Celcuity Inc. (CELC) FY 2021 MD&A

ITEM
7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You
should read the following discussion and analysis of our financial condition and results of operations together in conjunction with our
financial statements and the related notes included elsewhere in this Annual Report. Some of the information contained in this discussion
and analysis or set forth elsewhere in this Annual Report, including information with respect to our plans and strategy for our business
and expected financial results, includes forward-looking statements that involve risks and uncertainties. You should review the “Risk
Factors” discussed in Item 1A of Part I of this Annual Report.

OVERVIEW

We
are a clinical-stage biotechnology company seeking to extend the lives of cancer patients by pursing an integrated therapeutic (Rx) and
companion diagnostic (CDx) strategy. Our therapeutic efforts are focused on developing potential first-in-class or best-in-class molecularly
targeted therapies that address the same cancer driver a CELsignia companion diagnostic can identify. CELsignia is uniquely able to analyze
live patient tumor cells to identify new groups of cancer patients likely to benefit from targeted therapies. This enables a CELsignia
CDx to support advancement of new indications for already approved targeted therapies. We believe this integrated Rx and CDx strategy
will maximize the impact our drug development efforts have on the treatment landscape for cancer patients.

The
first drug candidate we are developing internally is gedatolisib, a potent, well-tolerated, small molecule dual inhibitor, administered
intravenously, that selectively targets all class I isoforms of PI3K and mammalian target of rapamycin (mTOR). In April 2021,
we obtained exclusive global development and commercialization rights to gedatolisib under a license agreement with Pfizer, Inc. We believe
gedatolisib’s unique mechanism of action, favorable pharmacokinetic properties, and intravenous formulation offer distinct advantages
over currently approved and investigational therapies that target PI3K or mTOR alone or together.

Gedatolisib
is a pan-class I isoform PI3K inhibitor with low nanomolar potency for the p110α, p110β, p110γ, and p110δ isoforms.
Each isoform is known to preferentially affect different signal transduction events that involve tumor cell survival, depending upon
the aberrations associated with the linked pathway. When a therapy only inhibits a single class I isoforms (e.g., alpelisib,
a PI3K-α inhibitor ) or only one mTOR kinase complex (e.g., everolimus, an mTORC1 inhibitor), numerous feedforward and feedback
loops between the PI3K isoforms and mTOR cross-activates the uninhibited sub-units. This, in turn, induces compensatory resistance that
reduces the efficacy of isoform specific PI3K or single mTOR kinase complex inhibitors. Inhibiting all four PI3K isoforms and both mTOR
complexes, as gedatolisib does, thus prevents the confounding effect of isoform interaction that may occur with isoform-specific PI3K
inhibitors and the confounding interaction between PI3K isoforms and mTOR.

Gedatolisib
is administered intravenously (IV) on a four-week cycle of three weeks-on, one week-off, in contrast to the orally administered pan-PI3K
or dual PI3K/mTOR inhibitors that are no longer being clinically developed. Oral pan-PI3K or PI3K/mTOR inhibitors have repeatably been
found to induce significant side effects that were not well tolerated by patients. This typically leads to a high proportion of patients
requiring dose reductions or treatment discontinuation. The challenging toxicity profile of these drug candidates ultimately played a
significant role in the decisions to halt their development, despite showing promising efficacy. By contrast, gedatolisib stabilizes
at lower concentration levels in plasma compared to orally administered PI3K inhibitors, resulting in less toxicity, while maintaining
concentrations sufficient to inhibit PI3K/mTOR signaling.

Isoform-specific
PI3K inhibitors administered orally were developed to reduce toxicities in patients. While the range of toxicities associated with isoform-specific
inhibitors is narrower than oral pan-PI3K or PI3K/mTOR inhibitors, administering them orally on a continuous basis still leads to challenging
toxicities. The experience with an FDA approved oral p110-α specific inhibitor, Piqray, illustrates the challenge. In its Phase
3 pivotal trial Piqray was found to induce a Grade 3 or 4 adverse event (AE) related to hyperglycemia in 39% of patients evaluated. In
addition, 26% of patients discontinued alpelisib due to treatment related adverse events. By contrast, in the 103-patient dose expansion
portion of the Phase 1b clinical trial with gedatolisib, only 7% of patients experienced Grade 3 or 4 hyperglycemia and less than 10%
discontinued treatment.

