Citius Pharmaceuticals, Inc. 10-Q

Item 2. 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 for the three- and nine-month periods ended June 30, 2023 should be read together with our unaudited consolidated financial statements and related notes included elsewhere in this report and in conjunction with the audited financial statements of Citius Pharmaceuticals, Inc. included in our Annual Report on Form 10-K for the year ended September 30, 2022. The following discussion contains “forward-looking statements” that reflect our future plans, estimates, beliefs and expected performance. Our actual results may differ materially from those currently anticipated and expressed in such forward-looking statements as a result of a number of factors. We caution that assumptions, expectations, projections, intentions, or beliefs about future events may, and often do, vary from actual results and the differences can be material. Please see “Cautionary Note Regarding Forward-Looking Statements” on page ii of this Report. Historical Background We are a late-stage biopharmaceutical company dedicated to the development and commercialization of first-in-class critical care products with a focus on oncology, anti-infectives in adjunct cancer care, unique prescription products and stem cell therapies. On September 12, 2014, we acquired Citius Pharmaceuticals, LLC as a wholly-owned subsidiary. On March 30, 2016, we acquired all the outstanding stock of Leonard-Meron Biosciences, Inc. (“LMB”) by issuing shares of our common stock. We acquired identifiable intangible assets of $19,400,000 related to in-process research and development and recorded goodwill of $9,346,796 for the excess of the purchase consideration over the net assets acquired. On September 11, 2020, we formed NoveCite, Inc. (“NoveCite”), a Delaware corporation, of which we own 75% of the issued and outstanding capital stock. On August 23, 2021, we formed Citius Acquisition Corp., a wholly owned subsidiary, which began operations in April 2022 and which changed its name to Citius Oncology, Inc. (“Citius Oncology”) on May 2, 2023. In-process research and development of $19,400,000 represents the value of LMB’s 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 Lymphir (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 June 30, 2023, we have devoted substantially all our efforts to product development, raising capital, building infrastructure through strategic alliances, and coordinating activities relating to our proprietary products. We have not yet realized any revenues from our operations. Patent and Technology License Agreements Mino-Lok® - LMB has a patent and technology license agreement with Novel Anti-Infective Therapeutics, Inc. (“NAT”) to develop and commercialize Mino-Lok on an exclusive, worldwide sub-licensable basis, as amended. Since May 2014, LMB has paid an annual maintenance fee, which began at $30,000 and that increased over five years to $90,000, where it will remain until the commencement of commercial sales of a product subject to the license. LMB will also pay annual royalties on net sales of licensed products, with royalties ranging from the mid-single digits to the low double digits. In limited circumstances in which the licensed product is not subject to a valid patent claim and a competitor is selling a competing product, the royalty rate is in the low single digits. After a commercial sale is obtained, LMB must pay minimum aggregate annual royalties that increase in subsequent years. LMB must also pay NAT up to $1,100,000 upon achieving specified regulatory and sales milestones. Finally, LMB must pay NAT a specified percentage of payments received from any sub licensees. 14 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 Mino-Wrap as 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 (“Novellus”), whereby NoveCite acquired an exclusive, worldwide license, with the right to sublicense, to develop and commercialize a stem cell therapy based on the Novelllus’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 Novellus issued to Novellus 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 ImmunoTherapeutics, Inc. (“Brooklyn”). Pursuant to this transaction, the NoveCite license was assumed by Brooklyn with all original terms and conditions. In October 2021, Brooklyn changed its name to Eterna Therapeutics Inc. As part of the Novellus and Brooklyn merger transaction, the 25% non-dilutive position as per the subscription agreement between Novellus and NoveCite was removed. Under the license agreement, NoveCite is obligated to pay Eterna 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 Novellus 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 Novellus an amount equal to a mid-twenties percentage of any sublicensee fees it receives. Under the terms of the license agreement, in the event that Novellus receives any revenue involving the original cell line included in the licensed technology, then Novellus shall remit to NoveCite 50% of such revenue. Lymphir - In September 2021, the Company entered into a definitive agreement with Dr. Reddy’s to acquire its exclusive license of Lymphir (denileukin diftitox), a late-stage oncology immunotherapy for the treatment of CTCL, a rare form of non-Hodgkin lymphoma. 