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 $5,114,260 for the three months ended December 31, 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 December 31, 2019, the Company had a working capital deficit of $794,467. The Company estimates cash
resources, including proceeds in January 2020 from the cash exercise of warrants issued in September 2019, will be sufficient
to fund its operations into the third quarter of fiscal year 2020. 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 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.
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 year ended September 30, 2019. We are obligated to pay an annual maintenance fee of $30,000,
commencing in January 2020, which 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.
4.
NOTES PAYABLE – RELATED PARTIES
The
aggregate principal balance as of December 31, 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 $3,991 and $4,003, respectively, for the three months ended December 31,
2019 and 2018.
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.
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.
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 December 31, 2019, there were options to purchase an aggregate of 861,838
shares of common stock outstanding under the 2014 Plan, options to purchase 4,829 shares were exercised, 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 December
31, 2019, there were options to purchase an aggregate of 1,890,000 shares of common stock outstanding under the 2018 Plan and
110,000 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. Since January 1, 2019,
the Company has 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, 2019
|
|
|
1,771,039
|
|
|
$
|
4.03
|
|
|
|
|
|
|
|
Granted
|
|
|
980,799
|
|
|
|
0.67
|
|
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
Outstanding at December 31, 2019
|
|
|
2,751,838
|
|
|
$
|
2.831
|
|
|
8.3 years
|
|
$
|
416,892
|
|
Exercisable at December 31, 2019
|
|
|
1,199,509
|
|
|
$
|
5.18
|
|
|
6.9 years
|
|
$
|
67,461
|
|
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. 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 three months ended December 31, 2019 and 2018 was $220,384 and $171,249, respectively.
At
December 31, 2019, unrecognized total compensation cost related to unvested awards of $1,208,053 is expected to be recognized
over a weighted average period of 1.9 years.
Warrants
As
of December 31, 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 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
|
|
|
|
4,985
|
|
|
January 8, 2020
|
LMB Warrants
|
|
|
20.70
|
|
|
|
2,668
|
|
|
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
|
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
|
September 2019 Offering Investor Warrants
|
|
|
0.77
|
|
|
|
7,821,230
|
|
|
September 27, 2024
|
September 2019 Offering Underwriter Warrants
|
|
|
1.12
|
|
|
|
547,486
|
|
|
September 27, 2024
|
|
|
|
|
|
|
|
24,416,845
|
|
|
|
During
the three months ended December 31, 2018, 1,600,000 of the August 2018 Offering Pre-Funded Unit Warrants were exercised at $0.01
per share for net proceeds of $16,000.
During
the three months ended December 31, 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.
At
December 31, 2019, the weighted average remaining life of the outstanding warrants is 3.49 years, all warrants are exercisable,
and the aggregate intrinsic value of the warrants outstanding was $1,955,308.
Common
Stock Reserved
A
summary of common stock reserved for future issuances as of December 31, 2019 is as follows:
Stock plan options outstanding
|
|
|
2,751,838
|
|
Stock plan shares available for future grants
|
|
|
110,000
|
|
Warrants outstanding
|
|
|
24,416,845
|
|
Unit purchase options outstanding
|
|
|
201,334
|
|
Total
|
|
|
27,480,017
|
|
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.
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 three months ended December 31, 2018 was $6,501.
Effective
July 1, 2019, Citius entered into a 76-month lease for office space in Cranford, NJ.
As
of September 30, 2019, minimum future lease payments under non-cancellable leases (consisting of the Cranford lease only)
were as follows:
Year Ending September 30,
|
|
|
|
2020
|
|
$
|
210,557
|
|
2021
|
|
|
234,447
|
|
2022
|
|
|
239,306
|
|
2023
|
|
|
244,165
|
|
2024
|
|
|
249,024
|
|
Thereafter
|
|
|
275,343
|
|
Total
|
|
$
|
1,452,842
|
|
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 electing
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
|
|
Three Months
Ended
December 31,
2019
|
|
Operating lease cost
|
|
$
|
57,349
|
|
Short-term lease cost
|
|
|
—
|
|
Variable lease cost
|
|
|
—
|
|
Total lease cost
|
|
$
|
57,349
|
|
|
|
|
|
|
Other information
|
|
|
|
|
Weighted-average remaining lease term - operating leases
|
|
|
5.8 Years
|
|
Weighted-average discount rate - operating leases
|
|
|
8.0
|
%
|
Maturities
of lease liabilities due under the Company’s current Cranford lease as of December 31, 2019 is as follows:
Leases
|
|
As of
December 31,
2019
|
|
2020 (excluding the 3 months ended December 31, 2019)
|
|
$
|
172,494
|
|
2021
|
|
|
234,447
|
|
2022
|
|
|
239,306
|
|
2023
|
|
|
244,165
|
|
2024
|
|
|
249,024
|
|
Thereafter
|
|
|
275,343
|
|
Total lease payments
|
|
|
1,414,779
|
|
Less: interest
|
|
|
(292,337
|
)
|
Present value of lease liabilities
|
|
$
|
1,122,442
|
|
Leases
|
|
Classification
|
|
As of
December 31,
2019
|
|
Assets
|
|
|
|
|
|
Lease asset
|
|
Operating
|
|
$
|
1,103,155
|
|
Total lease assets
|
|
|
|
$
|
1,103,155
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
Current
|
|
Operating
|
|
$
|
146,244
|
|
Non-current
|
|
Operating
|
|
|
976,198
|
|
Total lease liabilities
|
|
|
|
$
|
1,122,442
|
|
Interest
expense on the lease liability was $22,780 for the three months ended December 31, 2019.
