U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One) 

 QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended: June 30, 2020

 

OR

 

 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ______________ to ______________

 

Commission File Number 001-38174

 

Citius Pharmaceuticals, Inc.

(Exact name of registrant as specified in its charter)

 

Nevada   27-3425913
(State or other jurisdiction of
incorporation or organization
)
  (IRS Employer
Identification No.
)

 

11 Commerce Drive, First Floor, Cranford, NJ 07016

(Address of principal executive offices and zip code)

 

(908) 967-6677

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class   Trading Symbol(s)   Name of Each Exchange on
Which Registered
Common stock, $0.001 par value   CTXR   Nasdaq Capital Market
Warrants to purchase common stock   CTXRW   Nasdaq Capital Market

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer           ☐ Accelerated filer                   ☐
Non-accelerated filer             ☒ Smaller reporting company  ☒
Emerging growth company   ☐  

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ☐ No ☒

 

As of August 10, 2020, there were 55,475,822 shares of common stock, $0.001 par value, of the registrant issued and outstanding.

  

 

 

 

 

Citius Pharmaceuticals, Inc.

FORM 10-Q

TABLE OF CONTENTS

June 30, 2020

 

    Page
PART I. FINANCIAL INFORMATION:  
     
Item 1. Financial Statements (Unaudited) 1
  Condensed Consolidated Balance Sheets at June 30, 2020 and September 30, 2019 1
  Condensed Consolidated Statements of Operations for the Three and Nine Months Ended June 30, 2020 and 2019 2
  Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Three and Nine Months Ended June 30, 2020 and 2019 3
  Condensed Consolidated Statements of Cash Flows for the Nine Months Ended June 30, 2020 and 2019 4
  Notes to Condensed Consolidated Financial Statements 5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 16
Item 3. Quantitative and Qualitative Disclosures about Market Risk 20
Item 4. Controls and Procedures 20
     
PART II. OTHER INFORMATION  
     
Item 1. Legal Proceedings 21
Item 1A. Risk Factors 21
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 21
Item 3. Defaults Upon Senior Securities 21
Item 4. Mine Safety Disclosures 21
Item 5. Other Information 21
Item 6. Exhibits 21
   
  SIGNATURES 22

  

i

 

 

EXPLANATORY NOTE

 

In this Quarterly Report on Form 10-Q, and unless the context otherwise requires, the “Company,” “we,” “us,” and “our” refer to Citius Pharmaceuticals, Inc. and its wholly owned subsidiaries, Citius Pharmaceuticals, LLC and Leonard-Meron Biosciences, Inc., taken as a whole.

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q contains “forward-looking statements.” Forward-looking statements include, but are not limited to, statements that express our intentions, beliefs, expectations, strategies, predictions or any other statements relating to our future activities or other future events or conditions. These statements are based on current expectations, estimates and projections about our business based, in part, on assumptions made by management. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may, and are likely to, differ materially from what is expressed or forecasted in the forward-looking statements due to numerous factors discussed from time to time in this report and in other documents which we file with the Securities and Exchange Commission. In addition, such statements could be affected by risks and uncertainties related to:

 

  our ability to raise funds for general corporate purposes and operations, including our clinical trials;

 

  the cost, timing and results of our clinical trials;

 

  our ability to obtain and maintain required regulatory approvals for our product candidates;

 

  the commercial feasibility and success of our technology;

 

  our ability to recruit qualified management and technical personnel to carry out our operations; and

 

  the other factors discussed in the “Risk Factors” section of our most recent Annual Report on Form 10-K and in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020 and elsewhere in this report.

 

Any forward-looking statements speak only as of the date on which they are made, and except as may be required under applicable securities laws, we do not undertake any obligation to update any forward-looking statement to reflect events or circumstances after the filing date of this report.

   

ii

 

 

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

CITIUS PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

   June 30,   September 30, 
   2020   2019 
ASSETS      (as restated) 
Current Assets:        
Cash and cash equivalents  $8,517,339   $7,893,804 
Prepaid expenses   51,582    48,111 
Total Current Assets   8,568,921    7,941,915 
           
Property and equipment, net   1,789    590 
           
Operating lease right-of-use asset, net   1,025,119     
           
Other Assets:          
Deposits   57,093    57,093 
In-process research and development   19,400,000    19,400,000 
Goodwill   9,346,796    9,346,796 
Total Other Assets   28,803,889    28,803,889 
           
Total Assets  $38,399,718   $36,746,394 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
Current Liabilities:          
Accounts payable  $1,811,624   $2,713,542 
Accrued expenses   163,864    246,225 
Accrued compensation   1,220,314    1,400,688 
Accrued interest   86,513    74,297 
Notes payable – related parties   172,970    172,970 
Operating lease liability   154,663     
Total Current Liabilities   3,609,948    4,607,722 
           
Note payable – paycheck protection program   164,583     
Deferred tax liability   4,985,800    4,985,800 
Operating lease liability – non current   897,325     
Total Liabilities   9,657,656    9,593,522 
           
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; 200,000,000 shares authorized; 46,316,298 and 28,930,493 shares issued and outstanding at June 30, 2020 and September 30, 2019, respectively   46,316    28,930 
Additional paid-in capital   95,168,985    80,169,724 
Accumulated deficit   (66,473,239)   (53,045,782)
Total Stockholders’ Equity   28,742,062    27,152,872 
           
Total Liabilities and Stockholders’ Equity  $38,399,718   $36,746,394 

 

See notes to unaudited condensed consolidated financial statements.  

 

1

 

 

CITIUS PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 2020 AND 2019

(Unaudited)

 

   Three Months Ended   Nine Months Ended 
   June 30,   June 30,   June 30,   June 30, 
   2020   2019   2020   2019 
                 
Revenues  $   $   $   $ 
                     
Operating Expenses                    
Research and development   2,644,244    2,766,260    7,324,730    6,579,237 
General and administrative   1,869,636    1,456,451    5,690,953    4,782,972 
Stock-based compensation – general and administrative   175,011    204,002    554,228    578,946 
Total Operating Expenses   4,688,891    4,426,713    13,569,911    11,941,155 
                     
Operating Loss   (4,688,891)   (4,426,713)   (13,569,911)   (11,941,155)
                     
Other Income (Expense)                    
Other income           110,207     
Interest income   13,018    25,268    44,463    41,159 
Interest expense   (4,245)   (4,138)   (12,216)   (12,246)
Total Other Income, Net   8,773    21,130    142,454    28,913 
                     
Net Loss  $(4,680,118)  $(4,405,583)  $(13,427,457)  $(11,912,242)
                     
Net Loss Per Share - Basic and Diluted  $(0.11)  $(0.20)  $(0.38)  $(0.61)
                     
Weighted Average Common Shares Outstanding                    
Basic and diluted   41,600,428    22,000,387    35,017,739    19,412,641 

  

See notes to unaudited condensed consolidated financial statements.

