0001140361-17-017245.txt : 20170428 0001140361-17-017245.hdr.sgml : 20170428 20170428093111 ACCESSION NUMBER: 0001140361-17-017245 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 45 CONFORMED PERIOD OF REPORT: 20170331 FILED AS OF DATE: 20170428 DATE AS OF CHANGE: 20170428 FILER: COMPANY DATA: COMPANY CONFORMED NAME: OncoCyte Corp CENTRAL INDEX KEY: 0001642380 STANDARD INDUSTRIAL CLASSIFICATION: IN VITRO & IN VIVO DIAGNOSTIC SUBSTANCES [2835] IRS NUMBER: 271041563 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-37648 FILM NUMBER: 17791951 BUSINESS ADDRESS: STREET 1: 1010 ATLANTIC AVENUE STREET 2: SUITE 102 CITY: ALAMEDA STATE: CA ZIP: 94501 BUSINESS PHONE: 510-775-0515 MAIL ADDRESS: STREET 1: 1010 ATLANTIC AVENUE STREET 2: SUITE 102 CITY: ALAMEDA STATE: CA ZIP: 94501 10-Q 1 form10q.htm 10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2017

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from___________ to __________

Commission file number 1-37648

OncoCyte Corporation
 (Exact name of registrant as specified in its charter)

California
 
27-1041563
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)

1010 Atlantic Avenue, Suite 102
Alameda, California 94501
(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code
(510) 775-0515

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer
 
Accelerated filer
Non-accelerated filer
(Do not check if a smaller reporting company)
Smaller reporting company

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes No

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

As of April 16, 2017, there were outstanding 29,368,498 shares of common stock, no par value.
 


PART 1--FINANCIAL INFORMATION

Statements made in this Report that are not historical facts may constitute forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those discussed. Such risks and uncertainties include but are not limited to those discussed in this Report under Item 1 of the Notes to Financial Statements, and under Risk Factors in this Report. Words such as “expects,” “may,” “will,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates,” and similar expressions identify forward-looking statements.

References to “OncoCyte,” “our” or “we” means OncoCyte Corporation.

The description or discussion, in this Form 10-Q, 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.
 
2

Item 1.
Financial Statements

ONCOCYTE CORPORATION
CONDENSED BALANCE SHEETS
(IN THOUSANDS)

   
March 31,
2017
(unaudited)
   
December 31,
2016
 
ASSETS
           
CURRENT ASSETS
           
Cash and cash equivalents
 
$
11,352
   
$
10,174
 
BioTime shares held as available-for-sale securities, at fair value
   
1,649
     
2,237
 
Prepaid expenses and other current assets
   
451
     
285
 
Total current assets
   
13,452
     
12,696
 
                 
NONCURRENT ASSETS
               
Intangible assets, net
   
927
     
988
 
Equipment and furniture, net
   
636
     
688
 
Deposits
   
159
     
75
 
TOTAL ASSETS
 
$
15,174
   
$
14,447
 
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
CURRENT LIABILITIES
               
Amount due to BioTime and affiliates
 
$
2,610
   
$
2,854
 
Accounts payable
   
211
     
422
 
Accrued expenses
   
1,193
     
797
 
Loan payable, current portion
   
333
     
-
 
Capital lease liability, current portion
   
202
     
202
 
Total current liabilities
   
4,549
     
4,275
 
                 
LONG-TERM LIABILITIES
               
Loan payable, net of issuance costs, noncurrent portion
   
1,589
     
-
 
Capital lease liability, noncurrent portion
   
263
     
310
 
TOTAL LIABILITIES
   
6,401
     
4,585
 
                 
Commitments and contingencies (see Note 9)
               
                 
STOCKHOLDERS’ EQUITY
               
Preferred stock, no par value, 5,000 shares authorized; none issued and outstanding
   
-
     
-
 
Common stock, no par value, 50,000 shares authorized; 29,367 and 28,737 shares issued and outstanding at March 31, 2017 and December 31, 2016, respectively
   
49,360
     
45,818
 
Accumulated other comprehensive loss on available-for-sale securities
   
(581
)
   
(654
)
Accumulated deficit
   
(40,006
)
   
(35,302
)
Total stockholders’ equity
   
8,773
     
9,862
 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
 
$
15,174
   
$
14,447
 

The accompanying notes are an integral part of these unaudited condensed financial statements.
 
3

ONCOCYTE CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)

   
Three Months Ended
March 31,
 
   
2017
   
2016
 
EXPENSES
           
Research and development
 
$
1,834
   
$
1,689
 
General and administrative
   
2,043
     
1,015
 
Sales and marketing
   
655
     
228
 
Total operating expenses
   
4,532
     
2,932
 
                 
Loss from operations
   
(4,532
)
   
(2,932
)
                 
OTHER INCOME (EXPENSES), NET
               
Interest income (expense), net
   
(13
)
   
4
 
Other income (expense), net
   
(159
)
   
-
 
Total other income (expenses), net
   
(172
)
   
4
 
                 
NET LOSS
 
$
(4,704
)
 
$
(2,928
)
                 
Basic and diluted net loss per share
 
$
(0.16
)
 
$
(0.12
)
                 
Weighted average common shares outstanding: basic and diluted
   
28,965
     
25,396
 

The accompanying notes are an integral part of these unaudited condensed financial statements.
 
4

ONCOCYTE CORPORATION

CONDENSED STATEMENTS OF COMPREHENSIVE LOSS
(IN THOUSANDS)
(UNAUDITED)
 
   
Three Months Ended
March 31,
 
   
2017
   
2016
 
             
NET LOSS
 
$
(4,704
)
 
$
(2,928
)
                 
Other comprehensive loss, net of tax:
               
Realized loss on sale of BioTime shares
   
155
     
-
 
Unrealized (loss) gain on BioTime shares held as available-for-sale securities
   
(82
)
   
(762
)
COMPREHENSIVE LOSS
 
$
(4,631
)
 
$
(3,690
)

The accompanying notes are an integral part of these unaudited condensed financial statements.
 
5

ONCOCYTE CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)

   
Three Months Ended
March 31,
 
   
2017
   
2016
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net loss
 
$
(4,704
)
 
$
(2,928
)
Adjustments to reconcile net loss to net cash used in operating activities:
               
Depreciation expense
   
67
     
10
 
Amortization of intangible assets
   
61
     
61
 
Stock-based compensation
   
350
     
125
 
Loss on sale of BioTime shares
   
159
     
-
 
Warrants issued to certain shareholders as inducement of exercise of warrants
   
1,084
     
-
 
Amortization of debt issuance costs
   
3
     
-
 
Changes in operating assets and liabilities:
               
Amount due to BioTime and affiliates
   
(244
)
   
624
 
Prepaid expenses and other current assets
   
(166
)
   
126
 
Accounts payable and accrued liabilities
   
100
     
(185
)
Net cash used in operating activities
   
(3,290
)
   
(2,167
)
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Net proceeds from sale of BioTime shares
   
502
     
-
 
Purchase of equipment
   
(16
)
   
(15
)
Net cash provided by (used in) investing activities
   
486
     
(15
)
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Proceeds from exercise of options
   
16
     
42
 
Proceeds from exercise of warrants
   
2,031
     
-
 
Proceeds from issuance of loan payable, net of financing costs
   
1,982
     
-
 
Repayment of capital lease obligations
   
(47
)
   
-
 
Net cash provided by financing activities
   
3,982
     
42
 
                 
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
   
1,178
     
(2,140
)
CASH AND CASH EQUIVALENTS:
               
At beginning of the period
   
10,174
     
7,996
 
At end of the period
 
$
11,352
   
$
5,856
 

The accompanying notes are an integral part of these unaudited interim financial statements.
 
6

ONCOCYTE CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)

1.
Organization, Basis of Presentation and Liquidity

OncoCyte Corporation (“OncoCyte”) was incorporated in 2009 in the state of California and at December 31, 2016 was a majority-owned subsidiary of BioTime, Inc. (“BioTime”), a publicly traded biotechnology company focused in the field of regenerative medicine.  Beginning on February 17, 2017, OncoCyte ceased to be a subsidiary of BioTime for financial reporting purposes when BioTime’s percentage ownership of outstanding OncoCyte common stock declined below 50% as a result of the issuance of additional OncoCyte common stock to certain investors who exercised OncoCyte stock purchase warrants (see Note 6).

OncoCyte is developing molecular cancer diagnostics utilizing a discovery platform that focuses on identifying genetic markers that are differentially expressed in certain types of cancers. OncoCyte is presently focusing its efforts on developing diagnostic tests for use in detecting a variety of cancers including lung, bladder, and breast cancers.

Basis of presentation

The financial statements presented herein, and discussed below, have been prepared on a stand-alone basis. The accompanying unaudited condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities Exchange Commission.  In accordance with those rules and regulations certain information and footnote disclosures normally included in comprehensive financial statements have been condensed or omitted pursuant to such rules and regulations. The balance sheet as of December 31, 2016 was derived from the audited financial statements at that date, but does not include all the information and footnotes required by GAAP.  These financial statements should be read in conjunction with the audited financial statements and notes thereto included in OncoCyte’s Annual Report on Form 10-K for the year ended December 31, 2016.

The accompanying interim condensed 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 condensed results of operations are not necessarily indicative of the results to be expected for any other interim period or for the entire year.

Prior to February 17, 2017, BioTime consolidated the results of OncoCyte into BioTime’s consolidated results based on BioTime’s ability to control OncoCyte’s operating and financial decisions and policies through its majority ownership of OncoCyte common stock. BioTime owned 51.1% of the outstanding common stock of OncoCyte at December 31, 2016.  Beginning on February 17, 2017, BioTime’s percentage ownership of the outstanding OncoCyte common stock declined below 50%, resulting in a loss of “control” of OncoCyte under GAAP and as a result BioTime deconsolidated OncoCyte’s financial statements from BioTime’s consolidated financial statements.  As a result of this deconsolidation, OncoCyte is no longer considered a subsidiary of BioTime under GAAP as of February 17, 2017. OncoCyte remains an affiliate of BioTime based on BioTime’s retained share ownership in OncoCyte which is sufficient to allow BioTime to exert significant influence over the operations and management of OncoCyte.

