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, 2023 and 2022, 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, 2023 and 2022, 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. Emphasis of a Matter Regarding Going Concern The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has suffered recurring losses and negative cash flows from operations and has a significant accumulated deficit. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. 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 29, 2023 F- 2 CITIUS PHARMACEUTICALS, INC. CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 2023 AND 2022 2023 2022 ASSETS Current Assets: Cash and cash equivalents $ 26,480,928 $ 41,711,690 Prepaid expenses 7,889,506 2,852,580 Total Current Assets 34,370,434 44,564,270 Property and equipment, net 1,432 4,100 Operating lease right-of-use asset, net 454,426 646,074 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 $ 103,611,150 $ 113,999,302 LIABILITIES AND STOCKHOLDERS’ EQUITY Current Liabilities: Accounts payable $ 2,927,334 $ 1,165,378 Accrued expenses 476,300 1,405,394 Accrued compensation 2,156,983 1,762,251 Operating lease liability 218,380 196,989 Total Current Liabilities 5,778,997 4,530,012 Deferred tax liability 6,137,800 5,561,800 Operating lease liability – non current 262,865 481,245 Total Liabilities 12,179,662 10,573,057 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; 158,857,798 and 146,211,130 shares issued and outstanding at September 30, 2023 and 2022, respectively 158,858 146,211 Additional paid-in capital 252,903,629 232,368,121 Accumulated deficit ( 162,231,379 ) ( 129,688,467 ) Total Citius Pharmaceuticals, Inc. Stockholders’ Equity 90,831,108 102,825,865 Non-controlling interest 600,380 600,380 Total Equity 91,431,488 103,426,245 Total Liabilities and Equity $ 103,611,150 $ 113,999,302 See accompanying report of independent registered public accounting firm and notes to the financial statements. F- 3 CITIUS PHARMACEUTICALS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED SEPTEMBER 30, 2023 AND 2022 2023 2022 Revenues $ — $ — Operating Expenses: Research and development 14,819,729 17,655,482 General and administrative 15,295,584 11,754,609 Stock-based compensation – general and administrative 6,616,705 3,905,954 Total Operating Expenses 36,732,018 33,316,045 Operating Loss ( 36,732,018 ) ( 33,316,045 ) Other Income: Interest income 1,179,417 251,399 Gain on sale of New Jersey net operating losses 3,585,689 — Total Other Income 4,765,106 251,399 Loss before Income Taxes ( 31,966,912 ) ( 33,064,646 ) Income tax expense 576,000 576,000 Net Loss ( 32,542,912 ) ( 33,640,646 ) Deemed dividend on warrant extension 1,151,208 — Net Loss Applicable to Common Stockholders $ ( 33,694,120 ) ( 33,640,646 ) Net Loss Per Share Applicable to Common Stockholders - Basic and Diluted $ ( 0.22 ) ( 0.23 ) Weighted Average Common Shares Outstanding Basic and diluted 151,294,729 146,082,399 See accompanying report of independent registered public accounting firm and notes to the financial statements. F- 4 CITIUS PHARMACEUTICALS, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY FOR THE YEARS ENDED SEPTEMBER 30, 2023 AND 2022 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, 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 Issuance of common stock for services — 100,000 100 101,900 — 102,000 — 102,000 Issuance of common stock upon exercise of stock options — 46,667 47 31,220 — 31,267 — 31,267 Issuance of common stock in registered direct offering, net of costs of $ 1,201,818 — 12,500,001 12,500 13,785,683 — 13,798,183 — 13,798,183 Stock-based compensation expense — — — 6,616,705 — 6,616,705 — 6,616,705 Net loss — — — — ( 32,542,912 ) ( 32,542,912 ) — ( 32,542,912 ) Balance, September 30, 2023 $ — 158,857,798 $ 158,858 $ 252,903,629 $ ( 162,231,379 ) $ 90,831,108 $ 600,380 $ 91,431,488 See accompanying report of independent registered public accounting firm and notes to the financial statements. F- 5 CITIUS PHARMACEUTICALS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED SEPTEMBER 30, 2023 AND 2022 2023 2022 Cash Flows From Operating Activities: Net loss $ ( 32,542,912 ) $ ( 33,640,646 ) Adjustments to reconcile net loss to net cash used in operating activities: Stock-based compensation 6,616,705 3,905,954 Issuance of common stock for services 102,000 378,204 Amortization of operating lease right-of-use asset 191,648 176,754 Depreciation 2,668 2,923 Deferred income tax expense 576,000 576,000 Changes in operating assets and liabilities: Prepaid expenses ( 5,036,926 ) ( 111,176 ) Accounts payable 1,761,956 ( 111,717 ) Accrued expenses ( 929,094 ) 783,434 Accrued compensation 394,732 ( 143,749 ) Operating lease liability ( 196,989 ) ( 177,237 ) Net Cash Used In Operating Activities ( 29,060,212 ) ( 28,361,256 ) Cash Flows From Financing Activities: Proceeds from common stock option exercises 31,267 — Net proceeds from registered direct offerings 13,798,183 — Net Cash Provided By Financing Activities 13,829,450 — Net Change in Cash and Cash Equivalents ( 15,230,762 ) ( 28,361,256 ) Cash and Cash Equivalents – Beginning of Year 41,711,690 70,072,946 Cash