UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark
One)
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☒
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
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For the fiscal year ended December 31, 2019
or
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☐
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
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For the transition period from _______________________ to
___________________
Commission
File Number: 001-38207
Celcuity Inc.
(Exact
name of registrant as specified in its charter)
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Delaware
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82-2863566
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(State
or Other Jurisdiction of
Incorporation
or Organization)
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(I.R.S.
Employer
Identification
No.)
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16305 36
th
Avenue North, Suite 100
Minneapolis, MN
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55446
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(Address
of principal executive offices)
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(Zip
Code)
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Registrant’s
telephone number, including area code: (763)
392-0767
_________________________________________
Securities registered pursuant to Section 12(b) of the
Act:
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Title of each class
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Trading Symbol(s)
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Name of each exchange on which registered
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Common Stock, $0.001 par value per share
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CELC
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The Nasdaq Stock Market LLC
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Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act.
☐ Yes ☒ No
Indicate
by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act.
☐ Yes ☒ No
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
every Interactive Data File required to be submitted 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 such files). ☒
Yes ☐ No
Indicate
by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, a smaller reporting
company, or an emerging growth company. See the definitions of
“large accelerated filer,” “accelerated
filer,” “smaller reporting company,” and
“emerging growth company” in Rule 12b-2 of the Exchange
Act.:
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Large
accelerated filer ☐
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Accelerated
filer ☒
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Non-accelerated
filer ☐
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Smaller
reporting company ☒
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Emerging
growth company ☒
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If an
emerging growth company, indicate by check mark if the registrant
has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided
pursuant to Section 13(a) of the Exchange
Act ☒
Indicate
by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Act). ☐
Yes ☒ No
The
aggregate market value of the voting and non-voting common equity
held by non-affiliates of the registrant, based on $25.00, the
closing price of the shares of common stock on June 28, 2019 (the
last business day of the registrant’s most recently completed
second fiscal quarter) as reported by The Nasdaq Capital Market on
such date, was approximately $146,077,850.
As of
March 5, 2020, there were 10,253,988 shares of the
registrant’s common stock outstanding.
DOCUMENTS INCORPORATED IN PART BY REFERENCE
Portions
of the registrant’s definitive proxy statement relating to
its 2020 Annual Meeting of Stockholders are incorporated by
reference into Part III of this Annual Report on Form
10-K.
Table of Contents
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Page
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Business
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4
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Risk
Factors
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20
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Unresolved
Staff Comments
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32
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Properties
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32
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Legal
Proceedings
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32
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Mine
Safety Disclosures
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32
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Market
for Registrant’s Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
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33
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Selected
Financial Data
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34
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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35
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Quantitative
and Qualitative Disclosures About Market Risk
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40
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Financial
Statements and Supplementary Data
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41
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Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosures
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56
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Controls
and Procedures
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56
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Other
Information
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56
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56
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Directors,
Executive Officers and Corporate Governance
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57
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Executive
Compensation
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58
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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58
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Certain
Relationships and Related Transactions, and Director
Independence
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58
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Principal
Accounting Fees and Services
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58
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58
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Exhibits,
Financial Statement Schedules
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59
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Form
10-K Summary
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59
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Signatures
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60
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Special Note Regarding Forward-Looking Statements
This
Annual Report on Form 10-K (this “Annual Report”)
contains forward-looking statements regarding us, our business
prospects and our results of operations that are subject to certain
risks and uncertainties posed by many factors and events that could
cause our actual business, prospects and results of operations to
differ materially from those that may be anticipated by such
forward-looking statements. Factors that could cause or
contribute to such differences include, but are not limited to,
those described in Part I, Item 1A. “Risk Factors” and
elsewhere in this Annual Report. Readers are cautioned not to place
undue reliance on these forward-looking statements, which speak
only as of the date of this Annual Report. We expressly
disclaim any intent or obligation to update or revise any
forward-looking statements, whether as a result of new information,
future events or otherwise. Readers are urged to carefully
review and consider the various disclosures made by us in this
Annual Report and in our other reports filed with the Securities
and Exchange Commission (the “SEC”) that advise
interested parties of the risks and factors that may affect our
business.
All
statements, other than statements of historical facts, contained in
this Annual Report, including statements regarding our business,
operations and financial performance and condition, as well as our
plans, objectives and expectations for our business, operations and
financial performance and condition, are forward-looking
statements. In some cases, you can identify forward-looking
statements by the following words: "anticipate," "believe,"
"continue," "could," "estimate," "expect," "intend," "may,"
"might," "target," "ongoing," "plan," "potential," "predict,"
"project," "should," "will," "would," or the negative of these
terms or other comparable terminology, although not all
forward-looking statements contain these words. Forward-looking
statements involve known and unknown risks, uncertainties and other
factors that may cause our results, levels of activity, performance
or achievements to be materially different from the information
expressed or implied by the forward-looking statements in this
Annual Report. Forward-looking statements may include, among other
things, statements relating to:
●
our plans to develop and commercialize our
CELsignia (previously known as “CELx”) platform and
CELsignia tests for patients with cancer and our expectations
regarding the various cancer sub-types our CELsignia tests will
identify;
●
any
perceived advantage of our CELsignia platform and CELsignia tests
as compared to traditional molecular or other diagnostic tests,
including without limitation, the ability of our platform and tests
to help physicians treat their patients’ cancers or to
identify new patient populations not diagnosable with currently
available diagnostic tests;
●
our
expected first-mover advantage in providing products to culture
living tumor cells on a commercial scale, or the sustainability of
our competitive advantages;
●
the
size and growth potential of the markets for our CELsignia
platform, and our ability to serve those markets;
●
the
rate and degree of market acceptance, both in the United States and
internationally, and clinical utility of our diagnostic platform
and tests;
●
our
ability to partner with and generate revenue from pharmaceutical
partners and physicians, and the market opportunity for HER2 and
c-Met therapies and other CELsignia programs for our pharmaceutical
partners as a result of our CELsignia platform;
●
the
success of competing tests that are or may become
available;
●
expectations
with respect to our CELsignia Multi-Pathway Test, which combines
our CELsignia HER2 Signaling Function Test with additional tests to
analyze c-Met and PI3K signaling function and the expected
capabilities of such test;
●
the
ability of our CELsignia platform and tests to impact clinical
trials by our pharmaceutical partners, such as streamlining
approval from the U.S. Food and Drug Administration (the
“FDA”) of targeted therapeutics;
●
the
success, cost and timing of our CELsignia platform development
activities and planned clinical trials, as well as our reliance on
collaboration with third parties to conduct our clinical
trials;
●
expectations
with respect to clinical trials and collaborations with third
parties, including anticipated outcomes and timing of interim and
final results;
●
our
commercialization, marketing and manufacturing capabilities and
strategy;
●
expectations
regarding federal, state, and foreign regulatory requirements and
developments, such as potential FDA regulation of our CELsignia
platform and CELsignia tests, our operations, as well as our
laboratory;
●
our
plans with respect to pricing in the United States and
internationally, and our ability to obtain reimbursement for
CELsignia tests, including expectations as to our ability or the
amount of time it will take to achieve successful reimbursement
from third-party payors, such as commercial insurance companies and
health maintenance organizations, and government insurance
programs, such as Medicare and Medicaid;
●
our
ability to obtain funding for our operations, including funding
necessary to complete further development and commercialization of
our CELsignia platform and CELsignia tests;
●
our
expectations with respect to our facility needs;
●
our
estimates regarding expenses, future revenue, capital requirements
and needs for additional financing;
●
future
agreements with third parties about the commercialization of our
CELsignia diagnostic platform and tests;
●
our expectations regarding our ability to obtain
and maintain intellectual property protection for our CELsignia
platform
and
approach;
●
our
ability to attract and retain key scientific or management
personnel;
●
our
expectations regarding the period during which we qualify as an
emerging growth company defined under the Jumpstart Our Business
Startups Act of 2012 (the “JOBS Act”);
●
the
requirements of being a public company; and
●
our anticipated use of the net proceeds from our
initial public offering (“IPO”).
You
should read the matters described in Part I, Item 1A. "Risk
Factors" and the other cautionary statements made in this Annual
Report. We cannot assure you that the forward-looking statements in
this Annual Report will prove to be accurate and therefore you are
encouraged not to place undue reliance on forward-looking
statements. Actual results or events could differ materially from
the plans, intentions and expectations disclosed in the
forward-looking statements we make. You are urged to carefully
review and consider the various disclosures made by us in this
Annual Report and in other filings with the SEC that advise of the
risks and factors that may affect our business. Other than as
required by law, we undertake no obligation to update or revise
these forward-looking statements, even though our situation may
change in the future. Our forward-looking statements do not reflect
the potential impact of any future acquisitions, mergers,
dispositions, joint ventures or investments that we may
make.
P
ART I
I
TEM 1. Business
Overview
Unless otherwise provided in this
Annual Report, references to the “Company,”
“we,” “us,” and “our” and
similar references refer to Celcuity Inc., a Delaware corporation.
We own various unregistered trademarks and service marks, including
our corporate logo. Solely for convenience, the trademarks, trade
names and service marks in this Annual Report, including those
owned by third parties, may be referred to without
the ®,
TM
or
SM
symbols, but such references should
not be construed as any indicator that the owner of such
trademarks, trade names and service marks will not assert, to the
fullest extent under applicable law, their rights thereto. We do
not intend the use or display of other companies’ trademarks,
trade names and service marks to imply an endorsement or
sponsorship of us by any other companies.
We
are developing companion diagnostic tests designed to expand the
eligible patient populations for targeted therapies by discovering
new cancer sub-types molecular-based approaches cannot detect. Our
proprietary CELsignia (previously known as “CELx”)
diagnostic platform is the only commercially ready technology we
are aware of that uses a patient’s living tumor cells to
identify the specific abnormal cellular process driving a
patient’s cancer and the targeted therapy that best treats
it. We believe our CELsignia platform provides two important
improvements over traditional molecular diagnostics. First,
molecular diagnostics can only provide a snapshot of the genetic
mutations present in a patient’s tumor because they analyze
fixed (i.e., dead) cells. Using fixed cells prevents molecular
diagnostics from analyzing the dynamic cellular activities, known
as cell signaling, that regulate cell proliferation or survival.
Cancer can develop when certain cell signaling activity becomes
abnormal, or dysregulated. Since genetic mutations are often only
weakly correlated to the dysregulated cell signaling activity
driving a patient’s cancer, a molecular diagnostic is prone
to providing an incomplete diagnosis. CELsignia tests overcome this
limitation by measuring dynamic cell signaling activity in a cancer
patient’s living tumor cells. When a CELsignia test detects
abnormal signaling activity, a more accurate diagnosis of the
patient’s cancer driver is obtained. Second, molecular
diagnostics can only estimate the probability of a patient’s
potential drug response based on a statistical analysis of the
drug’s clinical trial results. Instead of this indirect
estimate of drug response, CELsignia tests confirm that a targeted
therapeutic matches the patient’s cancer driver, which
significantly increases the likelihood of a positive clinical
outcome.
Our
first analytically validated and commercially ready test using our
CELsignia platform is our CELsignia HER2 Signaling Function Test,
or CELsignia HSF Test. Our CELsignia HSF Test diagnoses two new
sub-types of HER2-negative breast cancer that traditional molecular
diagnostics cannot detect. Our internal studies show that
approximately 15%-20% of HER2-negative breast cancer patients have
abnormal HER2 signaling activity similar to levels found in HER2+
breast cancer cells. As a result, these HER2-negative patients have
undiagnosed HER2-driven breast cancer and would be likely to
respond to the same anti-HER2 targeted therapies only HER2+
patients receive today. Our CELsignia HSF Test is targeting
HER2-negative breast cancer patients receiving drug
treatment.
Our
second CELsignia test for breast cancer evaluates independent c-Met
signaling activity and its involvement with HER family signaling in
HER2-negative breast cancer tumor cells. Our internal studies have
found that approximately 20%-25% of HER2-negative breast cancer
patients have abnormal c-Met signaling activity that is
co-activated with abnormal HER family signaling. These studies
suggest that this sub-group of HER2-negative breast cancer patients
may best respond to treatment with a combination of HER family and
c-Met inhibitors.
We
completed development of our third CELsignia test for breast cancer
during the fourth quarter of 2019. This new test evaluates PI3K
signaling in HER2-negative breast cancer tumor cells. Our internal
studies demonstrate how measurement of PI3K-involved signaling may
provide a more sensitive and specific method of identifying
patients most likely to benefit from PI3K inhibitors than current
genetic tests that measure PI3K mutations.
We
intend to combine these three tests to create the CELsignia
Multi-Pathway Signaling Function Test, or CELsignia MP Test. With
this next generation CELsignia test, we plan to provide an analysis
of HER1, HER2, HER3, c-MET, and PI3K-node involved signaling
activity for each patient tumor specimen received.
In addition to the five new breast cancer
sub-types our CELsignia MP Test diagnoses, we discovered 11 new
potential cancer sub-types in breast, lung, colon, ovarian, kidney,
and bladder cancers. Approved or investigational drugs are
currently available to treat each of these new potential cancer
sub-types. CELsignia tests for these additional cancer sub-types
are in various stages of development, and we expect them to become
commercially ready on a staggered basis over the next few years.
The development process for these additional CELsignia tests
includes completion of internal animal, verification, training set,
and validation studies. As new CELsignia tests become commercially
ready, we expect to initiate collaborations with pharmaceutical
companies to help them obtain new drug indications for the new
cancer sub-types our tests identify. In
addition, we will continue our research to
identify additional new cancer sub-types and to develop the
corresponding CELsignia tests to diagnose them.
4
Our
overall commercialization strategy is to develop companion
diagnostics that identify new cancer sub-types and to seek
collaborations with pharmaceutical companies, which can vary in
scope. We have two collaborations underway that rely on the
CELsignia HSF Test to select breast cancer patients for treatment
with HER2 targeted therapies. For the first one of these
collaborations, we are fielding a prospective clinical trial with
Genentech, Inc. (“Genentech”) and NSABP Foundation,
Inc. (“NSABP”) to evaluate the efficacy of
Genentech’s HER2 targeted therapies in patients with these
newly identified cancer sub-types. We expect interim results from
this trial in early-to-mid-2021 and final results approximately
nine months later. For the second of these collaborations, we are
fielding a prospective clinical trial with Puma Biotechnology, Inc.
(“Puma”) and West Cancer Center to evaluate the
efficacy and safety of Puma’s drug, Nerlynx, and chemotherapy
in breast cancer patients selected with our CELsignia HSF Test. We
expect to obtain interim results in mid-2021and final results
approximately 9-12 months later.
For
a third collaboration, we were selected by NSABP and Puma to
evaluate tissue samples from a Phase II study evaluating
Puma’s pan-HER inhibitor, Nerlynx, Genentech’s HER2
antibody, Herceptin, and Bristol-Myers Squibb’s EGFR
inhibitor, Erbitux, in metastatic colorectal cancer patients. This
35-patient study is expected to be completed in late 2021. Unlike
the trial with NSABP and Genentech, our CELsignia test will be used
solely to evaluate tissue samples after they have been enrolled in
this trial. We will not receive payment for the testing we perform.
We expect our CELsignia test will provide critical insight after
the trial is completed about the patient characteristics most
correlative to drug response.
In
conjunction with the development of the CELsignia MP Test, we will
seek collaborations with pharmaceutical companies to field clinical
trials that evaluate the efficacy of combining HER family
inhibitors and c-Met inhibitors in breast cancer patients who have
abnormal c-Met and abnormal HER-family pathway activity. The FDA
has approved two c-Met inhibitors and six HER-family inhibitors for
cancer treatment. Additional c-Met and HER-family inhibitors are
being evaluated in on-going clinical trials. Several pharmaceutical
companies possess both a c-Met and a HER family inhibitor. We will
also seek collaborations with pharmaceutical companies to field
clinical trials that evaluate the efficacy of PI3K inhibitors in
breast cancer patients who have abnormal PI3K-node involved
signaling activity. The FDA has approved several PI3K inhibitors
for cancer treatment and additional PI3K inhibitors are being
evaluated in on-going clinical trials.
While
molecular tests identify increasing numbers of genetic variants in
tumor tissue, determining the dysfunction driving most
patient’s cancer using molecular tests remains elusive. Less
than 20% of Americans who died of cancer in 2018 were eligible for
a molecular targeted therapy because they lacked what are currently
considered actionable genetic or proteomic mutations. This reflects
the limitations of using static measurements of proteins or genetic
mutations in fixed cells to characterize the dynamic and complex
cell signaling activity that may be driving a patient’s
cancer.
Directly
measuring dynamic cell signaling activity is an alternative
diagnostic approach to identify the cancer driver in patient tumors
lacking actionable genomic or proteomic mutations. This approach
requires the use of living patient tumor cells as well as
technology to quantify signaling activity levels. Efforts to obtain
patient tumor cells have previously been limited by the lack of
reliable methods to extract and culture cancer cells from patient
tumors. Lack of access to living patient tumor cells, in turn,
hampered development of technology to analyze dynamic signaling
activity.
Our
CELsignia platform addresses the need for better cancer diagnostic
tests using two complementary technologies that represent a
significant departure from molecular-based analyses. Unlike
molecular tests that use fixed or lysed (i.e., dead) cells and can
only measure the static composition of a cell, our CELsignia
platform measures real-time signaling activity in a patient’s
live tumor cells. This enables us to (1) identify the cellular
signaling dysfunction driving a patient’s cancer; and (2)
identify the targeted therapy that matches the dysfunction in the
patient’s cells. Our CELsignia tests are performed in our
laboratory in Minneapolis, Minnesota that is certified under the
Clinical Laboratory Improvement Amendments of 1988, or CLIA, and
accredited by the College of American Pathologies, or
CAP.
Our
platform, comprised of our internally developed cell
microenvironment and cell signaling quantification technologies,
allows for more accurate diagnoses and the discovery of new cancer
sub-types. We believe our CELsignia platform will fundamentally
change the standard-of-care many cancer patients receive. Patients
with the newly identified cancer sub-types we have discovered have
oncogenic pathways that are signaling abnormally, and, we believe,
may respond positively to a matching targeted therapy. By
identifying patients with a new cancer sub-type, each CELsignia
test will create, in effect, a proprietary patient population that
molecular diagnostics cannot identify.
Our initial commercial strategy is to partner with
pharmaceutical companies to provide companion diagnostics for the
pharmaceutical partners’ existing or investigational targeted
therapies. We expect such partnerships to involve collaboration on
clinical trials, regulatory submissions, and commercialization
activities. We will initiate activities to pursue partnerships as
our CELsignia tests become commercially ready and can be matched
with a potential partner’s targeted therapies. Our
commercial-related efforts to date have focused on seeking
partnerships for our CELsignia HSF and CELsignia MP tests, which
became commercially ready as a laboratory developed test
(“LDT”) in 2016 and 2018, respectively. We expect to
seek pharmaceutical partnerships for a variety of different
targeted therapies in other solid tumor types as we are conducting
our initial clinical trials
with Genentech’s and Puma’s targeted
therapies.
We
believe our CELsignia tests will expand the matching drug’s
market size because they can facilitate approval of new drug
indications that a pharmaceutical company would not otherwise be
able to obtain. We expect that successful pharmaceutical company
partnerships will generate significant revenue from the sale of
tests to identify patients eligible for clinical trials, from
milestone payments, and, potentially, from royalties on the
incremental drug revenues our tests enable. A key requirement for
success of these partnerships will be clinical trial results that
demonstrate the advantages of using a CELsignia test as a companion
diagnostic. Once a new drug indication is received that requires
use of the CELsignia test to identify eligible patients, we will
offer our tests directly to treating physicians and coordinate
go-to-market strategies with our partner. This coordination of
commercialization strategies will allow us to significantly
leverage the sales, marketing and reimbursement resources of our
pharmaceutical partner, unlike traditional molecular diagnostic
companies.
5
Our Value Proposition
We
believe we offer a clear and compelling value proposition to the
key healthcare stakeholders:
●
Patients &
Providers—Improved patient outcomes.
Our CELsignia tests provide a more accurate
diagnosis of a patient’s cancer driver. This will enable
physicians to match more precisely the targeted therapy they use to
treat their patients. We believe this will increase the percentage
of patients responding to the drug, improving overall patient
outcomes significantly.
●
Pharma—Increased revenue
& optimized clinical trials.
CELsignia tests can significantly increase
the revenue potential for many existing targeted therapies by
identifying entirely new pools of patients potentially responsive
to their therapy. For some targeted therapies, we estimate a
CELsignia test could double the number of patients approved to
receive treatment, thus driving billions of dollars in incremental
sales. Also, by providing more precise selection of patients, our
CELsignia tests can increase the odds a clinical trial meets its
trial endpoint, greatly enhancing the likelihood the drug will
obtain FDA approval for a new indication. In addition, according to
an ARK Invest publication dated August 2016, companion diagnostics
that increase the response rates of a drug can reduce Phase 3
clinical trial size as much as ten-fold and costs as much as
60%.
●
Payors—Lower costs per
responsive patient.
By
providing more precise cancer diagnoses and driving higher drug
response rates, we will significantly reduce the money spent on
drugs that do not benefit patients. Many targeted therapies cost
more than $50,000 per treatment and only benefit a small fraction
of patients receiving them. Calculating drug costs on a
cost-per-responsive patient, and not just cost-per-treated patient,
highlights the true cost of targeted therapies and the expense
associated with low drug response rates. For instance, a $50,000
targeted therapy with a 30% response rate costs $167,000 per
responsive patient; however, that same drug would only cost $83,000
per responsive patient if the response rate was
60%.
Our Competitive Strengths
We
have a number of key strengths that enhance our ability to achieve
our mission and build a successful company:
●
First mover.
We are the first company that we are aware
of to launch diagnostic tests that measure the signaling pathway
activity in a patient’s live tumor cells, which we believe
gives us a significant first mover advantage.
●
High barriers to
entry.
Our issued and
pending patents, as well as our proprietary information and trade
secrets, give us a strong intellectual property position that we
believe creates a significant barrier to entry for potential
competitors.
●
Broad range of applications for
our platform.
We can
develop tests for a wide range of signaling pathways and a wide
range of cancer types. This allows us to build a deep new product
pipeline that creates multiple paths to build a large and
profitable business.
●
Diverse revenue streams
including pharma partnerships.
We anticipate generating significant revenue
from companion diagnostic pharmaceutical partners, including
revenue from the sale of tests to identify patients eligible for
clinical trials, milestone payments, and potentially, from
royalties on the incremental drug revenues our tests enable. Our
most significant revenue opportunity comes from ongoing sales of
CELsignia tests to physicians during the commercialization stage of
the companion diagnostic.
●
Strong senior leadership
team.
Our founders and
senior leaders have a proven track record of success building,
operating and selling several successful companies. We have deep
and highly relevant and complementary diagnostic, scientific,
product development, and commercialization experience that has
enabled us to establish market leadership positions for the
companies we previously led.
6
Our Platform Advantages
Our unique and proprietary CELsignia functional
cellular analysis technology represents a major shift from the
diagnostic
industry’s
reliance on molecular profiling to characterize a patient’s
cancer sub-type. Our goal is to leverage our technology to build a
durable competitive advantage that enables us to improve outcomes
for a significant percentage of cancer
patients.
Our
CELsignia platform advantages include:
●
Powerful cancer sub-type
discovery tool.
We have
already discovered 16 new potential cancer sub-types that are not
currently diagnosed and treated with a matching targeted therapy.
These sub-types are characterized by the dysregulated signaling
pathway activity our CELsignia tests identify. By identifying new
cancer sub-types, we are creating new patient populations to which
pharmaceutical companies can offer new and existing drug
therapies.
●
Direct patient-specific
assessment of disease status.
Even though the response rates for many
targeted therapeutics are low, for those patients who do respond,
their outcomes can be improved significantly. The problem is
matching the patient to the right drug. Our platform overcomes this
problem by directly identifying whether an oncogenic signaling
pathway is abnormally active in a patient’s cells. This
provides the most complete assessment available today of the
intracellular activity driving a patient’s cancer. Existing
genomic tests typically can only provide a determination whether
cancer is present and an assessment of molecular mutations that may
or may not be associated with the patient’s cancer
driver.
●
Direct measurement of matching
drug effectiveness.
An
important advantage of the CELsignia platform is its ability to
quantify the amount of signaling dysfunction that a matching
targeted therapy can inhibit in an individual patient’s
cancer cells. This allows us to evaluate whether there are inherent
drug resistance mechanisms that would prevent the therapy from
functioning in the patient’s tumor cells. Molecular tests
cannot provide this evaluation.
●
Improved response
rates.
We believe a
patient population will have a higher response rate to a matching
targeted therapy when it is diagnosed with a CELsignia test than
with a molecular biomarker. By first identifying whether
dysregulated signaling is present and then confirming that a
matching targeted therapy can inhibit the dysfunction, a CELsignia
test eliminates the two primary variables that confound patient
response to targeted therapy signaling: the presence or absence of
the disease and the drug not functioning as intended. A molecular
test provides insight on neither of these variables in most
cases.
●
Identified drug responsive
proprietary patient cohorts.
Approximately 80% of cancer patients lack a
genetic biomarker to guide treatment. For these patients, the
cellular dysfunction driving the cancer goes undiagnosed, thus
excluding such patients from receiving a potentially beneficial
targeted therapy. We believe our CELsignia tests will enable us to
identify new proprietary patient populations not currently
diagnosable with molecular tests and increase the number of
patients likely to respond to a matching targeted therapy.
Moreover, we will be the only partner a pharmaceutical company can
work with to develop a companion diagnostic for a new indication of
a targeted therapy addressing these new patient populations. By
contrast, most molecular diagnostic tests are undifferentiated and
have little proprietary value, which gives pharmaceutical companies
a wide range of companies to select from when choosing a
molecular-based companion diagnostic partner.
●
Streamlined FDA approval of
targeted therapeutics.
CELsignia tests will enable our
pharmaceutical partners to enroll patients in their clinical trial
with the same cellular dysfunction their targeted therapy is
designed to inhibit. We believe this will improve patient response
rates, increasing the likelihood the trial meets its endpoint
target and thus the likelihood the drug receives FDA approval.
Improved patient response rates would also help reduce the size,
cost, and length of our partner’s clinical
trials.
Our Industry
According
to the Centers for Disease Control and Prevention, cancer was the
second-leading cause of death in the United States in 2018,
responsible for nearly one of every four deaths. There are many
types of cancer treatment options, including surgery, radiation
therapy, chemotherapy, immunotherapy, hormone therapy, stem cell
transplant, and targeted therapy. Targeted therapies are drugs or
other substances that block the growth and spread of cancer by
interfering with specific molecular targets involved in the
progression of cancer. Targeted therapies differ from standard
chemotherapy drugs in that they are often cytostatic (block tumor
cell proliferation) rather than cytotoxic (kill tumor cells).
According to the National Cancer Institute, there are currently
more than 90 approved targeted oncology therapies, some of which
cost more than $100,000 per treatment course.
Diagnostic
tests to detect single biomarkers are now widely used by
pathologists to determine the molecular sub-type of a cancer. When
a molecular biomarker test is used to support the choice of therapy
to prescribe, it is often referred to as a “companion
diagnostic.” Increasing numbers of targeted therapeutics are
prescribed based on the results from a companion diagnostic test to
detect the presence of a molecular biomarker. Only patients testing
positive for the biomarker are eligible to receive the associated
therapy.
Companion diagnostics are becoming increasingly
important to the pharmaceutical industry. The use of companion
diagnostics to better match patients to effective treatments
positively impacts clinical outcomes and lowers expenditures on
drugs that do not benefit patients. Stratifying the eligible
patient population to include only likely responders is
particularly
important when the
percentage of likely responders is only a fraction of the total
cancer population. In these circumstances, narrowing the eligible
patient population is often necessary to meet the clinical endpoint
targets required to receive FDA drug approval.
7
Our Market Opportunities
Companion Diagnostic Development Opportunities
We
believe there at least 50 different potential opportunities for our
company to collaborate on companion diagnostic programs with
pharmaceutical companies. Our ability to develop partnering
relationships with these pharmaceutical companies will be
predicated on a number of factors, including the size of the
patient population our CELsignia test identifies, the remaining
patent life of the matching targeted therapy, as well as the
success or failure of clinical trials we have conducted with other
pharmaceutical companies. Completing clinical trials requires,
among other things, successful enrollment of patients, meeting
trial endpoint goals, and completing the trial in a timely manner.
The time to complete a clinical trial can vary widely depending on
a number of factors, many of which will be specific to any
particular clinical trial.
We
believe the revenue opportunity per companion diagnostic program
will be consistent with other development programs pharmaceutical
companies support. In addition, the revenue for an individual
companion diagnostic program would represent only a small fraction
of the potential value the new drug indication our companion
diagnostic could create for our pharmaceutical company partner. For
some drugs, our tests could double the number of patients eligible
for a targeted therapy.
