Item 7. Management’s Discussion
and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our
financial condition and results of operations should be read together with our financial statements and related notes included elsewhere
in this annual report on Form 10-K. Management’s discussion and analysis contains forward-looking statements, such as statements
of our plans, objectives, expectations and intentions. Any statements that are not statements of historical fact are forward-looking statements.
When used, the words “believe,” “plan,” “intend,” “anticipate,” “target,”
“estimate,” “expect” and the like, and/or future tense or conditional constructions (“will,” “may,”
“could,” “should,” etc.), or similar expressions, identify these forward-looking statements. These forward-looking
statements are subject to risks and uncertainties including those under “Risk Factors” in Item 1A in this Form 10-K that could
cause actual results or events to differ materially from those expressed or implied by the forward-looking statements. Our actual results
and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of several factors.
We do not undertake any obligation to update forward-looking statements to reflect events or circumstances occurring after the filing
date of this report.
Historical Background
We are a specialty pharmaceutical company dedicated
to the development and commercialization of critical care products targeting unmet needs with a focus on anti-infectives, cancer care
and unique prescription products. On September 12, 2014, we acquired Citius Pharmaceuticals, LLC as a wholly-owned subsidiary.
On March 30, 2016, we acquired all of the outstanding
stock of Leonard-Meron Biosciences, Inc. (“LMB”) by issuing shares of our common stock. We acquired identifiable intangible
assets of $19,400,000 related to in-process research and development and recorded goodwill of $9,346,796 for the excess of the purchase
consideration over the net assets acquired.
On September 11, 2020, we formed NoveCite, Inc.
(“NoveCite”), a Delaware corporation, of which we own 75% of the issued and outstanding capital stock.
On August 23, 2021, we formed Citius Acquisition
Corp., a wholly owned subsidiary.
42
In-process research and development of $19,400,000
represents the value of LMB’s leading drug candidate (Mino-Lok), which is an antibiotic solution used to treat catheter-related
bloodstream infections and is expected to be amortized on a straight-line basis over a period of eight years commencing upon revenue generation. Goodwill
of $9,346,796 represents the value of LMB’s industry relationships and its assembled workforce. Goodwill will not be amortized but
will be tested at least annually for impairment. In-process research and development of $40,000,000 represents the value of our September
2021 acquisition of an exclusive license for E7777 (denileukin diftitox), a late-stage oncology immunotherapy for the treatment of CTCL,
a rare form of non-Hodgkin lymphoma and is expected to be amortized on a straight-line basis over a period of twelve years commencing
upon revenue generation.
Through September 30, 2021, we have devoted substantially
all of our efforts to product development, raising capital, building infrastructure through strategic alliances and coordinating activities
relating to our proprietary products. We have not yet realized any revenues from its operations.
Patent and Technology License Agreements
Mino-Lok® - LMB has a patent and technology
license agreement with Novel Anti-Infective Therapeutics, Inc. (“NAT”) to develop and commercialize Mino-Lok on an exclusive,
worldwide sub-licensable basis, as amended. Since May 2014, LMB has paid an annual maintenance fee, which began at $30,000 and that increased
over five years to $90,000, where it will remain until the commencement of commercial sales of a product subject to the license. LMB will
also pay annual royalties on net sales of licensed products, with royalties ranging from the mid-single digits to the low double digits.
In limited circumstances in which the licensed product is not subject to a valid patent claim and a competitor is selling a competing
product, the royalty rate is in the low single digits. After a commercial sale is obtained, LMB must pay minimum aggregate annual royalties
that increase in subsequent years. LMB must also pay NAT up to $1,100,000 upon achieving specified regulatory and sales milestones. Finally,
LMB must pay NAT a specified percentage of payments received from any sub licensees.
Mino-Wrap - On January 2, 2019, we entered
into a patent and technology license agreement with the Board of Regents of the University of Texas System on behalf of the University
of Texas M. D. Anderson Cancer Center (“Licensor”), whereby we in-licensed exclusive worldwide rights to the patented technology
for any and all uses relating to breast implants. We intend to develop a liquefying gel-based wrap containing minocycline and rifampin
for the reduction of infections associated with breast implants following breast reconstructive surgeries. We are required to use commercially
reasonable efforts to commercialize Mino-Wrap under several regulatory scenarios and achieve milestones associated with these regulatory
options leading to an approval from the FDA.
Under the license agreement, we paid a nonrefundable
upfront payment of $125,000. We are obligated to pay an annual maintenance fee of $30,000, commencing in January 2020 that increases annually
by $15,000 per year up to a maximum of $90,000. Annual maintenance fees cease on the first sale of product. We also must pay up to an
aggregate of $2.1 million in milestone payments, contingent on the achievement of various regulatory and commercial milestones. Under
the terms of the license agreement, we also must pay a royalty of mid- to upper-single digit percentages of net sales, depending on the
amount of annual sales, and subject to downward adjustment to lower- to mid-single digit percentages in the event there is no valid patent
for the product in the United States at the time of sale. After the first sale of product, we will owe an annual minimum royalty payment
of $100,000 that will increase annually by $25,000 for the duration of the term. We will be responsible for all patent expenses incurred
by Licensor for the term of the agreement although Licensor is responsible for filing, prosecution and maintenance of all patents.
