIMS WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, AND NON-INFRINGEMENT WITH RESPECT TO ANY AND ALL OF THE FOREGOING.
Article 14
TERM AND TERMINATION
14.1 Term. This Agreement commences on the Effective Date and will remain in effect until December 31, 2035, unless terminated earlier as provided herein (“Term”); provided [***]. The Parties may extend the Term by mutual written agreement.
14.2 Termination Rights.
(a) For Cause. Either Party may terminate this Agreement by providing written notice of termination to the other Party in the event that the other Party materially breaches this Agreement and fails to cure such breach within [***] days of receiving a written notice of default from the non-breaching Party; provided, however, that if the default cannot, by its nature, be cured within such [***] day period, then the breaching Party may propose a plan to cure such breach in a longer period of time, such period not to exceed [***], and the Parties will discuss such plan [***]. If the Parties cannot agree on such proposed plan to cure the applicable breach in a period longer than [***] days (but less than [***]), then the non-breaching Party may terminate this Agreement upon the expiration of such [***] day period by providing written notice of termination to the other Party. Notwithstanding the foregoing, if the material breach relates only to Collaboration LTC Products, then the non-breaching Party may only terminate this Agreement with respect to Collaboration LTC Products, and if the material breach relates only to Collaboration Determa Products, then the non-breaching Party may only terminate this Agreement with respect to Collaboration Determa Products. Notwithstanding the foregoing, if the allegedly breaching Party disputes whether it has materially breached this Agreement or whether it has failed to cure such breach within such [***] day cure period and commences an action to dispute such allegation in accordance with Section 15.3 (Governing Law; Jurisdiction), then the cure period to cure such breach will be tolled and the Agreement will remain in effect pending the outcome of such litigation.
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(b) For Specific Events by LTC With Respect to a Collaboration LTC Product. LTC may terminate this Agreement with respect to the Collaboration LTC Product or, at LTC’s option, in its entirety, by providing written notice to Oncocyte if any of the following occurs, which termination will become effective [***] days following the date of such notice:
(i) Failure to Achieve LTC Product Development Milestone. Oncocyte fails to achieve a LTC Product Development Milestone under the then-current LTC Product Development Plan; and
(ii) [***]
(c) For Specific Events by Oncocyte With Respect to a Collaboration LTC Product. Oncocyte may terminate this Agreement with respect to Collaboration LTC Products by providing written notice of termination to LTC if LTC fails to achieve an LTC Product Development Milestone under the then-current LTC Product Development Plan, which termination will become effective [***] days following the date of such notice.
(d) With Respect to a Collaboration Determa Product.
(i) [***] Either Party may terminate this Agreement with respect to the Collaboration Determa Product by providing written notice of termination to the other Party if [***].
(ii) By LTC for Convenience Outside the Territory. LTC may terminate its license from Oncocyte to commercialize the Kitted Determa Product outside the Determa Product Territory and all of its obligations with respect to the commercialization of the Kitted Determa Product outside the Determa Product Territory (including its obligations under 5.3 (Commercialization of Products) with respect to Kitted Determa Products) by providing written notice of termination to Oncocyte, which termination will become effective [***] days following the date of such notice.
(e) Insolvency. Either Party may terminate this Agreement if the other Party becomes the subject of a voluntary or involuntary petition in bankruptcy or any proceeding relating to insolvency, receivership, liquidation, or composition or the benefit of creditors, if that petition or proceeding is not dismissed with prejudice within [***] days after filing. All licenses granted under this Agreement are deemed to be, for purposes of Section 365(n) of the U.S. Bankruptcy Code, licenses of right to “intellectual property” as defined in Section 101 of such code. The Parties agree that any licensee Party will retain and may fully exercise all of its rights and elections under the U.S. Bankruptcy Code.
14.3 Effects of Expiration or Termination.
(a) Generally. If this Agreement is terminated with respect to the Collaboration LTC Product or the Collaboration Determa Product or if it expires, then except as expressly provided in this Agreement (including in this Section 14.3 (Effects of Expiration or Termination) and Section 14.4 (Survival), all rights and obligations of the Parties with respect to the terminated product will terminate, or with respect to expiration, both products.
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(b) Expiration.
(i) Collaboration LTC Product. Upon expiration of the Term, the license grants to LTC in Section 3.2(a) (Oncocyte License Grants to LTC) will become fully paid-up, perpetual and irrevocable with respect to the Collaboration LTC Product, and the license grants to Oncocyte in Section 3.1(a) (LTC License Grants to Oncocyte) will terminate and expire with respect to the Collaboration LTC Product and Kitted LTC Product.
