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.
46
Historical Background
We are a late-stage biopharmaceutical company
dedicated to the development and commercialization of first-in-class critical care products with a focus on oncology, anti-infectives
in adjunct cancer care, unique prescription products and stem cell therapies. 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, which began operations in April 2022.
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, 2022, we have devoted substantially
all 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 our 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.
47
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. In October 2021, Brooklyn
changed its name to Eterna Therapeutics Inc.
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.
48
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, 2022 compared to Year Ended September 30, 2021
Revenues $ — $ —
Operating expenses:
Stock-based compensation – general and administrative 3,905,954 1,454,979
Interest expense — (10,839 )
Revenues
We did not generate any revenues for the years
ended September 30, 2022 and 2021.
Research and Development Expenses
For the year ended September 30, 2022, research
and development expenses were $17,655,482 as compared to $12,240,503 for the year ended September 30, 2021, an increase of $5,414,979.
Research and development costs for Mino-Lok®
increased by $723,405 to $4,250,655 for the year ended September 30, 2022 as compared to $3,527,250 for the year ended September 30, 2021
driven primarily by an increase in the costs associated with the addition of the global CRO, Biorasi, and the opening of international
sites, primarily in India, for the Phase 3 Mino-Lok trial.
49
Research and development costs for our Halo-Lido
product candidate increased by $1,835,175 to $2,697,348 for the year ended September 30, 2022 as compared to $862,173 for the year ended
September 30, 2021 due to an increase in costs associated with the initiation of the Phase 2 study for the year ended September 30, 2022.
Research and development costs for our Mino-Wrap
product candidate increased by $70,909 to $236,416 for the year ended September 30, 2022, as compared to $165,507 during the year ended
September 30, 2021, due to increased formulation work.
During the year ended September 30, 2022, research
and development costs for our proposed novel cellular therapy for acute respiratory distress syndrome (ARDS) were $1,777,288 as compared
to $6,946,365 for the year ended September 30, 2021. The decrease of $5,169,077 was primarily related to the $5,000,000 license fee paid
to Novellus in the year ended September 30, 2021.
We also incurred $8,693,775 in research and development
expenses for our E7777 product candidate during the year ended September 30, 2022 as compared to $739,208 during the year ended September
30, 2021. The increase of $7,954,567 was primarily due to costs associated with the completion of the Phase 3 trial, as well as the preparation
and submission of the Biologics License Application to the FDA, which we filed in September 2022.
We expect that research and development expenses
will continue to increase in fiscal 2023 as we continue to focus on the commercialization of E7777, our Phase 3 trial for Mino-Lok, our
Phase 2b trial for Halo-Lido, and accelerate our research and development efforts related to Mino-Wrap and ARDS.
General and Administrative Expenses
For the year ended September 30, 2022, general
and administrative expenses were $11,754,609 as compared to $9,836,412 for the year ended September 30, 2021, an increase of $1,918,197.
The primary reason for the increase was additional compensation costs for new employees, as well as increased investor relations expense.
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, 2022, stock-based
compensation expense was $3,905,954 as compared to $1,454,979 for the year ended September 30, 2021. Stock-based compensation expense
includes options granted to directors, employees, and consultants. For the years ended September 30, 2022 and 2021, stock-based compensation
expense includes $133,332 and $83,555, respectively, for the NoveCite stock option plan that was adopted in November 2020. Stock-based
compensation expense increased by $2,450,975 in comparison to the prior year due to new grants made by Citius and the increase in expense
for the NoveCite stock plan. In fiscal year 2022, we granted options to our new employees and additional options to other employees, our
directors, and consultants. At September 30, 2022, unrecognized total compensation cost related to unvested options for Citius common
stock of $5,317,681 is expected to be recognized over a weighted average period of 1.9 years and unrecognized total compensation cost
related to unvested options for NoveCite common stock of $183,111 is expected to be recognized over a weighted average period of 1.5 years.
Other Income (Expense)
During the year ended September 30, 2022, the
Company earned $251,399 of interest income compared to $261,825 of interest income during the year ended September 30, 2021. The decrease
was due to lower balances of investable funds offset by an increase in interest rates. We have invested the remaining balance of the 2021
equity offerings and common stock warrant exercises proceeds in money market accounts.
The Company recorded a gain of $166,557 during
the year ended September 30, 2021 for the principal and accrued interest on the Paycheck Protection Program loan that was forgiven on
July 28, 2021.
50
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.
There was no interest expense for the year ended
September 30, 2022 as compared to $10,839 for the year ended September 30, 2021. Interest expense was for the notes payable to related
parties that were acquired in the acquisition of LMB and the COVID-19 related Small Business Administration (“SBA”) Paycheck
Protection Program loan received on April 15, 2020. The notes payable to related parties were paid in full in June 2021 and therefore
were not outstanding at September 30, 2021 or 2022.
Income Taxes
The Company recorded deferred income tax expense
of $576,000 for the year ended September 30, 2022 related to the amortization for taxable purposes of its in-process research and development
asset. There was no provision for income taxes for the year ended September 30, 2021 due to the Company’s operating losses and the
valuation reserve on deferred tax assets.