NoveCite – On October 6, 2020, our
subsidiary NoveCite entered into a license agreement with Novellus Therapeutics Limited (“Licensor”), whereby NoveCite acquired
an exclusive, worldwide license, with the right to sublicense, to develop and commercialize a stem cell therapy based on the Licensor’s
patented technology for the treatment of acute pneumonitis of any etiology in which inflammation is a major agent in humans. Upon execution
of the license agreement, NoveCite paid an upfront payment of $5,000,000 to Licensor and issued to Licensor shares of Novecite’s
common stock representing 25% of NoveCite’s currently outstanding equity. We own the other 75% of NoveCite’s currently outstanding
equity.
In July 2021, Novellus was acquired by Brooklyn.
Pursuant to this transaction, the NoveCite license was assumed by Brooklyn with all original terms and conditions.
43
As part of the Novellus and Brooklyn merger transaction,
the 25% non-dilutive position as per the subscription agreement between Novellus and NoveCite was removed.
Under the license agreement, NoveCite is obligated
to pay Licensor up to an aggregate of $51,000,000 in regulatory and developmental milestone payments. NoveCite also must pay a royalty
equal to low double-digit percentages of net sales, commencing upon the first commercial sale of a licensed product. This royalty is subject
to downward adjustment on a product-by-product and country-by-country basis to an upper-single digit percentage of net sales in any country
in the event of the expiration of the last valid patent claim or if no valid patent claim exists in that country. The royalty will end
on the earlier of (i) date on which a biosimilar product is first marketed, sold, or distributed by Licensor or any third party in the
applicable country or (ii) the 10-year anniversary of the date of expiration of the last-to-expire valid patent claim in that country.
In the case of a country where no licensed patent ever exists, the royalty will end on the later of (i) the date of expiry of such licensed
product’s regulatory exclusivity and (ii) the 10-year anniversary of the date of the first commercial sale of the licensed product
in the applicable country. In addition, NoveCite will pay to Licensor an amount equal to a mid-twenties percentage of any sublicensee
fees it receives.
Under the terms of the license agreement, in the
event that Licensor receives any revenue involving the original cell line included in the licensed technology, then Licensor shall remit
to NoveCite 50% of such revenue.
I/ONTAK/E7777 - In September 2021 the Company
announced that it had entered into a definitive agreement with Dr. Reddy's to acquire its exclusive license of E7777 (denileukin diftitox),
a late-stage oncology immunotherapy for the treatment of CTCL, a rare form of non-Hodgkin lymphoma.
Under the terms of this agreement, Citius acquired
Dr. Reddy's exclusive license of E7777 from Eisai and other related assets owned by Dr. Reddy's. Citius's exclusive license rights include
rights to develop and commercialize E7777 in all markets except for Japan and certain parts of Asia. Additionally, Citius has an option
on the right to develop and market the product in India. Eisai retains exclusive development and marketing rights for the agent in Japan
and Asia. Dr. Reddy's received a $40 million upfront payment and is entitled to up to $40 million in development milestone payments related
to CTCL approvals in the U.S. and other markets, up to $70 million in development milestones for additional indications, as well as commercial
milestone payments and low double-digit tiered royalties on net product sales. Eisai is to receive a $6 million development milestone
payment upon initial approval and additional commercial milestone payments related to the achievement of net product sales thresholds.
Eisai will be responsible for completing the current CTCL clinical trial, and chemistry, manufacturing and controls (CMC) activities through
the filing of a BLA for E7777 with the FDA. Citius will be responsible for development costs associated with potential additional indications.
Results of Operations for Year Ended September
30, 2021 compared to Year Ended September 30, 2020
Revenues $ - $ -
Operating expenses:
Stock-based compensation – general and administrative 1,454,979 803,261
44
Revenues
We did not generate any revenues for the years
ended September 30, 2021 and 2020.
Research and Development Expenses
For the year ended September 30, 2021, research
and development expenses were $12,240,503 as compared to $8,812,810 for the year ended September 30, 2020, an increase of $3,427,693.
Research and development costs for Mino-Lok® decreased by $2,679,768 to $3,527,250 for the year ended September 30, 2021 as compared
to $6,207,018 for the year ended September 30, 2020 driven primarily by a decrease in the cost of registration batches produced in the
year ended September 30, 2021. Research and development costs for our Halo-Lido product candidate decreased by $783,870 to $862,173 for
the year ended September 30, 2021 as compared to $1,646,043 for the year ended September 30, 2020 due to a reduction in costs associated
with manufacturing development as well as our patient reported outcome tool for the year ended September 30, 2021. Research and development
costs for our Mino-Wrap product candidate increased by $51,990 to $165,507 for the year ended September 30, 2021 as compared to $113,517
during the year ended September 30, 2020. During the year ended September 30, 2021, research and development costs for our proposed novel
cellular therapy for acute respiratory distress syndrome (ARDS) were $6,946,365 as compared to $846,232 for the year ended September 30,
2020. The increase of $6,100,133 was primarily due to the $5,000,000 license fee paid to Novellus. We also incurred $739,208 in research
and development expenses for our proposed product candidate related to the E7777 license.
We expect that research and development expenses
will continue to increase in fiscal 2022 as we continue to focus on our Phase 3 trial for Mino-Lok, progress the Halo-Lido product candidate,
and accelerate our research and development efforts related to ARDS, Mino-Wrap and E7777.
