Citius Pharmaceuticals, Inc. 10-K

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 2022 2021 ASSETS Current Assets: Cash and cash equivalents $ 41,711,690 $ 70,072,946 Prepaid expenses 2,852,580 2,741,404 Total Current Assets 44,564,270 72,814,350 Property and equipment, net 4,100 7,023 Operating lease right-of-use asset, net 646,074 822,828 Other Assets: Deposits 38,062 38,062 In-process research and development 59,400,000 59,400,000 Goodwill 9,346,796 9,346,796 Total Other Assets 68,784,858 68,784,858 Total Assets $ 113,999,302 $ 142,429,059 LIABILITIES AND STOCKHOLDERS’ EQUITY Current Liabilities: Accounts payable $ 1,165,378 $ 1,277,095 Accrued expenses 1,405,394 621,960 Accrued compensation 1,762,251 1,906,000 Operating lease liability 196,989 177,237 Total Current Liabilities 4,530,012 3,982,292 Deferred tax liability 5,561,800 4,985,800 Operating lease liability – non current 481,245 678,234 Total Liabilities 10,573,057 9,646,326 Commitments and Contingencies Stockholders’ Equity: Preferred stock - $ 0.001 par value; 10,000,000 shares authorized; no shares issued and outstanding — — Common stock - $ 0.001 par value; 400,000,000 shares authorized; 146,211,130 and 145,979,429 shares issued and outstanding at September 30, 2022 and 2021, respectively 146,211 145,979 Additional paid-in capital 232,368,121 228,084,195 Accumulated deficit ( 129,688,467 ) ( 96,047,821 ) Total Citius Pharmaceuticals, Inc. Stockholders’ Equity 102,825,865 132,182,353 Non-controlling interest 600,380 600,380 Total Equity 103,426,245 132,782,733 Total Liabilities and Equity $ 113,999,302 $ 142,429,059 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 2022 2021 Revenues $ — $ — Operating Expenses: Research and development 17,655,482 12,240,503 General and administrative 11,754,609 9,836,412 Stock-based compensation – general and administrative 3,905,954 1,454,979 Total Operating Expenses 33,316,045 23,531,894 Operating Loss ( 33,316,045 ) ( 23,531,894 ) Other Income (Expense): Interest income 251,399 261,825 Gain on forgiveness of note payable - Paycheck Protection Program and accrued interest — 166,557 Other income — 59,917 Interest expense — ( 10,839 ) Total Other Income, Net 251,399 477,460 Loss before Income Taxes ( 33,064,646 ) ( 23,054,434 ) Income tax expense 576,000 — Net Loss ( 33,640,646 ) ( 23,054,434 ) Deemed dividend on warrant extension — 1,450,876 Net Loss Applicable to Common Stockholders $ ( 33,640,646 ) ( 24,505,310 ) Net Loss Per Share Applicable to Common Stockholders - Basic and Diluted $ ( 0.23 ) ( 0.23 ) Weighted Average Common Shares Outstanding Basic and diluted 146,082,399 108,599,080 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 Preferred Common Stock Additional Paid-In Accumulated Total Citius Pharmaceuticals, Inc. Shareholder’s Non-Controlling Total Stock Shares Amount Capital Deficit Equity Interest Equity Balance, October 1, 2020 $ — 55,576,996 $ 55,577 $ 104,208,958 $ ( 70,593,867 ) $ 33,670,668 $ — $ 33,670,668 Issuance of NoveCite common stock — — — 1,799,640 ( 2,399,520 ) ( 599,880 ) 600,380 500 Issuance of common stock in private placement offering, net of costs of $ 1,549,602 — 15,455,960 15,456 18,434,954 — 18,450,410 — 18,450,410 Issuance of common stock in registered direct offering, net of costs of $ 5,520,160 — 50,830,566 50,830 70,929,012 — 70,979,842 — 70,979,842 Issuance of common stock upon exercise of warrants — 23,995,907 23,996 31,106,138 — 31,130,134 — 31,130,134 Issuance of common stock for services — 50,000 50 67,950 — 68,000 — 68,000 Issuance of common stock upon exercise of stock options — 70,000 70 82,564 — 82,634 — 82,634 Stock-based compensation expense — — — 1,454,979 — 1,454,979 — 1,454,979 Net loss — — — — ( 23,054,434 ) ( 23,054,434 ) — ( 23,054,434 ) Balance, September 30, 2021 — 145,979,429 145,979 228,084,195 ( 96,047,821 ) 132,182,353 600,380 132,782,733 Issuance of common stock for services — 231,701 232 377,972 — 378,204 — 378,204 Stock-based compensation expense — — — 3,905,954 — 3,905,954 — 3,905,954 Net loss — — — — ( 33,640,646 ) ( 33,640,646 ) — ( 33,640,646 ) Balance, September 30, 2022 $ — 146,211,130 $ 146,211 $ 232,368,121 $ ( 129,688,467 ) $ 102,825,865 $ 600,380 $ 103,426,245 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 2022 2021 Cash Flows From Operating Activities: Net loss $ ( 33,640,646 ) $ ( 23,054,434 ) Adjustments to reconcile net loss to net cash used in operating activities: Stock-based compensation 3,905,954 1,454,979 Issuance of common stock for services 378,204 68,000 Amortization of operating lease right-of-use asset 176,754 163,376 Depreciation 2,923 