Net Loss
For the year ended September 30, 2022, we incurred
a net loss of $33,640,646 compared to a net loss of $23,054,434 for the year ended September 30, 2021. The $10,586,212 increase in the
net loss was primarily due to the $5,414,979 increase in research and development expenses, the $1,918,197 increase in general and administrative
expenses, and the $2,450,975 increase in stock-based compensation expense.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity and Working Capital
Citius has incurred operating losses since inception
and incurred net losses of $33,640,646 and $23,054,434 for the years ended September 30, 2022 and 2021, respectively. At September 30,
2022, Citius had an accumulated deficit of $129,688,467. Citius’ net cash used in operations during the years ended September 30,
2022 and 2021 was $28,361,256 and $24,250,414, 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 $40,000,000 at September 30, 2022.
We expect that we will have sufficient funds to continue our operations through December 2023. At September 30, 2022, Citius had cash
and cash equivalents of $41,711,690 available to fund its operations. The Company’s only source of cash flow since inception has
been from financing activities. During the year ended September 30, 2021, the Company received net proceeds of $120,643,020, from the
issuance of equity. 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
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.
51
Based on our cash and cash equivalents at September
30, 2022, we expect that we will have sufficient funds to continue our operations through December 2023. Additionally, in November 2022,
the Company was selected to participate in New Jersey’s Technology Business Tax Certificate Transfer (NOL) Program and will receive
$3.6 million in non-dilutive capital through the New Jersey Economic Development Authority; the Company expects to receive these funds
by late 2022 or early 2023. We may need to raise additional capital in the future to support our operations beyond December 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.
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.
52
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, 2022.
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 2022 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, 2022.
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.
53
Item 8. Financial Statements and Supplementary Data
CITIUS PHARMACEUTICALS, INC.
CONSOLIDATED FINANCIAL STATEMENTS
INDEX
Page
Report of Independent Registered Public Accounting Firm (PCAOB ID #392) 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, 2022 and 2021, 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, 2022 and 2021, 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 22, 2022
F-2
CITIUS PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2022 AND 2021
ASSETS
Current Assets:
Other Assets:
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Commitments and Contingencies
Stockholders’ Equity:
The accompanying notes are an integral part of
these consolidated financial statements.
F-3
CITIUS PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 2022 AND 2021
Revenues $ — $ —
Operating Expenses:
Stock-based compensation – general and administrative 3,905,954 1,454,979
Other Income (Expense):
Interest expense — (10,839 )
Deemed dividend on warrant extension — 1,450,876
Weighted Average Common Shares Outstanding
The accompanying notes are an integral part of
these consolidated financial statements.
F-4
CITIUS PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’
EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 2022 AND 2021
Stock Shares Amount Capital Deficit Equity Interest Equity
The accompanying notes are an integral part of
these consolidated financial statements.
F-5
CITIUS PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 2022 AND 2021
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 176,754 163,376
Deferred income tax expense 576,000 —
Changes in operating assets and liabilities:
Accrued interest — (87,996 )
Cash Flows From Investing Activities:
Purchase of property and equipment — (6,938 )
Purchase of in-process research and development — (40,000,000 )
Net Cash Used In Investing Activities — (40,006,938 )
Cash Flows From Financing Activities:
Principal paid on notes payable – related parties — (172,970 )
Proceeds from sale of NoveCite, Inc. common stock — 500
Proceeds from common stock warrant exercises — 31,130,134
Proceeds from common stock option exercises — 82,634
Net proceeds from private placement — 18,450,410
Net proceeds from registered direct offerings — 70,979,842
Net Cash Provided By Financing Activities — 120,470,550
The accompanying notes are an integral part of
these consolidated financial statements.
F-6
CITIUS PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 2022 AND 2021
1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION
Business
Citius Pharmaceuticals, Inc. (“Citius,”
the “Company” or “we”) is a late-stage biopharmaceutical company dedicated to the development and commercialization
of critical care products with a focus on oncology, anti-infectives in adjunct cancer care, unique prescription products and stem cell
therapies.
On March 30, 2016, Citius acquired Leonard-Meron
Biosciences, Inc. (“LMB”) as a wholly-owned subsidiary. The Company acquired all 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. (“Citius Acq.”), a wholly-owned subsidiary in conjunction with the acquisition of I/ONTAK, which began operations in
April 2022.
In-process research and development (“IPR&D)
consists of i) $19,400,000 acquisition 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, 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 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
Acq., and its majority-owned subsidiary NoveCite. NoveCite, was inactive until October 2020. Citius Acq. began operations in April 2022.
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 $28,361,256 and $24,250,414, for the years ended September
30, 2022 and 2021, respectively. The Company had working capital of approximately $40 million at September 30, 2022. The Company estimates
that its available cash resources will be sufficient to fund its operations through December 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 December 2023, including its development plans for E7777, Mino-Lok, Mino-Wrap, Halo-Lido and
NoveCite, will depend on its ability to obtain regulatory approval to market E7777 and/or Mino-Lok and generate substantial revenue from
the sale of E7777 and/or 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 E7777 and/or 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 2022 and 2021.
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 $60,000 and $45,000 in January 2022 and 2021, 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, if 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 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. In October 2021, Brooklyn changed its name to Eterna Therapeutics Inc.
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