CELC US Equity☆

celc_10k.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

(Mark One)

For the fiscal year ended December 31, 2020

or

For the transition period from _______________________ to ___________________

Commission File Number: 001-38207

Celcuity Inc.

(Exact name of registrant as specified in its charter)

(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code: (763) 392-0767

Securities registered pursuant to Section 12(b) of the Act:

Title of each class Trading Symbol(s) Name of each exchange on which registered

Common Stock, $0.001 par value per share CELC The Nasdaq Stock Market LLC

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.:

Large accelerated filer ☐ Accelerated filer ☐

Non-accelerated filer ☒ Smaller reporting company ☒

Emerging growth company ☒

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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐

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 $6.93, the closing price of the shares of common stock on June 30, 2020 (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 $40,900,174.

As of February 5, 2021, there were 10,304,089 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 2021 Annual Meeting of Stockholders are incorporated by reference into Part III of this Annual Report on Form 10-K.

2020 Annual Report on Form 10-K

Table of Contents

Page

PART I

Item 1. Business 4

Item 1A. Risk Factors 22

Item 1B. Unresolved Staff Comments 35

Item 2. Properties 35

Item 3. Legal Proceedings 35

Item 4. Mine Safety Disclosures 35

PART II

Item 6. Selected Financial Data 37

Item 7A. Quantitative and Qualitative Disclosures About Market Risk 44

Item 8. Financial Statements and Supplementary Data 45

Item 9A. Controls and Procedures 60

Item 9B. Other Information 60

PART III

Item 10. Directors, Executive Officers and Corporate Governance 61

Item 11. Executive Compensation 62

Item 14. Principal Accounting Fees and Services 63

PART IV

Item 15. Exhibits, Financial Statement Schedules 64

Signatures 65

Special Note Regarding Forward-Looking Statements

The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for 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 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 uncertainties that may affect our business.

All statements, other than statements of historical facts, contained in this Annual Report, including statements regarding 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, performance or achievements to be materially different from the information expressed or implied by the forward-looking statements in this Annual Report. Additionally, our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments that we may make. Forward-looking statements may include, among other things, statements relating to:

· the success of competing tests that are or may become available;

· our commercialization, marketing and manufacturing capabilities and strategy;

· our expectations with respect to our facility needs;

· our ability to attract and retain key scientific or management personnel;

· the impact on our business of the requirements of being a public company;

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PART I

ITEM 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 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 cell fragments. Using cell fragments 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 Pathway Activity Test for breast cancer, which 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-positive 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-positive patients receive today. Our CELsignia HER2 Pathway Activity 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.

Our third CELsignia test for breast cancer 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 Activity Test, or CELsignia MP Test. With this next generation CELsignia test, we plan to provide an analysis of EGFR/HER1, HER2, HER3, c-MET, and PI3K-node involved signaling activity for each patient tumor specimen received.

We completed development of our first CELsignia test for ovarian cancer in 2020. This test identifies a new sub-group of ovarian cancer patients with tumors that have abnormal c-Met and HER2 signaling activity. These findings suggest that a significant sub-group of ovarian cancer patients may respond to treatment with a combination of ErbB and c-Met inhibitors. Nearly 15,000 women a year die from ovarian cancer, a disease that has less than a 50% five-year survival rate and a limited range of targeted therapy options. There is thus a significant unmet need for additional therapeutic options for ovarian cancer patients. As a companion diagnostic, our CELsignia test for ovarian cancer will be intended to help pharmaceutical companies obtain new drug indications and expand treatment options for this challenging tumor type. We initiated discussions with pharmaceutical companies about collaborating on clinical trials in late 2020.