  

2

 

 

CITIUS PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 2020 AND 2019

(Unaudited)

 

               Additional         
   Preferred   Common Stock   Paid-In   Accumulated     
   Stock   Shares   Amount   Capital   Deficit   Total 
Balance, October 1, 2019, as previously reported       28,930,493   $28,930   $80,169,724   $(55,819,982) $24,378,672 
Restatement (see Note 9)                 2,774,200   2,774,200 
Balance, October 1, 2019, as restated      28,930,493   28,930   80,169,724   (53,045,782)  27,152,872 
Issuance of common stock upon exercise of warrants       1,060,615    1,061    (955)       106 
Issuance of common stock for services       186,566    187    99,813        100,000 
Stock-based compensation expense               220,384        220,384 
Net loss                   (4,322,370)   (4,322,370)
Balance, December 31, 2019       30,177,674    30,178    80,488,966    (57,368,152)   23,150,992 
Issuance of common stock upon exercise of warrants       7,614,388    7,614    6,019,417        6,027,031 
Issuance of common stock for services       286,000    286    305,734        306,020 
Stock-based compensation expense               158,833        158,833 
Net loss                   (4,424,969)   (4,424,969)
Balance, March 31, 2020       38,078,062    38,078    86,972,950    (61,793,121)   25,217,907 
Issuance of common stock for services       50,000    50    22,700        22,750 
Issuance of common stock in registered direct offering, net of  costs of $622,900       7,058,824    7,059    6,870,041        6,877,100 
Issuance of common stock upon exercise of warrants       1,129,412    1,129    1,128,283        1,129,412 
Stock-based compensation expense               175,011        175,011 
Net loss                   (4,680,118)   (4,680,118)
Balance, June 30, 2020  $    46,316,298   $46,316   $95,168,985   $  (66,473,239)  $28,742,062 
                               
Balance, October 1, 2018, as previously reported   $    16,198,791   $16,199   $68,107,323   $(40,257,838)  $27,865,684 
Restatement (see Note 9)  $              2,774,200   2,774,200 
Balance, October 1, 2018, as restated  $    16,198,791   16,199   68,107,323   (37,483,638)  30,639,884 
Issuance of common stock upon exercise of warrants       1,600,000    1,600    14,400        16,000 
Stock-based compensation expense               171,249        171,249 
Net loss                   (3,874,730)   (3,874,730)
Balance, December 31, 2018       17,798,791    17,799    68,292,972    (41,358,368)   26,952,403 
Issuance of common stock upon exercise of warrants       721,569    721    6,495        7,216 
Issuance of common stock for services        125,000    125    117,375        117,500 
Stock-based compensation expense               203,695        203,695 
Net loss                   (3,631,929)   (3,631,929)
Balance, March 31, 2019       18,645,360    18,645    68,620,537    (44,990,297)   23,648,885 
Issuance of common stock in registered direct offering, net of costs of $466,000       3,430,421    3,430    4,830,571        4,834,001 
Stock-based compensation expense               204,002        204,002 
Net loss                   (4,405,583)   (4,405,583)
Balance, June 30, 2019  $    22,075,781   $22,075   $73,655,110   $(49,395,880)  $24,281,305 

 

See notes to unaudited condensed consolidated financial statements.

 

3

 

  

CITIUS PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED JUNE 30, 2020 AND 2019

(Unaudited)

 

   2020   2019 
Cash Flows From Operating Activities:        
Net loss  $(13,427,457)  $(11,912,242)
Adjustments to reconcile net loss to net cash used in operating activities:          
Stock-based compensation expense   554,228    578,946 
Issuance of common stock for services   428,770    117,500 
Amortization of operating lease right-of-use asset   112,605     
Depreciation   632    706 
Changes in operating assets and liabilities:          
Other receivables       818,343 
Prepaid expenses   (3,471)   13,276 
Accounts payable   (901,918)   857,419 
Accrued expenses   (82,361)   (23,434)
Accrued compensation   (180,374)   6,771 
Accrued interest   12,216    12,246 
Operating lease liability   (85,736)    
Net Cash Used In Operating Activities   (13,572,866)   (9,530,469)
           
Cash Flows From Investing Activities          
   Purchase of property and equipment   (1,831)    
Net Cash Used in Investing Activities   (1,831)    
           
Cash Flows From Financing Activities:          
Proceeds from note payable – paycheck protection program   164,583     
Net proceeds from registered direct offerings   6,877,100    4,834,001 
Net proceeds from common stock warrant exercises   7,156,549    23,216 
Net Cash Provided By Financing Activities   14,198,232    4,857,217 
           
Net Change in Cash and Cash Equivalents   623,535    (4,673,252)
Cash and Cash Equivalents - Beginning of Period   7,893,804    9,184,003 
           
Cash and Cash Equivalents - End of Period  $8,517,339   $4,510,751 
           
Supplemental Disclosures Of Cash Flow Information and Non-cash Activities:          
Operating lease right-of-use asset and liability recorded upon adoption of ASC 842  $1,137,724   $ 

 

See notes to unaudited condensed consolidated financial statements.

  

4

 

 

CITIUS PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED JUNE 30, 2020 AND 2019

(Unaudited)

 

1. NATURE OF OPERATIONS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Business

 

Citius Pharmaceuticals, Inc. (“Citius,” the “Company,” “we” or “us”) is a specialty pharmaceutical company dedicated to the development and commercialization of critical care products targeting important medical needs with a focus on anti-infective products in adjunct cancer care and unique prescription products.

 

On March 30, 2016, Citius acquired Leonard-Meron Biosciences, Inc. (“LMB”) as a wholly-owned subsidiary. The Company acquired all of 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, as restated, for the excess of the purchase price over the net assets.

 

In-process research and development represents the value of LMB’s leading drug candidate, which is an antibiotic solution used to treat catheter-related bloodstream infections (Mino-Lok®) and is expected to be amortized on a straight-line basis over a period of eight years commencing upon revenue generation. Goodwill 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.

 

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 product candidates, market acceptance of its product candidates that might be approved, 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 and Summary of Significant Accounting Policies

 

Basis of Preparation — The accompanying condensed consolidated financial statements include the operations of Citius Pharmaceuticals, Inc., and its wholly-owned subsidiaries, Citius Pharmaceuticals, LLC, and LMB. All significant inter-company balances and transactions have been eliminated in consolidation.

 

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared on the same basis as the annual consolidated financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to fairly state the condensed consolidated financial position of the Company as of June 30, 2020, the results of its operations for the three- and nine-month periods ended June 30, 2020 and 2019, and cash flows for the nine months ended June 30, 2020 and 2019. The operating results for the three- and nine-month periods ended June 30, 2020 are not necessarily indicative of the results that may be expected for the year ending September 30, 2020. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended September 30, 2019 filed with the Securities and Exchange Commission.