and Cash Equivalents – End of Year $ 26,480,928 $ 41,711,690 See accompanying report of independent registered public accounting firm and notes to the financial statements. F- 6 CITIUS PHARMACEUTICALS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED SEPTEMBER 30, 2023 AND 2022 1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION Business Citius Pharmaceuticals, Inc. (“Citius Pharma,” 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, we acquired Leonard-Meron Biosciences, Inc. (“LMB”) as a wholly-owned subsidiary. We acquired all the outstanding stock of LMB by issuing shares of our common stock. The net assets acquired included identifiable intangible assets of $ 19,400,000 related to in-process research and development. We 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 Oncology, Inc. (formerly named Citius Acquisition Corp.) (“Citius Oncology”), as a wholly-owned subsidiary in conjunction with the acquisition of LYMPHIR, which began operations in April 2022. On October 23, 2023, Citius Pharma and Citius Oncology entered into an agreement and plan of merger and reorganization with TenX Keane Acquisition, and its wholly owned subsidiary, TenX Merger Sub Inc., whereby TenX Merger Sub Inc. will merge with and into Citius Oncology, with Citius Oncology surviving as a wholly owned subsidiary of TenX Keane Acquisition. The newly combined publicly traded company is to be named “Citius Oncology, Inc.” (see Note 11). In-process research and development (“IPR&D) consists of i) the $ 19,400,000 acquisition 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, and ii) the $ 40,000,000 acquisition value of the exclusive license for LYMPHIR (denileukin diftitox), a late-stage oncology immunotherapy for the treatment of cutaneous T-cell lymphoma (“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, we have devoted substantially all our efforts to business planning, research and development, recruiting management and technical staff, and raising capital. We are subject to a number of risks common to companies in the pharmaceutical industry including, but not limited to, risks related to the development by the Company or its competitors of research and development stage products, regulatory approval and 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 Oncology, and its majority-owned subsidiary NoveCite. NoveCite, was inactive until October 2020. Citius Oncology began operations in April 2022. All significant inter-company balances and transactions have been eliminated in consolidation. F- 7 2. GOING CONCERN UNCERTAINTY 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 $ 29,060,212 and $ 28,361,256 , for the years ended September 30, 2023 and 2022, respectively. The Company had working capital of approximately $ 28.6 million at September 30, 2023. The Company estimates that its available cash resources will be sufficient to fund its operations through August 2024 which raises substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the accompanying consolidated financial statements are issued. 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 August 2024, including its development plans for LYMPHIR, Mino-Lok, Mino-Wrap, Halo-Lido and NoveCite, will depend on its ability to obtain regulatory approval to market LYMPHIR and/or Mino-Lok and generate substantial revenue from the sale of LYMPHIR 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 LYMPHIR 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 LYMPHIR and/or 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 2023 and 2022. 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 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 (“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”). F- 8 Under the license agreement, we paid an annual maintenance fee of $ 75,000 and $ 60,000 in January 2023 and 2022, 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 . License Agreement with Eterna On October 6, 2020, our subsidiary, NoveCite, signed an exclusive license agreement for a novel cellular therapy for acute respiratory distress syndrome (ARDS) with a subsidiary of Novellus, Inc. (“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, if NoveCite issued additional equity, subject to certain exceptions, NoveCite had to maintain Novellus’s ownership at 25 % by issuing additional shares to Novellus. In July 2021, Novellus was acquired by Brooklyn ImmunoTherapeutics, Inc. (“Brooklyn”). In connection with that transaction, the stock subscription agreement 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 2022, Brooklyn changed its name to Eterna Therapeutics Inc. (“Eterna”). 