CELsignia Testing Opportunities
We
expect to generate recurring companion diagnostic testing revenues
once a CELsignia companion diagnostic-linked drug therapy is
approved for patient use. On average, we believe that the lifetime
value of providing the companion diagnostic test will significantly
exceed the revenue generated from the companion diagnostic
development program. We expect to offer each CELsignia test to
patients at prices ranging from $4,000–$7,000, depending on
the number of pathways evaluated. No tests directly comparable to
the CELsignia tests are available today to offer reference points
for pricing purposes. Pricing for several proprietary complex
genomic tests, however, fall within this range and we believe this
provides guidance on the amount insurance companies are willing to
pay for highly informative tests that guide patient
care.
CELsignia Technology Background
The Role of Cellular Signaling Pathways in Cancer
Cancer
is a class of exceedingly complex and diverse diseases
characterized by the development of abnormal cells that divide
uncontrollably and can infiltrate and destroy normal body tissue
and disrupt normal organ function. In normal cells, a series of
biochemical activities, known as signal transduction, transmit
biochemical signals through an interconnected network of signaling
pathways to control cell proliferation and survival. Cancer arises
when alterations occur in one or more of these signaling pathways
and normal cell processes are disrupted, resulting in uncontrolled
cell proliferation. These alterations are driven by a variety of
cellular aberrations, including genetic mutations and dysregulated
signaling pathway mechanisms. Identifying the alteration driving an
individual’s cancer is complicated by the immense complexity
of these signal transduction processes and the practically
unquantifiable number of pathway variables.
As
recently as 20 years ago, most cancers were classified and
subsequently treated solely on the basis of the anatomical location
of the tumor in the body. Chemotherapies that kill rapidly dividing
cells were widely used, but they had only limited efficacy for many
patients and caused a wide range of dangerous side effects due to
lack of discrimination for tumor tissue. As tools to identify
molecular mutations became available, scientists began to uncover
correlations between certain molecular mutations, cancer tissue
type, and a patient’s prognosis. This fostered the
development of molecularly targeted therapeutics that were designed
to disrupt the specific cellular function of the drug target,
typically abnormal signaling pathway activity, associated with the
molecular mutation. These targeted therapies greatly improved
outcomes for some cancer patients and are a testament to the
efficacy of targeted therapies when effectively prescribed.
According to information published by the Journal of Clinical
Oncology in July 2015, targeted therapies are oftentimes 10 to 20
times more expensive than chemotherapies.
In
conjunction with the advent of targeted therapies, new molecular
diagnostics were developed to help physicians refine the
classification of a patient’s cancer into sub-types based on
the presence of specific molecular anomalies, such as genetic
mutations or over-expressed proteins. Such mutations or
over-expressed proteins are commonly referred to as
“biomarkers” when they are used to diagnose a disease
and evaluate treatment options. For instance, breast cancer
diagnostic tests are performed to determine whether two protein
biomarkers, human epidermal growth factor receptor 2 (HER2) or
estrogen receptors (ER), are overexpressed in the cancer cells. The
results of these tests are used to classify the patient’s
cancer molecular sub-type and to guide selection of a corresponding
targeted drug therapy.
The
launch and on-going development of many new targeted therapies and
the increasing use of companion molecular diagnostics to guide
selection of the most appropriate therapy for each patient ushered
in the era of so-called “precision medicine” in
oncology. Advances in genomic and proteomic techniques and drug
discovery enabled researchers to identify new drug targets, new
molecular diagnostics, and drugs that would specifically bind to
the target.
While
the increased usage of targeted therapies has improved patient
outcomes, there is increasing recognition that the promise of
molecularly guided diagnoses and targeted treatment has fallen far
short of expectations. This is generally due to the heterogeneous
nature of these diseases from patient to patient and the challenge
of identifying the specific cellular dysfunction driving a cancer
patient’s tumor growth. No matter how sophisticated or
detailed, a point-in-time molecular profile can only provide a
snapshot of a tumor. As a result, the genetic mutations many
current tests identify are often only weakly correlated to the
abnormal signaling driving a patient’s cancer. This is
because protein and gene profiling provide an incomplete assessment
of the biochemical activity promoting cancer tumor growth. In fact,
when dysregulated, the activity of signaling pathway networks are,
we believe, not possible to assess using current genetic analyses,
despite the impressive investments in mapping the human genome and
advancements in techniques to identify molecular
mutations.
8
The
combination of the heterogeneous nature of cancer and the weak
correlation of abnormal signaling to many genetic mutations helps
explain why the response rates for patients treated with many
targeted therapies are often less than 50%, and in some cases as
low as 20%. For a patient to respond to a targeted therapy designed
to disrupt disease-related signaling activity, two factors must be
present: (1) the patient’s diseased cells must have the same
signaling pathway dysfunction the drug is designed to inhibit, and
(2) the drug affects its targeted pathway as intended. Current
state-of-the-art genomic tests use fixed (i.e., dead) cells, which
limits them to evaluating the presence or concentration of a
genetic mutation or protein. These tests cannot evaluate either
dynamic signaling activity or whether a drug can affect that
activity. When a patient’s genomic biomarker status does not
represent underlying signaling pathway dysfunction, this can lead
to selection of the wrong targeted therapy to treat the patient. Of
particular interest to us are those patients with dysregulated
signaling who lack a corresponding biomarker; they are not
currently eligible to receive any targeted therapy that treats
their dysregulated signaling.
To measure dynamic cellular activity, living
patient tumor cells are required. Until our advancements, efforts
to use living patient tumor cells have been limited by the lack of
reliable methods to extract and culture cancer cells from patient
tumors. These previously limited efforts reflect the emphasis
amongst cancer researchers on creating stable cell lines for use to
model cell function or to studies screen millions of test compounds
in drug discovery programs. Pharmaceutical companies driving the
commercial development of cell technologies work primarily with
immortalized cells or cell lines genetically modified to express a
target or mutation of interest. These cell lines consist of
established cell cultures that proliferate indefinitely and very
uniformly. They are used primarily because they provide a highly
uniform response when tested with millions of small molecules in
the search for potential new drugs, and because techniques to
culture these cells are well known, their properties well
understood, and other experimental results using them are available
for comparison purposes. Conversely, live patient tumor cells are
difficult to obtain, are only available in small quantities, and
according to a 2014 article published by
Science
, the percentage of tumors that yield
proliferative cells with conventional culturing methods has until
now been well below 50%, which required months of culturing to
obtain sufficient testable quantities of cells. For these reasons,
researchers prefer paraffin-fixed tissue or cell lines over living
tumor cells when studying disease processes or screening drug
candidates. This lack of compelling rationale for pharmaceutical
companies and academic institutions to work with live tumor cells
for research purposes left the field of live tumor cell research in
a relatively immature state.
Our CELsignia Platform
We
have made significant investments in research and development to
build the first commercially-ready cancer diagnostic platform that
we are aware of that measures the signaling pathway activity in a
patient’s living tumor cells. To measure dynamic cellular
activity, we internally developed two distinct but complementary
technologies, which now comprise our CELsignia
platform:
●
our
proprietary cell microenvironment; and
●
our
method to quantify dynamic patient cell signaling
dysfunction.
●
We
utilize our CELsignia platform to create CELsignia tests that
measure specific signaling pathway activity in various tumor
types.
Cell
microenvironment.
Previous
research has shown that cancer cells extracted from a
patient’s tumor share the molecular features of the primary
cancers from which they were derived and could provide an
ex vivo
(outside the patient) model of a
patient’s tumor. The technology around tumor cell extraction
from individual patients and culturing techniques, however, has
largely remained undeveloped. For instance, we are not aware of any
competing diagnostic tests that use live patient tumor cells to
measure dynamic cell signaling activity. Studies on the topic have
historically highlighted the challenges of deriving a viable
patient tumor cell sample from an individual patient tumor
specimen.
We
have developed a cell microenvironment to extract and expand viable
tumor cells from fresh human tumor tissue, which meets the three
critical clinical parameters a patient-derived tumor cell sample
would need to satisfy in order to meet the regulatory and clinical
requirements for a diagnostic test measuring signaling
activity:
●
The patient cell sample tested
must reflect the starting tumor’s
composition.
If samples do
not reflect the original tumor’s composition, test results
derived from that sample may not be representative of the
patient’s tumor.
●
The sample must be available
for testing in less than 21 days.
Clinicians generally require test results in
cases of complex diseases such as cancer within two to three weeks
so they can begin treatment of their patient as soon as the
initial symptoms are evaluated or a
preliminary diagnosis is made.
●
At least 90% of the tumor
specimens obtained from a patient must yield testable
samples.
Clinicians will
only order tests that require a patient specimen when they are
highly likely to receive a test result.
Dynamic patient cell signaling
quantification.
The second
component of our CELsignia platform involves methods to quantify
specific dynamic signal transduction events in patient derived
tumor cells. The complexity of signal transduction processes is
immense, and the permutations of the pathway variables are
practically unquantifiable. Current analytical methods to assess
these variables use fixed or lysed (i.e., dead) cells.
Point-in-time measurements are limited to assessment of the
compositional status (e.g., mutation), concentration level (e.g.,
protein amount), or activation status (e.g., phosphorylation) of a
finite number of signaling pathway components. A key insight
underlying our technology was our observation that, no matter how
sophisticated or detailed, a point-in-time molecular profile would
only provide a snapshot. These methods could not provide a
complete, dynamic assessment of the signaling activity driving a
patient’s cancer. These point-in-time molecular analyses
would, in many cases, only provide a weak correlation to the
presence of the signaling pathway dysfunction driving a
patient’s cancer. Instead, we concluded that a complete
diagnosis of cancer and an assessment of a patient’s response
to treating their disease requires measurement of the underlying
activity of signaling pathways in live patient tumor
cells.
9
To
measure live real-time dynamic cell signaling activity, we utilize
an impedance biosensor instrument. An impedance biosensor is an
analytical platform that converts changes in cellular activity to a
measurable electrical signal. When cells are stimulated and change
their function, the accompanying changes alter the electrical
signal that is measured. The output value is quantified over time
and used to determine a Signaling Function Score. To determine the
activity of a specific signaling pathway, an activating agent
specific to a pathway receptor is used to turn on the pathway and a
corresponding inhibitory agent specific to the pathway receptor is
used to turn signaling off. When signaling pathways are stimulated
in this manner, a change in the electrical signal occurs and
Signaling Function Score recorded. By relying on the principle of
detecting signaling pathway activity, we believe we can develop
tests for a range of disease types and targeted therapies that
affect various cellular pathways.
We
believe our pioneering efforts have substantially advanced the
technology of culturing primary tumor cells and analyzing cell
signaling activity to guide therapy selection. We have two issued
U.S. patents, one issued international patent, six pending U.S.
patent applications, 27 pending non-U.S. patent applications, and
one pending international PCT patent application, as well as
significant proprietary know-how and trade secrets for the various
cell sample preparation and cellular analysis methods we have
developed.
New Product Development
We
are leveraging our CELsignia technology to discover new cancer
sub-types that a genomic test cannot detect. These new sub-types
are characterized by the hyperactive signaling pathway our test
identifies. These sub-types cannot be detected by genomic tests
because they lack a corresponding molecular biomarker to identify
it. We will translate our discoveries into companion diagnostic
tests.
We
have already discovered several new breast cancer sub-types:
HER2-negative breast cancers that are ER-positive or ER-negative
with either (i) abnormal HER2 signaling, (ii) abnormal HER-family
signaling coincident with abnormal c-Met signaling, and (iii)
abnormal PI3K signaling.
We
are currently conducting research to identify additional cancer
sub-types in five solid tumor types. Our research studies to date
have identified 11 potentially new breast, lung, ovarian, kidney,
and bladder cancer sub-types that involve dysregulated oncogenic
signaling pathways. Multiple dysregulated pathways were active in
each of these tumor types. These studies confirm that the CELsignia
platform can be a cancer sub-type discovery engine and that we can
create a multi-pathway test to identify the specific driver in a
patient’s tumor. We expect to eventually expand the tumor
types we evaluate to include colon, head and neck, leukemia,
esophageal, and gastric cancers.
We
will seek to identify individual signaling pathways that may be
driving at least 5% to 10% of the total cancers in each tissue
area. Once we have characterized the prevalence of the different
sub-types of signaling dysfunction in each tumor type and validated
the tests for the different pathways, our plan will be to launch a
corresponding CELsignia test. Eventually, each CELsignia test will
analyze multiple pathways in a patient’s tumor to identify
the specific pathway dysfunction driving a patient’s cancer.
Testing multiple pathways will thus provide a system view of the
patient’s cancer using dynamic functional analysis. We
believe this will result in more accurate diagnosis of a patient
compared to molecular diagnostics that are using next generation
sequencing to assess the status of multiple static
biomarkers.
Clinical Trial Approach
A major component of our development and
commercial activities is providing clinical data from
interventional clinical trials using our CELsignia tests. Our
clinical trial strategy is predicated on proving the correlation
between our CELsignia Signaling Function Score and a
patient’s clinical results. Once our first trial demonstrates
that our CELsignia test identifies patients responsive to targeted
therapies, we expect pharmaceutical companies to partner with us to
fund trials to evaluate new potential indications for their drugs
with patients identified by one of our CELsignia tests. The trials
will be designed to confirm that patients with abnormal pathway
signaling obtain a superior clinical response to a therapy
targeting that pathway
than to
the standard-of-care therapy they currently
receive.
For
trials involving patients not currently eligible for a cancer drug
that targets a certain pathway, we would first obtain a tissue
specimen from each subject and perform the CELsignia test to
identify subjects who have abnormal signaling. These patients would
then be randomly assigned to either an arm that receives the
current standard-of-care therapy or one that includes the current
standard-of-care therapy plus the targeted therapy. All patients
would be monitored until their disease progresses or until the end
of the treatment regimen.
10
CELsignia Multi-Pathway Signaling Function Test
Our CELsignia MP Test is a qualitative LDT that
measures HER2, c-Met, and PI3K signaling activity in tumor cells
obtained from patients previously diagnosed with HER2-negative
breast cancer
that is either
ER-positive or ER-negative to determine whether or not the patients
have one of the following cancer sub-types:
1.
Abnormal HER2
signaling driven cancer
2.
Abnormal
c-Met and HER2 signaling driven cancer
3.
Abnormal
PI3K-involved signaling driven cancer
Abnormal HER2 Signaling Driven Cancer
Approximately
15% of breast cancer patients are diagnosed with HER2+ breast
cancer when their tumor cells are found to have overexpressed or
amplified levels of HER2. These patients are treated with anti-HER2
targeted therapies in combination with chemotherapies. Results from
a number of clinical trial results for HER2 drugs reveal that only
about 40% of HER2-positive patients respond to them. In addition,
findings from several clinical trials have shown that a sub-set of
HER2-negative patients benefit from therapies that target HER2.
These results highlight the relatively weak correlation between
HER2 receptor or gene amplification status and drug
response.
Despite
the widely recognized role that a dysregulated HER2-related
signaling network plays in promoting breast cancer, only tests
measuring a single reactant, HER2 protein, are performed in the
clinic to diagnose it; we believe no diagnostic tests are available
today that measure HER2 signaling activity within a patient’s
breast tumor epithelial cells. This focus on measuring HER2
expression-levels reflects the widely-held view that measuring a
patient’s HER2 status is sufficient to diagnose HER2-driven
breast cancers. When only HER2 expression is measured, though,
patients classified as HER2-negative but whose tumor cells have
abnormal HER2 signaling are diagnosed as not having HER2-driven
breast cancer, when, in fact, they do.
Since
current genomic methods cannot identify HER2-negative breast cancer
patients who have the HER2-driven cancer, a new method was
required. Such a method would need to analyze the HER2-signaling
pathways (MAPK and PI3K) associated with HER2 cancers in a
patient’s tumor cells. Our CELsignia MP Test identifies
patients whose HER2 status as determined by conventional techniques
does not represent the correct diagnosis of their breast cancer at
a functional level.
For
the sub-group of HER2-negative breast cancer patients diagnosed
with abnormal HER2-signaling, it would be intended that they
receive treatment with HER2 therapies.
Abnormal c-Met Signaling coincident with Abnormal HER2
signaling
Signaling
through c-Met is necessary for normal cell development. Numerous
studies have established the significant role of the c-Met pathway
in tumor growth and metastasis. Cross-talk between c-Met and HER
family receptors is also suspected of playing a role in tumor
progression and resistance to HER targeted therapies. Numerous
clinical trials have evaluated dual inhibition of c-Met and HER
pathways in a variety of tumor types, but they have produced mostly
negative results. Since subjects enrolled in these trials were
primarily ones with c-Met protein overexpression or gene
amplification, other biological factors, such as c-Met and HER
signaling activity, are likely more important to measure when
identifying patients eligible for c-Met therapies.
Our
recent studies found that a subset of HER2-negative breast cancer
patients has abnormal c-Met signaling coincident with abnormal HER2
signaling. The c-Met expression level of each patient studied was
normal. Strong evidence was found that c-Met and HER2 signaling is
co-involved and may explain why a c-Met tyrosine kinase inhibitor
is not an effective antagonistic when c-Met is hyperactive for this
patient sub-set. Additionally, evidence was found that simultaneous
inhibition of HER1, HER2, and HER3 signaling, in addition to
inhibition of c-Met signaling, was necessary to inhibit HER2 and
c-Met signaling activity most effectively.
For
the sub-group of HER2-negative breast cancer patients diagnosed
with abnormal c-Met and HER2-signaling, it would be intended that
they receive treatment with a combination of pan-HER and c-Met
inhibitors.
Abnormal PI3K Signaling Tumors
The
PI3K signaling pathway is a key regulator of normal cellular
processes involved in cell growth, proliferation, metabolism,
motility, survival, and apoptosis. Aberrant activation of the PI3K
pathway promotes the survival and proliferation of tumor cells in
many human cancers. In breast cancer, only patients with certain
PI3K mutations are eligible for treatment with a PI3K inhibitor.
However, recent clinical trial results suggest that factors other
than the mutational status of PI3K may be important to measure when
identifying patients eligible for PI3K inhibitors. Less than 20% of
PI3K mutated late stage breast cancer patients achieved an
objective response in a Phase III clinical trial with alpelisib, a
recently approved PI3K inhibitor.
Our
studies found hyperactive PI3K involved signaling in a sub-set of
HER2-negative breast cancer patients. Strong evidence was found
that pan-PI3K inhibitors, rather than inhibitors targeting PI3K-a,
may provide the most effective attenuation of dysregulated
signaling involving the PI3K-node. Our studies also found that the
signaling activity involving PI3K-a is likely more important to
measure than the mutational status of PI3K-a when selecting
patients for treatment with a PI3K-a inhibitor like
alpelisib.
11
Interventional Clinical Trials in Process using a CELsignia Test to
Select Patients for Treatment
FACT 1 Clinical Trial to Evaluate Efficacy of Genentech’s
HER2 Drugs
In July 2018, we activated a clinical trial with
NSABP to evaluate the efficacy and safety of Genentech’s
drugs, Herceptin (trastuzumab) and Perjeta (pertuzumab), and
chemotherapy, in breast cancer patients selected with our CELsignia
test. NSABP serves as the sponsor and principal investigator of the
trial and is responsible for, among other things, setting up
clinical sites, enrolling patients, and managing clinical data.
NSABP contracted separately with Genentech to provide Herceptin and
Perjeta for the study at no cost. We are performing the CELsignia
HSF Test to select patients for the trial and are providing the
funding for the trial’s patient-related costs. Completing
this trial will require, among other things, successful enrollment
of patients, meeting trial endpoint goals, and completing the trial
in a timely manner. As of February 2020, there were 27 activated
sites participating in the FACT 1 trial. The enrollment rate of
patients has fallen short of the expectations NSABP originally
provided. Based on NSABP’s updated estimates of patient
enrollment rates, we expect to obtain interim results in
early-to-mid 2021 and final results
approximately nine months
later.
NSABP
is one of the country’s premier clinical research
cooperatives. Its members include many of the country’s
leading medical centers and their investigators are amongst the
most-respected in the breast cancer field. Genentech is one of the
largest biopharmaceutical companies in the world and was the first
company to launch a HER2 targeted therapy; their anti-HER2 targeted
therapies have roughly 95% market share.
We
submitted an Investigational Device Exemption, or IDE, application
to the FDA to obtain approval to use our CELsignia HSF Test in a
clinical trial setting. The IDE submission included validation test
protocols and study reports, manufacturing process summaries, and
relevant publications. The FDA approved our IDE in early
2017.
The
goal is to demonstrate that patients who have an abnormal HER2
signaling pathway, as identified by our CELsignia test, respond to
treatment with a matching targeted therapy. A synopsis of the trial
protocol is provided below.
Clinical Trial Synopsis
|
Objective
|
To evaluate the efficacy of neoadjuvant HER2 drug
treatment in early stage HER2- breast cancer patients
with abnormal HER2
signaling
|
|
Sites/Sponsor
Subjects
Endpoint
Investigational Arm
|
Multi-center
in collaboration with NSABP and Genentech
54
HER2- early stage breast cancer (26 ER+/28ER-)
Pathological
complete response (ypT0/Tis ypN0)
AC-T
+ Trastuzumab + Pertuzumab
|
FACT 2 Clinical Trial to Evaluate Efficacy of Puma’s HER2
drug
In July 2019, we activated a clinical trial with
Puma and West Cancer Center to conduct a Phase II single-arm
interventional trial to evaluate the efficacy and safety of
Puma’s drug, Nerlynx (neratinib), and
chemotherapy, in breast cancer patients selected
with our CELsignia test. West Cancer Center serves as the sponsor
and principal investigator of the trial and is responsible for
enrolling patients and managing clinical data. Puma supplies
Nerlynx, its pan-HER inhibitor currently approved by the FDA for
extended adjuvant treatment of early-stage HER2-positive breast
cancer. We provide the CELsignia HSF Test to select triple-negative
breast cancer patients who have hyperactive HER2-driven signaling
pathways for the trial and will initially fund the patient-related
trial costs. We expect interim results from this trial in mid-2021
and final results approximately 9-12 months
later.
We
submitted an IDE application to the FDA to use our CELsignia HSF
Test for this clinical trial and received approval in
mid-2018.
The
goal of the trial is to demonstrate that triple-negative breast
cancer patients who have a hyperactive HER2 signaling tumor, as
identified by the CELsignia test, respond to treatment with
Nerlynx, a matching HER2 therapy. We believe there is significant
clinical interest in finding new diagnostic tests and targeted
therapies for triple-negative breast cancer patients because fewer
drug treatment options are available to them relative to other
breast cancer sub-types.
12
A
synopsis of the trial protocol is provided below.
Clinical Trial Synopsis
|
Objective
|
To
evaluate the efficacy of neoadjuvant HER2 drug treatment in early
stage triple-negative breast cancer patients with abnormal HER2
signaling
|
|
Sites/Sponsor
Subjects
Endpoint
Investigational
Arm
|
Multi-center
in collaboration with West Cancer Center and Puma
27
early stage triple-negative breast cancer with abnormal HER2
signaling
Pathological
complete response (ypT0/Tis ypN0)
Neratinib
then Paclitaxel + Carboplatin + Neratinib
|
Commercialization Strategy
Our
commercial activities will target three complementary groups at
various phases of the development of our CELsignia
tests.
●
Pharmaceutical
companies.
For each
CELsignia test we develop to diagnose a new cancer sub-type, we
will identify the matching targeted therapies, either currently
approved or in the investigational phase, and the manufacturer of
those therapies. We will initiate discussions and seek to reach
development agreements with each of these pharmaceutical companies
when we have verified the prevalence of the cancer sub-type and
completed successful animal studies.
●
Medical and surgical
oncologists.
We will
initially target key opinion leaders (KOLs), in each cancer type
once we have completed the analytical validation of a CELsignia
test. This will allow us to build awareness and credibility for the
CELsignia test as we are generating clinical validation data. When
a new drug indication is received that requires use of a CELsignia
companion diagnostic to identify eligible patients, we will
coordinate the pharmaceutical company’s go-to-market
activities with our own. This coordination will allow us to
significantly leverage the pharmaceutical company’s sales,
marketing, and reimbursement, unlike traditional molecular
diagnostic companies.
●
Payors.
We will initiate pilot activities with
payors for late stage patients during the clinical validation phase
of a CELsignia test’s development. We will expand our payor
efforts to include health economics analysis once we have clinical
trial data available. When a new drug indication is received that
requires use of a CELsignia companion diagnostic to identify
eligible patients, we expect to coordinate the pharmaceutical
company’s reimbursement activities with our
own.
Our
CELsignia tests are LDT’s and subject to regulation under
CLIA. We completed the analytical validation of our first CELsignia
test and received CLIA certification in 2016, at which time our
CELsignia HSF Test was ready to sell commercially on a stand-alone
basis to treating physicians. We expect to generate revenues from
CELsignia tests performed in conjunction with the clinical trials a
pharmaceutical company will field during the clinical phase of our
partners’ drug approval process. We also expect that the
agreements we enter into with the pharmaceutical companies
partnering with us on these trials will include milestone payments
at initiation and completion of trials and perhaps at various other
negotiated points during the trials. We expect to generate revenue
from the sale of CELsignia tests ordered by physicians either as
stand-alone diagnostics or, upon the approval of our pharmaceutical
company’s matching drug, as a companion diagnostic. A key
requirement for success of these partnerships will be clinical
trial results that demonstrate the advantages of using a CELsignia
test as a companion diagnostic.
We intend to position our unique and highly
differentiated tests as practice changing advancements in patient
care. To inform key stakeholders of the value of our solution in
order to drive adoption and reimbursement, we expect to employ
the
following diverse
commercialization strategies over time:
●
leverage
our pharmaceutical partnership and their go-to-market initiatives
for the drug our companion diagnostic is partnered
with;
●
collaborate
with oncology thought leaders, KOLs, and leading institutions on
clinical research, publications, and product
development;
●
build
an experienced, oncology-focused sales force in the United States
and international distribution channels that are supported by
dedicated company personnel;
●
integrate
into the everyday practice of clinicians through our medical
affairs and client services efforts;
●
publish
important medical and scientific data in peer-reviewed journals and
present at major industry conferences, conduct clinical trials;
and
●
work
with patient advocacy groups, leading cancer philanthropic
organizations, and medical societies to drive awareness of
CELsignia tests and the importance of incorporating functional
cellular analysis into cancer treatment.
13
Through
these efforts, we will seek to promote our CELsignia test’s
unique capabilities throughout the oncology community—from
patients, to the physicians treating them, to the third-party
payors for these treatments and to biopharmaceutical companies
developing new treatments—all with the goal of facilitating
better-informed treatment decisions for the greatest number of
patients.
A
CELsignia test would be launched to the broader market upon the
approval of a pharmaceutical company’s matching drug as a
companion diagnostic. We would expect physicians, typically a
medical or surgical oncologist, to order our tests in conjunction
with the roll-out of the pharmaceutical company’s matching
drug. The physician will prescribe a CELsignia test and coordinate
provision of a patient specimen from a biopsy or surgical
procedure. The fresh tissue would then be shipped overnight
directly to our laboratory where we would use our proprietary
methods to extract diseased cell samples from the patient’s
tissue and perform the CELsignia tests ordered. Test results would
typically be available in 10 to 14 days after receipt of the
patient specimen. For each patient sample analyzed, a Signaling
Function Score would be calculated quantitatively and converted
into a final qualitative result: abnormal or normal. For patients
found to have an abnormal signaling function, clinicians would use
the results of the CELsignia test as a guide to select a targeted
drug that inhibits the abnormal signaling activity
identified.
United States
For
our first tests, we will target the estimated 4,300 medical
oncologists working in hospitals and cancer centers in the United
States. We expect to hire domestic sales professionals with
typically over 10 years of experience in clinical oncology sales
working at leading biopharmaceutical or specialty reference
laboratory companies.
In
general, we intend to focus our initial sales efforts on building
relationships with KOLs and researchers at leading academic
research institutions to demonstrate the scientific credibility of
our CELsignia tests. We also plan to build relationships in
community oncology practice settings through leading physician
networks and community hospitals and community-based cancer
centers. We will also attend national and regional clinical
meetings focused on cancer treatment for our anti-cancer
tests.
We
believe the unique and important nature of the results our
CELsignia tests provide, and their positioning as a companion
diagnostic, will drive many medical oncologists to independently
seek out our tests once they become aware of them. We believe this
may allow us to achieve our market penetration goals with a sales
force and marketing expenses significantly less costly than has
been experienced by molecular diagnostic companies.
International
We
believe we can serve the international market from our laboratory
in Minnesota. We expect to establish an international presence
using local distributors that sell to physicians and coordinate
shipment of specimens to the United States. To serve international
markets, we would expect to add dedicated regional managers located
outside the United States to oversee our relationships at the local
level.
Pricing and Reimbursement
The
principal groups that we expect to pay us in the future for our
CELsignia tests include:
●
commercial
third-party payors;
●
government
payors, including Medicare and state Medicaid plans;
●
biopharmaceutical
customers;
●
hospitals,
cancer centers, and other institutions; and
●
patients.
14
Adequate reimbursement will be an important
factor in achieving broad clinical adoption of our CELsignia tests.
