# Celcuity Inc.: Form 10-Q for the period ended Sep 30, 2017

- Company: [Celcuity Inc.](/companies/celc.md) (CIK 1603454)
- Form: 10-Q
- Filed: 2017-11-13
- Accepted by EDGAR: Nov 13, 2017, 17:23 ET
- Period: 2017-09-30
- Accession: 0001144204-17-058480
- Inline XBRL: no
- Main document: https://www.sec.gov/Archives/edgar/data/1603454/000114420417058480/tv478251_10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1603454/000114420417058480/

## Management's discussion and analysis

As filed, 26,771 characters.

You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and the related notes appearing under Item 1 of Part I of this Quarterly Report on Form 10-Q. Some of the information contained in this discussion and analysis or set forth elsewhere in this quarterly 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 our Prospectus dated September 19, 2017 filed with the Securities and Exchange Commission on September 20, 2017 pursuant to Rule 424(b)(4) under the Securities Act of 1933, as amended, and elsewhere in this Quarterly Report on Form 10-Q, for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. “We,” “our,” “us,” “the Company” and similar words or phrases refer to Celcuity Inc. or Celcuity LLC (which converted into Celcuity Inc.).

### OVERVIEW

We are a cellular analysis company that is discovering new cancer sub-types and commercializing diagnostic tests designed to significantly improve the clinical outcomes of cancer patients treated with targeted therapies. Our proprietary 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 CELx 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 dead cells. Using dead cells prevents molecular diagnostics from analyzing in real-time the dynamic cellular activities, known as cell signaling, that regulate cell proliferation or survival. Cancer can develop when certain cell signaling activity becomes abnormal. Since genetic mutations are often only weakly correlated to the cell signaling activity driving a patient’s cancer, a molecular diagnostic is prone to providing an incomplete diagnosis. CELx tests overcome this limitation by measuring real-time cell signaling activity in a patient’s living tumor cells. When a CELx 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, CELx 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 CELx platform, the CELx HSF Test, diagnoses two new sub-types of HER2-negative breast cancer that traditional molecular diagnostics cannot detect. Our internal studies show that approximately 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 CELx HSF Test is targeting HER2-negative breast cancer patients receiving treatment, which, based on 2016 estimates from the NCI SEER Review and a May 2017 publication by the AACR, includes approximately 278,000 patients annually in the U.S. In late-2017 and through 2018, we will be fielding a prospective clinical trial in collaboration with Genentech and the NSABP to evaluate the efficacy of Genentech’s HER2 targeted therapies in patients with these newly identified cancer sub-types. We expect interim results 10 to 12 months from this trial after the first patient is enrolled and final results in 18 to 21 months.

In addition to our CELx tests for HER2-negative breast cancer, we are developing CELx tests to diagnose 14 new potential cancer sub-types we have discovered in breast, lung, colon, ovarian, kidney, bladder and hematological 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.

On September 22, 2017, we completed our underwritten initial public offering, or IPO, of 2,760,000 shares of our common stock at a price to the public of $9.50 per share. The aggregate net proceeds received by the company from the offering were approximately $23.3 million, net of underwriting discounts and commissions. Shares of our common stock began trading on September 20, 2017 on The Nasdaq Capital Market under the symbol “CELC.”

Following the IPO, we entered into a lease agreement for building space to accommodate expansion in research and development and general corporate office needs. The new lease commences and we will be moving to the space in May 2018, in conjunction with the termination of our existing lease. The lease agreement extends through April 2021 and provides for monthly rent, real estate taxes and operating expenses.