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. Eterna 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 Eterna 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 Eterna an amount equal to a mid-twenties percentage of any sublicensee fees it receives. Under the terms of the license agreement, if Eterna receives any revenue involving the original cell line included in the licensed technology, then Eterna 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. F- 9 Eterna 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 Eterna 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. License Agreement with Eisai In September 2021, the Company entered into an asset purchase agreement with Dr. Reddy’s Laboratories SA, a subsidiary of Dr. Reddy’s Laboratories, Ltd. (collectively, “Dr. Reddy’s”) and a license agreement with Eisai Co., Ltd. (“Eisai”) to acquire an exclusive license of E7777 (denileukin diftitox), a late-stage oncology immunotherapy for the treatment of CTCL, a rare form of non-Hodgkin lymphoma. We have obtained the trade name of LYMPHIR for E7777. Under the terms of these agreements, we acquired Dr. Reddy’s exclusive license for E7777 from Eisai and other related assets owned by Dr. Reddy’s. The exclusive license includes rights to develop and commercialize E7777 in all markets except for Japan and certain parts of Asia. Additionally, we 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 Pharma 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 were required to reimburse Eisai for up to $2.65 million of its costs to complete the ongoing Phase 3 pivotal clinical trial for LYMPHIR for the CTCL indication and reimburse Eisai for all reasonable costs associated with the preparation of a Biologics License Application (“BLA”) for LYMPHIR. Eisai was responsible for completing the CTCL clinical trial, and chemistry, manufacturing, and controls (CMC) activities through the filing of a BLA for LYMPHIR with the FDA. The BLA was filed with the FDA on September 27, 2022. We will also be responsible for development costs associated with potential additional indications. The term of the license agreement will continue until (i) March 30, 2026, if there has not been a commercial sale of a licensed product in the territory, or (ii) if there has been a first commercial sale of a licensed product in the territory by March 30. 2026, the 10-year anniversary of the first commercial sale on a country-by-country basis. 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. Also under the asset purchase agreement with Dr. Reddy’s, we are required to (i) use commercially reasonable efforts to make commercially available products in the CTCL indication, peripheral T-cell lymphoma indication and immuno-oncology indication, (ii) initiate two investigator initiated immuno-oncology trials, (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. F- 10 On July 29, 2023, we received a Complete Response Letter, (“CRL”) from the FDA regarding the BLA seeking approval for LYMPHIR. The FDA has required that we incorporate enhanced product testing, and additional controls agreed to with the FDA during the market application review. The FDA raised no concerns relating to the safety and efficacy clinical data package. On September 8, 2023, we announced that the FDA agreed with our plans to address the requirements outlined in the CRL. The guidance from the FDA provides a path for completing the necessary activities to support the resubmission of the BLA. No additional clinical efficacy or safety trials have been requested by FDA for the resubmission. Based on the feedback from the FDA, we plan to complete the CRL remediation activities by the end of 2023 and file the resubmission in early 2024. 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. Prepaid Expenses Prepaid expenses at September 30, 2023 and 2022 consist of $ 154,611 and $ 162,398 of prepaid insurance, respectively, and $ 7,734,895 and $ 2,690,182 of advance payments made for the preparation of long-lead time drug substance and product costs, respectively, which will be utilized in research and development activities or in the manufacturing of LYMPHIR for sales upon approval. 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 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. F- 11 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. 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. 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, 2023. 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 2023 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, 2023. 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, 2023. 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. F- 12 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. 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, 2023. Any interest or penalties are charged to expense. During the years ended September 30, 2023 and 2022, the Company did not recognize any interest and penalties. Tax years subsequent to September 30, 2019 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 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 year 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. COMMON STOCK, STOCK OPTIONS AND WARRANTS Common Stock Issued for Services 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. On March 27, 2023, the Company issued 100,000 shares of common stock for media, public and investor relations services and expensed the $ 102,000 fair value of the common stock issued. Common Stock Offering On May 8, 2023, the Company closed a registered direct offering of 12,500,001 common shares and warrants to purchase up to 12,500,001 common shares, at a purchase price of $ 1.20 per