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Dynamic quotes 
OFFON

ONCOCYTE CORPORATION

(OCX)
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ONCOCYTE CORP Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

11/09/2021 | 05:28pm EST
The matters addressed in this Item 2 that are not historical information
constitute "forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, including statements about any of the following: uncertainties
associated with the ongoing coronavirus (COVID-19) pandemic, including its
possible effects on our operations, the demand for our diagnostic tests and
other LDTs and Pharma Services, and our ability to raise capital to finance our
operations; our ability to efficiently and flexibly manage our business amid
uncertainties related to COVID-19; any projections of earnings, revenue, cash,
effective tax rate, use of net operating losses, or any other financial items;
the plans, strategies and objectives of management for future operations or
prospects for achieving such plans, and any statements of assumptions underlying
any of the foregoing. Any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements. Without limiting
the foregoing, the words "believes," "anticipates," "plans," "expects," "seeks,"
"estimates," and similar expressions are intended to identify forward-looking
statements. While Oncocyte may elect to update forward-looking statements in the
future, it specifically disclaims any obligation to do so, even if the Oncocyte
estimates change and readers should not rely on those forward-looking statements
as representing Oncocyte views as of any date subsequent to the date of the
filing of this Quarterly Report. Although we believe that the expectations
reflected in these forward-looking statements are reasonable, such statements
are inherently subject to risks and Oncocyte can give no assurances that its
expectations will prove to be correct. Actual results could differ materially
from those described in this report because of numerous factors, many of which
are beyond the control of Oncocyte. A number of important factors could cause
the results of the company to differ materially from those indicated by such
forward-looking statements, including those detailed under the heading "Risk
Factors" in our Form 10-K for the year ended December 31, 2020, and our other
reports filed with the SEC from time to time.



The following discussion should be read in conjunction with Oncocyte's condensed
consolidated interim financial statements and the related notes provided under
"Item 1- Financial Statements" above.



Critical Accounting Policies




This Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses and analyzes data in our unaudited condensed consolidated
interim financial statements, which we have prepared in accordance with U.S.
generally accepted accounting principles. Preparation of the financial
statements requires management to make estimates and assumptions that affect the
reported amounts of assets, liabilities, revenue and expenses, and related
disclosure of contingent assets and liabilities. Management bases its estimates
on historical experience and on various other assumptions that it believes to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Senior management has discussed the
development, selection and disclosure of these estimates with the Audit
Committee of our Board of Directors. Actual conditions may differ from our
assumptions and actual results may differ from our estimates.



An accounting policy is deemed critical if it requires an accounting estimate to
be made based on assumptions about matters that are highly uncertain at the time
the estimate is made, if different estimates reasonably could have been used, or
if changes in the estimate are reasonably likely to occur, that could materially
impact the financial statements. Management believes that there have been no
significant changes during the nine months ended September 30, 2021 to the
matters that we disclosed as our critical accounting policies and estimates in
Management's Discussion and Analysis of Financial Condition and Results of
Operations in our Annual Report on Form 10-K for the year ended December 31,
2020, except as disclosed in Note 2 to our condensed consolidated interim
financial statements included elsewhere in this Report.



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. Travel and visits
related to our business and business meetings, including planned or expected
travel and in-person meetings to market DetermaRx™, have been eliminated or
severely curtailed. 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.



41





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 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.



42






Operating Summary for the Three and Nine Months ended September 30, 2021 and
2020



                                        Three Months Ended                                       Nine Months Ended
                                           September 30,                                           September 30,
                          2021          2020       $ Change       % Change        2021          2020        $ Change       % Change

Revenues                      984          555           429             77 %       4,138           713         3,425            480 %
Cost of revenues            1,850          601         1,249            208 %       5,319         1,139         4,180            367 %
Research and
development expenses        3,142        2,615           527             20 %       9,040         8,000         1,040             13 %
Sales and marketing
expenses                    2,931        1,568         1,363             87 %       7,858         4,620         3,238             70 %
General and
administrative
expenses                    5,495        4,995           500             10 %      18,193        13,378         4,815             36 %
Change in fair value
of contingent
consideration               1,170       (2,980 )       4,150           -139 %       2,260        (2,980 )       5,240           -176 %
Loss from operations      (13,604 )     (6,244 )      (7,360 )          118 %     (38,532 )     (23,444 )     (15,088 )           64 %
Other income
(expense)                    (196 )       (539 )         343            -64 %         962        (1,274 )       2,236           -176 %
Loss before income
taxes                     (13,800 )     (6,783 )      (7,017 )          103 %     (37,570 )     (24,718 )     (12,852 )           52 %
Income tax benefit              -            -             -            n/a         9,358         1,095         8,263            755 %
Net Loss                  (13,800 )     (6,783 )      (7,017 )          103 %     (28,212 )     (23,623 )      (4,589 )           19 %



Results of Operations - Three Months Ended September 30, 2021 Compared with the Three Months Ended September 30, 2020




Revenues increased by $0.4 million to $1.0 million for the three months ended
September 30, 2021, as compared to $0.6 million in the comparable prior year
quarter, primarily due to increased revenues in DetermaRx™ tests, and new
licensing revenue recognized.