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We also made significant progress in 2020 developing a new CELsignia test intended to diagnose breast and ovarian cancers driven by dysregulated RAS signaling. Dysregulation of RAS signaling, which includes the RAF/MEK/ERK and PI3K/AKT/mTOR pathways, is estimated to drive 30%-40% of all cancers. Pharmaceutical companies have developed numerous drugs that target RAS-involved pathways. However, the number of interactions amongst RAS-regulated pathways has made it extremely difficult to use molecular tests to identify patients with dysregulated RAS signaling tumors. The challenge of diagnosing a cancer driven by a dysregulated RAS signaling network is magnified because two or more different pathways are typically involved. Recent research has also found that RAS mutations play a much less important role in dysregulated RAS signaling than previously thought. Our CELsignia platform is uniquely suited to untangle the complexity of dysregulated RAS signaling tumors and identify the targeted therapy combination capable of treating it.

Once development of the new RAS test is completed, we intend to add it to our current CELsignia Multi-Pathway Activity tests for breast and ovarian cancer. This next generation CELsignia test would provide an analysis of EGFR/HER1, HER2, HER3, c-MET, PI3K, and RAS-involved signaling activity for each patient tumor specimen received. Our current CELsignia tests have the potential to diagnose oncogenic signaling activity undetectable by molecular tests in up to one in three HER2-negative breast cancer patients and one in five ovarian cancer patients. If our efforts to develop a RAS dynamic signaling test are successful, the percentage of cancer patients who could benefit from a CELsignia test would further increase.

In addition to the new breast cancer sub-types our CELsignia test diagnoses, we discovered eight new potential cancer sub-types in lung, 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.

Our overall commercialization strategy is to develop companion diagnostics that expand the patient population eligible for targeted therapies. We expect to collaborate with pharmaceutical companies to advance the clinical development of their targeted therapies with the eventual goal of obtaining FDA approval of a new drug indication. Collaborations are expected to involve initially Phase I or Phase II interventional clinical trials to evaluate the efficacy of our collaboration partners’ targeted therapies patients selected with one of our CELsignia tests. We are currently evaluating, or expect to evaluate, a variety of targeted therapies in combination with other targeted therapies, hormonal therapies, of chemotherapies, including: i) pan-HER and c-Met inhibitors; ii) pan-HER inhibitors and endocrine therapy; iii) pan-HER inhibitors and chemotherapies; and iv) PI3K inhibitors and endocrine therapy. The FDA has approved three c-Met inhibitors, six HER-family inhibitors, and four PI3K inhibitors for cancer treatment. Additional c-Met, HER-family, and PI3K inhibitors are being evaluated in on-going clinical trials.

We have four collaborations underway that rely on a CELsignia Pathway Activity Test to select breast cancer patients for treatment with targeted therapies. For the first one of these collaborations, we are fielding a prospective open-label Phase II clinical trial with Genentech, Inc. (“Genentech”) and NSABP Foundation, Inc. (“NSABP”) to evaluate the efficacy and safety of Genentech’s HER2 targeted therapies, Herceptin and Perjeta, in early-stage HER2-negative breast cancer patients with hyperactive HER2 signaling tumors. We expect interim results from this trial in either the fourth quarter of 2021 or first quarter of 2022 and final results approximately nine months later. For the second of these collaborations, we are fielding a prospective open-label Phase II 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 early-stage triple-negative breast cancer patients selected with our CELsignia HER2 Pathway Activity Test. We expect to obtain interim results in either the fourth quarter of 2021 or first quarter of 2022 and final results approximately nine months later.

For our third collaboration, we are fielding a prospective open-label Phase II clinical trial with Puma Biotechnology, Inc. (“Puma”), Massachusetts General Hospital, the UCLA Jonsson Comprehensive Cancer Center and the Vanderbilt-Ingram Cancer Center to evaluate the efficacy and safety of Puma’s drug, Nerlynx, and Faslodex, an AstraZeneca drug, in previously treated metastatic HR-positive, HER2-negative breast cancer patients selected with our CELsignia HER2 Pathway Activity Test. For our fourth collaboration, we are fielding a prospective open-label Phase II clinical trial with Pfizer Inc. and Sarah Cannon Research Institute to evaluate the efficacy and safety of two Pfizer targeted therapies, Vizimpro, a pan-HER inhibitor, and Xalkori, a c-Met inhibitor, in previously treated metastatic HER2-negative breast cancer patients selected with our CELsignia Multi-Pathway Activity Test.

