Citius Pharmaceuticals, 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. 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 Year Ended September 30, 2021 Year Ended September 30, 2020 Revenues $ - $ - Operating expenses: Research and development 12,240,503 8,812,810 General and administrative 9,836,412 8,094,614 Stock-based compensation – general and administrative 1,454,979 803,261 Total operating expenses 23,531,894 17,710,685 Operating loss (23,531,894 ) (17,710,685 ) Interest income 261,825 68,066 Gain on forgiveness of note payable - Paycheck Protection Program and accrued interest 166,557 - Other income 59,917 110,207 Interest expense (10,839 ) (15,673 ) Net loss $ (23,054,434 ) $ (17,548,085 ) 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.