At the same time, we believe broad clinical adoption will help
drive favorable reimbursement decisions. To achieve broad
reimbursement coverage with commercial third-party payors and
government payors, including Medicare and Medicaid, we
plan to demonstrate the economic and
clinical value of our CELsignia tests to payors by employing a
multi-pronged strategy:
●
Set a high bar for analytical
validation.
We expect to
present data on the characterization of new cancer sub-types by
CELsignia tests at conferences and will seek to publish the results
in peer-reviewed journals.
●
Meet the evidence standards
necessary to be consistent with leading clinical
guidelines.
We believe
inclusion in leading clinical practice guidelines plays a critical
role in payers’ coverage decisions. We plan to conduct
clinical validation and clinical utility studies that are
consistent with the requirements of the widely recognized National
Comprehensive Cancer Network clinical practice
guidelines.
●
Execute an internal managed
care policy and claims adjudication function as part of our core
business operations.
We plan to
make obtaining adequate and widespread reimbursement a critical
component of our business operations. We expect to hire a team of
in-house claims processing and reimbursement specialists who will
work with patients and payers to navigate the claims process and
obtain maximum reimbursement.
●
Cultivate a network of
KOLs.
KOLs are able to
influence clinical practice by publishing research and determining
whether new tests should be integrated into practice guidelines. We
expect to collaborate with KOLs early in the development process to
ensure our clinical studies are designed and executed in a way that
clearly demonstrates the benefits of our tests to physicians and
payers.
●
Compile a growing library of
peer-reviewed studies that demonstrate the test is
effective.
We will seek to
publish peer-reviewed articles and review papers to help support
our efforts to obtain widespread adoption and reimbursement of our
CELsignia tests. In each disease area we pursue, we intend to
conduct studies in order to develop similar supporting
literature.
●
Reduce
expenditures.
We intend to
build economic models to measure the financial benefits of using
our CELsignia test in guiding patient treatment and minimizing the
use of drugs that will not likely have a positive impact. We plan
to use the data we gather through the use of these models as we
meet with commercial third-party payors and government
payors.
●
Exploit efforts by commercial
third-party and government payors to contain healthcare
costs.
A major cost reduction
opportunity is to reduce expenditures for drug courses that provide
no patient benefit. Our technology will enable physicians to
prescribe therapies that have significantly higher response rates
than has been the case with targeted therapies to date. Since this
will lower the drug cost per responsive patient, we believe
widespread use of our CELsignia tests is consistent with payors
goals of delivering health care more cost effectively.
Our Competition
At
present, we are not aware of any other companies that offer
diagnostic tests that use a patient’s live tumor cells to
identify the signaling pathway driving a patient’s cancer.
There are several companies focused on developing genomic or
proteomic analyses of a patient’s diseased cells. Initial
efforts identified protein targets or genetic mutations, oftentimes
referred to as “biomarkers,” that are associated with a
disease process to enable development of drugs more closely
tailored to specific patient populations.
As
tools for human genome analysis have become less expensive, a
number of companies have also recently launched more complex
genomic test panels and gene expression signatures tests. These
tests rely on a static measurement of molecular properties and
mathematical analysis to identify statistically significant
correlations between the selected molecular properties and a
clinical condition or outcome of populations of patients with the
“same” disease.
These
genetic tests often have limited predictive success because they
only identify some, but not all of, the molecular and cellular
conditions required for a drug therapy to function in a patient.
They may identify the presence of the genes associated with a
disease, but they cannot determine how the gene products function
in the context of a particular individual.
Providers
of genomic or proteomic tests includes diagnostic kit
manufacturers, hospitals and independent laboratories. We do not
plan to develop tests where a molecular biomarker can identify drug
responsive patients, so our current tests will not compete directly
against the tests provided by these other companies. The table
below provides a summary of the points of differentiation between
our signaling function analysis approach and the molecular
approaches used by our potential competitors.
15
Current Molecular Methods vs. Our Functional Cellular Analysis
Platform
|
Type of Cell Sample Used
|
||
|
|
Dead tumor cells
|
|
|
|
(fixed, lysed)
|
Live
tumor
cells
|
|
Type of Analysis Performed
|
Single point-in-time mutation(s) status or protein amount, or
activation status
|
Quantify signaling pathway activity over 24-hour
period
|
|
Relationship to disease driver
|
Correlative
|
Direct Cause
|
|
Disease driver evaluated
|
No. Only a single or small set of components of the cell are
evaluated
|
Yes. The activity of the entire signaling pathway is
assessed
|
|
Drug function evaluated
|
No. Cannot assess drug function with dead cells
|
Yes. Drug’s effect on signaling pathway activity in
patient’s cells quantified
|
|
Companies
|
Foundation Medicine, Caris Life Sciences, NeoGenomics, LabCorp,
Quest, Nanostring, Paradigm, Biocept, Exosome Diagnostics, Guardant
Health, Roche Diagnostics, Qiagen, Myriad, Genomic
Health
|
Celcuity
|
We
are not aware of any available tests directly comparable to the
CELsignia tests. We expect to offer each CELsignia test to patients
at list prices ranging from $4,000 to $7,000, depending on the
number of pathways evaluated. List prices for several proprietary
complex genomic tests fall within this range, and we believe this
provides guidance as to the pricing of highly informative tests
that guide cancer patient care.
Intellectual Property
We
believe one of our core competitive advantages is the strength of
our intellectual property portfolio. We developed our CELsignia
technology internally. We are seeking both U.S. and non-U.S.
patents to protect our inventions. We have two issued U.S. patents,
one issued international patient, six pending U.S. patent
applications, 27 pending non-U.S. patent applications, and one
pending PCT patent application, as well as numerous corresponding
non-U.S. patent applications covering our diagnostic approach using
cell signaling analysis in living patient cells to guide treatment
of patients with targeted therapies. The earliest expiration date
of patents is 2033. In addition, we have developed significant
proprietary know-how and trade secrets for the various cell sample
preparation and cellular analysis methods we have
developed.
We
understand we must develop and maintain protection on the
proprietary aspects of our technologies in order to remain
competitive. We rely on a combination of patents, copyrights,
trademarks, trade secret and other intellectual property laws and
confidentiality, material transfer agreements, invention assignment
agreements and other contracts to protect our intellectual property
rights.
We
plan to develop names for new products and apply for trademarks and
as appropriate secure trademark protection for them, including
domain name registration, in relevant jurisdictions. We also have
developed a number of proprietary methods, materials, processes,
and techniques related to the preparation of patient samples and
performance of the CELsignia test that we believe are most
effectively protected as trade secrets rather than as patented
subject matter.
Principal Suppliers
We
purchase commercially available reagents and instruments from a
variety of suppliers. Our principal reagent suppliers include
Bio-Techne Corporation, Selleck Chemicals, Sigma-Aldrich, and VWR
International. Our principal instrument suppliers include Agilent
Technologies, Integra Biosciences, Invitrogen, and Thermo Fisher
Scientific. These items are purchased on a purchase order basis
pursuant to the applicable supplier’s standard terms and
conditions. The items purchased from these suppliers are standard
products sold widely to the biotechnology industry. All items
purchased are typically available within several days after an
order is placed.
16
Government Regulation
CLIA and CMS
The
Centers for Medicare & Medicaid Services, or CMS, an agency
within the U.S. Department of Health and Human Services, regulates
all clinical laboratory testing (except research) performed on
humans in the United States through CLIA. All clinical laboratories
that perform clinical lab services on human specimens for the
purpose of providing information on the diagnosis, prevention or
treatment of disease must receive CLIA certification. This covers
approximately 175,000 laboratories as of 2017. Laboratories must
obtain CLIA certification and demonstrate compliance with CLIA
requirements as confirmed by an inspection by CMS. We received our
CLIA certification in 2016. We also had our laboratory certified by
the College of American Pathologies, or CAP, in 2016, an
organization recognized by CMS as a third-party reviewer of
clinical laboratories. Several states, including, among others, New
York and California, require licensure of out-of-state labs that
receive specimens from the state and compliance with the
state’s individual laboratory regulations.
If
our laboratory is out of compliance with CLIA requirements, we may
be subject to sanctions such as suspension, limitation or
revocation of our CLIA certificate, as well as directed plan of
correction, state on-site monitoring, civil money penalties, civil
injunctive suit or criminal penalties. We must maintain CLIA
compliance and certification to be eligible to bill for services
provided to Medicare and Medicaid beneficiaries. If we were to be
found out of compliance with CLIA program requirements and
subjected to sanction, our business could be harmed. Failure to
comply with state licensure laws, if applicable, could subject us
to additional sanctions imposed by state licensing
authorities.
FDA
FDA
approval or clearance is not currently required for CELsignia tests
offered as a stand-alone LDT test. If we are partnered with a drug
company to launch a CELsignia test as a companion diagnostic for a
new drug indication, we would be required to obtain premarket
approval, or PMA, in conjunction with the pharmaceutical company
seeking a new drug approval for the matching therapy. Historically,
the FDA has exercised enforcement discretion with respect to tests
performed solely in a central laboratory, like the CELsignia tests
or LDTs. The FDA has not required laboratories that furnish only
LDTs to comply with the agency’s requirements for medical
devices (e.g., establishment registration, device listing, quality
systems regulations, premarket clearance or premarket approval, and
post-market controls).
Although
the FDA proposed regulations that would apply to LDTs, FDA recently
decided that, at present, those regulations are not moving forward
towards approval and implementation. In mid-2014, the FDA published
a draft Guidance Document describing a proposed approach for a
regulatory framework for LDTs that would have resulted in most of
the high-value LDT tests marketed today eventually being required
to obtain 510(k) clearances or PMAs. If implemented, this
regulatory framework would require most hospital clinical labs to
abandon a number of tests they perform or to pursue regulatory
clearances or approvals to perform them. These proposals met
significant resistance from Congress, the hospital industry, and
independent clinical laboratories. The FDA indicated in late 2016
that it does not intend to finalize the draft Guidance Document at
this time. However, FDA continues to discuss potential regulatory
approaches to LDTs.
HIPAA and HITECH
Under
the administrative simplification provisions of the Health
Insurance Portability and Accountability Act of 1996, or HIPAA, as
amended by the Health Information Technology for Economic and
Clinical Health (“HITECH Act”), the U.S. Department of
Health and Human Services, or HHS, issued regulations that
establish uniform standards governing the conduct of certain
electronic healthcare transactions and protecting the privacy and
security of protected health information used or disclosed by
healthcare providers and other covered entities. HIPAA includes the
following primary sets of regulations: privacy regulations,
security regulations, and standards for electronic transactions,
which establish standards for certain healthcare transactions. The
privacy and security regulations were extensively amended in 2013
to incorporate new requirements from the HITECH Act.
The
privacy regulations cover the use and disclosure of protected
health information by healthcare providers and other covered
entities. They also set forth certain rights that an individual has
with respect to his or her protected health information, including,
but not limited to, the right to access or amend certain records
containing protected health information, or to request restrictions
on the use or disclosure of protected health information. The
security regulations establish requirements for safeguarding the
confidentiality, integrity, and availability of protected health
information that is electronically transmitted or electronically
stored. The HITECH Act, among other things, makes many of
HIPAA’s privacy and security standards applicable to business
associates of covered entities, and established certain protected
health information security breach notification requirements. A
covered entity must notify affected individual(s) and HHS when
there is a breach of unsecured protected health information. HIPAA
also governs patient access to laboratory test reports. Effective
October 6, 2014, individuals (or their personal
representatives, as applicable), have the right to access test
reports directly from clinical laboratories and to direct that
copies of those test reports be transmitted to persons or entities
designated by the individual.
17
These
laws impose significant fines and other penalties for improper use
or disclosure of protected health information. Additionally, to the
extent that we submit electronic healthcare claims and payment
transactions that do not comply with the electronic data
transmission standards established under HIPAA and the HITECH Act,
payments to us may be delayed or denied.
In
addition to the federal privacy regulations, there are a number of
state laws regarding the privacy and security of health information
and personal data that are applicable to our operations. The HIPAA
privacy and security regulations establish a uniform federal
“floor” that covered entities and business associates
must meet and do not supersede state laws that are more stringent
or provide individuals with greater rights with respect to the
privacy or security of, and access to, their records containing
protected health information. The compliance requirements of these
various state laws, including additional breach reporting
requirements, and the penalties for violation vary widely and new
privacy and security laws in this area are evolving. We believe
that we have taken the steps required for us to comply with health
information privacy and security statutes and regulations in all
jurisdictions, both state and federal. However, we may not be able
to maintain compliance in all jurisdictions where we do business.
Failure to maintain compliance, or changes in state or federal laws
regarding privacy or security, could result in civil and/or
criminal penalties and could have a material adverse effect on our
business.
Federal, State and Foreign Fraud and Abuse Laws
In
the United States, there are various fraud and abuse laws with
which we must comply and we are potentially subject to regulation
by various federal, state and local authorities, including CMS,
other divisions of HHS (e.g., the Office of Inspector General), the
U.S. Department of Justice, and individual U.S. Attorney offices
within the Department of Justice, and state and local governments.
We also may be subject to foreign fraud and abuse laws in
connection with our international business activities.
In
the United States, the federal Anti-Kickback Statute prohibits,
among other things, knowingly and willfully offering, paying,
soliciting or receiving remuneration to induce, or in return for
patient referrals for, or purchasing, leasing, ordering,
recommending or arranging for the purchase, lease or order of, any
healthcare item or service reimbursable under a governmental payor
program. Courts have stated that a financial arrangement may
violate the Anti-Kickback Statute if any one purpose of the
arrangement is to encourage patient referrals or other federal
healthcare program business, regardless of whether there are other
legitimate purposes for the arrangement. The definition
of “remuneration” has been broadly interpreted to
include anything of value, including gifts, discounts, credit
arrangements, payments of cash, consulting fees, waivers of
co-payments, ownership interests, and providing anything at less
than its fair market value. Recognizing that the Anti-Kickback
Statute is broad and may technically prohibit many innocuous or
beneficial arrangements within the healthcare industry, HHS issued
a series of regulatory “safe harbors.” These safe
harbor regulations set forth certain provisions, which, if met,
will assure healthcare providers and other parties that they will
not be prosecuted under the federal Anti-Kickback Statute. Although
full compliance with these provisions protects against prosecution
under the federal Anti-Kickback Statute, the failure of a
transaction or arrangement to fit within a specific safe harbor
does not necessarily mean that the transaction or arrangement is
illegal or that prosecution under the federal Anti-Kickback Statute
will be pursued. Many states also have anti-kickback statutes, some
of which may apply to items or services reimbursed by any
third-party payor, including commercial insurers.
In
addition, federal false claims laws, including the federal civil
False Claims Act, prohibit, among other things, any person or
entity from knowingly presenting, or causing to be presented, a
false claim for payment to, or approval by, the federal government
or knowingly making, using, or causing to be made or used a false
record or statement material to a false or fraudulent claim to the
federal government. As a result of a modification made by the Fraud
Enforcement and Recovery Act of 2009, a claim includes “any
request or demand” for money or property presented to the
U.S. government. Recently, several pharmaceutical and other
healthcare companies have been prosecuted under these laws for
allegedly providing free product to customers with the expectation
that the customers would bill federal programs for the product.
Other companies have been prosecuted for causing false claims to be
submitted because of the companies’ marketing of the product
for unapproved, and thus generally non-reimbursable, uses. The
civil monetary penalties statute imposes penalties against any
person or entity who, among other things, is determined to have
presented or caused to be presented a claim to a federal health
program that the person knows or should know is for an item or
service that was not provided as claimed or is false or
fraudulent.
HIPAA
created additional federal criminal statutes that prohibit
knowingly and willfully executing, or attempting to execute, a
scheme to defraud or to obtain, by means of false or fraudulent
pretenses, representations or promises, any money or property owned
by, or under the control or custody of, any healthcare benefit
program, including private third-party payors and knowingly and
willfully falsifying, concealing or covering up by trick, scheme or
device, a material fact or making any materially false, fictitious
or fraudulent statement in connection with the delivery of or
payment for healthcare benefits, items or services.
In
addition, various states have enacted false claim laws analogous to
the federal False Claims Act, although many of these state laws
apply where a claim is submitted to any third-party payor and not
merely a governmental payor program. If our operations are found to
be in violation of any of the federal or state healthcare laws
described above or any other governmental regulations that apply to
us, we may be subject to significant penalties, including without
limitation, civil, criminal and/or administrative penalties,
damages, fines, disgorgement, exclusion from participation in
government programs, such as Medicare and Medicaid, injunctions,
private “qui tam” actions brought by individual
whistleblowers in the name of the government, or refusal to allow
us to enter into government contracts, contractual damages,
reputational harm, administrative burdens, diminished profits and
future earnings, and the curtailment or restructuring of our
operations, any of which could adversely affect our ability to
operate our business and our results of operations.
18
In
Europe, various countries have adopted anti-bribery laws providing
for severe consequences, in the form of criminal penalties and/or
significant fines, for individuals and/or companies committing a
bribery offence. Violations of these anti-bribery laws, or
allegations of such violations, could have a negative impact on our
business, results of operations and reputation. For instance, in
the United Kingdom, under the Bribery Act 2010, which went into
effect in July 2011, a bribery occurs when a person offers,
gives or promises to give a financial or other advantage to induce
or reward another individual to improperly perform certain
functions or activities, including any function of a public nature.
Bribery of foreign public officials also falls within the scope of
the Bribery Act 2010. Under the new regime, an individual found in
violation of the Bribery Act 2010 faces imprisonment of up to 10
years. In addition, the individual can be subject to an unlimited
fine, as can commercial organizations for failure to prevent
bribery.
Federal and State Physician Self-Referral Prohibitions
Under
a federal law directed at “self-referral,” commonly
known as the “Stark Law,” there are prohibitions, with
certain exceptions, on referrals for certain designated health
services, including laboratory services, that are covered by the
Medicare and Medicaid programs by physicians who personally, or
through a family member, have an investment or ownership interest
in, or a compensation arrangement with, an entity performing the
tests. The prohibition also extends to payment for any testing
referred in violation of the Stark Law. A person who engages in a
scheme to circumvent the Stark Law’s referral prohibition may
be fined up to $100,000 for each such arrangement or scheme. In
addition, any person who presents or causes to be presented a claim
to the Medicare or Medicaid programs in violation of the Stark Law
is subject to civil monetary penalties of up to $15,000 per bill
submission, an assessment of up to three times the amount claimed
and possible exclusion from participation in federal governmental
payor programs. Bills submitted in violation of the Stark Law may
not be paid by Medicare or Medicaid, and any person collecting any
amounts with respect to any such prohibited bill is obligated to
refund such amounts. Many states have comparable laws that are not
limited to Medicare and Medicaid referrals.
Other Regulatory Requirements
Our
operations use small amounts of hazardous materials in research and
development and generate regulated medical waste in the normal
course of performing our CELsignia tests. This subjects us to a
variety of federal, state and local environmental and safety laws
and regulations. Some of the regulations under the current
regulatory structure provide for strict liability, holding a party
potentially liable without regard to fault or negligence. We could
be held liable for damages and fines as a result of our, or
others’, business operations should contamination of the
environment or individual exposure to hazardous substances occur.
We cannot predict how changes in laws or development of new
regulations will affect our business operations or the cost of
compliance.
New Legislation and Regulations
From
time to time, legislation is drafted, introduced and passed in
Congress that could significantly change the statutory provisions
governing the testing, approval, manufacturing and marketing of
products that are or will be regulated by the FDA or CMS. In
addition to new legislation, FDA and CMS regulations and policies
are often revised or interpreted by the agencies in ways that may
significantly affect our business and our products. It is
impossible to predict whether further legislative changes will be
enacted or FDA or CMS regulations, guidance, policies or
interpretations will be changed, or what the impact of such
changes, if any, may be. The 2020 presidential election and
potential change in administration make it even more difficult to
predict if and how federal regulations may change and/or federal
agencies might alter their positions.
Pharmaceutical Coverage, Pricing and Reimbursement
Significant
uncertainty exists as to the coverage and reimbursement status of
any products we sell. Sales of any of our products will depend, in
part, on the extent to which the costs of the products will be
covered by third-party payors, including government health programs
such as Medicare and Medicaid, commercial health insurers, managed
care organizations or pharmaceutical companies. The process for
determining whether a third-party payor will provide coverage for a
test sometimes is separate from the process for setting the price
of a drug product or for establishing the reimbursement rate that a
payor will pay for the drug product. Third-party payors may limit
coverage to specific testing products on an approved list, which
might not include all of the tests available for a particular
indication.
In
order to obtain coverage and reimbursement for any product, we may
need to conduct expensive pharmacoeconomic studies in order to
demonstrate the medical necessity and cost-effectiveness of the
test. Whether or not we conduct such studies, our products may not
be considered medically necessary or cost-effective. A third-party
payor’s decision to provide coverage for a test does not
imply that an adequate reimbursement rate will be approved.
Further, one payor’s determination to provide coverage for a
product does not assure that other payors will also provide
coverage, and adequate reimbursement, for the product. Third-party
reimbursement may not be sufficient to enable us to maintain price
levels high enough to realize an appropriate return on our
investment in product development.
The containment of healthcare costs has become a
priority of federal, state and foreign governments, and the prices
of tests and drugs have been a focus in this effort. Third-party
payors are increasingly challenging the prices charged for medical
products and services, examining the medical necessity and
reviewing the cost-effectiveness of testing products, drug products
and medical services and questioning safety and efficacy. If these
third-party payors do not consider our products to be
cost-effective compared to other available tests, they may not
cover our products or, if they do, the level of payment may not
be
sufficient to allow us to
sell our products at a profit. The U.S. government, state
legislatures and foreign governments have shown significant
interest in implementing cost-containment programs to limit the
growth of government-paid healthcare costs, including price
controls and restrictions on reimbursement. Adoption of such
controls and measures, and tightening of restrictive policies in
jurisdictions with existing controls and measures, could limit
payments for our testing products or drugs that require use of our
testing products and could adversely affect our net revenue and
results.
19
Pricing
and reimbursement schemes vary widely from country to country. Some
countries may require the completion of additional studies that
compare the cost-effectiveness of a particular test to currently
available tests. The downward pressure on healthcare costs in
general, particularly prescription drugs and testing products, has
become intense. As a result, increasingly high barriers are being
erected to the entry of new products. In addition, in some
countries, cross-border imports from low-priced markets exert
competitive pressure that may reduce pricing within a country. Any
country that has price controls or reimbursement limitations for
testing products may not allow favorable reimbursement and pricing
arrangements for any of our products.
Coverage
policies, third-party reimbursement rates and test pricing
regulation may change at any time. In particular, in the United
States, the Affordable Care Act contains provisions that have the
potential to substantially change healthcare delivery and
financing, including impacting the profitability of testing and
drugs. For example, the Affordable Care Act revised the methodology
by which rebates owed by manufacturers for covered outpatient drugs
are calculated under the Medicaid Drug Rebate Program, extended the
Medicaid Drug Rebate Program to utilization of covered drugs
dispensed to individuals enrolled in Medicaid managed care
organizations and subjected manufacturers to new annual fees for
certain branded prescription drugs. As the price of our test may be
included in the reimbursement rates for certain drugs, this could
significantly impact our pricing. Even if favorable coverage and
reimbursement status is attained for one or more products, less
favorable coverage policies and reimbursement rates may be
implemented in the future. However, the proposed repeal of the
Affordable Care Act and the uncertainty surrounding a potential
replacement law make it even more difficult to predict the future
for reimbursement and pricing of drugs and tests in the United
States.
Corporate History
We
were organized as a Minnesota limited liability company in 2011 and
commenced operations in 2012. On September 15, 2017, we
converted from a Minnesota limited liability company into a
Delaware corporation and changed our name from Celcuity LLC to
Celcuity Inc.
Employees and Labor Relations
As
of December 31, 2019, we had 27 employees, each of which were
full-time employees. None of our employees are currently covered by
collective bargaining agreements and we believe that our relations
with our employees are good.
I
TEM 1A. Risk Factors
Risk factors that could cause actual results to differ from our
expectations and that could negatively impact our financial
condition and results of operations are discussed below and
elsewhere in this report. Additional risks and uncertainties
not presently known to us or that are currently not believed to be
significant to our business may also affect our actual results and
could harm our business, financial condition and results of
operations. If any of the risks or uncertainties described
below or any additional risks and uncertainties actually occur, our
business, results of operations and financial condition could be
materially and adversely affected.
Risks Relating to Our Business
We have a limited operating history upon which you can evaluate us.
We may never generate revenue or profit.
We
are an early-stage biotechnology company that commenced activities
in January 2012. We only have a limited operating history upon
which you can evaluate us. Our business plan has not been tested.
Since inception, we have had no revenue and have incurred
significant operating losses. We have financed our operations
primarily through private placements of common equity and
convertible notes prior to our IPO, as well as through the proceeds
from our IPO. To generate revenue and become and remain profitable,
we must continue to develop and commercialize the CELsignia
platform. To do so, we need to successfully complete our two
existing clinical trial collaborations, one with Genentech and
NSABP; and the other with Puma and the West Cancer Center, for our
CELsignia HSF Test, continue to develop other CELsignia tests for
other cancer sub-types and cultivate partnerships with
pharmaceutical companies. We must also build operational and
financial infrastructure to support commercial operations, train
and manage employees, and market and sell our CELsignia tests (as a
companion diagnostic and/or as a stand-alone test).
We
may never succeed in any of these activities and, even if we do, we
may never generate revenue that is sufficient to achieve
profitability. We expect to continue to incur significant expenses
and operating losses for the foreseeable future, and the net losses
we incur may fluctuate significantly from quarter to quarter. Our
failure to become and remain profitable would decrease our value
and could impair our ability to raise capital, maintain or expand
our research and development efforts, expand our business, or
continue our operations.
20
Our initial success is heavily dependent on the success of our
first CELsignia test.
Our
business strategy is focused on attracting pharmaceutical company
partnerships that provide revenue from the sale of CELsignia tests
during clinical trials, from milestone payments during clinical
trials, from sales of our CELsignia tests as companion diagnostics
or stand-alone tests thereafter, and, potentially, from royalties
on the incremental drug revenues our tests enable. Our ability to
obtain such partnerships and generate such revenue depends in part
on the ability of our first CELsignia tests to demonstrate the
potential incremental opportunity available for pharmaceutical
companies. We do not expect to receive interim results for our
first prospective clinical trials for the CELsignia HSF Test until
early-to-mid-2021 and with final results expected approximately
nine months later. Success of the first clinical trial using the
CELsignia HSF Test will depend on many factors, such as
successfully enrolling patients, meeting trial endpoint goals, and
completing the trial in a timely manner. Our ability to complete
the trial could be delayed or prevented for several reasons that
are out of our control, such as the FDA withdrawing its
authorization and approval to perform the study, NSABP determining
that the human and/or toxicology test results do not support
continuing the trial, or participants having adverse reactions or
side-effects to the drugs administered in the study. If we are
unable to demonstrate that the CELsignia HSF Test is suitable as a
companion diagnostic for the targeted therapy, we will likely not
be able to generate future revenue from our CELsignia test and may
not be able to attract other pharmaceutical companies to partner
with us for the development and commercialization of other
CELsignia tests. Further, potential pharmaceutical company partners
may delay negotiating development agreements until results of the
first clinical trial using our CELsignia HSF Test trial are
available. Even if the ultimate outcome of the first clinical trial
using a CELsignia HSF Test trial is positive, any delays could
materially and adversely affect our business.
We may not be successful in finding pharmaceutical company partners
for continuing development of additional CELsignia
tests.
We
intend to develop strategic partnerships with pharmaceutical
companies for developing additional CELsignia tests. Many of the
potential partners are global, multi-billion-dollar pharmaceutical
companies with sophisticated research and development organizations
and multiple priorities. We may not be successful in our efforts to
establish such a strategic partnership or other alternative
arrangements for our CELsignia tests because, among other things,
our research and development pipeline may be insufficient, such
tests may be deemed to be at too early of a stage of development
for collaborative effort, or third parties may not view such tests
as having the requisite potential to demonstrate efficacy. In
addition, we may be restricted under collaboration agreements from
entering into future agreements with other partners. Even if we are
able to find suitable partners, we may not be successful in
negotiating development agreements with such partners that provide
revenue from the sale of our CELsignia tests, from milestone
payments, and/or from royalties on the incremental drug revenues
that our tests enable. If we are unable to reach agreements with
suitable strategic partners on a timely basis, on acceptable terms
or at all, we may have to curtail the development of additional
CELsignia tests, our expected revenue opportunities may be
significantly smaller than expected and our business may
fail.
While our first CELsignia test is commercially ready, we have not
attempted to market it to physicians or their patients as a
stand-alone test and have no ability to determine if this test or
any of our other tests are currently commercially
viable.
While
our CELsignia HSF Test has been analytically validated, is
conducted in our CLIA certified and CAP accredited laboratory, and
is currently ready for commercial use as a LDT, we have not
attempted to market it to physicians or their patients.
Furthermore, we have commenced only limited communications with
KOLs to build awareness and credibility of our CELsignia diagnostic
platform and CELsignia tests. Accordingly, we have no ability to
determine whether our first CELsignia test, or any other future
CELsignia tests, will be commercially viable as a stand-alone test.
