UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended September 30, 2018
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 333-170781
Citius Pharmaceuticals, Inc.
(Exact name of Registrant as specified in its Charter)
Nevada
(State or other jurisdiction of
incorporation or organization)
27-3425913
(I.R.S. Employer
Identification No.)
11 Commerce Drive, First Floor, Cranford, NJ 07016
(Address of principal executive offices) (Zip Code)
(908) 967-6677
(Registrant’s telephone number, including area code)
(Former name and address, if changed since last report)
Securities registered pursuant to Section 12(b) of the Exchange Act:
Common Stock, par value $0.001 per share
Warrants to purchase Common Stock
The NASDAQ Capital Market
The NASDAQ Capital Market
(Title or Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ☐ Yes ☒ No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. ☐ Yes ☒ No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the 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 ninety (90) days. ☒ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). ☒ Yes ☐ No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments
to this Form 10-K. ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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
Non-accelerated filer
☐
☒
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
The aggregate market value of the voting and non-voting common equity held by non-affiliates* computed by reference to the price at which the
common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently
completed second fiscal quarter (March 31, 2018) was $19.7 million.
Affiliates for the purpose of this item refers to the issuer’s officers and directors and/or any persons or firms (excluding those brokerage firms and/or
clearing houses and/or depository companies holding issuer’s securities as record holders only for their respective clienteles’ beneficial interest) owning
10% or more of the issuer’s common stock, both of record and beneficially.
Indicate the number of shares outstanding of each of the registrant’s classes of Common Stock, as of the latest practicable date:
APPLICABLE ONLY TO CORPORATE REGISTRANTS
17,798,791 shares as of December 1, 2018, all of one class of Common Stock, $0.001 par value.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company’s Proxy Statement for the Annual Meeting of Shareholders expected to be held on February 13, 2019 are incorporated by
reference in Part III of this Report.
Citius Pharmaceuticals, Inc.
FORM 10-K
September 30, 2018
TABLE OF CONTENTS
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions and Director Independence
Principal Accounting Fees and Services
PART I
Item 1.
Item 1A.
Item 1B
Item 2.
Item 3.
Item 4.
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
Item 15.
Exhibits, Financial Statement Schedules
Signatures
i
Page
1
12
30
30
30
30
31
31
31
37
F-1
38
38
38
39
39
39
39
39
40
43
NOTES
In this annual report on Form 10-K, 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.
Mino-Lok® is our registered trademark. All other trade names, trademarks and service marks appearing in this prospectus are the property
of their respective owners. We have assumed that the reader understands that all such terms are source-indicating. Accordingly, such terms,
when first mentioned in this prospectus, appear with the trade name, trademark or service mark notice and then throughout the remainder of
this prospectus without trade name, trademark or service mark notices for convenience only and should not be construed as being used in a
descriptive or generic sense.
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K 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, including the
risks described under Item 1A - “Risk Factors,” and Item 7 - “Management’s Discussion and Analysis of Financial Condition and Results
of Operations” 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 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
Item 1. Business
Overview
PART I
Citius Pharmaceuticals, Inc., headquartered in Cranford, New Jersey, 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. Our goal is to achieve leading market positions by providing therapeutic products that address unmet
medical needs yet have a lower development risk than is associated with new chemical entities. New formulations or combinations of
previously approved drugs with substantial existing safety and efficacy data are a core focus as we seek to reduce development and clinical
risks associated with drug development. Our strategy centers on products that have intellectual property and regulatory exclusivity
protection, while providing competitive advantages over other existing therapeutic approaches.
The Company was founded as Citius Pharmaceuticals, LLC, a Massachusetts limited liability company, on January 23, 2007. On
September 12, 2014, Citius Pharmaceuticals, LLC entered into a Share Exchange and Reorganization Agreement, with Citius
Pharmaceuticals, Inc. (formerly Trail One, Inc.), a publicly traded company incorporated under the laws of the State of Nevada. Citius
Pharmaceuticals, LLC became a wholly-owned subsidiary of Citius. On March 30, 2016, Citius acquired Leonard-Meron Biosciences, Inc.
as a wholly-owned subsidiary. LMB was a pharmaceutical company focused on the development and commercialization of critical care
products with a concentration on anti-infectives.
Since its inception, the Company has devoted substantially all of its efforts to business planning, research and development, recruiting
management and technical staff, and raising capital. We are developing two proprietary products: Mino-Lok, an antibiotic lock solution
used to treat patients with catheter-related bloodstream infections by salvaging the infected catheter, and a hydrocortisone-lidocaine topical
formulation that is intended to provide anti-inflammatory and anesthetic relief to individuals suffering from hemorrhoids. We believe the
markets for our products are large, growing, and underserved by the current prescription products or procedures.
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 products, market acceptance of its products, competition from
larger companies, dependence on key personnel, dependence on key suppliers and strategic partners, the Company’s ability to obtain
additional financing and the Company’s compliance with governmental and other regulations.
Mino-Lok®
Overview
Mino-Lok is a patented solution containing minocycline, disodium ethylenediaminetetraacetic acid (edetate), and ethyl alcohol, all of which
act synergistically to treat and salvage infected central venous catheters (“CVCs”) in patients with catheter related bloodstream infections
(“CRBSIs”). Mino-Lok breaks down biofilm barriers formed by bacterial colonies, eradicates the bacteria, and provides anti-clotting
properties to maintain patency in CVCs.
The administration of Mino-Lok consists of filling the lumen of the catheter with 0.8 ml to 2.0 ml of Mino-Lok solution. The catheter is
then “locked”, meaning that the solution remains in the catheter without flowing into the vein. the lock is maintained for a dwell-time of
two hours while the catheter is not in use. If the catheter has multiple lumens, all lumens may be locked with the Mino-Lok solution either
simultaneously or sequentially. If patients are receiving continuous infusion therapy, the catheters alternate between being locked with the
Mino-Lok solution and delivering therapy. The Mino-Lok therapy is two hours per day for at least five days, usually with two additional
locks in the subsequent two weeks. After locking the catheter for two hours, the Mino-Lok solution is aspirated, and the catheter is flushed
with normal saline. At that time, either the infusion will be continued, or will be locked with the standard-of-care lock solution until further
use of the catheter is required. In a clinical study conducted by MD Anderson Cancer Center (“MDACC”), there were no serum levels of
either minocycline or edetate detected in the sera of several patients who underwent daily catheter lock solution with minocycline and
edetate (“M-EDTA”) at the concentration level proposed in Mino-Lok treatment. Thus, it has been demonstrated that the amount of either
minocycline or edetate that leaks into the serum is very low or none at all.
1
Phase 2b Results
From April 2013 to July 2014, 30 patients with CVC-related bloodstream infection were enrolled at MDACC in a prospective Phase 2b
study. Patients received Mino-Lok therapy for two hours once daily for a minimum of five days within the first week followed by two
additional locks within the next two weeks. Patients were followed for one month post lock therapy. Demographic information, clinical
characteristics, laboratory data, therapy, as well as adverse events and outcome were collected for each patient. Median age at diagnosis
was 56 years (range: 21-73 years). In all patients, prior to the use of lock therapy, systemic treatment with a culture-directed, first-line
intravenous antibiotic was started. Microbiological eradication was achieved at the end of therapy in all cases. None of the patients
experienced any serious adverse event related to the lock therapy.
The active arm, which is the Mino-Lok treated group of patients, was then compared to 60 patients in a matched cohort that experienced
removal and replacement of their CVCs within the same contemporaneous timeframe. The patients were matched for cancer type, infecting
organism, and level of neutropenia. All patients were cancer patients and treated at the MDACC. The efficacy of Mino-Lok therapy was
100% in salvaging CVCs, demonstrating equal effectiveness to removing the infected CVC and replacing with a new catheter.
The main purpose of the study was to show that Mino-Lok therapy was at least as effective as the removal and replacement of CVCs when
CRBSIs are present, and that the safety was better, that is, the complications of removing an infected catheter and replacing with a new one
could be avoided. In addition to having a 100% efficacy rate with all CVCs being salvaged, Mino-Lok therapy had no significant adverse
events (“SAEs”), compared to an 18% SAE rate in the matched cohort where patients had the infected CVCs removed and replaced
(“R&R”) with a fresh catheter. There were no overall complication rates in the Mino-Lok arm group compared to 11 patients with events
(18%) in the control group. These events included bacterial relapse (5%) at four (4) weeks post-intervention, and a number of
complications associated with mechanical manipulation in the removal or replacement procedure for the catheter (10%) or development of
deep seated infections such as septic thrombophlebitis and osteomyelitis (8%). As footnoted, six (6) patients had more than one (1)
complication in the control arm group.
Parameter
Patients
Cancer type
- Hematologic
- Solid tumor
ICU Admission
Mech.Ventilator
Bacteremia
- Gram+
- Gram-
Neutropenia (<500)
Microbiologic Eradication
- Relapse
Complications
SAEs related R&R
Overall Complication Rate
Mino-Lok® Arm
(%)
N
Control Arm
N
(%)
30
20
10
4
3
17
14
19
30
0
0
0
0
(100%)
(67)
(33)
(13)
(10)
(57)*
(47)*
(63)
(100)
(0)
(0)
(0)
(0%)
60
48
12
4
0
32
28
36
60
3
8
6
11**
(100%)
(80)
(20)
(7)
(0)
(53)
(47)
(60)
(100)
(5)
(13)
(10)
(18%)
* 1 Polymicrobial patient had a Gram+ and a Gram- organism cultured
** 6 Patients had > 1 complication
Source: Dr. Issam Raad, Antimicrobial Agents and Chemotherapy, June 2016, Vol. 60 No. 6, Page 3429
2
Phase 3 Initiation
In November 2016, the Company initiated site recruitment for Phase 3 clinical trials. From initiation through first quarter 2017, the
Company received input from several sites related to the control arm as being less than standard of care for some of the respective
institutions. The Company worked closely with the U.S. Food and Drug Administration (“FDA”) with respect to the design of the phase 3
trial, and received feedback on August 17, 2017. The FDA stated that they recognized that there is an unmet medical need in salvaging
infected catheters and agreed that an open label, superiority design would address the Company’s concerns and would be acceptable to meet
the requirements of a new drug application. The Company amended the phase 3 study design to remove the saline and heparin placebo
control arm and to use an active control arm that conforms with today’s current standard of care. Patient enrollment commenced in
February 2018.
