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 $9,530,469 for the nine months ended June 30, 2019. 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, 2019, the
Company had limited capital to fund its operations. 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 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 2019 was $90,000 (at which
level it will remain for as long as it is due) and the annual fee paid in June 2018 was $75,000.
LMB
will also pay annual royalties on net sales of licensed products, with royalties ranging from the mid-single digits to the low
double digits. In limited circumstances in which the licensed product is not subject to a valid patent claim and a competitor
is selling a competing product, the royalty rate is in the low single digits. After a commercial sale is obtained, LMB must pay
minimum aggregate annual royalties 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 $1,390,000 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.
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. We are obligated to pay an annual maintenance fee of $30,000, commencing in
January 2020, that increases annually by $15,000 per year up to a maximum of $90,000. Annual maintenance fees cease on the first
sale of product. We also must pay up to an aggregate of $2.1 million in milestone payments, contingent on the achievement of various
regulatory and commercial milestones. Under the terms of the license agreement, we also must pay a royalty of mid- to upper-single
digit percentages of net sales, depending on the amount of annual sales, and subject to downward adjustment to lower- to mid-single
digit percentages in the event there is no valid patent for the product in the United States at the time of sale. After the first
sale of product, we will owe an annual minimum royalty payment of $100,000 that will increase annually by $25,000 for the duration
of the term. We will be responsible for all patent expenses incurred by Licensor for the term of the agreement although
Licensor is responsible for filing, prosecution and maintenance of all patents. The agreement expires on the later of the expiration
of the patents or January 2, 2034.
4.
NOTES PAYABLE – RELATED PARTIES
The
aggregate principal balance as of June 30, 2019 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 $4,138 and $3,900, respectively, for the three months ended June 30, 2019
and 2018. Interest expense on notes payable – related parties was $12,246 and $11,797, respectively, for the nine months
ended June 30, 2019 and 2018.
5.
COMMON STOCK, STOCK OPTIONS AND WARRANTS
2017
Public Offering and Release Agreement
On
November 7, 2017, the Company entered into a release agreement with the underwriter of the public offering that closed in August
2017. The Company had previously granted a right of first refusal to underwrite all equity and debt offerings for a period of
twelve months following completion of the August 2017 public offering (“Right of First Refusal”). Under the release,
the Company agreed to pay the underwriter $100,000 in cash and issue 60,000 shares of restricted common stock with a fair value
of $257,400 in exchange for a full release from all obligations related to the Right of First Refusal. The Company expensed the
$357,400 cost of the release agreement in November 2017.
Registered
Direct/Private Placement Offerings
On
December 19, 2017, the Company closed a registered direct offering with several institutional and accredited investors for the
sale of 1,280,360 shares of common stock at $4.6925 per share for gross proceeds of $6,008,089. Simultaneously, the Company privately
sold and issued to the investors 640,180 immediately exercisable five and a half year warrants with an exercise price of $4.63
per share. The Company paid the placement agent for the offering a fee of 7% of the gross proceeds totaling $420,566 and issued
the placement agent 89,625 immediately exercisable five-year warrants with an exercise price of $5.8656 per share. The Company
also reimbursed the placement agent for $85,000 in expenses and incurred $20,000 in other expenses. Net proceeds from the offering
were $5,482,523. The estimated fair value of the 640,180 warrants issued to the investors was $2,407,276 and the estimated fair
value of the 89,625 warrants issued to the placement agent was $316,071.
On
March 29, 2018, the Company closed a registered direct offering with an institutional and an accredited investor for the sale
of 669,504 shares of common stock at $2.985 per share for gross proceeds of $1,998,469. Simultaneously, the Company privately
sold and issued to investors 669,504 immediately exercisable five and a half year warrants with an exercise price of $2.86 per
share. The Company paid the placement agent for the offering a fee of 7% of the gross proceeds totaling $139,893 and issued the
placement agent 46,866 immediately exercisable five-year warrants with an exercise price of $3.73125 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 $1,763,576. The estimated fair value of the 669,504 warrants issued to the investors was $1,679,482 and the estimated fair
value of the 46,866 warrants issued to the placement agent was $110,511.
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.