An additional collaboration 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 is expected to be completed in late 2022. Unlike the four clinical trial collaborations, 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.

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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 cell fragments 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 cell fragments 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 tests, the first of which became commercially ready as a laboratory developed test (“LDT”) in 2016. 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, Pfizer’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.

Our Value Proposition

We believe we offer a clear and compelling value proposition to the key healthcare stakeholders:

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Our Competitive Strengths

We have a number of key strengths that enhance our ability to achieve our mission and build a successful company:

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:

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Our Industry

According to the Centers for Disease Control and Prevention, cancer was the second-leading cause of death in the United States in 2019, 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.

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, and 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 that the new drug indication 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.

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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 2017, 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.

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 cell fragments, 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 study and 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 several articles published in leading cancer journals between 2017-2019 , the percentage of tumors that yield proliferative cells with conventional culturing methods has until now been well below 50%. 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.

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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:

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 cell fragments. 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.

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 three issued U.S. patents, five issued international patents, five pending U.S. patent applications, 23 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.

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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 eight potentially new 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. The goal of our clinical trial strategy is to demonstrate that patients found by a CELsignia test to have abnormal pathway signaling will respond favorably to a matching targeted therapy. 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.

CELsignia Multi-Pathway Activity Test

Our CELsignia MP Test is a qualitative LDT that measures HER2, c-Met, and PI3K signaling activity in breast and ovarian tumor cells obtained from patients previously diagnosed with cancer 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.

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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. Crosstalk 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 have 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 antagonist when c-Met is hyperactive for this patient sub-set. Additionally, evidence was found that simultaneous inhibition of EGFR/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 and ovarian 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 PIK3CA sequence variance status may be important to measure when identifying patients eligible for PI3K inhibitors. In one Phase III clinical trial, the net increase in the objective response rate of PI3KCA-mutated late stage breast cancer patients who received alpelisib, a PIK3CA inhibitor, and fulvestrant versus those who received fulvestrant alone was less than 20%.

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-α, may provide the most effective attenuation of dysregulated signaling involving the PI3K-node. Our studies also found that the signaling activity involving PI3K-α is likely more important to measure than the mutational status of PI3K-α when selecting patients for treatment with a PI3K-α inhibitor like alpelisib.

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 Targeted Therapies

In July 2018, we activated the first site in 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 HER2 Pathway Activity 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 2021, 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 to reflect the impact of COVID-19, we expect to obtain interim results in the fourth quarter of 2021 or first quarter of 2022 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 more than 50% market share.

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We submitted an Investigational Device Exemption, or IDE, application to the FDA to obtain approval to use our CELsignia HER2 Pathway Activity 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.

FACT-1 Clinical Trial Synopsis

FACT-2 Clinical Trial to Evaluate Efficacy of Puma’s HER2 Targeted Therapy

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 HER2 Pathway Activity 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. Based on West Cancer Center estimates to reflect the impact of COVID-19, we expect interim results from this trial in the fourth quarter of 2021 or first quarter of 2022 and final results approximately nine months later.

We submitted an IDE application to the FDA to use our CELsignia HER2 Pathway Activity 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.

A synopsis of the trial protocol is provided below.

FACT-2 Clinical Trial Synopsis

FACT-3 Clinical Trial to Evaluate Efficacy of Pfizer’s pan-HER and c-Met Targeted Therapies

In January 2021, we announced a clinical trial collaboration with Sarah Cannon Research Institute, a global leader in cancer research, and Pfizer Inc., a global biopharmaceutical company, to conduct a Phase II clinical trial. This open-label Phase II trial will evaluate the efficacy and safety of two Pfizer targeted therapies, Vizimpro (dacomitinib), a pan-HER inhibitor, and Xalkori (crizotinib), a c-Met inhibitor, in previously treated metastatic HER2-negative breast cancer patients selected with our CELsignia Multi-Pathway Activity Test. Under the agreement, Sarah Cannon will serve as the sponsor and principal investigator of the trial and will be responsible for enrolling patients and managing clinical data. Pfizer will supply Vizimpro and Xalkori, targeted therapies currently approved by the FDA to treat metastatic non-small cell lung cancer. We will provide our CELsignia Multi-Pathway Activity Test to select HER2- metastatic breast cancer patients who have hyperactive HER2 and c-Met signaling pathways for the trial and will fund the patient-related trial costs. Based on the Sarah Cannon Research Institute’s estimates of patient enrollment rates, we expect to obtain interim results 12 to 15 months after the protocol is activated and final results 12-15 months later. We expect enrollment to begin in the second quarter of 2021.