The Mino-Lok Phase 3 Trial is planned to enroll 700 patients in 50 participating institutions, all located in the U.S. There will be interim
analyses at both the 50% and 75% points of the trial as measured by the number of patients treated. As of December 2018, there are 20
active sites currently enrolling patients including such academic centers as MD Anderson Cancer Center, Henry Ford Health Center,
Georgetown University Medical Center, University of Chicago, and others. There are 15 additional well renowned medical centers in
startup mode. When these study centers are activated, site recruitment will have reached 75% of the target institutions planned; and there
are another 30 centers in feasibility stage as of December 1, 2018.
Fast Track Designation
In October 2017, the Company received official notice from FDA that the investigational program for Mino-Lok was granted “Fast Track”
status. Fast Track is a designation that expedites FDA review to facilitate development of drugs which treat a serious or life-threatening
condition and fill an unmet medical need. A drug that receives Fast Track designation is eligible for the following:
● More frequent meetings with FDA to discuss the drug’s development plan and ensure collection of appropriate data needed to
support drug approval;
● More frequent written correspondence from FDA about the design of the clinical trials;
● Priority review to shorten the FDA review process for a new drug from ten months to six months; and,
● Rolling review, which means Citius can submit completed sections of its New Drug Application (“NDA”) for review by FDA,
rather than waiting until every section of the application is completed before the entire application can be reviewed.
Mino-Lok International Study
In October 2017, data from an international study on Mino-Lok was presented at the Infectious Disease Conference, (“ID Week”), in San
Diego, California. The 44 patient study was conducted in Brazil, Lebanon, and Japan and showed Mino-Lok therapy was an effective
intervention to salvage long term, infected central venous catheters (CVCs) in catheter related bloodstream infections in patients who had
cancer with limited vascular access. This study showed 95% effectiveness for Mino-Lok therapy in achieving microbiological eradication
of the CVCs as compared to 83% for the control.
Stability Patent Application for Mino-Lok
In July 2018, the Company received notice from the MD Anderson Cancer Center that the U.S. Patent and Trademark Office has reviewed
and examined the patent application US 2017/051373 A1 and that it is allowed for issuance as a patent. The new invention overcomes
limitations in mixing antimicrobial solutions in which components have precipitated because of physical and/or chemical factors, thus
limiting the stability of the post-mix solutions.
Citius holds the exclusive worldwide license which provides access to this patented technology for development and commercialization of
Mino-Lok.
3
Market Opportunity
In spite of best clinical practice, catheters contribute to approximately 70% of blood stream infections that occur in the ICU, or are
associated with hemodialysis or cancer patients (approximately 470,000 per year). Bacteria enter the catheter either from the skin or
intraluminally through the catheter hub. Once in the catheter, bacteria tend to form a protective biofilm on the interior surface of the
catheter that is resistant to most antimicrobial solutions. The most frequently used maintenance flush, heparin, actually stimulates biofilm
formation. Heparin is widely used as a prophylactic lock solution, in spite of the evidence that it contributes to the promotion of biofilm
formation. The formation of bacterial biofilm usually precedes CRBSIs.
The SOC in the management of CRBSI patients consists of removing the infected CVC and replacing it with a new catheter at a different
vascular access site. However, in cancer and hemodialysis patients with long-term surgically implantable silicone catheters, removal of the
CVC and reinsertion of a new one at a different site might be difficult, or even impossible, because of the unavailability of other accessible
vascular sites and the need to maintain infusion therapy. Furthermore, critically ill patients with short-term catheters often have underlying
coagulopathy, which makes reinsertion of a new CVC at a different site, in the setting of CRBSIs, risky in terms of mechanical
complications, such as pneumothorax, misplacement, or arterial puncture. Studies have also revealed that CRBSI patients may be
associated with serious complications, including septic thrombosis, endocarditis and disseminated infection, particularly if caused by
Staphylococcus aureus or Candida species. Furthermore, catheter retention in patients with CRBSIs is associated with a higher risk of
relapse and poor response to antimicrobial therapy.
According to Maki et al., published in the Mayo Clinic Proceedings in 2006, there are approximately 250,000 CRBSIs annually in the U.S.
Subsequent to this study, our estimates have ranged upwards to over 450,000 CLABSIs annually (see analysis in the table below). CRBSIs
are associated with a 12% to 35% mortality rate and an attributable cost of $35,000 to $56,000 per episode.
We estimate that the potential market for Mino-Lok in the U.S. to be approximately $500 million to $1 billion as shown in the table below
based on a target price of up to $300 per dose of each salvage flush treatment.
No. of Catheters
Avg. Duration (Days)
Catheter Days
Infection Rate
Catheters Infected
Flushes/Catheter
Total Salvage Flushes
Long-Term
CVC
4 million
100
Short-Term
CVC
3 million
12
Total
7 million
N/A
36 million 400 million 436 million
N/A
472,000
6.7
3,160,000
2/1,000 days 1/1,000 days
400,000
7
2,800,000
72,000
5
360,000
Sources: Ann Intern Med 2000; 132:391-402, Clev Clin J Med 2011; 78(1):10-17, JAVA 2007; 12(1):17-27, J Inf Nurs 2004;27(4):245-
250, Joint Commission website Monograph, CLABSI and Internal Estimates.
Under various plausible pricing scenarios, we believe that Mino-Lok would be cost saving to the healthcare system given that the removal
of an infected CVC and replacement of a new catheter in a different venous access site is estimated by the Company to cost between $8,000
and $10,000. Furthermore, there are potential additional medical benefits, a reduction in patient discomfort and avoidance of serious
adverse events with the Mino-Lok approach since the catheter remains in place and is not subject to manipulation. We believe there will be
an economic argument to enhance the adoption of Mino-Lok by infection control committees at acute care institutions.
4
In January of 2017, the Company commissioned a primary market research study with MEDACore, a subsidiary of Leerink, a healthcare
focused network with more than 35,000 healthcare professionals, including key opinion leaders, experienced practitioners and other
healthcare professionals throughout North America, Europe, Asia and other locations around the world. This network includes
approximately 55 clinical specialties, 21 basic sciences and 20 business specialties. As part of this market research project, the Company
commissioned a third party survey of 31 physicians to qualify the need for catheter salvage in patients with infected, indwelling central
venous lines, especially when the catheter is a tunneled or an implanted port. There were 19 infectious disease experts and 12 intensivists
surveyed who all agreed that salvage would be preferable to catheter exchange to avoid catheter misplacements, blood clots, or vessel
punctures that can potentially occur during reinsertion. Most were also concerned that viable venous access may not be available in patients
who were vitally dependent on a central line.
Hydro-Lido
Overview
Hydro-Lido is a topical formulation of hydrocortisone and lidocaine that is intended for the treatment of hemorrhoids. To our knowledge,
there are currently no FDA-approved prescription drug products for the treatment of hemorrhoids. Some physicians are known to prescribe
topical steroids for the treatment of hemorrhoids. In addition, there are various strengths of topical combination prescription products
containing hydrocortisone along with lidocaine or pramoxine, each a topical anesthetic, that are prescribed by physicians for the treatment
of hemorrhoids. These products contain drugs that were in use prior to the start of the Drug Efficacy Study Implementation (“DESI”)
program and are commonly referred to as DESI drugs. However, none of these single-agent or combination prescription products have
been clinically evaluated for safety and efficacy and approved by the FDA for the treatment of hemorrhoids. Further, many hemorrhoid
patients use over the counter (“OTC”) products as their first line therapy. OTC products contain any one of several active ingredients
including glycerin, phenylephrine, pramoxine, white petrolatum, shark liver oil and/or witch hazel, for symptomatic relief.
Development of Hemorrhoids Drugs
Hemorrhoids are a common gastrointestinal disorder, characterized by anal itching, pain, swelling, tenderness, bleeding and difficulty
defecating. In the U.S., hemorrhoids affect nearly 5% of the population, with approximately 10 million persons annually admitting to
having symptoms of hemorrhoidal disease. Of these persons, approximately one third visit a physician for evaluation and treatment of their
hemorrhoids. The data also indicate that for both sexes a peak of prevalence occurs from age 45 to 65 years with a subsequent decrease after
age 65 years. Caucasian populations are affected significantly more frequently than African Americans, and increased prevalence rates are
associated with higher socioeconomic status in men but not women. Development of hemorrhoids before age 20 is unusual. In addition,
between 50% and 90% of the general U.S., Canadian and European population will experience hemorrhoidal disease at least once in life.
Although hemorrhoids and other anorectal diseases are not life-threatening, individual patients can suffer from agonizing symptoms which
can limit social activities and have a negative impact on the quality of life.
Hemorrhoids are defined as internal or external according to their position relative to the dentate line. Classification is important for
selecting the optimal treatment for an individual patient. Accordingly, physicians use the following grading system referred to as the
Goligher’s classification of internal hemorrhoids:
Grade I
Hemorrhoids not prolapsed but bleeding.