As
of December 31, 2021, 492 patients with solid tumors have received gedatolisib in eight clinical trials sponsored by Pfizer. Of the 492
patients, 129 were treated with gedatolisib as a single agent in three clinical trials. The remaining 363 patients received gedatolisib
in combination with other anti-cancer agents in five clinical trials. Additional patients received gedatolisib in combination with other
anti-cancer agents in nine investigator sponsored clinical trials.

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A
Phase 1b trial (B2151009) evaluating patients with HR+/HER2- metastatic breast cancer was initiated in 2016 and subsequently
enrolled 138 patients. Twelve patients from this study continue to receive study treatment, as of December 31, 2021, ten of whom
have received study treatment for more than three years. The B2151009 clinical was an open label, multiple arm Phase 1b study that
evaluated gedatolisib in combination with palbociclib (CDK4/6 inhibitor) and fulvestrant or letrozole in patients with HR+/HER2-
advanced breast cancer. Thirty-five patients were enrolled in two dose escalation arms to evaluate the safety and tolerability and
to determine the maximum tolerated dose (MTD) of gedatolisib when used in combination with the standard doses of palbociclib and
endocrine therapy (letrozole or fulvestrant). The MTD was determined to be 180 mg administered intravenously once weekly. A total of
103 patients were subsequently enrolled in one of four expansion arms (A, B, C, D).

High
objective overall response rates were observed in all four expansion arms and were comparable in each arm for PIK3CA WT and PIK3CA MT
patients. In treatment-naïve patients (Arm A), ORR was 85%. In patients who received prior hormonal therapy alone or in combination
with a CDK4/6 inhibitor (Arms B, C, and D), ORR ranged from 32% to 77%. Each arm achieved its primary endpoint target, which was reporting
higher ORR in the study arm than ORR from either the PALOMA-2 (ORR=55%) study that evaluated palbociclib plus letrozole for Arm A or
the PALOMA-3 study (ORR=25%) that evaluated palbociclib plus fulvestrant for Arms B, C, and D. For all enrolled patients, a clinical
benefit rate (CBR) of ≥79% was observed. Median progression-free survival (PFS) was 31.1 months for patients receiving first-line
treatment (Arm A) and 12.9 months for patients who received a prior CDK4/6 inhibitor and were treated in the study with the Phase 3 dosing
schedule (Arm D).

Gedatolisib
combined with palbociclib and endocrine therapy demonstrated a favorable safety profile with manageable toxicity. The majority of treatment
emergent adverse events were Grade 1 and 2. The most frequently observed adverse events included stomatitis/mucosal inflammation, the
majority of which were Grade 1 and 2. The most common Grade 4 AEs were neutropenia and neutrophil count decrease, which were assessed
as related to treatment with palbociclib. No grade 5 events were reported in this study.

We are preparing to initiate VIKTORIA-1, a Phase 3, open-label, randomized clinical trial to evaluate the efficacy and safety of two regimens in adults
with HR+/HER2- advanced breast cancer whose disease has progressed after prior CDK4/6 therapy in combination with an aromatase
inhibitor: 1) gedatolisib in combination with palbociclib and fulvestrant; and 2) gedatolisib in combination with fulvestrant. We
expect to initiate the VIKTORIA-1 study in the first half of 2022.

The clinical trial will
enable separate evaluation of subjects according to their PIK3CA status. Subjects who meet eligibility criteria and are PIK3CA WT will
be randomly assigned (1:1:1) to receive a regimen of either gedatolisib, palbociclib, and fulvestrant (Arm A), gedatolisib
and fulvestrant (Arm B), or fulvestrant (Arm C). Subjects who meet eligibility criteria and are PIK3CA MT will be randomly assigned (1:1)
to receive a regimen of either gedatolisib, palbociclib, and fulvestrant (Arm D) or alpelisib and fulvestrant (Arm E).