Loss before income taxes was $13.8 million for the three months ended September
30, 2021, and $6.8 million for the three months ended September 30, 2020. Net
change in loss before income taxes was comprised of the change in revenues
described above and other changes in operating expenses and other income and
expenses as follows:


? DetermaRx™ testing revenue increased by $0.2 million due to an increase in
revenue from increased tests during the quarter, supplemented by an increase of
$0.3 million in new licensing revenues. Pharma Services revenue decreased by
$0.1 million due to a decreased number of contracts performed during the period.



? Cost of revenue and amortization of acquired intangibles increased by $1.3
million, from $0.6 million to $1.9 million, primarily due to increased allocated
labor and overhead associated with performing our DetermaRx™ tests and Pharma
Services, and with providing revenue deliverables under our license agreements,
as well as increased noncash amortization of acquired intangible assets such as
our Razor asset and customer relationship intangible assets acquired as part of
the Insight merger.



? Research and development expenses increased to $3.1 million, primarily due to
increased headcount and continued development of DetermaIO™, DetermaTx™, and
DetermaMx™; clinical trials to promote the commercialization of DetermaRx™, and,
with the recent completion of the Chronix merger, the development of our planned
DetermaCNI™.


? Sales and marketing expenses increased to $2.9 million as we continue to market and sell DetermaRx™.

? General and administrative expenses increased to $5.5 million, primarily due to increased headcount, consulting, and insurance expenses.




? Change in fair value of contingent considerations by decreased $4.2 million,
from a gain of $3.0 million to a loss of $1.2 million, due to revised estimates
of the timing of possible future payouts.



? Other expenses decreased by $0.3 million, from $0.5 million to $0.2 million, primarily due to a pro rata loss from our equity method investment in Razor prior to February 24, 2021.

Results of Operations - Nine Months Ended September 30, 2021 Compared with the Nine Months Ended September 30, 2020




Revenues increased by $3.4 million to $4.1 million for the nine months ended
September 30, 2021, as compared to $0.7 million in the comparable prior year
period, primarily due to increased revenues from DetermaRx™ tests, Pharma
Services performed and new licensing revenue recognized.



43






Loss before income taxes was $37.6 million for the nine months ended September
30, 2021, and $24.7 million for the nine months ended September 30, 2020. Net
change in loss before income taxes was comprised of the change in revenues
described above and other changes in operating expenses and other income and
expenses as follows:


? DetermaRx™ testing revenue increased by $1.4 million due to an increase in
revenue from increased tests during the period, supplemented by an increase of
$1.5 million in new licensing revenues and $0.5 million in Pharma Services
revenue due to an increased number of contracts performed during the period.



? Cost of revenue and amortization of acquired intangibles increased by $4.2
million, from $1.1 million to $5.3 million, primarily due to increased allocated
labor and overhead associated with performing our DetermaRx™ tests and Pharma
Services, and with providing revenue deliverables under our license agreements,
as well as increased noncash amortization of acquired intangible assets such as
our Razor asset and customer relationship intangible assets acquired as part of
the Insight merger.



? Research and development expenses increased to $9.0 million, primarily due to
increased headcount and continued development of DetermaIO™, DetermaTx™, and
DetermaMx™; clinical trials to promote commercialization of DetermaRx™; and,
with the recent completion of the Chronix merger, the development of our planned
DetermaCNI™ test.


? Sales and marketing expenses increased to $7.9 million as we continue to market and sell DetermaRx™.

? General and administrative expenses increased to $18.2 million, primarily due to increased headcount, severance, consulting, and insurance expenses.




? Change in fair value of contingent considerations decreased by $5.3 million,
from a gain of $3.0 million to a loss of $2.3 million, due to revised estimates
of the timing of possible future payouts.



? Other expenses increased by $2.3 million, from an expense of $1.3 million to
an income of $1.0 million, primarily due to the gain on extinguishment of debt
from the forgiveness of the PPP loan obligation in May 2021, and the elimination
of the pro rata loss from our equity method investment in Razor prior to
February 24, 2021.