Grade II
Hemorrhoids prolapse and reduce spontaneously with or without bleeding.
Grade III
Prolapsed hemorrhoids that require reduction manually.
Grade IV
Prolapsed and cannot be reduced including both internal and external hemorrhoids that are confluent from skin tag to inner
anal canal.
5
Development Activities to Date
In the fall of 2015, we completed dosing patients in a double-blind dose ranging placebo controlled Phase 2a study where six different
formulations containing hydrocortisone and lidocaine in various strengths (“CITI-001”) were tested against the vehicle control. The
objectives of this study were to: 1) demonstrate the safety and efficacy of the formulations when applied twice daily for two weeks in
subjects with Grade I or II hemorrhoids and 2) assess the potential contribution of lidocaine hydrochloride and hydrocortisone acetate,
alone or in combination for the treatment of symptoms of Goligher’s Classification Grade I or II hemorrhoids.
Symptom improvement was observed based on a global score of disease severity (“GSDS”), and based on some of the individual signs and
symptoms of hemorrhoids, specifically itching and overall pain and discomfort. Within the first few days of treatment, the combination
products (containing both hydrocortisone and lidocaine) were directionally favorable versus the placebo and their respective individual
active treatment groups (e.g., hydrocortisone or lidocaine alone) in achieving ‘almost symptom free’ or ’symptom free’ status according to
the GSDS scale. These differences suggest the possibility of a benefit for the combination product formulation.
Overall, results from adverse event reporting support the safety profile of all test articles evaluated in this study and demonstrate similar
safety profiles as compared to the vehicle. The safety findings were unremarkable. There was a low occurrence of adverse events and a
similar rate of treatment related adverse events across all treatment groups. The majority of adverse events were mild and only one was
severe. None of the adverse events were serious and the majority of adverse events were recovered/resolved at the end of the study. There
were only two subjects who were discontinued from the study due to adverse events.
In addition to the safety and dose-ranging information, information was obtained relating to the use of the GSDS as an assessment tool for
measuring the effectiveness of the test articles. Individual signs and symptoms were also assessed but can vary from patient to patient.
Therefore, the goal of the GSDS was to provide an assessment tool that could be used for all patients regardless of which signs and
symptoms they are experiencing. The GSDS proved to be a more effective tool for assessing the severity of the disease and the
effectiveness of the drug when compared to the assessment of the individual signs and symptoms. Citius believes that we can continue to
develop this assessment tool as well as other patient reported outcome endpoints for use in the next trials and in the pivotal trial.
Information was also obtained about the formulation of the drug and the vehicle. As a result of this study, we believe that the performance
of the active arms of the study relative to the vehicle can be improved by re-formulating our topical preparation. Therefore, we have
initiated work on vehicle formulation and evaluation of higher potency steroids.
In June and July 2016, the Company engaged the Dominion Group, a leading provider of healthcare and pharmaceutical marketing research
services. The primary market research was conducted to understand the symptoms that are most bothersome to patients better in order to
develop meaningful endpoints for the clinical trials. We also learned about the factors that drive patients to seek medical attention for
hemorrhoids in an effort to understand the disease impact on quality of life. The results of this survey are able to help us develop patient
reported outcome evaluation tools. These tools can be used in clinical trials to evaluate the patients’ conditions and to assess the
performance of the test articles.
In March 2018, we announced that we are selecting a higher potency corticosteroid in our steroid/anesthetic topical formulation program
for the treatment of hemorrhoids. The original topical preparation, CITI-001, which was used in the Phase 2a study, was a combination of
hydrocortisone acetate and lidocaine hydrochloride. The new formulation, CITI-002, which we refer to as Halo-Lido, will combine
lidocaine with the higher potency corticosteroid for symptomatic relief of the pain and discomfort of hemorrhoids.
We held a Type C meeting with the FDA in December 2017 to discuss the results of the Phase 2a study and to obtain the FDA’s view on
development plans to support the potential formulation change for the planned Phase 2b study. We also requested the FDA’s feedback on
our Phase 2b study design, including target patient population, inclusion/exclusion criteria, and efficacy endpoints. The pre-clinical and
clinical development programs for CITI-002 are planned to be similar to those conducted for the development of CITI-001 to support the
design for a planned Phase 3 clinical trial.
6
Market Opportunity
The current market for OTC and topical prescription (“Rx”) products for the symptomatic treatment of hemorrhoids is highly fragmented,
and includes approximately 20 million units of OTC and over 4 million prescriptions. None of the Rx products have received FDA
approval and are only available due to the Drug Efficacy Study Implementation (“DESI”) program, which started decades ago after
enactment of the 1962 Kefauver-Harris Drug Amendments. These DESI products have no FDA reviewed evidence of efficacy or safety,
and may be subject to withdrawal if an approved product were to be introduced. Several topical combination prescription products for the
treatment of hemorrhoids are available containing hydrocortisone in strengths ranging from 0.5% to 3.0%, combined with lidocaine in
strengths ranging from 1.0% to 3.0%. The various topical formulations include creams, ointments, gels, lotions, enemas, pads, and
suppositories. The most commonly prescribed topical combination gel is sold as a branded generic product and contains 2.5%
hydrocortisone and 3.0% lidocaine.
We believe there are currently no FDA-approved prescription drug products for the treatment of hemorrhoids. Although there are numerous
Rx and OTC products commonly used to treat hemorrhoids, none possess proven safety and efficacy data generated from rigorously
conducted clinical trials. We believe that a novel topical formulation of hydrocortisone and lidocaine designed to provide anti-
inflammatory and anesthetic relief and which has an FDA-approved label specifically claiming the treatment of hemorrhoids will become
an important treatment option for physicians who want to provide their patients with a therapy that has demonstrated safety and efficacy in
treating this uncomfortable and often recurring disease. We believe that our CITI-002 product represents an attractive, low-risk product
opportunity with meaningful upside potential.
Market Exclusivity
We believe that we will be the first company to conduct rigorous clinical trials and receive FDA approval of a topical hydrocortisone-
lidocaine combination product for the treatment of hemorrhoids. If we receive FDA approval, we will qualify for 3 years of market
exclusivity for our dosage strength and formulation. In addition, we will also be the only product on the market specifically proven to be
safe and effective for the treatment of hemorrhoids. Generally, if a company conducts clinical trials and receives FDA approval of a product
for which there are similar, but non FDA-approved, prescription products on the market, the manufacturers of the unapproved but marketed
products are required to withdraw them from the market. However, the FDA has significant latitude in determining how to enforce its
regulatory powers in these circumstances. We have not had any communication with the FDA regarding this matter and cannot predict what
action, if any, the FDA will take with respect to the unapproved products.
We believe that should our product receive an FDA approval and demonstrate, proven safety and efficacy data, and if our products obtain 3
years of market exclusivity based on our dosage strength and formulation, we are likely to have a meaningful advantage in our pursuit of
achieving a significant position in the market for topical combination prescription products for the treatment of hemorrhoids.
Sales and Marketing
We are primarily focused on identifying opportunities within the critical care and cancer care market segments. In our product acquisition
criteria, we concentrate on markets that are highly influenced by key opinion leaders (KOLs) and have products that are prescribed by a
relatively small number of physicians, yet provide large opportunities for growth and market share. This strategy allows for a manageable
commercialization effort for our Company in terms of resources and capital. We also seek to provide cost-effective therapies that would be
endorsed by payers, patients, and providers. We believe that we will be able to commercialize products within the scope of these criteria
ourselves, and that we can create marketing synergies by having a common narrow audience for our marketing efforts (“several products in
the bag for the same customer”).
For products that we own that fall out of the narrow scope criteria, we have identified pharmaceutical companies with large sales forces,
experienced sales and marketing management teams, direct-to-consumer (“DTC”) capabilities, significantly larger resources than ours, and
non-competing product portfolios that we believe would make excellent sales and marketing partners for us. We intend to license our mass
audience, non-specialty products to such companies for sales and marketing.
7
Intellectual Property
We rely on a combination of patent, trade secret, copyright, and trademark laws, as well as confidentiality, licensing and other agreements,
to establish and protect our proprietary rights. Our policy is to actively seek to obtain, where appropriate, the broadest intellectual property
protection possible for our current product candidates and any future product candidates both in the U.S. and abroad. However, patent
protection may not provide us with complete protection against competitors who seek to circumvent our patents. To help protect our
proprietary know-how that is not patentable, and for inventions for which patents may be difficult to enforce, we currently rely and will in
the future rely on trade secret protection and confidentiality agreements to protect our interests.
Mino-Lok Intellectual Property
Mino-Lok is covered by an issued U.S. patent (no. 7,601,731), “Antimicrobials in Combination with Chelators and Ethanol for the Rapid
Eradication of Microorganisms Embedded in Biofilm,” which was issued on October 13, 2009. This patent is a composition of matter
patent and provides intellectual property protection until June 7, 2024. There are corresponding applications pending in Europe and Canada
(European Application No. EP 1644024; Canadian Patent Application No. 0252852). On April 15, 2014, a patent application was filed for
an enhanced formulation that provides greater stability of the reconstituted Mino-Lok solution. In June 2017, the Company was notified
that US Patent Application 15/344,113 has been published by the US Patent Office with a publication date of June 1, 2017. This patent is a
step forward for Mino-Lok as it overcomes limitations in mixing antimicrobial solutions where components may precipitate because of
physical and/or chemical factors, thus limiting the stability of the post-mix solutions.