(ii) Collaboration Determa Product. Upon expiration of the Term, the license grants to Oncocyte in Section 3.1(a) (LTC License Grants to Oncocyte) will become fully paid-up, perpetual, and irrevocable with respect to the Collaboration Determa Product and the license grants to LTC in Section 3.2(a) (Oncocyte License Grants to LTC) will terminate with respect to the Collaboration Determa Product.
(iii) Negotiation. At the request of either Party, reasonably in advance of the expiration of the Term, the Parties will negotiate [***].
(iv) Preferred Diagnostic Partner. For clarity, and without limitation, upon expiration or termination of the Term, LTC will not longer be obligated to recommend Oncocyte as LTC’s preferred contract research organization as required by Section 3.3(b) (Preferred Diagnostic Partner).
(c) Termination Other Than For [***].
(i) If either Party terminates this Agreement with respect to the Collaboration Determa Product for any reason, then the licenses granted in (A) Section 3.1(a) (LTC License Grants to Oncocyte) and (B) Section 3.2(a) (Oncocyte License Grants to LTC), in each case (A) and (B) with respect to the Collaboration Determa Product, will terminate.
(ii) If this Agreement is terminated by Oncocyte with respect to the Collaboration LTC Product pursuant to Section 14.2(c) (For Specific Events by Oncocyte With Respect to a Collaboration LTC Product) then (A) the licenses granted to Oncocyte in Section 3.1(a) (LTC License Grant to Oncocyte) with respect to the Collaboration Determa Products will become non-exclusive, worldwide, perpetual, irrevocable, and royalty-free, (B) the licenses granted in Section 3.1(a) (LTC License Grants to Oncocyte) and Section 3.2(a) (Oncocyte License Grants to LTC) with respect to the Collaboration LTC Product will terminate and (C) [***]; provided that [***].
(iii) If this Agreement is terminated by LTC with respect to the Collaboration LTC Product pursuant to Section 14.2(a) (For Cause) or Section 14.2(b)(i) (Failure to Achieve the LTC Product Development Milestone) then (A) the licenses granted to LTC in Section 3.2(a) (Oncocyte License Grants to LTC) with respect to the Collaboration LTC Products and Kitted LTC Product will become non-exclusive, worldwide, perpetual, irrevocable, and royalty-free, (B) the licenses granted in Section 3.1(a) (LTC License Grants to Oncocyte) and Section 3.2(a) (Oncocyte License Grants to LTC) with respect to the Collaboration Determa Product will terminate; provided that if such termination occurs prior to Regulatory Approval of the Collaboration LTC Product in the United States and the European Union, then Oncocyte (A) will (and hereby does) grant to LTC a non-exclusive license under all relevant Intellectual Property Rights Controlled by it to perform Oncocyte’s Development obligations with respect to the Collaboration LTC Product under the then-current LTC Product Development Plan in the United States and European Union, as applicable (and will transfer to LTC all data and information reasonably necessary to perform such activities) and (B) [***]; provided that [***].
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(iv) If this Agreement is terminated by Oncocyte with respect to the Collaboration LTC Product pursuant to Section 14.2(a) (For Cause), then the rights granted under in Section 3.1(a) (LTC License Grants to Oncocyte) and Section 3.2(a) (Oncocyte License Grants to LTC) will terminate.
(v) Upon termination of this Agreement with respect to the Collaboration LTC Product for any reason other than by Oncocyte pursuant to Section 14.2(a) (For Cause), Oncocyte will transfer to LTC all IVD data with respect to the Collaboration LTC Product and rights therein in its Control as of the effective date of the termination.
(d) [***]
(e) Confidential Information. Subject to Section 14.3(c) (Termination), upon termination (but not expiration) of this Agreement, each Receiving Party will dispose of all tangible embodiments, and render inaccessible or useless all electronic embodiments, of any Confidential Information of the Disclosing Party hereunder, except that such Receiving Party may retain one copy thereof for legal archival purposes.
(f) Materials. Upon termination (but not expiration) of this Agreement, each receiving Party will, as directed by the providing Party, either (i) return to the providing Party any unused or reusable Materials provided to the receiving Party by the providing Party hereunder or (ii) destroy or otherwise dispose in a manner to render inaccessible all such Materials.