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 our inception in 2012. For the nine months ended September 30, 2017 and 2016, we reported a net loss of approximately $4.5 million and $2.4 million, respectively. As of September 30, 2017, we had a combined accumulated deficit of approximately $12.9 million under Celcuity LLC and Celcuity Inc., which includes $1.3 million of non-cash charges, consisting of approximately $0.8 million for equity-based compensation and approximately $0.5 million for non-cash interest expense. As of September 30, 2017, we had cash, cash equivalents, and investments of approximately $32.5 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 CELx platform, development and validation of our CELx HSF Test, 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, 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 initiate clinical trials to evaluate efficacy of targeted therapies in cancer patients selected with one of our CELx 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 and related benefits related to our executive, finance and support functions. Other general and administrative expenses include travel expenses for our general and administrative personnel and professional fees for auditing, tax, and legal services.

#### 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 CELx platform and corresponding CELx tests. We expect to begin to incur increased selling and marketing expenses in anticipation of the commercialization of our CELx HSF Test. 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.

#### Interest Expense

Interest expense primarily consists of the amortization of debt discount and debt financing costs related to the issuance of our unsecured convertible promissory notes that were converted to common stock upon our IPO.

#### Interest Income

Interest income consists of interest income earned on our cash, cash equivalents, and investment balances.

### Results of Operations

*(unaudited)*

*(unaudited)*

| Operating expenses: | Three Months Ended September 30, 2017 | 2016 | Percent Change | Nine Months Ended September 30, 2017 | 2016 | Percent Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Research and development | $1,364,728 | $812,803 | 68% | $3,577,357 | $2,224,859 | 61% |
| General and administrative | 164,665 | 64,738 | 154 | 551,555 | 196,155 | 181 |
| Total operating expenses | 1,529,393 | 877,541 | 74 | 4,128,912 | 2,421,014 | 71 |
| Loss from operations | (1,529,393) | (877,541) | 74% | (4,128,912) | (2,421,014) | 71% |
| Other income (expense) |  |  |  |  |  |  |
| Interest expense | (264,905) | - | na | (451,664) | - | na |
| Interest income | 30,322 | 9,021 | 61 | 53,034 | 13,040 | 307 |
| Total other income (expense) | (234,583) | 9,021 | (2,700) | (398,630) | 13,040 | (3,157) |
| Net loss | $(1,763,976) | $(868,520) | 103% | $(4,527,542) | $(2,407,974) | 88% |

#### Research and Development

Our total research and development expenses for the three and nine months ended September 30, 2017 were approximately $1.4 and $3.6 million, respectively, representing an increase of approximately $0.6 million and $1.4 million, or 68% and 61%, compared to the same periods in 2016. The increases for such periods primarily resulted from an increase in employee-related expenses, including approximately $0.05 million and $0.3 million of non-cash stock-based compensation, to support development of our CELx platform, validation studies of our CELx HSF Test, legal expenses related to patent costs, start-up clinical trial costs, 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 CELx 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 CELx tests.

#### General and Administrative

Our total general and administrative expenses for the three and nine months ended September 30, 2017 were approximately $0.2 million and $0.6 million, respectively, representing an increase of approximately $0.1 million and $0.4 million, or 154% and 181%, compared to the same periods in 2016. The increases for such periods primarily resulted from increases in employee-related expenses, including approximately $0.01 million and $0.1 million of non-cash stock-based compensation, professional accounting and audit fees, and director and officer insurance.

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 CELx tests, an expanding infrastructure, and increased professional fees associated with being a public reporting company.

To date, we have incurred immaterial sales and marketing expenses as we continue to focus primarily on the development of our CELx platform and corresponding CELx tests. We expect to begin to incur increased selling and marketing expenses in anticipation of the commercialization of our CELx HSF Test. 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.

#### Interest Expense

Interest expense for the three and nine months ended September 30, 2017 was approximately $0.3 million and $0.5 million, respectively. We incurred no interest expense in 2016. The increases for the three and nine-month periods consisted of approximately $0.3 million and $0.5 million, respectively, of non-cash amortization of debt discount and debt financing costs and accrued interest related to the issuance of our unsecured convertible promissory notes.