In July 2018, the Company received notice from the MD Anderson Cancer Center that the U.S. Patent and Trademark Office has reviewed
and examined the patent application US 2017/051373 A1 and that it is allowed for issuance as a patent. The new invention overcomes
limitations in mixing antimicrobial solutions in which components have precipitated because of physical and/or chemical factors, thus
limiting the stability of the post-mix solutions.
On May 14, 2014, LMB entered into a patent and technology license agreement with Novel Anti-Infective Therapeutics, Inc. (“NAT”) to
develop and commercialize Mino-Lok on an exclusive, worldwide (except for South America), sub licensable basis. LMB incurred a one-
time license fee in May 2014. On March 20, 2017, LMB entered into an amendment to the license agreement that expanded the licensed
territory to include South America, providing LMB with worldwide rights. Under the license agreement, the Company will pay (i) an
annual maintenance fee until commercial sales of a product subject to the license, (ii) upon commercialization, we will pay annual royalties
on net sales of licensed products, and (iii) certain regulatory and milestone payments. Unless earlier terminated by NAT based on the
failure to achieve certain development or 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.
Mino-Lok has received a Qualified Infectious Disease Product (“QIDP”) designation. The QIDP designation provides New Drug
Applications an additional five years of market exclusivity, which together with the potential three years of exclusivity for the new strength
and formulation of Mino-Lok, would result in a combined total of eight years of market exclusivity regardless of patent protection
Hydro-Lido Intellectual Property
We are developing a new formulation of Hydro-Lido, CITI-002, which will have a unique combination of excipients as well as unique
concentrations of the active ingredients. The goal is to have a product that is optimized for stability and activity. Once the formulation
development is completed and data is obtained, we intend to apply for a patent on this new topical formulation.
We seek to achieve approval for Hydro-Lido by utilizing the FDA’s 505(b)(2) pathway. This pathway will provide 3 years of market
exclusivity.
8
Competition
We operate in a highly competitive and regulated industry which is subject to rapid and frequent changes. We face significant competition
from organizations that are pursuing drugs that would compete with the drug candidates that we are developing and the same or similar
products that target the same conditions we intend to treat. Due to our limited resources, we may not be able to compete successfully
against these organizations, which include many large, well-financed and experienced pharmaceutical and biotechnology companies, as
well as academic and research institutions and government agencies.
Mino-Lok Competition
Currently, the only alternative to Mino-Lok in the treatment of infected CVCs in CRBSI/CLABSI patients of which we are aware, is the
SOC of removing the culprit CVC and replacing a new CVC at a different vascular site. Citius is not aware of any Investigational New
Drug Applications (“INDs”) for a salvage antibiotic lock solution and does not expect any to be forthcoming due to the difficulty of
meeting the necessary criteria to be effective and practical.
At this time, there are no pharmacologic agents approved in the U.S. for the prevention or treatment of CLABSIs in central venous
catheters. Citius is aware that there are several agents in development for prevention but none for salvage. The most prominent of these
appear to be Neutrolin from CorMedix and B-Lock from Great Lakes Pharmaceuticals, Inc. (“GLP”).
Neutrolin® (CorMedix Inc.)
Neutrolin is a formulation of Taurolidine 1.35%, Citrate 3.5%, and Heparin 1000 units/mL. Neutrolin is an anti-microbial catheter lock
solution being developed by CorMedix to prevent CRBSIs and to prevent clotting. In January 2015, the U.S. Food and Drug Administration
(the “FDA”) granted Fast Track and Qualified Infectious Disease Product (“QIDP”) designations for Neutrolin. In December 2015,
CorMedix initiated its Phase 3 clinical trial in hemodialysis patients in the United States. The clinical trial named Catheter Lock Solution
Investigational Trial, or LOCK-IT-100 is a prospective, multicenter, randomized, double-blind, placebo-controlled, active control trial
designed to show efficacy and safety of Neutrolin in preventing CRBSIs in subjects receiving hemodialysis therapy. On April 20, 2017,
CorMedix provided an update on the LOCK-IT-100 trial. CorMedix had enrolled 368 patients to date and completed a safety review by an
independent Data and Safety Monitoring Board (“DSMB”) of the first 279 patients. The DSMB concluded that it was safe to continue the
trial as designed; however, CorMedix initiated discussions with the FDA to make some protocol changes to include one or more interim
efficacy analyses. According to CorMedix, the FDA accepted the CorMedix proposal.
On June 20, 2018, CorMedix announced that it had completed its review and source-verification of the data required for the interim
analysis of the Phase 3 LOCK-IT-100 study for Neutrolin®. The data was then locked and transferred to the independent biostatistician for
un-blinding and analysis, who then provided the results to the independent Data Safety Monitoring Board (DSMB) for its review.
On July 25, 2018 CorMedix announced that the independent Data Safety Monitoring Board (DSMB) had completed its review of the
interim analysis of the data from the currently ongoing Phase 3 LOCK-IT-100 study for Neutrolin®. Because the pre-specified level of
statistical significance was reached and efficacy had been demonstrated, the DSMB recommended the study be terminated early. No safety
concerns were reported by the DSMB based on the interim analysis. The company will submit the results of the interim analysis to the U.S.
Food and Drug Administration for its review.
9
B-Lock™ (Great Lakes Pharmaceuticals, Inc.)
B-Lock is a triple combination of trimethoprim, EDTA and ethanol from Great Lakes Pharmaceuticals, Inc. (“GLP”). On July 24, 2012,
GLP announced the initiation of a clinical study of B-Lock. We are unaware as to the progress or results of these studies. In addition, we
are not aware of any IND being filed in the US for B-Lock, nor are we aware of any clinical studies to support salvage of infected catheters
in bacteremic patients.
Neither of these lock solutions have been shown to be effective in salvaging catheters in bacteremic patients as Mino-Lok is intended to do,
and Citius does not expect that either would be pursued for this indication.
There has been no further public information available on GLP. GLP’s web site and phone number are no longer active and the Company
believes that they have ceased operations.
Hydro-Lido Competition
The primary competition in the hemorrhoid market is non-prescription over the counter products. When approved, Hydro-Lido will be the
only prescription product for the treatment of hemorrhoids.
Supply and Manufacturing
We do not currently have and we do not intend to set up our own manufacturing facilities. We expect to use approved contract
manufacturers for manufacturing our products in all stages of development after we file for FDA approval. Each of our domestic and
foreign contract manufacturing establishments, including any contract manufacturers we may decide to use, must be listed in the New Drug
Application (“NDA”) and must be registered with the FDA. Also, the FDA imposes substantial annual fees on manufacturers of branded
products.
In general, our suppliers purchase raw materials and supplies on the open market. Substantially all such materials are obtainable from a
number of sources so that the loss of any one source of supply would not have a material adverse effect on us.
If we elect to conduct product development and manufacturing, we will be subject to regulation under various federal and state laws,
including the Occupational Safety and Health Act, the Environmental Protection Act, the Toxic Substances Control Act, the Resource
Conservation and Recovery Act, the Controlled Substances Act and other present and potential future federal, state or local regulations.
We have contracted with proven suppliers and manufacturers for active pharmaceutical ingredient, development and packaging. We are
confident that all materials meet or will meet specifications discussed at the chemistry, manufacturing and controls meeting with the FDA.
Regulatory Strategy
United States Government Regulation
The research, development, testing, manufacture, labeling, promotion, advertising, distribution and marketing, among other things, of our
products are extensively regulated by governmental authorities in the United States and other countries. Our products may be classified by
the FDA as a drug or a medical device depending upon the indications for use or claims. Because certain of our product candidates are
considered as medical devices and others are considered as drugs for regulatory purposes, we intend to submit applications to regulatory
agencies for approval or clearance of both medical device and pharmaceutical product candidates.
In the United States, the FDA regulates drugs and medical devices under the Federal Food, Drug, and Cosmetic Act and the agency’s
implementing regulations. If we fail to comply with the applicable United States requirements at any time during the product development
process, clinical testing, and the approval process or after approval, we may become subject to administrative or judicial sanctions. These
sanctions could include the FDA’s refusal to approve pending applications, license suspension or revocation, withdrawal of an approval,
warning letters, adverse publicity, product recalls, product seizures, total or partial suspension of production or distribution, injunctions,
fines, civil penalties or criminal prosecution. Any agency enforcement action could have a material adverse effect on our company.
10
Foreign Regulatory Requirements
We and any collaborative partners may be subject to widely varying foreign regulations, which may be different from those of the FDA,
governing clinical trials, manufacture, product registration and approval and pharmaceutical sales. Whether or not FDA approval has been
obtained, we or our collaboration partners must obtain a separate approval for a product by the comparable regulatory authorities of foreign
countries prior to the commencement of product marketing in such countries. In certain countries, regulatory authorities also establish
pricing and reimbursement criteria. The approval process varies from country to country, and the time may be longer or shorter than that
required for FDA approval. In addition, under current United States law, there are restrictions on the export of products not approved by the
FDA, depending on the country involved and the status of the product in that country.
International sales of medical devices manufactured in the U.S. that are not approved by the FDA for use in the U.S., or are banned or
deviate from lawful performance standards, are subject to FDA export requirements. Exported devices are subject to the regulatory
requirements of each country to which the device is exported. Some countries do not have medical device regulations, but in most foreign
countries, medical devices are regulated. Frequently, regulatory approval may first be obtained in a foreign country prior to application in
the U.S. to take advantage of differing regulatory requirements. Most countries outside of the U.S. require that product approvals be
recertified on a regular basis, generally every 5 years. The recertification process requires that we evaluate any device changes and any new
regulations or standards relevant to the device and conduct appropriate testing to document continued compliance. Where recertification
applications are required, they must be approved in order to continue selling our products in those countries.