1,492 Deferred income tax expense 576,000 — Gain from forgiveness of notes payable – paycheck protection program and accrued interest — ( 166,557 ) Changes in operating assets and liabilities: Prepaid expenses ( 111,176 ) ( 2,619,167 ) Deposits — 19,031 Accounts payable ( 111,717 ) ( 579,140 ) Accrued expenses 783,434 457,920 Accrued compensation ( 143,749 ) 251,081 Accrued interest — ( 87,996 ) Operating lease liability ( 177,237 ) ( 158,999 ) Net Cash Used In Operating Activities ( 28,361,256 ) ( 24,250,414 ) 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 Net Change in Cash and Cash Equivalents ( 28,361,256 ) 56,213,198 Cash and Cash Equivalents – Beginning of Year 70,072,946 13,859,748 Cash and Cash Equivalents – End of Year $ 41,711,690 $ 70,072,946 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 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), 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. 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. Included in the IPR&D is the historical know-how, formula protocols, designs, and procedures expected to be needed to complete Phase 3. In addition, the contracts acquired in connection with Dr. Reddy’s transaction with the clinical research and manufacturing organization are at market rates and could be provided by multiple vendors in the marketplace. Therefore, there is no fair value associated with the contracts acquired. F- 11 Incremental costs incurred on IPR&D after the acquisition date are expensed as incurred, unless there is an alternative future use. 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 in the period identified. No impairment has occurred since the acquisitions through September 30, 2022. Goodwill represents the value of LMB’s industry relationships and its assembled workforce. Goodwill is not amortized but it is tested at least annually for impairment. 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 issued by the Financial Accounting Standards Bureau (“FASB”). 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. Patents and Trademarks Certain costs of outside legal counsel related to obtaining trademarks for the Company are capitalized. Patent costs are amortized over the legal life of the patents, generally twenty years , starting at the patent issuance date. There are no capitalized patents and trademarks as of September 30, 2022. The costs of unsuccessful and abandoned applications are expensed when abandoned. The costs of maintaining existing patents are expensed as incurred. Stock-Based Compensation The Company recognizes compensation costs resulting from the issuance of stock-based awards to employees and directors as an expense in the 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 as of the date of grant using the Black-Scholes option pricing model. The Company estimates volatility using the trading activity of its common stock. Because the Company’s 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 single measure of fair value of the Company’s 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 measurement of fair value for each stock award and records forfeitures as they occur. F- 12 Income Taxes The Company follows accounting guidance regarding the recognition, measurement, presentation, and disclosure of uncertain tax positions in the consolidated financial statements. Tax positions taken or expected to be taken in the course of preparing the Company’s 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 consolidated financial statements. There are no uncertain tax positions that require accrual or disclosure as of September 30, 2022. Any interest or penalties are charged to expense. During the years ended September 30, 2022 and 2021, the Company did not recognize any interest and penalties. Tax years subsequent to September 30, 2018 are subject to examination by federal and state authorities. The Company recognizes deferred tax assets and liabilities based on differences between the financial reporting and tax basis of assets and liabilities, and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using the enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. The Company provides a valuation allowance, if necessary, for deferred tax assets for which it does not consider realization of such assets to be “more-likely-than-not.” The deferred tax benefit or expense for the period represents the change in the deferred tax asset or liability from the beginning to the end of the period. Basic and Diluted Net Loss per Common Share Basic and diluted net loss per common share applicable to common stockholders is computed