To the extent OncoCyte does not have its own employees or human resources for its operations, BioTime or BioTime subsidiaries provide certain employees for administrative or operational services, as necessary, for the benefit of OncoCyte (see Note 4). Accordingly, BioTime allocates expenses such as salaries and payroll related expenses incurred and paid on behalf of OncoCyte based on the amount of time that particular employees devote to OncoCyte affairs. Other expenses such as legal, accounting, travel, and entertainment expenses are allocated to OncoCyte to the extent that those expenses are incurred by or on behalf of OncoCyte.  BioTime also allocates certain overhead expenses such as insurance, internet and telephone expenses based on a percentage determined by management. These allocations are made based upon activity-based allocation drivers such as headcount, time spent, percentage of square feet of office or laboratory space used, and percentage of personnel devoted to OncoCyte’s operations or management. Management evaluates the appropriateness of the percentage allocations on a quarterly basis and believes that this basis for allocation is reasonable.

OncoCyte previously granted stock options to employees of BioTime, or employees of other BioTime subsidiaries who perform services for OncoCyte, and OncoCyte recorded stock-based compensation expense in the accompanying statements of operations for these services performed in the periods presented.
 
7

Liquidity

For all periods presented, OncoCyte had generated no revenues. Since inception, OncoCyte has financed its operations through the sale of its common stock and warrants to its shareholders, including BioTime, loans from BioTime and other BioTime affiliates, warrant exercises, and a bank loan (see Note 5), and sales of BioTime common shares that OncoCyte holds as available-for-sale securities. OncoCyte has incurred operating losses and negative cash flows since inception, and had an accumulated deficit of $40.0 million and $35.3 million as March 31, 2017 and December 31, 2016, respectively.

OncoCyte plans to continue to invest significant resources in research and development in the field of molecular cancer diagnostics. OncoCyte expects to continue to incur operating losses and negative cash flows. If results of OncoCyte’s research and development efforts, including the results of CLIA and validity studies of its lung cancer test, are successful to the point where it believes that a commercial product can be launched successfully, then additional capital will be required to continue to develop a sales and marketing team and to launch OncoCyte’s first diagnostic test.   OncoCyte will also need to raise additional capital in subsequent years to develop and launch additional diagnostic tests, for working capital, and for other expenses, until such time as it is able to generate sufficient revenues from the commercialization of its diagnostic tests to finance its operations. 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 its 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.

At March 31, 2017, OncoCyte had $11.4 million of cash and cash equivalents and held BioTime common shares as available-for-sale securities valued at $1.6 million (see Notes 2 and 5). OncoCyte believes it has sufficient cash, cash equivalents, available for sale securities and working capital to carry out its current operations through at least twelve months from the issuance date of the financial statements included herein, but will need to raise additional capital if it determines to commercialize its lung cancer test during that time frame.

2.
Summary of Significant Accounting Policies

Adoption of ASU 2016-09, Improvements to Employee Share-Based Payment Accounting

In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, forfeitures, classification of awards as either equity or liabilities, and classification on the statement of cash flows.   OncoCyte adopted ASU 2016-09 beginning on January 1, 2017.

In connection with the adoption of ASU 2016-09, OncoCyte changed its accounting policies including how it accounts for excess tax benefits and deficiencies, if any, and forfeitures, as applicable.  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.  Prior to the adoption of ASU 2016-09, OncoCyte recognized excess tax benefits, if any, in additional paid-in capital only if the tax deduction reduced cash income taxes payable and, excess tax deficiencies were recognized either as an offset to accumulated excess tax benefits, if any, on OncoCyte’s 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) and an insignificant number of stock option exercises during the current quarter, 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 now accounted for as they occur instead of based on the number of awards that were expected to vest.  Based on the nature and timing of OncoCyte’s grants, straight line expense attribution of stock based compensation for the entire award and the relatively low forfeiture rate on OncoCyte’s experience, the impact of adoption of ASU 2016-09 pertaining to forfeitures was not significant to OncoCyte’s financial statements.

Accounting for BioTime shares

OncoCyte accounts for the BioTime shares it holds as available-for-sale equity securities in accordance with ASC 320-10-25, Investments – Debt and Equity Securities, as the shares have a readily determinable fair value quoted on the NYSE MKT and are held principally for sale to meet future working capital needs. These shares are measured at fair value and reported as current assets on OncoCyte’s balance sheet based on the closing trading price of the shares as of the date being presented. Unrealized holding gains and losses are excluded from the statements of operations and are reported in equity as part of other comprehensive income or loss, net of income taxes, until realized. Prior to February 17, 2017, realized gains and losses for shares sold were reclassified out of accumulated other comprehensive income or loss and were included in equity, as an increase or decrease to equity in common stock consistent with, and pursuant to, ASC 805-50, transactions between entities under common control.  As discussed in Note 1, on February 17, 2017 BioTime deconsolidated OncoCyte’s financial statements from its consolidated financial statements.  Due to this deconsolidation, and based on BioTime no longer having “control” over OncoCyte under GAAP, any realized gains and losses OncoCyte generates from the sale of BioTime shares on or after February 17, 2017 will be included in its statements of operations.
 
8

In March 2017, OncoCyte sold 141,844 shares of BioTime stock for net proceeds of $502,000 and used those proceeds to pay down amounts due to BioTime and affiliates (see Note 5).  OncoCyte recognized a $155,000 loss from the sale of the BioTime shares included in other income and expenses, net, for the three months ended March 31, 2017. As of March 31, 2017, OncoCyte held 477,862 BioTime common shares as available-for-sale securities with a fair market value of $1.6 million. Proceeds from the sale of BioTime shares may only be used to repay amounts due to BioTime and affiliates (see Note 5).

Net loss per common share

The computations of basic and diluted net loss per share of common stock are as follows (in thousands, except per share amounts):

   
Three Months Ended March 31,
(Unaudited)
 
   
2017
   
2016
 
Net loss
 
 
$(4,704)
 
 
 
$(2,928)
 
Weighted average common shares outstanding – basic and diluted
   
28,965
     
25,396
 
Net loss per share – basic and diluted
 
 
$(0.16)
 
 
 
$(0.12)
 

The following common stock equivalents were excluded from the computation of diluted net loss per share of common stock for the periods presented because including them would have been antidilutive (in thousands):

   
Three Months Ended March 31,
(Unaudited)
 
   
2017
   
2016
 
Stock options
   
3,263
     
2,848
 
Warrants
   
3,049
     
-
 

Reclassifications

Certain reclassifications from general and administrative expenses have been made to present sales and marketing expenses in the statements of operations for the three months ended March 31, 2016 to conform and be comparable to the three months ended March 31, 2017 presentation.  These reclassifications had no impact to loss from operations or net loss as reported in the statements of operations and had no impact on cash flows or the balance sheets for any period presented.

3.
Selected Balance Sheet Components

Prepaid expenses and other current assets

As of March 31, 2017 and December 31, 2016, prepaid expenses and other current assets were comprised of the following (in thousands):

   
March 31, 2017
(Unaudited)
   
December 31, 2016
 
Insurance
 
 
$229
   
 
$182
 
Other prepaid expenses and current asset
   
222
     
103
 
Prepaid expenses and other current assets
 
 
$451
   
 
$285
 
 
9

Accrued expenses

As of March 31, 2017 and December 31, 2016, accrued expenses were comprised of the following (in thousands):

   
March 31, 2017
(Unaudited)
   
December 31, 2016
 
Accrued compensation
 
 
$345
   
 
$549
 
Accrued vendor payables
   
662
     
236
 
Other accrued expenses
   
186
     
12
 
Accrued expenses
 
 
$1,193
   
 
$797
 

Intangible assets, net

As of March 31, 2017 and December 31, 2016, intangible assets, consisting primarily of acquired patents, patent applications, and licenses to use certain patents, were as follows (in thousands):

   
March 31, 2017
(Unaudited)
   
December 31, 2016
 
Intangible assets
 
 
$2,419
   
 
$2,419
 
Accumulated amortization
   
(1,492)
 
   
(1,431)
 
Intangible assets, net
 
 
$927
   
 
$988
 

Amortization expense amounted to $61,000 for the three months ended March 31, 2017 and 2016, respectively.

Equipment and furniture, net

As of March 31, 2017 and December 31, 2016, equipment and furniture were comprised of the following (in thousands):

   
March 31, 2017
(Unaudited)
   
December 31, 2016
 
Equipment and furniture
 
 
$1,023
   
 
$1,007
 
Accumulated depreciation
   
(387)
 
   
(319)
 
Equipment and furniture, net
 
 
$636
   
 
$688
 
 
Depreciation expense amounted to $67,000 and $10,000 for the three months ended March 31, 2017 and 2016, respectively.

4.
Related Party Transactions

Shared Facilities and Service Agreement

On October 8, 2009, OncoCyte and BioTime entered into a Shared Facilities and Services Agreement (“Shared Facilities Agreement”). Under the terms of the Shared Facilities Agreement, BioTime allows OncoCyte to use BioTime’s premises and equipment located at Alameda, California for the sole purpose of conducting business. BioTime also provides accounting, billing, bookkeeping, payroll, treasury, payment of accounts payable, and other similar administrative services to OncoCyte. BioTime may also provide the services of attorneys, accountants, and other professionals who may also provide professional services to BioTime and its other subsidiaries. BioTime  also has provided OncoCyte with the services of  laboratory and research personnel, including BioTime employees and contractors, for the performance of research and development work for OncoCyte at the premises.