General and Administrative Expenses
For the year ended September 30, 2021, general
and administrative expenses were $9,836,412 as compared to $8,094,614 for the year ended September 30, 2020 an increase of $1,741,798.
The primary reason for the increase was additional compensation costs for new employees and performance bonuses. General and administrative
expenses consist primarily of compensation costs, consulting fees incurred for financing activities and corporate development services,
and investor relations expenses.
Stock-based Compensation Expense
For the year ended September 30, 2021, stock-based
compensation expense was $1,454,979 as compared to $803,261 for the year ended September 30, 2020. Stock-based compensation expense includes
options granted to directors, employees and consultants. For the year ended September 30, 2021, stock-based compensation includes $83,555
in expense for the NoveCite stock option plan that was adopted in November 2020. Stock-based compensation expense increased by $651,718
in comparison to the prior year due to new grants made by Citius and the expense for the NoveCite stock plan. In fiscal year 2012, we
granted options to our new employees and additional options to other employees, our directors and consultants. At September 30, 2021,
unrecognized total compensation cost related to unvested options for Citius common stock of $3,012,685 is expected to be recognized over
a weighted average period of 2.34 years and unrecognized total compensation cost related to unvested options for NoveCite common stock
of $316,444 is expected to be recognized over a weighted average period of 2.42 years
Other Income (Expense)
During the year ended September 30, 2021, the
Company earned $261,825 of interest income compared to $68,066 of interest income during the year ended September 30, 2020. The increase
was due to our investment of most of the 2021 equity offerings and common stock warrant exercises proceeds in money market accounts.
The Company recorded a gain of $166,557 for the
principal and accrued interest on the Paycheck Protection Program loan that was forgiven on July 28, 2021.
45
Other income for the year ended September 30,
2021 consists of accrued interest of $59,917 on notes payable – related parties that was forgiven in June 2021.
In November 2019, we received a $110,207 refund
from the FDA for 2016 product and establishment fees because the fees paid by the Company exceeded the costs of the FDA’s review
of the associated applications. The Company recorded the $110,207 as other income during the year ended September 30, 2020.
Interest expense for the year ended September
30, 2021 was $10,839 as compared to $15,673 for the year ended September 30, 2020. Interest expense for both years is primarily for the
notes payable to related parties that were acquired in the acquisition of LMB. We also accrued interest expense on the COVID-19 related
Small Business Administration (“SBA”) Paycheck Protection Program loan received on April 15, 2020. At September 30, 2021,
there were no outstanding notes payable.
Net Loss
For the year ended September 30, 2021, we incurred
a net loss of $23,054,434 compared to a net loss of $17,548,085 for the year ended September 30, 2020. The $5,506,349 increase in
the net loss was primarily due to the $3,427,693 increase in research and development expenses and the $1,741,798 increase in general
and administrative expenses, which increases were primarily associated with NoveCite.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity and Working Capital
Citius has incurred operating losses since inception
and incurred net losses of $23,054,434 and $17,548,085 for the years ended September 30, 2021 and 2020, respectively. At September 30,
2021, Citius had an accumulated deficit of $96,047,821. Citius’ net cash used in operations during the years ended September 30,
2021 and 2020 was $24,250,414 and $16,930,658, respectively.
As a result of our common stock offerings and
common stock warrant exercises in fiscal year 2021, the Company had working capital of approximately $68,800,000 at September 30, 2021. We expect that we will have sufficient funds to continue our operations through March 2023.
At September 30, 2021, Citius had cash and cash equivalents of $70,072,946 available to fund its operations. The Company’s only
source of cash flow since inception has been from financing activities. During the years ended September 30, 2021 and 2020, the Company
received net proceeds of $120,643,020 and $22,733,850, respectively, from the issuance of equity. We also received $164,583 from the COVID-related
SBA paycheck protection program loan received on April 15, 2020. Our primary uses of operating cash were for in-licensing of intellectual
property, product development and commercialization activities, employee compensation, consulting fees, legal and accounting fees, insurance
and investor relations expenses.
Financing Activities
In December 2019, 1,060,615 of the September 2019
Offering Pre-Funded Unit Warrants were exercised at $0.0001 per share for net proceeds of $106.
In January 2020, investors who participated in
the September 2019 Offering exercised 1,315,715 warrants at $0.77 per share resulting in net proceeds of $1,013,101 to the Company.
On February 14, 2020, the Company entered into
a warrant exercise agreement for 3,712,218 shares of common stock having an exercise price of $0.77 and 2,586,455 shares of common stock
at a reduced exercise price of $1.02. The offering closed on February 19, 2020 and net proceeds were $5,013,930 after placement agent
fees and offering expenses.
46
On May 18, 2020, the Company closed a registered
direct offering for the sale of 7,058,824 shares of common stock at $1.0625 per share for gross proceeds of $7,500,001. The Company also
issued 3,529,412 unregistered immediately exercisable warrants to the investors with an exercise price of $1.00 per share and a term of
five and one-half years. Net proceeds from the offering were $6,877,100.
On June 26, 2020, 1,129,412 of the May 2020 Registered
Direct Offering Investor Warrants were exercised at $1.00 per share for net proceeds of $1,129,412.