August
2018 Offering
On
August 13, 2018, Citius closed an underwritten offering of (i) 5,521,569 units, each unit consisting of one share of common stock
and one immediately exercisable five-year warrant to purchase one share with an exercise price of $1.15 per share, and (ii) 2,321,569
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 with an exercise price of $1.15 per share. The pre-funded warrants included in the pre-funded
units are immediately exercisable at a price of $0.01 per share and do not expire. The offering price was $1.275 per unit and
$1.265 per pre-funded unit. The net proceeds of the offering were $8,926,786. The Company issued underwriter warrants to purchase
up to 549,020 shares with an exercise price of $1.59375 per share with an estimated fair value of $491,737. The underwriter warrants
are exercisable following February 8, 2019 and expire on August 8, 2023. The estimated fair value of the 2,321,569 pre-funded
warrants was $2,630,072, and the estimated fair value of the 7,843,138 warrants included in the units and the pre-funded units
issued to the investors was $7,311,727.
Unit
Purchase Options
On
April 7, 2017, the Company issued a three-year Unit Purchase Option Agreement for 38,000 units at a purchase price of $9.00 per
unit. Each unit consists of one share of common stock and a warrant to purchase one share of common stock at an exercise price
of $9.00 per share which expires on the earlier of three years after exercise of the Unit Purchase Option Agreement or April 7,
2023.
On
June 29, 2017, the Company issued a three-year Unit Purchase Option Agreement for 62,667 units at a purchase price of $9.00 per
unit. Each unit consists of one share of common stock and a warrant to purchase one share of common stock at an exercise price
of $9.00 per share which expires on the earlier of three years after exercise of the Unit Purchase Option Agreement or June 29,
2022. The Company estimated the fair value of the unit purchase option agreement at $193,860 and recorded it as a prepaid expense.
The Company recorded an expense of $96,930 for this agreement during the year ended September 30, 2017 and expensed the remaining
balance of $96,930 during the three months ended December 31, 2017.
Common
Stock Issued for Services
On
February 7, 2018, the Company issued 22,200 shares of common stock for services provided by two consultants and expensed the $88,800
fair value of the common stock issued. On April 1, 2018, the Company issued 10,000 shares of common stock for services provided
by a consultant and expensed the $31,000 fair value of the common stock issued.
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.
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, 2019, there were options to purchase an aggregate of 856,039
shares of common stock outstanding under the 2014 Plan, options to purchase 4,829 shares were exercised, and 5,799 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,
2019, there were options to purchase an aggregate of 915,000 shares of common stock outstanding under the 2018 Plan and 1,085,000
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. Due to its
limited operating history and limited number of sales of its common stock, the Company estimated its volatility in consideration
of a number of factors including the volatility of comparable public companies through December 31, 2018. During the six months
ended June 30, 2019, the Company estimated its volatility using the trading activity of its 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, 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 2014 Plan and 2018 Plan is presented below:
|
|
Option
Shares
|
|
|
Weighted-
Average
Exercise
Price
|
|
|
Weighted-
Average
Remaining
Contractual
Term
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding at October 1, 2018
|
|
|
1,601,039
|
|
|
$
|
4.35
|
|
|
8.56 years
|
|
$
|
173,291
|
|
Granted
|
|
|
190,000
|
|
|
|
1.04
|
|
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
(20,000
|
)
|
|
|
0.94
|
|
|
|
|
|
|
|
Outstanding at June 30, 2019
|
|
|
1,771,039
|
|
|
$
|
4.03
|
|
|
8.01 years
|
|
$
|
65,072
|
|
Exercisable at June 30, 2019
|
|
|
796,714
|
|
|
$
|
6.92
|
|
|
6.42 years
|
|
$
|
64,239
|
|
Stock-based
compensation expense for the nine months ended June 30, 2019 and 2018 was $578,946 and $629,085, respectively.
At
June 30, 2019, unrecognized total compensation cost related to unvested awards of $973,826 is expected to be recognized over a
weighted average period of 1.8 years.
Warrants
As
of June 30, 2019, 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 and Placement Agent Warrants
|
|
$
|
9.00
|
|
|
|
384,006
|
|
|
September 12, 2019
|
Investor Warrants
|
|
|
9.00
|
|
|
|
202,469
|
|
|
March 19, 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
|
|
|
9.90
|
|
|
|
8,155
|
|
|
September 30, 2019 – January 8, 2020
|
LMB Warrants
|
|
|
20.70
|
|
|
|
17,721
|
|
|
November 3, 2019 – March 6, 2020
|
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
|
Convertible Note Warrants
|
|
|
9.75
|
|
|
|
40,436
|
|
|
September 12, 2019
|
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
|
|
|
|
669,504
|
|
|
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
|
|
|
|
3,430,421
|
|
|
April 5, 2021
|
April 2019 Registered Direct/Private Placement Offering Placement Agent Warrants
|
|
|
1.93
|
|
|
|
240,130
|
|
|
April 5, 2021
|
|
|
|
|
|
|
|
16,490,794
|
|
|
|
During
the nine months ended June 30, 2018, 40,834 of the Financial Advisor Warrants were exercised on a cashless basis resulting in
the issuance of 16,547 shares of common stock and 272,767 of the August 2017 public offering warrants were exercised at $4.125
per share for net proceeds of $1,125,148.