On
January 13, 2022, gedatolisib was granted Fast Track designation for the treatment of patients with ER+/HER2- metastatic breast cancer
after progression on CDK4/6 therapy. Fast Track designation is granted by the FDA for products that are intended for the treatment of
serious or life-threatening disease or conditions and which demonstrate the potential to address an unmet medical need. The designation
offers the opportunity for frequent interactions with the FDA to discuss the drug’s development plan and to ensure collection of
appropriate data needed to support drug approval, as well as eligibility for rolling submission of a New Drug Application.

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. This enables us to identify patients whose tumors may respond to a targeted therapy, even though they lack a previously associated
molecular mutation. By identifying cancer patients whose tumors lack an associated genetic mutation but have abnormal cellular activity
a matching targeted therapeutic is designed to inhibit, CELsignia CDx can expand the markets for a number of already approved targeted
therapies. Our current CDx identifies breast and ovarian cancer patients whose tumors have cancer drivers potentially responsive to treatment
with human epidermal growth factor receptor 2-negative (HER2), mesenchymal-epithelial transition factor (c-MET), or phosphatidylinositol
3-kinases (PI3K) targeted therapeutics. While U.S. Food and Drug Administration (“FDA”) approval or clearance is not currently
required for CELsignia tests offered as a stand-alone laboratory developed 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.

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We
are supporting the advancement of new potential indications for four different targeted therapies, controlled by other pharmaceutical
companies, that would rely on a CELsignia CDx to select patients. Five Phase 2 trials are underway to evaluate the efficacy and safety
of these therapies in CELsignia selected patients. These patients are not currently eligible to receive these drugs and are not identifiable
with a molecular test.

Supporting
the development of a potential first-in-class targeted therapy for breast cancer, like gedatolisib, with our CELsignia platform is a
natural extension of our strategy to use our CELsignia CDx to enable new indications for other companies’ targeted therapies. By
combining companion diagnostics designed to enable proprietary new drug indications with targeted therapies that treat signaling dysregulation
our CDx identifies, we believe we are uniquely positioned to improve the standard-of-care for many early and late-stage breast cancer
patients. Our goal is to play a key role in the multiple treatment approaches required to treat breast cancer patients at various stages
of their disease. With each program, we are:

We
have not generated any revenue from sales to date, and we continue to incur significant research and development and other expenses related
to our ongoing operations. As a result, we are not and have never been profitable and have incurred losses in each period since we began
operations in 2012. For the years ended December 31, 2021 and 2020, we reported a net loss of approximately $29.6 million and
$9.5 million, respectively. As of December 31, 2021, our cash and cash equivalents were approximately $84.3 million, and we had an accumulated
deficit of approximately $55.9 million.

Impact
of COVID-19 on our Business

A
novel strain of coronavirus (COVID-19) was first identified in Wuhan, China in December 2019, and subsequently declared a pandemic by
the World Health Organization. The impact of the COVID-19 pandemic on our business is discussed in further detail below:

Health
and Safety

To
help protect the health and safety of our employees, suppliers and collaborators, we took proactive, aggressive action from the earliest
signs of the outbreak. We enacted rigorous safety measures in our laboratory and administrative offices, including implementing social
distancing protocols, allowing working from home for those employees that do not need to be physically present in a lab to perform their
work, suspending travel, implementing temperature checks at the entrances to our facilities, extensively and frequently disinfecting
our workspaces and providing masks to those employees who must be physically present. We expect to continue with these measures until
the COVID-19 pandemic is contained and we may take further actions as government authorities require or recommend or as we determine
to be in the best interests of our employees, suppliers, and collaborators.