We may never be successful in generating revenue from our CELsignia
tests as stand-alone tests, and if we are unable to build
pharmaceutical partnerships that enable us to market this and other
tests as companion diagnostic tests, we may never generate any
revenue and our business may fail.
Developing our CELsignia tests involves a lengthy and complex
process that may not be successful.
Our
CELsignia tests may take several years to develop from the time
they are discovered to the time they are available for patient use,
if ever. In order to develop additional CELsignia tests into
commercially ready products, we need to successfully complete a
variety of activities, including, among others, conducting
substantial research and development, conducting extensive
analytical testing, and maintaining our CLIA certified and CAP
accredited laboratory. In addition, our business strategy is
focused heavily on our CELsignia tests being sold as companion
diagnostics. This will require obtaining and maintaining
partnerships with pharmaceutical companies and successfully
completing clinical studies that demonstrate the suitability of the
applicable CELsignia test as a companion diagnostic for their
targeted therapies.
These
activities will require us to expend significant resources. Based
on comparable companies in this industry, few research and
development projects result in commercially viable products, and
success in early clinical studies often is not replicated in later
studies. At any point, we may abandon development of a product
candidate for several reasons, such as a clinical validation study
failing to demonstrate the prospectively defined endpoints of the
study. We may also be required to expend considerable resources
repeating clinical studies, which would adversely affect the timing
for generating potential revenue from a new product and our ability
to invest in other products in our pipeline.
Clinical trials are expensive and complex with uncertain outcomes,
which may prevent or delay commercialization of our CELsignia
tests.
For
our CELsignia tests to become a companion diagnostic for a matching
targeted therapy, we must conduct clinical trials to demonstrate
that patients who have an abnormal signaling pathway, as identified
by our CELsignia tests, respond to treatment with a matching
targeted therapy. Clinical testing is expensive, is difficult to
design and implement, and can take many years to complete, and its
outcome is inherently uncertain. As a company, we have limited
experience in conducting or participating in clinical trials. We
cannot be certain that any future clinical trials will conclusively
demonstrate that any CELsignia test is effective as a companion
diagnostic. If our trials do not yield positive results, we may be
unable to maintain the pharmaceutical company partnerships we build
or find additional partners, we may not be able to successfully
commercialize our CELsignia tests or generate any revenue, our
business may fail, and you may lose part or all of your
investment.
21
We
cannot be certain that our existing clinical trial or future
clinical trials, if any, will begin or be completed on time, if at
all. We may experience numerous unforeseen events during, or as a
result of, clinical trials that could delay or prevent our ability
to commercialize our CELsignia tests, such as:
●
delays
in reaching, or failure to reach, agreement on acceptable clinical
trial contracts or clinical trial protocols with planned trial
sites and/or strategic partners;
●
delay
or failure in reaching agreement with the FDA or a comparable
foreign regulatory authority on a trial design, in obtaining
authorization from such authorities to commence the trial, and/or
in complying with conditions or other requirements imposed by such
regulatory authorities with respect to the trial;
●
delay
or failure in recruiting and enrolling suitable subjects to
participate in one or more clinical trials, or in such participants
completing a trial or returning for follow-up during or after the
trial;
●
clinical
sites, investigators or other third-parties deviating from the
trial protocol, failing to conduct the trial in accordance with
regulatory and contractual requirements, and/or dropping out of a
trial;
●
regulatory
imposition of a clinical hold for any of our clinical trials, where
a clinical hold in a trial in one indication would result in a
clinical hold for clinical trials in other indications;
and
●
changes
in governmental regulations or administrative actions.
Significant
nonclinical or clinical trial delays could prevent us from
maintaining and/or developing new pharmaceutical company
partnerships. Delays could also shorten any periods during which we
may have the exclusive right to commercialize our CELsignia tests
or allow our competitors to bring products to market before we do.
As such, any delays could impair our ability to successfully
commercialize our CELsignia tests and may materially and adversely
affect our business, financial condition, results of operations and
prospects.
Even if our CELsignia tests achieve positive clinical trial
results, they may fail to achieve the degree of market acceptance
by physicians, patients, third-party payors and others in the
medical community necessary for commercial success.
If
any of our potential CELsignia tests, including our first CELsignia
HSF Test, achieve positive clinical trial results, they may
nonetheless fail to gain sufficient market acceptance by
physicians, patients, third-party payors and others in the medical
community necessary for commercial success. For example,
conventional genomic- or proteomic-based analyses are commonly used
today to diagnose cancer and prescribe cancer medications, and
physicians may continue to rely on these diagnostic tests instead
of adopting the use of a CELsignia test. The degree of market
acceptance of our CELsignia tests will depend on a number of
factors, including:
●
their
efficacy and other potential advantages compared to alternative
diagnostic tests;
●
our
ability to offer them for sale at competitive prices;
●
their
convenience and ease of obtaining patient specimens compared to
alternative diagnostics;
●
the
willingness of the target patient population to try new diagnostics
and of physicians to initiate such diagnostics;
●
the
strength of marketing and distribution support;
●
the
availability of third-party coverage and adequate reimbursement for
our diagnostic tests; and
●
our
ability to partner with pharmaceutical companies to develop
companion diagnostic programs for the new cancer sub-types we
discover.
If
our CELsignia tests do not achieve an adequate level of acceptance,
we may never generate significant product revenues and we may not
become profitable.
Our business, operational and financial goals may not be attainable
if the market opportunities for our CELsignia tests or our
pharmaceutical company partners are smaller than we expect. Our
internal research and estimates on market opportunities have not
been verified by independent sources, and we have not independently
verified market and industry data from third-parties that we have
relied on.
The
total market opportunities that we believe exist are based on a
variety of assumptions and estimates, including the number of
potential companion diagnostic programs we will be able to
successfully pursue, the amount of potential milestone payments
that we could receive in companion diagnostic programs, the number
of patients we will test in clinical trials, the price we will be
able to charge for our tests and the total annual number of cancer
patients with undiagnosed abnormal cell signaling. In addition, we
have relied on third-party publications, research, surveys and
studies for information related to determining market
opportunities, including without limitation, information on the
number of cancer patients and those receiving various forms of
treatment, the cost of drug therapy, the amount of revenue
generated from various types of drug therapy, the objective
response rates of drug therapies, the number of deaths caused by
cancer and the expected growth in cancer drug therapy and
diagnostic markets. Our internal research and estimates on market
opportunities have not been verified by independent sources, and we
have not independently verified market and industry data from
third-parties that we have relied on. Any or all of our assumptions
and/or estimates may prove to be incorrect for several reasons,
such as inaccurate reports or information that we have relied on,
potential patients or providers not being amenable to using our
CELsignia platform for diagnostic testing or such patients becoming
difficult to identify and access, limited reimbursement for
companion diagnostics, pricing pressure due to availability of
alternative diagnostic tests, or an inability of the CELsignia
tests’ companion drugs to obtain the necessary regulatory
approvals for new indications. If any or all of our assumptions and
estimates prove inaccurate, we and our companion diagnostic
pharmaceutical partners may not attain our business, operational
and financial goals.
22
The expected selling price range of our CELsignia tests is an
estimate. We have not yet sold any such tests and the actual price
we are able to charge may be substantially lower than our expected
price range.
We
have estimated the selling price range of our CELsignia tests based
on the pricing of other diagnostic tests currently available and
assumptions regarding the efficacy and market acceptance of our
tests. We have not yet sold our CELsignia tests and cannot be
certain of the actual price we may be able to charge. The
availability and price of our competitors’ products could
limit the demand and the price we are able to charge. We may not
achieve our business plan if acceptance is inhibited by price
competition, if pharmaceutical companies refuse to pay our expected
prices for CELsignia tests in clinical trials, if physicians are
reluctant to switch from other diagnostic tests to our CELsignia
tests or if physicians switch to other new products or choose to
reserve our CELsignia tests for use in limited circumstances.
Furthermore, reductions in the reimbursement rate of third-party
payors have occurred and may occur in the future. Each of these
factors could cause our selling price to be substantially lower
than expected, and we may fail to generate revenue or become
profitable.
The insurance coverage and reimbursement status of new diagnostic
products is uncertain. Failure to obtain or maintain adequate
coverage and reimbursement for CELsignia tests could limit our
ability to market those CELsignia tests and decrease our ability to
generate revenue.
The availability and extent of reimbursement by
governmental and private payors is essential for most patients to
be able to afford expensive diagnostic tests and treatments. Sales
of any of our potential CELsignia tests will depend substantially,
both
in the United States and
internationally, on the extent to which the costs of our CELsignia
tests will be paid by health maintenance, managed care, and similar
healthcare management organizations, or reimbursed by government
health administration authorities, private health coverage insurers
and other third-party payors. Reimbursement by a payor may depend
on a number of factors, including a payor’s determination
that the CELsignia tests are:
●
neither
experimental nor investigational;
●
appropriate
for the specific patient;
●
cost-effective;
●
supported
by peer-reviewed publications; and
●
included
in clinical practice guidelines.
If
reimbursement is not available, or is available only to a limited
amount, we may not be able to successfully commercialize our
CELsignia tests at expected levels, or potentially at all. Even if
coverage is provided, the approved reimbursement amount may not be
high enough to allow us to establish or maintain pricing sufficient
to realize a sufficient return on our research and development
investment.
There
is significant uncertainty related to the insurance coverage and
reimbursement of newly approved diagnostic products. In the United
States, the principal decisions about reimbursement for new
diagnostic products and services are typically made by CMS. CMS
decides whether and to what extent a new product or service will be
covered and reimbursed under Medicare. Private payors tend to
follow CMS to a substantial degree. As such, a significant portion
of our potential revenue depends on CMS approving coverage and
reimbursement of our CELsignia tests.
Outside
the United States, international operations are generally subject
to extensive governmental price controls and other market
regulations, and we believe the increasing emphasis on
cost-containment initiatives in Europe, Canada and other countries
has and will continue to put pressure on the pricing and usage of
diagnostic tests such as our potential CELsignia tests. In many
countries, particularly the countries of the European Union, the
prices of medical products are subject to varying price control
mechanisms as part of national health systems. In these countries,
pricing negotiations with governmental authorities can take
considerable time. To obtain reimbursement or pricing approval in
some countries, we may be required to demonstrate the
cost-effectiveness of our CELsignia tests relative to other
available diagnostic tests. The prices of products under such
systems may be substantially lower than in the United States. Other
countries allow companies to fix their own prices for products but
monitor and control company profits. Additional foreign price
controls or other changes in pricing regulation could restrict the
amount that we are able to charge for our CELsignia tests.
Accordingly, in markets outside the United States, the
reimbursement for our potential CELsignia tests may be reduced
compared with the United States and may be insufficient to generate
commercially reasonable revenue and profit.
Moreover,
increasing efforts by governmental and third-party payors, in the
United States and internationally, to cap or reduce healthcare
costs may cause such organizations to limit both coverage and level
of reimbursement for new products approved and, as a result, they
may not cover or provide adequate payment for our potential
CELsignia tests. The downward pressure on healthcare costs in
general, particularly prescription drugs and surgical procedures
and other treatments, has become very intense. We expect to
experience pricing pressures in connection with the sale of any
CELsignia tests due to the trend toward managed healthcare, the
increasing influence of health maintenance organizations and
additional legislative changes.
We may encounter difficulties in commercializing and marketing our
products.
In
order to commercialize any CELsignia test, we must build marketing,
sales, managerial and other non-technical capabilities or make
arrangements with third parties to perform these services, and we
may not be successful in doing so. For each CELsignia test we
develop, we intend to pursue development agreements with the
pharmaceutical companies that provide matching targeted therapies.
Once we have completed the analytical validation of a CELsignia
test, we plan to target KOLs to build product awareness. Once we
have clinical validation data available, we expect to expand our
sales and marketing efforts to target the broader market and
coordinate our go-to-market activities with those of our partner
pharmaceutical companies. These activities will be expensive and
time consuming and will require significant attention of our
executive officers to manage. Furthermore, there is no guarantee
that any new drug indications will require our CELsignia tests as a
companion diagnostic or that any pharmaceutical company will
effectively coordinate sales and marketing activities with us. Any
failure or delay in these activities would adversely impact the
commercialization our CELsignia platform, and our business,
financial condition, results of operations and prospects may be
materially and adversely affected.
23
We may encounter difficulties in managing growth, which could
disrupt our operations.
To manage our anticipated future growth, we must
continue to implement and improve our managerial, operational and
financial systems, expand our facilities and continue to recruit
and train additional qualified personnel. Due to our limited
financial resources, we may not be able to effectively manage the
expansion of our operations or recruit and train additional
qualified personnel. The expansion of our operations may lead to
significant costs and may divert our management and
business development resources. Any
inability to manage growth could delay the execution of our
business plans or disrupt our operations.
We face significant competition from other diagnostic companies and
our operating results will suffer if we fail to compete
effectively.
The
diagnostic testing industry is intensely competitive. We have
competitors both in the United States and abroad, including
universities and other research institutions and providers of
diagnostics that focus on developing genomic or proteomic analyses
of a patient’s diseased cells or theranostic tests to predict
specific patient responses to a drug therapy. Many of our
competitors have substantially greater financial, technical and
other resources, such as larger research and development staff and
well-established marketing and sales forces. Our competitors may
succeed in developing, acquiring or licensing, on an exclusive
basis, products or services that are more effective or less costly
than the CELsignia tests that we are currently developing or that
we may develop. In addition, established medical technology,
biotechnology and/or pharmaceutical companies may invest heavily to
accelerate discovery and development of diagnostic tests that could
make our CELsignia tests less competitive.
Our
ability to compete successfully will depend largely on our ability
to:
●
discover
and develop CELsignia tests for cancer sub-types that are superior
to other products in the market;
●
demonstrate
compelling advantages in the efficacy and convenience of our
CELsignia tests on a cost competitive basis;
●
attract
qualified scientific, product development and commercial
personnel;
●
obtain
and maintain patent and other proprietary protection as necessary
for our CELsignia platform;
●
obtain
required U.S. and international regulatory approvals;
●
successfully
collaborate with research institutions and pharmaceutical companies
in the discovery, development and commercialization of our current
and future CELsignia tests; and
●
successfully
expand our operations and build a sales force to support
commercialization.
We
may not be able to compete effectively if we are unable accomplish
one or more of these objectives.
If our sole laboratory facility becomes inoperable, we will be
unable to perform our tests and our business will be
harmed.
We
do not have redundant laboratory facilities. We perform all of our
diagnostic services in our laboratory located in Minneapolis,
Minnesota. Our facility and the equipment we use to perform our
tests would be costly to replace and could require substantial lead
time to repair or replace. The facility may be harmed or rendered
inoperable by physical damage from fire, floods, tornadoes, power
loss, telecommunications failures, break-ins and similar events,
which may render it difficult or impossible for us to perform our
tests for some period of time. The inability to perform our tests
may result in the loss of customers or harm our reputation, and we
may be unable to regain those customers in the future. Although we
possess insurance for damage to our property and the disruption of
our business, this insurance may not be sufficient to cover all of
our potential losses and may not continue to be available to us on
acceptable terms, or at all.
In
order to rely on a third party to perform our tests, we could only
use another facility with established state licensure and CLIA
accreditation under the scope of which our potential CELsignia
tests could be performed following validation and other required
procedures. We cannot assure you that we would be able to find
another CLIA-certified facility willing to adopt CELsignia tests
and comply with the required procedures, or that this laboratory
would be willing to perform the tests for us on commercially
reasonable terms.
We must hire and retain a qualified sales force.
Our
ability to grow revenue for our CELsignia tests is dependent upon
our ability to build an effective sales team. We do not currently
have a dedicated sales force and building one will be an expensive
and time-consuming process. We face intense competition for
qualified sales personnel and our inability to hire or retain an
adequate number of sales representatives could limit our ability to
maintain or expand our business and increase sales. Even if we are
able to increase our sales force, our new sales personnel may not
provide sufficient high quality service and attention to
effectively market and sell our CELsignia platform. If we are
unable to develop our marketing and sales networks or if our sales
personnel do not perform as expected, we may be unable to maintain
or grow our existing business and our business, financial
condition, results of operations and prospects may be materially
and adversely affected.
We will be dependent on our ability to attract and retain key
personnel.
Our
operations will be materially dependent upon the services of our
officers and key employees, including Brian F. Sullivan, our Chief
Executive Officer, and Dr. Lance G. Laing, our Chief Science
Officer. Successful implementation of our business plan will also
require the services of other consultants and additional personnel.
We cannot assure you that we will be able to attract and retain
such persons as employees, independent contractors, consultants or
otherwise. If we are not able to attract individuals with the
skills required for our business, or if we lose the services of
either Mr. Sullivan or Dr. Laing, we may be unable successfully to
implement our business plan.
24
Our inability to raise additional capital on acceptable terms in
the future may limit our ability to develop and commercialize our
CELsignia platform.
We
may require additional capital to finance capital expenditures and
operating expenses over the next several years as we launch our
CELsignia platform and expand our infrastructure, commercial
operations and research and development activities. We may seek to
raise additional capital through equity offerings, debt financings,
collaborations or licensing arrangements. Additional funding may
not be available to us on acceptable terms, or at all. If we raise
funds by issuing equity securities, dilution to our stockholders
could result. Any equity securities issued may also provide for
rights, preferences or privileges senior to those of holders of our
existing securities. The incurrence of additional indebtedness or
the issuance of certain equity securities could result in increased
fixed payment obligations and could also include restrictive
covenants, such as limitations on our ability to incur additional
debt or issue additional equity, limitations on our ability to
acquire or license intellectual property rights, and other
operating restrictions that could adversely affect our ability to
conduct our business. In the event that we enter into
collaborations or licensing arrangements to raise capital, we may
be required to accept unfavorable terms. If we are not able to
secure additional funding when needed, we may have to delay, reduce
the scope of or eliminate one or more research and development
programs or selling and marketing initiatives. In addition, we may
have to work with a partner on one or more of our products or
market development programs, which could lower the economic value
of those programs to our company.
Risks Related to Our Reliance on Third Parties
We will rely on collaboration with third parties to conduct our
clinical trials, including the current trials involving the
CELsignia test, and those third parties may not perform
satisfactorily.
We
will rely on third parties to conduct clinical trials for our
CELsignia tests. For our FACT 1 clinical trial, we are
collaborating with Genentech and NSABP to conduct a 54-patient
single-arm interventional trial that is expected to obtain interim
results in early-to-mid-2021 and final results approximately nine
months later. We will rely on NSABP to conduct our clinical trial
of patients selected using a CELsignia HSF Test, including setting
up clinical sites, enrolling patients, and managing clinical data
and Genentech will supply the drugs. For our FACT 2 clinical trial,
we are collaborating with Puma and the West Cancer Center to
conduct a 27-patient single-arm interventional trial that is
expected to obtain interim results in mid-2021 and final results
approximately 9-12 months later. We will rely on West Cancer Center
to conduct our clinical trial of patients selected using a
CELsignia HSF Test, including setting up clinical sites, enrolling
patients, and managing clinical data and Puma will supply the
drugs.
We
expect to field additional clinical trials to evaluate new
potential indications for drugs with patients identified by one of
our new CELsignia tests. NSABP, the West Cancer Center or other
contract research organizations that we hire and/or pharmaceutical
companies we partner with might not successfully carry out their
contractual duties, meet expected deadlines, or conduct our planned
clinical trials in accordance with regulatory requirements or our
stated protocols. Any of them may also terminate their relationship
with us for a variety of reasons. Furthermore, these third parties
may also have relationships with other entities, some of which may
be our competitors. If we need to enter into alternative
arrangements, we may not be able to complete our clinical trials
and may not be able to, or may be delayed in our efforts to,
successfully commercialize our potential CELsignia
tests.
The pharmaceutical companies that we partner with may not be
successful in receiving regulatory approval for drug indications or
may not commercialize their companion therapies for our expected
companion diagnostic programs.
While
we intend to provide our pharmaceutical company partners with new
patient populations for such partners’ existing or
investigational targeted therapies, there can be no assurances that
such partners will be able to obtain regulatory approval for new
indications to treat these patient populations or otherwise be
successful in commercializing these new therapies. The
pharmaceutical companies we partner with:
●
may
not meet clinical trial endpoint targets in evaluating efficacy of
a targeted therapy in the patient population;
●
may
encounter regulatory or production difficulties that could
constrain the supply of the companion therapies;
●
may
have difficulties gaining acceptance of the use of the companion
therapies in the clinical community;
●
may
not pursue commercialization of any companion
therapies;
●
may
elect not to continue or renew commercialization programs based on
changes in their strategic focus or available funding, or external
factors, such as an acquisition, that divert resources or create
competing priorities;
●
may
not commit sufficient resources to the marketing and distribution
of such companion therapies; or
●
may
terminate their relationship with us.
Any
of these factors could adversely affect our commercialization
strategy, business, results of operations and financial
condition.
Our instrument or reagent suppliers may fail to meet our quality
requirements for the items we purchase or fail to provide a
continuous supply of the items we utilize to perform our CELsignia
tests.
We
utilize highly specialized reagents and instruments to perform our
CELsignia tests. We may be unable to find suitable replacement
reagents and instruments on a timely basis, if at all. Interruption
in the supply of these items or degradation in their quality could
delay analytical and clinical studies, and/or render us unable to
deliver CELsignia tests. This would interrupt sales and adversely
affect our business, results of operations and financial
condition.
25
Performance issues or price increases by our shipping carriers
could adversely affect our business, results of operations and
financial condition, and harm our reputation and ability to provide
our CELsignia tests on a timely basis.
Expedited,
reliable shipping is essential to our operations. Should our
shipping carrier encounter delivery performance issues such as
loss, damage or destruction of a sample, such occurrences may
damage our reputation and lead to decreased demand for our services
and increased cost and expense to our business. In addition, any
significant increase in shipping rates could adversely affect our
operating margins and results of operations. Similarly, strikes,
severe weather, natural disasters or other service interruptions by
delivery services we use would adversely affect our ability to
receive and process patient samples on a timely basis. There are
only a few providers of overnight nationwide transport services,
and there can be no assurance that we will be able to maintain
arrangements with providers on acceptable terms, if at
all.
Risks Related to Government Regulation
Our CELsignia tests represent a novel approach to companion
diagnostics, which could result in heightened regulatory scrutiny,
delays in clinical development, or delays in our ability to
commercialize any products.
Our
unique and proprietary CELsignia technology is the first cancer
diagnostic platform we are aware of that can detect the underlying
signaling dysfunction driving a patient’s cancer. Because
this is a novel approach to companion diagnostics, there can be no
assurance as to the length of a clinical trial period, the number
of patients the FDA or another applicable regulatory authority will
require to be enrolled in the trials in order to establish the
safety and efficacy of our CELsignia tests and the companion drugs,
or that the data generated in these trials will be acceptable to
the FDA or another applicable regulatory authority to support
marketing approval of new indications for the companion drugs. This
could delay or prohibit our clinical trials and/or
commercialization of our CELsignia tests.
If the FDA were to begin regulating our tests, we could incur
substantial costs and delays associated with trying to obtain
premarket clearance or approval.
Most
LDTs, are not currently subject to FDA regulation, although
reagents, instruments, software or components provided by third
parties and used to perform LDTs may be subject to regulation. We
believe that the CELsignia tests are LDT’s, which is a term
that describes tests that are designed and performed within a
single laboratory. As a result, we believe the CELsignia tests are
not currently subject to regulation by the FDA in accordance with
the FDA’s current policy of exercising enforcement discretion
regarding LDTs.
Historically,
the FDA has not required laboratories that furnish only LDTs to
comply with the agency’s requirements for medical devices
(e.g., establishment registration, device listing, quality systems
regulations, premarket clearance or premarket approval, and
post-market controls). In mid-2014, the FDA published a draft
Guidance Document describing a proposed approach for a regulatory
framework for LDTs, but in late 2016, the FDA indicated it no
longer intended to finalize the LDT Guidance Document at that time.
It is not clear when or if the FDA will seek to alter the current
LDT regulatory framework in the future. We cannot provide any
assurance that FDA regulation, including premarket review, will not
be required in the future for our tests, whether through additional
guidance issued by the FDA, new enforcement policies adopted by the
FDA or new legislation enacted by Congress. We cannot predict with
certainty the timing or content of future legislation enacted or
guidance issued regarding LDTs, or how it will affect our
business.
If
premarket review is required by the FDA at a future date or if we
decide to voluntarily pursue FDA premarket review of our CELsignia
tests, there can be no assurance that our CELsignia tests or any
tests we may develop in the future will be cleared or approved by
the FDA on a timely basis, if at all, nor can there be assurance
that labeling claims will be consistent with our current claims or
adequate to support continued adoption of and reimbursement for our
CELsignia tests. If our CELsignia tests are allowed to remain on
the market but there is uncertainty in the marketplace about our
tests, if they are labeled investigational by the FDA, or if
labeling claims the FDA allows us to make are more limited than we
expect, reimbursement may be adversely affected and we may not be
able to sell our CELsignia tests. Compliance with FDA regulations
would increase the cost of conducting our business and subject us
to heightened regulation and scrutiny by the FDA and penalties for
failure to comply with these requirements.
If we fail to obtain required federal and state laboratory
licenses, we could lose the ability to perform our
tests.
Clinical laboratory tests, including our CELsignia
tests, are regulated under CLIA. CLIA is a federal law that
regulates clinical laboratories that perform testing on specimens
derived from humans for the purpose of providing information for
the diagnosis, prevention or treatment of disease. CLIA regulations
mandate specific standards for laboratories in the areas of
personnel qualifications, administration, and participation in
proficiency testing, patient test management and quality assurance.
CLIA certification is also required in order for us to be eligible
to bill state and federal healthcare programs, as well as many
private third-party payers, for any tests we launch. We will also
be required to maintain state licenses in certain states to
conduct testing in our laboratories.
While we currently have CLIA certification for our Minnesota
laboratory, failure to maintain this certification would adversely
affect our ability to launch our CELsignia
tests.
We generate medical waste and could face substantial liability if
we violate laws with respect to the handling of medical
waste.
We
generate regulated medical waste in the normal course of performing
our CELsignia tests. This subjects us to a variety of federal,
state and local environmental and safety laws and regulations. Some
of the regulations under the current regulatory structure provide
for strict liability, holding a party potentially liable without
regard to fault or negligence. We could be held liable for damages
and fines as a result of our, or others’, business operations
should contamination of the environment or individual exposure to
hazardous substances occur related to our business. We cannot
predict how changes in laws or development of new regulations will
affect our business operations or the cost of
compliance.
26
Failure to comply with the HIPAA security and privacy regulations
may increase our operational costs.
A
portion of the data that we obtain and handle for or on behalf of
our clients is considered protected health information, or PHI,
subject to HIPAA. Under HIPAA and our contractual agreements with
our HIPAA-covered entity health plan customers, we are considered a
“business associate” to those customers, and are
required to maintain the privacy and security of PHI in accordance
with HIPAA and the terms of our business associate agreements with
our clients, including by implementing HIPAA-required
administrative, technical and physical safeguards. We are also
required to maintain similar business associate agreements with our
subcontractors that have access to PHI of our customers in
rendering services to us or on our behalf. We will incur
significant costs to establish and maintain these safeguards and,
if additional safeguards are required to comply with HIPAA
regulations or our clients’ requirements, our costs could
increase further, which would negatively affect our operating
results. Furthermore, we cannot guarantee that such safeguards have
been and will continue to be adequate under applicable laws. If we
have failed, or fail in the future, to maintain adequate
safeguards, or we or our agents or subcontractors use or disclose
PHI in a manner prohibited or not permitted by HIPAA, our
subcontractor business associate agreements, or our business
associate agreements with our customers, or if the privacy or
security of PHI that we obtain and handle is otherwise compromised,
we could be subject to significant liabilities and
consequences.
We will also need to expend a considerable amount of resources
complying with other federal, state and foreign laws and
regulations. If we are unable to comply or have not complied with
such laws, we could face substantial penalties or other adverse
actions.
Our
operations are subject, directly or indirectly, to other federal,
state and foreign laws and regulations that are complex and their
application to our specific products, services and relationships
may not be clear and may be applied to our business in ways that we
do not anticipate. Compliance with laws and regulations will
require us to expend considerable resources implementing internal
policies and procedures for compliance and ongoing monitoring and
will require significant attention of our management team. This
will be challenging as an early-stage company with limited
financial resources and human capital. These laws include, for
example:
●
Title
XI of the Social Security Act, commonly referred to as the federal
Anti-Kickback Statute, which prohibits the knowing and willful
offer, payment, solicitation or receipt of remuneration, directly
or indirectly, in cash or in kind, in return for or to reward the
referral of patients or arranging for the referral of patients, or
in return for the recommendation, arrangement, purchase, lease or
order of items or services that are covered, in whole or in part,
by a federal healthcare program such as Medicare or
Medicaid;
●
The
civil False Claims Act, that forbids the knowing submission or
“causing the submission” of false or fraudulent
information or the failure to disclose information in connection
with the submission and payment of claims for reimbursement to
Medicare, Medicaid, federal healthcare programs or private health
plans;
●
The
federal Physician Self-referral Law, commonly known as the Stark
Law, which prohibits physicians from referring Medicare or Medicaid
patients to providers of “designated health
services” with whom the physician or a member of the
physician’s immediate family has an ownership interest or
compensation arrangement, unless a statutory or regulatory
exception applies, and similar state equivalents that may apply
regardless of payor; and
●
The
U.S. Foreign Corrupt Practices Act of 1977, as amended, or FCPA,
the U.S. domestic bribery statute contained in 18 U.S.C. §
201, the U.S. Travel Act, and the USA PATRIOT Act, which among
other things, prohibit companies and their employees, agents,
third-party intermediaries, joint venture partners and
collaborators from authorizing, promising, offering, or providing,
directly or indirectly, improper payments or benefits to recipients
in the public or private sector.