by dividing net loss applicable to common stockholders in each period by the weighted average number of shares of common stock outstanding during such period. For the periods presented, common stock equivalents, consisting of options and warrants were not included in the calculation of the diluted loss per share because they were anti-dilutive. Segment Reporting The Company currently operates as a single segment. Concentrations of Credit Risk The Company has no significant off-balance-sheet concentration of credit risk such as foreign exchange contracts, option contracts or other hedging arrangements. Recently Issued Accounting Standards In August 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2020-06, Debt — Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging — Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity , which, among other things, provides guidance on how to account for contracts on an entity’s own equity. This ASU eliminates the beneficial conversion and cash conversion accounting models for convertible instruments. It also amends the accounting for certain contracts in an entity’s own equity that are currently accounted for as derivatives because of specific settlement provisions. In addition, this ASU modifies how particular convertible instruments and certain contracts that may be settled in cash or shares impact the diluted EPS computation. The amendments in this ASU are effective for public companies for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020. The Company is currently evaluating the impact of ASU 2020-06 on its consolidated financial statements. In October 2021, the FASB issued ASU No. 2021-08, Business Combinations (Topic 805): Accounting for Acquired Contract Assets and Contract Liabilities. Under the new guidance (ASC 805-20-30-28), the acquirer should determine what contract assets and/or contract liabilities it would have recorded under Accounting Standards Codification (“ASC”) 606 (the revenue guidance) as of the acquisition date, as if the acquirer had entered into the original contract at the same date and on the same terms as the acquiree. The recognition and measurement of those contract assets and contract liabilities will likely be comparable to what the acquiree has recorded on its books under ASC 606 as of the acquisition date. ASU 2021-08 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. ASU 2021-08 is effective for the Company in the first quarter of fiscal 2024. Early adoption is permitted, including in an interim period, for any period for which financial statements have not yet been issued. However, adoption in an interim period other than the first fiscal quarter requires an entity to apply the new guidance to all prior business combinations that have occurred since the beginning of the annual period in which the new guidance is adopted. The Company is currently evaluating the adoption date of ASU 2021-08 and the impact, if any, adoption will have on its financial position and results of operations. F- 13 5. NOTES PAYABLE Notes Payable – Related Parties The aggregate principal balance consisted of notes payable held by our Chairman, Leonard Mazur, in the amount of $ 160,470 and notes payable held by our Chief Executive Officer, Myron Holubiak, in the amount of $ 12,500 . Notes with an aggregate principal balance of $104,000 accrued interest at the prime rate plus 1.0% per annum and notes with an aggregate principal balance of $68,970 accrued interest at 12% per annum. In June 2021, we repaid the $ 172,970 principal balance of these notes and paid accrued interest of $ 38,917 . Accrued interest of $ 59,917 was forgiven and has been recorded as other income during the year ended September 30, 2021. Interest expense on notes payable – related parties for the year ended September 30, 2021 was $ 9,606 . Paycheck Protection Program On April 12, 2020, due to the business disruption caused by the COVID-19 health crisis, the Company applied for a forgivable loan through the Small Business Association’s Paycheck Protection Program (the “PPP”). In accordance with the provisions of the PPP, the loan accrued interest at a rate of 1% and a portion of the loan may be forgiven if it is used to pay qualifying costs such as payroll, rent and utilities. Amounts that are not forgiven will be repaid two years from the date of the loan. On April 15, 2020, the Company received $164,583 from the PPP through its bank. Interest expense on the PPP loan was $ 1,233 for the year ended September 30, 2021. On July 28, 2021, the Small Business Administration gave full forgiveness of the PPP loan. The Company recorded a gain from debt extinguishment of $ 166,557 consisting of the principal balance and related accrued interest expense. 