Clinical
Trials and Collaborations

As
a result of the COVID-19 pandemic, governmental authorities have implemented and are continuing to implement numerous and constantly
evolving measures to try to contain the virus, such as travel bans and restrictions, limits on gatherings, quarantines, shelter-in-place
orders, and business shutdowns. As we continue to advance our clinical trial collaborations, we are in close contact with our current
clinical sponsors, and principal investigators, as well as prospective pharmaceutical company and clinical collaborators, to assess the
impact of COVID-19 on our trial enrollment timelines and collaboration discussions. In light of the COVID-19 pandemic, the focus of healthcare
providers and hospitals on fighting the virus, and consistent with the FDA’s updated industry guidance for conducting clinical
trials issued on March 18, 2020, we are experiencing delays in the enrollment of patients in our ongoing clinical trials. We now expect
interim results from the FACT-1 and FACT-2 trials to be delayed until the first half of 2023 and final results approximately nine months
later. As the impact of COVID-19 on our industry becomes clearer, we may need to reassess the timing of our anticipated clinical milestones.
Prospective clinical trial collaborations with pharmaceutical companies and sponsors may also be delayed but the impact on the timing
of finalizing agreements is not yet known.

Research
and Development

While
our facility currently remains operational, the evolving measures to try to contain the virus have impacted and may further impact our
workforce and operations, as well as those of our vendors and suppliers. Our laboratory remains operational as of this date, but, in
response to the COVID-19 pandemic, we have implemented protective policies that reduce the number of research and development staff operating
in our laboratory at any one time. While governmental measures may be modified or extended, we expect that our research and development
and clinical laboratory will remain operational. However, in light of the focus of healthcare providers and hospitals on fighting the
virus, several of the clinical sites that provide us tumor tissue for research have halted this service, reducing the number of new tumor
tissue specimens we would typically expect to receive. These various constraints may slow or diminish our research and development activities.
In addition, cancer research-related industry meetings, such as the American Association for Cancer Research (AACR), were delayed for
several months. Our submissions to present research results at these meetings were accepted, but the release of the results was postponed
in conjunction with the delayed meeting schedules.

Liquidity

Although
there is uncertainty related to the anticipated impact of the recent COVID-19 outbreak on our future results, we believe our existing
balance of cash and cash equivalents will be sufficient to meet our cash needs arising in the ordinary course of business for at least
the next twelve months. We continue to monitor the rapidly evolving situation and guidance from federal, state and local public health
authorities and may take additional actions based on their recommendations. In these circumstances, there may be developments outside
our control requiring us to adjust our operating plan. In addition, see Item 1A of Part I of this Annual Report for additional information
on risks associated with pandemics in general and COVID-19 specifically and how those risks may impact our business and operations.

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RESULTS
OF OPERATIONS

Components
of Operating Results

Revenue

To
date, we have not generated any revenue. Initially, our ability to generate revenue will depend primarily upon our ability to obtain
partnership agreements with pharmaceutical companies to provide companion diagnostics for such pharmaceutical partners’ existing
or investigational targeted therapies. We expect these partnerships to generate significant revenue from the sale of tests to identify
patients eligible for clinical trials, from milestone payments, and, potentially, from royalties on the incremental drug revenues our
tests enable. Once a new drug indication is received that requires use of our companion diagnostic to identify eligible patients, we
expect to generate revenues from sales of tests to treating physicians. With the execution of the Pfizer license agreement in April 2021,
whereby we acquired exclusive world-wide licensing rights to develop and commercialize gedatolisib, we expect to conduct clinical trials
to support potential regulatory approval to market gedatolisib. If we obtain regulatory approvals to market gedatolisib, we expect to
generate revenue from sales of the drug for the treatment of breast cancer patients.

Research
and Development

Since
our inception, we have primarily focused on research and development of our CELsignia platform, development and validation of our CELsignia
tests, and research related to the discovery of new cancer sub-types. Beginning in April 2021, we are also focusing on development of
gedatolisib, a PI3K/mTOR targeted therapy. Research and development expenses primarily include:

Internal
and external research and development costs are expensed as they are incurred. As we initiate a Phase 3 clinical trial for gedatolisib
and continue to expand clinical trials to evaluate efficacy of targeted therapies in cancer patients selected with one of our CELsignia
tests, the proportion of research and development expenses allocated to external spending will grow at a faster rate than expenses allocated
to internal expenses.

General
and Administrative

General
and administrative expenses consist primarily of salaries, benefits and stock-based compensation related to our executive, finance and
support functions. Other general and administrative expenses include professional fees for auditing, tax, and legal services associated
with being a public company, director and officer insurance and travel expenses for our general and administrative personnel.