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The Sarah Cannon Research Institute is one of the world’s leading clinical research organizations and has participated in clinical trials for a majority of approved cancer therapies over the last decade. Pfizer is one of the largest biopharmaceutical companies in the world and offers a number of targeted therapies for cancer patients.

The goal of the trial is to demonstrate that previously treated HER2-negative metastatic breast cancer patients who have hyperactive HER2 and c-Met signaling tumors, as identified by the CELsignia test, respond to treatment with Vizimpro in combination with Xalkori. We believe there is significant clinical interest in finding new diagnostic tests and targeted therapies for metastatic HER2-negative breast cancer patients whose disease progressed on prior therapies. The anti-tumor effect of blockading EGFR/HER1, HER2, HER3 and c-Met pathways when the HER2 and c-Met pathways are hyperactive has been demonstrated in animal models.

A synopsis of the trial protocol is provided below.

FACT-3 Clinical Trial Synopsis

FACT-4 Clinical Trial to Evaluate Efficacy of Puma’s HER2 Targeted Therapy

In December 2020, we announced a clinical trial collaboration with Massachusetts General Hospital and Puma Biotechnology, a biopharmaceutical company, to conduct a Phase II clinical trial. This open-label Phase II trial will evaluate the efficacy and safety of Puma’s drug, Nerlynx (neratinib), and Faslodex (fulvestrant), an AstraZeneca drug, in previously treated metastatic HR-positive (HR+), HER2-negative breast cancer patients selected with our CELsignia HER2 Pathway Activity Test. Under the agreement, Massachusetts General Hospital will serve as the sponsor and the principal investigator of this study, while the UCLA Jonsson Comprehensive Cancer Center and the Vanderbilt-Ingram Cancer Center will serve as co-sponsors. Each of these institutions is amongst the United States’ 51 NCI-Designated Comprehensive Cancer Centers tasked with developing new approaches to diagnosing and treating cancer. Puma will supply Nerlynx, its HER2 inhibitor currently approved by the FDA for early and late-stage HER2-positive breast cancer. We will provide our CELsignia HER2 Pathway Activity Test to select HR+, HER2-negative metastatic breast cancer patients who have hyperactive HER2-driven signaling pathways for the trial and will fund the patient-related trial costs. Based on Massachusetts General Hospital’s estimates of patient enrollment rates, we expect to obtain interim results 12 to 15 months after the protocol is activated and final results 12 to 15 months later. We expect enrollment to begin in the second quarter of 2021.

The goal of the trial is to demonstrate that previously treated HR+, HER2-negative metastatic breast cancer patients who have hyperactive HER2 signaling tumors, as identified by the CELsignia test, respond to treatment with Nerlynx in combination with Faslodex, a hormonal therapy that targets the estrogen receptor. We believe there is significant clinical interest in finding new diagnostic tests and targeted therapies for metastatic HR+, HER2-negative breast cancer patients whose disease progressed on prior therapies. Of particular interest are new therapeutic combinations that can overcome resistance to anti-estrogen therapies like Faslodex. The blockade of estrogen receptor and HER2 pathways when the HER2 pathway is hyperactive using a combination of Neratinib and Faslodex has been demonstrated in animal models.

A synopsis of the trial protocol is provided below.

FACT-4 Clinical Trial Synopsis

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Commercialization Strategy

Our commercial activities will target three complementary groups at various phases of the development of our CELsignia tests.