On August 10, 2020, the Company closed an underwritten
public offering of 9,159,524 shares of common stock at $1.05 per share for gross proceeds of $9,617,500. The Company paid the underwriter
a fee of 7% of the gross proceeds totaling $673,225 and issued the underwriter 641,166 immediately exercisable warrants with an exercise
price of $1.3125 per share and a term of five years. The Company also reimbursed the placement agent for $135,000 in expenses and incurred
$109,074 in other expenses. Net proceeds from the offering were $8,700,201.
On January 27, 2021, the Company closed a private
placement for 15,455,960 common shares and warrants to purchase 7,727,980 common shares, at a purchase price of $1.294 per share
of common stock and accompanying warrant, for gross proceeds of $20,000,012. Net proceeds from the offering were $18,450,410.
On February 19, 2021, the Company closed a registered
direct offering for 50,830,566 common shares and warrants to purchase 25,415,283 common shares, at a purchase price of $1.505 per share
and accompanying warrant, for gross proceeds of $76,500,002. Net proceeds from the offering were $70,979,842.
During the year ended September 30, 2021, we received
$31,130,134 in proceeds from the exercise of common stock warrants and $82,634 in proceeds from the exercise of common stock options.
Based on our cash and cash equivalents at September
30, 2021, we expect that we will have sufficient funds to continue our operations through March 2023. We may need to raise additional
capital in the future to support our operations beyond March 2023. There is no assurance, however, that we will be successful in raising
the needed capital or that the proceeds will be received in an amount or in a timely manner to support our operations.
While the COVID-19 pandemic has adversely impacted
the progress of our clinical trials and operations, as of the date of this report, the Company has been able to access the capital markets
and successfully complete financing transactions. However, we cannot be certain that any future impact of COVID-19 on our operations will
not negatively impact our ability to raise capital.
Inflation
Our management believes that inflation has not
had a material effect on our results of operations.
Off Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of our 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. The preparation of these financial statements requires us to make estimates and judgments that affect the
reported amounts of assets, liabilities and expenses and related disclosure of contingent assets and liabilities. We review our estimates
on an ongoing basis. We base our estimates on historical experience and on various other factors that we believe to be reasonable under
the circumstances. Actual results may differ from these estimates. We believe the judgments and estimates required by the following accounting
policies to be critical in the preparation of our financial statements.
47
Research and Development
Research and development costs, including upfront
fees and milestones paid to collaborators who are performing research and development activities under contractual agreement with us,
are expensed as incurred. We defer and capitalize our nonrefundable advance payments that are for research and development activities
until the related goods are delivered or the related services are performed. When we are reimbursed by a collaboration partner for work
we perform, we record the costs incurred as research and development expenses and the related reimbursement as a reduction to research
and development expenses in our statement of operations. Research and development expenses primarily consist of clinical and non-clinical
studies, materials and supplies, third-party costs for contracted services, and payments related to external collaborations and other
research and development related costs.
In-process Research and Development and
Goodwill
In-process research and development of $19,400,000
represents the value of LMB’s leading drug candidate, Mino-Lok, an antibiotic lock solution in Phase 3 clinical development, which
if approved, would be used to treat catheter-related bloodstream infections and is expected to be amortized on a straight-line basis over
a period of eight years commencing upon revenue generation. In-process research and development of $40,000,000 represents the value
of our September 2021 acquisition of an exclusive license for E7777 (denileukin diftitox), a late-stage oncology immunotherapy for the
treatment of CTCL, a rare form of non-Hodgkin lymphoma and is expected to be amortized on a straight-line basis over a period of twelve
years commencing upon revenue generation.
Goodwill represents the value of LMB’s industry
relationships and its assembled workforce. Goodwill will not be amortized and will be tested at least annually for impairment.
The Company reviews intangible assets annually
to determine if any adverse conditions exist or a change in circumstances has occurred that would indicate impairment or a change in the
remaining useful life of any intangible asset. If the carrying value of an asset exceeds its undiscounted cash flows, the Company writes
down the carrying value of the intangible asset to its fair value for the period identified. No impairments have occurred since the acquisitions
of our intangible assets through September 30, 2021.
The Company evaluates the recoverability of goodwill
annually or more frequently if events or changes in circumstances indicate that the carrying value of an asset might be impaired, in accordance
with Accounting Standard Update (“ASU”) 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Accounting
for Goodwill Impairment. Goodwill is first qualitatively assessed to determine whether further impairment testing is necessary. Factors
that management considers in this assessment include macroeconomic conditions, industry and market considerations, overall financial performance
(both current and projected), changes in management and strategy and changes in the composition or carrying amount of net assets. If this
qualitative assessment indicates that it is more likely than not that the fair value of a reporting unit is less than its carrying amount,
a one-step test is then performed in accordance with ASU 2017-04. Under the simplified model, a goodwill impairment is calculated as the
difference between the carrying amount of the reporting unit and its fair value.
The Company performed a qualitative assessment
for its 2021 analysis of goodwill. Based on this assessment, management does not believe that it is more likely than not that the carrying
value of the reporting unit exceeds its fair value. Accordingly, no further testing was performed as management believes that there are
no impairment issues with respect to goodwill as of September 30, 2021.