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 three months ended December 31, 2019.
9.
SUBSEQUENT EVENTS
Nasdaq
Listing
On
October 30, 2019, Citius had received notice from The Nasdaq Stock Market, (“NASDAQ”), indicating that, because the
closing bid price for the common stock had 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 January 31, 2020, Citius received notice from
NASDAQ stating that because the closing bid price of the Company’s common stock was $1.00 per share or greater for 10 consecutive
business days, the Company had regained compliance with the Listing Rule requirements of NASDAQ.
Warrant
Exercises
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.
Annual
Meeting
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.
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 months ended December 31, 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, 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”
or the “Company”) 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 December 31, 2019, 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 reduction 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. We believe these unique markets for our 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 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.
RESULTS OF OPERATIONS
Three months ended December 31, 2019
compared with the three months ended December 31, 2018
|
|
Three Months Ended
December 31,
2019
|
|
|
Three Months Ended
December 31,
2018
|
|
Revenues
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
2,664,546
|
|
|
|
2,113,101
|
|
General and administrative
|
|
|
1,562,995
|
|
|
|
1,588,124
|
|
Stock-based compensation expense
|
|
|
220,384
|
|
|
|
171,249
|
|
Total operating expenses
|
|
|
4,447,925
|
|
|
|
3,872,474
|
|
Operating loss
|
|
|
(4,447,925
|
)
|
|
|
(3,872,474
|
)
|
Interest income
|
|
|
19,339
|
|
|
|
1,747
|
|
Other income
|
|
|
110,207
|
|
|
|
—
|
|
Interest expense
|
|
|
(3,991
|
)
|
|
|
(4,003
|
)
|
Net loss
|
|
$
|
(4,322,370
|
)
|
|
$
|
(3,874,730
|
)
|
Revenues
We did not generate any revenues for the three months ended
December 31, 2019 or 2018.
Research and Development Expenses
For the three months ended December
31, 2019, research and development expenses were $2,664,546 as compared to $2,113,101 during the three months ended December
31, 2018, an increase of $551,445. Research and development costs for Mino-Lok® increased by $118,902 to $2,113,005 for
the three months ended December 31, 2019 as compared to $1,994,103 for the three months ended December 31, 2018. Research and
development costs for our Halo-Lido product candidate increased by $431,043 to $550,041 for the three months ended December
31, 2019 as compared to $118,998 for the three months ended December 31, 2018. We incurred $1,500 in research and development
costs on our Mino-Wrap in the three months ended December 31, 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® 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.
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. Topline data from the
superior efficacy interim analysis, the next major milestone in the Mino-Lok trial, is expected in the first half of 2020.
General and Administrative Expenses
For the three months ended December 31,
2019, general and administrative expenses were $1,562,995 as compared to $1,588,124 during the three months ended December 31,
2018. General and administrative expenses decreased by $25,129 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.
Stock-based Compensation Expense
For the three months ended December 31,
2019, stock-based compensation expense was $220,384 as compared to $171,249 for the three months ended December 31, 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 $49,135 as the Company granted new options this quarter under its stock option plans.
Other Income (Expense)
Interest income for the three months ended
December 31, 2019 was $19,339 compared to interest income of $1,747 for the prior period. We have invested some of the proceeds
of our recent equity offerings in money market accounts.
In November 2019, we received an additional
$110,207 refund from the Food and Drug Administration (“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 three months ended December 31, 2019.
Interest expense on notes payable –
related parties for the three months ended December 31, 2019 was $3,991 compared to $4,003 for the three months ended December
31, 2018.
Net Loss
For the three months ended December 31,
2019, we incurred a net loss of $4,322,370 compared to a net loss for the three months ended December 31, 2018 of $3,874,730. The
$447,640 increase in the net loss was primarily due to the increase of $551,445 in research and development expenses.
LIQUIDITY AND CAPITAL RESOURCES
Going Concern Uncertainty and Working Capital
Citius has incurred operating losses since
inception and incurred a net loss of $4,322,370 for the three months ended December 31, 2019. At December 31, 2019, Citius had
an accumulated deficit of $60,142,352. Citius’ net cash used in operations during the three months ended December 31, 2019
was $5,114,260.
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 December 31, 2019, Citius had a working
capital deficit of $794,467. Our limited working capital is attributable to the operating losses incurred by the Company since
inception offset by our capital raising activities. At December 31, 2019, Citius had cash and cash equivalents of $2,779,650 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 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.
Based on our cash and cash equivalents
at December 31, 2019 and the proceeds from the January 2020 warrant exercises, we expect that we will have sufficient funds to
continue our operations through March 2020. 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.