#### Interest Income

Interest income for the three and nine months ended September 30, 2017 was approximately $0.03 million and $0.05 million, respectively, representing an increase of approximately $0.02 million and $0.04 million, or 61% and 307%, compared to the same periods in 2016. The increases resulted from interest earned on our cash, cash equivalents, and investment balances.

### LIQUIDITY AND CAPITAL RESOURCES

Since our inception, we have incurred losses and cumulative negative cash flows from operations. Through September 30, 2017, we have 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 also closed on the initial public offering 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 September 30, 2017, our cash, cash equivalents, and investments were approximately $32.5 million and we had a combined accumulated deficit of approximately $12.9 million under Celcuity LLC and Celcuity Inc.

We expect that our research and development and general and administrative expenses will increase as we continue to develop our CELx platform and additional CELx 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 CELx HSF Test. 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 during at least the next 24 months.

We may seek to raise additional capital beyond the currently anticipated amount 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

*(unaudited)*

| Net cash provided by (used in): | Nine Months Ended September 30, 2017 | 2016 |
| --- | ---: | ---: |
| Operating activities | $(3,838,020) | $(2,184,283) |
| Investing activities | (448,496) | (30,774) |
| Financing activities | 30,734,313 | 3,718,300 |
| Net increase in cash and cash equivalents | $26,447,797 | $1,503,243 |

#### Operating Activities

Net cash used in operating activities was approximately $3.8 million for the nine months ended September 30, 2017, and consisted primarily of a net loss of approximately $4.5 million and approximately $0.4 million in working capital changes, adjusted for non-cash items of approximately $1.1 million. The approximately $0.4 million of working capital was primarily due to approximately $0.3 million in prepaid insurance and deposits and approximately $0.1 million in accounts payable and accrued expenses. Non-cash expense items of approximately $1.1 million consisted of depreciation of approximately $0.08 million, stock-based compensation expense of approximately $0.6 million and interest expense of approximately $0.5 million primarily related to amortization of debt discount and debt financing costs. The net cash used in operating activities was approximately $2.2 million for the nine months ended September 30, 2016 and consisted primarily of a net loss of approximately $2.4 million, adjusted for approximately $0.2 million of non-cash items, including depreciation of approximately $0.05 million, stock-based compensation expense of approximately $0.1 million.

#### Investing Activities

Net cash used in investing activities for the nine months ended September 30, 2017 was approximately $0.4 million and consisted of approximately $0.2 million of investments in certificates of deposit and approximately $0.2 million in purchases of property and equipment. Net cash used in investing activities for the nine months ended September 30, 2016 was approximately $0.03 million and consisted of purchases of property and equipment.

#### Financing Activities

Net cash provided by financing activities for the nine months ended September 30, 2017 was approximately $30.7 million and reflects the net proceeds of approximately $7.5 million from the sale of unsecured convertible promissory notes and warrants to certain investors through a private placement, as well as the net proceeds of approximately $23.3 million from the sale of common stock in our initial public offering. Net cash provided by financing activities for the nine months ended September 30, 2016 was approximately $3.7 million and reflects the net proceeds from the sale of membership units of Celcuity LLC to certain investors.

### 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 condensed financial statements included elsewhere in this Quarterly Report on Form 10-Q, 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 condensed financial statements included in this Quarterly Report on Form 10-Q.

### PRIVATE SECURITIES LITIGATION REFORM ACT

The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements. Such “forward-looking” information is included in this Form 10-Q and in other materials filed or to be filed by us with the Securities and Exchange Commission (as well as information included in oral statements or other written statements made or to be made by us). Forward-looking statements include all statements based on future expectations. This Form 10-Q contains forward-looking statements that involve risks and uncertainties, including but not limited to, (i) our clinical trial plans, the estimated costs for such trials and our expectations regarding the timeframe for such trials; (ii) our expectations regarding the development, launch and commercialization of our CELx test; (iii) our beliefs related to the perceived advantages of our CELx tests compared to traditional molecular or other diagnostic tests; (iv) our expectations regarding building a sales and marketing function; (v) our expectations regarding revenue from sales of CELx tests and revenue from milestone or other payment sources; (vi) our plans with respect to research and development and related expenses for the foreseeable future; (vii) our expectations regarding business development activities, including partnering with pharmaceutical companies and other companion diagnostic related activities with pharmaceutical companies; (viii) our expectations with respect to costs and timelines to develop and validate CELx tests; (ix) our plans to transition into our newly leased space and expand operations; and (x) our beliefs regarding the ability of our 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.