14.4 Survival. Termination of this Agreement by either Party for any reason does not affect the rights and obligations (including payment obligations) of the Parties accrued prior to the effective date of the termination of this Agreement. All rights and obligations of the Parties set forth herein that expressly or by their nature survive the expiration or termination of this Agreement will continue in full force and effect subsequent to and notwithstanding the expiration or termination of this Agreement until they are satisfied or by their nature expire, including Sections 3.6 (No Implied Licenses), 9.1 (Ownership of Intellectual Property), Section 10.1 (Confidentiality Requirement), Section 10.2 (Authorized Disclosure), 14.3 (Effect of Termination), 14.4 (Survival), Article 1 (Definitions), Article 7 (Payments) (to the extent related to payment obligation accruing prior to the effective date of termination) Article 12 (Indemnification), Article 13 (Limitation of Liability and Disclaimer of Warranties), and Article 15 (General Provisions). In addition, the provisions of Article 7 (Payments) will survive during any Transition Period and following termination other than Section 14.2(a) (For Cause by LTC)
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Article 15
GENERAL PROVISIONS
15.1 Notice. Notices provided for herein must be in writing and delivered by hand or overnight courier service, or mailed (certified or registered) as follows:
If to Oncocyte: [***]
[***]
Attn: [***]
Email: [***]
with a copy to:
[***]
[***]
[***]
Attn: [***]
Email: [***]
If to LTC:
[***]
[***]
[***]
Attn: [***]
with a copy to: [***]
All notices and other communications given to any Party in accordance with the provisions of this Agreement are deemed to have been given on the date of receipt if delivered by hand or overnight courier service, or on the date of [***] business days after dispatch by certified or registered mail return receipt requested (postage prepaid) if mailed, in each case delivered, sent or mailed (properly addressed) to such Party to its address as set forth in this Section 15.1 (Notice), or to such other address that such Party may have notified to the other Party from time to time.
15.2 Compliance with Law. Oncocyte, and its respective Affiliates, and LTC and the LTC Subsidiaries, will comply with Applicable Law applicable to the performance of their activities in connection with this Agreement.
15.3 Governing Law; Jurisdiction. This Agreement is governed by, construed and enforced in accordance with the laws of the State of New York, other than its conflict of laws principles directing the application of any other law; provided that those matters pertaining to the validity or enforceability of patent rights will be interpreted and enforced in accordance with the laws of the territory in which such patent rights exist. Subject to Section 15.4 (Arbitration), any legal suit, action, or proceeding arising out of or based upon this agreement or the transactions contemplated hereby may be instituted in the state or federal courts of the United States of America located in the Southern District of New York and each party irrevocably submits to the exclusive jurisdiction of such courts in any such suit, action, or proceeding.
15.4 [***]
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15.5 Relationship. This Agreement does not establish any Party as the legal representative or agent of the other, nor does any Party have the right or authority to assume, create or incur any liability or any obligation of any kind, express or implied, against, or in the name of or on behalf of, any other Party. This Agreement does not constitute, create or in any way be interpreted as a joint venture, partnership or formal business organization of any kind.
15.6 Force Majeure. Neither Party will lose any rights hereunder or be liable to the other Party for Losses on account of failure of performance by the defaulting Party, if the failure is occasioned by government or court action (e.g. injunction), war, terrorism, public health emergency, pandemic, epidemic, fire, explosion, flood, strike, lockout, embargo, widespread market shortage of materials or utilities or an act of God; provided that the Party claiming force majeure has exerted all Commercially Reasonable Efforts to avoid or remedy such force majeure. Such excuse will continue as long as the condition preventing the performance continues. Upon cessation of such condition, the affected Party will promptly resume performance hereunder. Each Party agrees to give the other Party prompt written notice of the occurrence of any such condition, the nature thereof, and the extent to which the affected Party will be unable to perform its obligations hereunder. Each Party further agrees to use Commercially Reasonable Efforts to correct the condition as quickly as possible and to give the other Party prompt written notice when it is again fully able to perform its obligations hereunder.