During
the nine months ended June 30, 2019, the 2,321,569 August 2018 Offering Pre-Funded Unit Warrants were exercised at $0.01 per share
for net proceeds of $23,216.
At
June 30, 2019, the weighted average remaining life of the outstanding warrants is 3.26 years, all warrants are exercisable, and
there was no aggregate intrinsic value for the warrants outstanding.
Common
Stock Reserved
A
summary of common stock reserved for future issuances as of June 30, 2019 is as follows:
Stock plan options outstanding
|
|
|
1,771,039
|
|
Stock plan shares available for future grants
|
|
|
1,090,799
|
|
Warrants outstanding
|
|
|
16,490,794
|
|
Unit purchase options outstanding
|
|
|
201,334
|
|
Total
|
|
|
19,553,966
|
|
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 December 2017 Registered Direct/Private Placement Offering, Mr. Mazur purchased 213,106 shares of common stock
at $4.6925 per share and received 106,553 warrants with an exercise price of $4.63 per share (See Note 5). In connection
with the March 2018 Registered Direct/Private Placement Offering, Mr. Mazur purchased 167,504 shares of common stock at $2.985
per share and received 167,504 warrants with an exercise price of $2.86 per share (See Note 5). The purchases were made on
the same terms as for all other investors.
In
connection with the August 2018 offering, Mr. Mazur purchased 3,137,255 shares of common stock at $1.275 per share and received
3,137,255 warrants with an exercise price of $1.15 per share, and Mr. Holubiak purchased 784,314 shares of common stock at $1.275
per share and received 784,314 warrants with an exercise price of $1.15 per share (See Note 5). The purchases were made on the
same terms as for all other investors.
In
connection with the April 2019 Registered Direct/Private Placement Offering, 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 (See Note 5).
The purchases were made on the same terms as for all other investors.
General
and administrative expense for the nine months ended June 30, 2019 and 2018 includes $20,000 and $36,000, respectively, paid to
a financial consultant who is a stockholder of the Company. The consulting agreement ended in February 2019.
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 and 2018 was $56,063 and $19,500, respectively.
Effective
July 1, 2019, Citius entered into a 76-month lease for office space in Cranford, NJ. Annual base rent for the years ending June
30, 2020, 2021, 2022, 2023, 2024, 2025 and 2026 is $152,249, $233,232, $238,091, $242,950, $247,809, $252,668 and $85,842, respectively.
Citius will also pay its proportionate share of real estate taxes and operating expenses in excess of the base year expenses.
8.
SUBSEQUENT EVENTS
Effective
July 1, 2019, Citius entered into a 76-month lease for office space (See Note 7).
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, 2019 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, 2018. 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” or the “Company”) is a specialty pharmaceutical company dedicated to the
development and commercialization of critical care products targeting unmet needs with a focus on anti-infectives, cancer care
and unique prescription products. On September 12, 2014, we acquired Citius Pharmaceuticals, LLC as a wholly-owned subsidiary.
On
March 30, 2016, the Company acquired all of the outstanding stock of Leonard-Meron Biosciences, Inc. (“LMB”).
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, 2019, the Company has devoted substantially all of its efforts to product development, raising capital, building infrastructure
through strategic alliances and coordinating activities relating to its proposed proprietary products. The Company is focusing
on the Phase 3 development of Mino-Lok®, developing a regulatory pathway for Mino-Wrap and the Phase 2b development of Hydro-Lido
for hemorrhoids. The Company has not yet realized any revenues from its planned principal operations.
Patent
and Technology License Agreements
Mino-Lok®
- LMB has a patent and technology license agreement with Novel Anti-Infective Therapeutics, Inc. (“NAT”) to develop
and commercialize Mino-Lok® on an exclusive, worldwide sub-licensable basis, as amended. Since May 2014, LMB has paid an annual
maintenance fee, which began at $30,000 and that increased over five years to $90,000, where it will remain until 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. 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 $1,390,000 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 U.S. Food and Drug Administration.