Many states and foreign governments have
adopted similar laws and regulations. Violations of law could
subject us to civil or criminal penalties, monetary fines,
disgorgement, individual imprisonment, contractual damages,
reputational harm, diminished profits and future earnings and
curtailment of our operations. We could also be required to change
or terminate some portions of operations or business or could be
disqualified from providing services to healthcare providers doing
business
with government
programs.
New legislation and regulations could be passed that affect our
operations and result in additional risks and/or costs to our
business.
From
time to time, legislation is drafted, introduced and passed in
Congress that could significantly change the statutory provisions
governing the testing, approval, manufacturing and marketing of
products that are or will be regulated by the FDA or CMS. In
addition to new legislation, CMS and FDA regulations and policies
are often revised or interpreted by the agencies in ways that may
significantly affect our business and our products. It is
impossible to predict whether further legislative changes will be
enacted or FDA or CMS regulations, guidance, policies or
interpretations will be changed, or what the impact of such
changes, if any, may be. The 2020 presidential election and
potential change in administration make it even more difficult to
predict if and how federal regulations may change and/or federal
agencies might alter their positions. Changes in laws and the
development of new regulations could affect our business operations
and/or the cost of compliance.
27
Risks Related to Intellectual Property
If we are unable to obtain and maintain intellectual property
protection for our technology, or if the scope of the intellectual
property protection obtained is not sufficiently broad, our
competitors could develop and commercialize technology and
diagnostic tests similar or identical to ours, and our ability to
successfully commercialize our technology and diagnostic tests may
be impaired.
Our
ability to compete successfully will depend in part on our ability
to obtain and enforce patent protection for our products, preserve
our trade secrets and operate without infringing the proprietary
rights of third parties. We have applied for patents that protect
our technology. Our patent portfolio includes two issued U.S.
patents, one issued international patent, six pending U.S. patent
applications, 27 pending non-U.S. patent applications, one pending
international PCT patent application, and numerous corresponding
non-U.S. patent applications. Each patent and patent application
covers methods of use. However, we cannot assure you that our
intellectual property position will not be challenged or that all
patents for which we have applied will be granted. The validity and
breadth of claims in patents involve complex legal and factual
questions and, therefore, may be highly uncertain. Uncertainties
and risks that we face include the following:
●
our
pending or future patent applications may not result in the
issuance of patents;
●
the
scope of any existing or future patent protection may not exclude
competitors or provide competitive advantages to us;
●
our
patents may not be held valid if subsequently
challenged;
●
other
parties may claim that our products and designs infringe the
proprietary rights of others, and even if we are successful in
defending our patents and proprietary rights, the cost of such
litigation may adversely affect our business; and
●
other
parties may develop similar products, duplicate our products, or
design around our patents.
The
patent prosecution process is expensive and time-consuming, and we
may not be able to file, prosecute, maintain, enforce or license
all necessary or desirable patent applications at a reasonable cost
or in a timely manner, or in all jurisdictions. We may choose not
to seek patent protection for certain innovations and may choose
not to pursue patent protection in certain jurisdictions, and under
the laws of certain jurisdictions, patents or other intellectual
property rights may be unavailable or limited in scope. It is also
possible that we will fail to identify patentable aspects of our
discovery and nonclinical development output before it is too late
to obtain patent protection.
The
patent position of companies like ours is highly uncertain,
involves complex legal and factual questions and has in recent
years been the subject of much litigation. The U.S. Patent and
Trademark Office, or U.S. PTO, has not established a consistent
policy regarding the breadth of claims that it will allow in
medical technology patents. In addition, the laws of foreign
jurisdictions may not protect our rights to the same extent as the
laws of the United States. For example, India and China do not
allow patents for methods of treating the human body. Publications
of discoveries in the scientific literature often lag behind the
actual discoveries, and patent applications in the United States
and other jurisdictions are typically not published until 18 months
after filing, or in some cases not at all. Therefore, we cannot
know with certainty whether we were the first to make the
inventions claimed in our owned or licensed patents or pending
patent applications, or that we were the first to file for patent
protection of such inventions. As a result, the issuance, scope,
validity, enforceability and commercial value of our patent rights
are highly uncertain. Our pending and future patent applications
may not result in patents being issued that protect our technology
or CELsignia tests, in whole or in part, or which effectively
prevent others from commercializing competitive technologies and
diagnostic tests. Changes in either the patent laws or
interpretation of the patent laws in the United States and other
countries may diminish the value of our patents or narrow the scope
of our patent protection.
Moreover, we may be subject to a third-party
pre-issuance submission of prior art to the U.S. PTO or patent
offices in foreign jurisdictions, or become involved in opposition,
derivation, reexamination, inter parties review, post-grant review
or interference proceedings challenging our patent rights or the
patent rights of others. An adverse determination in any
such
submission, proceeding or
litigation could reduce the scope of, or invalidate, our patent
rights, allow third parties to commercialize our technology and
compete directly with us, without payment to us, or result in our
inability to commercialize CELsignia platform without infringing
third-party patent rights. In addition, if the breadth or strength
of protection provided by our patents and patent applications is
threatened, it could dissuade companies from collaborating with us
to develop or commercialize current or future CELsignia
tests.
Even
if our owned patent applications issue as patents, they may not
issue in a form that will provide us with any meaningful
protection, prevent competitors from competing with us or otherwise
provide us with any competitive advantage. Our competitors may be
able to circumvent our owned patents by developing similar or
alternative technologies or products in a non-infringing
manner.
The
issuance of a patent is not conclusive as to its inventorship,
scope, validity or enforceability, and our owned patents may be
challenged in the courts or patent offices in the United States and
abroad. Such challenges may result in loss of exclusivity or
freedom to operate or in patent claims being narrowed, invalidated
or held unenforceable, in whole or in part, which could limit our
ability to stop others from using or commercializing similar or
identical technology and product candidates, or limit the duration
of the patent protection of our technology and potential diagnostic
tests. Given the amount of time required for the development,
testing and regulatory review of new diagnostic tests, patents
protecting such tests might expire before or shortly after such
candidates are commercialized. As a result, our owned patent
portfolio may not provide us with sufficient rights to exclude
others from commercializing diagnostic tests similar or identical
to ours.
28
Patent reform legislation could increase the uncertainties and
costs surrounding the prosecution of our patent applications and
the enforcement or defense of our issued patents.
On
September 16, 2011, the Leahy-Smith America Invents Act, or
the Leahy-Smith Act, was signed into law. The Leahy-Smith Act
includes a number of significant changes to U.S. patent law. These
include provisions that affect the way patent applications are
prosecuted and may also affect patent litigation. The U.S. PTO
recently developed new regulations and procedures to govern
administration of the Leahy-Smith Act, and many of the substantive
changes to patent law associated with the Leahy-Smith Act, and in
particular, the first to file provisions, only became effective on
March 16, 2013. Accordingly, it is not clear what, if any,
impact the Leahy-Smith Act will have on the operation of our
business. However, the Leahy-Smith Act and its implementation could
increase the uncertainties and costs surrounding the prosecution of
our patent applications and the enforcement or defense of our
issued patents, all of which could have a material adverse effect
on our business and financial condition. Depending on future
actions by the U.S. Congress, the federal courts, and the U.S. PTO,
the laws and regulations governing patents could change in
unpredictable ways that would weaken our ability to obtain new
patents or to enforce our existing patents and patents that we
might obtain in the future. In addition, there may be patent law
reforms in foreign jurisdictions that could increase the
uncertainties and costs surrounding the prosecution of our patent
applications and the enforcement or defense of our issued patents
in those foreign jurisdictions.
Third parties may initiate legal proceedings alleging that we are
infringing their intellectual property rights, the outcome of which
would be uncertain and could have a material adverse effect on the
success of our business.
Our
commercial success depends upon our ability, and the ability of our
collaborators, to develop, manufacture, market and sell our
CELsignia tests and use our proprietary technologies without
infringing the proprietary rights of third parties. There is
considerable intellectual property litigation in the medical
technology, biotechnology and pharmaceutical industries. We may
become party to, or threatened with, future adversarial proceedings
or litigation regarding intellectual property rights with respect
to our CELsignia platform, including interference or derivation
proceedings before the U.S. PTO and similar bodies in other
jurisdictions. Third parties may assert infringement claims against
us based on existing patents or patents that may be granted in the
future.
If
we are found to infringe a third party’s intellectual
property rights, we could be required to obtain a license from such
third party to continue developing and marketing our CELsignia
platform and CELsignia tests. However, we may not be able to obtain
any required license on commercially reasonable terms or at all.
Even if we were able to obtain a license, it could be
non-exclusive, thereby giving our competitors access to the same
technologies licensed to us. We could be forced, including by court
order, to cease commercializing the infringing technology or
product. In addition, we could be found liable for monetary
damages, including treble damages and attorneys’ fees if we
are found to have willfully infringed a patent. A finding of
infringement could prevent us from commercializing our CELsignia
platform or force us to cease some of our business operations,
which could materially harm our business. Claims that we have
misappropriated the confidential information or trade secrets of
third parties could have a similar negative impact on our
business.
We may be subject to claims by third parties asserting that our
employees or we have misappropriated their intellectual property,
or claiming ownership of what we regard as our own intellectual
property.
Our current and future employees may have been
previously employed at universities or other biotechnology,
diagnostic technology or pharmaceutical companies, including our
competitors or potential competitors and strategic partners.
Although we try to ensure that our employees do not use the
proprietary information or know-how of others in their work for us,
we may be subject to claims that these employees or we have used or
disclosed intellectual property, including trade secrets or
other
proprietary information,
of any such employee’s former employer. Litigation may be
necessary to defend against these claims.
In
addition, while it is our policy to require our employees and
contractors who may be involved in the development of intellectual
property to execute agreements assigning such intellectual property
to us, we may be unsuccessful in executing such an agreement with
each party who in fact develops intellectual property that we
regard as our own. Our and their assignment agreements may not be
self-executing or may be breached, and we may be forced to bring
claims against third parties, or defend claims they may bring
against us, to determine the ownership of what we regard as our
intellectual property.
If
we fail in prosecuting or defending any such claims, in addition to
paying monetary damages, we may lose valuable intellectual property
rights or personnel. Even if we are successful in prosecuting or
defending against such claims, litigation could result in
substantial costs and be a distraction to management.
Any lawsuits relating to infringement of intellectual property
rights necessary to defend ourselves or enforce our rights will be
costly and time consuming and could be unsuccessful.
Because
competition in our industry is intense, competitors may infringe or
otherwise violate our issued patents, patents of our licensors or
other intellectual property. To counter infringement or
unauthorized use, we may be required to file infringement claims,
which can be expensive and time consuming, and could distract our
technical and management personnel from their normal
responsibilities. Any claims we assert against perceived infringers
could provoke these parties to assert counterclaims against us
alleging that we infringe their patents. In addition, in a patent
infringement proceeding, a court may decide that a patent of ours
is invalid or unenforceable, in whole or in part, construe the
patent’s claims narrowly or refuse to stop the other party
from using the technology at issue on the grounds that our patents
do not cover the technology in question. An adverse result in any
litigation proceeding could put one or more of our patents at risk
of being invalidated or interpreted narrowly. We may also elect to
enter into license agreements in order to settle patent
infringement claims or to resolve disputes prior to litigation, and
any such license agreements may require us to pay royalties and
other fees that could be significant. Furthermore, because of the
substantial amount of discovery required in connection with
intellectual property litigation, there is a risk that some of our
confidential information could be compromised by
disclosure.
29
If we are not able to prevent disclosure of our trade secrets and
other proprietary information, the value of our CELsignia platform
could be significantly diminished.
We
rely on trade secret protection to protect our interests in
proprietary know-how and in processes for which patents are
difficult to obtain or enforce. We may not be able to protect our
trade secrets adequately. We have a policy of requiring our
consultants, advisors and strategic partners to enter into
confidentiality agreements and our employees to enter into
invention, non-disclosure and non-compete agreements. However, no
assurance can be given that we have entered into appropriate
agreements with all parties that have had access to our trade
secrets, know-how or other proprietary information. There is also
no assurance that such agreements will provide meaningful
protection of our trade secrets, know-how or other proprietary
information in the event of any unauthorized use or disclosure of
information. Furthermore, we cannot provide assurance that any of
our employees, consultants, contract personnel, or strategic
partners, either accidentally or through willful misconduct, will
not cause serious damage to our programs and/or our strategy, for
example by disclosing important trade secrets, know-how or
proprietary information to our competitors. It is also possible
that our trade secrets, know-how or other proprietary information
could be obtained by third parties as a result of breaches of our
physical or electronic security systems. Any disclosure of
confidential data into the public domain or to third parties could
allow our competitors to learn our trade secrets and use the
information in competition against us. In addition, others may
independently discover our trade secrets and proprietary
information. Any action to enforce our rights is likely to be time
consuming and expensive, and may ultimately be unsuccessful, or may
result in a remedy that is not commercially valuable. These risks
are accentuated in foreign countries where laws or law enforcement
practices may not protect proprietary rights as fully as in the
United States. Any unauthorized disclosure of our trade secrets or
proprietary information could harm our competitive
position.
Risks Relating to Our Common Stock
Provisions
in our corporate charter documents and under Delaware law could
make an acquisition of our company, which may be beneficial to our
stockholders, more difficult and may prevent attempts by our
stockholders to replace or remove our current
management.
Provisions
in our certificate of incorporation and our bylaws may discourage,
delay or prevent a merger, acquisition or other change in control
of our company that stockholders may consider favorable, including
transactions in which you might otherwise receive a premium for
your shares. These provisions could also limit the price that
investors might be willing to pay in the future for shares of our
common stock, thereby depressing the market price of our common
stock. In addition, because our board of directors will be
responsible for appointing the members of our management team,
these provisions may frustrate or prevent any attempts by our
stockholders to replace or remove our current management by making
it more difficult for stockholders to replace members of our board
of directors. Among other things, these provisions:
●
allow
the authorized number of our directors to be changed only by
resolution of our board of directors;
●
limit
the manner in which stockholders can remove directors from our
board of directors;
●
establish
advance notice requirements for stockholder proposals that can be
acted on at stockholder meetings and nominations to our board of
directors;
●
require
that stockholder actions must be effected at a duly called
stockholder meeting and prohibit actions by our stockholders by
written consent;
●
limit
who may call stockholder meetings;
●
authorize
our board of directors to issue preferred stock without stockholder
approval, which could be used to institute a “poison
pill” that would work to dilute the stock ownership of a
potential hostile acquirer, effectively preventing acquisitions
that have not been approved by our board of directors;
and
●
require
the approval of the holders of at least two-thirds of the votes
that all our stockholders would be entitled to cast to amend or
repeal specified provisions of our certificate of incorporation or
bylaws.
Moreover,
we are governed by the provisions of Section 203 of the Delaware
General Corporation Law, which prohibits a person who owns in
excess of 15% of our outstanding voting stock from merging or
combining with us for a period of three years after the date of the
transaction in which the person acquired in excess of 15% of our
outstanding voting stock, unless the merger or combination is
approved in a prescribed manner.
Any
of these provisions of our charter documents or Delaware law could,
under certain circumstances, depress the market price of our common
stock.
30
The price of our common stock may be volatile and fluctuate
substantially, which could result in substantial losses for
purchasers of our common stock.
Our
stock price may be extremely volatile. The stock market in general
and the market for smaller medical technology companies in
particular have experienced extreme volatility that has often been
unrelated to the operating performance of particular companies. As
a result of this volatility, you may not be able to sell your
common stock at or above the price you paid for such stock. The
market price for our common stock may be influenced by many
factors, including:
●
the
success of competitive products or technologies;
●
results
of planned clinical trials of our first CELsignia HSF Test or other
CELsignia tests may develop in the future;
●
regulatory
or legal developments in the United States and other
countries;
●
developments
or disputes concerning patent applications, issued patents or other
proprietary rights;
●
the
recruitment or departure of key personnel;
●
the
level of expenses related to any of our CELsignia tests or clinical
development programs;
●
actual
or anticipated changes in estimates as to financial results,
development timelines or recommendations by securities
analysts;
●
operating
results that fail to meet expectations of securities analysts that
cover our company;
●
variations
in our financial results or those of companies that are perceived
to be similar to us;
●
changes
in the structure of healthcare payment systems;
●
market
conditions in the pharmaceutical, biotechnology and medical
technology sectors;
●
sales
of our stock by us, our insiders and our other
stockholders;
●
general
economic and market conditions; and
●
the
other factors described in this “Risk Factors”
section.
We may be subject to securities litigation, which is expensive and
could divert management attention.
Smaller medical technology companies like us often
experience volatile stock prices, and companies that have
experienced volatility in the market price of their stock have been
subject to an increased incidence of securities class action
litigation. We
may be the
target of this type of litigation in the future. Securities
litigation against us could result in substantial costs and divert
our management’s attention from other business concerns,
which could seriously harm our business.
If securities or industry analysts do not publish research or
reports about our business, or publish negative reports about our
business, our stock price and trading volume could
decline.
The
trading market for our common stock depends in part on the research
and reports that securities or industry analysts publish about us
or our business. We do not have any control over these analysts.
There can be no assurance that analysts will cover us or provide
favorable coverage. If one or more of the analysts who cover us
downgrade our stock or change their opinion of our stock, our stock
price would likely decline. If one or more of these analysts cease
coverage of our company or fail to regularly publish reports on us,
we could lose visibility in the financial markets, which could
cause our stock price or trading volume to decline.
We are an “emerging growth company,” and the reduced
disclosure requirements applicable to emerging growth companies may
make our common stock less attractive to investors.
We
are an “emerging growth company,” as defined in the
JOBS Act, and may remain an emerging growth company for up to five
years. For so long as we remain an emerging growth company, we are
permitted and intend to rely on exemptions from certain disclosure
requirements that are applicable to other public companies that are
not emerging growth companies. These exemptions
include:
●
being
permitted to provide only two years of audited financial
statements, in addition to any required unaudited interim financial
statements, with correspondingly reduced “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations” disclosure;
●
not
being required to comply with the auditor attestation requirements
in the assessment of our internal control over financial reporting
of Section 404(b) of the Sarbanes-Oxley Act;
●
not
being required to comply with any requirement that may be adopted
by the Public Company Accounting Oversight Board regarding
mandatory audit firm rotation or a supplement to the
auditor’s report providing additional information about the
audit and the financial statements;
●
reduced
disclosure obligations regarding executive compensation;
and
●
exemptions
from the requirements of holding a nonbinding advisory vote on
executive compensation and stockholder approval of any golden
parachute payments not previously approved.
We
have taken advantage of reduced reporting burdens in this report.
We cannot predict whether investors will find our common stock less
attractive if we rely on these exemptions. If some investors find
our common stock less attractive as a result, there may be a less
active trading market for our common stock and our stock price may
be more volatile.
31
We incur increased costs as a result of operating as a public
company, and our management will be required to devote substantial
time to new compliance initiatives and corporate governance
practices.
As
a public company, and particularly after we are no longer an
emerging growth company, we will incur significant legal,
accounting and other expenses that we did not incur as a private
company. The Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform
and Consumer Protection Act, the continued listing requirements of
The Nasdaq Stock Market and other applicable securities rules and
regulations impose various requirements on public companies,
including establishment and maintenance of effective disclosure and
financial controls and corporate governance practices. Our
management and other personnel will need to devote a substantial
amount of time to these compliance initiatives. Moreover, these
rules and regulations have increased our ongoing legal and
financial compliance costs and will make some activities more
time-consuming and costly.
Pursuant
to Section 404 of the Sarbanes-Oxley Act, or Section 404, we are
required to furnish a report by our management on our internal
control over financial reporting. If we cease to be an emerging
growth company, we will also be required to include an attestation
report on internal control over financial reporting issued by our
independent registered public accounting firm as required by
Section 404(b). As of December 31, 2018, our management identified
a material weakness in our internal controls due to the lack of
segregation of duties, and as a result, concluded that our internal
control over financial reporting was, at that time, ineffective.
While we have remediated this material weakness and, as of December
31, 2019, concluded that our internal control over financial
reporting was effective, we may need to dedicate additional
internal resources and engage outside consultants to maintain
compliance with Section 404 in the future. Any material weaknesses
that we may identify in the future could result in an adverse
reaction in the financial markets due to a loss of confidence in
the reliability of our financial statements.
Since we do not anticipate paying any cash dividends on our capital
stock in the foreseeable future, stock price appreciation, if any,
will be your sole source of gain.
We
currently intend to retain all of our future earnings, if any, to
finance the growth and development of our business. In addition,
the terms of any future debt agreements may preclude us from paying
dividends. As a result, appreciation, if any, in the market price
of our common stock will be your sole source of gain for the
foreseeable future.
I
TEM 1B. Unresolved Staff
Comments
None.
I
TEM 2. Properties
We currently lease and occupy approximately 16,000
square feet in Minneapolis, Minnesota, which includes our clinical
laboratory and offices. This lease expires in April 2021 and is
renewable annually
with the right to extend the term for two
periods of one year each and provides for monthly rent, real estate
taxes and operating expenses. We believe that this leased space is
adequate to meet current and anticipated future requirements and
that additional or substitute space will be available as needed to
accommodate any expansions that our operations
require.
I
TEM 3. Legal Proceedings
From
time to time we may be involved in disputes or litigation relating
to claims arising out of our operations. We are not currently a
party to any legal proceedings that could reasonably be expected to
have a material adverse effect on our business, financial condition
and results of operations.
I
TEM 4. Mine Safety
Disclosures
Not
applicable.
32
P
ART II
I
TEM 5. Market For Registrant’s
Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities.
Market Price Information
Our
common stock has been listed on The Nasdaq Capital Market under the
symbol "CELC" since September 20, 2017.
As of
February 28, 2020, there were approximately 44 holders of record of
our common stock. The actual number of holders of common stock is
greater than this number of record holders and includes
stockholders who are beneficial owners, but whose shares are held
in street name by brokers and nominees. The number of holders of
record also does not include stockholders whose shares may be held
in trust by other entities.
Dividends
We have
never declared or paid any cash dividends on our common stock. We
currently intend to retain our future earnings, if any, to finance
the operation and expansion of our business. We do not expect to
pay cash dividends on our common stock in the foreseeable future.
Payment of future cash dividends, if any, will be at the discretion
of our board of directors after taking into account various
factors, including our financial condition, operating results,
current and anticipated cash needs, outstanding indebtedness and
plans for expansion and restrictions imposed by lenders, if
any.
Recent Sales of Unregistered Securities
None.
Issuer Purchases of Equity Securities
None.
Equity Compensation Plan Information
The
information required by this Item concerning equity compensation
plans is incorporated herein by reference from Part III,
Item 11 of this Annual Report.
Use of Proceeds from Registered Securities
On
September 22, 2017, we issued and sold 2,760,000 shares of our
common stock in the IPO at a public offering price of $9.50 per
share, for aggregate gross proceeds of $26.2 million. All of the
shares issued and sold in the IPO were registered under the
Securities Act pursuant to a Registration Statement on
Form S-1 (File No. 333-220128), which was declared
effective by the SEC on September 19, 2017. Craig-Hallum Capital
Group LLC acted as the sole manager for the offering. The offering
terminated on September 22, 2017.
The net
offering proceeds to us, after deducting underwriting discounts of
approximately $1.8 million and offering expenses paid by us
totaling approximately $1.1 million, were approximately $23.3
million. No offering expenses were paid directly or indirectly to
any of our directors or officers (or their associates) or persons
owning 10.0% or more of any class of our equity securities or to
any other affiliates.
At
December 31, 2019, the net proceeds from our IPO were held in a
diversified portfolio of bank deposits and prime and government
money market funds. All investments are highly liquid, with
liquidity and capital preservation being the primary investment
objectives. There has been no material change in our planned uses
of the net proceeds from those described in the Prospectus dated
September 19, 2017.
33
I
TEM 6. Selected Financial
Data
The
following tables present, as of the dates and for the years
indicated, our selected historical financial data, as indicated
therein. The statement of operations data for the years ended
December 31, 2019 and 2018 and the balance sheet data as of
December 31, 2019 and 2018 are derived from our audited
financial statements that are included elsewhere in this Annual
Report. Our historical results are not indicative of the results to
be expected in the future.
You
should read this information together with our financial statements
and the related notes, as well as Part II, Item 7.
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations” of this Annual
Report.
Celcuity Inc.
Statements of Operations
|
|
Years
Ended December 31,
|
|
|
|
2019
|
2018
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
Research
and development
|
$
6,269,308
|
$
6,325,995
|
|
General
and administrative
|
1,535,993
|
1,606,543
|
|
Total
operating expenses
|
7,805,301
|
7,932,538
|
|
Loss
from operations
|
(7,805,301
)
|
(7,932,538
)
|
|
|
|
|
|
Other
income (expense)
|
|
|
|
Interest
expense
|
(159
)
|
(111
)
|
|
Interest
income
|
446,096
|
448,834
|
|
Gain
on sale of fixed assets
|
-
|
3,000
|
|
Other
income, net
|
445,937
|
451,723
|
|
Net loss before income taxes
|
(7,359,364
)
|
(7,480,815
)
|
|
Income
tax benefits
|
-
|
-
|
|
Net loss
|
$
(7,359,364
)
|
$
(7,480,815
)
|
|
|
|
|
|
Net
loss per share, basic and diluted
|
$
(0.72
)
|
$
(0.74
)
|
|
|
|
|
|
Weighted
average common shares outstanding, basic and diluted
|
10,226,041
|
10,124,544
|
|
|
As of December 31,
|
|
|
|
2019
|
2018
|
|
Balance Sheet Data:
|
|
|
|
Total
assets
|
$
20,280,800
|
$
26,031,821
|
|
Total
liabilities
|
983,229
|
682,210
|
|
Total
stockholders' equity
|
19,297,571
|
25,349,611
|
34
I
TEM 7. Management’s Discussion
and Analysis of Financial Condition and Results of
Operations
You
should read the following discussion and analysis of our financial
condition and results of operations together in conjunction with
our financial statements and the related notes included elsewhere
in this report. Some of the information contained in this
discussion and analysis or set forth elsewhere in this report,
including information with respect to our plans and strategy for
our business and expected financial results, includes
forward-looking statements that involve risks and uncertainties.
You should review the “Risk Factors” discussed in Item
1A of Part I of this Annual Report.
OVERVIEW
We are
developing companion diagnostic tests designed to expand the
eligible patient populations for targeted therapies by discovering
new cancer sub-types molecular-based approaches cannot detect. Our
proprietary CELsignia diagnostic platform is the only commercially
ready technology we are aware of that uses a patient’s living
tumor cells to identify the specific abnormal cellular process
driving a patient’s cancer and the targeted therapy that best
treats it. We believe our CELsignia platform provides two important
improvements over traditional molecular diagnostics. First,
molecular diagnostics can only provide a snapshot of the genetic
mutations present in a patient’s tumor because they analyze
fixed (i.e., dead) cells. Using fixed cells prevents molecular
diagnostics from analyzing in the dynamic cellular activities,
known as cell signaling, that regulate cell proliferation or
survival. Cancer can develop when certain cell signaling activity
becomes abnormal, or dysregulated. Since genetic mutations are
often only weakly correlated to the dysregulated signaling activity
driving a patient’s cancer, a molecular diagnostic is prone
to providing an incomplete diagnosis. CELsignia tests overcome this
limitation by measuring dynamic cell signaling activity in a
patient’s living tumor cells. When a CELsignia test detects
abnormal signaling activity, a more accurate diagnosis of the
patient’s cancer driver is obtained. Second, molecular
diagnostics can only estimate the probability of a patient’s
potential drug response based on a statistical analysis of the
drug’s clinical trial results. Instead of this indirect
estimate of drug response, CELsignia tests directly measure the
effectiveness of a targeted therapy in a patient’s living
tumor cells. This enables physicians to confirm that the
therapeutic matching the patient’s cancer driver is
functional in the patient’s tumor cells before prescribing
it, which significantly increases the likelihood of a positive
clinical outcome.
Our
first analytically validated and commercially ready test using our
CELsignia platform, the CELsignia HSF Test, diagnoses two new
sub-types of HER2-negative breast cancer that traditional molecular
diagnostics cannot detect. Our internal studies show that
approximately 15-20% of HER2-negative breast cancer patients have
abnormal HER2 signaling activity similar to levels found in HER2+
breast cancer cells. As a result, these HER2-negative patients have
undiagnosed HER2-driven breast cancer and would be likely to
respond to the same anti-HER2 targeted therapies only HER2+
patients receive today. We have two interventional clinical trials
underway to evaluate the efficacy of HER2 targeted therapies in
breast cancer patients selected with our CELsignia HSF
Test.