BioTime charges OncoCyte a “Use Fee” for services provided and usage of BioTime facilities, equipment, and supplies. For each billing period, BioTime prorates and allocates to OncoCyte costs incurred, including costs for  services of Bio Time employees and use of equipment, insurance, leased space, professional services, software licenses, supplies and utilities. The allocation of costs depends on key cost drivers, including actual documented use, square footage of facilities used, time spent, costs incurred by BioTime for OncoCyte, or upon proportionate usage by BioTime and OncoCyte, as reasonably estimated by BioTime. BioTime, at its discretion, has the right to charge OncoCyte a 5% markup on such allocated costs although BioTime elected not to charge this markup from the inception of the Shared Facilities Agreement through December 31, 2015.  For allocated costs incurred beginning on January 1, 2016, BioTime is charging the 5% markup. The allocated cost of BioTime employees and contractors who provide services is based upon records maintained of the number of hours of such personnel devoted to the performance of services.
 
10

The Use Fee is determined and invoiced to OncoCyte on a quarterly basis for each calendar quarter of each calendar year. If the Shared Facilities Agreement terminates prior to the last day of a billing period, the Use Fee will be determined for the number of days in the billing period elapsed prior to the termination of the Shared Facilities Agreement. Each invoice will be payable in full by OncoCyte within 30 days after receipt. Any invoice, or portion thereof, not paid in full when due will bear interest at the rate of 15% per annum until paid, unless the failure to make a payment is due to any inaction or delay in making a payment by BioTime employees from OncoCyte funds available for such purpose, rather than from the unavailability of sufficient funds legally available for payment or from an act, omission, or delay by any employee or agent of OncoCyte. Through March 31, 2017, BioTime has not charged OncoCyte any interest.

In addition to the Use Fees, OncoCyte will reimburse BioTime for any out of pocket costs incurred by BioTime for the purchase of office supplies, laboratory supplies, and other goods and materials and services for the account or use of OncoCyte, provided that invoices documenting such costs are delivered to OncoCyte with each invoice for the Use Fee. BioTime will have no obligation to purchase or acquire any office supplies or other goods and materials or any services for OncoCyte, and if any such supplies, goods, materials or services are obtained for OncoCyte, BioTime may arrange for the suppliers to invoice OncoCyte directly.

The Shared Facilities Agreement will remain in effect, unless either party gives the other party written notice stating that the Shared Facilities Agreement will terminate on December 31 of that year, or unless the agreement is otherwise terminated under another provision of the agreement.

For the three months ended March 31, 2017 and 2016, Use Fees of approximately $79,000 and $178,000, respectively, are included in general and administrative expenses, and Use Fees of approximately $317,000 and $229,000, respectively, are included in research and development expenses in OncoCyte’s statements of operations.

As of March 31, 2017 and December 31, 2016, OncoCyte had $2.6 million and $2.9 million outstanding and payable to BioTime and affiliates included in current liabilities on account of Use Fees under the Shared Facilities Agreement. Since these amounts are due and payable within 30 days of being invoiced, the payables are classified as current liabilities for all periods presented.

5.
Loan Payable to Silicon Valley Bank

On February 21, 2017, OncoCyte entered into a Loan and Security Agreement (the “Loan Agreement”) with Silicon Valley Bank (the “Bank”) pursuant to which OncoCyte borrowed $2 million, (the “First Tranche”) on March 23, 2017.  The loan may be increased by $3 million (the “Contingent Tranche”) on or after May 1, 2017 if OncoCyte obtains at least $20 million of additional equity capital and launches its initial lung cancer diagnostic test, and is not in default under the Loan Agreement.  Payments of interest only on the principal balance are due monthly from the draw date through October 31, 2017, and, beginning on November 1, 2017, monthly payments of principal of approximately $67,000 plus interest will be due and payable. The outstanding principal balance of the loan bears interest at a stated floating annual interest rate equal to the greater of (i) three-quarters of one percent (0.75%) above the prime rate or (ii) four and one-quarter percent (4.25%).  As of March 31, 2017, the prime rate plus 0.75% was 4.75% per annum.

The principal amount of the First Tranche plus accrued interest will be due and payable to the Bank at maturity on April 1, 2020. The principal amount of all draws under the Contingent Tranche, if any, plus accrued interest will be due and payable to the Bank at maturity on October 1, 2020. At maturity, OncoCyte will also pay the Bank an additional final payment fee of 5.8% of the original principal borrowed.  OncoCyte accrued the $116,000 final payment fee included in the loan payable as a deferred financing cost on March 23, 2017 when it borrowed the First Tranche.

OncoCyte may prepay in full the outstanding principal balance at any time, subject to a prepayment fee equal to 3.0% of the outstanding principal balance if prepaid on or before February 21, 2018, 2.0% of the outstanding principal balance if prepaid after February 21, 2018 but not later than February 21, 2019, or 1.0% of the outstanding principal balance if prepaid after February 21, 2019. Any amounts borrowed and repaid may not be reborrowed.

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 Agreement occurs and is not cured within any applicable cure period. 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 financial statements and copies of filings with the Securities and Exchange Commission, as required, legal judgments or pending or threatened legal actions of $50,000 or more, insolvency, and delisting from the NYSE MKT. 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.  OncoCyte was in compliance with the Loan Agreement as of the date of this report.
 
11

Under the provisions of the Loan Agreement, the proceeds received by OncoCyte from all sales of BioTime shares can only be used to pay the amounts due to BioTime and affiliates discussed in Note 4.

Bank Warrants
 
On February 21, 2017 and in conjunction with the $2 million First Tranche becoming available under the Loan Agreement, OncoCyte issued common stock purchase warrants to the Bank (the “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 First Tranche, the Bank became entitled to purchase 8,247 shares of OncoCyte common stock at an exercise price of $4.85 per share, through February 21, 2027 (“Tranche 1 Warrant”).  On March 23, 2017, in conjunction with borrowing the First Tranche, the Bank became entitled to purchase an additional 7,321 shares (“Tranche 2 Warrant”) at an exercise price of $5.46 per share, through March 23, 2027.   The Bank will become entitled to purchase additional shares of OncoCyte common stock commencing on the date on which OncoCyte meets the conditions of the Contingent Tranche availability (“Tranche 3 Warrant”), and again on the date of the first draw, if any, on the Contingent Tranche (“Tranche 4 Warrant”).  The number of additional shares issuable under the Tranche 3 and Tranche 4 Warrants, if any, will be equal to 2.0% of the Contingent Tranche divided by the then determined exercise price, as defined in the Bank Warrants.  The exercise price will be determined with reference to the market price of OncoCyte common stock on the date the Contingent Tranche becomes available, or the date on which OncoCyte borrows funds under the Contingent Tranche, as applicable.  The Bank may elect to exercise the Bank Warrants on a “cashless exercise” basis and receive a number of shares determined by multiplying the number of shares for which the applicable tranche is being exercised by (A) the excess of the fair market value of the common stock over the applicable exercise price, divided by (B) the fair market value of the common stock.  The fair market value of the common stock will be last closing or sale price on a national securities exchange, interdealer quotation system, or over-the-counter market.

OncoCyte considers each warrant tranche, as issued or issuable, to be a separate unit of accounting.  The Tranche 1 and Tranche 2 Warrants are classified as equity since, among other factors, they are not mandatorily redeemable, cannot be settled in cash or other assets and require settlement by issuing a fixed number of shares of common stock of OncoCyte.  OncoCyte determined the fair value of the warrants using the Black-Scholes option pricing model approximating $61,000, which was recorded as a deferred financing cost against the loan payable balance.  Aggregate deferred financing costs of $196,000, recorded against the loan payable balance, will be amortized to interest expense using the effective interest method.

6.
Shareholders’ Equity

Preferred Stock

OncoCyte is authorized to issue up to 5,000,000 shares of no par value preferred stock. As of March 31, 2017, no preferred shares were issued or outstanding.

Issuance of common stock and warrants

On August 29, 2016, OncoCyte sold an aggregate of 3,246,153 immediately separable units, with each unit consisting of one share of OncoCyte common stock and one warrant to purchase one share of OncoCyte common stock (the “Offering Warrants”), at a price of $3.25 per unit (the “Offering”). The sales were made pursuant to the terms and conditions of certain Purchase Agreements between OncoCyte and the purchasers in the Offering. OncoCyte received $9.8 million in net proceeds after discounts, commissions and expenses from the Offering.

Pursuant to the terms of the Purchase Agreements, on September 26, 2016, OncoCyte filed a resale registration statement on Form S-1, referred to as the Resale Registration Statement, with the Securities and Exchange Commission (the “SEC”), to register for sale under the Securities Act of 1933, as amended (the “Securities Act”), the shares of OncoCyte common stock sold in the Offering and the shares of OncoCyte common stock that may be issued if the Warrants are exercised (the “Warrant Shares”),. The SEC declared the Resale Registration Statement effective on October 20, 2016. OncoCyte has agreed to use commercially reasonable efforts to maintain the effectiveness of the Resale Registration Statement under the Securities Act until the earlier of (i) the date that all shares of its common stock covered by the Resale Registration Statement have been sold or can be sold publicly without restriction or limitation under Rule 144 (including, without limitation, the requirement to be in compliance with Rule 144(c)(1)), or (ii) August 29, 2018.

OncoCyte was in compliance with the aforementioned terms of the Purchase Agreement as of the date of this report.

Offering Warrants and New Warrants

The Offering Warrants have an exercise price of $3.25 per Warrant Share, and may be exercised for five years from October 17, 2016, the date the Offering Warrants became exercisable. The Warrants may be exercised on a net “cashless exercise” basis, meaning that the value of a portion of Warrant Shares may be used to pay the exercise price (rather than payment in cash), in certain circumstances, including if the Resale Registration Statement is not effective when and as required by the Purchase Agreements. The exercise price and the number of Warrant Shares will be adjusted to account for certain transactions, including stock splits, dividends paid in common stock, combinations or reverse splits of common stock, or reclassifications of common stock.
 