Income Taxes
We follow accounting guidance regarding the recognition,
measurement, presentation and disclosure of uncertain tax positions in the financial statements. Tax positions taken or expected to be
taken in the course of preparing our tax returns are required to be evaluated to determine whether the tax positions are “more-likely-than-not”
of being sustained by the applicable tax authorities. Tax positions not deemed to meet a more-likely-than-not threshold would be recorded
in the financial statements.
We recognize deferred tax assets and liabilities
based on differences between the financial reporting and tax basis of assets and liabilities using the enacted tax rates and laws that
are expected to be in effect when the differences are expected to reverse. We provide a valuation allowance for deferred tax assets for
which we do not consider realization of such assets to be more likely than not.
Item 7A. Quantitative and Qualitative Disclosures
About Market Risk
Not required.
Item 8. Financial Statements and Supplementary
Data
48
CITIUS PHARMACEUTICALS, INC.
CONSOLIDATED FINANCIAL STATEMENTS
INDEX
Page
Report of Independent Registered Public Accounting Firm F-2
Consolidated Balance Sheets F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Changes in Stockholders’ Equity F-5
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-7
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
To the Stockholders and Board of Directors of
Citius Pharmaceuticals, Inc.:
Opinion on the Financial Statements
We have audited the accompanying consolidated
balance sheets of Citius Pharmaceuticals, Inc. (the “Company”) as of September 30, 2021 and 2020, and the related consolidated
statements of operations, changes in stockholders’ equity and cash flows for the years then ended, and the related notes to the
consolidated financial statements (collectively, the “financial statements”). In our opinion, the financial statements present
fairly, in all material respects, the financial position of the Company as of September 30, 2021 and 2020, and the results of its operations
and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility
of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our
audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”)
and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the
standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged
to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding
of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess
the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond
to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.
Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating
the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
Critical audit matters are matters arising from
the current period audit of the consolidated financial statements that were communicated or required to be communicated to the board of
directors and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially
challenging, subjective, or complex judgments. We determined that there are no critical audit matters.
/s/ Wolf & Company, P.C.
We have served as the Company’s auditor since 2014.
Boston, Massachusetts
December 15, 2021
F-2
CITIUS PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2021 AND 2020
ASSETS
Current Assets:
Other Assets:
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Notes payable – related parties — 172,970
Note payable – paycheck protection program — 164,583
Commitments and Contingencies
Stockholders’ Equity:
Non-controlling interest 600,380 —
See accompanying report of independent registered
public accounting firm and notes to the consolidated financial statements.
F-3
CITIUS PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 2021 AND 2020
Revenues $ — $ —
Operating Expenses:
Stock-based compensation – general and administrative 1,454,979 803,261
Other Income (Expense):
Deemed dividend on warrant extension 1,450,876 —
Weighted Average Common Shares Outstanding
See accompanying report of independent registered
public accounting firm and notes to the consolidated financial statements.
F-4
CITIUS PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’
EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 2021 AND 2020
Stock Shares Amount Capital Deficit Equity Interest Equity
See accompanying report of independent registered
public accounting firm and notes to the consolidated financial statements.
F-5
CITIUS PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 2021 AND 2020
Cash Flows From Operating Activities:
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization of operating lease right-of-use asset 163,376 151,520
Changes in operating assets and liabilities:
Cash Flows From Investing Activities:
Purchase of property and equipment (6,938 ) (1,831 )
Purchase of in-process research and development (40,000,000 ) —
Cash Flows From Financing Activities:
Proceeds from notes payable – paycheck protection program — 164,583
Principal paid on notes payable – related parties (172,970 ) —
Proceeds from sale of NoveCite, Inc. common stock 500 —
Proceeds from common stock option exercises 82,634 —
Net proceeds from underwritten offerings — 8,700,201
Net proceeds from private placement 18,450,410 —
Supplemental Disclosures of Cash Flow Information and Non-cash Activities:
See accompanying report of independent registered
public accounting firm and notes to the consolidated financial statements.
F-6
CITIUS PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 2021 AND 2020
1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION
Business
Citius Pharmaceuticals, Inc. (“Citius,”
the “Company” or “we”) is a specialty pharmaceutical company dedicated to the development and commercialization
of critical care products targeting unmet needs with a focus on anti-infectives, cancer care and unique prescription products.
On March 30, 2016, Citius acquired Leonard-Meron
Biosciences, Inc. (“LMB”) as a wholly-owned subsidiary. The Company acquired all of the outstanding stock of LMB by issuing
shares of its common stock. The net assets acquired included identifiable intangible assets of $19,400,000 related to in-process research
and development. The Company recorded goodwill of $9,346,796 for the excess of the purchase price over the net assets acquired.
On September 11, 2020, we formed NoveCite, Inc.
(“NoveCite”), a Delaware corporation, of which we own 75% of the issued and outstanding capital stock.
On August 23, 2021, we formed Citius Acquisition
Corp., a wholly owned subsidiary in conjunction with the acquisition of I/ONTAK, but no activity has occurred to date.