Our
second CELsignia test for breast cancer evaluates independent c-Met
signaling activity and its involvement with HER family signaling in
HER2-negative breast cancer tumor cells. Our internal studies show
that approximately 20%-25% of HER2-negative breast cancer patients
have abnormal c-Met signaling activity that is co-activated with
abnormal HER family signaling. These studies suggest that this
sub-group of HER2-negative breast cancer patients may best respond
to treatment with a combination of HER family and c-Met
inhibitors.
We
completed development of our third CELsignia test for breast cancer
during the fourth quarter of 2019. This new test evaluates PI3K
signaling in HER2-negative breast cancer tumor cells. Our internal
studies demonstrate how measurement of PI3K-involved signaling may
provide a more sensitive and specific method of identifying
patients most likely to benefit from PI3K inhibitors than current
genetic tests that measure PI3K mutations.
We
intend to combine these three tests to create the CELsignia
Multi-Pathway Signaling Function Test. With this next generation
CELsignia test, we plan to provide an analysis of HER1, HER2, HER3,
c-MET, and PI3K-node involved signaling activity for each patient
tumor specimen received.
In
addition to our CELsignia tests for HER2-negative breast cancer, we
are developing CELsignia tests to diagnose 11 new potential cancer
sub-types we have discovered in breast, lung, colon, ovarian,
kidney, and bladder cancers. Approved or investigational drugs are
currently available to treat these new potential cancer sub-types.
We expect to launch these additional tests on a staggered basis
over the next few years while continuing our research to identify
additional new cancer sub-types.
Our
overall commercialization strategy is to develop diagnostics that
identify new cancer sub-types and to seek collaborations with
pharmaceutical companies, which can vary in scope. We have two
collaborations underway that rely on the CELsignia HSF Test to
select breast cancer patients for treatment with HER2 targeted
therapies. For the first one of these collaborations, we are
fielding a prospective clinical trial with Genentech and NSABP to
evaluate the efficacy of Genentech’s HER2 targeted therapies
in patients with abnormal HER2 signaling. We expect interim results
from this trial in early-to-mid 2021 and final results
approximately nine months later. For the second of these
collaborations, we are fielding a prospective clinical trial with
Puma and West Cancer Center to evaluate the efficacy and safety of
Puma’s drug, Nerlynx, and chemotherapy, in breast cancer
patients selected with our CELsignia HSF Test. We expect to obtain
interim results in mid-2021 and final results approximately 9-12
months later.
For a
third collaboration, we were selected by NSABP and Puma to evaluate
tissue samples from a Phase II study evaluating Puma’s
pan-HER inhibitor, Nerlynx, Genentech’s HER2 antibody,
Herceptin, and Bristol-Myers Squibb’s EGFR inhibitor,
Erbitux, in metastatic colorectal cancer patients. This 35-patient
study is expected to be completed in late 2021. Unlike the trial
with NSABP and Genentech, our CELsignia test will be used solely to
evaluate tissue samples after they have been enrolled in this
trial. We will not receive payment for the testing we perform. We
expect our CELsignia test will provide critical insight after the
trial is completed about the patient characteristics most
correlative to drug response.
35
In
conjunction with the development of the CELsignia MP test, we will
seek collaborations with pharmaceutical companies to field clinical
trials that evaluate the efficacy of combining HER family
inhibitors and c-Met inhibitors in breast cancer patients who have
abnormal c-Met and abnormal HER1 pathway activity. The FDA has
approved two c-Met inhibitors and six HER-family inhibitors for
cancer treatment. Additional c-Met and HER-family inhibitors are
being evaluated in on-going clinical trials. Several pharmaceutical
companies possess both a c-Met and a HER family inhibitor. We will
also seek collaborations with pharmaceutical companies to field
clinical trials that evaluate the efficacy of PI3K inhibitors in
breast cancer patients who have abnormal PI3K-node involved
signaling activity. The FDA has approved several PI3K inhibitors
for cancer treatment and additional PI3K inhibitors are being
evaluated in on-going clinical trials.
We have
not generated any revenue from sales to date, and we continue to
incur significant research and development and other expenses
related to our ongoing operations. As a result, we are not and have
never been profitable and have incurred losses in each period since
we began operations in 2012. For the years ended December 31, 2019
and 2018, we reported a net loss of approximately $7.4 and
$7.5 million, respectively. As of December 31, 2019, we had a
combined accumulated deficit of approximately $12.6 million
under Celcuity LLC and $16.8 million under Celcuity Inc. As of
December 31, 2019, we had cash and cash equivalents of
approximately $18.7 million.
RESULTS OF OPERATIONS
Components of Operating Results
Revenue
To
date, we have not generated any revenue. Initially, our ability to
generate revenue will depend primarily upon our ability to obtain
partnership agreements with pharmaceutical companies to provide
companion diagnostics for such pharmaceutical partners’
existing or investigational targeted therapies. We expect these
partnerships to generate significant revenue from the sale of tests
to identify patients eligible for clinical trials, from milestone
payments, and, potentially, from royalties on the incremental drug
revenues our tests enable. Once a new drug indication is received
that requires use of our companion diagnostic to identify eligible
patients, we expect to generate revenues from sales of tests to
treating physicians.
Research
and Development
Since our inception, we have
primarily focused on research and development of our CELsignia
platform, development and validation of our CELsignia tests, and
research related to the discovery of new cancer sub-types. Research
and development expenses primarily include:
●
employee-related
expenses related to our research and development activities,
including salaries, benefits, recruiting, travel and stock-based
compensation expenses;
●
laboratory
supplies;
●
consulting
fees paid to third parties;
●
clinical
trial costs;
●
facilities
expenses; and
●
legal
costs associated with patent applications.
Internal and
external research and development costs are expensed as they are
incurred. As we continue to expand clinical trials to evaluate
efficacy of targeted therapies in cancer patients selected with one
of our CELsignia tests, the proportion of research and development
expenses allocated to external spending will grow at a faster rate
than expenses allocated to internal expenses.
General and Administrative
General
and administrative expenses consist primarily of salaries, benefits
and stock-based compensation related to our executive, finance and
support functions. Other general and administrative expenses
include professional fees for auditing, tax, and legal services
associated with being a public company, director and officer
insurance and travel expenses for our general and administrative
personnel.
Sales and Marketing
Selling
and marketing expenses consist primarily of professional and
consulting fees related to these functions. To date, we have
incurred immaterial sales and marketing expenses as we continue to
focus primarily on the development of our CELsignia platform and
corresponding CELsignia tests. We expect to begin to incur
increased selling and marketing expenses in anticipation of the
commercialization of our first CELsignia tests. These increased
expenses are expected to include payroll-related costs as we add
employees in the commercial departments, costs related to the
initiation and operation of our sales and distribution network and
marketing related costs.
36
Interest Expense
Interest expense is
the result of finance lease obligations.
Interest Income
Interest income
consists of interest income earned on our cash, cash equivalents,
and investment balances.
Results of Operations
Comparison of the Years Ended December 31, 2019 and
2018
|
|
Years Ended December 31,
|
Increase (Decrease)
|
|
|
|
|
2019
|
2018
|
$
|
Percent Change
|
|
Statements of Operations Data:
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
Research
and development
|
$
6,269,308
|
$
6,325,995
|
$
(56,687
)
|
(1
)%
|
|
General
and administrative
|
1,535,993
|
1,606,543
|
(70,550
)
|
(4
)
|
|
Total
operating expenses
|
7,805,301
|
7,932,538
|
(127,237
)
|
(2
)
|
|
Loss
from operations
|
(7,805,301
)
|
(7,932,538
)
|
127,237
|
(2
)
|
|
Other
income (expense)
|
|
|
|
|
|
Interest
expense
|
(159
)
|
(111
)
|
(48
)
|
n/a
|
|
Interest
income
|
446,096
|
448,834
|
(2,738
)
|
(1
)
|
|
Gain
on sale of fixed assets
|
-
|
3,000
|
(3,000
)
|
n/a
|
|
Other
income, net
|
445,937
|
451,723
|
(5,786
)
|
(1
)
|
|
Net loss before income taxes
|
(7,359,364
)
|
(7,480,815
)
|
121,451
|
(2
)
|
|
Income
tax benefits
|
-
|
-
|
-
|
-
|
|
Net loss
|
$
(7,359,364
)
|
$
(7,480,815
)
|
$
121,451
|
(2
)%
|
Research and Development
For the
year ended December 31, 2019, our total research and development
expenses decreased approximately $0.06 million, or 1%, to
approximately $6.27 million from $6.33 million for the prior year.
The decrease primarily resulted from a $0.31 million decrease in
compensation expense, primarily in payroll taxes resulting from
utilization of research and development tax credits as authorized
by the Path Act and a decrease of $0.16 million in non-cash
stock-based compensation. This decrease was offset by a $0.41
million increase in clinical validation and laboratory studies,
legal expenses related to patent costs and operational and business
development activities.
Conducting a
significant amount of research and development is central to our
business model. We plan to increase our research and development
expenses for the foreseeable future as we seek to discover new
cancer sub-types and to develop and validate additional CELsignia
tests to diagnose such sub-types. We also expect to incur increased
expenses to support companion diagnostic business development
activities with pharmaceutical companies as we develop additional
CELsignia tests.
General and Administrative
For the
year ended December 31, 2019, our total general and administrative
expenses decreased approximately $0.07 million, or 4%, to
approximately $1.54 million from $1.61 million for the prior year.
The decrease primarily resulted from a decrease in professional
fees associated with being a public company.
We
anticipate that our general and administrative expenses will
increase in future periods, reflecting both increased costs in
connection with the potential future commercialization of CELsignia
tests, an expanding infrastructure, and increased professional fees
associated with being a public reporting company.
Interest Expense
For the
years ended December 31, 2019 and 2018, interest expense is related
to finance lease liabilities.
Interest Income
For the
year ended December 31, 2019, interest income was essentially flat
over the prior year. Higher market interest rates on cash and cash
equivalents was offset by lower cash balances.
37
LIQUIDITY AND CAPITAL RESOURCES
Since
our inception, we have incurred losses and cumulative negative cash
flows from operations. Through December 31, 2019, we raised
capital of approximately $13.7 million and $7.5 million through
private placements of common equity and unsecured convertible
notes, respectively. On September 22, 2017, we closed on the IPO of
our common stock, which generated approximately $
23.3
million of
additional cash after taking into account underwriting discounts
and commissions and offering expenses. Cash from these capital
raising activities has been our primary source of funds for our
operations since inception. As of December 31, 2019, our cash
and cash equivalents were approximately $18.7 million, and we had a
combined accumulated deficit of approximately $12.6 million
under Celcuity LLC and $16.8 million under Celcuity
Inc.
We
expect that our research and development and general and
administrative expenses will increase as we continue to develop our
CELsignia platform and additional CELsignia tests, conduct research
related to the discovery of new cancer sub-types, conduct clinical
trials, and pursue other business development activities. We will
also start to incur sales and marketing expenses as we
commercialize our CELsignia tests. We expect to use cash on hand to
fund our research and development expenses, capital expenditures,
working capital, sales and marketing expenses, and general
corporate expenses, as well as for the increased costs associated
with being a public company.
Based
on our current business plan,
we
believe that our current cash on hand will provide sufficient cash
to finance operations and pay obligations when due until the fourth
quarter of 2021.
We may
seek to raise additional capital to expand our business, pursue
strategic investments, and take advantage of financing or other
opportunities that we believe to be in the best interests of the
company and our stockholders. Additional capital may be raised
through the sale of common or preferred equity or convertible debt
securities, entry into debt facilities or other third-party funding
arrangements. The sale of equity and convertible debt securities
may result in dilution to our stockholders and those securities may
have rights senior to those of our common shares. Agreements
entered into in connection with such capital raising activities
could contain covenants that would restrict our operations or
require us to relinquish certain rights. Additional capital may not
be available on reasonable terms, or at all.
Cash Flows
The
following table sets forth the primary sources and uses of cash for
the years ended December 31:
|
|
2019
|
2018
|
|
Net
cash provided by (used in):
|
|
|
|
Operating
activities
|
$
(5,998,711
)
|
$
(6,076,269
)
|
|
Investing
activities
|
8,529,799
|
19,094,392
|
|
Financing
activities
|
259,305
|
236,697
|
|
Net
increase in cash and cash equivalents
|
$
2,790,393
|
$
13,254,820
|
Operating Activities
Net
cash used in operating activities was approximately $6.0 million
for the year ended December 31, 2019 and consisted primarily of a
net loss of approximately $7.36 million and working capital
changes of approximately $0.06 million, adjusted for non-cash items
of approximately $1.42 million. The working capital change was
primarily due to approximately $0.19 million increase in payroll
tax receivable, offset by a $0.11 million increase in accrued
expenses. Non-cash expense items of approximately $1.42 million
consisted of depreciation of approximately $0.34 million,
stock-based compensation expense of approximately $1.04
million and interest income of approximately $0.04
million.
Net
cash used in operating activities was approximately $6.08 million
for the year ended December 31, 2018 and consisted primarily of a
net loss of approximately $7.48 million and approximately
$0.07 million in working capital changes, adjusted for non-cash
items of approximately $1.47 million. The working capital change
was primarily due to approximately $0.05 million increase in
prepaid insurance and deposits. Non-cash expense items of
approximately $1.47 million consisted of depreciation of
approximately $0.22 million, stock-based compensation expense
of approximately $1.17 million and interest income of
approximately $0.08 million.
Investing Activities
Net
cash provided by investing activities for the year ended December
31, 2019 was approximately $8.53 million and consisted of
approximately $8.91 million of net proceeds from investments in
certificates of deposit and government securities (U.S. Treasury
Notes and U.S. government agency securities), adjusted by
approximately $0.38 million in purchases of property and
equipment.
Net
cash provided by investing activities for the year ended December
31, 2018 was approximately $19.09 million and consisted of
approximately $19.72 million of net proceeds from investments in
certificates of deposit and government securities (U.S. Treasury
Notes and U.S. government agency securities), adjusted by
approximately $0.63 million in purchases of property and
equipment.
38
Financing Activities
Net
cash provided by financing activities for the year ended December
31, 2019 was approximately $0.26 million and consisted of proceeds
from the exercise of common stock warrants and stock options, and
employee stock purchases.
Net
cash provided by financing activities for the year ended December
31, 2018 was approximately $0.24 million and primarily consisted of
approximately $0.33 million of proceeds from the exercise of common
stock warrants and employee stock purchases, adjusted by
approximately $0.06 million for payment of taxes for net share
settlement of stock options exercised.
OFF-BALANCE SHEET ARRANGEMENTS
We do
not currently have any off-balance sheet arrangements as defined in
Item 303(a)(4) of Regulation S-K.
RECENT ACCOUNTING PRONOUNCEMENTS
From time to time new accounting pronouncements
are issued by the Financial Accounting Standards Board, or FASB, or
other standard setting bodies and adopted by us as of the specified
effective date. Unless otherwise discussed in Note 2 to our
financial statements included elsewhere
in this
report
, we believe that the impact of
recently issued standards that are not yet effective will not have
a material impact on our financial position or results of
operations upon adoption.
CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES
Our
management’s discussion and analysis of financial condition
and results of operations is based on our financial statements,
which have been prepared in accordance with accounting principles
generally accepted in the United States, or Generally Accepted
Accounted Principles (“U.S. GAAP”). The preparation of
these financial statements requires us to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities
at the date of the financial statements, as well as the reported
expenses during the reporting periods. These items are monitored
and analyzed by us for changes in facts and circumstances, and
material changes in these estimates could occur in the future. We
base our estimates on historical experience and on various other
factors that we believe are reasonable under the circumstances; the
results of which form the basis for making judgments about the
carrying value of assets and liabilities that are not readily
apparent from other sources. Changes in estimates are reflected in
reported results for the period in which they become known. Actual
results may differ materially from these estimates.
Our
significant accounting policies are more fully described in Note 2
to our financial statements included elsewhere in this Annual
Report. Of our significant accounting policies, we believe that the
following is the most critical:
Stock-Based Compensation
Our
stock-based compensation consists of common stock options and
restricted stock issued to certain employees and nonemployees and
our Employee Stock Purchase Plan (“ESPP”). We recognize
compensation expense based on an estimated grant date fair value
using the Black-Scholes option-pricing method. We have elected to
account for forfeitures as they occur.
The
inputs for the Black-Scholes valuation model require
management’s significant assumptions. Prior to our IPO, the
price per share of common stock was determined by our board based
on recent prices of common stock sold in private offerings.
Subsequent to the IPO, the price per share of common stock is
determined by using the closing market price on the Nasdaq Capital
Market on the grant date. The risk-free interest rates are based on
the rate for U.S. Treasury securities at the date of grant with
maturity dates approximately equal to the expected life at the
grant date. The expected life was based on the simplified method in
accordance with SEC Staff Accounting Bulletin Nos. 107 and 110. The
expected volatility was estimated based on historical volatility
information of peer companies that are publicly available in
combination with our calculated volatility since being publicly
traded.
All
assumptions used to calculate the grant date fair value of
nonemployee options are generally consistent with the assumptions
used for options granted to employees. In the event we terminate
any of our consulting agreements, the unvested options issued in
connection with such agreements would also be cancelled. Unvested
nonemployee options were marked-to-market through April 1, 2018,
the date that we adopted ASU No. 2018-07,
Improvements to Non-employee Share-Based
Payment Accounting
.
For
grants of restricted stock, we record compensation expense based on
the quoted fair value of the shares on the grant date over the
requisite service period. Compensation expense for ESPP rights is
recorded in line with each respective offering period
.
39
I
TEM 7A.
Quantitative
and Qualitative Disclosures About Market Risk
As a
smaller reporting company, we are not required to provide
disclosure pursuant to this item.
40
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
To the
Board of Directors and
Stockholders
of Celcuity Inc.
Opinion on the Financial Statements
We have
audited the accompanying balance sheets of Celcuity Inc. (the
Company) as of December 31, 2019 and 2018, and the related
statements of operations, changes in stockholders’ equity,
and cash flows for each of the years in the two-year period ended
December 31, 2019, and the related notes (collectively referred to
as the financial statements). In our opinion, the financial
statements present fairly, in all material respects, the financial
position of the Company as of December 31, 2019 and 2018 and the
results of its operations and its cash flows for each of the years
in the two-year period ended December 31, 2019, in conformity with
accounting principles generally accepted in the United States of
America.
Basis for Opinion
These
financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on the
Company’s financial statements based on our audits. We are a
public accounting firm registered with the Public Company
Accounting Oversight Board (United States) (PCAOB) and are required
to be independent with respect to the Company in accordance with
the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the
PCAOB.
We
conducted our audits in accordance with the standards of the PCAOB.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements
are free of material misstatement, whether due to error or fraud.
The Company is not required to have, nor were we engaged to
perform, an audit of its internal control over financial reporting.
As part of our audits, we are required to obtain an understanding
of internal control over financial reporting, but not for the
purpose of expressing an opinion on the effectiveness of the
Company’s internal control over financial reporting.
Accordingly, we express no such opinion.
Our
audits included performing procedures to assess the risks of
material misstatement of the financial statements, whether due to
error or fraud, and performing procedures that respond to those
risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the financial
statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as
well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis
for our opinion.
/s/
Boulay PLLP
We have
served as the Company’s auditor since 2017.
Minneapolis,
Minnesota
March
13, 2020
41
Celcuity Inc.
Balance Sheets
|
|
December
31,
2019
|
December
31,
2018
|
|
|
|
|
|
Assets
|
|
|
|
Current Assets:
|
|
|
|
Cash
and cash equivalents
|
$
18,735,002
|
$
15,944,609
|
|
Investments
|
-
|
8,952,907
|
|
Deposits
|
22,009
|
22,009
|
|
Deferred
transaction costs
|
28,743
|
28,743
|
|
Payroll
tax receivable
|
190,000
|
-
|
|
Prepaid
assets
|
274,600
|
269,940
|
|
Total current assets
|
19,250,354
|
25,218,208
|
|
Property
and equipment, net
|
833,463
|
813,613
|
|
Operating
lease right-of-use assets
|
196,983
|
-
|
|
Total Assets
|
$
20,280,800
|
$
26,031,821
|
|
Liabilities and Stockholders' Equity:
|
|
|
|
Current Liabilities:
|
|
|
|
Accounts
payable
|
$
142,773
|
$
119,811
|
|
Finance
lease liabilities
|
5,769
|
5,730
|
|
Operating
lease liabilities
|
178,466
|
-
|
|
Accrued
expenses
|
584,319
|
536,791
|
|
Total current liabilities
|
911,327
|
662,332
|
|
Finance
lease liabilities
|
14,109
|
19,878
|
|
Operating
lease liabilities
|
57,793
|
-
|
|
Total Liabilities
|
983,229
|
682,210
|
|
Stockholders' Equity:
|
|
|
|
Preferred
stock, $0.001 par value: 2,500,000 shares authorized; 0 shares
issued and outstanding as of December 31, 2019 and December 31,
2018
|
-
|
-
|
|
Common
stock, $0.001 par value: 25,000,000 shares authorized; 10,253,988
and 10,186,382 shares issued and outstanding as of December 31,
2019 and December 31, 2018, respectively
|
10,254
|
10,186
|
|
Additional
paid-in capital
|
36,134,723
|
34,827,467
|
|
Accumulated
deficit
|
(16,847,406
)
|
(9,488,042
)
|
|
Total Stockholders' Equity
|
19,297,571
|
25,349,611
|
|
Total Liabilities and Stockholders' Equity
|
$
20,280,800
|
$
26,031,821
|
|
See accompanying notes to the financial
statements
|
||
|
|
|
|
42
Celcuity Inc.
Statements of Operations
|
|
Years
Ended December 31,
|
|
|
|
2019
|
2018
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
Research
and development
|
$
6,269,308
|
$
6,325,995
|
|
General
and administrative
|
1,535,993
|
1,606,543
|
|
Total
operating expenses
|
7,805,301
|
7,932,538
|
|
Loss
from operations
|
(7,805,301
)
|
(7,932,538
)
|
|
|
|
|
|
Other
income (expense)
|
|
|
|
Interest
expense
|
(159
)
|
(111
)
|
|
Interest
income
|
446,096
|
448,834
|
|
Gain
on sale of fixed assets
|
-
|
3,000
|
|
Other
income, net
|
445,937
|
451,723
|
|
Net loss before income taxes
|
(7,359,364
)
|
(7,480,815
)
|
|
Income
tax benefits
|
-
|
-
|
|
Net loss
|
$
(7,359,364
)
|
$
(7,480,815
)
|
|
|
|
|
|
Net
loss per share, basic and diluted
|
$
(0.72
)
|
$
(0.74
)
|
|
|
|
|
|
Weighted
average common shares outstanding, basic and diluted
|
10,226,041
|
10,124,544
|
|
|
|
|
|
See accompanying notes to the financial
statements
|
||
43
Celcuity Inc.
Statements of Changes in Stockholders' Equity
|
|
Common
Stock
|
|
|
|
|
|
|
Shares
|
Par
Amount
|
Additional
Paid-In Capital
|
Accumulated
Deficit
|
Total
|
|
Balance at December 31, 2017
|
10,087,516
|
$
10,087
|
$
33,388,597
|
$
(2,007,227
)
|
$
31,391,457
|
|
Exercise
of common stock warrants
|
19,343
|
19
|
183,740
|
|
183,759
|
|
Stock-based
compensation
|
2,571
|
3
|
1,168,613
|
-
|
1,168,616
|
|
Exercise
of common stock options, net of shares withheld for exercise price
and employee taxes
|
59,400
|
59
|
(59
)
|
-
|
-
|
|
Payments
for taxes related to net share settlement of stock options
exercised
|
|
|
(55,138
)
|
|
(55,138
)
|
|
Employee
stock purchases
|
17,552
|
18
|
141,714
|
-
|
141,732
|
|
Net
loss
|
-
|
-
|
-
|
(7,480,815
)
|
(7,480,815
)
|
|
Balance at December 31, 2018
|
10,186,382
|
10,186
|
34,827,467
|
(9,488,042
)
|
25,349,611
|
|
Exercise
of common stock warrants
|
395
|
-
|
3,752
|
-
|
3,752
|
|
Stock-based
compensation
|
-
|
-
|
1,040,989
|
-
|
1,040,989
|
|
Exercise
of common stock options, net of shares withheld for exercise
price
|
58,127
|
59
|
174,899
|
-
|
174,958
|
|
Employee
stock purchases
|
9,084
|
9
|
87,616
|
-
|
87,625
|
|
Net
loss
|
-
|
-
|
-
|
(7,359,364
)
|
(7,359,364
)
|
|
Balance at December 31, 2019
|
10,253,988
|
$
10,254
|
$
36,134,723
|
$
(16,847,406
)
|
$
19,297,571
|
|
|
|
|
|
|
|
|
See accompanying notes to the financial
statements
|
|||||
44
Celcuity Inc.
Statements of Cash Flows
|
|
Years
Ended December 31,
|
|
|
|
2019
|
2018
|
|
Cash flows from operating activities:
|
|
|
|
Net
loss
|
$
(7,359,364
)
|
$
(7,480,815
)
|
|
Adjustments
to reconcile net loss to net cash used for operations:
|
|
|
|
Depreciation
|
338,996
|
223,037
|
|
Stock-based
compensation
|
1,040,989
|
1,168,616
|
|
Gain
on sale of fixed assets
|
-
|
(3,000
)
|
|
Non-cash
interest income, net of cash received
|
42,907
|
89,324
|
|
Changes
in operating assets and liabilities:
|
|
|
|
Payroll
tax receivable
|
(190,000
)
|
-
|
|
Prepaid
assets and deposits
|
(20,143
)
|
(54,514
)
|
|
Accounts
payable
|
45,617
|
25,432
|
|
Accrued
expenses
|
111,403
|
(44,349
)
|
|
Non-cash
operating lease, net
|
(9,116
)
|
-
|
|
Net
cash used for operating activities
|
(5,998,711
)
|
(6,076,269
)
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
Purchases
of investments
|
-
|
(3,235,000
)
|
|
Proceeds
from sale of investments
|
8,910,000
|
22,955,000
|
|
Purchases
of property and equipment
|
(380,201
)
|
(629,608
)
|
|
Proceeds
from sale of property and equipment
|
-
|
4,000
|
|
Net
cash provided by investing activities
|
8,529,799
|
19,094,392
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
Proceeds
from exercise of common stock warrants
|
3,752
|
183,759
|
|
Proceeds
from exercise of employee stock options
|
174,958
|
-
|
|
Proceeds
from employee stock purchases
|
87,625
|
141,732
|
|
Payments
for secondary registration statement costs
|
(1,300
)
|
(27,443
)
|
|
Payments
for finance leases
|
(5,730
)
|
(3,324
)
|
|
Payments
for taxes related to net share settlement of stock options
exercised
|
-
|
(55,138
)
|
|
Payments
for IPO costs
|
-
|
(2,889
)
|
|
Net
cash provided by financing activities
|
259,305
|
236,697
|
|
Net
change in cash and cash equivalents
|
2,790,393
|
13,254,820
|
|
|
|
|
|
Cash and cash equivalents:
|
|
|
|
Beginning
of period
|
15,944,609
|
2,689,789
|
|
End
of period
|
$
18,735,002
|
$
15,944,609
|
|
Supplemental disclosures of non-cash investing and financing
activities:
|
|
|
|
Property
and equipment included in accounts payable
|
$
2,700
|
$
24,055
|
|
Property
and equipment funded by finance lease
|
-
|
28,932
|
|
Leasehold
improvements funded by landlord and related deferred rent included
in accrued expenses
|
-
|
75,000
|
|
Registration
statement costs included in accounts payable
|
-
|
1,300
|
|
See accompanying notes to the financial
statements
|
||
45
CELCUITY INC.
NOTES TO FINANCIAL STATEMENTS
1.
Organization
Nature of Business
Celcuity
Inc., a Delaware corporation (the “Company”), is
developing companion diagnostic tests designed to expand the
eligible patient populations for targeted therapies by discovering
new cancer sub-types molecular-based approaches cannot detect. The
Company’s proprietary CELsignia diagnostic platform is
currently the only commercially ready technology the Company is
aware of that uses a patient’s living tumor cells to evaluate
the functional status of the cell signaling pathways associated
with cancer. The CELsignia platform identifies the abnormal
signaling activity driving a patient’s cancer and quantifies
how effectively a targeted therapy can treat it. This enables
physicians to select the therapeutic that precisely matches and
inhibits a patient’s cellular dysfunction, which
significantly increases the likelihood of a positive clinical
outcome. The Company was co-founded in 2012 by Brian F. Sullivan
and Dr. Lance G. Laing and is based in Minnesota. The Company has
not generated any revenues to date.
2.
Summary of Significant Accounting Policies
Basis of Presentation
The accompanying financial statements have been prepared in
accordance with accounting principles generally accepted in the
United States (“U.S. GAAP”) and pursuant to the rules
and regulations of the Securities and Exchange Commission (the
“SEC”). Operating results for the year ended December
31, 2019 are not necessarily indicative of results to be expected
for any future year.