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Under certain provisions of the Offering Warrants, in the event of a Fundamental Transaction, as defined in the Offering Warrants, OncoCyte will use reasonable best efforts for the acquirer, or any successor entity other than OncoCyte, to assume the Offering Warrants. If the acquirer does not assume the OncoCyte Offering Warrant obligations, then the acquirer shall pay the holders of Offering Warrants an amount equal to the aggregate value equal to the Black Scholes Value, as defined in the Offering Warrants. The payment of the Black Scholes Value shall be made in cash or such other consideration as the acquirer paid to the other OncoCyte shareholders in the Fundamental Transaction.

OncoCyte is not required to net cash settle the Offering Warrants under any circumstance. OncoCyte 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. Since solely an acquirer, and not OncoCyte itself, may be required to net cash settle the Offering Warrants in the event of a Fundamental Transaction, the Offering Warrants are classified as equity.

On February 17, 2017, certain OncoCyte investors exercised 625,000 Offering Warrants at an exercise price of $3.25 per warrant for total exercise cash proceeds of $2.0 million (the “Warrant exercise”).  In order to induce the investors to complete the Warrant exercise and, in conjunction with the Warrant exercise, OncoCyte issued new warrants to those investors (the “New Warrants”).  Certain investors received 200,000 New Warrants with an exercise price of $5.50 per share and the other investor received 212,500 New Warrants with an exercise of $3.25 per share.  The New Warrants are exercisable at any time for five years from February 17, 2017. After the Warrant exercise and issuance of the New Warrants to those investors, OncoCyte has an aggregate of 3,033,653 warrants, including the Offering Warrants and New Warrants, outstanding at exercise prices ranging from $3.25 and $5.50 per warrant.

The New Warrants are classified as equity as their terms are consistent with the Offering Warrants.  For financial reporting purposes, the issuance of the New Warrants was treated as an inducement offer to certain shareholders to exercise their Offering Warrants.  Accordingly, the fair value of the New Warrants, determined using the Black-Scholes option pricing model, approximating $1.1 million was recognized by OncoCyte as a noncash charge to shareholder expense included in general and administrative expenses and a corresponding increase to equity on February 17, 2017, the issuance date.

Stock option exercises

During the three months ended March 31, 2017, 5,484 shares of common stock were issued upon the exercise of stock options, from which OncoCyte received approximately $16,000 in cash proceeds.

7.
Stock-based Compensation

Options Granted

OncoCyte has adopted a Stock Option Plan (the “Plan”) under which 4,000,000 shares of common stock are authorized for the grant of stock options or the sale of restricted stock. The Plan also permits OncoCyte to issue such other securities as its Board of Directors or the Compensation Committee administering the Plan may determine.

As of March 31, 2017, 629,121 shares of common stock were available for future grants under the Plan.
 
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A summary of OncoCyte stock option activity under the Plan and related information follows (in thousands except weighted average exercise price):

Options
 
Available for
Grant
   
Number of
Shares
   
Weighted
Average
Exercise
Price
 
Outstanding at December 31, 2016
   
880
     
3,017
   
 
$2.52
 
Options granted
   
(432)
 
   
432
     
4.91
 
Options exercised
   
-
     
(5)
 
   
2.98
 
Options forfeited
   
181
     
(181)
 
   
2.90
 
Outstanding at March 31, 2017
   
629
     
3,263
   
 
$2.81
 
Exercisable at March 31, 2017
           
1,209
   
 
$1.76
 

There were 5,484 stock options exercised during the three months ended March 31, 2017.

OncoCyte recorded stock-based compensation expense in the following categories on the accompanying statements of operations for the three months ended March 31, 2017 and 2016 (in thousands):

   
Three Months Ended
March 31,
(Unaudited)
 
   
2017
   
2016
 
Research and development
 
 
$205
   
 
$37
 
General, administrative, sales and marketing
   
145
     
88
 
Total stock-based compensation expense
 
 
$350
   
 
$125
 

The assumptions that were used to calculate the grant date fair value of OncoCyte’s employee and non-employee stock option grants for the three months ended March 31, 2017 and 2016 were as follows.

   
2017
   
2016
 
Expected life (in years)
   
6.53
     
6.39
 
Risk-free interest rates
   
2.11 %
   
1.40 %
Volatility
   
57.29 %
   
71.22 %
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 the three months ended March 31, 2017 and 2016 may have been significantly different.

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.

8.
Income Taxes

The provision for income taxes is determined using an estimated annual effective tax rate.  The effective tax rate may be subject to fluctuations during the year as new information is obtained, which may affect the assumptions used to estimate the annual effective tax rate, including factors such as valuation allowances against deferred tax assets, the recognition or de-recognition of tax benefits related to uncertain tax positions, if any, and changes in or the interpretation of tax laws in jurisdictions where OncoCyte conducts business. Due to losses incurred for all periods presented, OncoCyte did not record any provision or benefit for income taxes.

A valuation allowance is provided when it is more likely than not that some portion of the deferred tax assets will not be realized. 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.
 
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9.
Commitments and Contingencies

Master Lease Line Agreement

On April 7, 2016, OncoCyte entered into a Master Lease Line Agreement (the “Lease Agreement”) with an unrelated financing company for the purchase and financing of certain equipment. OncoCyte may use up to $875,000 for purchases of equipment financed by the Lease Agreement from March 29, 2016 through May 31, 2017, the expiration date of the availability of funds under the Lease Agreement. Each lease schedule OncoCyte enters into under the Lease Agreement must be in minimum increments of $50,000 each with a 36-month lease term, collateralized by the equipment financed under the lease schedule. Each lease schedule requires a deposit for the first and last payment under that schedule. Monthly payments will be determined using a lease factor approximating an interest rate of 10% per annum. At the end of each lease schedule under the Lease Agreement, assuming no default has occurred, OncoCyte may either return the equipment financed under the schedule for a restocking fee of 7.5% of the original cost of the equipment or purchase the equipment from the financing company at a fair value not less than 12.5% of the original cost of the equipment.

On April 7, 2016, OncoCyte entered into a lease schedule under the Lease Agreement for certain equipment costing approximately $435,000 applied against the lease line, requiring payments of $14,442 per month over 36 months. In December 2016, OncoCyte entered into a lease schedule under the Lease Agreement for certain equipment costing approximately $161,000, requiring payments of $5,342 per month over 36 months. OncoCyte has accounted for these leases as a capital lease in accordance with ASC 840, Leases, due to the net present value of the payments under the lease approximating the fair value of the equipment at inception of the lease, or approximately $626,000. The payments under the lease schedules will be amortized to capital lease obligations and interest expense using the interest method at an imputed rate of approximately 10% per annum. As of March 31, 2017, there was approximately $279,000 available under the Lease Agreement for future purchases and financing of equipment (see Note 10).

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. OncoCyte is not aware of any claims likely to have a material adverse effect on its financial condition or results of operations.

Employment Contracts

OncoCyte has entered into employment 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 involuntary terminations.

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. The term of these indemnification agreements will generally continue in effect after the termination or expiration of the particular research, development, services, or license agreement to which they relate. 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 March 31, 2017 and December 31, 2016.

10.
Subsequent Events

On April 13, 2017, OncoCyte entered into a lease schedule under the Lease Agreement for certain equipment costing approximately $285,000, requiring payments of $9,462 per month over 36 months.  After this lease schedule, there is no remaining financing available under the Lease Agreement.
 
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Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations

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: 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 Part I, Item 1A of OncoCyte Form 10-K for the year ended December 31, 2016.

The following discussion should be read in conjunction with OncoCyte’s interim condensed 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 interim financial statements, which we have prepared in accordance with U.S. generally accepted accounting principles. Preparation of these 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 three months ended March 31, 2017 to the items 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, 2016.

Results of Operations

Comparison of three months ended March 31, 2017 and 2016

The following tables show our operating expenses for the three months ended March 31, 2017 and 2016 (in thousands).

   
Three Months Ended
March 31,
         
   
2017
   
2016
   
$ Increase
   
% Increase
 
Research and development expenses
 
 
$1,834
   
 
$1,689
   
 
$145
     
8.6%
 
General and administrative expenses
   
2,043
     
1,015
     
1,028
     
101.3%
 
Sales and marketing expenses
   
655
     
228
     
427
     
187.3%
 
 
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Research and development expenses

The following table shows the approximate amounts and percentages of our total research and development expenses allocated to our primary research and development projects during the three months ended March 31, 2017 and 2016, respectively (in thousands).

   
Amount(1)
   
Percent
 
Program
 
2017
   
2016
   
2017
   
2016
 
General
 
 
$728
   
 
$413
     
39.7%
 
   
24.4%
 
Lung cancer confirmatory diagnostic
   
644
     
805
     
35.1%
 
   
47.7%
 
Bladder cancer confirmatory diagnostic
   
21
     
191
     
1.1%
 
   
11.3%
 
Breast cancer confirmatory diagnostic
   
115
     
240
     
6.3%
 
   
14.2%
 
Diagnostics laboratory
   
240
     
35
     
13.1%
 
   
2.1%
 
Prosigna and other
   
86
     
5
     
4.7%
 
   
0.3%
 
Total
 
 
$1,834
   
 
$1,689
     
100%
 
   
100%
 

(1)
Amounts also include certain general research and development expenses, such as laboratory supplies, laboratory expenses, rent allocated, and insurance allocated to research and development expenses, incurred directly by BioTime on behalf of OncoCyte and allocated to OncoCyte under the Shared Facilities Agreement.

The increases in research and development expenses for the three months ended March 31, 2017 are primarily attributable to increases of $205,000 in salaries and payroll related expenses, $168,000 in stock based compensation expenses, $94,000 in laboratory expenses, $88,000 in research and development expenses allocated to us by BioTime, $73,000 in clinical trial expenses and $55,000 in depreciation expense due to additional equipment financed or purchased.  These increases were offset by decreases of $404,000 in outside services expenses and $121,000 in consulting services primarily due to the increased headcount and decreased reliance upon services from consultants and other third parties, consistent with the increases in payroll and related expenses.