 

Recently Adopted Accounting Standards

 

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842). ASU 2016-02 requires a lessee to record a right-of-use asset and a corresponding lease liability, initially measured at the present value of the lease payments, on the balance sheet for all leases with terms longer than 12 months, as well as the disclosure of key information about leasing arrangements. Leases will be classified as either finance leases or operating leases, with classification affecting the pattern of expense recognition in the statement of operations. In January, July and December 2018, the FASB issued ASU Nos. 2018-01, 2018-10, 2018-11 and 2018-20 and in 2019 issued ASU No. 2019-01, which were targeted improvements to ASU No. 2016-02 (collectively, with ASU No. 2016-02, “ASC 842”) and provided entities with an additional (and optional) transition method to adopt the new lease standard, and provided clarifications to address potential narrow-scope implementation issues. The Company adopted ASU 2016-02 effective October 1, 2019 and elected the optional transition method for adoption. The Company also took advantage of the transition package of practical expedients permitted within ASU 2016-02, which among other things, allowed it to carryforward historical lease classifications. The Company also elected to keep leases with an initial term of 12 months or less off of the balance sheet as a policy election and will recognize those lease payments in the consolidated statements of operations on a straight-line basis over the lease term. As of the adoption date, the Company identified one operating lease arrangement in which it is a lessee. The adoption of ASU 2016-02 resulted in the recognition of a right-of-use asset and lease liability of $1,137,724. 

 

5

 

 

In June 2018, the FASB issued ASU No. 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, which is intended to reduce cost and complexity and to improve financial reporting for nonemployee share-based payments. The amendment is effective for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. The Company adopted ASU 2018-07 on October 1, 2019 and it did not have a material effect on the Company’s financial position, results of operations or disclosures.

 

Recently Issued Accounting Standards

 

In December 2019, the FASB issued ASU No. 2019-12 Simplifications to Accounting for Income Taxes. ASU 2019-12 removes certain exceptions for recognizing deferred taxes for investments, performing intra-period allocation, and calculating income taxes in interim periods. The ASU also adds guidance to reduce complexity in certain areas, including deferred taxes for goodwill and allocating taxes for members of a consolidated group. ASU 2019-12 is effective for all entities for fiscal years beginning after December 15, 2020, and earlier adoption is permitted. The Company is currently evaluating the impact of adopting ASU 2019-12 on its consolidated financial statements.

 

Use of Estimates — Our accounting principles require our management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of assets and liabilities at the date of the financial statements, and reported amounts of revenues and expenses during the reporting period. Estimates having relatively higher significance include stock-based compensation, accounting for leases, valuation of warrants, and income taxes. Actual results could differ from those estimates and changes in estimates may occur.

 

Basic and Diluted Net Loss per Common Share — Basic and diluted net loss per common share is computed by dividing net loss 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 stock options and warrants were not included in the calculation of the diluted loss per share because they were anti-dilutive.

 

2. GOING CONCERN UNCERTAINTY AND MANAGEMENT’S PLAN

 

The accompanying condensed 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 $13,572,866 for the nine months ended June 30, 2020. 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. At June 30, 2020, the Company had working capital of $4,958,973 to fund its operations.  The Company estimates that its cash resources as of that date will be sufficient to fund its operations through January 2021. This raises substantial doubt about the Company’s ability to continue as a going concern.

 

The Company plans to raise capital through equity financings from outside investors as well as raise additional funds from existing investors and, to a lesser extent, continued borrowings under related party debt agreements. There is no assurance, however, that the Company will be successful in raising the needed capital and, if funding is available, that it will be available in amounts sufficient for and on terms acceptable to the Company. The accompanying condensed consolidated financial statements do not include any adjustments that might result from the outcome of the above uncertainty.

 

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 annual fee paid in June 2020 was $90,000 (at which level it will remain for as long as it is due). 

 

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 or, in the event the licensed product is not subject to a valid patent claim, the royalty is reduced to mid- to lower-single 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 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.

 

6

 

 

Unless earlier terminated by NAT, based on the failure by the Company to achieve certain development and commercial milestones or for various breaches by the Company, 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 (“FDA”). 

 

Under the license agreement, the Company paid a nonrefundable upfront payment of $125,000, which was recorded as research and development expense during the nine months ended June 30, 2019. During the nine months ended June 30, 2020, we paid an annual maintenance fee of $30,000. The annual maintenance fee 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. Unless earlier terminated by Licensor, based upon the failure by us to achieve certain development and commercial milestones or for various breaches by us, the agreement expires on the later of the expiration of the patents or January 2, 2034.

 

Option to License Novel Stem-Cell Therapy for Acute Respiratory Distress Syndrome (ARDS)

 

On March 31, 2020, we entered into an option agreement with a subsidiary of Novellus, Inc. (“Novellus”) whereby for the duration of the option agreement we will have the exclusive opportunity to in-license from Novellus on a worldwide basis, a novel cellular therapy for acute respiratory distress syndrome (ARDS). The option exercise period runs for six months, during which period, if and when we exercise the option, we and Novellus must negotiate a mutually acceptable definitive license agreement. The option agreement contains the agreed upon financial terms for the license. Novellus also agreed to allow us access to such records as we deem necessary for our due diligence to determine whether to exercise the option. 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, is a director and significant shareholder of Novellus. As required by our Code of Ethics, the Audit Committee of our Board of Directors considered the potential conflict of interest of Mr. Mazur in the transaction with Novellus and on March 31, 2020 approved the entry into the option agreement with Novellus, as did the disinterested members of our Board of Directors.

 

4. NOTES PAYABLE

 

Notes Payable – Related Parties

 

The aggregate principal balance as of June 30, 2020 consists 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 accrue interest at the prime rate plus 1.0% per annum and notes with an aggregate principal balance of $68,970 accrue interest at 12% per annum.

 

Interest expense on notes payable – related parties was $3,909 and $4,138, respectively, for the three months ended June 30, 2020 and 2019. Interest expense on notes payable – related parties was $11,880 and $12,246, respectively, for the nine months ended June 30, 2020 and 2019.

 

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 accrues 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 2 years from the date of the loan. On April 15, 2020, the Company received funding in the amount of $164,583 from the Paycheck Protection Program through its bank.

 

Interest expense for the PPP loan was $336 for the three and nine months ended June 30, 2020.

 

7

 

 

5. COMMON STOCK, STOCK OPTIONS AND WARRANTS

 

Registered Direct/Private Placement Offerings

 

On April 3, 2019, the Company closed a registered direct offering with several institutional and accredited investors for the sale of 3,430,421 shares of common stock at $1.545 per share for gross proceeds of $5,300,001. Simultaneously, the Company also privately sold and issued 3,430,421 immediately exercisable two-year unregistered warrants to the investors with an exercise price of $1.42 per share. The Company paid the placement agent for the offering a fee of 7% of the gross proceeds totaling $371,000 and issued the placement agent 240,130 immediately exercisable two-year warrants with an exercise price of $1.93125 per share. The Company also reimbursed the placement agent for $85,000 in expenses and incurred $10,000 in other expenses. Net proceeds from the offering were $4,834,001. The estimated fair value of the 3,430,421 warrants issued to the investors was $2,709,467 and the estimated fair value of the 240,130 warrants issued to the placement agent was $169,854.