6. COMMON STOCK, STOCK OPTIONS AND WARRANTS Common Stock Issued for Services On February 12, 2021, the Company issued 50,000 shares of common stock for investor relations services and expensed the $ 68,000 fair value of the common stock issued. On November 2, 2021, the Company issued 50,201 shares of common stock for investor relations services and expensed the $ 95,884 fair value of the common stock issued. On March 21, 2022, the Company issued 100,000 shares of common stock for media, public and investor relations services and expensed the $ 178,000 fair value of the common stock issued. On September 13, 2022, the Company issued 81,500 shares of common stock for media, public and investor relations services and expensed the $ 104,320 fair value of the common stock issued. Common Stock Offerings 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 common share and accompanying warrant, for gross proceeds of $20,000,012. The 7,727,980 warrants are immediately exercisable at $1.231 per common share for a term of five and one-half years. The Company paid the placement agent a fee of 7% of the gross proceeds totaling $1,400,001 and issued the placement agent 1,081,917 immediately exercisable warrants at $1.6175 per common share for a term of five and one-half years. The Company also reimbursed the placement agent for $85,000 in expenses and incurred $64,601 in other expenses. Net proceeds from the offering were $18,450,410. The estimated fair value of the 7,727,980 warrants issued to the investors was approximately $7,582,000 and the estimated fair value of the 1,081,917 warrants issued to the placement agent was approximately $1,025,000. F- 14 On February 19, 2021, the Company closed a registered direct offering for 50,830,566 common shares and warrants to purchase up to 25,415,283 common shares, at a purchase price of $1.505 per share of common stock and accompanying warrant, for gross proceeds of $76,500,002. The 25,415,283 warrants are immediately exercisable at $1.70 per common share for a term of five years. The Company paid the placement agent a fee of 7% of the gross proceeds totaling $5,355,000 and issued the placement agent 3,558,140 immediately exercisable warrants at $1.881 per common share for a term of five years. The Company also reimbursed the placement agent for $85,000 in expenses and incurred $80,160 in other expenses. Net proceeds from the offering were $70,979,842. The estimated fair value of the 25,415,283 warrants issued to the investors was approximately $42,322,000 and the estimated fair value of the 3,558,140 warrants issued to the placement agent was approximately $5,850,000. Stock Option Plans Pursuant to its 2014 Stock Incentive Plan, we reserved 866,667 shares of common stock for issuance to employees, directors and consultants. As of September 30, 2022, there were options to purchase 855,171 shares outstanding, options to purchase 4,829 shares were exercised, options to purchase 6,667 shares expired, and no shares were available for future grants. On February 7, 2018, our stockholders approved the 2018 Omnibus Stock Incentive Plan and we reserved 2,000,000 shares of common stock for issuance to employees, directors, and consultants. As of September 30, 2022, there were options to purchase 1,820,000 shares outstanding, options to purchase 70,000 shares were exercised and the remaining 110,000 shares were transferred to the 2020 Omnibus Stock Incentive Plan (“2020 Plan”). On February 10, 2020, our stockholders approved the 2020 Plan and we reserved 3,110,000 common shares. As of September 30, 2022, there were options to purchase 1,870,000 shares outstanding and the remaining 1,240,000 shares were transferred to the 2021 Omnibus Stock Incentive Plan (“2021 Stock Plan”). On May 24, 2021, our stockholders approved the 2021 Stock Plan and we reserved 8,740,000 shares. The 2021 Stock Plan provides incentives to employees, directors, and consultants through options, SARs, dividend equivalent rights, restricted stock, restricted stock units, or other rights. As of September 30, 2022, options to purchase 4,855,000 shares were outstanding and there were 3,885,000 shares available for future grants. The fair value of each stock option award is estimated on the date of grant using the Black-Scholes option pricing model. Volatility is estimated using the trading activity of our common stock. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant commensurate with the expected term assumption. The expected term of stock options granted to employees and directors, all of which qualify as “plain vanilla,” is based on the average of the contractual term (generally 10 years) and the vesting period. For non-employee options, the expected term is the contractual term. The following assumptions were used in determining the fair value of stock option grants for the years ended September 30, 2022 and 2021: 2022 2021 Risk-free interest rate 1.05 – 2.94 % 0.32 – 0.89 % Expected dividend yield 0.00 % 0.00 % Expected term 6.50 – 10 years 6.50 – 10 years Expected volatility 94 – 110 % 111 – 112 % F- 15 A summary of option activity under the plans (excluding the NoveCite Stock Plan) is presented below: Shares Weighted- Average Exercise Price Weighted- Average Remaining Contractual Term Aggregate Intrinsic Value Outstanding at September 30, 2021 5,755,171 $ 2.13 8.02 years $ 3,589,392 Granted 3,645,000 1.97 Outstanding at September 30, 2022 9,400,171 $ 2.07 7.81 years $ 869,509 Exercisable at September 30, 2022 4,140,116 $ 2.42 6.58 years $ 595,405 The weighted average grant date fair value of the options granted during the year ended September 30, 2021 was estimated at $ 1.34 per share. All these options vest over terms of 12 to 36 months and have a term of 10 years. The weighted average grant date fair value of the options granted during the year ended September 30, 2022 was estimated at $ 1.67 per share. All these options vest over terms of 12 to 36 months and have a term of 10 years. Stock-based compensation expense for the years ended September 30, 2022 and 2021 was $3,905,954 (including $133,332 for the NoveCite Stock Plan) and $1,454,979 (including $83,555 for the NoveCite Stock Plan), respectively. At September 30, 2022, unrecognized total compensation cost related to unvested awards under the Citius stock plans of $ 5,317,681 is expected to be recognized over a weighted average period of 1.92 years. On November 5, 2020, the stockholders of NoveCite, approved NoveCite’s Stock Plan and under which 2,000,000 common shares of NoveCite were reserved. The NoveCite Stock Plan provides incentives to employees, directors, and consultants through grants of options, SARs, dividend equivalent rights, restricted stock, restricted stock units, or other rights. As of September 30, 2022, there were options outstanding to purchase 2,000,000 common shares of NoveCite and no common shares of NoveCite available for future grants. During the year ended September 30, 2021, NoveCite granted options to purchase 2,000,000 common shares to employees at a weighted average exercise price of $0.24 per share, of which 1,084,444 are exercisable as of September 30, 2022. The weighted average grant date fair value of the options granted during the year ended September 30, 2021 was estimated at $0.20 per share. All these options vest over 36 months and have a term of 10 years. The weighted average remaining contractual term of options outstanding under the NoveCite Stock Plan is 8.39 years. At September 30, 2022, unrecognized total compensation cost related to unvested awards under the NoveCite Stock Plan of $183,111 is expected to be recognized over a weighted average period of 1.45 years. Warrants The Company has reserved 38,325,489 shares of common stock for the exercise of outstanding warrants. The following table summarizes the warrants outstanding at September 30, 2022: Exercise price Number Expiration Dates December 2017 Registered Direct/Private Placement Investors $ 4.63 640,180 June 19, 2023 December 2017 Registered Direct/Private Placement Agent 5.87 89,625 December 19, 2022 March 2018 Registered Direct/Private Placement Investors 2.86 218,972 October 2, 2023 March 2018 Registered Direct/Private Placement Agent 3.73 46,866 March 28, 2023 August 2018 Offering Investors 1.15 3,921,569 August 14, 2023 August 2018 Offering Agent 1.59 189,412 August 8, 2023 April 2019 Registered Direct/Private Placement Investors 1.42 1,294,498 April 5, 2024 April 2019 Registered Direct/Private Placement Agent 1.93 240,130 April 5, 2024 September 2019 Offering Investors 0.77 2,793,297 September 27, 2024 September 2019 Offering Underwriter 1.12 194,358 September 27, 2024 February 2020 Exercise Agreement Placement Agent 1.28 138,886 August 19, 2025 May 2020 Registered Direct Offering Investors 1.00 1,670,588 November 18, 2025 May 2020 Registered Direct Offering Placement Agent 1.33 155,647 May 14, 2025 August 2020 Underwriter 1.31 201,967 August 10, 2025 January 2021 Registered Direct Offering Investors 1.23 3,091,192 July 27, 2026 January 2021 Registered Direct Offering Agent 1.62 351,623 