We expect to continue to incur a significant amount of research and development expenses during the foreseeable future.

General and administrative expenses

General and administrative expenses for the three months ended March 31, 2017 increased in comparison to the comparable period in 2016. The increase is attributable to $1.1 million in shareholder noncash expense  for the issuance of certain warrants, $84,000 in insurance expenses and $65,000 in legal expenses, offset by decreases of $99,000 in general and administrative expenses allocated to us by BioTime, $84,000 in consulting expenses, and $79,000 in transfer agent, stock listing and SEC filing expenses.
 
Sales and marketing expenses

Sales and marketing expenses for the three months ended March 31, 2017 increased in comparison to the comparable period in 2016 as we prepare for the commercial launch of our lung cancer diagnostic test. The increase was attributable to $194,000 in consulting expenses, $152,000 in salaries and payroll related expenses and $50,000 in marketing expenses.

Income taxes

Due to our losses incurred for all periods presented, we did not record any provision or benefit for income taxes for any period presented.

A valuation allowance will be provided when it is more likely than not that some portion of the deferred tax assets will not be realized. 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.

Liquidity and Capital Resources

At March 31, 2017, we had $11.4 million of cash and cash equivalents and held BioTime common shares as available-for-sale securities valued at $1.6 million.

Since inception, we have financed our operations through the sale of our common stock and warrants to our shareholders, including BioTime, loans from BioTime and other BioTime affiliates, warrant exercises, a bank loan, and sales of BioTime common shares that we hold as available-for-sale securities. We have incurred operating losses and negative cash flows since inception, and had an accumulated deficit of $40.0 million as March 31, 2017.

We plan to continue to invest significant resources in research and development in the field of molecular cancer diagnostics. We expect to continue to incur operating losses and negative cash flows. If results of our research and development efforts, including the results of CLIA and validity studies of our lung cancer test, are successful to the point where we believe that a commercial product can be launched successfully, then additional capital will be required to continue to develop a sales and marketing team and to launch our first diagnostic test.  OncoCyte will also need to raise additional capital in subsequent years to develop and launch additional diagnostic tests, for working capital, and for other expenses until such time as it is able to generate sufficient revenues from the commercialization of its diagnostic tests to finance its operations. 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.
 
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We believe we have sufficient cash, cash equivalents, available for sale securities and working capital to carry out our current operations through at least twelve months from the issuance date of the financial statements included elsewhere in this report, but we will need to raise additional capital if we determine to commercialize our lung cancer test during that time frame.

Cash used in operations

During the three months ended March 31, 2017 and 2016, our total research and development expenses were $1.8 million and $1.7 million, respectively, our general and administrative expenses were $2.0 million and $1.0 million, respectively, and our sales and marketing expenses were $655,000 and $228,000, respectively.  Net loss for the three months ended March 31, 2017 and 2016 amounted to $4.7 million and $2.9 million, respectively.  Net cash used in operating activities during these periods amounted to $3.3 million and $2.2 million, respectively. The amount by which our net loss exceeded net cash used in our operating activities during the  three months ended March 31, 2107 is primarily due to the following noncash items: a $1.1 million noncash charge related to warrants issued to certain investors as an inducement to exercise previously issued warrants, stock-based compensation of $350,000, $159,000 loss on sales of BioTime shares held as available-for-sale securities, and $128,000 in depreciation and amortization expenses.  Changes in working capital amounted to an approximate $310,000 of additional use of cash.

Cash provided by or used in investing activities

During the three months ended March 31, 2017 and 2016, there was $16,000 and $15,000, respectively, in cash payments for purchases of machinery and equipment as we principally utilized capital lease financing to acquire equipment.  During the three months ended March 31, 2017, we sold 141,844 shares of BioTime stock we hold as available-for-sale securities with net proceeds to us of $502,000, which we used to pay down amounts owed to BioTime and affiliates.  Under the provisions of the Loan Agreement discussed in Note 5 to our financial statements, we can only use the proceeds from sale of BioTime shares to pay amounts owed to BioTime and affiliates.

Cash provided by financing activities

During the three months ended March 31, 2017 and 2016, we received $16,000 and $42,000, respectively, in cash from the exercise of stock options.  During the three months ended March 31, 2017, certain investors exercised 625,000 warrants at an exercise price of $3.25 per warrant for total exercise proceeds to us of $2.0 million, and we borrowed $2.0 million from the Bank.  We used $47,000 to pay down capital lease obligations during the first quarter of 2017.

Off-Balance Sheet Arrangements

As of March 31, 2017 and December 31, 2016, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.

Item 3.
Quantitative and Qualitative Disclosures about Market Risk

There have been no material changes in our qualitative and quantitative market risk since the disclosure in our Annual Report on Form 10‑K for the year ended December 31, 2016.

Available for sale securities at fair value

As of March 31, 2017 we held 477,862 BioTime common shares at fair value as available-for-sale securities. Those shares are subject to changes in market value. BioTime common shares trade on the NYSE MKT under the ticker “BTX”. As of March 31, 2017, the 52 week high/low stock price per share range for BioTime was $3.97 - $2.29.

Item 4.
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 Securities Exchange Act of 1934 (“Exchange Act”). Our management, including our principal executive officer and principal financial officer, have reviewed and evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Following this review and evaluation, the principal executive officer and principal financial officer 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 principal executive officer, and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
 
18

Changes in Internal Controls

There were no changes in our internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1.
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, and to our knowledge no such litigation or proceedings are contemplated.

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 and the risks described in our Annual Report on Form 10-K for the year ended December 31, 2016, which could materially adversely affect our proposed operations, 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.

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 flow and we expect to continue to incur losses and negative cash flow in the future. Our net losses for the three months ended March 31, 2017 and for the fiscal years ended December 31, 2016 and 2015 were approximately $4.7 million, $11.2 million and $8.7 million, respectively, and we had an accumulated deficit of approximately $40.0 million and $35.3 million as of March 31, 2017 and December 31, 2016, respectively. Since inception, we have financed our operations through the sale of our common stock and warrants, loans from BioTime and BioTime affiliates, warrant exercises, a bank loan and sale of BioTime common shares that we hold as available-for-sale securities. Although BioTime may continue to provide administrative support to us on a reimbursable basis, there is no assurance that BioTime will provide future financing. 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.

Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3
Default Upon Senior Securities

None.

Item 4.
Mine Safety Disclosures

Not applicable.

Item 5
Other Information

None.
 
19

Item 6

Exhibit
Numbers
 
Exhibit Description
3.1
 
Articles of Incorporation with all amendments (1)
     
3.2
 
By-Laws, as amended (1)
     
4.1
 
Form of August 2016 Warrant (2)
     
4.2
 
Form of 2017 Warrant, Exercise Price $3.25 (3)
     
4.3
 
Form of 2017 Warrant, Exercise Price $5.50 (3)
     
4.4
 
Silicon Valley Bank Warrant (3)
     
10.1
 
Form of Warrant Exercise Agreement (4)
     
10.2
 
Form of Alternate Exercise Agreement (4)
     
10.3
 
Loan and Security Agreement, dated February 21, 2017, between OncoCyte Corporation and Silicon Valley Bank (3)
     
 
Employment Termination and Release Agreement, dated February 27, 2017, between OncoCyte Corporation and Karen Chapman*
     
 
Rule 13a-14(a)/15d-14(a) Certification*
     
 
Section 1350 Certification*
     
101
 
Interactive Data Files
     
101 INS
 
XBRL Instance Document*
     
101SCH
 
XBRL Taxonomy Extension Schema*
     
101CAL
 
XBRL Taxonomy Extension Calculation Linkbase*
     
101LAB
 
XBRL Taxonomy Extension Label Linkbase*
     
101PRE
 
XBRL Taxonomy Extension Presentation Linkbase*
     
101DEF
 
XBRL Taxonomy Extension Definition Document*

(1)
Incorporated by reference to OncoCyte Corporation’s Form 10 12(b) filed on November 23, 2015.

(2)
Incorporated by reference to OncoCyte Corporation’s Current Report on Form 8-K filed with the Securities and Exchange Commission on August 29, 2016.

(3)
Incorporated by reference to OncoCyte Corporation’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 27, 2017.

(4)
Incorporated by reference to OncoCyte Corporation's Current Report on Form 8-K filed with the Securities and Exchange Commission on February 24, 2017.

*
Filed herewith
 
20

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 
ONCOCYTE CORPORATION
 
     
Date: April 28, 2017
/s/ William Annett
 
 
William Annett
 
 
President and Chief Executive Officer
 

Date: April 28, 2017
/s/ Russell L. Skibsted
 
 
Russell L. Skibsted
 
 
Chief Financial Officer
 
 
 
21

EX-10.4 2 ex10_4.htm EXHIBIT 10.4

Exhibit 10.4
 
EMPLOYMENT TERMINATION AND RELEASE AGREEMENT

This Employment Termination and Release Agreement (the “Agreement”) is entered into as of February 21, 2017 by and between Karen Chapman (“Employee”) OncoCyte Corporation (“OncoCyte”) and BioTime, Inc. (“BioTime”).

Recitals

A.            Employee is resigning as an officer and employee of OncoCyte, BioTime and any applicable BioTime subsidiaries for which she may have performed services.

B.            OncoCyte, BioTime, and Employee wish to provide for a resolution of any claim that Employee may have against OncoCyte, BioTime and BioTime subsidiaries.