 

On September 27, 2019, Citius closed an underwritten at-the-market offering of (i) 6,760,615 units, each unit consisting of one share of common stock and one immediately exercisable five-year warrant to purchase one share at $0.77 per share, and (ii) 1,060,615 pre-funded units, each pre-funded unit consisting of one pre-funded warrant to purchase one share and one immediately exercisable five-year warrant to purchase one share at $0.77 per share. The pre-funded warrants included in the pre-funded units are immediately exercisable at a price of $0.0001 per share and do not expire. The offering price was $0.8951 per unit and $0.895 per pre-funded unit. The net proceeds of the offering were $6,290,335. The Company issued the underwriter immediately exercisable five-year warrants to purchase up to 547,486 shares at $1.118875 per share with an estimated fair value of $323,414. The estimated fair value of the 1,060,615 pre-funded warrants was $809,145, and the estimated fair value of the 7,821,230 warrants included in the units and the pre-funded units issued to the investors was $4,845,341.

 

On May 18, 2020, the Company closed a registered direct offering with several institutional and accredited investors for the sale of 7,058,824 shares of common stock at $1.0625 per share for gross proceeds of $7,500,001. The Company also agreed to issue 3,529,412 unregistered immediately exercisable warrants to the investors with an exercise price of $1.00 per share and a term of five and one-half years. The Company paid the placement agent for the offering a fee of 7% of the gross proceeds totaling $525,000 and issued the placement agent 494,118 immediately exercisable warrants with an exercise price of $1.3281 per share and a term of five years. The Company also reimbursed the placement agent for $85,000 in expenses and incurred $12,901 in other expenses. Net proceeds from the offering were $6,877,100. The estimated fair value of the 3,529,412 warrants issued to the investors was $2,138,998 and the estimated fair value of the 494,118 warrants issued to the placement agent was $275,724.

 

Common Stock Issued for Services

 

On February 13, 2019, the Company issued 125,000 shares of common stock for investor relations services and expensed the $117,500 fair value of the common stock issued.

 

On September 16, 2019, the Company issued 94,097 shares of common stock for investor relations services and expensed the $94,097 fair value of the common stock issued.

 

On November 4, 2019, the Company issued 186,566 shares of common stock for strategic consulting and corporate development services and expensed the $100,000 fair value of the common stock issued.

 

On February 10, 2020, the Company issued 150,000 shares of common stock for investor relations services and 136,000 shares of common stock for general advisory and business development advisory services. The Company expensed the $306,020 fair value of the common stock issued.

 

On April 6, 2020, the Company issued 50,000 shares of common stock for strategic consulting and corporate development services and expensed the $22,750 fair value of the common stock issued.

 

8

 

 

Stock Option Plans

 

Pursuant to its 2014 Stock Incentive Plan (the “2014 Plan”) the Company reserved 866,667 shares of common stock for issuance to employees, directors and consultants. The Board of Directors (or committees and/or executive officers delegated by the Board of Directors) may grant stock options, stock appreciation rights, restricted stock, restricted stock units, other stock-based awards and cash-based awards under the 2014 Plan. As of June 30, 2020, there were options to purchase an aggregate of 855,171 shares of common stock outstanding under the 2014 Plan, options to purchase 4,829 shares were exercised, options to purchase 6,667 shares expired, and no shares remain available for future grants.

 

On February 7, 2018, our stockholders approved the 2018 Omnibus Stock Incentive Plan (the “2018 Plan”) and the Company reserved 2,000,000 shares of common stock for issuance to employees, directors and consultants. Pursuant to the 2018 Plan, the Board of Directors (or committees and/or executive officers delegated by the Board of Directors) may grant stock options, stock appreciation rights, restricted stock, restricted stock units, other stock-based awards and cash-based awards. As of June 30, 2020, there were options to purchase an aggregate of 1,890,000 shares of common stock outstanding under the 2018 Plan and no shares available for future grants.

 

On February 10, 2020, the Company’s stockholders approved the 2020 Omnibus Stock Incentive Plan (“2020 Stock Plan”). The 2020 Stock Plan authorizes a maximum of 3,110,000 shares. The 2020 Stock Plan provides incentives to employees, directors, and consultants of the Company in form of granting an option, SAR, dividend equivalent right, restricted stock, restricted stock unit, or other right or benefit under the 2020 Stock Plan. As of June 30, 2020, there were options to purchase 20,000 shares outstanding under the 2020 Plan and 3,090,000 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. 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, 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. 

 

A summary of option activity under the Company’s stock option plans is presented below:

 

   Option
Shares
   Weighted-
Average
Exercise
Price
   Weighted-
Average
Remaining
Contractual
Term
  Aggregate
Intrinsic
Value
 
Outstanding at October 1, 2019   1,771,039   $4.03         
Granted   1,000,799    0.68         
Exercised                
Forfeited or expired   (6,667)   9.00         
Outstanding at June 30, 2020   2,765,171   $2.80   7.9 years  $547,433 
Exercisable at June 30, 2020   1,293,260   $4.90   6.6 years  $83,540 

 

On October 8, 2019, the Board of Directors granted stock options to purchase a total of 705,799 shares to employees, 125,000 shares to directors and 125,000 shares to consultants at $0.67 per share. On October 28, 2019, the Board of Directors granted stock options to purchase a total of 25,000 shares to a consultant at $0.55 per share. On May 12, 2020, the Board of Directors granted stock options to purchase a total of 20,000 shares to a consultant at $1.05 per share. All of these options vest over terms of 12 to 36 months and have a term of 10 years.

 

Stock-based compensation expense for the nine months ended June 30, 2020 and 2019 was $554,228 and $578,946, respectively.

 

At June 30, 2020, unrecognized total compensation cost related to unvested awards of $765,775 is expected to be recognized over a weighted average period of 1.6 years.