Under
the license agreement, the Company paid a nonrefundable upfront payment of $125,000. We are obligated to pay an annual maintenance
fee of $30,000, commencing in January 2020, that increases annually by $15,000 per year up to a maximum of $90,000. Annual maintenance
fees cease on the first sale of product. We also must pay up to an aggregate of $2.1 million in milestone payments, contingent
on the achievement of various regulatory and commercial milestones. Under the terms of the license agreement, we also must pay
a royalty of mid- to upper-single digit percentages of net sales, depending on the amount of annual sales, and subject to downward
adjustment to lower- to mid-single digit percentages in the event there is no valid patent for the product in the United States
at the time of sale. After the first sale of product, we will owe an annual minimum royalty payment of $100,000 that will increase
annually by $25,000 for the duration of the term. We will be responsible for all patent expenses incurred by Licensor for
the term of the agreement although Licensor is responsible for filing, prosecution and maintenance of all patents. The agreement
expires on the later of the expiration of the patents or January 2, 2034.
RESULTS
OF OPERATIONS
Three
months ended June 30, 2019 compared with the three months ended June 30, 2018
|
|
Three Months Ended
June 30,
2019
|
|
|
Three Months Ended
June 30,
2018
|
|
Revenues
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
2,766,260
|
|
|
|
778,856
|
|
General and administrative
|
|
|
1,456,451
|
|
|
|
1,114,740
|
|
Stock-based compensation expense
|
|
|
204,002
|
|
|
|
124,398
|
|
Total operating expenses
|
|
|
4,426,713
|
|
|
|
2,017,994
|
|
Operating loss
|
|
|
(4,426,713
|
)
|
|
|
(2,017,994
|
)
|
Interest income
|
|
|
25,268
|
|
|
|
—
|
|
Interest expense
|
|
|
(4,138
|
)
|
|
|
(3,900
|
)
|
Net loss
|
|
$
|
(4,405,583
|
)
|
|
$
|
(2,021,894
|
)
|
Revenues
We
did not generate any revenues for the three months ended June 30, 2019 or 2018.
Research
and Development Expenses
For
the three months ended June 30, 2019, research and development expenses were $2,766,260 as compared to $778,856 during the three
months ended June 30, 2018. The $1,987,404 increase in 2019 was primarily due to an increase in expenses for Mino-Lok®. Research
and development costs for Mino-Lok® increased by $1,648,038 to $2,370,800 for the three months ended June 30, 2019 as compared
to $722,762 for the three months ended June 30, 2018. Research and development costs for our Hydro-Lido product candidate increased
by $339,366 to $395,460 for the three months ended June 30, 2019 as compared to $56,094 for the three months ended June 30, 2018.
We expect that research and development expenses will increase in fiscal 2019 as we continue to focus on our Phase 3 trial for
Mino-Lok® and commence our research and development efforts related to Mino-Wrap. We are actively seeking to raise additional
capital in order to fund our research and development efforts.
General
and Administrative Expenses
For
the three months ended June 30, 2019, general and administrative expenses were $1,456,451 as compared to $1,114,740 during the
three months ended June 30, 2018. General and administrative expenses increased by $341,711 in comparison with the prior period.
The increase was primarily due to an increase of $111,054 in investor relations expenses, an increase of $216,308 in compensation
costs and an increase in rent of $36,563. General and administrative expenses consist primarily of compensation costs, consulting
fees incurred for financing activities and corporate development services, and investor relations expenses.
Stock-based
Compensation Expense
For
the three months ended June 30, 2019, stock-based compensation expense was $204,002 as compared to $124,398 for the three months
ended June 30, 2018. Stock-based compensation expense includes options granted to directors, employees and consultants. Stock-based
compensation expense for the most recently completed quarter increased by $79,604 as the Company granted new options under the
2018 Omnibus Stock Incentive Plan.
Other
Income (Expense)
Interest
income for the three months ended June 30, 2019 was $25,268 as we invested some of the proceeds from the April 2019 offering.
There was no interest income for the three months ended June 30, 2018.
Interest
expense on notes payable – related parties for the three months ended June 30, 2019 was $4,138 compared to $3,900 for the
three months ended June 30, 2018.
Net
Loss
For
the three months ended June 30, 2019, we incurred a net loss of $4,405,583 compared to a net loss for the three months ended June
30, 2018 of $2,021,894. The $2,383,689 increase in the net loss was primarily due to the increase of $1,987,404 in research and
development expenses.
