Stock-Based Compensation

9 Months Ended

Sep. 30, 2023

Share-Based Payment Arrangement [Abstract]

Stock-Based Compensation

9. Stock-Based Compensation

Equity Incentive Plans

Oncocyte had a 2010 Stock Option Plan (the “2010 Plan”) under which 260,000 shares of common stock were authorized for the grant of stock options or the sale of restricted stock. On August 27, 2018, Oncocyte shareholders approved a new Equity Incentive Plan (the “2018 Incentive Plan”) to replace the 2010 Plan. In adopting the 2018 Incentive Plan, Oncocyte terminated the 2010 Plan and will not grant any additional stock options or sell any stock under restricted stock purchase agreements under the 2010 Plan; however, stock options issued under the 2010 Plan will continue in effect in accordance with their terms and the terms of the 2010 Plan until the exercise or expiration of the individual options.

As of September 30, 2023, 1,050,000 shares of common stock were reserved under the 2018 Incentive Plan for the grant of stock options or the sale of restricted stock or for the settlement of RSUs. Oncocyte may also grant stock appreciation rights under the 2018 Incentive Plan. As of September 30, 2023, 387,000 shares are available for grant under the 2018 Incentive Plan.

2022 Equity Awards

During the year ended December 31, 2022, the Company awarded executive share-based payment awards under the 2018 Plan to certain executive officers and employees with time-based, market-based and performance-based vesting conditions (“2022 equity awards”).

The fair value of the RSU 2022 equity awards with performance-based vesting condition was estimated using the Black-Scholes option-pricing model assuming that performance goals will be achieved. If such performance conditions are not met, no compensation cost is recognized and any recognized compensation cost is reversed. The probability of 2022 equity awards performance-based vesting conditions will be evaluated each reporting period and the Company will true-up the amount of cumulative cost recognized for the 2022 performance-based awards at each reporting period based on the most up-to-date probability estimates. The Company will recognize the compensation expense for 2022 performance-based awards expected to vest on a straight-line basis over the respective service period for each separately vesting tranche.

The fair value of the RSU 2022 equity awards with market-based and time-based vesting conditions were estimated using the Monte Carlo simulation model. Assumptions and estimates utilized in the model include the risk-free interest rate, dividend yield, expected stock volatility and the estimated period to achievement of the performance and market conditions, which are subject to the achievement of the market-based goals established by the Company and the continued employment of the participant. These awards vest only to the extent that the market-based conditions are satisfied as specified in the vesting conditions. Unlike the performance-based awards, the grant date fair value and associated compensation cost of the market-based awards reflect the probability of the market condition being achieved, and the Company will recognize this compensation cost regardless of the actual achievement of the market condition. Assumptions utilized in connection with the Monte Carlo valuation technique included: estimated risk-free interest rate of 2.0 percent; term of 2.8 years; expected volatility of 100 percent; and expected dividend yield of 0 percent. The risk-free interest rate was determined based on the yields available on U.S. Treasury zero-coupon issues. The expected stock price volatility was determined using historical volatility. The expected dividend yield was based on expectations regarding dividend payments. The total grant date fair value of the market-based awards was $117,625.

2022 Modifications

In May 2022, the Company approved amendments to vesting conditions of 61,875 performance-based and 12,500 market-based awards of certain executive officers and employees. The performance-based awards were modified such that the stock awards will be eligible to vest as follows: (i) 50% will vest on December 31, 2023 if the Company achieves LCD reimbursement for VitaGraft (formerly TheraSure Transplant Monitor) for one organ no later than December 31, 2022 and (ii) 50% will vest on December 31, 2023 if DetermaIO or DetermaCNI (formerly TheraSure - CNI Monitor) submission for LCD is completed no later than December 31, 2022. Additional performance-based RSU awards were modified to be eligible to vest upon the achievement by the Company of average market capitalization minimum, target, and maximum goals of (i) $300 million; (ii) $400 million; and (iii) $500 million, respectively, during the period beginning on January 1, 2022 and ending on December 31, 2024. The market-based RSU awards were modified such that the awards will be eligible to vest upon the achievement of product commercial launch minimum, target, and maximum goals as follows: (i) one laboratory test product in the US; (ii) two laboratory test products in US, and (iii) three laboratory test products in the US, respectively.

In accordance with ASC 718, the Company calculated the fair value of the market-based awards on the date of modification, noting an increase in the fair value of approximately $58,500, with the incremental increase in fair value representing additional stock-based compensation expense. The following assumptions were used in calculating the fair value of the market-based options on the date of modification: estimated risk-free interest rate of 2.72 percent, term of 2.6 years, expected volatility of 95.0 percent and expected dividend yield of 0 percent.