 

9

 

 

Warrants

 

As of June 30, 2020, the Company has reserved shares of common stock for the exercise of outstanding warrants. The following table summarizes the warrants outstanding:

 

   Exercise
price
   Number   Expiration Dates
Investor Warrants  $9.00    59,446   July 2, 2020 – September 14, 2020
Investor Warrants   9.00    307,778   November 5, 2020 – April 25, 2021
LMB Warrants   6.15    38,771   November 20, 2020 – March 2, 2021
LMB Warrants   7.50    73,883   August 18, 2020 – March 14, 2021
LMB Warrants   7.50    53,110   March 24, 2022 – April 29, 2022
Financial Advisor Warrants   3.00    25,833   August 15, 2021
2016 Offering Warrants   4.13    140,819   November 23, 2021 – February 27, 2022
2017 Public Offering Warrants   4.13    1,622,989   August 2, 2022
2017 Public Offering Underwriter Warrants   4.54    65,940   February 2, 2023
December 2017 Registered Direct/Private Placement Offering Investor Warrants   4.63    640,180   June 19, 2023
December 2017 Registered Direct/Private Placement Offering Placement Agent Warrants   5.87    89,625   December 19, 2022
March 2018 Registered Direct/Private Placement Offering Investor Warrants   2.86    218,972   October 2, 2023
March 2018 Registered Direct/Private Placement Offering Placement Agent Warrants   3.73    46,866   March 28, 2023
August 2018 Offering Investor Warrants   1.15    7,843,138   August 14, 2023
August 2018 Offering Agent Warrants   1.59    549,020   August 8, 2023
April 2019 Registered Direct/Private Placement Offering Investor Warrants   1.42    1,294,498   April 5, 2021
April 2019 Registered Direct/Private Placement Offering Placement Agent Warrants   1.93    240,130   April 5, 2021
September 2019 Offering Investor Warrants   0.77    2,793,297   September 27, 2024
September 2019 Offering Underwriter Warrants   1.12    547,486   September 27, 2024
February 2020 Exercise Agreement Warrants   1.02    6,298,673   August 19, 2025
February 2020 Exercise Agreement Placement Agent Warrants   1.28    440,907   August 19, 2025
May 2020 Registered Direct Offering Investor Warrants   1.00    2,400,000   November 18, 2025
May 2020 Registered Direct Offering Placement Agent Warrants   1.33    494,118   May 14, 2025
         26,285,479    

 

10

 

 

During the nine months ended June 30, 2019, 2,321,569 August 2018 Offering Pre-Funded Unit Warrants were exercised at $0.01 per share for net proceeds of $23,216.

 

In December 2019, 1,060,615 of the September 2019 Offering Pre-Funded Unit Warrants were exercised at $0.0001 per share for net proceeds of $106.

 

In January 2020, 1,315,715 of the September 2019 Offering Investor Warrants were exercised at $0.77 per share for net proceeds of $1,013,101.

 

On February 14, 2020, the Company entered into a warrant exercise agreement for an aggregate of 3,712,218 shares of common stock having an existing exercise price of $0.77 and 2,586,455 shares of common stock at a reduced exercise price of $1.02. In consideration for the exercise of the warrants for cash, the exercising holders received new unregistered warrants to purchase 6,298,673 shares of common stock at an exercise price of $1.02 per share, exercisable six months after issuance and which have a term of exercise equal to five years. The offering closed on February 19, 2020 and net proceeds were $5,013,930 after placement agent fees and offering expenses. The Company also issued warrants to purchase 440,907 shares to the placement agent. The placement agent warrants have identical terms to the investor warrants except that the exercise price is $1.275 per share. The estimated fair value of the 6,298,673 warrants issued to the investors was $5,360,465 and the estimated fair value of the 440,907 warrants issued to the placement agent was $367,022.

 

On June 26, 2020, 1,129,412 of the May 2020 Registered Direct Offering Investor Warrants were exercised at $1.00 per share for net proceeds of $1,129,412.

 

At June 30, 2020, the weighted average remaining life of the outstanding warrants is 3.75 years, all warrants are exercisable except for the February 2020 warrants, and the aggregate intrinsic value of the warrants outstanding was $2,016,532. 

 

Common Stock Reserved 

 

A summary of common stock reserved for future issuances as of June 30, 2020 is as follows:

 

Stock plan options outstanding   2,765,171 
Stock plan shares available for future grants   3,090,000 
Warrants outstanding   26,285,479 
Total   32,140,650 

  

11

 

 

6. RELATED PARTY TRANSACTIONS

 

Our Chairman of the Board, Leonard Mazur, was the cofounder and Vice Chairman of Akrimax Pharmaceuticals, LLC (“Akrimax”), a privately held pharmaceutical company specializing in producing cardiovascular and general pharmaceutical products. The Company leased office space from Akrimax through April 30, 2019 (see Note 7).

 

The Company has outstanding debt due to Leonard Mazur (Chairman of the Board) and Myron Holubiak (Chief Executive Officer) (see Note 4).

 

In connection with the April 2019 registered direct/private placement offering (See Note 5), Mr. Mazur purchased 1,165,048 shares of common stock at $1.545 per share and received 1,165,048 warrants with an exercise price of $1.42 per share, and Mr. Holubiak purchased 129,450 shares of common stock at $1.545 per share and received 129,450 warrants with an exercise price of $1.42 per share. The purchases were made on the same terms as for all other investors.

 

In connection with the September 2019 offering (See Note 5), Mr. Mazur purchased 2,234,700 shares of common stock at $0.8951 per share and received 2,234,700 warrants exercisable at $0.77 per share, and Mr. Holubiak purchased 558,597 shares of common stock at $0.8951 per share and received 558,597 warrants exercisable at $0.77 per share. The purchases were made on the same terms as for all other investors.

 

Leonard Mazur is a director and significant shareholder of Novellus, Inc. On March 31, 2020, we entered into an option agreement with a subsidiary of Novellus (See Note 3). 

 

7. OPERATING LEASE

 

LMB leased office space from Akrimax (see Note 6) in Cranford, New Jersey at a monthly rental rate of $2,167 pursuant to an agreement which expired on April 30, 2019. Rent expense for the nine months ended June 30, 2019 was $56,063.

 

Effective July 1, 2019, Citius entered into a 76-month lease for office space in Cranford, NJ.

 

Citius will also pay its proportionate share of real estate taxes and operating expenses in excess of the base year expenses. These costs are considered to be 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 current 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  Nine Months
Ended
June 30,
2020
 
Operating lease cost  $167,725 
Variable lease cost    
Total lease cost  $167,725 
      
Other information     
Weighted-average remaining lease term - operating leases   5.3 Years 
Weighted-average discount rate - operating leases   8.0 

 

12

 

 

Maturities of lease liabilities due under the Company’s non-cancellable leases as of June 30, 2020 is as follows:

 

Year Ending September 30,  June 30,
2020
 
2020 (excluding the 9 months ended June 30, 2020)  $58,308 
2021   234,447 
2022   239,306 
2023   244,165 
2024   249,024 
Thereafter   275,343 
Total lease payments   1,300,593 
Less: interest   (248,605)
Present value of lease liabilities  $1,051,988 

 

Leases  Classification  June 30,
2020
 
Assets       
Lease asset  Operating  $1,025,119 
Total lease assets     $1,025,119 
         
Liabilities        
Current  Operating  $154,663 
Non-current  Operating   897,325 
Total lease liabilities     $1,051,988 

 

Interest expense on the lease liability was $66,512 for the nine months ended June 30, 2020.

 

8. FDA REFUND

 

In November 2019, the Company received an additional $110,207 refund from the FDA for 2016 product and establishment fees because the fees paid by the Company exceeded the costs of the FDA’s review of the associated applications. The Company recorded the $110,207 as other income during the nine months ended June 30, 2020.

