CITIUS ONCOLOGY, INC. 10-K

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. Business Citius Oncology is a specialty biopharmaceutical company focused on developing and commercializing innovative targeted oncology therapies. We are commercializing LYMPHIR (denileukin diftitox), an oncology immunotherapy for the treatment of CTCL, a rare form of non-Hodgkin lymphoma. LYMPHIR was approved by the FDA in August 2024 and commercially launched in the U.S. in December 2025. We were incorporated in the Cayman Islands on March 1, 2021, for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination with one or more businesses. In August 2024, we reincorporated in Delaware and completed the Merger whereby we acquired SpinCo as a wholly owned subsidiary and changed our name to Citius Oncology, Inc. SpinCo began operations in April 2022. Since inception, we have devoted substantially all of our efforts to business planning, research and development, recruiting management and technical staff and commercially launching LYMPHIR. We are subject to a number of risks common to companies in the pharmaceutical industry including, but not limited to, our ability to obtain additional financing, risks related to the development by us or our competitors of research and development stage products, market acceptance of our approved products, competition from larger companies, dependence on key personnel, dependence on key suppliers and strategic partners, and our compliance with governmental and other regulations. License Agreement with Eisai In September 2021, Citius Pharma entered into an asset purchase agreement with Dr. Reddy’s and a license agreement with Eisai to acquire an exclusive license of E7777 (denileukin diftitox), an oncology immunotherapy for the treatment of CTCL, a rare form of non-Hodgkin lymphoma. Citius Pharma assigned these agreements to us effective April 1, 2022. Citius Pharma renamed E7777 as I/ONTAK and also obtained the trade name LYMPHIR TM for the product. Denileukin diftitox is referred to in this annual report as E7777, I/ONTAK or LYMPHIR, depending on the period of time and context that is being discussed. Under the terms of these agreements, Citius Pharma acquired Dr. Reddy’s exclusive license of E7777 from Eisai and other related assets owned by Dr. Reddy’s. The exclusive license includes rights to develop and commercialize E7777 in all markets except for Japan and certain parts of Asia. Eisai retains exclusive development and marketing rights for the agent in Japan, China, Korea, Taiwan, Hong Kong, Macau, Indonesia, Thailand, Malaysia, Brunei, Singapore, India, Pakistan, Sri Lanka, Philippines, Vietnam, Myanmar, Cambodia, Laos, Afghanistan, Bangladesh, Bhutan, Nepal, Mongolia, and Papua New Guinea. Citius Pharma paid Dr. Reddy’s a $40 million upfront payment which represents the acquisition date fair value of the in-process research and development acquired. 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 (within a range of 10% to 15%), 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 (within a range of 10% to 15%). 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 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. Citius Pharma is a guarantor of our obligations under these agreements. 50 At the time of the FDA approval for LYMPHIR, a $27.5 million milestone payment became payable to Dr. Reddy’s under the terms of the asset purchase agreement for which a balance of $19.75 million remains due as of September 30, 2025. Dr. Reddy’s agreed to a partial deferral without penalty of this milestone payment. Under the license agreement, Eisai was due a $5.9 million milestone payment, upon FDA approval, of which $2.9 million remains payable at September 30, 2025, and additional commercial milestone payments related to the achievement of net product sales thresholds and an aggregate of up to $22 million related to the achievement of net product sales thresholds. We were also required to reimburse Eisai for up to $2.65 million of its costs to complete the Phase 3 pivotal clinical trial for LYMPHIR for the CTCL indication and reimburse Eisai for all reasonable costs associated with the preparation of a BLA for LYMPHIR. Eisai was responsible for completing the CTCL clinical trial, and CMC activities through the filing of the BLA for LYMPHIR with the FDA. We are responsible for development costs associated with potential additional indications. On March 28, 2025, Citius Oncology and Eisai entered into a letter agreement that amended the license agreement to provide for a payment schedule to Eisai for the milestone payment and certain unpaid invoices. We agreed to pay Eisai on or before July 15, 2025, an aggregate amount of $2,535,318 and thereafter on the 15 th of each of the next four months to pay Eisai $2.35 million and make a final payment of $2,197,892 to Eisai on or before