In some cases, you can identify forward-looking statements by the following words: “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “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 are only predictions and are not guarantees of performance. These statements are based on our management’s beliefs and assumptions, which in turn are based on their interpretation of currently available information.

These statements involve known and unknown risks, uncertainties and other factors that may cause our results or our industry’s actual results, levels of activity, performance or achievements to be materially different from the information expressed or implied by these forward-looking statements. Certain risk, uncertainties and other factors include, but are not limited to, our limited operating history; our initial success being heavily dependent on the success of our CELx HSF Test; our inability to determine whether our CELx tests are currently commercially viable; challenges we may face in developing and maintaining relationships with pharmaceutical company partners; the complexity and timeline for development of CELx tests; the uncertainty and costs associated with clinical trials; the uncertainty regarding market acceptance by physicians, patients, third-party payors and others in the medical community, and with the size of market opportunities available to us; the pricing of molecular and other diagnostic products and services that compete with us; uncertainty with insurance coverage and reimbursement for our CELx tests; difficulties we may face in managing growth, such as hiring and retaining a qualified sales force and attracting and retaining key personnel; changes in government regulations; and obtaining and maintaining intellectual property protection for our technology and time and expense associated with defending third-party claims of intellectual property infringement, investigations or litigation threatened or initiated against us. These and additional risks, uncertainties and other factors are described more fully in our Prospectus filed with the Securities and Exchange Commission on September 20, 2017 pursuant to Rule 424(b)(4) under the Securities Act of 1933, as amended. Copies of filings made with the SEC are available through the SEC’s electronic data gathering analysis and retrieval system (EDGAR) at www.sec.gov.

You should read these risk factors and the other cautionary statements made in this Form 10-Q as being applicable to all related forward-looking statements wherever they appear in this Form 10-Q. We cannot assure you that the forward-looking statements in this Form 10-Q will prove to be accurate. Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. You should read this Form 10-Q completely. Other than as required by law, we undertake no obligation to update these forward-looking statements, even though our situation may change in the future.

## Controls and procedures

As filed, 1,405 characters.

### Evaluation of Disclosure Controls and Procedures

Our Chief Executive Officer and Chief Financial Officer, referred to collectively herein as the Certifying Officers, are responsible for establishing and maintaining our disclosure controls and procedures. The Certifying Officers have reviewed and evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934 (the “Exchange Act”)) as of September 30, 2017. Based on that review and evaluation, the Certifying Officers have concluded that, as of the end of the period covered by this Report, our disclosure controls and procedures, as designed and implemented, are effective and provide reasonable assurance that information required to be disclosed by us in the periodic and current reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the periods specified by the Securities and Exchange Commission’s rules and forms.

### Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the nine months ended September 30, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 966 characters.

As a smaller reporting company, we are not required to provide disclosure pursuant to this item. However, in addition to other information set forth in this report, including the important information in the section entitled “Private Securities Litigation Reform Act,” you should carefully consider the “Risk Factors” discussed in our Prospectus filed with the Securities and Exchange Commission on September 20, 2017 pursuant to Rule 424(b)(4) under the Securities Act of 1933, as amended, and elsewhere in this Quarterly Report on Form 10-Q, for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial might materially adversely affect our actual business, financial condition and/or operating results.

Filed Nov 13, 2017.
Source: SEC EDGAR, the filing index for accession 0001144204-17-058480. Last ingested by Listed: Nov 5, 2026, 20:37 ET. No prices; not investment advice.