Based on these recitals, the parties agree as follows:

Agreement

1.             Employment Termination Arrangements.

(a)          Employee agrees that her employment with OncoCyte, BioTime, and each of BioTime’s subsidiaries, if any, for which Employee performed services or by which she was employed (each a “Related Company”) will terminate effective at the close of business on March 22, 2017 (the “Termination Date”) as a result of her resignation.  Employee agrees that (i) she has been paid in full for all salary, wages, bonus payments (if any), accrued sick leave, accrued vacation, paid time off, and other compensation (collectively, “Compensation”) owed by OncoCyte, BioTime and any Related Company pursuant to her existing Employment Agreement dated as of April 1, 2011 and any other agreement or arrangement (written or oral) that may exist between Employee and OncoCyte, BioTime and any Related Company (the “Employment Agreement”) through the date of this Agreement, and (ii) BioTime and the Related Companies will not owe Employee any further or additional Compensation of any kind after the date of this Agreement.  Employee agrees that the only additional or further Compensation that OncoCyte will owe Employee after the date of this Agreement will be regular installments of her regular OncoCyte base salary through the Termination Date, any paid time off from OncoCyte remaining unused or unpaid on the Termination Date, coverage by any OncoCyte employee benefit plans available for all OncoCyte employees generally through the Termination Date, and the bonus payment referenced in Section 1(b) below.  Employee acknowledges and agrees that she is entitled to receive no other payments, benefits, or Compensation of any kind from OncoCyte, BioTime or any Related Company for services as an officer or employee of OncoCyte, BioTime or any Related Company.

(b)          Employee agrees that she will be using paid time off days from March 13 through March 22, 2017 and that she will receive payment for any remaining unused paid time off days from OncoCyte in her final paycheck in accordance with OncoCyte’s regular practices.

(b)          OncoCyte agrees that Employee shall receive from OncoCyte an annual bonus in the amount of $69,000 based on her performance as an OncoCyte employee, which shall be paid on or about March 10, 2017.  Employee agrees that she is not entitled to receive a bonus from BioTime or any Related Company or a bonus in excess of $69,000 from OncoCyte.

(c)          Employee, BioTime and OncoCyte agree that execution and delivery of this Agreement by Employee shall constitute the 30 day notice of resignation required by her Employment Agreement, and that she is resigning in all capacities as an officer or employee of OncoCyte, BioTime and any Related Company for which she may have been employed or performed services.

(d)          Employee currently holds the following employee stock options that were granted by OncoCyte, BioTime, or certain Related Companies:

OncoCyte Options
Grant Date
 
 Adjusted Strike Price for Reverse Stock Split
 
 O/S After Reverse Stock Split
 
Vesting
Start date
 
Vested
as of
DOT*
 
Unvested and forfeited
immediately at DOT*
 
Cancelled if not exercised by February 28, 2018
4/1/2011
 
$   1.50
 
200,000
 
4/1/2011
 
200,000
 
-
 
200,000
1/9/2015
 
$   2.20
 
100,000
 
1/9/2015
 
54,166
 
45,834
 
54,166
2/16/2016
 
$   3.06
 
60,000
 
2/16/2016
 
16,250
 
43,750
 
16,250
               
270,416
 
89,584
 
270,416

BioTime Options
Grant Date
 
 Exercise Price
 
Total Granted
 
Vesting
Start date
 
Vested
as of
DOT*
 
Unvested and forfeited
immediately at DOT*
 
Cancelled if not exercised in 90 days
9/1/2011
 
$     4.61
 
10,000
 
9/1/2011
 
10,000
 
-
 
10,000
2/202013
 
$     4.22
 
25,000
 
1/1/2013
 
25,000
 
-
 
25,000
3/20/2014
 
$     3.51
 
25,000
 
3/20/2014
 
18,750
 
6,250
 
18,750-
               
53,750
 
6,250
 
53,750

ReCyte Therapeutics, Inc. Options
Grant Date
 
 Exercise
Price
 
Total
Granted
 
Vesting
Start date
 
Vested
as of
DOT*
 
Unvested and forfeited
immediately at DOT*
 
Cancelled if not exercised in 90 days
7/1/2012
 
$      2.05
 
50,000
 
7/1/2012
 
50,000
 
-
 
50,000

OrthoCyte Corporation Options
Grant Date
 
 Exercise
Price
 
Total
Granted
 
Vesting
Start date
 
Vested
as of
DOT*
 
Unvested and forfeited
immediately at DOT*
 
Cancelled if not exercised in 90 days
7/1/2012
 
$      0.08
 
50,000
 
7/1/2012
 
50,000
 
-
 
50,000

*DOT means Termination Date

As a result of Employee ceasing to be an employee of OncoCyte and BioTime, and any Related Companies, under the terms of the applicable stock option plans of OncoCyte, BioTime, and Related Companies that have granted stock options to Employee, and the stock option agreements governing those stock options, Employee’s stock options that have not vested on or before the Termination Date shall expire upon the termination of her employment on the Termination Date, and except as otherwise provided in Section 3 of this Agreement with respect to vested OncoCyte stock options, her vested stock options shall expire ninety (90) days after the Termination Date unless exercised by Employee by that date.
 
2

2.             Tax. Employee shall be responsible for the payment of all income taxes arising from any exercise of her stock options and sale of the common stock issued upon exercise.

3.             Special OncoCyte Stock Option Amendment; Lock-Up Agreements.

(a)          In consideration of Employee entering into this Agreement and performing her obligations and covenants under this Agreement, including but not limited to the provisions of paragraph (b) of this Section 3, OncoCyte agrees that Employee’s OncoCyte stock options are amended as follows:

(i)          The expiration date of the OncoCyte stock options that are vested on the date of this Agreement and any stock options that vest from the date of this Agreement through the Termination Date is extended to 5:00 p.m. Pacific Time on February 28, 2018, subject to Employee’s full and timely performance of all of her obligations and covenants under this Agreement;

(b)          As an inducement for OncoCyte agreeing to extend the expiration date of Employee’s OncoCyte vested stock options, Employee hereby acknowledges and agrees that during the “Lock-Up Period” Employee will not, without the prior written consent of OncoCyte (which consent may be granted or withheld in OncoCyte’s sole discretion): (i) offer, sell, contract to sell (with the exception that Employee may enter a 10b5-1 planned sale agreement during the Lock-Up Period, so long as the sale of the Lock-up Shares does not occur during the Lock-up Period and planned sale of Locked-up Shares commences after Lock-up Period is over), pledge, grant any option to purchase or otherwise dispose of (collectively, a “Disposition”) any “Lock-Up Shares;” and (ii) exercise or seek to exercise or effectuate in any manner any rights of any nature that Employee has or may have hereafter to require OncoCyte to register under the Securities Act of 1933, as amended (the “Act”) Employee’s sale, transfer or other disposition of any of the Lock-Up Shares. As used in this Agreement, “Lock-Up Shares” means OncoCyte stock options held by Employee as defined by the table below:

OncoCyte Options
Grant Date
 
 Adjusted Strike Price for Reverse Stock Split
 
 O/S After Reverse Stock Split
 
Vesting
Start date
 
Vested
as of
DOT*
 
Unvested and forfeited immediately at DOT*
 
Cancelled if not exercised by February 28, 2018
4/1/2011
 
 $   1.50
 
200,000
 
4/1/2011
 
200,000
 
-
 
200,000
1/9/2015
 
 $   2.20
 
100,000
 
1/9/2015
 
54,166
 
45,834
 
54,166
2/16/2016
 
 $   3.06
 
60,000
 
2/16/2016
 
16,250
 
43,750
 
16,250
               
270,416
 
89,584
 
270,416

“Lock-Up Shares” only applies to OncoCyte stock options held by Employee and excludes any stock options or shares held by spouse.
 
3

As used in this Agreement, “Lock-Up Period” means a period of time commencing on the date of this Agreement and ending at 5:00 p.m. Pacific Time on May 31, 2017. The foregoing restrictions under this paragraph are expressly agreed to preclude Employee from engaging in any hedging, collar (whether or not for any consideration) or other transaction that is designed to or reasonably expected to lead or result in a Disposition of Lock-Up Shares during the Lock-Up Period, even if such Lock-Up Shares would be disposed of by someone other than Employee. Such prohibited hedging or other transactions would include any short sale or any purchase, sale or grant of any right (including any put or call option or reversal or cancellation thereof) with respect to any Lock-Up Shares or with respect to any security (other than a broad-based market basket or index) that includes, relates to or derives any significant part of its value from Lock-Up Shares. Notwithstanding Employee’s agreement not to make any Disposition during the Lock-Up Period, the foregoing restrictions under this paragraph shall not apply to: (i) any transfers made by Employee by will or intestate succession upon the death of Employee, or (ii) a transfer to OncoCyte in connection with the exercise of any OncoCyte stock option, or (iii) any transfers made by the spouse of the Employee of options or shares currently held in his name. Employee may enter a 10b5-1 planned sale agreement during the Lock-Up Period, so long as the sale of the Lock-up Shares does not occur during the Lock-up Period and planned sale of Locked-up Shares commences after Lock-up Period is over.

(c)          Employee acknowledges and agrees that she will promptly comply in all respects with Section 6 of her Employment Agreement by returning to OncoCyte, BioTime and all Related Companies (i) all equipment and other property belonging to OncoCyte, BioTime and the Related Companies, (ii) all originals and copies of Confidential Information as defined in her Employment Agreement, and (ii) any and all other documents, information, and other items referenced in Section 6 of her Employment Agreement, to the extent any of the foregoing have not been returned to OncoCyte, BioTime, and all Related Companies on or before the Termination Date.