December 15, 2025, in each case with interest on each obligation from its original due date through the date of actual payment under the letter agreement at the rate of 2% per annum. During the year ended September 30, 2025, we recorded $218,032 in interest expense under the agreement. The parties released each other from any and all claims, losses, damages, costs and expenses that arise from or related to our failure to pay the milestone payment or the other incurred costs under the license agreement except for any claims arising out of a breach of the letter agreement. All other terms of the license agreement remain in full force and effect. During the year ended September 30, 2025 we paid $3 million of the development milestone and the balance of $2.9 million is included in license fee payable at September 30, 2025. On July 21, 2025, we made a payment to Eisai of $1,616,522 for other invoices and accumulated interest associated with the letter agreement. The term of the license agreement will continue until (i) March 30, 2026, if there has not been a commercial sale of a licensed product in the territory, or (ii) if there has been a commercial sale of a licensed product in the territory by March 30, 2026, the 10-year anniversary of the first commercial sale on a country-by-country basis. We expect the first commercial sale to occur in the first quarter of 2026. 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. Under the purchase 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 (both of which have been initiated), (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 ; the launch of LYMPHIR in December 2025 satisfied this requirement in the U.S . Specialty Distribution Agreements In 2025, the Company executed three service agreements with pharmaceutical wholesalers to provide distribution of its LYMPHIR product to healthcare organizations which include academic centers, community oncology practices, as well as infusion centers. 51 RESULTS OF OPERATIONS Year ended September 30, 2025 compared with the year ended September 30, 2024 Year Ended September 30, 2025 Year Ended September 30, 2024 Revenues $ — $ — Operating expenses: Research and development 6,418,334 4,925,001 General and administrative 8,783,997 8,148,929 Stock-based compensation – general and administrative 8,320,419 7,498,817 Total operating expenses 23,522,750 20,572,747 Operating loss (23,522,750 ) (20,572,747 ) Interest income 36,373 — Interest expense (218,032 ) — Loss before income taxes (23,704,409 ) (20,572,747 ) Income tax expense 1,056,960 576,000 Net loss $ (24,761,369 ) $ (21,148,747 ) Revenues We did not generate any revenues for the years ended September 30, 2025 and 2024. Research and Development Expenses For the year ended September 30, 2025, research and development expenses were $6,418,334 as compared to $4,925,001 for the year ended September 30, 2024, an increase of $1,493,333 primarily related to costs associated with the expense of a drug substance batch needed for the pre-license inspection of the manufacturer. General and Administrative Expenses For the year ended September 30, 2025, general and administrative expenses were $8,783,997 as compared to $8,148,929 for the year ended September 30, 2024, an increase of $635,068. The primary reason for the increase was the efforts associated with the pre-commercial and commercial launch activities of LYMPHIR associated with market research, marketing, distribution and drug product reimbursement from health plans and payers. Stock-based Compensation Expense For the year ended September 30, 2025, stock-based compensation expense was $8,320,419 as compared to $7,498,817 for the year ended September 30, 2024. The primary reasons for the $821,602 increase in stock-based compensation expense were the new options granted in December 2024 and the restricted stock awards granted in September 2025. 52 Other Income (Expense) Interest income for the year ended September 30, 2025 was $36,373 as we invested some of the proceeds from our July 2025 and September 2025 equity offerings in a money market account. There was no interest income for the year ended September 30, 2024. Interest expense of $218,032 for the year ended September 30, 2025 consists of $218,032 in interest under the payment agreement with Eisai. Income Taxes We recorded deferred income tax expense of $1,056,960 in the year ended September 30, 2025 as compared to $576,000 in the year ended September 30, 2024 related to the amortization for taxable purposes of our in-process research and development asset. Net Loss For the year ended September 30, 2025, we incurred a net loss of $24,761,369 compared to a net loss of $21,148,747 for the year ended September 30, 2024. The $3,612,622 increase in the net loss was primarily due to the increases of $1,493,333 in research and development, $635,068 in general and