Accounting Estimates
Management
uses estimates and assumptions in preparing these financial
statements in accordance with U.S. GAAP. Those estimates and
assumptions affect the reported amounts of assets and liabilities,
the disclosure of contingent assets and liabilities, and the
reported revenues and expenses. Actual results could differ from
those estimates. Significant items subject to such estimates and
assumptions include the valuation of stock-based compensation and
prepaid or accrued clinical trial costs.
Cash and Cash Equivalents
The
Company maintains its accounts primarily at one financial
institution. At times throughout the year, the Company’s cash
balances may exceed amounts insured by the Federal Deposit
Insurance Corporation. At December 31, 2019 and December 31, 2018,
the Company had $18,369,229 and $15,822,846, respectively, in money
market funds that are considered cash equivalents and not insured
by the Federal Deposit Insurance Corporation.
Investments
The
Company maintains its investments in certificates of deposit, U.S.
governmental agency securities and U.S. Treasury Notes and has
classified them as held-to-maturity at the time of purchase.
Held-to-maturity securities are those securities in which the
Company has the ability and intent to hold until maturity. Held-to
maturity securities are recorded at amortized cost, adjusted for
the amortization or accretion of premiums and discounts. Premiums
and discounts are amortized or accreted over the life of the
related held-to-maturity security using a straight-line method. At
December 31, 2019 and December 31, 2018, the Company had $0 and
$8,982,907, respectively, of short-term investments.
Property and Equipment
Property
and equipment are stated at cost. Depreciation is provided over
estimated useful lives using the straight-line method. Maintenance
and repairs are expensed as incurred; major improvements and
betterments are capitalized.
46
Estimated
useful lives of property and equipment are as follows for the major
classes of assets:
|
Asset
Description
|
Estimated
Lives
|
|
Furniture and
Equipment
|
4-5
|
|
Leasehold
Improvements
|
2-3
|
Long-Lived Assets
Long-lived
assets, such as property and equipment, are reviewed for impairment
whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. If
circumstances require a long-lived asset or asset group be tested
for possible impairment, the Company first compares undiscounted
cash flows expected to be generated by that asset or asset group to
its carrying value. If the carrying value of the long-lived asset
or asset group is not recoverable on an undiscounted cash flow
basis, an impairment is recognized to the extent that the carrying
value exceeds its fair value. Fair value is determined through
various valuation techniques including discounted cash flow models,
quoted market values, and third-party independent appraisals, as
considered necessary.
Deferred Transaction Costs
Deferred
transaction costs primarily consist of legal fees, SEC filing fees
and other fees relating to the Company’s Registration
Statement on Form S-3 filed on September 21, 2018. The deferred
transaction costs were capitalized as incurred and will be offset
against the proceeds from future securities offered by the Company
for a period up to three years. The deferred transaction costs will
be reviewed periodically to assess the probability that future
securities will be offered. In the event that no future offering
will occur, any deferred transaction costs will be expensed. Total
costs incurred were $0 and $28,743 for years ended December 31,
2019 and 2018, respectively.
Comprehensive Loss
Comprehensive
loss includes net loss as well as other changes in
stockholders’ equity that result from transactions and
economic events other than those with stockholders. For all periods
presented, there was no difference between net loss and
comprehensive loss.
Risks and Uncertainties
The
Company is subject to risks common to companies in the development
stage including, but not limited to, dependency on the clinical and
commercial success of its diagnostic tests, ability to obtain
regulatory approval of its diagnostic tests, the need for
substantial additional financing to achieve its goals, uncertainty
of broad adoption of its approved products, if any, by physicians
and consumers, and significant competition.
Fair Value of Financial Instruments
The
Company’s accounting for fair value measurements of assets
and liabilities that are recognized or disclosed at fair value in
the financial statements on a recurring or nonrecurring basis
adheres to the Financial Accounting Standards Board
(“FASB”) fair value hierarchy that prioritizes the
inputs to valuation techniques used to measure fair value. The
hierarchy gives the highest priority to unadjusted quoted prices in
active markets for identical assets or liabilities (Level 1
measurements) and the lowest priority to measurements involving
significant unobservable inputs (Level 3 measurements). The three
levels of the fair value hierarchy are as follows:
●
Level 1 Inputs:
Unadjusted quoted prices in active markets for identical assets or
liabilities accessible to the Company at the measurement
date.
●
Level 2 Inputs:
Other than quoted prices included in Level 1 inputs that are
observable for the asset or liability, either directly or
indirectly, for substantially the full term of the asset or
liability.
●
Level 3 Inputs:
Unobservable inputs for the asset or liability used to measure fair
value to the extent that observable inputs are not available,
thereby allowing for situations in which there is little, if any,
market activity for the asset or liability at measurement
date.
The
level in the fair value hierarchy within which a fair value
measurement in its entirety falls is based on the lowest level
input that is significant to the fair value measurement in its
entirety.
The
carrying values of cash equivalents, accounts payable, accrued
expenses and other financial working capital items approximate fair
value at December 31, 2019 and December 31, 2018, due to the short
maturity nature of these items.
47
Income Taxes
The
Company accounts for income taxes using the asset and liability
method, as required by the accounting standard for income taxes.
Under this method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases, as
well as net operating loss and tax credit carryforwards. Deferred
taxes are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences
are expected to be recovered or settled. The effect on deferred
taxes of a change in tax rates is recognized in results of
operations in the period that includes the enactment date. The
effects of any future changes in tax laws or rates have not been
considered. The Company regularly reviews deferred tax assets to
assess their potential realization and establish a valuation
allowance for portions of such assets to reduce the carrying value
if the Company does not consider it to be more likely than not that
the deferred tax assets will be realized.
The
Company recognizes the impact of an uncertain tax position in its
financial statements if, in management's judgment, the position is
more-likely-than-not sustainable upon audit based on the position's
technical merits. This involves the identification of potential
uncertain tax positions, the evaluation of applicable tax laws and
an assessment of whether a liability for an uncertain tax position
is necessary.
Stock-Based Compensation
The
Company’s stock-based compensation consists of stock options
and restricted stock issued to certain employees and nonemployees
of the Company and the Company’s 2017 Employee Stock Purchase
Plan. The Company recognizes compensation expense based on an
estimated grant date fair value using the Black-Scholes
option-pricing method. If the factors change and different
assumptions used, the Company’s stock-based compensation
expense could be materially different in the future. The Company
recognizes stock-based compensation expense for these options on a
straight-line basis over the requisite service period. The Company
has elected to account for forfeitures as they occur.
Research and Development
Research
and development costs are expensed as incurred. Research and
development costs amounted to $6,269,308 in the year ended December
31, 2019 and $6,325,995 in the year ended December 31,
2018.
Clinical Trial Costs
The Company records prepaid assets or accrued expenses for prepaid
or estimated clinical trial costs conducted by third-party service
providers, which include the conduct of preclinical studies and
clinical trials. These costs can be a significant component
of the Company’s research and development expenses. The
Company accrues for these costs based on factors such as estimates
of the work completed and in accordance with service agreements
with its third-party service providers. The Company makes
significant judgments and estimates in determining the accrued
liabilities balance in each reporting period. As actual costs
become known, the Company adjusts its prepaid assets or accrued
expenses. The Company has not experienced any material
differences between accrued costs and actual costs incurred.
However, the status and timing of actual services performed, number
of patients enrolled, and the rate of patient enrollments may vary
from the Company’s
estimates, resulting in an adjustment to expense
in future periods. Changes in these estimates that result in
material changes to the Company’s prepaid assets or accrued
expenses could materially affect the Company’s results of
operations.
Segment Data
The
Company manages its operations as a single segment for the purposes
of assessing performance and making operating
decisions.
Application
of New or Revised Accounting Standards
Pursuant
to the JOBS Act, a company constituting an “emerging growth
company” is, among other things, entitled to rely upon
certain reduced reporting requirements. The Company is an emerging
growth company but has irrevocably elected not to take advantage of
the extended transition period afforded by the JOBS Act for the
implementation of new or revised accounting standards. As a result,
the Company will comply with new or revised accounting standards on
the relevant dates on which adoption of such standards is required
for public companies that are not emerging growth
companies.
Recently Adopted Accounting Pronouncements
Effective
January 1, 2019, the Company adopted Accounting Standards Update
(“ASU”) No. 2016-02,
Leases (Topic 842),
which requires the
recognition of lease assets and lease liabilities by lessees for
those leases classified as operating leases under previous
guidance. The original guidance required application on a modified
retrospective basis with the earliest period presented. In August
2018, the FASB issued ASU 2018-11, Targeted Improvements to ASC
842, which included an option to not restate comparative periods in
transition and elect to use the effective date of ASC 842 as the
date of initial application of transition, which the Company
elected. As a result of the adoption of ASC 842 on January 1, 2019,
the Company recorded both operating lease right-of-use (ROU) assets
of $356,539 and lease liabilities of $404,931 and eliminated
deferred rent of $63,875 and prepaid rent of $15,483. The adoption
of ASC 842 had no impact on the Company’s Statement of
Operations and Statement of Cash Flows for the year ended December
31, 2019. In addition, the Company elected the package of practical
expedients permitted under the transition guidance within the new
standard which allowed us to carry forward the historical lease
classification. Additional information and disclosures required by
this new standard are contained in Note 8.
48
3.
Net
Loss Per Common Share
Basic
and diluted net loss per common share is determined by dividing net
loss attributable to common stockholders by the weighted-average
common shares outstanding during the period. For all periods
presented, the common shares underlying the options and warrants
have been excluded from the calculation because their effect would
be anti-dilutive. Therefore, the weighted-average shares
outstanding used to calculate both basic and diluted loss per
common share are the same.
For the years ended December 31, 2019 and 2018, potentially
dilutive securities excluded from the computations of diluted
weighted-average shares outstanding were options to purchase
585,215 and 478,503 shares of common stock, respectively, warrants
to purchase 353,585 and 353,980 shares of common stock,
respectively, and 0 and 2,571 shares of restricted common stock,
respectively.
4.
Investments
The Company held no investments as of December 31,
2019.
The following table summarizes the Company’s held-to-maturity
investment securities at amortized cost as of December 31,
2018:
|
|
December
31, 2018
|
|||
|
|
Amortized
Cost, as Adjusted
|
Gross
Unrealized Holding Gains
|
Gross
Unrealized Holding Losses
|
Estimated
Fair Value
|
|
Short-term
investments:
|
|
|
|
|
|
Certificates
of Deposit
|
$
4,415,548
|
$
-
|
$
33,526
|
$
4,382,022
|
|
Governmental
Agency Securities
|
3,038,217
|
-
|
24,444
|
3,013,773
|
|
U.S.
Treasury Notes
|
1,499,142
|
-
|
2,130
|
1,497,012
|
|
Total
|
$
8,952,907
|
$
-
|
$
60,100
|
$
8,892,807
|
|
|
|
|
|
|
5.
Prepaid Assets
Prepaid assets consisted of the following at December
31:
|
|
2019
|
2018
|
|
Current:
|
|
|
|
Directors
& officers' insurance
|
$
229,167
|
$
224,125
|
|
Prepaid
rent
|
-
|
21,490
|
|
Other
|
45,433
|
24,325
|
|
Total
|
$
274,600
|
$
269,940
|
6.
Property and Equipment
Property
and equipment consisted of the following at December
31:
|
|
2019
|
2018
|
|
Leasehold
improvements
|
$
302,848
|
$
297,094
|
|
Furniture
and equipment
|
1,350,508
|
997,416
|
|
|
1,653,356
|
1,294,510
|
|
Less:
Accumulated depreciation
|
(819,893
)
|
(480,897
)
|
|
Total
|
$
833,463
|
$
813,613
|
|
|
|
|
Depreciation
expense was $338,996 and $223,037 for the years ended December 31,
2019 and 2018, respectively.
49
7.
Accrued
Expenses
Accrued expenses consisted of the following at December
31:
|
|
2019
|
2018
|
|
Accrued
compensation
|
$
461,452
|
$
391,629
|
|
Deferred
rent
|
-
|
63,875
|
|
Employee
Stock Purchase Plan
|
10,121
|
28,940
|
|
Other
|
112,746
|
52,347
|
|
Total
|
$
584,319
|
$
536,791
|
|
|
|
|
8.
Commitments
Operating and Finance Leases
The
Company leases its corporate space in Minneapolis, Minnesota. In
September 2017, the Company entered into a non-cancelable operating
lease agreement for building space. The new lease commenced, and
the Company moved to the facility in May 2018, in conjunction with
the termination of its then existing lease. Rent expense is
recorded on a straight-line basis over the lease term. The new
lease agreement extends through April 2021 and provides for monthly
rent, real estate taxes and operating expenses.
The
lease agreement includes the option to extend the term for two
periods of one year each. The option to extend is at the
Company’s discretion and because the Company has not
determined if the option to extend will be exercised, the extended
lease terms are not included in the ROU assets and lease
liabilities. The Company regularly evaluates the renewal options
and when it is reasonably certain of exercise, the Company includes
the renewal period in its lease term.
In May
2018, the Company entered into a non-cancelable finance lease
agreement for office equipment with a five-year term. The
underlying assets are included in furniture and equipment. The
lease contains a bargain purchase option at the end of the
lease.
When an
implicit rate is not provided, the Company uses its incremental
borrowing rate based on the information available at the lease
commencement date in determining the present value of the lease
payments.
Supplemental
balance sheet information consisted of the following at December
31, 2019:
|
Operating
Lease
|
|
|
Right-of-use
assets
|
$
196,983
|
|
|
|
|
Operating
lease liability
|
$
236,259
|
|
Less:
short term portion
|
(178,466
)
|
|
Long
term portion
|
$
57,793
|
|
|
|
|
Finance
Lease
|
|
|
Furniture
and equipment
|
$
28,932
|
|
Less:
Accumulated depreciation
|
(9,162
)
|
|
Net
book value of property and equipment under finance
lease
|
$
19,770
|
|
|
|
|
Finance
lease liability
|
$
19,878
|
|
Less:
short term portion
|
(5,769
)
|
|
Long
term portion
|
$
14,109
|
|
|
|
50
Maturity
analysis under lease agreements consisted of the following as of
December 31, 2019:
|
|
Operating Leases
|
Finance Leases
|
|
2020
|
$
193,338
|
$
7,255
|
|
2021
|
64,940
|
7,255
|
|
2022
|
-
|
7,255
|
|
2023
|
-
|
3,022
|
|
Total
minimum lease payments
|
258,278
|
24,787
|
|
Less:
Present value discount
|
(22,019
)
|
(242
)
|
|
Less
amount representing services
|
|
(4,667
)
|
|
Present
value of net minimum lease payments
|
$
236,259
|
$
19,878
|
|
|
|
|
|
Weighted
Average
|
Remaining Lease Term
|
Discount Rate
|
|
Operating
lease
|
1.3
years
|
5.5
%
|
|
Finance
lease
|
3.4
years
|
1.0
%
|
Lease
costs for the year ended December 31, 2019:
|
|
Twelve-month
Period
|
|
|
|
|
Operating
lease cost
|
$
164,252
|
|
Finance
lease cost:
|
|
|
Amortization
|
5,786
|
|
Interest
|
159
|
|
Variable
lease cost
|
82,885
|
|
|
$
253,082
|
|
|
|
Supplemental
cash flow information related to leases for the year ended December
31, 2019:
|
|
Twelve-month
Period
|
|
Cash
paid for amounts included in operating and finance
leases:
|
|
|
Operating
cash outflow from operating leases
|
$
248,450
|
|
Operating
cash outflow from finance leases
|
159
|
|
Financing
cash outflow from finance leases
|
5,730
|
|
|
$
254,339
|
As of
December 31, 2018, minimum rental commitments under non-cancelable
operating leases under prior lease accounting rules (ASC 840)
were:
|
|
Amount
|
|
2019
|
$
173,367
|
|
2020
|
193,338
|
|
2021
|
64,940
|
|
Total
|
$
431,645
|
51
Clinical Research Studies
In May
2017, the Company entered into an agreement with a clinical
research organization to conduct a clinical research study. The
Company made payments of $50,000, $200,000 and $350,000 in 2019,
2018 and 2017, respectively. Additional payments will be due as
certain milestones are met and clinical sites are added. The
maximum amount of these additional payments is estimated to be
approximately $2,690,000 over the course of the
agreement.
In
October 2018, the Company entered into an agreement with a
biopharmaceutical company and a cancer research center to conduct a
clinical research study. The Company made payments of approximately
$70,000 in 2019. Additional payments of approximately $112,000 will
be due as certain milestones are met.
9.
Stockholders’
Equity
On September 15, 2017, in connection with its IPO, Celcuity LLC
filed a certificate of conversion, whereby Celcuity LLC effected a
corporate conversion from a Minnesota limited liability company to
a Delaware corporation and changed its name to Celcuity Inc.
Pursuant to the conversion, units of membership interest in the
limited liability company were converted into shares of common
stock of the corporation at a conversion ratio of 40 units for one
share of common stock.
The Company had 257,604,208 units
issued and outstanding as of September 15, 2017. After giving
effect to the corporate conversion, the number of common shares
outstanding as of such date was 6,440,139.
As a result of the corporate conversion,
accumulated deficit was reduced to zero on the date of the
corporate conversion, and the corresponding amount was credited to
additional paid-in capital. The corporate conversion was approved
by members holding a majority of the outstanding units of Celcuity
LLC, and in connection with such conversion, the Company filed a
certificate of incorporation and adopted bylaws. The Company
determined that the corporate conversion is equivalent to a change
in the Company’s capital structure.
On September 22, 2017, the Company completed its IPO whereby it
sold 2,760,000 shares of common stock at a public offering price of
$9.50 per share. The aggregate net proceeds received by the Company
from the IPO were approximately $23.3 million, net of underwriting
commissions of approximately $1.8 million and offering expenses of
approximately $1.1 million. Upon the closing of the IPO, 10,082,050
shares of common stock were outstanding, which included 881,911
shares of common stock issued as a result of the conversion of the
Company’s convertible notes. Shares of the Company’s
common stock began trading on September 20, 2017 on The Nasdaq
Capital Market under the symbol “CELC”.
On May
11, 2018, the Company filed an amendment to its certificate of
incorporation with the Secretary of State of the State of Delaware
to decrease the number of authorized shares of its common stock and
preferred stock.
Pursuant to the
Company’s amended certificate of incorporation, the Company
is authorized to issue up to 25,000,000 shares of common stock,
$0.001 par value per share and 2,500,000 shares of preferred stock,
$0.001 par value per share.
At
December 31, 2019 and 2018, the Company had 10,253,988 and
10,186,382 shares of common stock outstanding,
respectively.
Warrants
In
connection with the 2016 private placement offering of units, the
Company issued ten-year warrants to the placement agent of the
private placement. The warrants allow the placement agent to
purchase up to 55,249 shares of common stock at $7.56 per share.
The warrants were immediately exercisable and expire on January 14,
2026 and May 2, 2026. These warrants are equity classified and the
$330,607 fair value of the warrants is reflected as additional
paid-in capital.
In
connection with the private placement offering of convertible
notes, the Company issued ten-year warrants to the placement agent
to purchase 48,615 shares of common stock at a price of $8.42 per
share. The warrants were immediately exercisable and expire on
April 28, 2027 and May 17, 2027. These warrants are equity
classified and the $286,999 fair value of the warrants is reflected
as additional paid-in-capital.
In
addition, the Company granted the purchasers of the convertible
notes the right to receive a seven-year warrant to purchase 131,675
shares of common stock at an exercise price equal to the conversion
price of the convertible notes. With the completion of the IPO on
September 22, 2017, these warrants were issued. These warrants were
immediately exercisable and expire on September 22, 2024. These
warrants are equity classified and the $776,717 fair value of the
warrants is reflected as additional paid-in-capital.
In
connection with the IPO, the Company issued a five-year warrant to
the underwriter. The warrant allows the underwriter to purchase up
to 138,000 shares of common stock at $10.45 per share. This warrant
was immediately exercisable and expires on September 19, 2022. This
warrant is equity classified and the $784,111 fair value of the
warrant is reflected as additional paid-in-capital.
At
December 31, 2019 and 2018, the Company had warrants to purchase
353,585 and 353,980 shares of common stock outstanding,
respectively, at a weighted average exercise price of $9.42. A
total of 395 and 19,343 warrants were exercised in the years ended
December 31, 2019 and 2018, respectively.
52
10.
Stock-Based
Compensation
2012 Equity Incentive Plan
The
2012 Equity Incentive Plan, as amended, was adopted by the
Company’s board and approved by the members of Celcuity LLC
on August 10, 2012. The Company reserved a maximum of 625,000
shares of common stock for issuance under the 2012 Equity Incentive
Plan. The 2012 Equity Incentive Plan provides for options,
restricted stock awards, performance stock awards or stock bonuses.
The exercise price of each option granted under the 2012 Equity
Incentive Plan is not less than 100% of the fair market value of
one share on the date of grant. The maximum permitted term of
options granted under the 2012 Equity Incentive Plan is ten years.
The Company’s board administers the 2012 Equity Incentive
Plan and determines the provisions of incentive awards, including
eligible recipients, number of shares subject to an incentive
award, exercise price, vesting schedule, duration of an incentive
award and other restrictions an incentive award may be subject to.
The 2012 Equity Incentive Plan was frozen on September 6, 2017 and
any new awards will be issued under the terms of the 2017 Stock
Incentive Plan.
2017 Stock Incentive Plan
The
2017 Stock Incentive Plan (the “2017 Plan”) was adopted
by the Company’s board on September 6, 2017, became effective
following the corporate conversion on September 15, 2017, and was
approved by stockholders at the Company’s annual stockholder
meeting on May 10, 2018. The Company reserved a maximum of 750,000
shares of common stock for issuance under the 2017 Plan. The number
of shares reserved for issuance under the 2017 Plan will increase
automatically on January 1, 2019 and each subsequent anniversary
through January 1, 2027 by the number of shares equal to 1.0% of
the aggregate number of outstanding shares of the Company’s
common stock as of the immediately preceding December 31. However,
the Company’s board may reduce the amount of the increase in
any particular year. The Company’s board decided that no
increase would occur on January 1, 2019. The 2017 Plan provides for
options, restricted stock awards, stock appreciation rights,
restricted stock units, performance awards and stock bonuses. The
exercise price of each option granted under the 2017 Plan is not
less than 100% of the fair market value of one share on the date of
grant. The maximum permitted term of options granted under the 2017
Plan is ten years. The 2017 Plan is generally administered by the
compensation committee of the Company’s board, which has the
authority to interpret the 2017 Plan, grant awards and make all
other determinations necessary for the administration of the 2017
Plan.
The
following table summarizes the activity for all stock options
outstanding for the years ended December 31:
|
|
2019
|
2018
|
||
|
|
Shares
|
Weighted Average Exercise Price
|
Shares
|
Weighted Average Exercise Price
|
|
Options
outstanding at beginning of year
|
478,503
|
$
9.73
|
501,603
|
$
7.58
|
|
Granted
|
248,756
|
19.69
|
66,899
|
23.17
|
|
Exercised
|
(66,489
)
|
5.13
|
(89,999
)
|
7.60
|
|
Forfeited/Expired
|
(75,555
)
|
10.55
|
-
|
-
|
|
Balance
at December 31
|
585,215
|
$
14.37
|
478,503
|
$
9.73
|
|
|
|
|
|
|
|
Options
exercisable at December 31:
|
264,280
|
$
9.52
|
256,029
|
$
7.00
|
|
|
|
|
|
|
|
Weighted
Average Grant Date Fair Value for Options Granted During the
year:
|
|
$
13.46
|
|
$
15.76
|
The
following table summarizes additional information about stock
options outstanding and exercisable at December 31,
2019:
|
Options
Outstanding
|
Options
Exercisable
|
|||||
|
Options
Outstanding
|
Weighted
Average Remaining Contractual Life
|
Weighted
Average Exercise Price
|
Aggregate
Intrinsic Value
|
Options
Exercisable
|
Weighted
Average Exercise Price
|
Aggregate
Intrinsic Value
|
|
585,215
|
8.15
|
$
14.37
|
$
906,765
|
264,280
|
$
9.52
|
$
806,301
|
The
Company recognized stock-based compensation expense for stock
options of $990,839 and $1,009,620 for the years ended December 31,
2019 and 2018, respectively.
53
The
Black-Scholes option-pricing model was used to estimate the fair
value of equity-based awards with the following weighted-average
assumptions for the years ended December 31:
|
|
2019
|
2018
|
|
Risk-free interest rate
|
1.42% - 2.47%
|
2.52% - 3.09%
|
|
Expected volatility
|
76.2% - 80.0%
|
72.0%-76.0%
|
|
Expected life (years)
|
5.2 to 6.3
|
5.5 to 10.00
|
|
Expected dividend yield
|
0%
|
0%
|
The
inputs for the Black-Scholes valuation model require
management’s significant assumptions. Prior to the
Company’s IPO, the price per share of common stock was
determined by the Company’s board based on recent prices of
common stock sold in private offerings. Subsequent to the IPO, the
price per share of common stock is determined by using the closing
market price on the Nasdaq Capital Market on the grant date. The
risk-free interest rates are based on the rate for U.S. Treasury
securities at the date of grant with maturity dates approximately
equal to the expected life at the grant date. The expected life was
based on the simplified method in accordance with SEC Staff
Accounting Bulletin Nos. 107 and 110. The expected volatility was
estimated based on historical volatility information of peer
companies that are publicly available in combination with the
Company’s calculated volatility since being publicly
traded.
All
assumptions used to calculate the grant date fair value of
nonemployee options are generally consistent with the assumptions
used for options granted to employees. In the event the Company
terminates any of its consulting agreements, the unvested options
issued in connection with such agreements would also be cancelled.
Unvested nonemployee options were marked-to-market through April 1,
2018, the date that the Company adopted ASU No. 2018-07,
Improvements to Non-employee
Share-Based Payment Accounting.
No
restricted stock awards were granted in the year ended December 31,
2019. A restricted stock award of 2,571 shares was granted to a
member of the Company’s board in 2018. The Company had 0 and
2,571 shares of restricted stock outstanding as of December 31,
2019 and 2018, respectively. During the years ended December 31,
2019 and 2018, 2,571 and 5,250 shares of restricted stock vested,
respectively, The Company recognized stock-based compensation
expense for restricted stock of $17,047 and $87,232 for the years
ended December 31, 2019 and 2018, respectively.
The
total remaining shares available for grant under the 2017 Plan is
386,178.
Total
unrecognized compensation cost related to stock options and
restricted stock is estimated to be recognized as
follows:
|
2020
|
$
1,229,261
|
|
2021
|
944,230
|
|
2022
|
784,416
|
|
2023
|
440,701
|
|
2024
|
84,484
|
|
Total estimated compensation cost to be recognized
|
$
3,483,092
|
|
|
|
2017 Employee Stock Purchase Plan
The
Company’s 2017 Employee Stock Purchase Plan (the
“ESPP”) was adopted by the Company’s board on
September 6, 2017 and approved by stockholders at the
Company’s annual stockholder meeting on May 10, 2018. The
Company has reserved a total of 100,000 shares for issuance under
the ESPP. The number of shares authorized and reserved for issuance
under the ESPP will be automatically increased on the first day of
each of the Company’s fiscal years beginning in 2019 by the
number of shares equal to 0.5% of the total outstanding number of
shares of common stock. However, the Company’s board may
reduce the amount of the increase in any particular year. The
Company’s board decided that no increase would occur on
January 1, 2019. The ESPP provides participating employees with an
opportunity to purchase shares of the Company’s common stock
at a discount through payroll deductions. The ESPP is available to
all employees unless they are employed for less than 20 hours per
week or own 5% or more of the total combined voting power or value
of the Company’s common stock. The ESPP is administered using
overlapping 24 month offering periods, referred to as an Offering
Period. Each Offering Period has four six-month purchase periods. A
new Offering Period and purchase period begin every six months on
May 1 and November 1 of each year. Participating employees may
purchase common stock, on a voluntary after tax-basis, at a price
equal to 85% of the fair market value of a share of common stock on
either the offering date or the purchase date, whichever is lower.
If the purchase date has a lower price, the employee will
automatically be placed in the Offering Period beginning
immediately after the purchase date. The Company recognized
stock-based compensation expense related to the ESPP of $33,103 and
$71,764 for the years ended December 31, 2019 and 2018,
respectively.
54
The
Company recognized total stock-based compensation expense, as
follows for the years ended December 31:
|
|
2019
|
2018
|
|
Stock-based
compensation expense in operating expenses:
|
|
|
|
Research
and development
|
$
567,305
|
$
727,216
|
|
General
and administrative
|
473,684
|
441,400
|
|
Total
|
$
1,040,989
|
$
1,168,616
|
11.
Income
Taxes
Following
the conversion of Celcuity LLC to Celcuity Inc. on September 15,
2017, the Company began filing federal and state returns where
required. No income tax benefit was recorded for the years 2019 and
2018, due to net losses and recognition of a valuation allowance.