share and accompanying warrant for gross proceeds of $ 15,000,001 . The warrants have an exercise price of $ 1.50 per share, are exercisable six months from the date of issuance, and expire five years from the date of issuance. The estimated fair value of the warrants issued to the investors was approximately $ 11,000,000 . Net proceeds were $ 13,798,183 after deducting the placement agent fee of $ 1,050,000 , placement agent expenses of $ 85,000 , legal fees of $ 50,868 , and other offering expenses of $ 15,950 . The Company also issued 875,000 warrants to the placement agent at an exercise price of $ 1.50 per share, that are exercisable six months from the date of issuance, and expire five years from the date of issuance. The estimated fair value of the warrants issued to the placement agent was approximately $ 771,000 . Stock Option Plans Pursuant to our 2014 Stock Incentive Plan, we reserved 866,667 shares of common stock. As of September 30, 2023, there were options to purchase 795,171 shares outstanding, options to purchase 4,829 shares were exercised, options to purchase 66,667 shares expired, and no shares were available for future grants. Pursuant to our 2018 Omnibus Stock Incentive Plan, we reserved 2,000,000 shares of common stock. As of September 30, 2023, there were options to purchase 1,760,000 shares outstanding, options to purchase 116,667 shares were exercised, options to purchase 13,333 shares expired, and the remaining 110,000 shares were transferred to the 2020 Omnibus Stock Incentive Plan (“2020 Plan”). Pursuant to our 2020 Plan, we reserved 3,110,000 shares of common stock. As of September 30, 2023, there were options to purchase 1,820,000 shares outstanding, options to purchase 50,000 shares expired and the remaining 1,240,000 shares were transferred to the 2021 Omnibus Stock Incentive Plan (“2021 Stock Plan”). Pursuant to our 2021 Stock Plan, we reserved 8,740,000 shares of common stock. As of September 30, 2023, options to purchase 8,630,000 shares were outstanding, options to purchase 75,000 shares expired and the remaining 35,000 shares were transferred to the 2023 Omnibus Stock Incentive Plan (“2023 Stock Plan”). In November 2022, our Board approved the 2023 Stock Plan, subject to stockholder approval, which was received on February 7, 2023. The 2023 Stock Plan has reserved for issuance 12,035,000 shares of common stock. As of September 30, 2023, options to purchase 300,000 shares were outstanding and 11,735,000 shares remain available for future grants. F- 14 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, 2023 and 2022: 2023 2022 Risk-free interest rate 3.52 – 4.14 % 1.05 – 2.94 % Expected dividend yield 0.00 % 0.00 % Expected term 5.50 – 10 years 6.50 – 10 years Expected volatility 89 – 90 % 94 – 110 % A summary of option activity under the Citius Pharma plans (excluding the NoveCite and Citius Oncology Stock Plans) is presented below: Option Shares Weighted- Average Exercise Price Weighted- Average Remaining Contractual Term Aggregate Intrinsic Value Outstanding at September 30, 2022 9,400,171 $ 2.07 7.81 years $ 869,509 Granted 4,150,000 1.26 Exercised ( 46,667 ) 0.67 34,067 Forfeited or expired ( 198,333 ) 3.91 Outstanding at September 30, 2023 13,305,171 $ 1.79 7.41 years $ 56,203 Exercisable at September 30, 2023 6,558,507 $ 2.09 6.19 years $ 56,203 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. The weighted average grant date fair value of the options granted during the year ended September 30, 2023 was estimated at $ 0.98 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, 2023 and 2022 was $ 6,616,705 (including $ 130,382 for the NoveCite plan and $ 1,965,500 for the Citius Oncology plan) and $ 3,905,954 (including $ 133,332 for the NoveCite plan), respectively. At September 30, 2023, unrecognized total compensation cost related to unvested awards under the Citius stock plans of $ 4,840,874 is expected to be recognized over a weighted average period of 1.53 years. NoveCite Stock Plan – Under the NoveCite Stock Plan, we reserved 2,000,000 common shares of NoveCite. As of September 30, 2023, there were options outstanding to purchase 1,911,500 common shares of NoveCite and 88,500 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 options to purchase 88,500 common shares were forfeited, and options to purchase 1,673,625 common shares were exercisable as of September 30, 2023. 