In July 2022, the Company approved amendments to vesting conditions of 23,750 performance-based awards of certain executive officers and employees. Certain performance-based awards were modified such that the stock awards will be eligible to vest as follows: (i) fifty percent (50%) of the options will vest on December 31, 2023 (the “Vesting Date”), subject to Continuous Service through the Vesting Date, if local coverage determination is issued and priced for VitaGraft (Transplant) with respect to one organ no later than December 31, 2022; and (ii) fifty percent (50%) of the options will vest on the Vesting Date, subject to Continuous Service through the Vesting Date, if the Company submits a local coverage determination request for DetermaIO or DetermaCNI no later than December 31, 2022. Additional performance-based stock awards were modified to be eligible to vest upon the achievement of performance minimum, target, and maximum goals of (i) 90% of revenue goal; (ii) 100% of revenue goal; and (iii) exceed revenue goal by up to 150%, respectively, during fiscal year 2022. These same awards contained budget performance goals which were modified to be eligible to vest upon the achievement of performance minimum, target, and maximum goals of (i) complete fiscal year 2022 with sufficient cash to continue operations for 12 months; (ii) complete fiscal year 2022 with sufficient cash to continue operations for 15 months; and (iii) complete fiscal year 2022 with sufficient cash to continue operations for 16 months, respectively.

As of December 31, 2022, 50% of the performance-based were forfeited since the Company did not achieve LCD reimbursement for VitaGraft. The remaining 50% is eligible to vest on December 31, 2023, since the Company completed the LCD submission for DetermaCNI on December 16, 2022.

During the year ended December 31, 2022, the Company accelerated the vesting of certain equity awards in accordance with the 2018 Incentive Plan after the departure of officers of the Company and the adoption of the workforce reduction plan. Due to the acceleration of such awards all associated unrecognized compensation was accelerated and recognized in full.

2010 Plan Activity

A summary of Oncocyte’s 2010 Plan activity and related information follows:

	Shares		Number			Weighted
	Available		of Options			Average
Options	for Grant		Outstanding			Exercise Price
	(In thousands, except weighted average exercise price)
Balance at December 31, 2022		-		30		$	80.78
Exercised		-		-		$	-
Cancelled		-		(20	)	$	-
Balance at September 30, 2023		-		10		$	73.22
Exercisable at September 30, 2023				10		$	73.22

2018 Plan Activity

A summary of Oncocyte’s 2018 Incentive Plan activity and related information follows:

	Shares Available for Grant			Number of Options Outstanding			Number of RSUs Outstanding			Weighted Average Exercise Price
	(In thousands, except weighted average exercise price)
Balance at December 31, 2022		442			428			22		$	59.23
RSUs vested		-			-			(14	)	$	-
RSUs granted		(9	)		-			5		$	-
Options granted		(298	)		298			-		$	5.96
Options forfeited/expired		235			(235	)		-		$	-
RSUs forfeited/expired		2			-			(1	)	$	-
Performance RSUs forfeited/expired		15			-			(7	)	$	-
Balance at September 30, 2023		387			491			5		$	27.31
Options exercisable at September 30, 2023					140					$	98.80

During the nine months ended September 30, 2023, the Company granted 178,000 employee and non-employee stock option awards. The assumptions used to calculate the Black-Scholes grant date fair value of such awards were as follows:

	Nine Months Ended
	September 30,
	2023			2022
Expected life (in years)		6.25			5.98
Risk-free interest rates		3.76	%		2.29	%
Volatility		105.99	%		106.85	%
Dividend yield		0	%		0	%

In August 2023, the Company awarded 120,000 stock option grants with market-based and time-based vesting conditions to certain executives. The fair value of such awards was estimated using the Monte Carlo simulation model. Assumptions and estimates utilized in the model include the risk-free interest rate, dividend yield, expected stock volatility and the estimated period to achievement of the performance and market conditions, which are subject to the achievement of the market-based goals established by the Company and the continued employment of the executives through December 31, 2025. These awards vest only to the extent that the market-based conditions are satisfied as specified in the vesting conditions. The grant date fair value and associated compensation cost of the market-based awards reflect the probability of the market condition being achieved, and the Company will recognize this compensation cost regardless of the actual achievement of the market condition. Assumptions utilized in connection with the Monte Carlo valuation technique included: estimated risk-free interest rate of 4.81 percent; term of 6.19 years; expected volatility of 91.0 percent; and expected dividend yield of 0 percent. The risk-free interest rate was determined based on the yields available on U.S. Treasury zero-coupon issues. The expected stock price volatility was determined using historical volatility. The expected dividend yield was based on expectations regarding dividend payments. Based on the market-based conditions, the grant date fair values of these awards ranged from $1.09 to $1.74, amounting to a total fair value of approximately $156,000.

Oncocyte recorded stock-based compensation expense in the following categories on the accompanying consolidated statements of operations:

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2023			2022		2023		2022
	(In thousands)
Cost of revenues	$	(2	)	$	94	$	10	$	239
Research and development		294			521		931		1,416
Sales and marketing		64			942		216		1,681
General and administrative		252			1,624		1,119		4,087
Total	$	608		$	3,181	$	2,276	$	7,423

In August 2023, the Company issued 9,091 restricted stock awards in connection with a consulting service arrangement for a total fair value of $36,000.

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 and nine months ended September 30, 2023, and 2022 may have been significantly different. Refer to Note 2 for additional information.

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.