15.7 Interpretation. The headings used herein are included for convenience only and are not to be used in construing or interpreting this Agreement. The singular includes the plural and the plural includes the singular. The word “or” is used in the disjunctive sense, commonly associated with “and/or.” The term “including,” “include,” or “includes” means including, without limiting the generality of any description preceding such term. Unless the context requires otherwise, (i) any definition of or reference to any agreement, document or law will be construed as referring to such agreement, document or law as from time to time amended, supplemented or otherwise modified, (ii) the words “herein,” “hereof” and “hereunder” and words of similar import will each be construed to refer to this Agreement in its entirety and not to any particular provision hereof, (iii) all references to Sections or Exhibits will be construed to refer to Sections or Exhibits to this Agreement, (iv) the word “days” means calendar days unless otherwise specified, (v) the words “copy” and “copies” and words of similar import include, to the extent available, electronic copies, files or databases containing the information, files, items, documents or materials to which such words apply, (vi) wherever used, the word “shall” and the word “will” are each understood to be imperative or mandatory in nature and are interchangeable with one another; (vii) all references to dollars will be to US dollars; and (viii) “person” and “party” will be interpreted broadly to include any natural person, corporation, limited liability company, trust, joint venture, association, company, partnership, government authority or other entity.
15.8 Assignment; Transfer Event; Change of Control.
(a) Assignment. No Party has the right to assign its rights or obligations under this Agreement without the prior written consent of the other Party, such consent not to be unreasonably withheld, conditioned or delayed; provided, however, that: (a) each Party may assign this Agreement and all of its rights and obligations hereunder, without such consent, to an entity that acquires substantially all of the assets of such Party (or the business or assets to which this Agreement pertains) whether by merger, consolidation, reorganization, acquisition, sale or otherwise, and (b) each Party may assign this Agreement and all of its rights and obligations hereunder, without such consent, to an Affiliate if the assigning Party remains liable and responsible for the performance and observance of all of the Affiliate’s duties and obligations hereunder. This Agreement is binding upon and inures to the benefit of the successors and permitted assigns of each respective Party to the extent necessary to carry out the intent of this Agreement. Any assignment not in accordance with this Section 15.8 (Assignment; Transfer Event) is null and void.
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(b) Transfer Event. Upon either (a) assignment of this Agreement to a Third Party by Oncocyte pursuant to Section 15.8(a) (Assignment) or (b) any other Change of Control of Oncocyte (such event, a “Transfer Event”) that, in either case, ((a) or (b)), occurs after the earlier of (x) [***] following the Effective Date or (y) the date of submission for Regulatory Approval in the Field in the Territory of the Collaboration LTC Product (such date, the “Transfer Event Date”), Oncocyte shall pay LTC a one-time amount in U.S. Dollars equal to the lesser of (i) [***] of the value of the total consideration actually received by Oncocyte or its shareholders in consideration for such Transfer Event (with publicly traded equity securities received in consideration being valued at their market price on the day of the closing of the Transfer Event, and other securities valued by a nationally recognized financial valuation firm agreed by the Parties), or (ii) [***] (the “Transfer Event Fee”). For the avoidance of doubt, no Transfer Event Fee shall be payable prior to the Transfer Event Date. In the case of a Transfer Event, at LTC’s request, Oncocyte and the acquiring Third Party will implement firewalls and other protective measures to protect LTC’s confidential and proprietary information pertaining to OCA Plus, the Collaboration LTC Product, and NGS Products, as applicable, and Activities. In addition, if such Transfer Event occurs before Regulatory Approval is obtained for the Collaboration LTC Product in the Field in the Territory, then the Parties will enter into an escrow agreement with a Third Party escrow agent mutually agreed by the Parties within [***] days following the effective date of such Change of Control (the “Escrow Agreement”) pursuant to which Oncocyte will deposit (i) [***] if Transfer Event occurs within [***] of Effective Date of the Agreement, or (ii) [***] if the Transfer Event occurs after [***] of the Effective Date Oncocyte will have the right to withdraw funds from the escrow account solely to fund the remaining Activities under the LTC Product Development Plan and may not be used by Oncocyte for any other purpose. The unused balance of the funds in escrow (if any) will be released to Oncocyte upon LTC receiving Regulatory Approval for the Collaboration LTC Product in the Field in the Territory; provided that release of such funds will not diminish Oncocyte’s obligations to complete all remaining Activities under the LTC Product Development Plan. In addition, if this Agreement is terminated by LTC with respect to the Collaboration LTC Product pursuant to Section 14.2(a) (For Cause) or Section 14.2(b)(i) (Failure to Achieve the LTC Product Development Milestone), then the unused balance of the funds in escrow (if any) may be released to Oncocyte solely for use by Oncocyte to fund its reimbursement obligation pursuant to Section 14.3(c)(iii) (Termination Other Than For [***]) and for no other purpose.