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 7.39 years. No options were issued in fiscal years 2023 and 2022. At September 30, 2023, unrecognized total compensation cost related to unvested awards under the NoveCite Stock Plan of $ 47,575 is expected to be recognized over a weighted average period of 0.67 years. F- 15 Citius Oncology Stock Plan - Under the Citius Oncology Stock Plan, adopted on April 29, 2023, we reserved 15,000,000 common shares of Citius Oncology. The Citius Oncology 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. During the year ended September 30, 2023, Citius Oncology granted options to purchase 12,750,000 common shares at a weighted average price of $ 2.15 per share, of which options to purchase 150,000 common shares were forfeited and options to purchase 655,556 common shares were exercisable at September 30, 2023. The weighted average grant date fair value of the options granted during the year ended September 30, 2023 was estimated at $ 1.65 per share. These options vest over periods from 12 to 36 months and have a term of 10 years. The weighted average remaining contractual term of options outstanding under the Citius Oncology Stock Plan is 9.77 years. At September 30, 2023, unrecognized total compensation cost related to unvested awards under the Citius Oncology Stock Plan of $ 18,882,500 is expected to be recognized over a weighted average period of 2.64 years. Warrants The Company has reserved 50,923,819 shares of common stock for the exercise of outstanding warrants. The following table summarizes the warrants outstanding at September 30, 2023: Exercise price Number Expiration Dates March 2018 Registered Direct/Private Placement Investors $ 2.86 218,972 October 2, 2023 August 2018 Offering Investors 1.15 3,921,569 August 14, 2024 August 2018 Offering Agent 1.59 189,412 August 8, 2024 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 May 2023 Registered Direct Offering Investors 1.50 12,500,001 May 8, 2028 May 2023 Registered Direct Offering Agent 1.50 875,000 May 3, 2028 50,923,819 On August 8, 2023, we extended the term by one year to August 14, 2024 for 3,921,569 warrants for common stock with an exercise price of $ 1.15 per share and extended the term by one year to August 8, 2024 for 189,412 warrants with an exercise price of $ 1.59 per share. We recorded a deemed dividend of $ 1,151,208 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, 2023. At September 30, 2023, the weighted average remaining life of the outstanding warrants is 2.72 years, all warrants are exercisable, and there was no aggregate intrinsic value for the warrants outstanding. F- 16 Common Stock Reserved A summary of common stock reserved for future issuances as of September 30, 2023 is as follows: Stock plan options outstanding 13,305,171 Stock plan shares available for future grants 11,735,000 Warrants outstanding 50,923,819 Total 75,963,990 6. RELATED PARTY TRANSACTIONS On August 8, 2023, we extended the term by one year for 3,921,569 warrants held by our Chairman and by our Executive Vice Chairman (see Note 5). 7. 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 November 27, 2017, the Company entered into an employment agreement with Jaime Bartushak to serve as the Chief Financial Officer and Principal Financial Officer of the Company. 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. On April 12, 2022, we 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. On July 13, 2020, we 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. 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. 8. COMMITMENTS AND CONTINGENCIES Operating Lease Effective July 1, 2019, we entered into a 76-month lease for office space in Cranford, NJ. We pay our 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. We identified and assessed the following significant assumptions in recognizing its right-of-use assets and corresponding lease liabilities: ● As the 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. F- 17 ● 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, 2023 Year Ended September 30, 2022 Operating lease cost $ 238,824 $ 238,822 Variable lease cost 4,771 772 Total lease cost $ 243,595 $ 239,594 Other information Weighted-average remaining lease term - operating leases 2.1 Years 3.1 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, 2024 $ 249,024 2025 253,883 2026 21,460 Total lease payments 524,367 Less: interest ( 43,122 ) Present value of lease liabilities $ 481,245 Leases Classification September 30, 2023 September 30, 2022 Assets Lease asset Operating $ 454,426 $ 646,074 Total lease assets $ 454,426 $ 646,074 Liabilities Current Operating $ 218,380 $ 196,989 Non-current Operating 262,865 481,245 Total lease liabilities $ 481,245 $ 678,234 Interest expense on the lease liability was $ 47,176 and $ 62,068 for the years ended September 30, 2023 and 2022, 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. F- 18 9. GAIN ON SALE OF NEW JERSEY NET OPERATING LOSSES The Company recognized a gain of $ 3,585,689 for the year ended September 30, 2023 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. 10. INCOME TAXES The Company recorded deferred income tax expense of $ 576,000 for the both the years ended September 30, 2023 and 2022 related to the amortization for taxable purposes of its in-process research and development asset. 