In-process research and development (“IPR&D)
consists of i) $19,400,000 acquisition value of of LMB’s leading drug candidate (Mino-Lok), which is an antibiotic solution used
to treat catheter-related bloodstream infections and is expected to be amortized on a straight-line basis over a period of eight years
commencing upon revenue generation, and ii) $40,000,000 acquisition value of the exclusive license for E7777 (denileukin diftitox), a
late-stage oncology immunotherapy for the treatment of CTCL, a rare form of non-Hodgkin lymphoma and is expected to be amortized on a
straight-line basis over a period of twelve years commencing upon revenue generation. Goodwill of $9,346,796 represents the value of LMB’s
industry relationships and its assembled workforce. Goodwill will not be amortized but will be tested at least annually for impairment.
Since its inception, the Company has devoted substantially
all of its efforts to business planning, research and development, recruiting management and technical staff, and raising capital. Citius
is subject to a number of risks common to companies in the pharmaceutical industry including, but not limited to, risks related to the
development by Citius or its competitors of research and development stage products, market acceptance of its products, competition from
larger companies, dependence on key personnel, dependence on key suppliers and strategic partners, the Company’s ability to obtain
additional financing and the Company’s compliance with governmental and other regulations.
Basis of Presentation
The accompanying consolidated financial statements
include the operations of Citius Pharmaceuticals, Inc., and its wholly-owned subsidiaries, Citius Pharmaceuticals, LLC, LMB and Citius
Acquisition Corp., and its majority-owned subsidiary NoveCite. NoveCite, was inactive until October 2020. Citius Acquisition Corp. was
inactive at September 30, 2021. All significant inter-company balances and transactions have been eliminated in consolidation.
2. LIQUIDITY AND MANAGEMENT’S PLAN
The accompanying consolidated financial statements
have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal
course of business. The Company experienced negative cash flows from operations of $24,250,414 and $16,930,658, for the years ended September
30, 2021 and 2020, respectively. As a result of the Company’s common stock offerings and common stock warrant exercises during the
year ended September 30, 2021, the Company had working capital of approximately $68,800,000 at September 30, 2021. The Company estimates
that its available cash resources will be sufficient to fund its operations through March 2023.
F-7
The Company has generated no operating revenue
to date and has principally raised capital through the issuance of debt and equity instruments to finance its operations. However, the
Company’s continued operations beyond March 2023, including its development plans for Mino-Lok, Mino-Wrap, Halo-Lido, Novecite and
E7777, will depend on its ability to obtain regulatory approval to market Mino-Lok and generate substantial revenue from the sale of Mino-Lok
and on its ability to raise additional capital through various potential sources, such as equity and/or debt financings, strategic relationships,
or out-licensing of its product candidates. However, the Company can provide no assurances on regulatory approval, commercialization or
future sales of Mino-Lok or that financing or strategic relationships will be available on acceptable terms, or at all. If the Company
is unable to raise sufficient capital, find strategic partners or generate substantial revenue from the sale of Mino-Lok, there would
be a material adverse effect on its business. Further, the Company expects in the future to incur additional expenses as it continues
to develop its product candidates, including seeking regulatory approval, and protecting its intellectual property.
3. PATENT AND TECHNOLOGY LICENSE AGREEMENTS
Patent and Technology License Agreement
– Mino-Lok
LMB has a patent and technology license agreement
with Novel Anti-Infective Therapeutics, Inc. (“NAT”) to develop and commercialize Mino-Lok® on an exclusive, worldwide
sub licensable basis, as amended. LMB pays an annual maintenance fee each June until commercial sales of a product subject to the license
commence. The Company recorded an annual maintenance fee expense of $90,000 in 2021 and 2020.
LMB will also pay annual royalties on net sales
of licensed products, with royalties ranging from the mid-single digits to the low double digits. In limited circumstances in which the
licensed product is not subject to a valid patent claim and a competitor is selling a competing product, the royalty rate is in the low-
to mid-single digits. After a commercial sale is obtained, LMB must pay minimum aggregate annual royalties of $100,000 in the first commercial
year which is prorated for a less than 12-month period, increasing $25,000 per year to a maximum of $150,000 annually. LMB must also pay
NAT up to $1,100,000 upon achieving specified regulatory and sales milestones. Finally, LMB must pay NAT a specified percentage of payments
received from any sub-licensees.
Unless earlier terminated by NAT, based on the
failure to achieve certain development and commercial milestones, the license agreement remains in effect until the date that all patents
licensed under the agreement have expired and all patent applications within the licensed patent rights have been cancelled, withdrawn
or expressly abandoned.
Patent and Technology License Agreement
– Mino-Wrap
On January 2, 2019, we entered into a patent and
technology license agreement with the Board of Regents of the University of Texas System on behalf of the University of Texas M. D. Anderson
Cancer Center (“Licensor”), whereby it in-licensed exclusive worldwide rights to the patented technology for any and all uses
relating to breast implants. We intend to develop a liquefying gel-based wrap containing minocycline and rifampin for the reduction
of infections associated with breast implants following breast reconstructive surgeries (“Mino-Wrap”). We are required to
use commercially reasonable efforts to commercialize Mino-Wrap under several regulatory scenarios and achieve milestones associated with
these regulatory options leading to an approval from the U.S. Food and Drug Administration (the “FDA”).