15.9 Right of First Negotiation. During the first [***] after the Effective Date, Oncocyte will provide LTC with at least [***] prior notice (the “RFN Notice”) prior to each instance of (i) Oncocyte entering into a letter of intent or other similar confidential written understanding (not including a confidentiality/non-disclosure agreement that does not discuss terms other than confidentiality) with any Third Party regarding a transaction that may result in a Change of Control, (ii) Oncocyte’s decision to engage in or initiate a Change of Control process involving one or more Third Parties or a SPAC, (iii) Oncocyte seeking to retain an investment advisor for the purpose of initiating a Change of Control process, or an Initial Public Offering. During the [***]-day period following the date of an RFN Notice, (the “RFN Period”), Oncocyte will refrain from granting exclusive negotiating rights to any Third Party regarding a potential transaction that could result in a Change of Control. Further, during such RFN Period, LTC and Oncocyte will engage in good faith discussions regarding a potential sale of Oncocyte to LTC or other business arrangement, which will be reasonably considered by Oncocyte’s board of directors as may be appropriate. For the avoidance of doubt, at all times Oncocyte may consult with its officers, directors, shareholders, employees, agents, accountants, legal counsel and investment advisor and other representatives. Following the expiration of such RFN Period, Oncocyte will be under no further obligation to LTC with respect to the Third Party(ies) and transaction that was the subject of the applicable RFN Notice, including with respect to any transaction with a Third Party resulting from a Change of Control process pursuant to either (ii) or (iii) above, regardless of whether the Third Party was known as of the time of the RFN Notice. For clarity, to the extent Oncocyte is engaged in a Change of Control process, whether using an investment advisor or not, following the expiration of the RFN Period applicable to the applicable RFN Notice, Oncocyte is under no obligation to provide further RFN Notices relating to such Change of Control process and transactions that may arise out of such Change of Control process.
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15.10 Entire Agreement. This Agreement (including all Exhibits hereof) constitutes the entire agreement between the Parties with respect to the matters set forth herein, and supersedes all prior agreements and understandings, both written and oral, between the Parties with respect thereto.
15.11 Severability. If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced by any rule of law or public policy, all other conditions and provisions of this Agreement will nevertheless remain in full force and effect so long as the economic and legal substance of the underlying transaction, taken as a whole, is not affected in any manner materially adverse to either Party. Upon such determination that: (a) any term or other provision is invalid, illegal or incapable of being enforced, and (b) the economic or legal substance of the underlying transaction, taken as a whole, is affected in a manner materially adverse to either Party, the Parties will negotiate in good faith to modify this Agreement so as to effect the original intent of the Parties as closely as possible in a mutually acceptable manner to the fullest extent permitted by Applicable Law in order that the underlying transaction be completed as originally contemplated to the fullest extent possible.
15.12 Waivers; Amendment. The failure of either Party to insist, in any one or more instances, upon the performance of any of the terms, covenants or conditions of this Agreement or to exercise any right hereunder, will not be construed as a waiver or relinquishment of the future performance of any such term, covenant or conditions or the future exercise of such right, and the obligation of the other Party with respect to such future performance will continue in full force and effect. No item or provision of this Agreement may be altered or amended except by a writing signed by both Parties.
15.13 No Construction Against Drafter. The Parties acknowledge and agree that each Party has participated in the drafting and negotiation of this contract and have had a free and equal opportunity to do so, that each Party has been represented by counsel or had an opportunity to be represented by counsel, and that the provisions of this Agreement will not be construed against any Party as the drafter.
15.14 Expenses. Except as expressly provided herein or in any Development Plan, all fees, costs and expenses incurred in connection with the negotiation of this Agreement and the other agreements contemplated hereby, the performance of this Agreement and the other agreements contemplated hereby, and the consummation of the transactions contemplated hereby and thereby will be the responsibility of the Party incurring such fees, costs and expenses.
15.15 Counterparts. This Agreement and any amendments may be executed (including via facsimile or other reliable electronic means of transmitting signed copies such as emailed scanned signed copies) in any number of counterparts, each of which will be deemed an original, but all of which together will constitute one and same instrument.
[Signature Page Follows]
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IN WITNESS WHEREOF, the Parties, through their duly authorized representatives, have executed this Collaboration Agreement and have caused it to be effective as of the Effective Date set forth above.
| Oncocyte Corporation | Life Technologies Corporation | |||
| By: | By: | |||
| Name: | Name: | |||
| Title: | Title: | |||
Schedules Omitted from Collaboration Agreement
Certain schedules and exhibits have been omitted pursuant to Item 601(a)(5) of Regulation S-K. Oncocyte agrees to furnish a copy of any omitted schedules to the Securities and Exchange Commission upon request.