In the European Union, in order for a product to be marketed and sold, it is required to comply with the Medical Devices Directive and
obtain CE Mark certification. The CE Mark certification encompasses an extensive review of the applicant’s quality management system
which is inspected by a notified body’s auditor as part of a stage 1 and 2 International Organization for Standardization (“ISO”) 13485:2016
audit, in accordance with worldwide recognized ISO standards and applicable European Medical Devices Directives for quality
management systems for medical device manufacturers. Once the quality management system and design dossier has been successfully
audited by a notified body and reviewed and approved by a competent authority, a CE certificate for the medical device will be issued.
Applicants are also required to comply with other foreign regulations such as the requirement to obtain Ministry of Health, Labor and
Welfare approval before a new product can be launched in Japan. The time required to obtain these foreign approvals to market our
products may vary from U.S. approvals, and requirements for these approvals may differ from those required by the FDA.
Medical device laws and regulations are in effect in many of the countries in which we may do business outside the United States. These
laws and regulations range from comprehensive device approval requirements for our medical device product to requests for product data
or certifications. The number and scope of these requirements are increasing. We may not be able to obtain regulatory approvals in such
countries and may be required to incur significant costs in obtaining or maintaining its foreign regulatory approvals. In addition, the export
of certain of our products which have not yet been cleared for domestic commercial distribution may be subject to FDA export restrictions.
Any failure to obtain product approvals in a timely fashion or to comply with state or foreign medical device laws and regulations may have
a serious adverse effect on our business, financial condition or results of operations.
Employees
As of September 30, 2018, we had seven employees and various consultants providing support. Through our consulting and collaboration
arrangements, and including our Scientific Advisory Board, we have access to more than 30 additional professionals, who possess
significant expertise in business development, legal, accounting, regulatory affairs, clinical operations and manufacturing. We also rely
upon a network of consultants to support our clinical studies and manufacturing efforts.
11
Executive Officers of Citius
Myron Holubiak, President, Chief Executive Officer and Director – Mr. Holubiak, 71, was appointed President, Chief Executive Officer
and Director in March 2016. He previously served as a Director of Citius since October 2015 and was the founder and Chief Executive
Officer and President of Leonard-Meron Biosciences, Inc., an acquired subsidiary of Citius, from March 2013 until March 2016.
Leonard Mazur, Executive Chairman and Secretary – Mr. Mazur, 73, has been a member of the Board since September 2014. Mr. Mazur
previously served as Chief Executive Officer, President, and Chief Operating Officer from September 2014 until March 2016.
Jaime Bartushak, Chief Financial Officer and Principal Financial Officer – Mr. Bartushak, 51, was appointed as Chief Financial Officer in
November 2017. Previously, he was one of the founders and Chief Financial Officer of Leonard-Meron Biosciences, Inc., an acquired
subsidiary of Citius,
Other Information
We make available, free of charge through our website, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports
on Form 8-K and all amendments to those reports as soon as is reasonably practicable after such material is electronically filed with or
furnished to the Securities and Exchange Commission (the “SEC”) pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of
1934, as amended (the “Exchange Act”). The SEC maintains an Internet site that contains these reports at www.sec.gov.
Our website address is http://www.citiuspharma.com. The information contained in, or that can be accessed through, our website is not part
of this report.
Item 1A. Risk Factors
This report contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from
those discussed in this report. Factors that could cause or contribute to these differences include, but are not limited to, those discussed
below and elsewhere in this report and in any documents incorporated in this report by reference.
If any of the following risks, or other risks not presently known to us or that we currently believe to not be significant, develop into
actual events, then our business, financial condition, results of operations or prospects could be materially adversely affected. If that
happens, the market price of our common stock could decline, and stockholders may lose all or part of their investment.
Risks related to our Business and our Industry
We have a history of net losses and expect to incur losses for the foreseeable future. We may never generate revenues or, if we are able
to generate revenues, achieve profitability.
We were formed as a limited liability company in 2007 and since our inception have incurred a net loss in each of our previous operating
years. Our ability to become profitable depends upon our ability to obtain marketing approval for and generate revenues from sales of our
product candidates. We have been focused on product development and have not generated any revenues to date. We have incurred losses
in each period of our operations, and we expect to continue to incur losses for the foreseeable future. These losses are likely to continue to
adversely affect our working capital, total assets and shareholders’ equity (deficit). The process of developing our products requires
significant clinical, development and laboratory testing and clinical trials. In addition, commercialization of our product candidates will
require that we obtain necessary regulatory approvals and establish sales, marketing and manufacturing capabilities, either through internal
hiring or through contractual relationships with others. We expect to incur substantial losses for the foreseeable future as a result of
anticipated increases in our research and development costs, including costs associated with conducting preclinical testing and clinical
trials, and regulatory compliance activities. We incurred net losses of $12,536,638, $10,384,953, and $8,295,698 for the years ended
September 30, 2018, 2017 and 2016, respectively. At September 30, 2018, we had stockholders’ equity of $27,865,684 and an accumulated
deficit of $40,257,838. Our net cash used for operating activities was $11,318,138, $7,971,205, and $5,900,421 for the years ended
September 30, 2018, 2017 and 2016, respectively.
12
Our ability to generate revenues and achieve profitability will depend on numerous factors, including success in:
● developing and testing product candidates;
● receiving regulatory approvals for our product candidates;
● commercializing our product candidates;
● manufacturing commercial quantities of our product candidates at acceptable cost levels; and
● establishing a favorable competitive position for our product candidates.
Many of these factors will depend on circumstances beyond our control. We cannot assure you that any of our products will be approved
by the FDA, that we will successfully bring any product to market or, if so, that we will ever become profitable.
There is substantial doubt about our ability to continue as a going concern.
Currently, we do not have sufficient capital to continue our operations after the first nine months of fiscal 2019. You should not rely on our
consolidated balance sheet as an indication of the amount of proceeds that would be available to satisfy claims of creditors, and potentially
be available for distribution to shareholders, in the event of liquidation.
Our audited consolidated financial statements included within have been prepared assuming that 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. We have concluded that substantial doubt about our
ability to continue as a going concern exists and our auditors have made reference to this in their audit report on our audited consolidated
financial statements for the year ended September 30, 2018.
We need to secure additional financing.
We anticipate that we will incur operating losses for the foreseeable future. We have received gross proceeds of approximately $35.6
million from our public and private placement offerings through September 30, 2018. Additionally, in connection with the acquisition of
LMB our Executive Chairman, Leonard Mazur, made an equity investment of $3.0 million in March 2016. Mr. Mazur has also loaned us
$4,710,000 pursuant to convertible promissory notes. On August 8, 2017, these notes and accrued interest of $76,240 were converted into
1,547,067 shares of common stock at a price of $3.09 per share as part of an underwritten public offering which closed on the same date.
The amount and timing of our future funding requirements will depend on many factors, including, but not limited to:
● the rate of progress and cost of our trials and other product development programs for our product candidates;
● the costs and timing of obtaining licenses for additional product candidates or acquiring other complementary technologies;
● the timing of any regulatory approvals of our product candidates;
● the costs of establishing sales, marketing and distribution capabilities; and
● the status, terms and timing of any collaborative, licensing, co-promotion or other arrangements.
13
We will need to access the capital markets in the future for additional capital for research and development and for operations.
Traditionally, pharmaceutical companies have funded their research and development expenditures through raising capital in the equity
markets. Declines and uncertainties in these markets over the past several years have severely restricted raising new capital and have
affected companies’ ability to continue to expand or fund existing research and development efforts. If these economic conditions continue
or become worse, our future cost of equity or debt capital and access to the capital markets could be adversely affected. If we are not
successful in securing additional financing, we may be required to delay significantly, reduce the scope of or eliminate one or more of our
research or development programs, downsize our general and administrative infrastructure, or seek alternative measures to avoid
insolvency, including arrangements with collaborative partners or others that may require us to relinquish rights to certain of our
technologies or product candidates.
We are a late-stage development company with an unproven business strategy and may never achieve commercialization of our
therapeutic products or profitability.
Our strategy of using collaborative partners to assist us in the development of our therapeutic products is unproven. Our success will
depend upon our ability to enter into additional collaboration agreements on favorable terms and to select an appropriate commercialization
strategy for each product candidate that we and our collaborators choose to pursue. If we are not successful in implementing our strategy to
commercialize our product candidates, we may never achieve, maintain or increase profitability. Our ability to successfully commercialize
any of our products or product candidates will depend, among other things, on our ability to:
● successfully complete clinical trials for our product candidates;
● produce, through a validated process, sufficiently large quantities of our drug compound(s) to permit successful commercialization
of our product candidates;
● receive marketing approvals from the FDA and similar foreign regulatory authorities for our product candidates;
● establish commercial manufacturing arrangements with third-party manufacturers for our product candidates;
● build and maintain strong sales, distribution and marketing capabilities sufficient to launch commercial sales of any approved
products or establish collaborations with third parties for such commercialization;
● secure acceptance of any approved products from physicians, health care payers, patients and the medical community; and
● manage our spending as costs and expenses increase due to clinical trials, regulatory applications and development and
commercialization activities.
There are no guarantees that we will be successful in completing these tasks. If we are unable to successfully complete these tasks, we may
not be able to commercialize any of our product candidates in a timely manner, or at all, in which case we may be unable to generate
sufficient revenues to sustain and grow our business. If we experience unanticipated delays or problems, our development costs could
substantially increase and our business, financial condition and results of operations will be adversely affected.
We face significant risks in our product candidate development efforts.