Under the license agreement, we paid a nonrefundable
upfront payment of $125,000 which was recorded as research and development expense during the year ended September 30, 2019. We paid annual
maintenance fees of $45,000 and $30,000 in January 2021 and 2020, respectively. The annual maintenance fee increases by $15,000 per year
up to a maximum of $90,000 and ceases on the first sale of product. We also must pay up to an aggregate of $2.1 million in milestone payments,
contingent on the achievement of various regulatory and commercial milestones. Under the terms of the license agreement, we also must
pay a royalty of mid- to upper-single digit percentages of net sales, depending on the amount of annual sales, and subject to downward
adjustment to lower- to mid-single digit percentages in the event there is no valid patent for the product in the United States at the
time of sale. After the first sale of product, we will owe an annual minimum royalty payment of $100,000 that will increase annually by
$25,000 for the duration of the term. We will be responsible for all patent expenses incurred by Licensor for the term of the agreement
although Licensor is responsible for filing, prosecution and maintenance of all patents. The agreement expires on the later of the expiration
of the patents or January 2, 2034.
F-8
License Agreement with Novellus
On March 31, 2020, we entered into an option agreement
with a subsidiary of Novellus, Inc. (“Novellus”) whereby we had the opportunity to in-license from Novellus on a worldwide
basis, a novel cellular therapy for acute respiratory distress syndrome (ARDS). The option exercise period ran for six months and the
option agreement contained the agreed upon financial terms for the license. In April 2020 we paid Novellus $100,000 for the option and
recorded it as a research and development expense.
Our Board Chairman Leonard Mazur, who is also
our largest stockholder, was a director and significant shareholder of Novellus at this time and until the acquisition of Novellus by
Brooklyn ImmunoTherapeutics, Inc. (“Brooklyn”) in July 2021. As required by our Code of Ethics, the Audit Committee of our
Board of Directors approved the entry into the option agreement with Novellus, as did the disinterested members of our Board of Directors.
On October 6, 2020, our subsidiary, NoveCite,
exercised the option and signed an exclusive license agreement with Novellus. Upon execution of the agreement, we paid $5,000,000 to Novellus,
which was charged to research and development expense during the year ended September 30, 2021, and issued Novellus shares of NoveCite’s
common stock representing 25% of the outstanding equity. We own the other 75% of NoveCite’s outstanding equity. Pursuant to the
terms of the original stock subscription agreement between Novellus and NoveCite, if NoveCite issued additional equity, subject to certain
exceptions, NoveCite had to maintain Novellus’s ownership at 25% by issuing additional shares to Novellus.
Citius is responsible for the operational activities
of NoveCite and bears all costs necessary to operate NoveCite. Citius’s officers are also the officers of NoveCite and oversee the
business strategy and operations of NoveCite. As such, NoveCite is accounted for as a consolidated subsidiary with a noncontrolling interest.
Novellus has no contractual rights in the profits
or obligations to share in the losses of NoveCite, and the Company has not allocated any losses to the noncontrolling interest.
NoveCite is obligated to pay Novellus up to $51,000,000
upon the achievement of various regulatory and developmental milestones. NoveCite also must pay a royalty equal to low double-digit percentages
of net sales, commencing upon the sale of a licensed product. This royalty is subject to downward adjustment to an upper-single digit
percentage of net sales in any country in the event of the expiration of the last valid patent claim or if no valid patent claim exists
in that country. The royalty will end on the earlier of (i) date on which a biosimilar product is first marketed, sold, or distributed
in the applicable country or (ii) the 10-year anniversary of the date of expiration of the last-to-expire valid patent claim in that country.
In the case of a country where no licensed patent ever exists, the royalty will end on the later of (i) the date of expiry of such licensed
product’s regulatory exclusivity and (ii) the 10-year anniversary of the date of the first commercial sale of the licensed product
in the applicable country. In addition, NoveCite will pay to Novellus an amount equal to a mid-twenties percentage of any sublicensee
fees it receives.
Under the terms of the license agreement, in the
event that Novellus receives any revenue involving the original cell line included in the licensed technology, then Novellus shall remit
to NoveCite 50% of such revenue.
The term of the license agreement will continue
on a country-by-country and licensed product-by-licensed product basis until the expiration of the last-to-expire royalty term. Either
party may terminate the license agreement upon written notice if the other party is in material default. NoveCite may terminate the license
agreement at any time without cause upon 90 days prior written notice.
Novellus will be responsible for preparing, filing,
prosecuting and maintaining all patent applications and patents included in the licensed patents in the territory, provided however, that
if Novellus decides that it is not interested in maintaining a particular licensed patent or in preparing, filing, or prosecuting a licensed
patent, NoveCite will have the right, but not the obligation, to assume such responsibilities in the territory at NoveCite’s sole
cost and expense.
F-9
In July 2021, Novellus was acquired by Brooklyn.
In connection with that transaction, the stock subscription agreement between Novellus and NoveCite was amended to assign to Brooklyn
all of Novellus’s right, title, and interest in the stock subscription agreement and delete the anti-dilution protection and replace
it with a right of first refusal whereby Brooklyn will have the right to purchase all or a portion of the securities that NoveCite intends
to sell or in the alternative, at the option of NoveCite, Brooklyn may purchase that amount of the securities proposed to be sold by NoveCite
to allow Brooklyn to maintain its then percentage ownership.
License Agreement with Eisai
In September 2021, the Company entered into a
definitive agreement with Dr. Reddy's Laboratories SA, a subsidiary of Dr. Reddy's Laboratories, Ltd. (collectively, "Dr. Reddy's")
to acquire its exclusive license of E7777 (denileukin diftitox), a late-stage oncology immunotherapy for the treatment of CTCL, a rare
form of non-Hodgkin lymphoma.