15 Under the terms of this agreement, Citius acquired Dr. Reddy’s exclusive license of Lymphir from Eisai and other related assets owned by Dr. Reddy’s. Citius’s exclusive license rights include rights to develop and commercialize Lymphir 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 denileukin diftitox 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 Lymphir with the FDA. Citius will be responsible for development costs associated with potential additional indications. RESULTS OF OPERATIONS Three months ended June 30, 2023 compared with the three months ended June 30, 2022 Three Months Ended June 30, 2023 Three Months Ended June 30, 2022 Revenues $ — $ — Operating expenses: Research and development 3,764,675 4,888,192 General and administrative 3,733,326 3,024,783 Stock-based compensation expense 1,174,111 1,003,677 Total operating expenses 8,672,112 8,916,652 Operating loss (8,672,112 ) (8,916,652 ) Interest income 336,780 53,020 Loss before income taxes (8,335,332 ) (8,863,632 ) Income tax expense 144,000 — Net loss $ (8,479,332 ) $ (8,863,632 ) Revenues We did not generate any revenues for the three months ended June 30, 2023 or 2022. Research and Development Expenses For the three months ended June 30, 2023, research and development expenses were $3,764,675 as compared to $4,888,192 during the three months ended June 30, 2022, a decrease of $1,123,517. Research and development costs for Mino-Lok decreased by $242,634 to $1,091,500 for the three months ended June 30, 2023 as compared to $1,334,134 for the three months ended June 30, 2022, due primarily to decreased start-up costs associated with Biorasi, LLC (“Biorasi”), a global clinical research organization (CRO), to help expand the Company’s Phase 3 Mino-Lok trial to additional sites outside the United States, which are no longer incurred. Research and development costs for Halo-Lido increased by $485,081 to $1,002,883 for the three months ended June 30, 2023 as compared to $517,802 for the three months ended June 30, 2022 due to higher costs associated with the Phase 2b trial incurred in the three months ended June 30, 2023. On April 3, 2023, Citius announced that enrollment in the Phase 2b trial has been completed. On June 20, 2023, we announced that the high dose formulation of CITI-002, a lidocaine and halobetasol propionate combination formulation, provided a meaningful reduction in symptom severity, as reported by patients, when compared to individual components alone. Moreover, there were no reported significant adverse events and CITI-002 was well tolerated by patients in the study. Citius intends to schedule an end of Phase 2 meeting with the FDA to begin planning the next steps in the regulatory and clinical development program for CITI-002. 16 Research and development costs for Lymphir were $1,658,838 during the three months ended June 30, 2023 as compared to $1,992,897 for the three months ended June 30, 2022. The $334,059 decrease in expenses was primarily due to the completion and filing of our BLA with the FDA in September 2022. Research and development costs for NoveCite decreased by $992,937 for the three months ended June 30, 2023 to $16,650 due primarily to manufacturing start up costs incurred in the three months ended June 30, 2022 which are no longer realized. We expect that research and development expenses will stabilize in fiscal 2023 as we focus on the commercialization of Lymphir and complete our Phase 3 trial for Mino-Lok and our Phase 2b trial for Halo-Lido. General and Administrative Expenses For the three months ended June 30, 2023, general and administrative expenses were $3,733,326 as compared to $3,024,783 during the three months ended June 30, 2022. General and administrative expenses increased by $708,543 in comparison with the prior period. The primary reason for the increase were costs associated with pre-launch and market research activities associated with Lymphir. General and administrative expenses consist primarily of compensation costs, professional fees for legal, regulatory, accounting, and corporate development services, and investor relations expenses. Stock-based Compensation Expense For the three months ended June 30, 2023, stock-based compensation expense was $1,174,111 as compared to $1,003,677 for the three months ended June 30, 2022. For the three months ended June 30, 2023 and 2022, stock-based compensation includes $31,858 and $33,333, respectively, in expense for the NoveCite stock option plan. Stock-based compensation expense for the most recently completed quarter increased by $170,434 in comparison to the prior period primarily due to new grants made to employees (including new hires), directors and consultants. Other Income Interest income for the three months ended June 30, 2023 was $336,780 as compared to interest income of $53,020 for the prior period. The increase is due to higher interest rates on the investment of the remaining proceeds of our equity offerings and common stock warrant exercises in money market accounts. Income Taxes The Company recorded deferred income tax expense of $144,000 for the three months ended June 30, 2023, related to the amortization for taxable purposes of its in-process research and development asset. There was no provision for income taxes for the three months ended June 30, 2022 due to the Company’s operating losses and the valuation reserve on deferred tax assets. Net Loss For the three months ended June 30, 2023, we incurred a net loss of $8,479,332, compared to a net loss for the three months ended June 30, 2022 of $8,863,632. The $384,300 decrease in the net loss was primarily due to the decrease of $1,123,517 in research and development expenses offset by the increase of $708,543 in general and administrative expenses. 17 Nine months ended June 30, 2023 compared with the nine months ended June 30, 2022 Nine Months Ended June 30, 2023 Nine Months Ended June 30, 2022 Revenues $ — $ — Operating expenses: Research and development 11,937,045 13,798,251 General and administrative 11,129,463 9,038,949 Stock-based compensation expense 3,540,787 2,929,279 Total operating expenses 26,607,295 25,766,479 Operating loss (26,607,295 ) (25,766,479 ) Interest income 854,604 116,573 Gain on sale of New Jersey net operating losses 3,585,689 — Loss before income taxes (22,167,002 ) (25,649,906 ) Income tax expense 432,000 — Net loss $ (22,599,002 ) $ (25,649,906 ) Revenues We did not generate any revenues for the nine months ended June 30, 2023 or 2022. Research and Development Expenses For the nine months ended June 30, 2023, research and development expenses were $11,937,045 as compared to $13,798,251 during the nine months ended June 30, 2022, a decrease of $1,861,206. Research and development costs for Mino-Lok increased by $92,829 to $3,309,248 for the nine months ended June 30, 2023 as compared to $3,216,419 for the nine months ended June 30, 2022, due primarily to increased costs associated with the addition of Biorasi, LLC (“Biorasi”), a global clinical research organization (CRO), to help expand