Nine
months ended June 30, 2019 compared with the nine months ended June 30, 2018
|
|
Nine Months Ended
June 30,
2019
|
|
|
Nine Months Ended
June 30,
2018
|
|
Revenues
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
6,579,237
|
|
|
|
4,825,230
|
|
General and administrative
|
|
|
4,782,972
|
|
|
|
4,673,405
|
|
Stock-based compensation expense
|
|
|
578,946
|
|
|
|
629,085
|
|
Total operating expenses
|
|
|
11,941,155
|
|
|
|
10,127,720
|
|
Operating loss
|
|
|
(11,941,155
|
)
|
|
|
(10,127,720
|
)
|
Gain on extinguishment of liability
|
|
|
—
|
|
|
|
450,000
|
|
Interest income
|
|
|
41,159
|
|
|
|
—
|
|
Interest expense
|
|
|
(12,246
|
)
|
|
|
(11,990
|
)
|
Net loss
|
|
$
|
(11,912,242
|
)
|
|
$
|
(9,689,710
|
)
|
Revenues
We
did not generate any revenues for the nine months ended June 30, 2019 and 2018.
Research
and Development Expenses
For
the nine months ended June 30, 2019, research and development expenses were $6,579,237 as compared to $4,825,230 during the nine
months ended June 30, 2018. The $1,754,007 increase in 2019 was primarily due to increased expenses related to the ongoing Phase
3 trial of Mino-Lok® which commenced during the quarter ended March 31, 2018. Research and development costs for Mino-Lok®
increased by $1,130,811 to $5,572,115 for the nine months ended June 30, 2019 as compared to $4,441,304 for the nine months ended
June 30, 2018. Research and development costs for our Hydro-Lido product candidate increased by $498,196 to $882,122 for the nine
months ended June 30, 2019 as compared to $383,926 for the nine months ended June 30, 2018. We also incurred $125,000 in research
and development expense related to the Mino-Wrap license agreement during the nine months ended June 30, 2019. We expect that
research and development expenses will continue to increase as we focus on our Phase 3 trial for Mino-Lok® and commence our
research and development efforts related to Mino-Wrap. We are actively seeking to raise additional capital in order to fund our
research and development efforts.
General
and Administrative Expenses
For
the nine months ended June 30, 2019, general and administrative expenses were $4,782,972 as compared to $4,673,405 during the
nine months ended June 30, 2018. General and administrative expenses increased by $109,567 in comparison with the prior period.
The increase was primarily due to an increase in compensation costs of $414,683 being offset by the $357,400 in settlement costs
for the termination of the right of first refusal agreement with the underwriter of our 2017 Public Offering incurred in 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.
Stock-based
Compensation Expense
For
the nine months ended June 30, 2019, stock-based compensation expense was $578,946 as compared to $629,085 for the nine months
ended June 30, 2018, representing a decrease of $50,139 as certain options have been fully expensed. Stock-based compensation
expense includes options granted to directors, employees and consultants.
Other
Income (Expense)
During
the nine months ended June 30, 2018, the Company recorded a $450,000 gain on the extinguishment of a liability. The Company reversed
an accrual for certain research and development expenses that was recorded in a prior year that will not be paid.
Interest
income for the nine months ended June 30, 2019 was $41,159 as we invested some of the proceeds from our recent offerings. There
was no interest income for the nine months ended June 30, 2018.
Interest
expense on notes payable – related parties and credit cards for the nine months ended June 30, 2019 was $12,246 compared
to $11,990 for the nine months ended June 30, 2018.
Net
Loss
For
the nine months ended June 30, 2019, we incurred a net loss of $11,912,242 compared to a net loss for the nine months ended June
30, 2018 of $9,689,710. The $2,222,532 increase in the net loss was primarily due to the increase of $1,754,007 in research and
development expenses and the decrease in other income.
LIQUIDITY
AND CAPITAL RESOURCES
Going
Concern Uncertainty and Working Capital
Citius
has incurred operating losses since inception and incurred a net loss of $11,912,242 for the nine months ended June 30, 2019.
At June 30, 2019, Citius had an accumulated deficit of $52,170,080. Citius’ net cash used in operations during the nine
months ended June 30, 2019 was $9,530,469.
Our
September 30, 2018 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, 2019, Citius had $519,532 in working capital. 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, 2019, Citius had cash and cash equivalents
of $4,510,751 available to fund its operations. The Company’s primary sources of cash flow since inception have been from
financing activities. During the nine months ended June 30, 2019, the Company received net proceeds of $4,857,217 from financing
activities. Our primary uses of operating cash were for product development and commercialization activities, employee compensation,
consulting fees, legal and accounting fees, insurance and investor relations expenses.
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 $5.3 million. Simultaneously, the Company also privately
sold and issued 3,430,421 immediately exercisable two-year unregistered warrants to the investors. The warrants have an exercise
price of $1.42 per share.
Based
on our cash and cash equivalents at June 30, 2019, we expect that we will have sufficient funds to continue our operations through
September 2019. 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, 2018
as filed with the SEC.