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. Our current focus is to field clinical trials with leading cancer centers in collaboration with pharmaceutical companies to demonstrate that cancer patients diagnosed with an abnormal signaling pathway by a CELsignia test respond efficaciously to treatment with a matching targeted therapy. Once favorable efficacy data is available, we expect to generate revenues from CELsignia tests performed in conjunction with the clinical trials a pharmaceutical company will field during the registrational 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 registrational 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 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:

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.

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A CELsignia test would be launched 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 pathway, 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.

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:

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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 include 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.

Current Molecular Methods vs. Our Pathway Activity Analysis Platform

Type of Cell Sample Used:

Tumor cell fragments(fixed, lysed, DNA) Live tumor cells

Relationship to disease driver Correlative Direct Cause

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.

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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 three issued U.S. patents, five issued international patents, five pending U.S. patent applications, 23 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.

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, the 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, the FDA continues to discuss potential regulatory approaches to LDTs.

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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, made 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.

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.

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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.

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.

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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 the resulting 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.

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.

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, 2020, we had 30 full-time employees, most of which were engaged in research and development activities. None of our employees are currently represented by a labor union or covered by a collective bargaining agreement and we believe that our relations with our employees are good. During 2020, our voluntary turnover rate was less than 4%. Our human capital resources objectives include identifying, recruiting, retaining, and incentivizing our existing and new employees. We maintain an equity incentive plan, the principal purposes of which are to attract, retain and reward personnel through the granting of stock-based compensation awards, in order to increase stockholder value and the success of our company by motivating such individuals to perform to the best of their abilities and achieve our objectives.

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ITEM 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 Annual 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 and 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 and 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 equity and debt offerings, including 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 four existing clinical trial collaborations, one with Genentech and NSABP, one with Puma and the West Cancer Center, and one with Puma and the Massachusetts General Hospital for our CELsignia HER2 Pathway Activity Test, and a fourth one with the Sarah Cannon Research Institute and Pfizer for our CELsignia Multi-Pathway Activity 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.

Our initial success is heavily dependent on the success of our first CELsignia tests.

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 the first interim results for our prospective clinical trials for the CELsignia HER2 Pathway Activity Test until the fourth quarter of 2021 or first quarter of 2022 and with final results expected approximately nine months later. Success of the clinical trials using the CELsignia HER2 Pathway Activity Test or CELsignia Multi-Pathway Activity 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, West Cancer Center, Massachusetts General Hospital, or Sarah Cannon Research Institute 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 HER2 Pathway Activity Test or CELsignia Multi-Pathway Activity Test is suitable as a companion diagnostic for the targeted therapy, we will likely not be able to generate future revenue from our CELsignia HER2 Pathway Activity Test or CELsignia Multi-Pathway Activity 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 HER2 Pathway Activity Test trial are available. Even if the ultimate outcome of the first clinical trial using a CELsignia HER2 Pathway Activity Test trial is positive, any delays could materially and adversely affect our business.

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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 CELsignia HER2 Pathway Activity Test and CELsignia Multi-Pathway Activity Test are commercially ready, we have not attempted to market these to physicians or their patients as stand-alone tests and have no ability to determine if these tests or any of our other tests will be commercially viable.

While our CELsignia HER2 Pathway Activity Test and CELsignia Multi-Pathway Activity Test are analytically validated, conducted in our CLIA certified and CAP accredited laboratory, and currently ready for commercial use as an LDT, we have not attempted to market them 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 CELsignia HER2 Pathway Activity Test, CELsignia Multi-Pathway Activity Test or any other future CELsignia tests, will be commercially viable as stand-alone tests. 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 the CELsignia HER2 Pathway Activity Test, the CELsignia Multi-Pathway Activity Test, 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 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.

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:

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· 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 HER2 Pathway Activity Test and CELsignia Multi-Pathway Activity 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:

· our ability to offer them for sale at competitive prices;

· the strength of marketing and distribution support;

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.

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.

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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, including in hiring and retaining a qualified sales force.

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. In particular, there is 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. 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, including if we are unable to develop our marketing and sales networks or if our sales personnel do not perform as expected, would adversely impact the commercialization our CELsignia platform, and our business, financial condition, results of operations and prospects may be materially and adversely affected.

