of December 31, 2017, OncoCyte has net operating loss carryforwards of approximately $47.8
million for U.S. federal income tax purposes and $15.6 million for state income
tax purposes. Federal net operating loss carryforwards expire in varying amounts from 2030 and 2037, and state carryforwards expire
from 2029 and 2037. In addition, as of December 31, 2017, OncoCyte has research and development credit carryforwards for federal
and state purposes of $1.0 million and $1.1 million, respectively. The federal credits will expire between 2030 and 2037, while
the state credits have no expiration.
2017, OncoCyte sold 266,442 BioTime common shares, in at-the-market transactions which resulted in a taxable loss of approximately
$301,000. No BioTime common shares were sold in 2016. During 2015, OncoCyte sold 259,712 BioTime common shares in at-the-market
transactions which resulted in a taxable loss of approximately $397,000.
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. The change in the valuation allowance was $1.1 million
and $5.1 million for the years ended December 31, 2017 and 2016, respectively.
Income Tax Matters
Revenue Code Section 382 places a limitation (“Section 382 Limitation”) on the amount of taxable income that can be
offset by net operating loss (“NOL”) carryforwards after a change in control (generally greater than 50% change in
ownership within a three-year period) of a loss corporation. California has similar rules. Generally, after a control change,
a loss corporation cannot deduct NOL carryforwards in excess of the Section 382 Limitation. Due to these “change in ownership”
provisions, utilization of the NOL and tax credit carryforwards may be subject to an annual limitation regarding their utilization
against taxable income in future periods.
may be subject to potential income tax examination by U.S. federal or states authorities. These potential examinations may include
inquiries regarding the timing and amount of deductions, and compliance with U.S. federal and state tax laws. In general, OncoCyte
is no longer subject to tax examination by major taxing authorities for years before 2013. Although the statute is closed for
purposes of assessing additional income and tax in those years, the taxing authorities may still make adjustments to the net operating
loss and credit carryforwards used in open years. Any potential examinations may include inquiries regarding the timing and amount
of deductions, and compliance with U.S. federal and state tax laws.
Commitments and Contingencies
has certain commitments other than those under the Shared Facilities and Services Agreement described in Note 4.
Lease Line Agreement
April 7, 2016, OncoCyte entered into a Master Lease Line Agreement (“Lease Agreement”) with an unrelated financing
company for the purchase and financing of certain equipment. OncoCyte may use up to $881,000, as amended, for purchases of equipment
financed under the Lease Agreement through April 2017. Each lease schedule OncoCyte enters into under 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 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.
April 7, 2016, OncoCyte entered into a lease schedule under the Lease Agreement (“Lease Schedule No. 1”) 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 another lease schedule (“Lease Schedule No. 2”) for certain equipment costing
approximately $161,000, requiring payments of $5,342 per month over 36 months. In April 2017, OncoCyte entered into a third and
final lease schedule (“Lease Schedule No. 3”) for certain equipment costing approximately $285,000, requiring payments
of $9,462 per month over 36 months. After this last tranche, the Lease Agreement was closed and has no remaining financing available.
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. 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.
May 11, 2017, OncoCyte entered into another Master Lease Line Agreement (“Lease Agreement No. 2”) with the same finance
company above and similar terms. OncoCyte may use up to $900,000 for purchases of equipment financed under Lease Agreement No.
2 through October 28, 2018. As of December 31, 2017, $820,000 under Lease Agreement No. 2 was available to OncoCyte.