 

13

 

 

9. RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS

Our Consolidated Balance Sheet as of September 30, 2019 and our beginning balances in the Condensed Consolidated Statements of Changes in Stockholders’ Equity for the nine months ended June 30, 2020 and 2019, have been restated for errors made with regard to deferred tax liability, goodwill and accumulated deficit as further described below.

We determined that a deferred tax liability should have been recorded in the amount of $7,760,000 related to recording of the in-process research and development, in connection with the acquisition of LMB in March 2016 (see Note 1), which would have resulted in additional goodwill being recorded in the same amount of $7,760,000. Had the deferred tax liability been recorded upon acquisition of LMB, in 2018 we would have also recognized an income tax benefit of $2,774,200 as a result of the Tax Cuts and Jobs Act enacted into law on December 21, 2017 lowering the U.S. corporate tax rate from 35% to 21%.

Below indicates the impact of restatements at September 30, 2019:

   As of Year Ended September 30, 2019 
   As Previously Recorded   Adjustment   As Restated 
ASSETS            
Goodwill  $1,586,796   $7,760,000   $9,346,796 
Total Assets  $28,986,394   $7,760,000   $36,746,394 
                
LIABILITIES AND STOCKHOLDERS’ EQUITY               
Deferred Tax Liability  $-     $4,985,000   $4,985,000 
Total Liabilities  $-     $4,985,000   $4,985,000 
                
Stockholders’ Equity:               
Accumulated deficit  $(55,819,982)  $2,774,200   $(53,045,782)
Total Stockholders’ Equity  $24,378,672   $2,774,200   $27,152,872 
Total Liabilities and Stockholders’ Equity  $28,986,394   $7,760,000   $36,746,394 

 

 

14

 

 

10. SUBSEQUENT EVENTS

 

Nasdaq Listing

 

On April 1, 2020, Citius received notice from The Nasdaq Stock Market, (“Nasdaq”), indicating that, because the closing bid price for the common stock has fallen below $1.00 per share for 30 consecutive business days, the Company no longer complied with the $1.00 minimum bid price requirement for continued listing. On July 10, 2020, the Company received notice from Nasdaq that the Company had regained compliance because the Company’s common stock had closed at a price greater than $1.00 for the 10 consecutive trading days between June 25 and July 9, 2020. As a result, Nasdaq has closed the matter.

 

Employment Agreement

 

On July 13, 2020, Citius entered into an employment agreement with Myron Czuczman, M.D. In exchange for his services as Executive Vice President, Chief Medical Officer, Dr. Czuczman will receive an annual base salary of $400,000 and be eligible for an annual bonus of up to 35% of his base salary at the discretion of our Chief Executive Officer and Board of Directors. Dr. Czuczman will also be entitled to severance benefits under certain conditions.

 

Dr. Czuczman was granted an option to purchase 500,000 shares of common stock under the 2020 Omnibus Stock Incentive Plan. The exercise price of the options is $1.19, which was the fair market value of the common stock on the date of grant. One-third of the options will vest on the first anniversary of the employment agreement and the remainder will vest in 24 equal monthly installments thereafter, subject to continued employment on the applicable vesting dates.

 

Public Offering

 

On August 10, 2020, Citius closed a public offering of 9,159,524 shares of common stock at a price of $1.05 per share, less underwriting discounts and commissions. The gross proceeds to Citius, before deducting offering expenses, was approximately $9.6 million. The Company intends to use the net proceeds from this offering for general corporate purposes, including its Phase 3 clinical Mino-Lok® trial for the treatment of catheter related bloodstream infections, development of Mino-Wrap, its Phase 2b trial of Halo-Lido cream for the treatment of hemorrhoids, its other product development initiatives and working capital and capital expenditures.

 

The shares of common stock were offered by the Company pursuant to a “shelf” registration statement on Form S-3 (File No. 333-221492) originally filed with the Securities and Exchange Commission (the “SEC”) on November 9, 2017, and declared effective by the SEC on December 15, 2017.

 

The Company also issued to the underwriter of the offering and its designees, as underwriting compensation, warrants to purchase up to an aggregate of 641,166 shares of common stock, which represents 7% of the aggregate number of shares sold in the offering. The exercise price of these warrants is $1.3125 per share and they are exercisable for five years until August 5, 2025. These warrants and the shares issuable upon their exercise were issued as a private placement exempt from registration under the federal securities laws.

 

15

 

  

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 months ended June 30, 2020 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, 2019. 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.”

  

Historical Background

 

Citius Pharmaceuticals, Inc. (“Citius,” the “Company,” “we” or “us”) is a specialty pharmaceutical company dedicated to the development and commercialization of critical care products targeting important medical needs with a focus on anti-infective products in adjunct cancer care and unique prescription products. On September 12, 2014, we acquired Citius Pharmaceuticals, LLC as a wholly-owned subsidiary and on March 30, 2016, we acquired Leonard-Meron Biosciences, Inc. (“LMB”) as a wholly-owned subsidiary.

 

In-process research and development represents the value of LMB’s leading drug candidate, Mino-Lok®, which is an antibiotic solution used to treat catheter-related bloodstream infections.  Goodwill represents the value of LMB’s industry relationships and its assembled workforce. In-process research and development is expected to be amortized on a straight-line basis over a period of eight years commencing upon revenue generation. Goodwill will not be amortized, but will be tested at least annually for impairment.

 

Through June 30, 2020, the Company has devoted substantially all of its efforts to business planning, acquiring our proprietary technology, research and development, recruiting management and technical staff, and raising capital. We are developing three proprietary products: Mino-Lok, an antibiotic lock solution used to treat patients with catheter-related bloodstream infections by salvaging the infected catheter; Mino-Wrap, a liquifying gel-based wrap for reducting tissue expander infections following breast reconstructive surgeries; and Halo-Lido, a corticosteroid-lidocaine topical formulation that is intended to provide anti-inflammatory and anesthetic relief to persons suffering from hemorrhoids. On March 31, 2020, we entered into an option agreement with a subsidiary of Novellus, Inc. for a novel cellular therapy for acute respiratory distress syndrome (ARDS). We believe these unique markets for our proposed products are large, growing, and underserved by the current prescription products or procedures.

 

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 commence. 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 or, in the event the licensed product is not subject to a valid patent claim, the royalty is reduced to mid- to lower-single digits. In limited circumstances in which the licensed product is not subject to a valid patent claim and a competitor is selling a competing product, the royalty rate is in the low single digits. After a commercial sale is obtained, LMB must pay minimum aggregate annual royalties that increase in subsequent years. LMB must also pay NAT up to $1,100,000 upon achieving specified regulatory and sales milestones. Finally, LMB must pay NAT a specified percentage of payments received from any sub licensees.