July 27, 2026 February 2021 Offering Investors 1.70 20,580,283 February 19, 2026 February 2021 Offering Agent 1.88 2,506,396 February 19, 2026 38,325,489 F- 16 In April 2021, we extended the term by three years to April 5, 2024 for 1,294,498 warrants for common stock with an exercise price of $ 1.42 per share and 240,130 warrants with an exercise price of $ 1.93 per share. We recorded a deemed dividend of $ 1,450,876 based on the excess of the fair value of the modified warrants over the fair value of the warrants before the modification, the effect of which was an increase in the net loss attributable to common shareholders in the statement of operations for the year ended September 30, 2021. During the year ended September 30, 2021, we received $ 31,130,134 in proceeds from the exercise of common stock warrants. At September 30, 2022, the weighted average remaining life of the outstanding warrants is 2.89 years, all warrants are exercisable, and the aggregate intrinsic value for the warrants outstanding was $ 1,832,879 . Common Stock Reserved A summary of common stock reserved for future issuances as of September 30, 2022 is as follows: Stock plan options outstanding 9,400,171 Stock plan shares available for future grants 3,885,000 Warrants outstanding 38,325,489 Total 51,610,660 7. RELATED PARTY TRANSACTIONS The Company had outstanding debt due to Leonard Mazur (Chairman of the Board) and Myron Holubiak (Chief Executive Officer) (see Note 5). Mr. Mazur was a director and significant shareholder of Novellus, Inc. until July 2021. On October 6, 2020, the Company, through its subsidiary NoveCite, entered into an exclusive agreement with Novellus to develop cellular therapies (see Note 3). In April 2021, we extended the term by three years for 1,294,498 warrants held by our Chairman and our Chief Executive Officer (see Note 6). 8. EMPLOYMENT AGREEMENTS Employment Agreements On October 19, 2017, the Company and its Chairman of the Board, Leonard Mazur, entered into an employment agreement with a three-year term. Upon expiration, the agreement automatically renews for successive periods of one-year unless terminated pursuant to its terms. Under the terms of the agreement, the Company is required to pay base compensation plus incentives over the employment term plus severance benefits upon the occurrence of certain events as described in the agreement. On April 12, 2022, the Company entered into an 18-month employment agreement with Myron Holubiak to serve as Executive Vice Chairman. Upon expiration, the agreement automatically renews for successive periods of one-year unless terminated pursuant to its terms. The agreement requires the Company to pay base compensation plus incentives over the employment term plus severance benefits upon the occurrence of certain events as described in the agreement. F- 17 On July 13, 2020, Citius entered into an employment agreement with Myron Czuczman, M.D. to serve as Executive Vice President, Chief Medical Officer. The agreement requires the Company to pay base compensation plus incentives over the employment term plus severance benefits upon the occurrence of certain events as described in the agreement. Dr. Czuczman was granted an option to purchase 500,000 shares of common stock. The Company has employment agreements with certain other employees that require the Company to pay base compensation plus incentives over the employment term plus severance benefits upon the occurrence of certain events as described in the agreement. 9. COMMITMENTS AND CONTINGENCIES Operating Lease Effective July 1, 2019, Citius entered into a 76-month lease for office space in Cranford, NJ. Citius will pay its proportionate share of real estate taxes and operating expenses in excess of the base year expenses. These costs are variable lease payments and are not included in the determination of the lease’s right-of-use asset or lease liability. The Company identified and assessed the following significant assumptions in recognizing its right-of-use assets and corresponding lease liabilities: ● As the Company’s Cranford lease does not provide an implicit rate, the Company estimated the incremental borrowing rate in calculating the present value of the lease payments. The Company has estimated its incremental borrowing rate based on the remaining lease term as of the adoption date. ● Since the Company elected to account for each lease component and its associated non-lease components as a single combined component, all contract consideration was allocated to the combined lease component. ● The expected lease terms include noncancelable