Revenues (amounts in thousands, except percentage changes)




                            Three Months Ended                                     Nine Months Ended
                              September 30,                                          September 30,
              2021         2020       $ Change       % Change        2021         2020        $ Change      % Change
DetermaRx   $    402$    208$     194             93 %   $  1,654$    219$    1,435           655 %
Pharma
Services         282          347           (65 )          -19 %        967          494            473            96 %
Licensing        300            -           300            n/a        1,517            -          1,517           n/a
Total       $    984$    555$     429             77 %   $  4,138$    713$    3,425           480 %




Comparison of Three Months Ended September 30, 2021 and Three Months Ended June
30, 2021



                       Three            Three
                      Months            Months
                       Ended            Ended
                   September 30,       June 30,       $ Increase       % Increase
                       2021              2021         (Decrease)       (Decrease)
DetermaRx         $           402     $      645$       (243 )            -38 %
Pharma Services               282            168              114               68 %
Licensing                     300          1,217             (917 )            -75 %
Total             $           984     $    2,030$     (1,046 )            -52 %




44





Revenues (amounts in thousands, except percentage changes)




We recognize testing revenues for our services in accordance with the provisions
of ASC 606, Revenue from Contracts with Customersas further discussed in Note 2
of this Report. During the first quarter of 2020, we generated revenues for the
first time since our company's inception in 2009. We currently derive our
revenues from Pharma Services generated by our wholly owned subsidiaries,
Insight and Chronix, which we acquired on January 31, 2020 and April 15, 2021,
respectively, and from the sale of our lung cancer stratification test,
DetermaRx™, which we commercially launched in early 2020. In the three months
ending September 30, 2021, we also generated revenues from our DetermaRx™ and
TheraSure™ technology licensing. See Notes 2 and 3.



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 there is Medicare
or other insurance coverage for a test, we recognize revenue upon 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. As of March 31, 2021, we also commenced
accruing Medicare Advantage covered tests at the CMS approved rate. All other
payers for the DetermaRx™ test are currently recognized upon payment. 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.



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, on an accrual basis.



Licensing revenues are generally recognized upon transfer of promised technology
information and other contractual performance obligations to licensees in an
amount that reflects the consideration we expect to receive in exchange.
Licensing revenue is recognized at the point in time when the applicable
performance obligations are satisfied and all other revenue recognition criteria
have been met.



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. Licensing revenues were earned through license
agreements entered into during the fourth quarter of 2020 or that arose from
licensing of technology that we acquired through our acquisition of Chronix
during 2021.



Pharma Services revenues are generated under discrete agreements for particular
customer projects that generally expire with the completion or termination of
the customer's project. Accordingly, different customers may account for greater
or lesser portions of Pharma Services during different accounting periods, and
Pharma Services revenues may exhibit a larger variance from accounting period to
accounting period than other revenues such as DetermaRx testing revenues. During
the three months ended September 30, 2021, Pharma Services revenues increased
from the amounts recognized during three months ended June 30, 2021 reflecting
increased sample volumes from biopharma clinical trials.



Licensing revenues for the three months ended September 30, 2021 primarily
reflect the revenue recognition of $0.3 million from amortization of the $0.7
million deferred revenue from the Chronix acquisition. Like Pharma Services
revenues, licensing revenues may vary significantly between accounting periods
reflecting the attainment of additional licensing agreement milestones that
trigger license fees payable to Oncocyte, or reflecting the beginning or end of
a revenue stream upon the commencement or termination of a license agreement
related to a particular customer project.



45





The following table presents the percentage of consolidated revenues by products or services classes:



                     Three Months Ended           Nine Months Ended
                        September 30,               September 30,
                    2021            2020          2021           2020
DetermaRx                41 %            37 %          40 %         31 %
Pharma Services          29 %            63 %          23 %         69 %
Licensing                30 %             -            37 %          -
Total                   100 %           100 %         100 %        100 %




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.



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




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, with the recent completion of the Chronix merger, the
development of our planned DetermaCNI™ test. 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 with the recent
completion of the Chronix Merger, 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.



Sales and marketing expenses


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.



46





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:



                                        Three Months Ended                                    Nine Months Ended
                                          September 30,                                         September 30,
                          2021        2020       $ Change       % Change   

2021 2020 $ Change % Change Personnel costs and board fees

               $ 1,901$ 1,198$     703             59 %   $  4,384$  4,174$      210             5 %
Non-cash stock
compensation expense       1,029       1,129          (100 )           -9 %
     2,995        2,546            449            18 %
Non-recurring
severance expense              -       1,169        (1,169 )         -100 %      2,452        1,169          1,283           110 %
Legal expense                679         410           269             66 %      2,162        1,491            671            45 %
Corporate, general and
administrative costs       1,886       1,089           797             73 %
     6,200        3,998          2,202            55 %
Total                    $ 5,495$ 4,995$     500             10 %   $ 18,193$ 13,378$    4,815            36 %



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 condensed consolidated interim 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
and Chronix acquisition dates 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 nine months ended September 30, 2021, we
recorded an unrealized loss of approximately $2.3 million related to the
increase in the fair value of contingent consideration primarily attributable to
a revised estimate of the timing of the possible future payouts.