LIST OF OMITTED SCHEDULES
Schedule 3.3(b)(i) CRO Site Key Performance Indicators Assessment
Schedule 3.3(b)(ii) CRO Site Key Performance Indicators Assessment
Schedule 4.1 LTC Product Development Plan
Schedule 4.4 Approved Subcontractors
Schedule 4.7 AmpliSeq Terms and Conditions
Schedule 5.1(c) Intended Use
Schedule 5.3(a) Kitted LTC Product Commercialization Responsibilities
Schedule 8.2 LTC Instrument Services Terms and Conditions
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Schedule 1.13
[***]
Schedule 1.24
[***]
Schedule 5.2(a)(i): Genexus Price List
[***]
Schedule 5.2(a)(ii): Initial Purchase Order Quote
[***]
Schedule 5.2(a)(iii): Second Purchase Order Quote
[***]
Exhibit 21
Oncocyte Corporation
The following is a list of subsidiaries of Oncocyte Corporation, omitting some subsidiaries which, considered in the aggregate, would not constitute a significant subsidiary.
| Subsidiary | State or Jurisdiction of Incorporation | |
| Insight Genetics, Inc. | Tennessee | |
| Razor Genomics, Inc. | Delaware | |
| Chronix Biomedical, Inc. | Delaware | |
| Chronix Biomedical GmbH | Germany |
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in Amendment No. 2 to Registration Statement on Form S-1 (No. 333-213810), Registration Statements on Form S-3 (Nos. 333-220769, 333-231980, 333-240207, 333-252765, 333-256650 and 333-257905) and in Registration Statements on Form S-8 (Nos. 333-219109, 333-208935, 333-227118, 333-232773 and 333-257740) of Oncocyte Corporation of our report dated March 11, 2022, relating to the consolidated financial statements of Oncocyte Corporation for the year ended December 31, 2021, which appears in this Annual Report on Form 10-K.
/s/ WithumSmith+Brown, PC
San Francisco, California
March 11, 2022
Exhibit 23.2
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in Amendment No. 2 to Registration Statement on Form S-1 (No. 333-213810), Registration Statements on Form S-3 (Nos. 333-220769, 333-231980, 333-240207, 333-252765, 333-256650 and 333-257905) and in Registration Statements on Form S-8 (Nos. 333-219109, 333-208935, 333-227118, 333-232773 and 333-257740) of OncoCyte Corporation of our report dated March 19, 2021 relating to the consolidated financial statements of OncoCyte Corporation as of and for the year ended December 31, 2021, which appears in this Annual Report on Form 10-K.
/s/ OUM & CO. LLP
San Francisco, California
March 11, 2022
Exhibit 31.1
CERTIFICATIONS
I, Ronald Andrews, certify that:
| 1. | I have reviewed this annual report on Form 10-K of Oncocyte Corporation; | |
| 2 | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; | |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; | |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: | |
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this periodic report is being prepared; | |
| (b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; | |
| (c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | |
| (d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and | |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions): | |
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and | |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. | |
Date: March 11, 2022
| /s/ Ronald Andrews | |
| Ronald Andrews | |
| President and Chief Executive Officer |
Exhibit 31.2
CERTIFICATIONS
I, Mitchell Levine, certify that:
| 1. | I have reviewed this annual report on Form 10-K of Oncocyte Corporation; | |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; | |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; | |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: | |
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this periodic report is being prepared; | |
| (b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; | |
| (c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | |
| (d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and | |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions): | |
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and | |
| (c) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. | |
Date: March 11, 2022
| /s/ Mitchell Levine | |
| Mitchell Levine | |
| Chief Financial Officer |
Exhibit 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report on Form 10-K of Oncocyte Corporation (the “Company”) for the year ended December 31, 2021 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), we, Ronald Andrews, President and Chief Executive Officer of the Company, and Mitchell Levine, Chief Financial Officer of the Company, certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
| 1 | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and |
| 2. | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
Date: March 11, 2022
| /s/ Ronald Andrews | |
| Ronald Andrews | |
| President and Chief Executive Officer | |
| /s/ Mitchell Levine | |
| Mitchell Levine | |
| Chief Financial Officer |