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, 2023 and 2022 due to the following: 2023 2022 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 3.7 1.8 Increase in the valuation reserve 25.4 27.2 1.8 % 1.7 % 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, 2023 September 30, 2022 Deferred tax assets: Net operating loss carryforward $ 34,980,000 $ 34,673,000 Stock-based compensation 2,191,000 1,569,000 Capitalized research and development 3,644,000 Other 4,100,000 3,689,000 Valuation allowance on deferred tax assets ( 44,915,000 ) ( 39,931,000 ) Total deferred tax assets — — Deferred tax liabilities: In-process research and development ( 6,137,800 ) ( 5,561,800 ) Total deferred tax liability ( 6,137,800 ) ( 5,561,800 ) Net deferred tax liability $ ( 6,137,800 ) $ ( 5,561,800 ) 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, 2023 and 2022, the valuation allowance increased by $ 4,984,000 and $ 10,754,000 , respectively. The increase in the valuation allowance during the years ended September 30, 2023 and 2022 was primarily due to the Company’s net operating loss. At September 30, 2023, the Company has a federal net operating loss carryforward of approximately $ 133,000,000 . Federal net operating loss carryforwards of approximately $ 35,000,000 begin expiring in 2034 and carryforwards of approximately $ 98,000,000 generated in tax years beginning after 2017 may be carried forward indefinitely. As of September 30, 2023, the Company also has estimated federal research and development credits of $ 3,511,000 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. F- 19 11. NASDAQ LISTING On September 12, 2023, we received a notification letter from the Nasdaq Stock Market LLC (“Nasdaq”) indicating that we were not in compliance with Nasdaq Listing Rule 5550(a)(2) because the minimum bid price of our common stock on the Nasdaq Capital Market closed below $ 1.00 per share for 30 consecutive business days. In accordance with Nasdaq Listing Rule 5810(c)(3)(A), the Company has a compliance period of 180 calendar days, or until March 11, 2024, to regain compliance with the Bid Price Rule. If at any time before March 11, 2024, the bid price of the Company’s common stock closes at $ 1.00 per share or more for a minimum of ten consecutive business days, Nasdaq will provide the Company with a written confirmation of compliance with the Bid Price Rule. If the Company does not regain compliance with the Bid Price Rule by March 11, 2024, the Company may be eligible for an additional 180-day compliance period. To qualify, the Company would be required to meet the continued listing requirement for market value of publicly held shares and all other initial listing standards for the Nasdaq Capital Market, with the exception of the Bid Price Rule, and would need to provide written notice of its intention to cure the bid price deficiency during the second compliance period by effecting a reverse stock split, if necessary. 12. SUBSEQUENT EVENTS Merger Agreement - On October 23, 2023, Citius Pharma and Citius Oncology entered into an agreement and plan of merger and reorganization (the “Merger Agreement”) with TenX Keane Acquisition, a Cayman Islands exempted company (“TenX”), and TenX Merger Sub Inc., a Delaware corporation, and a wholly owned subsidiary of TenX (“Merger Sub”). The Merger Agreement provides, among other things, (i) on the terms and subject to the conditions set forth therein, that Merger Sub will merge with and into Citius Oncology, with Citius Oncology surviving as a wholly owned subsidiary of TenX (the “Merger”), and (ii) that prior to the effective time of the Merger (the “Effective Time”), TenX will migrate to and domesticate as a Delaware corporation in accordance with Section 388 of the General Corporation Law of the State of Delaware and the Cayman Islands Companies Act (As Revised) (the “Domestication”). The newly combined publicly traded company is to be named “Citius Oncology, Inc.” (the “Combined Company”). The Domestication, Merger and the other transactions contemplated by the Merger Agreement are referred to as the “Business Combination.” In the Merger, all shares of Citius Oncology would be converted into the right to receive common stock of the Combined Company. As a result, upon closing, Citius Pharma would receive 67.5 million shares of common stock of the Combined Company. As part of the transaction, Citius Pharma will contribute $ 10 million in cash to the Combined Company. The 12.6 million existing Citius Oncology common stock options will be assumed by the Combined Company. Citius Pharma and the Combined Company will also enter into an amended and restated shared services agreement, which, among other things, will govern certain management and scientific services that Citius Pharma will continue to provide to the Combined Company following the Effective Time. The Merger Agreement, Business Combination and the transactions contemplated thereby were unanimously approved by the boards of directors of each of Citius Pharma, Citius Oncology and TenX. The transaction is expected to be completed in the first half of 2024, subject to approval by stockholders of TenX and other customary closing conditions, including final regulatory approvals and SEC filings. There can be no assurance regarding the ultimate timing of the proposed transaction or that the transaction will be completed at all. On December 11, 2023, the Company terminated the Mino-Wrap license agreement with the Board of Regents of the University of Texas System on behalf of MDACC. In late December 2023, the Company determined that patient enrollment for the Mino-Lok trial was complete and that it would begin site shutdown activities. F- 20 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.