Our business depends on the successful development and commercialization of our product candidates. We are not permitted to market any
of our product candidates in the United States until we receive approval of an NDA from the FDA, or in any foreign jurisdiction until we
receive the requisite approvals from such jurisdiction. The process of developing new drugs and/or therapeutic products is inherently
complex, unpredictable, time-consuming, expensive and uncertain. We must make long-term investments and commit significant resources
before knowing whether our development programs will result in drugs that will receive regulatory approval and achieve market
acceptance. Product candidates that appear to be promising at all stages of development may not reach the market for a number of reasons
that may not be predictable based on results and data of the clinical program. Product candidates may be found ineffective or may cause
harmful side effects during clinical trials, may take longer to progress through clinical trials than had been anticipated, may not be able to
achieve the pre-defined clinical endpoints due to statistical anomalies even though clinical benefit may have been achieved, may fail to
receive necessary regulatory approvals, may prove impracticable to manufacture in commercial quantities at reasonable cost and with
acceptable quality, or may fail to achieve market acceptance.
14
We cannot predict whether or when we will obtain regulatory approval to commercialize our product candidates that are under
development and we cannot, therefore, predict the timing of any future revenues from these product candidates, if any. The FDA has
substantial discretion in the drug approval process, including the ability to delay, limit or deny approval of a product candidate for many
reasons. For example, the FDA:
● could determine that we cannot rely on Section 505(b)(2) for Mino-Lok or Hydro-Lido or any future product candidates;
● could determine that the information provided by us was inadequate, contained clinical deficiencies or otherwise failed to
demonstrate the safety and effectiveness of any of our product candidates for any indication;
● may not find the data from clinical trials sufficient to support the submission of an NDA or to obtain marketing approval in the
United States, including any findings that the clinical and other benefits of our product candidates outweigh their safety risks;
● may disagree with our trial design or our interpretation of data from preclinical studies or clinical trials, or may change the
requirements for approval even after it has reviewed and commented on the design for our trials;
● may determine that we have identified the wrong reference listed drug or drugs or that approval of our Section 505(b)(2) application
for any of our product candidates is blocked by patent or non-patent exclusivity of the reference listed drug or drugs;
● may identify deficiencies in the manufacturing processes or facilities of third-party manufacturers with which we enter into
agreements for the manufacturing of our product candidates;
● may approve our product candidates for fewer or more limited indications than we request, or may grant approval contingent on the
performance of costly post-approval clinical trials;
● m a y change its approval policies or adopt new regulations that could adversely impact our product candidate development
programs; or
● may not approve the labeling claims that we believe are necessary or desirable for the successful commercialization of our product
candidates.
Any failure to obtain regulatory approval of our product candidates would significantly limit our ability to generate revenues, and any
failure to obtain such approval for all of the indications and labeling claims we deem desirable could reduce our potential revenues.
The results of pre-clinical studies and completed clinical trials are not necessarily predictive of future results, and our current product
candidates may not have favorable results in later studies or trials.
Pre-clinical studies and Phase 1 and Phase 2 clinical trials are not primarily designed to test the efficacy of a product candidate in the
general population, but rather to test initial safety, to study pharmacokinetics and pharmacodynamics, to study limited efficacy in a small
number of study patients in a selected disease population, and to identify and attempt to understand the product candidate’s side effects at
various doses and dosing schedules. Success in pre-clinical studies or completed clinical trials does not ensure that later studies or trials,
including continuing pre-clinical studies and large-scale clinical trials, will be successful nor does it predict future results. Favorable results
in early studies or trials may not be repeated in later studies or trials, and product candidates in later stage trials may fail to show acceptable
safety and efficacy despite having progressed through earlier trials. In addition, the placebo rate in larger studies may be higher than
expected.
15
We may be required to demonstrate through large, long-term outcome trials that our product candidates are safe and effective for use in a
broad population prior to obtaining regulatory approval.
There is typically a high rate of attrition from the failure of product candidates proceeding through clinical trials. In addition, certain
subjects in our clinical trials may respond positively to placebo treatment - these subjects are commonly known as “placebo responders” -
making it more difficult to demonstrate efficacy of the test drug compared to placebo. This effect is likely to be observed in the treatment of
hemorrhoids.
If any of our product candidates fail to demonstrate sufficient safety and efficacy in any clinical trial, we will experience potentially
significant delays in, or may decide to abandon development of that product candidate. If we abandon or are delayed in our development
efforts related to any of our product candidates, we may not be able to generate any revenues, continue our operations and clinical studies,
or become profitable. Our reputation in the industry and in the investment community would likely be significantly damaged. Further, it
might not be possible for us to raise funds in the public or private markets, and our stock price would likely decrease significantly.
If we are unable to file for approval of Mino-Lok or Hydro-Lido under Section 505(b)(2) of the Federal Food, Drug and Cosmetic Act
or if we are required to generate additional data related to safety and efficacy in order to obtain approval of Mino-Lok under Section
505(b)(2), we may be unable to meet our anticipated development and commercialization timelines.
Our current plans for filing additional NDAs for our product candidates include efforts to minimize the data we will be required to generate
in order to obtain marketing approval for our additional product candidates and therefore possibly reduce the time and cost of development
of a product candidate and obtain a shortened review period for the application. The timeline for filing and review of our planned NDA for
each of Mino-Lok and Hydro-Lido is based upon our plan to submit each such NDA under Section 505(b)(2) of the Federal Food, Drug
and Cosmetic Act, wherein we will rely in part on data in the public domain or elsewhere. Depending on the data that may be required by
the FDA for approval, some of the data may be related to products already approved by the FDA. If the data relied upon is related to
products already approved by the FDA and covered by third-party patents we would be required to certify that we do not infringe the listed
patents or that such patents are invalid or unenforceable. As a result of the certification, the third party would have 45 days from
notification of our certification to initiate an action against us. In the event that an action is brought in response to such a certification, the
approval of our NDA could be subject to a stay of up to 30 months or more while we defend against such a suit. Approval of any product
candidate under Section 505(b)(2) may therefore be delayed until patent exclusivity expires or until we successfully challenge the
applicability of those patents applicable to our product candidates. Alternatively, we may elect to generate sufficient additional clinical data
so that we no longer rely on data which triggers a potential stay of the approval of any product candidate. Even if no exclusivity periods
apply to an application under Section 505(b)(2), the FDA has broad discretion to require us to generate additional data on the safety and
efficacy of our product candidates to supplement third-party data on which we may be permitted to rely. In either event, we could be
required, before obtaining marketing approval for such product candidate, to conduct substantial new research and development activities
beyond those we currently plan to engage in order to obtain approval of that product candidate. Such additional new research and
development activities would be costly and time consuming.
We may not be able to obtain shortened review of our applications where available, and in any event the FDA may not agree that any of our
product candidates qualify for marketing approval. If we are required to generate additional data to support approval, we may be unable to
meet our anticipated development and commercialization timelines, may be unable to generate the additional data at a reasonable cost, or at
all, and may be unable to obtain marketing approval of that product candidate. In addition, notwithstanding the approval of many products
by the FDA pursuant to Section 505(b)(2), over the last few years, some pharmaceutical companies and others have objected to the FDA’s
interpretation of Section 505(b)(2). If the FDA changes its interpretation of Section 505(b)(2), or if the FDA’s interpretation is successfully
challenged in court, this could delay or even prevent the FDA from approving any Section 505(b)(2) application that we submit.
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Even if we receive regulatory approval to commercialize our product candidates, post-approval marketing and promotion of products is
highly regulated by the FDA, and marketing campaigns which violate FDA standards may result in adverse consequences including
regulatory enforcement action by the FDA as well as follow-on actions filed by consumers and other end-payers, which could result in
substantial fines, sanctions and damage awards against us, any of which could harm our business.
Post-approval marketing and promotion of drugs, standards and regulations for direct-to-consumer advertising, dissemination of off-label
product information, industry-sponsored scientific and educational activities and promotional activities via the Internet are heavily
scrutinized and regulated by the FDA. Drugs may only be marketed for approved indications and in accordance with provisions of the FDA
approved labels. Failure to comply with such requirements may result in adverse publicity, warning letters issued by the FDA, and civil or
criminal penalties.
In the event the FDA discovers post-approval violations, we could face penalties in the future including the FDA’s issuance of a cease and
desist order, impounding of our products, and civil or criminal penalties. As a follow-on to such governmental enforcement activities,
consumers and other end-payers of the product may initiate action against us claiming, among other things, fraudulent misrepresentation,
unfair competition, violation of various state consumer protection statues and unjust enrichment. If the plaintiffs in such follow-on actions
are successful, we could be subject to various damages, including compensatory damages, treble damages, punitive damages, restitution,
disgorgement, prejudgment and post-judgment interest on any monetary award, and the reimbursement of the plaintiff’s legal fees and costs,
any of which could have an adverse effect on our revenue, business, financial condition and prospects.
Even if we receive regulatory approval to commercialize a product candidate, our ability to generate revenues from any resulting
product will be subject to a variety of risks, many of which are out of our control.