Sales
and Marketing

Sales
and marketing expenses consist primarily of professional and consulting fees related to these functions. To date, we have incurred immaterial
sales and marketing expenses as we continue to focus primarily on the development of our first drug, gedatolisib, development of our
CELsignia platform and corresponding CELsignia tests. We expect to begin to incur increased selling and marketing expenses in anticipation
of regulatory approval to market gedatolisib and the commercialization of our first CELsignia tests. These increased expenses are expected
to include payroll-related costs as we add employees in the commercial departments, costs related to the initiation and operation of
our sales and distribution network and marketing related costs.

Interest
Expense

Interest
expense is primarily due to a loan agreement and finance lease obligations.

Interest
Income

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

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Results
of Operations

Comparison
of the Years Ended December 31, 2021 and 2020

Research
and Development

For
the year ended December 31, 2021, our research and development expenses were approximately $25.8 million, representing an increase of
approximately $18.1 million, or 235%, compared to the same period in 2020. The increase primarily resulted from a $10.0 million upfront
license fee related to the execution of the Pfizer license agreement, which included $5.0 million of non-cash expense for the issuance
of common stock. The remaining $8.1 million increase primarily resulted from expenses related to the support and development of gedatolisib.
Employee related expenses, including consulting fees, accounted for a $3.4 million increase. The increase of $3.4 million included an
increase of $0.6 million in non-cash stock-based compensation. The remaining increase of $4.7 million is related to clinical trials,
costs associated with the transfer of the gedatolisib-related activities from Pfizer to Celcuity and patent legal fees.

Conducting
a significant amount of research and development is central to our business model. We plan to increase our research and development expenses
for the foreseeable future as we seek to develop gedatolisib, discover new cancer sub-types, and develop and validate additional CELsignia
tests to diagnose such sub-types. We also expect to incur increased expenses to support companion diagnostic business development activities
with pharmaceutical companies as we develop additional CELsignia tests and initiate a clinical trial for gedatolisib.

General
and Administrative

For
the year ended December 31, 2021, our total general and administrative expenses were $2.6 million, representing an increase of approximately
$0.7 million, or 39%, compared to the same period in 2020. The increase primarily resulted from a $0.4 million increase in compensation
related expenses, including approximately $0.3 million of non-cash stock-based compensation. In addition, other general and administrative
expenses increased $0.3 million primarily due to professional fees associated with being a public company and director and officer insurance.

We
anticipate that our general and administrative expenses will increase in future periods, reflecting both increased costs in connection
with the potential future commercialization of gedatolisib and CELsignia tests, an expanding infrastructure, and increased professional
fees associated with being a public company.

Interest
Expense

For
the year ended December 31, 2021, interest expense was $1.3 million and represents an increase of $1.3 million compared to the same period
in 2020. The increase is due to the loan agreement that was executed in April 2021 and includes $0.6 million of non-cash interest expense.

Interest
Income

For
the year ended December 31, 2021, interest income decreased approximately $0.1 million compared to the same period in 2020. The decrease
was primarily the result of lower market interest rates.

57

LIQUIDITY
AND CAPITAL RESOURCES

Since
our inception, we have incurred losses and cumulative negative cash flows from operations. Through December 31, 2021, we raised capital
of approximately $13.7 million and $7.5 million through private placements of common equity and unsecured convertible notes, respectively.
On September 22, 2017, we closed on the IPO of our common stock, which generated approximately $23.3 million of additional cash after
taking into account underwriting discounts and commissions and offering expenses. On June 5, 2020, we entered into an At Market Issuance
Sales Agreement with B. Riley, FBR, Inc (the “ATM Agreement”). The ATM Agreement allowed us to sell shares of common stock
up to an aggregate offering price of $10.0 million. Through December 31, 2021, we generated approximately $0.1 million of additional
cash through sales pursuant to the ATM Agreement, after taking into account commissions and offering expenses. On February 26, 2021,
we completed a follow-on offering of our common stock, which generated approximately $25.8 million of additional cash after taking into
account underwriting discounts and offering expenses. In conjunction with the follow-on offering, the ATM Agreement was terminated. On
April 8, 2021, we entered into a loan agreement with Innovatus Life Sciences Lending Fund I, LP (“Innovatus”), whereby Innovatus
agreed to loan up to $25 million in three tranches consisting of (i) a $15.0 million non-contingent term A loan that was funded on April
8, 2021, (ii) a $5 million term B loan to be funded upon our request no later than March 31, 2022, and (iii) a $5 million term C loan
to be funded upon our request no later than March 31, 2023. Funding of the term B and C loan is subject to our ability to achieve certain
milestones. Net proceeds generated from the loan agreement were $14.4 million. On July 1, 2021, we completed a follow-on offering of
our common stock, which generated approximately $52.8 million of additional cash after taking into account underwriting discounts of
and offering expenses.