 

Mino-Wrap - On January 2, 2019, we entered into a patent and technology license agreement with the Board of Regents of the University of Texas System on behalf of the University of Texas M. D. Anderson Cancer Center (“Licensor”), whereby we in-licensed exclusive worldwide rights to the patented technology for any and all uses relating to breast implants.  We intend to develop a liquefying gel-based wrap containing minocycline and rifampin for the reduction of infections associated with breast implants following breast reconstructive surgeries (“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 Food and Drug Administration (“FDA”). 

  

Under the license agreement, the Company paid a nonrefundable upfront payment of $125,000. We paid an annual maintenance fee of $30,000 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. 

 

16

 

 

RESULTS OF OPERATIONS

 

Three months ended June 30, 2020 compared with the three months ended June 30, 2019

 

   Three Months
Ended
June 30,
2020
   Three Months
Ended
June 30,
2019
 
Revenues  $   $ 
           
Operating expenses:          
Research and development   2,644,244    2,766,260 
General and administrative   1,869,636    1,456,451 
Stock-based compensation expense   175,011    204,002 
Total operating expenses   4,688,891    4,426,713 
Operating loss   (4,688,891)   (4,426,713)
Interest income   13,018    25,268 
Interest expense   (4,245)   (4,138)
Net loss  $(4,680,118)  $(4,405,583)

 

Revenues

 

We did not generate any revenues for the three months ended June 30, 2020 or 2019.

 

Research and Development Expenses

 

For the three months ended June 30, 2020, research and development expenses were $2,644,244 as compared to $2,766,260 during the three months ended June 30, 2019, a decrease of $122,016. Research and development costs for Mino-Lok® decreased by $881,515 to $1,489,285 for the three months ended June 30, 2020 as compared to $2,370,800 for the three months ended June 30, 2019. Research and development costs for our Halo-Lido product candidate decreased by $27,147 to $368,313 for the three months ended June 30, 2020 as compared to $395,460 for the three months ended June 30, 2019. Research and development costs for our Mino-Wrap product candidate increased to $22,216 for the three months ended June 30, 2020 as compared to no costs during the three months ended June 30, 2019. During the three months ended June 30, 2020, research and development costs for our new proposed novel cellular therapy for acute respiratory distress syndrome (ARDS) were $764,430.

 

We expect that research and development expenses will continue to increase in fiscal 2020 as we continue to focus on our Phase 3 trial for Mino-Lok®, progress the Halo-Lido product candidate and commence our research and development efforts related to ARDS and Mino-Wrap. We are actively seeking to raise additional capital in order to fund our research and development efforts.

 

On December 19, 2019, the Company announced a positive outcome of the pre-specified interim futility analysis for the Phase 3 clinical trial of Mino-Lok® versus the standard-of-care antibiotic locks. The analysis was conducted by the Mino-Lok trial Data Monitoring Committee (“DMC”), an independent panel of experts charged with periodically monitoring the safety and efficacy of the progress of the pivotal trial. The Company reached and completed the prespecified 40% enrollment required for the interim futility analysis in late September and, based on the analysis of the data and recommendations of the DMC, will proceed with the current trial as planned. The DMC is expected to meet again prior to September 30, 2020 to perform a second interim analysis.

  

General and Administrative Expenses

 

For the three months ended June 30, 2020, general and administrative expenses were $1,869,636 as compared to $1,456,451 during the three months ended June 30, 2019. General and administrative expenses increased by $413,185 in comparison with the prior period. General and administrative expenses consist primarily of compensation costs, consulting fees incurred for financing activities and corporate development services, and investor relations expenses. During the three months ended June 30, 2020, the Company incurred $347,315 in increased expenses for investor relations services compared to the three months ended June 30, 2019.

 

17

 

 

Stock-based Compensation Expense

 

For the three months ended June 30, 2020, stock-based compensation expense was $175,011 as compared to $204,002 for the three months ended June 30, 2019. Stock-based compensation expense includes options granted to directors, employees and consultants. Stock-based compensation expense for the most recently completed quarter decreased by $28,991 in comparison to the prior period.

 

Other Income (Expense)

 

Interest income for the three months ended June 30, 2020 was $13,018 as compared to interest income of $25,268 for the prior period. We have invested some of the proceeds of our recent equity offerings in money market accounts. Interest income has decreased as interest rates have declined.

 

Interest expense on notes payable for the three months ended June 30, 2020 was $4,245 compared to $4,138 for the three months ended June 30, 2019. The three months ended June 30, 2020 includes $336 in interest on the paycheck protection program loan received on April 15, 2020.

 

Net Loss

 

For the three months ended June 30, 2020, we incurred a net loss of $4,680,118 compared to a net loss for the three months ended June 30, 2019 of $4,405,583. The $274,535 increase in the net loss was primarily due to the increase of $413,185 in general and administrative expenses.

   

Nine months ended June 30, 2020 compared with the nine months ended June 30, 2019

 

   Nine Months Ended
June 30,
2020
   Nine Months Ended
June 30,
2019
 
Revenues  $   $ 
           
Operating expenses:          
Research and development   7,324,730    6,579,237 
General and administrative   5,690,953    4,782,972 
Stock-based compensation expense   554,228    578,946 
Total operating expenses   13,569,911    11,941,155 
Operating loss   (13,569,911)   (11,941,155)
Other income   110,207     
Interest income   44,463    41,159 
Interest expense   (12,216)   (12,246)
Net loss  $(13,427,457)  $(11,912,242)

 

Revenues

 

We did not generate any revenues for the nine months ended June 30, 2020 or 2019.

 

Research and Development Expenses

 

For the nine months ended June 30, 2020, research and development expenses were $7,324,730 as compared to $6,579,237 during the nine months ended June 30, 2019, an increase of $745,493. Research and development costs for Mino-Lok® decreased by $371,508 to $5,200,607 for the nine months ended June 30, 2020 as compared to $5,572,115 for the nine months ended June 30, 2019. Research and development costs for our Halo-Lido product candidate increased by $366,238 to $1,248,360 for the nine months ended June 30, 2020 as compared to $882,122 for the nine months ended June 30, 2019. Research and development costs for our Mino-Wrap product candidate decreased by $13,667 to $111,333 for the nine months ended June 30, 2020 as compared to $125,000 during the nine months ended June 30, 2019.

 

We expect that research and development expenses will continue to increase in fiscal 2020 as we continue to focus on our Phase 3 trial for Mino-Lok®, progress the Halo-Lido product candidate and commence our research and development efforts related to ARDS and Mino-Wrap. We are actively seeking to raise additional capital in order to fund our research and development efforts. 

 

18

 

  

General and Administrative Expenses

 

For the nine months ended June 30, 2020, general and administrative expenses were $5,690,953 as compared to $4,782,972 during the nine months ended June 30, 2019. General and administrative expenses increased by $907,981 in comparison with the prior period. General and administrative expenses consist primarily of compensation costs, consulting fees incurred for financing activities and corporate development services, and investor relations expenses. During the nine months ended June 30, 2020, the Company issued $428,770 in common stock for investor relations and other consulting services, and incurred additional legal and business advisory expenses.