Even if one of our product candidates obtain regulatory approval, the product may not gain market acceptance among physicians, patients,
healthcare payers or the medical community. The indication may be limited to a subset of the population or we may implement a
distribution system and patient access program that is limited. Coverage and reimbursement of our product candidates by third-party
payers, including government payers, generally is also necessary for optimal commercial success. We believe that the degree of market
acceptance and our ability to generate revenues from any approved produce candidate or acquired product will depend on a number of
factors, including:
● prevalence and severity of any side effects;
● results of any post-approval studies of the drug;
● potential or perceived advantages or disadvantages over alternative treatments including generics;
● the relative convenience and ease of administration and dosing schedule;
● availability of coverage and reimbursement from government and other third-party payers;
● the willingness of patients to pay out of pocket in the absence of government or third-party coverage;
● product labeling or product insert requirements of the FDA or other regulatory authorities;
● strength of sales, marketing and distribution support;
● price of any future drugs, if approved, both in absolute terms and relative to alternative treatments;
● the effectiveness of our or any future collaborators’ sales and marketing strategies;
● the effect of current and future healthcare laws on our product candidates;
● patient access programs that require patients to provide certain information prior to receiving new and refill prescriptions; and
● requirements for prescribing physicians to complete certain educational programs for prescribing drugs.
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If approved, any product candidate may fail to achieve market acceptance or generate significant revenue to achieve or sustain profitability.
In addition, our efforts to educate the medical community and third-party payers on the benefits of any product candidate may require
significant resources and may never be successful.
Even if approved for marketing by applicable regulatory bodies, we will not be able to create a market for any of our products if we fail
to establish marketing, sales and distribution capabilities, or fail to enter into arrangements with third parties.
Our strategy with our product candidates is to outsource to third parties, all or most aspects of the product development process, as well as
marketing, sales and distribution activities. Currently, we do not have any sales, marketing or distribution capabilities. In order to generate
sales of any product candidates that receive regulatory approval, we must either acquire or develop an internal marketing and sales force
with technical expertise and with supporting distribution capabilities or make arrangements with third parties to perform these services for
us. The acquisition or development of a sales and distribution infrastructure would require substantial resources, which may divert the
attention of our management and key personnel and defer our product development efforts. To the extent that we enter into marketing and
sales arrangements with other companies, our revenues will depend on the efforts of others. These efforts may not be successful. If we fail
to develop sales, marketing and distribution channels, or enter into arrangements with third parties, we will experience delays in product
sales and incur increased costs.
The markets in which we operate are highly competitive and we may be unable to compete successfully against new entrants or
established companies.
Competition in the pharmaceutical and medical products industries is intense and is characterized by costly and extensive research efforts
and rapid technological progress. We are aware of several pharmaceutical companies also actively engaged in the development of therapies
for at least some of the same conditions we are targeting. Many of these companies have substantially greater research and development
capabilities as well as substantially greater marketing, financial and human resources than we do. In addition, many of these companies
have significantly greater experience than us in undertaking pre-clinical testing, human clinical trials and other regulatory approval
procedures. Our competitors may develop technologies and products that are more effective than those we are currently marketing or
researching and developing. Such developments could render our product candidates, if approved, less competitive or possibly obsolete.
We are also competing with respect to marketing capabilities and manufacturing efficiency, areas in which we have no current capabilities
and in which we have limited experience. Mergers, acquisitions, joint ventures and similar events may also significantly increase the
competition we face. In addition, new developments, including the development of other drug technologies and methods of preventing the
incidence of disease, occur in the pharmaceutical and medical technology industries at a rapid pace. These developments may render our
products and product candidates obsolete or noncompetitive. Compared to us, many of our potential competitors have substantially greater:
● research and development resources, including personnel and technology;
● regulatory resources, experience and expertise;
● product candidate development and clinical trial resources and experience;
● product sourcing, sales and marketing resources and experience;
● experience and expertise in exploitation of intellectual property rights; and
● access to strategic partners and capital resources.
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As a result of these factors, our competitors may obtain regulatory approval of their products more rapidly than we can or may obtain
patent protection or other intellectual property rights that limit our ability to develop or commercialize our product candidates. Our
competitors may also develop drugs or surgical approaches that are more effective, more useful and less costly than ours and may also be
more successful in manufacturing and marketing their products. In addition, our competitors may be more effective than us in
commercializing their products and as a result, our business and prospects might be materially harmed.
Physicians and patients might not accept and use any of our products for which regulatory approval is obtained.
Even if the FDA approves one of our product candidates, physicians and patients might not accept and use it. Acceptance and use of our
approved products will depend upon a number of factors, including:
● perceptions by members of the health care community, including physicians, about the safety and effectiveness of our products;
● cost-effectiveness of our product relative to competing products or therapies;
● availability of reimbursement for our product from government or other healthcare payers; and
● effective marketing and distribution efforts by us and/or our licensees and distributors, if any.
If our current product candidates are approved, we expect their sales to generate substantially all of our revenues for the foreseeable future,
and as a result, the failure of these products to find market acceptance would harm our business and would require us to seek additional
financing.
Our two product candidates, Mino-Lok and Hydro-Lido, are combination products consisting of components that have each been
separately approved by the FDA for other indications and which are commercially available and marketed by other companies. Our
approval under 505(b)(2), if received, would not preclude physicians, pharmacists and patients from obtaining individual drug products
and titrating the dosage of these drug products as close to our approved dose as possible.
Our Hydro-Lido product candidate for the treatment of hemorrhoids is a combination product consisting of two drugs, hydrocortisone and
lidocaine, that have each been separately approved by the FDA for other indications and which are commercially available and marketed
by other companies. Hydrocortisone creams are available from strengths ranging from 0.5% to 2.5% and lidocaine creams are also available
in strengths up to 5%. From our market analysis and discussions with a limited number of physicians, we know that patients sometimes
obtain two separate cream products and co-administer them as prescribed, giving them a combination treatment which could be very similar
to what we intend to study and seek approval for. As a branded, FDA-approved product with safety and efficacy data, we intend to price our
product substantially higher than the generically available individual creams. We will then have to convince third-party payers and
pharmacy benefit managers of the advantages of our product and justify our premium pricing. We may encounter resistance from these
entities and will then be dependent on patients’ willingness to pay the premium and not seek alternatives. In addition, pharmacists often
suggest lower cost prescription treatment alternatives to both physicians and patients. Our 505(b)(2) approval and the market exclusivity we
may receive will not guarantee that such alternatives will not exist, that substitution will not occur, or that there will be immediate
acceptance to our pricing by payer formularies.
Our Mino-Lok solution contains minocycline, disodium ethylenediaminetetraacetic acid (edetate), and ethyl alcohol, all of which have been
separately approved by the FDA for other indications, or are used as excipients in other parenteral products.
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Our ability to generate product revenues will be diminished if any of our approved products sell for inadequate prices or patients are
unable to obtain adequate levels of reimbursement.
Our ability to commercialize our product candidates, alone or with collaborators, will depend in part on the extent to which reimbursement
will be available from:
● government and health administration authorities;
● private health maintenance organizations and health insurers; and
● other healthcare payers.
Significant uncertainty exists as to the reimbursement status of newly approved healthcare products. Healthcare payers, including Medicare,
are challenging the prices charged for medical products and services. Government and other healthcare payers increasingly attempt to
contain healthcare costs by limiting both coverage and the level of reimbursement for drugs. Even if our product candidates are approved
by the FDA, insurance coverage might not be available, and reimbursement levels might be inadequate, to cover our products. If
government and other healthcare payers do not provide adequate coverage and reimbursement levels for our products, once approved,
market acceptance of such products could be reduced. Proposals to modify the current health care system in the U.S. to improve access to
health care and control its costs are continually being considered by the federal and state governments. In March 2010, the U.S. Congress
passed landmark healthcare legislation. Portions of this legislation have been repealed recently and members of the U.S. Congress and
some state legislatures continue to seek to overturn at least some remaining portions of the legislation and we expect they will continue to
review and assess this legislation and possibly alternative health care reform proposals. We cannot predict what impact on federal
reimbursement policies this legislation will have in general or on our business specifically. We cannot predict whether new proposals will
be made or adopted, when they may be adopted or what impact they may have on us if they are adopted.
Health administration authorities in countries other than the U.S. may not provide reimbursement for our products at rates sufficient for us
to achieve profitability, or at all. Like the U.S., these countries have considered health care reform proposals and could materially alter their
government-sponsored health care programs by reducing reimbursement rates. Any reduction in reimbursement rates under Medicare or
foreign health care programs could negatively affect the pricing of our products. If we are not able to charge a sufficient amount for our
products, then our margins and our profitability will be adversely affected.
We rely exclusively on third parties to formulate and manufacture our product candidates.
We do not have and do not intend to establish our own manufacturing facilities. Consequently, we lack the physical plant to formulate and
manufacture our own product candidates, which are currently being manufactured entirely by a commercial third party. If any additional
product candidate we might develop or acquire in the future receives FDA approval, we will rely on one or more third-party contractors to
manufacture our products. If, for any reason, we become unable to rely on our current source or any future source to manufacture our
product candidates, either for clinical trials or, for commercial quantities, then we would need to identify and contract with additional or
replacement third-party manufacturers to manufacture compounds for preclinical, clinical and commercial purposes. We might not be
successful in identifying additional or replacement third-party manufacturers, or in negotiating acceptable terms with any that we do
identify. If we are unable to secure and maintain third-party manufacturing capacity, the development and sales of our products and our
financial performance might be materially affected.
In addition, before any of our collaborators can begin to commercially manufacture our product candidates, each must obtain regulatory
approval of the manufacturing facility and process. Manufacturing of drugs for clinical and commercial purposes must comply with the
FDA’s Current Good Manufacturing Practices, or cGMP, and applicable non-U.S. regulatory requirements. The cGMP requirements
govern quality control and documentation policies and procedures. Complying with cGMP and non-U.S. regulatory requirements will
require that we expend time, money, and effort in production, recordkeeping, and quality control to assure that the product meets applicable
specifications and other requirements. Our contracted manufacturing facilities must also pass a pre-approval inspection prior to FDA
approval. Failure to pass a pre- approval inspection might significantly delay FDA approval of our products. If any of our collaborators fails
to comply with these requirements, we would be subject to possible regulatory action which could limit the jurisdictions in which we are
permitted to sell our products. As a result, our business, financial condition, and results of operations might be materially harmed.