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, unrealized gains and losses on Lineage and AgeX
marketable equity securities we hold, and gain on extinguishment of debt (PPP
loan). 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, 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 condensed consolidated statement of operations. All previously
accrued PPP loan interest expenses of $11,000 were reversed in the second
quarter of 2021.



Income taxes



In connection with the Chronix and Razor acquisitions discussed in Note 3 to our
condensed consolidated interim financial statements included elsewhere in 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 nine months
ended September 30, 2021, we recorded a $9.4 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
condensed consolidated interim 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 nine
months ended September 30, 2020, we recorded a $1.1 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.



Oncocyte did not record any provision or benefit for income taxes for the three
months ended September 30, 2021 and September 30, 2020, as Oncocyte had a full
valuation allowance for the periods presented.



47





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
releases discussed above, 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.



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 $151.9 million at September 30, 2021. We expect to
continue to incur operating losses and negative cash flows for the near future.



During the nine months ended September 30, 2021 we raised approximately $75.0
million in net cash proceeds through sales of shares of our common stock. We
used $11.1 million, net of cash acquired, of those proceeds as part of the
purchase price paid to acquire Razor and Chronix in February 2021 and April
2021, respectively (see Note 3). At September 30, 2021, we had $43.3 million of
cash and cash equivalents, and held shares of Lineage and AgeX common stock as
marketable equity securities valued at $0.9 million. We raised approximately
$6.1 million of additional cash, net of fees and commissions, during July 2021
through sales of shares of our common stock in "at-the-market" transactions as
discussed in Note 1 to our condensed consolidated interim financial statements.
We believe that our current cash, cash equivalents, and marketable equity
securities are sufficient to finance our current operations through at least
twelve months from the issuance date of the condensed consolidated interim
financial statements included in this Report.



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
DetermaCNI™ acquired through the Chronix Merger. 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.



In addition to sales and marketing expenses, we will incur expenses from leasing
and improving our new office and laboratory facilities in Irvine California, and
from operating our CLIA laboratories in Brisbane, California, Irvine,
California, and Nashville, Tennessee.



We may need to meet significant cash payment obligations to former Insight and
Chronix shareholders in connection with our acquisition of those companies, as
disclosed in Note 3 to the condensed consolidated interim financial statements
included elsewhere in this Report. To meet the future cash payment obligations,
we may have to utilize cash on hand that would otherwise be available to us for
other business and operational purposes, which could cause us to delay or reduce
activities in the development and commercialization of our cancer tests.



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 former Chronix
shareholders and former 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.



48






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 operations



During the nine months ended September 30, 2021 and 2020, our total research and
development expenses were $9.0 million and $8.0 million, respectively, our sales
and marketing expenses were $7.9 million and $4.6 million, and our general and
administrative expenses were $18.2 million and $13.4 million, respectively. We
also incurred $5.3 million in cost of revenues, including $2.4 million
amortization of intangible expenses, in the first nine months of 2021. Net loss
for the nine months ended September 30, 2021 amounted to $28.2 million and net
cash used in operating activities amounted to $28.9 million. Our cash used in
operating activities during the nine months ended September 30, 2021 does not
include the following noncash items: $9.4 million in income tax benefit; $5.1
million in stock-based compensation; $1.1 million gain on extinguishment of
debt; $2.3 million in loss from change in fair value of contingent
consideration; $3.1 million in depreciation and amortization expenses; $0.2
million in unrealized gain on marketable equity securities; and $0.3 million in
pro rata loss from our equity method investment in Razor. Changes in operating
assets and liabilities were approximately $0.8 million as an additional use
of
cash.


Cash used in investing activities

During the nine months ended September 30, 2021, net cash used in investing
activities was $13.6 million, primarily attributable to the acquisition of the
remaining interests in Razor, net of cash acquired, of $6.6 million; $1.8
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 nine months ended September 30, 2021, net cash provided by financing
activities was $78.6 million, primarily attributable to $75.0 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
$1.3 million, and $0.2 million on common shares received and retired for
employee taxes paid.



49





Off-Balance Sheet Arrangements

As of September 30, 2021 and December 31, 2020, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.

© Edgar Online, source Glimpses

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Ronald Asbury Andrews President, Chief Executive Officer & Director
Mitchell Stuart Levine Chief Financial Officer
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