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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:

· attract qualified scientific, product development and commercial personnel;

· obtain required U.S. and international regulatory approvals;

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 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 to successfully implement our business plan.

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.

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The COVID-19 pandemic may materially and adversely impact our business, including ongoing clinical trials.

The outbreak of COVID-19 and government measures taken in response have had a significant impact on the global economy, with healthcare systems particularly affected. In response to the COVID-19 outbreak, public health measures have been implemented across much of the United States, Europe and Asia, including in the locations of our offices, clinical trial sites, and partners. Due to these public health measures, we are allowing employees who do not need to be physically present in the lab to perform their work at home. Our increased reliance on employees working from home may negatively impact productivity, or disrupt, delay or otherwise adversely impact our business.

As a result of the COVID-19 outbreak and related public health measures, we have and may in the future experience disruptions that could materially and adversely impact our clinical trials, business, financial condition and results of operations. Potential disruptions include but are not limited to:

· diversion of healthcare resources away from the conduct of clinical trials;

The COVID-19 pandemic continues to rapidly evolve. The extent to which the outbreak impacts our business will depend on future developments, which are highly uncertain and cannot be predicted with confidence, such as the magnitude of the pandemic, the duration of social distancing in the United States and other countries, business closures or business disruptions, and the effectiveness of actions taken in the United States and other countries to contain and treat the disease.

Beyond the direct effect of the pandemic, mitigation efforts have had broad economic effects. The extent of the scope and duration of these economic effects cannot currently be predicted, although they are likely to be significant for the near future. The economic impact of COVID-19 will affect us in a variety of ways, including without limitation making our stock price more volatile, making it more difficult to raise additional capital through offerings of equity or debt securities, and reducing the availability of bank loans. As a result, we may face difficulties raising capital and capital raising efforts may be on terms that are less favorable than would have been previously available.

All of the effects of COVID-19 described herein are expected to apply to any future recurrences of COVID-19 and any other pandemics that may occur in the future.

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 tests, 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 the fourth quarter of 2021 or first quarter of 2022 and final results approximately nine months later. We will rely on NSABP to conduct our clinical trial of patients selected using a CELsignia HER2 Pathway Activity 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 the fourth quarter of 2021 or first quarter of 2022 and final results approximately nine months later. We will rely on West Cancer Center to conduct our clinical trial of patients selected using a CELsignia HER2 Pathway Activity Test, including setting up clinical sites, enrolling patients, and managing clinical data and Puma will supply the drugs. For our FACT-3 clinical trial, we are collaborating with Pfizer and the Sarah Cannon Research Institute to conduct a 23-patient single-arm interventional trial that is expected to obtain interim results 12 to 15 months after the protocol is activated and final results 12-15 months later. We expect enrollment to begin in the second quarter of 2021. We will rely on the Sarah Cannon Research Institute to conduct our clinical trial of patients selected using a CELsignia Multi-Pathway Activity Test, including setting up clinical sites, enrolling patients, and managing clinical data and Pfizer will supply the drugs. For our FACT-4 clinical trial, we are collaborating with Puma and Massachusetts General Hospital to conduct a 23-patient single-arm interventional trial that is expected to obtain interim results 12 to 15 months after the protocol is activated and final results 12-15 months later. We expect enrollment to begin in the second quarter of 2021. We will rely on Massachusetts General Hospital to conduct our clinical trial of patients selected using a CELsignia HER2 Pathway Activity Test, including setting up clinical sites, enrolling patients, and managing clinical data and Puma will supply the drugs.

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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, the Sarah Cannon Research Institute, Massachusetts General Hospital, or other contract research organizations or cancer centers that we collaborate with 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 pursue commercialization of any companion therapies;

· 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.

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.

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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 LDTs, 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 did not intend 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.

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.

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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:

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.

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 three issued U.S. patents, five issued international patents, five pending U.S. patent applications, 23 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 patents may not be held valid if subsequently challenged;

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.

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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.

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.

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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.