Cash
from these capital raising activities has been our primary source of funds for our operations since inception. As of December 31, 2021,
our cash and cash equivalents were approximately $84.3 million, and we had an accumulated deficit of approximately $55.9 million.

In
February of 2022, we entered into an Open Market Sale AgreementSM with Jefferies LLC, as agent (“Jefferies”),
pursuant to which we may offer and sell, from time to time, through Jefferies, shares of our common stock having an aggregate offering
price of up to $50,000,000. We will pay Jefferies a commission equal to 3.0% of the aggregate gross proceeds from each sale of such shares.
To date, we have not yet made any sales under this arrangement.

We
expect that our research and development and general and administrative expenses will increase as we continue development of gedatolisib,
development and validation of our CELsignia platform and additional CELsignia tests, conduct research related to the discovery of new
cancer sub-types, conduct clinical trials, and pursue other business development activities. We will also start to incur sales and marketing
expenses as we commercialize our CELsignia tests and gedatolisib. We expect to use cash on hand to fund our research and development
expenses, capital expenditures, working capital, sales and marketing expenses, and general corporate expenses, as well as for the increased
costs associated with being a public company.

Based
on our current business plan, we believe that our current cash on hand will provide sufficient cash to finance operations and pay obligations
when due for at least the next twelve months.

We
may seek to raise additional capital to expand our business, pursue strategic investments, and take advantage of financing or other opportunities
that we believe to be in the best interests of the Company and our stockholders. Additional capital may be raised through the sale of
common or preferred equity or convertible debt securities, entry into debt facilities or other third-party funding arrangements. The
sale of equity and convertible debt securities may result in dilution to our stockholders and those securities may have rights senior
to those of our common shares. Agreements entered into in connection with such capital raising activities could contain covenants that
would restrict our operations or require us to relinquish certain rights. Additional capital may not be available on reasonable terms,
or at all.

Cash
Flows

The
following table sets forth the primary sources and uses of cash for the years ended December 31:

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Operating
Activities

Net
cash used in operating activities was approximately $20.3 million for the year ended December 31, 2021 and consisted primarily of a net
loss of approximately $29.6 million, offset by non-cash expense items of approximately $8.5 million and working capital changes
of $0.8 million. Non-cash expense items of approximately $8.5 million primarily consisted of $5.0 million for issuance of common stock
related to a license agreement, $2.6 million of stock-based compensation expense, non-cash interest expense of $0.6 million and depreciation
expense of $0.3 million. The approximately $0.8 million of working capital changes was primarily due to an increase in accounts payable,
slightly offset by an increase in prepaid assets.

Net
cash used in operating activities was approximately $7.1 million for the year ended December 31, 2020 and consisted primarily of a net
loss of approximately $9.5 million, adjusted for non-cash items of approximately $2.2 million and working capital changes of approximately
$0.2 million. Non-cash expense items of approximately $2.2 million consisted of stock-based compensation expense of approximately $1.8
million and of depreciation of approximately $0.4 million. The working capital change was primarily due to approximately $0.2
million in accrued expenses.

Investing
Activities

Net
cash used in investing activities for the years ended December 31, 2021 and December 31, 2020 were flat at approximately $0.1 million
and consisted of purchases of property and equipment.