the Company’s Phase 3 Mino-Lok trial to additional sites outside the United States. Research and development costs for Halo-Lido increased by $1,514,702 to $3,733,981 for the nine months ended June 30, 2023 as compared to $2,219,279 for the nine months ended June 30, 2022 due to higher costs associated with the Phase 2b trial incurred in the nine months ended June 30, 2023. On April 3, 2023, Citius announced that enrollment in the Phase 2b trial has been completed. On June 20, 2023, we announced that the high dose formulation of CITI-002, a lidocaine and halobetasol propionate combination formulation, provided a meaningful reduction in symptom severity, as reported by patients, when compared to individual components alone. Moreover, there were no reported significant adverse events and CITI-002 was well tolerated by patients in the study. Citius intends to schedule an end of Phase 2 meeting with the FDA to begin planning the next steps in the regulatory and clinical development program for CITI-002. Research and development costs for Lymphir were $4,490,291 during the nine months ended June 30, 2023 as compared to $6,513,262 for the nine months ended June 30, 2022. The $2,022,971 decrease in expenses was primarily due to costs associated with the completed Lymphir phase 3 clinical trial as well as the preparation of the BLA which were incurred in the nine months ended June 30, 2022. We expect that research and development expenses will stabilize in fiscal 2023 as we focus on the commercialization of Lymphir and complete our Phase 3 trial for Mino-Lok and our Phase 2b trial for Halo-Lido. General and Administrative Expenses For the nine months ended June 30, 2023, general and administrative expenses were $11,129,463 as compared to $9,038,949 during the nine months ended June 30, 2022. General and administrative expenses increased by $2,090,514 in comparison with the prior period. The primary reason for the increase was costs associated with pre-launch and market research activities associated with Lymphir. General and administrative expenses consist primarily of compensation costs, professional fees for legal, regulatory, accounting, and corporate development services, and investor relations expenses. 18 Stock-based Compensation Expense For the nine months ended June 30, 2023, stock-based compensation expense was $3,540,787 as compared to $2,929,279 for the nine months ended June 30, 2022. For the nine months ended June 30, 2023 and 2022, stock-based compensation includes $98,524 and $99,999, respectively in expense for the NoveCite stock option plan. Stock-based compensation expense for the most recently completed quarter increased by $611,508 in comparison to the prior period primarily due to new grants made to employees (including new hires), directors and consultants. Other Income Interest income for the nine months ended June 30, 2023 was $854,604 as compared to interest income of $116,573 for the prior period. The increase is due to higher interest rates on the investment of the remaining proceeds of our early 2021 equity offerings and common stock warrant exercises in money market accounts. Other income for the nine months ended June 30, 2023 consists of the $3,585,689 gain recognized in connection with the sale of certain New Jersey income tax net operating losses to a third party under the New Jersey Technology Business Tax Certificate Transfer Program. Income Taxes The Company recorded deferred income tax expense of $432,000 for the nine months ended June 30, 2023, related to the amortization for taxable purposes of its in-process research and development asset. There was no provision for income taxes for the nine months ended June 30, 2022 due to the Company’s operating losses and the valuation reserve on deferred tax assets. Net Loss For the nine months ended June 30, 2023, we incurred a net loss of $22,599,002, compared to a net loss for the nine months ended June 30, 2022 of $25,649,906. The $3,050,904 decrease in the net loss was primarily due to the increase of $4,323,720 in other income offset by an aggregate increase in operating expenses of $840,816 and a $432,000 increase in income tax expense. LIQUIDITY AND CAPITAL RESOURCES Liquidity and Working Capital Citius has incurred operating losses since inception and incurred a net loss of $22,599,002 for the nine months ended June 30, 2023. At June 30, 2023, Citius had an accumulated deficit of $152,287,469. Citius’ net cash used in operations during the nine months ended June 30, 2023 was $22,259,997. As a result of the Company’s common stock offerings and common stock warrant exercises during the year ended September 30, 2021 and the May 2023 registered direct offering, the Company had working capital of approximately $35,300,000 at June 30, 2023. At June 30, 2023, Citius had cash and cash equivalents of $33,281,830 available to fund its operations. The Company’s primary sources of cash flow since inception have been from financing activities. 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. Based on our cash and cash equivalents at June 30, 2023, we expect that we will have sufficient funds to continue our operations through August 2024. We expect to need to raise additional capital in the future to support our operations beyond August 2024. 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. 19 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 and Estimates The preparation of our financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities as of the date of the financial statements and the amounts of revenues and expenses recorded during the reporting periods. We base our estimates on historical experience, where applicable, and other assumptions that we believe are reasonable under the circumstances. Actual results may differ from our estimates under different assumptions or conditions. Our critical accounting policies and use of estimates are discussed in, and should be read in conjunction with, the annual consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended September 30, 2022 filed with the SEC. Item 3. Quantitative and Qualitative Disclosures About Market Risk Not applicable.