lease periods. The elements of lease expense are as follows: Lease cost Year Ended September 30, 2022 Year Ended September 30, 2021 Operating lease cost $ 238,822 $ 238,824 Variable lease cost 772 194 Total lease cost $ 239,594 $ 239,018 Other information Weighted-average remaining lease term - operating leases 3.1 Years 4.1 Years Weighted-average discount rate - operating leases 8.0 % 8.0 % Maturities of lease liabilities due under the Company’s non-cancellable leases are as follows: Year Ending September 30, 2023 $ 244,165 2024 249,024 2025 253,883 2026 21,460 Total lease payments 768,532 Less: interest ( 90,298 ) Present value of lease liabilities $ 678,234 F- 18 Leases Classification September 30, 2022 September 30, 2021 Assets Lease asset Operating $ 646,074 $ 822,828 Total lease assets $ 646,074 $ 822,828 Liabilities Current Operating $ 196,989 $ 177,237 Non-current Operating 481,245 678,234 Total lease liabilities $ 678,234 $ 855,471 Interest expense on the lease liability was $ 62,068 and $ 75,448 for the years ended September 30, 2022 and 2021, respectively. Legal Proceedings The Company is not involved in any litigation that it believes could have a material adverse effect on its financial position or results of operations. There is no action, suit, proceeding, inquiry, or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the Company’s executive officers, threatened against or affecting the Company or its officers or directors in their capacities as such. 10. 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. The income tax expense (benefit) differs from the amount of income tax determined by applying the U.S. federal income tax rate to pretax income for the years ended September 30, 2022 and 2021 due to the following: 2022 2021 Computed “expected” tax benefit ( 21.0 )% ( 21.0 )% Increase (decrease) in income taxes resulting from: State taxes, net of federal benefit ( 6.3 )% ( 6.3 )% Permanent differences 1.8 % 0.7 % Increase in the valuation reserve 27.2 % 26.6 % 1.7 % 0.0 % Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities are as follows: September 30, 2022 September 30, 2021 Deferred tax assets: Net operating loss carryforward $ 34,673,000 $ 25,508,000 Stock-based compensation 1,569,000 1,105,000 Other 3,689,000 2,564,000 Valuation allowance on deferred tax assets ( 39,931,000 ) ( 29,177,000 ) Total deferred tax assets — — Deferred tax liabilities: In-process research and development ( 5,561,800 ) ( 4,985,800 ) Total deferred tax liability ( 5,561,800 ) ( 4,985,800 ) Net deferred tax liability $ ( 5,561,800 ) $ ( 4,985,800 ) F- 19 The Company has recorded a valuation allowance against deferred tax assets as the utilization of the net operating loss carryforward and other deferred tax assets is uncertain. During the years ended September 30, 2022 and 2021, the valuation allowance increased by $ 10,754,000 and $ 12,257,000 , respectively. The increase in the valuation allowance during the years ended September 30, 2022 and 2021 was primarily due to the Company’s net operating loss. At September 30, 2022, the Company has a federal net operating loss carryforward of approximately $ 121,000,000 . Federal net operating loss carryforwards of approximately $ 35,000,000 begin expiring in 2034 and carryforwards of approximately $ 86,000,000 generated in tax years beginning after 2017 may be carried forward indefinitely. As of September 30, 2022, the Company also has estimated federal research and development credits of $ 3,208,000 to offset future income taxes. The tax credit carryforwards will begin to expire in 2036. The Company accounts for uncertain tax positions in accordance with the guidance provided in ASC 740, “Accounting for Income Taxes.” This guidance describes a recognition threshold and measurement attribute for the financial statement disclosure of tax positions taken or expected to be taken in a tax return and requires recognition of tax benefits that satisfy a more-likely-than-not threshold. ASC 740 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods and disclosure. There have been no reserves for uncertain tax positions recorded by the Company to date. 11. SUBSEQUENT EVENTS In November 2022, the Company was selected to participate in New Jersey’s Technology Business Tax Certificate Transfer (NOL) Program, more commonly known as the Net Operating Loss (NOL) Program, and will receive $ 3.6 million in non-dilutive capital through the New Jersey Economic Development Authority (NJEDA). The Company expects to receive the funds by late 2022 or early 2023. F- 20 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.