Financing
Activities

Net
cash provided by financing activities for the year ended December 31, 2021 was approximately $93.0 million. The $93.0 million primarily
consisted of net proceeds from the sale of shares of our common stock through two follow-on offerings totaling $78.5 million and $14.4
million from net proceeds related to the closing of a loan agreement. The remaining $0.1 million was the result of proceeds from the
exercise of common stock warrants and employee stock options and proceeds from employee stock purchases.

Net
cash provided by financing activities for the year ended December 31, 2020 was approximately $0.1 million and primarily reflects net
proceeds from the sale of shares of our common stock through the ATM Agreement and employee stock purchases.

RECENT
ACCOUNTING PRONOUNCEMENTS

From
time-to-time new accounting pronouncements are issued by the Financial Accounting Standards Board, or FASB, or other standard setting
bodies and adopted by us as of the specified effective date. Unless otherwise discussed in Note 2 to our financial statements included
elsewhere in this Annual Report, we believe that the impact of recently issued standards that are not yet effective will not have a material
impact on our financial position or results of operations upon adoption.

CRITICAL
ACCOUNTING POLICIES AND USE OF ESTIMATES

Our
management’s discussion and analysis of financial condition and results of operations is based on our financial statements, which
have been prepared in accordance with accounting principles generally accepted in the United States, or Generally Accepted Accounted
Principles (“U.S. GAAP”). The preparation of these financial statements requires us to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial
statements, as well as the reported expenses during the reporting periods. These items are monitored and analyzed by us for changes in
facts and circumstances, and material changes in these estimates could occur in the future. We base our estimates on historical experience
and on various other factors that we believe are reasonable under the circumstances; the results of which form the basis for making judgments
about the carrying value of assets and liabilities that are not readily apparent from other sources. Changes in estimates are reflected
in reported results for the period in which they become known. Actual results may differ materially from these estimates.

Our
significant accounting policies are more fully described in Note 2 to our financial statements included elsewhere in this Annual Report.
Of our significant accounting policies, we believe that the following are the most critical:

Stock-Based
Compensation

Our
stock-based compensation consists of common stock options and restricted stock issued to certain employees and nonemployees and our Employee
Stock Purchase Plan (“ESPP”). We recognize compensation expense based on an estimated grant date fair value using the Black-Scholes
option-pricing method. We have elected to account for forfeitures as they occur.

The
inputs for the Black-Scholes valuation model require management’s significant assumptions. Prior to our IPO, the price per share
of common stock was determined by our board based on recent prices of common stock sold in private offerings. Subsequent to the IPO,
the price per share of common stock is determined by using the closing market price on the Nasdaq Capital Market on the grant date. The
risk-free interest rates are based on the rate for U.S. Treasury securities at the date of grant with maturity dates approximately equal
to the expected life at the grant date. The expected life was based on the simplified method in accordance with SEC Staff Accounting
Bulletin Nos. 107 and 110. The expected volatility was estimated based on historical volatility information of peer companies that are
publicly available in combination with our calculated volatility since being publicly traded.

59

All
assumptions used to calculate the grant date fair value of nonemployee options are generally consistent with the assumptions used for
options granted to employees. In the event we terminate any of our consulting agreements, the unvested options issued in connection with
such agreements would also be cancelled.

For
grants of restricted stock, we record compensation expense based on the quoted fair value of the shares on the grant date over the requisite
service period. Compensation expense for ESPP rights is recorded in line with each respective offering period.

Clinical
Trial Costs

The
Company records prepaid assets or accrued expenses for prepaid or estimated clinical trial costs conducted by third-party service providers,
which includes the conduct of preclinical studies and clinical trials. These costs can be a significant component of the Company’s
research and development expenses. The Company accrues for these costs based on factors such as estimates of the work completed and in
accordance with service agreements with its third-party service providers. The Company makes significant judgments and estimates in determining
the accrued liabilities balance in each reporting period. As actual costs become known, the Company adjusts its prepaid assets or accrued
expenses. The Company has not experienced any material differences between accrued costs and actual costs incurred. However, the status
and timing of actual services performed, number of patients enrolled, and the rate of patient enrollments may vary from the Company’s
estimates, resulting in an adjustment to expense in future periods. Changes in these estimates that result in material changes to the
Company’s prepaid assets or accrued expenses could materially affect the Company’s results of operations.