4.             Confidential and Proprietary Information.

(a)          During her employment with OncoCyte and BioTime, Employee had access to trade secrets and confidential information of OncoCyte, BioTime and certain Related Companies. Confidential Information means all information and ideas, in any form, relating in any manner to matters such as: products; formulas; technology and know-how; inventions; diagnostic test development and trial plans and data; clinical trial development plans and data, business plans; marketing plans; the identity, expertise, and compensation of employees and contractors; systems, procedures, and manuals; customers; suppliers; joint venture partners; research collaborators; licensees; and financial information. Confidential Information also shall include any information of any kind, whether belonging to OncoCyte, BioTime, a Related Company, or any third party, that OncoCyte, BioTime, or a Related Company has agreed to keep secret or confidential under the terms of any agreement with any third party. Confidential Information does not include: (i) information that is or becomes publicly known through lawful means other than unauthorized disclosure by Employee; (ii) information that was rightfully in Employee’s possession prior to this employment with OncoCyte or BioTime and was not assigned to OncoCyte, BioTime, or a Related Company, or was not disclosed to Employee in Employee’s capacity as an employee or other fiduciary of OncoCyte, BioTime; or a Related Company, or (iii) information disclosed to Employee, after the Termination Date without a confidential restriction by a third party who rightfully possesses the information and did not obtain it, either directly or indirectly, from OncoCyte, BioTime or a Related Company, and who is not subject to an obligation to keep such information confidential for the benefit of OncoCyte, BioTime, a Related Company, or any third party with whom OncoCyte, BioTime, or a Related Company has a contractual relationship. Employee understands and agrees that all Confidential Information shall be kept confidential by Employee on and after the Termination Date notwithstanding that her employment by OncoCyte, BioTime, and the Related Companies has terminated, and Employee further agrees that Employee (i) will not, without the prior written approval by OncoCyte, BioTime, and the respective Related Companies disclose any Confidential Information, or use any Confidential Information in any way, and (ii) Employee shall return to OncoCyte, BioTime, or a Related Company all originals and copies of Confidential Information belonging to such companies.
 
4

(b)          Employee agrees to keep the terms of this Agreement strictly confidential and will not disclose such information, without the prior written permission of OncoCyte and BioTime, to anyone except Employee’s attorneys or tax advisors, if any, but only after informing those persons that they too must keep the information confidential, unless and until (i) OncoCyte or BioTime discloses the material terms of this Agreement in a report or registration statement filed with the Securities and Exchange Commission under the Securities Exchange Act 1934, as amended, or under the Act, or (ii) Employee is required by court order or other law to disclose the terms of this Agreement.

5.             Release. Employee, on behalf of herself and her heirs, executors, administrators, and assigns, releases and discharges OncoCyte, BioTime, each Related Company, and each of the former, current or future officers, directors, employees, agents, fiduciaries, shareholders, insurers, and benefit plans of OncoCyte, BioTime and each Related Company from any and all claims, liabilities, causes of action, damages, losses, demands or obligations (“Claims”) of every kind and nature, whether now known or unknown, suspected or unsuspected, which Employee ever had, now has, or hereafter may have by reason of any act, omission, transaction, practice, conduct, or matter of any kind whatsoever, relating to or based upon, in whole or in part, Employee’s employment or termination of employment with OncoCyte, BioTime or any Related Company, except for “Excluded Claims.” As used in this Agreement, “Excluded Claims” mean Employee’s right to receive from OncoCyte regular installments of her regular base salary through the Termination Date, any paid time off remaining unused or unpaid on the Termination Date, coverage by any OncoCyte employee benefit plans available for all OncoCyte employees generally through the Termination Date, and the bonus payment referenced in Section 1(b). This release and discharge includes, but is not limited to, all Claims arising under federal, state and local statutory or common law, including, but not limited to, the Age Discrimination in Employment Act, Title VII of the Civil Rights Act of 1964, the California Fair Employment and Housing Act, Claims for wrongful discharge under any public policy or any policy of OncoCyte, BioTime or any Related Company, Claims for breach of fiduciary duty, and the laws of contract and tort, and any Claim for attorney’s fees. Employee promises never to file a lawsuit or assist in or commence any action asserting any Claims released hereunder. Not withstanding the above, Employee does not release OrthoCyte Corporation or its parent BioTime from claims related to employee’s rights as a shareholder of OrthoCyte Corporation.

6.             Known or Unknown Claims. Employee understands and expressly agrees that the provisions of Sections 5 and 6 of this Agreement extend to all Claims of every nature and kind, known or unknown, suspected or unsuspected, past, present, or future, other than Excluded Claims, arising from or attributable to any conduct of OncoCyte, BioTime, any Related Company, and any of their respective officers, directors, employees, agents, fiduciaries, shareholders, insurers, and benefit plans, whether or not Employee knows or believes she may have any Claims. Employee hereby WAIVES any and all rights granted to Employee under Section 1542 of the California Civil Code or any analogous state law or federal law or regulations. Section 1542 of the California Civil Code reads as follows:
 
5

A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS OR HER FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM OR HER MUST HAVE MATERIALLY AFFECTED HIS OR HER SETTLEMENT WITH THE DEBTOR.

7.             No Disparagement. Employee agrees not to disparage OncoCyte, BioTime or any Related Company or any of their respective officers, employees, agents or representatives, and will not knowingly say or do anything that would have an adverse impact on OncoCyte, BioTime, or any Related Company. .

8.             Dispute. It is the intention of Employee, OncoCyte, BioTime, and the Related Companies that the Federal Arbitration Act and the California Arbitration Act shall apply with respect to the arbitration of disputes, claims, and controversies pursuant to, arising under, or in connection with this Agreement. Should a dispute arise concerning this Agreement or its performance, such dispute shall be resolved, at the election of the party seeking to enforce the Agreement, either by court action, or by binding arbitration administered by JAMS under its applicable dispute resolution rules. If arbitration is initiated, the arbitration shall be held in San Francisco or Oakland, California. The Company or BioTime shall pay the arbitrator’s fees and costs. Employee shall pay for Employee’s own costs and attorneys' fees, if any and the Company and BioTime shall pay for their own costs and attorneys' fees, if any, subject to the right of the prevailing party to recover its reasonable attorneys’ fees and costs as provided in Section 10.

EMPLOYEE UNDERSTANDS AND AGREES THAT THIS AGREEMENT TO ARBITRATE CONSTITUTES A WAIVER OF EMPLOYEE’S RIGHT TO A TRIAL BY JURY OF ANY MATTERS COVERED BY THIS AGREEMENT TO ARBITRATE

9.             Construction. This Agreement shall be construed and enforced in accordance with the laws of the State of California.

10.           Attorneys’ Fees. Should any action be brought by any party to this Agreement to enforce any provision of this Agreement, the prevailing party shall be entitled to recover, in addition to any other relief, reasonable attorneys’ fees and costs and expenses of litigation or arbitration.

11.           The terms of this agreement apply individually to Employee and do not affect the individual and separable rights of the Employee’s spouse.

12.           Integration. This Agreement constitutes an integration of the entire understanding and agreement of the parties with respect to the matters referred to in this Agreement. Any representation, warranty, promise or condition, whether written or oral, between the parties with respect to the matters referred to in this Agreement which is not specifically incorporated in this Agreement shall not be binding upon any of the parties hereto and the parties acknowledge that they have not relied, in entering into this Agreement, upon any representations, warranties, promises or conditions not specifically set forth in this Agreement. No prior or contemporaneous oral or written understanding, covenant, or agreement between the parties, with respect to the matters referred to in this Agreement, shall survive the execution of this Agreement. This Agreement may be modified only by a written agreement executed by both parties hereto.
 
6

13.           Successors and Assigns. This Agreement shall be binding on, and shall inure to the benefit of, Employee and OncoCyte, BioTime, each Related Company, and their respective heirs, executors, successor and assigns. The provisions of Sections 5, 6, and 7 shall also inure to the benefit of each of the former, current and future officers, directors, employees, agents, fiduciaries, shareholders, insurers, and benefit plans of OncoCyte, BioTime, and each Related Company and their respective heirs, executors, successors, and assigns.

14.           Construction. The language of this Agreement shall be construed as to its fair meaning and not strictly for or against either party.

15.           Counterparts. This Agreement may be executed in counterparts and when each party has signed and delivered at least one such counterpart, each counterpart shall be deemed an original and all counterparts taken together shall constitute one and the same Agreement, which shall be binding and effective as to all parties.

16.           Headings. Headings in this Agreement are for convenience of reference only and are not a part of the substance hereof.

17.           Severability. If any provision of this Agreement is held to be invalid, void or unenforceable, the remaining provisions shall remain in full force and effect, except that, should Section 5 or Section 6 be held invalid, void or unenforceable, either jointly or separately, as a result of any action by Employee, the Company shall be entitled to rescind the Agreement.

18.           Effective Date of Agreement

EMPLOYEE IS ADVISED THAT EMPLOYEE HAS UP TO TWENTY-ONE (21) CALENDAR DAYS TO CONSIDER THIS AGREEMENT IN WHICH EMPLOYEE WAIVES IMPORTANT RIGHTS, INCLUDING THOSE UNDER THE AGE DISCRIMINATION AND EMPLOYMENT ACT OF 1967. EMPLOYEE ALSO IS ADVISED TO CONSULT WITH AN ATTORNEY PRIOR TO EMPLOYEE’S SIGNING OF THIS AGREEMENT.

EMPLOYEE MAY REVOKE THIS AGREEMENT FOR A PERIOD OF SEVEN (7) CALENDAR DAYS FOLLOWING THE DAY EMPLOYEE SIGNS THIS AGREEMENT. ANY REVOCATION WITHIN THIS PERIOD MUST BE SUBMITTED, IN WRITING, TO WILLIAM ANNETT, CHIEF EXECUTIVE OFFICER, ONCOCYTE CORPORATION, AND TO ADITYA MOHANTY, CO-CHIEF EXECUTIVE OFFICER, BIOTIME, INC., 1010 ATLANTIC AVENUE, SUITE 102, ALAMEDA, CA 94501 AND STATE, "I HEREBY REVOKE MY ACCEPTANCE OF OUR EMPLOYMENT TERMINATION AND RELEASE AGREEMENT AND RELEASE OF ALL CLAIMS." THE REVOCATION MUST BE PERSONALLY DELIVERED TO WILLIAM ANNETTT, CHIEF EXECUTIVE OFFICER ONCOCYTE CORPORATION, AND TO ADITYA MOHANTY, CO-CHIEF EXECUTIVE OFFICER, BIOTIME, INC., 1010 ATLANTIC AVENUE, SUITE 102, ALAMEDA, CA 94501AND POSTMARKED WITHIN SEVEN (7) CALENDAR DAYS AFTER EMPLOYEE SIGNS THIS AGREEMENT.
 