administrative expenses and the increase in stock-based compensation expense of $821,602. LIQUIDITY AND CAPITAL RESOURCES Liquidity and Working Capital We have incurred operating losses since inception and incurred a net loss of $24,761,369 for the year ended September 30, 2025. At September 30, 2025, we had an accumulated deficit of $64,039,956. We have had no revenue and have historically relied on funding from Citius Pharma to finance our operations. At September 30, 2025, we had $3,924,908 in cash and a negative working capital of approximately $21.9 million. During the year ended September 30, 2025, Citius Oncology received aggregate net proceeds of approximately $15 million from equity offerings in July 2025 and September 2025 and Citius Pharma received net proceeds of approximately $32 million from their equity offerings and $1 million from the issuance of a note payable. Additionally, on October 21, 2025, Citius Pharma sold 3,973,510 shares of common stock (or pre-funded warrants in lieu thereof) and accompanying warrants to purchase 3,973,510 shares of common stock, at a combined per unit price of $1.51 for gross proceeds of approximately $6 million. The immediately exercisable five-year warrants have an exercise price of $1.40 per share. We need to obtain substantial additional financing in order to satisfy our outstanding milestone payment obligations, as well as meet minimum purchase commitments under our agreements for the manufacture and supply of our drug product, and cannot be sure that any additional funding will be available on terms favorable to us, or at all. As of September 30, 2025, our outstanding milestone payments and purchase commitments for 2025 include: ● On March 28, 2025, we entered into a letter agreement to pay Eisai on or before July 15, 2025, $2,535,318 and thereafter on the 15 th of each of the next four months $2.35 million and make a final payment of $2,197,892 to Eisai on or before December 15, 2025, in each case with interest on each obligation from its original due date at the rate of 2% per annum. As of September 30, 2025, we owe a balance of $2.9 million for the milestone approval fee and $6,697,892 for certain other invoices. ● At the time of the FDA approval for LYMPHIR, a $27.5 million milestone payment became payable to Dr. Reddy’s of which a balance of $19.75 million remains due as of September 30, 2025. Dr. Reddy’s has agreed to a partial deferral without penalty of this milestone payment. 53 ● We entered into an agreement with a contract manufacturing organization for the manufacture and supply of drug substance. Under this agreement, we are obligated to purchase minimum annual quantities of batches at a set price per batch, subject to annual increases. As of September 30, 2025, the total minimum purchase commitment under this agreement was approximately $16.2 million, consisting of payments of $8.5 million and $5.3 million for calendar years 2025 and 2026, respectively and $2.4 million for 2026 pass-throughs and consumable manufacturing components. ● As of September 30, 2025, the Company also has commercial supply agreements with two other vendors for the completion and packaging of finished drug products. Minimum purchase commitments under these two agreements are approximately $4.9 million, consisting of purchase commitment obligations of $1.2 million in calendar years 2025 and $1.9 million in 2026 and $1.8 million in 2027. We plan to continue to rely on funding from Citius Pharma, to raise capital through equity financings from outside investors, and to generate revenue from the future sales of LYMPHIR. We also have retained Jefferies LLC as our exclusive financial advisor in evaluating strategic alternatives aimed at maximizing shareholder value. There is no assurance, however, that Citius Pharma will have the resources to continue funding us, that we will be successful in raising the needed capital and, if funding is available, that it will be available on terms acceptable to us or that we will find strategic partners or generate substantial revenue from the sale of LYMPHIR. After giving effect to the Citius Pharma equity offerings during the year ended September 30, 2025, our equity offerings during the year ended September 30, 2025, Citius Pharma’s October equity offering, and our December 2025 equity offering, we expect that we and Citius Pharma collectively will have sufficient funds to continue our operations through March 2026. We will need to raise additional capital in the future to support our operations beyond March 2026, including to successfully commercialize of LYMPHIR. 