 

Stock-based Compensation Expense

 

For the nine months ended June 30, 2020, stock-based compensation expense was $554,228 as compared to $578,946 for the nine months ended June 30, 2019. Stock-based compensation expense includes options granted to directors, employees and consultants.

 

Other Income (Expense)

 

In November 2019, we received an additional $110,207 refund from the FDA for 2016 product and establishment fees because the fees paid by the Company exceeded the costs of the FDA’s review of the associated applications. The Company recorded the $110,207 as other income during the nine months ended June 30, 2020.

 

Interest income for the nine months ended June 30, 2020 was $44,463 compared to interest income of $41,159 for the prior period. We have invested some of the proceeds of our recent equity offerings in money market accounts and the interest is dependent on the amounts invested and the rates paid during any given period.

  

Interest expense on notes payable for the nine months ended June 30, 2020 was $12,216 compared to $12,246 for the nine months ended June 30, 2019.

 

Net Loss

 

For the nine months ended June 30, 2020, we incurred a net loss of $13,427,457 compared to a net loss for the nine months ended June 30, 2019 of $11,912,242. The $1,515,215 increase in the net loss was primarily due to the increase of $745,493 in research and development expenses and the increase of $907,981 in general and administrative expenses.

 

LIQUIDITY AND CAPITAL RESOURCES

 

Going Concern Uncertainty and Working Capital

 

Citius has incurred operating losses since inception and incurred a net loss of $13,427,457 for the nine months ended June 30, 2020. At June 30, 2020, Citius had an accumulated deficit of $66,473,239. Citius’ net cash used in operations during the nine months ended June 30, 2020 was $13,572,866.

 

Our September 30, 2019 consolidated financial statements contains an emphasis of a matter regarding substantial doubt about our ability to continue as a going concern and that the consolidated financial statements have been prepared assuming we will continue as a going concern and do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets, or the amounts and classification of liabilities that may result if we do not continue as a going concern.

 

As of June 30, 2020, Citius had working capital of $4,958,973. Our limited working capital is attributable to the operating losses incurred by the Company since inception offset by our capital raising activities. At June 30, 2020, Citius had cash and cash equivalents of $8,517,339 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.

 

In January 2020, investors who participated in the September 2019 Offering exercised 1,315,715 warrants to purchase 1,315,715 shares of common stock. The exercise price of each warrant was $0.77 per share resulting in net proceeds of $1,013,101 to the Company.

 

On February 14, 2020, the Company entered into a warrant exercise agreement for an aggregate of 3,712,218 shares of common stock having an existing exercise price of $0.77 and 2,586,455 shares of common stock at a reduced exercise price of $1.02. The offering closed on February 19, 2020 and net proceeds were $5,013,930 after placement agent fees and offering expenses.

 

19

 

 

On May 18, 2020, the Company closed a registered direct offering with several institutional and accredited investors for the sale of 7,058,824 shares of common stock at $1.0625 per share for gross proceeds of $7,500,001. The Company also agreed to issue 3,529,412 unregistered immediately exercisable warrants to the investors with an exercise price of $1.00 per share and a term of five and one-half years. Net proceeds from the offering were $6,877,100.

 

On June 26, 2020, 1,129,412 of the May 2020 Registered Direct Offering Investor Warrants were exercised at $1.00 per share for net proceeds of $1,129,412.

 

Based on our cash and cash equivalents at June 30, 2020, we expect that we will have sufficient funds to continue our operations through January 2021. We plan to raise additional capital in the future to support our operations. 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.

 

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, 2019 as filed with the SEC.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

Not applicable.

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures designed to provide reasonable assurance that information required to be disclosed in reports filed under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the specified time periods and accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding disclosure.

 

Our Chief Executive Officer (who is our principal executive officer) and Chief Financial Officer (who is our principal financial officer and principal accounting officer), evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Exchange Act) as of June 30, 2020. In designing and evaluating disclosure controls and procedures, we recognize that any disclosure controls and procedures, no matter how well designed and operated, can only provide reasonable assurance of achieving the desired control objective. As of June 30, 2020, based on the evaluation of these disclosure controls and procedures, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective in ensuring that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

 

Changes In Internal Control Over Financial Reporting

 

There were no changes in our internal control over financial reporting during the quarter ended June 30, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

20

 

 

PART II - OTHER INFORMATION

 

Item 1. Legal Proceedings

 

None.

 

 Item 1A. Risk Factors

 

There has been no change in the Company’s risk factors since the Company’s Form 10-Q filed with the SEC on May 14, 2020.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

None.

 

Item 3. Defaults Upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

None.

 

Item 6. Exhibits

 

4.1   Form of Investor Warrant issued May 18, 2020 (incorporated herein by reference to Exhibit 4.1 to the Current Report on Form 8-K filed on May 18, 2020).
4.2   Form of Placement Agent Warrant issued May 18, 2020 (incorporated herein by reference to Exhibit 4.2 to the Current Report on Form 8-K filed on May 18, 2020).
10.1   Form of Securities Purchase Agreement, dated May 14, 2020, by and between Citius Pharmaceuticals, Inc. and the purchasers signatory thereto (incorporated herein by reference to Exhibit 10.1 to the Current Report on Form 8-K filed on May 18, 2020).
10.2   Engagement letter, dated February 14, 2020, between Citius Pharmaceuticals, Inc. and H. C. Wainwright & Co., LLC (incorporated herein by reference to Exhibit 10.2 to the Current Report on Form 8-K filed on May 18, 2020).
10.3   Employment Agreement, effective as of July 14, 2020, between Citius Pharmaceuticals, Inc. and Myron Czuczman.*
31.1   Certification of the Principal Executive Officer pursuant to Exchange Act Rule 13a-14(a).*
31.2   Certification of the Principal Financial Officer pursuant to Exchange Act Rule 13a-14(a).*
32.1   Certification of the Principal Executive and Principal Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002.*
EX-101.INS   XBRL INSTANCE DOCUMENT*
EX-101.SCH   XBRL TAXONOMY EXTENSION SCHEMA DOCUMENT*
EX-101.CAL   XBRL TAXONOMY EXTENSION CALCULATION LINKBASE*
EX-101.DEF   XBRL TAXONOMY EXTENSION DEFINITION LINKBASE*
EX-101.LAB   XBRL TAXONOMY EXTENSION LABELS LINKBASE*
EX-101.PRE   XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE*

 

*Filed herewith.

 

21

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  CITIUS PHARMACEUTICALS, INC.
     
Date: August 14, 2020 By: /s/ Myron Holubiak
    Myron Holubiak
    Chief Executive Officer
(Principal Executive Officer)
     
Date: August 14, 2020 By: /s/ Jaime Bartushak
    Jaime Bartushak
    Chief Financial Officer
(Principal Financial and Accounting Officer)

 

 

22