7

PROVIDED THAT EMPLOYEE HAS NOT REVOKED THIS AGREEMENT, PURSUANT TO THE PRECEDING PARAGRAPH, THE EFFECTIVE DATE OF THIS AGREEMENT SHALL BE THE DAY AFTER THE EMPLOYEE HAS DELIVERED A SIGNED COPY OF THE AGREEMENT TO WILLIAM ANNETT, CHIEF EXECUTIVE OFFICER. ONCOCYTE CORPORATION, AND TO ADITYA MOHANTY, CO-CHIEF EXECUTIVE OFFICER, BIOTIME, INC., 1010 ATLANTIC AVENUE, SUITE 102, ALAMEDA, CA 94501.

IN WITNESS WHEREOF the parties have entered into this Agreement as of the date first above written.

/s/ Karen Chapman
 
Karen Chapman
 
     
Address:
 
   
 
BioTime, Inc.
 
     
By:
/s/ Editya P. Mohanty
 
     
Title:
Co-CEO
 
     
OncoCyte Corporation
 
     
By:
/s/ William Annett
 
     
Title:
CEO
 

 
8
EX-31 3 ex31.htm EXHIBIT 31

Exhibit 31
 
CERTIFICATIONS

I, William Annett, certify that:

1. I have reviewed this quarterly report on Form 10-Q 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: April 28, 2017

/s/ William Annett
 
William Annett
 
Chief Executive Officer
 
 

Exhibit 31
 
CERTIFICATIONS

I, Russell L. Skibsted, certify that:

1. I have reviewed this quarterly report on Form 10-Q 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: April 28, 2017

/s/ Russell L. Skibsted
 
Russell L. Skibsted
 
Chief Financial Officer
 
 
 

EX-32 4 ex32.htm EXHIBIT 32

Exhibit 32

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 Quarterly Report on Form 10-Q of OncoCyte Corporation (the “Company”) for the quarter ended March 31, 2017 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), we William Annett, Chief Executive Officer, and Russell L. Skibsted, 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: April 28, 2017

 
/s/ William Annett
 
 
William Annett
 
 
Chief Executive Officer
 
     
 
/s/ Russell L. Skibsted
 
 
Russell L. Skibsted
 
 
Chief Financial Officer
 
 
 

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Prior to February 17, 2017, realized gains and losses for shares sold were reclassified out of accumulated other comprehensive income or loss and were included in equity, as an increase or decrease to equity in common stock consistent with, and pursuant to, ASC 805-50, transactions between entities under common control.&#160; As discussed in Note 1, on February 17, 2017 BioTime deconsolidated OncoCyte&#8217;s financial statements from its consolidated financial statements.&#160; Due to this deconsolidation, and based on BioTime no longer having &#8220;control&#8221; over OncoCyte under GAAP, any realized gains and losses OncoCyte generates from the sale of BioTime shares on or after February 17, 2017 will be included in its statements of operations.</div><div style="background-color: #ffffff;">&#160;</div><div style="font-size: 10pt; font-family: 'Times New Roman'; text-align: left; background-color: #ffffff; text-indent: 36pt;">In March 2017, OncoCyte sold 141,844 shares of BioTime stock for net proceeds of $502,000 and used those proceeds to pay down amounts due to BioTime and affiliates (see Note 5).&#160; OncoCyte recognized a $155,000 loss from the sale of the BioTime shares included in other income and expenses, net, for the three months ended March 31, 2017. 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(&#8220;BioTime&#8221;), a publicly traded biotechnology company focused in the field of regenerative medicine.&#160; Beginning on February 17, 2017, OncoCyte ceased to be a subsidiary of BioTime for financial reporting purposes when BioTime&#8217;s percentage ownership of outstanding OncoCyte common stock declined below 50% as a result of the issuance of additional OncoCyte common stock to certain investors who exercised OncoCyte stock purchase warrants (see Note 6).</div><div style="background-color: #ffffff;"><br /></div><div style="font-size: 10pt; font-family: 'Times New Roman'; text-align: left; background-color: #ffffff; text-indent: 36pt;">OncoCyte is developing molecular cancer diagnostics utilizing a discovery platform that focuses on identifying genetic markers that are differentially expressed in certain types of cancers. 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BioTime, at its discretion, has the right to charge OncoCyte a 5% markup on such allocated costs although BioTime elected not to charge this markup&#160;from the inception of the Shared Facilities Agreement through December 31, 2015.&#160; For allocated costs incurred beginning on January 1, 2016, BioTime is charging&#160;the 5% markup. The allocated cost of BioTime employees and contractors who provide services is based upon records maintained of the number of hours of such personnel devoted to the performance of services.</div><div>&#160;</div><div style="font-size: 10pt; font-family: 'Times New Roman'; text-align: left; text-indent: 36pt;">The Use Fee is determined and invoiced to OncoCyte on a quarterly basis for each calendar quarter of each calendar year. 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font-family: 'Times New Roman'; text-align: left; background-color: #ffffff; text-indent: 36pt;">Forfeitures are now accounted for as they occur instead of based on the number of awards that were expected to vest.&#160; Based on the nature and timing of OncoCyte&#8217;s grants, straight line expense attribution of stock based compensation for the entire award and the relatively low forfeiture rate on OncoCyte&#8217;s experience, the impact of adoption of ASU 2016-09 pertaining to forfeitures was not significant to OncoCyte&#8217;s financial statements.</div><div><br /></div></div><div style="font-size: 10pt; font-family: 'Times New Roman'; font-style: italic; text-align: left; background-color: #ffffff;">Accounting for BioTime shares</div><div style="background-color: #ffffff;"><br /></div><div style="font-size: 10pt; font-family: 'Times New Roman'; text-align: left; background-color: #ffffff; text-indent: 36pt;">OncoCyte accounts for the BioTime shares it holds as available-for-sale equity securities in accordance with ASC 320-10-25,<font style="font-size: 10pt; 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font-size: 10pt;"><div style="text-align: left;"><table cellpadding="0" cellspacing="0" class="DSPFListTable" style="font-size: 10pt; font-family: 'Times New Roman'; width: 100%;"><tr><td style="font-size: 10pt; font-family: 'Times New Roman'; width: 18pt; vertical-align: top; font-weight: bold; align: right;">6.</td><td style="width: auto; vertical-align: top; text-align: left;"><div style="font-size: 10pt; font-family: 'Times New Roman'; font-weight: bold;">Shareholders&#8217; Equity</div></td></tr></table></div><div><br /></div><div style="font-size: 10pt; font-family: 'Times New Roman'; font-style: italic; text-align: left;">Preferred Stock</div><div><br /></div><div style="font-size: 10pt; font-family: 'Times New Roman'; text-align: left; text-indent: 36pt;">OncoCyte is authorized to issue up to 5,000,000 shares of no par value preferred stock. As of March 31, 2017, no preferred shares were issued or outstanding.</div><div><br /></div><div style="background-color: #ffffff;"><div style="font-size: 10pt; font-family: 'Times New Roman'; font-style: italic; text-align: left;">Issuance of common stock and warrants</div><div><br /></div></div><div style="background-color: #ffffff;"><div style="font-size: 10pt; font-family: 'Times New Roman'; text-align: left; text-indent: 36pt;">On August 29, 2016, OncoCyte sold an aggregate of 3,246,153 immediately separable units, with each unit consisting of one share of OncoCyte common stock and one warrant to purchase one share of OncoCyte common stock (the &#8220;Offering Warrants&#8221;), at a price of $3.25 per unit (the &#8220;Offering&#8221;). The sales were made pursuant to the terms and conditions of certain Purchase Agreements between OncoCyte and the purchasers in the Offering. 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OncoCyte has agreed to use commercially reasonable efforts to maintain the effectiveness of the Resale Registration Statement under the Securities Act until the earlier of (i) the date that all shares of its common stock covered by the Resale Registration Statement have been sold or can be sold publicly without restriction or limitation under Rule 144 (including, without limitation, the requirement to be in compliance with Rule 144(c)(1)), or (ii) August 29, 2018.</div></div><div style="background-color: #ffffff;"><br /></div><div style="font-size: 10pt; font-family: 'Times New Roman'; text-align: left; background-color: #ffffff; text-indent: 36pt;">OncoCyte was in compliance with the aforementioned terms of the Purchase Agreement as of the date of this report.</div><div><br /></div><div style="font-size: 10pt; font-family: 'Times New Roman'; font-style: italic; text-align: left; background-color: #ffffff;">Offering Warrants and New Warrants</div><div style="background-color: #ffffff;"><div><br /></div><div style="font-size: 10pt; font-family: 'Times New Roman'; text-align: left; text-indent: 36pt;">The Offering Warrants have an exercise price of $3.25 per Warrant Share, and may be exercised for five years from October 17, 2016, the date the Offering Warrants became exercisable. The Warrants may be exercised on a net &#8220;cashless exercise&#8221; basis, meaning that the value of a portion of Warrant Shares may be used to pay the exercise price (rather than payment in cash), in certain circumstances, including if the Resale Registration Statement is not effective when and as required by the Purchase Agreements. 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The payment of the Black Scholes Value shall be made in cash or such other consideration as the acquirer paid to the other OncoCyte shareholders in the Fundamental Transaction.</div><div style="background-color: #ffffff;"><br /></div><div style="background-color: #ffffff;"><div style="font-size: 10pt; font-family: 'Times New Roman'; text-align: left; text-indent: 36pt;"><font style="font-size: 10pt; font-family: 'Times New Roman'; background-color: #ffffff;">OncoCyte is not required to net cash settle the Offering Warrants under any circumstance. </font>OncoCyte considered the guidance in ASC 815-40, <font style="font-size: 10pt; font-family: 'Times New Roman'; font-style: italic;">Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company&#8217;s Own Stock</font>, 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. 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