The following table presents a reconciliation of the tax expense
computed at the statutory federal rate and the Company’s tax
expense for the years ended December 31:
|
|
2019
|
2018
|
|
Tax
benefit at statutory federal rate
|
$
(1,545,000
)
|
$
(1,571,000
)
|
|
State
income tax benefit, net of federal tax effect
|
(24,000
)
|
(30,000
)
|
|
Change
in valuation allowance on deferred tax assets
|
1,781,000
|
1,881,000
|
|
Other
permanent items
|
(212,000
)
|
(280,000
)
|
|
Income
tax benefits
|
$
-
|
$
-
|
|
|
|
|
Deferred
income taxes reflect the net effects of temporary differences
between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes. The Company’s deferred tax assets relate primarily
to its net operating loss carryforwards and other balance sheet
basis differences. In accordance with ASC 740,
Income Taxes
, the Company recorded a
valuation allowance to fully offset the net deferred tax asset,
because it is more likely than not that the Company will not
realize future benefits associated with these deferred tax assets
at December 31, 2019. The tax effects of temporary differences and
carryforwards that give rise to significant portions of the
deferred tax assets are as follows:
|
|
2019
|
2018
|
|
Deferred
tax assets (liabilities):
|
|
|
|
Accrued
expenses
|
$
8,000
|
$
14,000
|
|
Share-based
compensation
|
435,000
|
329,000
|
|
Property
and equipment
|
175,000
|
103,000
|
|
Right-of-use
assets
|
(41,000
)
|
-
|
|
Lease
liability
|
50,000
|
-
|
|
Start-up
expenditures
|
2,038,000
|
1,265,000
|
|
Net
operating losses and tax credits
|
1,894,000
|
1,067,000
|
|
Valuation
allowance
|
(4,559,000
)
|
(2,778,000
)
|
|
Net
deferred tax assets
|
$
-
|
$
-
|
|
|
|
|
At
December 31, 2019, the Company had federal and state net operating
loss carryforwards of approximately $6.2 million and $0.6 million,
respectively. The net operating loss carryforwards for 2017 will
begin to expire in the year ending December 31, 2037. The net
operating loss carryforwards starting in 2018 have no
expiration.
Under
the provisions of Section 382 of the Internal Revenue Code of
1986, certain substantial changes in the Company's ownership,
including a sale of the Company, or significant changes in
ownership due to sales of equity, may limit in the future the
amount of net operating loss carryforwards available to offset
future taxable income.
The
Company recognizes uncertain tax positions in accordance with ASC
740 on the basis of evaluating whether it is more-likely-than not
that the tax positions will be sustained upon examination by tax
authorities. For those tax positions that meet the more-likely-than
not recognition threshold, we recognize the largest amount of tax
benefit that is more than 50 percent likely to be realized upon
ultimate settlement. As of December 31, 2019, and 2018, the Company
has no significant uncertain tax positions. There are no
unrecognized tax benefits included on the balance sheet that would,
if recognized, impact the effective tax rate. The Company does not
anticipate there will be a significant change in unrecognized tax
benefits within the next 12 months.
Prior to the conversion, Celcuity LLC was a limited liability
company and therefore was taxed as a partnership for income tax
purposes. Accordingly, no benefit for income taxes was recorded
prior to the conversion.
For
years prior to 2015, the Company is no longer subject to U.S.
federal or state income tax examinations. The Company's policy is
to recognize interest and penalties related to uncertain tax
positions as a component of general and administrative
expenses.
55
I
TEM 9. Changes in and Disagreements with
Accountants on Accounting and Financial Disclosure
None
I
TEM 9A. Controls and
Procedures
Evaluation of Disclosure Controls and Procedures
Our
management, with the participation of our Chief Executive Officer
and Chief Financial Officer, evaluated the effectiveness of our
disclosure controls and procedures as of December 31, 2019. The
term “disclosure controls and procedures,” as defined
in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended (the “Exchange
Act”), means controls and other procedures of a company that
are designed to ensure that information required to be disclosed by
a company in the reports that it files or submits under the
Exchange Act is recorded, processed, summarized and reported,
within the time periods specified in the SEC’s rules and
forms. Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that
information required to be disclosed by a company in the reports
that it files or submits under the Exchange Act is accumulated and
communicated to the company’s management, including its
principal executive and principal financial officers, as
appropriate to allow timely decisions regarding required
disclosure. Management recognizes that any controls and procedures,
no matter how well designed and operated, can provide only
reasonable assurance of achieving their objectives and management
necessarily applies its judgment in evaluating the cost-benefit
relationship of possible controls and procedures.
Based
on the evaluation of our disclosure controls and procedures as of
December 31, 2019, our Chief Executive Officer and Chief Financial
Officer concluded that, as of such date, our disclosure controls
and procedures were effective.
Management Report on Internal Control over Financial
Reporting
Our
management is responsible for establishing and maintaining adequate
internal control over financial reporting as such term is defined
in Rule 13a-15(f) under the Securities Exchange Act of 1934.
Management has assessed the effectiveness of our internal control
over financial reporting as of December 31, 2019 based on criteria
set forth by the Committee of Sponsoring Organizations of the
Treadway Commission (“COSO – 2013”) in Internal
Control-Integrated Framework. As disclosed in our Annual Report on
Form 10-K for the year ended December 31, 2018, as of December 31,
2018 our internal control over financial reporting was not
effective due to limited segregation of duties, which is indicative
of many small companies with limited staff. We have designed and
implemented an enhancement plan, with oversight from our Audit
Committee, to remediate this previously-identified material
weakness. As a part of this plan, we have implemented certain
changes to our internal control over financial reporting,
including, but not limited to:
●
Continued to
utilize an outside resource who provided an independent review and
oversight of transactions that were initiated by someone
else.
●
Continued to engage
an outside resource to test key financial reporting
controls.
After
implementing this enhancement plan described above, based on an
evaluation of our internal control over financial reporting as of
December 31, 2019, our Chief Executive Officer and Chief Financial
Officer concluded that, as of December 31, 2019, our
previously-identified material weakness had been remediated and our
internal control over financial reporting was
effective.
This
Report does not include an attestation report of our registered
public accounting firm regarding internal control over financial
reporting. Management’s report was not subject to attestation
by our registered public accounting firm pursuant to our
designation as an “emerging growth company,” as defined
in the JOBS Act.
Changes in Internal Control over Financial Reporting
With the exception of the
efforts described above, there have been no
changes to our system of internal control over financial reporting
during the three months ended December 31, 2019 and during the
subsequent time period through the filing
of this Annual Report that have materially
affected, or are reasonably likely to materially affect, our system
of controls over financial reporting.
I
TEM 9B. Other Information
None.
56
P
ART III
I
TEM 10. Directors, Executive
Officers and Corporate Governance
Directors
Brian F.
Sullivan
, age 58, is our
co-Founder and has served as Chairman of the Board and Chief
Executive Officer since we commenced operations in 2012. Mr.
Sullivan has over 25 years of experience founding and building
successful, high growth technology companies. He was Chairman and
CEO of SterilMed, a medical device reprocessing company, from 2003,
when he led an investment group to acquire a majority interest,
until its sale to Ethicon Endo-Surgery Inc., a Johnson &
Johnson company, for $330 million in 2011. Previously, he was
co-founder and Chief Executive Officer of Recovery Engineering, a
filtration company, which he took public and subsequently sold to
Procter & Gamble for $265 million in 1999. Since 2003, Mr.
Sullivan has served on the board of directors of Entegris, Inc., a
publicly-held company. Mr. Sullivan has received six U.S.
patents and has several pending. He graduated
magna cum laude
with distinction from Harvard College
with an A.B. in economics. Among other attributes, skills, and
qualifications, the board of directors believes Mr. Sullivan
is uniquely qualified to serve as a director based on his extensive
operational and business development experience, and his knowledge
in building stockholder value, growing a company from inception and
navigating significant corporate transactions and the public
company process.
Lance G. Laing, Ph.D.,
age 58, is our co-Founder and has
served as Chief Science Officer, Vice President, Secretary and
Director since we commenced operations in 2012. Dr. Laing’s
career spans more than 15 years in drug discovery research and
technology development. He received his doctorate in biophysics and
biochemistry from The Johns Hopkins University and completed a
National Institutes of Health post-doctoral fellowship at
Washington University Medical School. He has received 18 U.S.
patents and has an additional 24 U.S. patents pending. His drug
discovery research career began at Scriptgen/Anadys Pharmaceuticals
(purchased by Novartis), where he worked under Professor Peter Kim,
who became President of Merck Research. He also was Director of
Chemistry and Bioapplications and Director of Detection Product
Development for two companies that each developed instruments
similar to those Celcuity uses to perform the CELsignia tests. His
work at these two instrument companies gave him unique expertise
and experience in developing a variety of patented applications for
these instruments. Most recently, he served as an executive
director for an international drug discovery and development
company. Among other attributes, skills, and qualifications, the
board of directors believes Dr. Laing is uniquely qualified to
serve as a director based on his significant research, medical and
scientific expertise.
Richard E. Buller, M.D.,
Ph.D.,
age 70, was appointed to
Celcuity’s board of directors in December 2019. Dr. Buller
has over 15 years of experience leading oncology clinical
development and translational medicine departments at major
pharmaceutical companies. He has participated in the development of
15 drugs and several companion diagnostics that received U.S. FDA
approval.
Dr. Buller most recently served as Head Oncology
Clinical Development and Vice President of Translational Oncology
at Pfizer, Inc, one of the world’s largest pharmaceutical
companies, until he retired in 2016. He had previously served as
Vice President of Translational Medicine at Exelixis, a leading
biopharmaceutical company, where he led efforts to study patients
selected by molecular testing for inclusion in their phase 2 and
phase 3 clinical trials. He began his pharmaceutical company career
at GlaxoSmithKline as Director of the Oncology Medicine Development
Center. Prior to his leadership positions in drug development, he
was Professor of Gynecologic Oncology at the University of Iowa,
where he led laboratory research focused on identifying genomic
variants involved in ovarian cancer. He received his M.D. from the
Baylor College of Medicine, where he also received his Ph.D. in
cell biology.
Among other attributes,
skills, and qualifications, the board of directors believes Dr.
Buller is uniquely qualified to serve as a director based on his
oncology drug and diagnostic development
expertise.
David F.
Dalvey
, age 61, has served as a
member of Celcuity’s board of directors since
February 2014. Mr. Dalvey has more than 30 years of
experience in the fields of corporate finance and venture capital,
working primarily with growth-oriented technology and life-science
businesses. He has over 10 years of corporate finance advisory
experience with two national investment banks, completing over 150
individual transactions. He has been the General Partner of
Brightstone Venture Capital, a venture capital management company,
since September 2000. Brightstone is a 25-year old venture
capital management company that has raised and managed ten venture
partnerships. Previously, he held management positions with R.J.
Steichen and Company, an investment bank, from 1995 to 2000, The
Food Fund LP, a venture capital firm, from 1992 to 1995 and
Wessels, Arnold & Henderson, an investment bank, from 1987 to
1992. Mr. Dalvey served on the board of directors for Navarre
Corporation (now Speed Commerce, Inc.) from 2009 until
November 2012, on the board of managers for Blue
Rock Market Neutral Fund, a mutual
fund registered under the Investment Company Act of 1940 from 2000
to 2014 and on the board of directors for Digitiliti, Inc. from
July 2011 until October 2012. Mr. Dalvey has significant
operational exposure as a board director or advisor to many other
public and privately held growth businesses and has served on these
companies’ audit, strategic or governance committees,
including companies such as HomeSpotter, Definity Health, AppTec
Laboratories, CHF Solutions, BiteSquad, Agiliti, and Nature Vision.
Mr. Dalvey received a B.S. in Business/Management Economics from
University of Minnesota. Among other attributes, skills, and
qualifications, the board of directors believes Mr. Dalvey is
uniquely qualified to serve as a director based on his leadership
experience in operating both public and private companies and his
experience working in the investment community and with investment
firms enable him to bring valuable insight and knowledge to our
board of directors.
Leo T. Furcht, M.D.,
age 73, was appointed to
Celcuity’s board of directors in May 2019. Dr. Furcht
is currently Allen-Pardee Professor of Cancer Biology and Head of
the Department of Laboratory Medicine and Pathology at the
University of Minnesota and a member of the Division of Molecular
Pathology and Genomics. He served as Chairman of the Board of
Directors for University of Minnesota Physicians, the Medical
School practice plan with approximately 700 physicians, from
2004-2014. He was also the founding Director of the Biomedical
Engineering Center from 1990-2001, where he led efforts to
establish stem cell and molecular diagnostics expertise at the
University of Minnesota. He has published more than 180 scientific
papers and holds more than 30 patents in the fields of
polypeptides, biomaterials, and adult stem cells. His business
experience includes co-founding two medical technology companies,
South Bay Medical, a medical device company that was acquired by
Mentor Corporation, and Diascreen, a diagnostics company, which was
later acquired by Chronimed.
Among
other attributes, skills, and qualifications, the board of
directors believes Dr. Furcht is uniquely qualified to serve as a
director based on his research in tumor cell behavior and
extracellular matrix proteins, Head of the University of
Minnesota’s Department of Laboratory Medicine and Pathology,
and his experience in several biotechnology
start-ups.
57
Richard J.
Nigon
, age 72, is currently
Senior Vice President of Cedar Point Capital, LLC., a private
company that raises capital for early stage companies, where he has
served since 2007. Mr. Nigon has also been a board member for
Tactile Systems Technology since September 2012 and Northern
Technologies International Corp. since February 2010,
including its non-executive Chairman of the board of directors
since November 2012. Mr. Nigon also serves as a director of
several private companies. Mr. Nigon previously served as a board
member for Vascular Solutions, Inc. from November 2000 to
February 2017, when it was acquired by Teleflex, Incorporated
and as a board member for Virtual Radiologic Corporation from
May 2007 until it was acquired in July 2010. From
February 2001 until December 2006, Mr. Nigon was a
Director of Equity Corporate Finance for Miller Johnson Steichen
Kinnard, a privately held investment firm, which was acquired in
December 2006 by Stifel Nicolaus, a brokerage and investment
banking firm. After that acquisition, Mr. Nigon became a Managing
Director of Private Placements of Stifel Nicolaus until
May 2007. From February 2000 to February 2001, Mr.
Nigon served as the Chief Financial Officer of Dantis, Inc., a web
hosting company. Prior to joining Dantis, Mr. Nigon was employed by
Ernst & Young LLP from 1970 to 2000, where he served as a
partner from 1981 to 2000. While at Ernst & Young, Mr. Nigon
served as the Director of Ernst & Young’s Twin Cities
Entrepreneurial Services Group and was the coordinating partner on
several publicly-traded companies in the consumer retailing and
manufacturing sectors. Among other attributes, skills, and
qualifications, the board of directors believes Mr. Nigon is
qualified to serve as a director because of his extensive public
accounting and auditing experience, including particular experience
with emerging growth companies. The board of directors also
believes that Mr. Nigon will bring to the board of directors a
strong background in financial controls and reporting, financial
management, financial analysis, SEC reporting requirements and
mergers and acquisitions. His strategic planning expertise gained
through his management and leadership roles at private investment
firms also makes him well-suited to serve as a member of the board
of directors.
Executive Officers
Information
regarding our Chief Executive Officer, Brian F. Sullivan, and our
Chief Science Officer, Lance G. Laing, PhD., is included above
under the heading “Directors”.
Vicky Hahne
, age 53, joined as our
Chief Financial Officer in July 2017. She has more than 20 years of
financial leadership experience, including the most recent 10 years
in the healthcare industry. Prior to joining Celcuity, Ms. Hahne
served as Controller of Respiratory Technologies Inc., a medical
device manufacturer, from 2015 to 2017. While at Respiratory
Technologies, she played a key role in the due diligence process to
sell the company to Koninklijke Philips. In 2014, she served as
Controller for Ability Network Inc., a healthcare information
technology company. From 2007 to 2012, Ms. Hahne served as
Controller of Sterilmed Inc., a medical device reprocessing
company, where she was significantly involved in the sale of the
company to Johnson & Johnson. Prior to these roles, Ms. Hahne
held several senior financial positions at SimonDelivers Inc.,
including Chief Financial Officer. Ms. Hahne has extensive
experience in early stage, high growth companies with
responsibilities including financial controls and stewardship,
financial analysis, mergers and acquisitions, building
infrastructure and systems. She received a B.S. degree in Finance
and Accounting from Northern State University and received her CPA
certificate in 1990.
Corporate Governance
Our
board of directors has adopted a Code of Business Conduct and
Ethics that applies to our directors, officers and
employees. This code is available on the corporate
governance section of our website (which is a subsection of the
investor relations section of our website) at the following
address: www.celcuity.com. We intend to disclose on our website any
amendments or waivers to the Code that are required to be disclosed
by SEC rules.
Additional
information required by this Item 10 will be contained in our
definitive proxy statement for our 2020 Annual Meeting of
Stockholders (the “Definitive Proxy Statement”) and is
incorporated herein by reference.
I
TEM 11. Executive
Compensation
The
information required by this Item 11 will be contained in the
Definitive Proxy Statement and is incorporated herein by
reference.
I
TEM 12. Security Ownership of Certain
Beneficial Owners and Management and Related Stockholder
Matters
The
information required by this Item 12 will be contained in the
Definitive Proxy Statement and is incorporated herein by
reference.
I
TEM 13. Certain Relationships and
Related Transactions, and Director Independence
The
information required by this Item 13 will be contained in the
Definitive Proxy Statement and is incorporated herein by
reference.
I
TEM 14. Principal Accounting Fees and
Services
The
information required by this Item 14 will be contained in the
Definitive Proxy Statement and is incorporated herein by
reference.
58
P
ART IV
I
TEM 15. Exhibits, Financial
Statement Schedules.
FINANCIAL STATEMENTS
|
Item
|
|
Page
|
|
Report
of Independent Registered Public Accounting Firm
|
|
41
|
|
Balance
Sheets – December 31, 2019 and 2018
|
|
42
|
|
Statements
of Operations – Years ended December 31, 2019 and
2018
|
|
43
|
|
Statements
of Stockholders’ Equity – Years ended December 31, 2019
and 2018
|
|
44
|
|
Statements
of Cash Flows – Years ended December 31, 2019 and
2018
|
|
45
|
|
Notes
to Consolidated Financial Statements
|
|
46
|
FINANCIAL STATEMENT SCHEDULES
None.
EXHIBITS
See
Exhibit Index immediately following the signature page hereto,
which is incorporated herein by reference.
I
TEM 16. Form 10-K Summary
None.
59
S
IGNATURES
Pursuant
to the requirements of Section 13 or 15(d) 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.
|
Dated:
March 13, 2020
|
|
|
CELCUITY
INC.
|
|
||
|
|
|
|
|
|||
|
|
By
|
|
/s/
Brian F. Sullivan
|
|
||
|
|
|
|
Brian
F. Sullivan
|
|
||
|
|
|
|
Chairman
and Chief Executive Officer
|
|
||
|
|
|
|
(Principal
Executive Officer)
|
|
||
|
|
|
|
|
|||
Pursuant
to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates
indicated.
Each
person whose signature appears below constitutes and appoints Brian
F. Sullivan and Vicky Hahne as the undersigned’s true and
lawful attorneys-in fact and agents, each acting alone, with full
power of substitution and resubstitution, for the undersigned and
in the undersigned’s name, place and stead, in any and all
amendments to this Annual Report on Form 10-K and to file the same,
with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granted
unto said attorneys-in-fact and agents, each acting alone, full
power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as
fully to all intents and purposes as the undersigned might or could
do in person, hereby ratifying and confirming all said
attorneys-in-fact and agents, each acting alone, or his substitute
or substitutes, may lawfully do or cause to be done by virtue
thereof.
|
|
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
||
|
|
|
|
|
|
||
|
/s/ Brian F. Sullivan
|
|
Chairman and Chief Executive Officer
|
|
March 13
,
2020
|
||
|
Brian F. Sullivan
|
|
(Principal Executive Officer)
|
|
|
||
|
|
|
|
|
|
||
|
/s/ Vicky Hahne
|
|
Chief Financial Officer
|
|
March 13
,
2020
|
||
|
Vicky Hahne
|
|
(Principal Financial and Accounting Officer)
|
|
|
||
|
|
|
|
|
|
||
|
/s/ Lance G. Laing
|
|
Chief Science Officer, Vice President and Secretary,
and
|
|
March 13
,
2020
|
||
|
Lance G. Laing
|
|
Director
|
|
|
||
|
|
|
|
|
|
||
|
/s/ Richard Buller
|
|
Director
|
|
March 13
,
2020
|
||
|
Richard Buller
|
|
|
|
|
||
|
|
|
|
|
|
||
|
/s/ Dave F. Dalvey
|
|
Director
|
|
March 13
,
2020
|
||
|
Dave F. Dalvey
|
|
|
|
|
||
|
|
|
|
|
|
||
|
/s/ Leo Furcht
|
|
Director
|
|
March 13
,
2020
|
||
|
Leo Furcht
|
|
|
|
|
||
|
|
|
|
|
|
||
|
/s/ Richard J. Nigon
|
|
Director
|
|
March 13
,
2020
|
||
|
Richard J. Nigon
|
|
|
|
|
||
60
EXHIBIT
INDEX
CELCUITY INC.
FORM 10-K
|
Exhibit
No.
|
|
Description
|
|
|
Form
of Plan of Conversion (incorporated by reference to Exhibit 2.1 to
the Company’s Registration Statement on Form S-1/A filed with
the SEC on September 12, 2017).
|
|
|
|
|
|
|
|
Certificate
of Incorporation of the Company (incorporated by reference to
Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q
filed with the SEC on August 9, 2018).
|
|
|
|
|
|
|
|
Bylaws
of the Company (incorporated by reference to Exhibit 3.2 to the
Company’s Quarterly Report on Form 10-Q filed with the SEC on
November 13, 2017).
|
|
|
|
|
|
|
|
Specimen
Certificate representing shares of common stock of Celcuity Inc.
(incorporated by reference to Exhibit 4.1 to the Company’s
Registration Statement on Form S-1/A filed with the SEC on
September 12, 2017).
|
|
|
|
|
|
|
4.2
*
|
|
Description
of Registered Securities.
|
|
|
|
|
|
|
Celcuity
Inc. 2017 Employee Stock Purchase Plan (incorporated by reference
to Exhibit 10.1 to the Company’s Registration Statement on
Form S-1/A filed with the SEC on September 12, 2017).
|
|
|
|
|
|
|
|
Celcuity
Inc. 2017 Stock Incentive Plan (incorporated by reference to
Exhibit 10.2 to the Company’s Registration Statement on Form
S-1/A filed with the SEC on September 12, 2017).
|
|
|
|
|
|
|
|
Amendment
No. 1 to Celcuity Inc. 2017 Stock Incentive Plan (incorporated by
reference to Exhibit 10.1 to the Company’s Quarterly Report
on Form 10-Q filed with the SEC on August 9, 2018).
|
|
|
|
|
|
|
|
Form
of Stock Option Agreement pursuant to Celcuity Inc. 2017 Stock
Incentive Plan (incorporated by reference to Exhibit 10.3 to the
Company’s Registration Statement on Form S-1/A filed with the
SEC on September 12, 2017).
|
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Form
of Restricted Stock Agreement pursuant to Celcuity Inc. 2017 Stock
Incentive Plan (incorporated by reference to Exhibit 10.4 to the
Company’s Registration Statement on Form S-1/A filed with the
SEC on September 12, 2017).
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Form
of Restricted Stock Unit Agreement pursuant to Celcuity Inc. 2017
Stock Incentive Plan (incorporated by reference to Exhibit 10.5 to
the Company’s Registration Statement on Form S-1/A filed with
the SEC on September 12, 2017).
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Form
of Stock Appreciation Rights Agreement pursuant to Celcuity Inc.
2017 Stock Incentive Plan (incorporated by reference to Exhibit
10.6 to the Company’s Registration Statement on Form S-1/A
filed with the SEC on September 12, 2017).
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Celcuity
LLC 2012 Equity Incentive Plan, adopted August 10, 2012, as amended
by First Amendment to the Celcuity LLC 2012 Equity Incentive Plan,
adopted November 12, 2015 (incorporated by reference to Exhibit
10.7 to the Company’s Registration Statement on Form S-1
filed with the SEC on August 23, 2017).
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Form
of Incentive Plan Unit Option Agreement pursuant to the Celcuity
LLC 2012 Equity Incentive Plan (incorporated by reference to
Exhibit 10.8 to the Company’s Registration Statement on Form
S-1 filed with the SEC on August 23, 2017).
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Form
of Warrant to Purchase Units of Membership Interest issued by
Celcuity LLC to Cedar Point Capital, LLC, as placement agent of
membership units and unsecured convertible promissory notes of
Celcuity LLC (incorporated by reference to Exhibit 10.9 to the
Company’s Registration Statement on Form S-1 filed with the
SEC on August 23, 2017).
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61
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Form
of 1.25% Unsecured Convertible Promissory Note issued by Celcuity
LLC (incorporated by reference to Exhibit 10.10 to the
Company’s Registration Statement on Form S-1 filed with the
SEC on August 23, 2017).
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Form
of Warrant to Purchase Shares of Common Stock issued by Celcuity
Inc. in connection with the conversion of 1.25% Unsecured
Convertible Promissory Notes (incorporated by reference to Exhibit
10.2 to the Company’s Current Report on Form 8-K filed with
the SEC on September 25, 2017).
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Commercial
Lease, dated September 28, 2017, between West Glen Development I,
LLC and Celcuity, LLC (incorporated by reference to Exhibit 10.11
to the Company’s Quarterly Report on Form 10-Q filed with the
SEC on November 13, 2017).
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Clinical
Trial Agreement, dated May 8, 2017, between NSABP Foundation, Inc.
and Celcuity LLC (incorporated by reference to Exhibit 10.13 to the
Company’s Registration Statement on Form S-1 filed with the
SEC on August 23, 2017).
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Confidentiality,
Assignment of Inventions and Non-Competition Agreement, dated
November 15, 2011, between Celcuity LLC and Brian F. Sullivan
(incorporated by reference to Exhibit 10.14 to the Company’s
Registration Statement on Form S-1 filed with the SEC on August 23,
2017).
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Confidentiality,
Assignment of Inventions and Non-Competition Agreement, dated
November 15, 2011, between Celcuity LLC and Lance G. Laing
(incorporated by reference to Exhibit 10.15 to the Company’s
Registration Statement on Form S-1 filed with the SEC on August 23,
2017).
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Confidentiality,
Non-Compete and Proprietary Rights Agreement, dated May 17, 2017,
between Celcuity LLC and Vicky Hahne (incorporated by reference to
Exhibit 10.16 to the Company’s Registration Statement on Form
S-1 filed with the SEC on August 23, 2017).
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Form
of Indemnification Agreement between Celcuity Inc. and each of its
officers and directors (incorporated by reference to Exhibit 10.17
to the Company’s Registration Statement on Form S-1/A filed
with the SEC on September 12, 2017).
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Representative’s
Warrant to Purchase Common Stock (incorporated by reference to
Exhibit 10.1 to the Company’s Current Report on Form 8-K
filed with the SEC on September 25, 2017).
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23.1
*
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Consent of Boulay PLLP.
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24.1
*
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Power of Attorney (included on the signature page).
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31.1
*
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Certification of principal executive officer required by Rule
13a-14(a).
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31.2
*
|
|
Certification of principal financial officer required by Rule
13a-14(a).
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32.1
**
|
|
Section 1350 Certification of principal executive
officer.
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32.2
**
|
|
Section 1350 Certification of principal financial
officer.
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101
|
|
Financial
statements from the Annual Report on Form 10-K of the Company for
the year ended December 31, 2019, formatted, in Extensible Business
Reporting Language (XBRL): (i) the Balance Sheets, (ii) the
Statements of Operations, (iii) the Statements of Changes in
Stockholders’ Equity, (iv) the Statements of Cash Flows, and
(v) the Notes to Financial Statements.
|
*
Filed
herewith.
**
Furnished
herewith.
+
Management
contract or compensatory plan.
62
TABLE OF CONTENTS
Part IItem 1. BusinessItem 1A. Risk FactorsItem 1B. Unresolved Staff CommentsItem 2. PropertiesItem 3. Legal ProceedingsItem 4. Mine Safety DisclosuresPart IIItem 5. Market For Registrant S Common Equity, Related Stockholder Matters and Issuer Purchases Of Equity SecuritiesItem 6. Selected Financial DataItem 7. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 7A. Quantitative and Qualitative Disclosures About Market RiskItem 8. Financial Statements and Supplementary DataItem 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9A. Controls and ProceduresItem 9B. Other InformationPart IIIItem 10. Directors, Executive Officers and Corporate GovernanceItem 11. Executive CompensationItem 12. Security Ownership Of Certain Beneficial Owners and Management and Related Stockholder MattersItem 13. Certain Relationships and Related Transactions, and Director IndependenceItem 14. Principal Accounting Fees and ServicesPart IVItem 15. Exhibits, Financial Statement SchedulesItem 16. Form 10-k Summary