Under the terms of this
agreement, Citius acquired Dr. Reddy's exclusive license of E7777 from Eisai Co., Ltd. ("Eisai") and other related assets owned
by Dr. Reddy's. Citius's exclusive license include rights to develop and commercialize E7777 in all markets except for Japan and certain
parts of Asia. Additionally, Citius retained an option on the right to develop and market the product in India. Eisai retains exclusive
development and marketing rights for the agent in Japan and Asia. Citius paid $40 million upfront payment which represents the acquisition
date fair value of the in-process research and development acquired from Dr. Reddy’s. Dr. Reddy’s is entitled to up to $40
million in development milestone payments related to CTCL approvals in the U.S. and other markets, up to $70 million in development milestones
for additional indications, as well as commercial milestone payments and low double-digit tiered royalties on net product sales, and up
to $300 million for commercial sales milestones. We also must pay on a fiscal quarter basis tiered royalties equal to low double-digit
percentages of net product sales. The royalties will end on the earlier of (i) the 15-year anniversary of the first commercial sale of
the latest indication that received regulatory approval in the applicable country and (ii) the date on which a biosimilar product results
in the reduction of net sales in the applicable product by 50% in two consecutive quarters, as compared to the four quarters prior to
the first commercial sale of the biosimilar product. We will also pay to Dr. Reddy’s an amount equal to a low-thirties percentage
of any sublicense upfront consideration or milestone payments (or the like) received by us and the greater of (i) a low-thirties percentage
of any sublicensee sales-based royalties or (ii) a mid-single digit percentage of such licensee’s net sales.
Under the license agreement, Eisai is to receive a $6.0 million development
milestone payment upon initial approval and additional commercial milestone payments related to the achievement of net product sales thresholds
(which increases to $7 million in the event we have exercised our option to add India to the licensed territory prior to FDA approval)
and an aggregate of up to $22 million related to the achievement of net product sales thresholds. We also are required to reimburse Eisai
for up to $2.65 million of its costs to complete the ongoing Phase 3 pivotal clinical trial for I/ONTAK for the CTCL indication and reimburse
Eisai for all reasonable costs associated with the preparation of a BLA for I/ONTAK. Eisai will be responsible for completing the current
CTCL clinical trial, and chemistry, manufacturing and controls (CMC) activities through the filing of a BLA for E7777 with the FDA. Citius
will be responsible for development costs associated with potential additional indications.
The term of the license
agreement will continue until (i) if there has not been a commercial sale of a licensed product in the territory, until the 10-year anniversary
of the original license effective date, March 30, 2016, or (ii) if there has been a first commercial sale of a licensed product in the
territory within the 10-year anniversary of the original license effective date, the 10-year anniversary of the first commercial sale
on a country-by-country basis. The term of the license may be extended for additional 10-year periods for all countries in the territory
by notifying Eisai and paying an extension fee equal to $10 million. Either party may terminate the license agreement upon written notice
if the other party is in material breach of the agreement, subject to cure within the designated time periods. Either party also may terminate
the license agreement immediately upon written notice if the other party files for bankruptcy or takes related actions or is unable to
pay its debts as they become due. Additionally, either party will have the right to terminate the agreement if the other party directly
or indirectly challenges the patentability, enforceability or validity of any licensed patent.
F-10
Also under the agreement
with Dr. Reddy’s, we are required to (i) use commercially reasonable efforts to make commercially available products in the CTCL
indication, peripheral T-cell lymphoma indication and immuno-oncology indication, (ii) initiate two investigator initiated immuno-oncology
trials, (iii) use commercially reasonable efforts to achieve each of the approval milestones, and (iv) to complete each specified immuno-oncology
investigator trial on or before the four-year anniversary of the effective date of the definitive agreement. Additionally, we are required
to commercially launch a product in a territory within six months of receiving regulatory approval for such product in each such jurisdiction.
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies
followed by the Company in the preparation of the consolidated financial statements is as follows:
Use of Estimates
The process of preparing financial statements
in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to
make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the date of financial statements and the reported amounts of revenues and expenses during the reporting period. Estimates having relatively
higher significance include the accounting for in-process research and development and goodwill impairment, stock-based compensation,
valuation of warrants, and income taxes. Actual results could differ from those estimates and changes in estimates may occur.
Cash and Cash Equivalents
The Company considers all highly liquid instruments
with maturities of less than three months at the time of purchase to be cash equivalents. From time to time, the Company may have cash
balances in financial institutions in excess of insurance limits. The Company has never experienced any losses related to these balances.
Research and Development
Research and development costs, including upfront
fees and milestones paid to collaborators who are performing research and development activities under contractual agreements with the
Company, are expensed as incurred. The Company defers and capitalizes its nonrefundable advance payments that are for research and development
activities until the related goods are delivered or the related services are performed. When the Company is reimbursed by a collaboration
partner for work the Company performs, it records the costs incurred as research and development expenses and the related reimbursement
as a reduction to research and development expenses in its consolidated statement of operations. Research and development expenses primarily
consist of clinical and non-clinical studies, materials and supplies, third-party costs for contracted services, and payments related
to external collaborations and other research and development related costs.