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. Investing Activities During the year ended September 30, 2025, we paid $3 million to Eisai in connection with partial milestone payments and paid $2.75 million in connection with partial milestone payments to Dr. Reddy’s. During the year ended September 30, 2024, the Company paid $5 million in connection with a partial milestone payment due under its asset purchase agreement with Dr. Reddy’s. Financing Activities In connection with closing of the Merger on August 12, 2024, Citius Pharma, made a contribution to our capital in the amount of $33,180,961 representing the balance of the due to/due from related party account on the date of the Merger. Citius Pharma also made cash contributions to our capital, pursuant to the terms of the Merger Agreement, in the amount of $3,827,944. Also in connection with the closing of the Merger, Citius Pharma made a loan to the Company, evidenced by an unsecured promissory note issued by the Company to Citius Pharma, dated August 16, 2024, as amended September 10, 2025, in the principal amount of $3,800,111. The promissory note bears no interest and is repayable in full upon the date at which the Company has closed a series of capital raises that in the aggregate provide gross proceeds of at least $30 million through the issuance of debt or equity securities or the royalty-backed monetization of LYMPHIR™. To date the Company has raised $18 million in capital raises and the likelihood of raising an additional $12 million to trigger the repayment obligation is uncertain at this time. 54 On July 17, 2025, we sold 6,818,182 shares of common stock and warrants to purchase 6,818,182 shares of common stock, at a combined per unit price of $1.32. The immediately exercisable five-year warrants have an exercise price of $1.32 per share. Net proceeds were approximately $7.4 million, after deducting placement agent fees and other expenses. On September 10, 2025, we sold 5,142,858 shares of common stock and warrants to purchase 5,142,858 shares of common stock, at a combined per unit price of $1.75. The warrants have an exercise price of $1.84 per share, are exercisable six months after the date of issuance for one share of common stock and will expire five and a half years following the date of issuance. Gross proceeds were approximately $7.5 million, after deducting placement agent fees and other expenses. 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. In-process Research and Development The Company capitalizes intangible assets purchased from others for use in research and development activities as In Process Research & Development (IPR&D) when the assets acquired have an alternative future use, the Company anticipates future economic benefit from that use and the assets acquired are not dependent on future development. Milestone payments upon regulatory approval that meet the same criteria are capitalized when the payments are considered recoverable based on expected future cash flows. Amortization of IPR&D over the exclusive regulatory period of the acquired asset commences upon revenue generation. In-process research and development of $73.4 million represents the value of our September 2021 acquisition of an exclusive license for LYMPHIR (denileukin diftitox), an 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 12 years commencing upon revenue generation. In-process research and development consists of $40 million paid to Dr. Reddy’s from the asset purchase agreement and approval milestone fees of $27.5 million to Dr. Reddy’s and $5.9 million to Eisai. Incremental costs incurred on IPR&D after the acquisition date are expensed as incurred, unless there is an alternative future use. We review 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, we write 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, 2025. 55 Stock-Based Compensation We recognize compensation costs resulting from the issuance of stock-based awards to employees and directors as an expense in our consolidated statement of operations over the requisite service period based on the fair value for each stock award on the grant date. The fair value of each option grant is estimated using the Black-Scholes option pricing model. Volatility is estimated using the trading activity of Citius Pharma common stock until such time as we have sufficient history. Because our stock options have characteristics significantly different from those of traded options, and because changes in the input assumptions can materially affect the fair value estimate, the existing model may not necessarily provide a reliable measure of the fair value of our stock options. The Company recognizes compensation costs resulting from the issuance of stock-based awards to non-employees as an expense in the consolidated statement of operations over the service period based on the fair value for each stock award and records forfeitures as they occur. 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 See the financial statements included in this report beginning on page F-1. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.