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Our reliance on a limited number of third-party manufacturers exposes us to the following risks:
● We might be unable to identify manufacturers for commercial supply on acceptable terms or at all because the number of potential
manufacturers is limited and the FDA must approve any replacement contractor. This approval would generally require compliance
inspections. In addition, a new manufacturer would have to be educated in, or develop substantially equivalent processes for,
production of our products after receipt of FDA approval, if any;
● Our third-party manufacturers might be unable to formulate and manufacture our products in the volume and of the quality required
to meet our clinical and commercial needs, if any;
● Our contract manufacturers might not perform as agreed or might not remain in the contract manufacturing business for the time
required to supply our clinical trials or to successfully produce, store and distribute our products;
● Currently, our contract manufacturer for our clinical supplies is foreign, which increases the risk of shipping delays and adds the
risk of import restrictions;
● Drug manufacturers are subject to ongoing periodic unannounced inspection by the FDA and corresponding state agencies to ensure
strict compliance with cGMP and other government regulations and corresponding foreign standards. We do not have complete
control over third-party manufacturers’ compliance with these regulations and standards;
● If any third-party manufacturer makes improvements in the manufacturing process for our products, we might not own, or might
have to share, the intellectual property rights to the innovation with our licensors;
● Operations of our third-party manufacturers or suppliers could be disrupted by conditions unrelated to our business or operations,
including a bankruptcy of the manufacturer or supplier; and
● We might compete with other companies for access to these manufacturers’ facilities and might be subject to manufacturing delays
if the manufacturers give other clients higher priority than us.
Each of these risks could delay our clinical trials or the approval, if any, of our product candidates by the FDA or any foreign regulatory
agency or the commercialization of our product candidates and could result in higher costs or deprive us of potential product revenues. As
a result, our business, financial condition, and results of operations might be materially harmed.
We are and will be dependent on third-party contract research organizations to conduct all of our future human trials.
We are and will be dependent on third-party research organizations to conduct all of our human trials with respect to our product
candidates, including those that we may develop in the future. If we are unable to obtain any necessary testing services on acceptable
terms, we may not complete our product development efforts in a timely manner. If we rely on third parties for human trials, we may lose
some control over these activities and become too dependent upon these parties. These third parties may not complete testing activities on
schedule or when we so request. We may not be able to secure and maintain suitable research organizations to conduct our human trials.
We are responsible for confirming that each of our clinical trials is conducted in accordance with our general plan and protocol. Moreover,
the FDA and foreign regulatory agencies require us to comply with regulations and standards, commonly referred to as good clinical
practices, for conducting, recording and reporting the results of clinical trials to assure that data and reported results are credible and
accurate and that the trial participants are adequately protected. Our reliance on third parties does not relieve us of these responsibilities
and requirements. If these third parties do not successfully carry out their contractual duties or regulatory obligations or meet expected
deadlines, if the third parties need to be replaced or if the quality or accuracy of the data they obtain is compromised due to the failure to
adhere to our clinical protocols or regulatory requirements or for other reasons, our preclinical development activities or clinical trials may
be extended, delayed, suspended or terminated, and we may not be able to obtain regulatory approval for our future product candidates.
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Any termination or breach by or conflict with our strategic partners or licensees could harm our business.
If we or any of our collaborators or licensees fail to renew or terminate any of our collaboration or license agreements or if either party fails
to satisfy its obligations under any of our collaboration or license agreements or complete them in a timely manner, we could lose
significant sources of revenue, which could result in volatility in our future revenue. In addition, our agreements with our collaborators and
licensees may have provisions that give rise to disputes regarding the rights and obligations of the parties. These and other possible
disagreements could lead to termination of the agreement or delays in collaborative research, development, supply or commercialization of
certain products, or could require or result in litigation or arbitration. Any such conflicts with our collaborators could reduce our ability to
obtain future collaboration agreements and could have a negative impact on our relationship with existing collaborators, adversely
affecting our business and revenues. Finally, any of our collaborations or license agreements may prove to be unsuccessful.
We might seek to grow and develop our business through acquisitions of or investment in new or complementary businesses, products
or technologies, and the failure to manage these acquisitions or investments, or the failure to integrate them with our existing business,
could have a material adverse effect on us.
We might consider opportunities to acquire or invest in other technologies, products and businesses that might enhance our capabilities or
complement our current product candidates. Potential and completed acquisitions and strategic investments involve numerous risks,
including potential problems or issues associated with the following:
● assimilating the purchased technologies, products or business operations;
● maintaining uniform standards, procedures, controls and policies;
● unanticipated costs associated with the acquisition or investment;
● diversion of our management’s attention from our preexisting business;
● maintaining or obtaining the necessary regulatory approvals or complying with regulatory standards; and
● adverse effects on existing business operations.
We have no current commitments with respect to any acquisition or investment in other technologies or businesses. We do not know if we
will identify suitable acquisitions, whether we will be able to successfully complete any acquisitions, or whether we will be able to
successfully integrate any acquired product, technology or business into our business or retain key personnel, suppliers or collaborators.
Our ability to successfully develop our business through acquisitions would depend on our ability to identify, negotiate, complete and
integrate suitable target businesses or technologies and obtain any necessary financing. These efforts could be expensive and time
consuming and might disrupt our ongoing operations. If we are unable to efficiently integrate any acquired business, technology or product
into our business, our business and financial condition might be adversely affected.
If we are unable to retain or hire additional qualified personnel, our ability to grow our business might be harmed.
We utilize the services of a clinical management team on part-time basis to assist us in managing our ongoing Phase 2 and Phase 3 trials
and intend to do so for future trials. While we believe this will provide us with sufficient staffing for our current and future development
efforts, we will need to hire or contract with additional qualified personnel with expertise in preclinical testing, clinical research and testing,
government regulation, formulation and manufacturing and sales and marketing in connection with the continued development, regulatory
approval and commercialization of our product candidates. We compete for qualified individuals with numerous pharmaceutical and
biopharmaceutical companies, universities and other research institutions. Competition for these individuals is intense, and we cannot be
certain that our search for such personnel will be successful. Attracting and retaining qualified personnel will be critical to our success. In
addition, we may be unable to attract and retain those qualified officers, directors and members of board committees required to provide for
effective management. If we are unable to attract and retain qualified employees, officers and directors, the management and operation of
our business could be adversely affected.
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We expect to need to increase the size of our organization to further develop our product candidates, and we may experience difficulties
in managing growth.
We will need to manage our anticipated growth and increased operational activity. Our personnel, systems and facilities currently in place
may not be adequate to support this future growth. Our need to effectively execute our growth strategy will require that we:
● manage our regulatory trials effectively;
● attract and motivate sufficient numbers of talented employees;
● manage our internal development efforts effectively while complying with our contractual obligations to licensors, licensees,
contractors, collaborators and other third parties;
● develop internal sales and marketing capabilities or establish collaborations with third parties with such capabilities;
● commercialize our product candidates; and
● improve our operational, financial and management controls, reporting systems and procedures.
This planned future growth could place a strain on our administrative and operational infrastructure and may require our management to
divert a disproportionate amount of its attention away from our day-to-day activities. We may not be able to effectively manage the
expansion of our operations or recruit and train additional qualified personnel, which may result in weaknesses in our infrastructure, and
give rise to operational mistakes, loss of business opportunities, loss of employees and reduced productivity among remaining employees.
We may not be able to make improvements to our management information and control systems in an efficient or timely manner and may
discover deficiencies in existing systems and controls. If our management is unable to effectively manage our expected growth, our
expenses may increase more than expected, our ability to generate or increase our revenues could be reduced and we may not be able to
implement our business strategy. Our future financial performance and our ability to compete effectively will depend, in part, on our ability
to effectively manage any future growth.
We are subject to extensive and costly government regulation.
Risks Related to Our Regulatory and Legal Environment
Product candidates and approved products such as ours are subject to extensive and rigorous domestic government regulation including
regulation by the FDA, the Centers for Medicare and Medicaid Services, other divisions of the U.S. Department of Health and Human
Services, the U.S. Department of Justice, state and local governments, and their respective foreign equivalents. The FDA regulates the
research, development, preclinical and clinical testing, manufacture, safety, effectiveness, record keeping, reporting, labeling, storage,
approval, advertising, promotion, sale, distribution, import, and export of pharmaceutical products. The FDA regulates small molecule
chemical entities, whether administered orally, topically or by injection, as drugs, subject to an NDA, under the Federal Food, Drug, and
Cosmetic Act. If our product candidates are to be marketed abroad, they will also be subject to extensive regulation by foreign
governments, whether or not they have obtained FDA approval. Such foreign regulation might be equally or more demanding than
corresponding U.S. regulation. Government regulation substantially increases the cost and risk of researching, developing, manufacturing,
and selling our products. The regulatory review and approval process, which includes preclinical testing and clinical trials of each product
candidate, is lengthy, expensive, and uncertain. Our collaborators or we must obtain and maintain regulatory authorization to conduct
clinical trials and approval for each product we intend to market, and the manufacturing facilities used for the products must be inspected
and meet legal requirements. Securing regulatory approval requires submitting extensive preclinical and clinical data and other supporting
information for each proposed therapeutic indication in order to establish the product’s safety and efficacy for each intended use. The
development and approval process might take many years, requires substantial resources, and might never lead to the approval of a product.
Even if we are able to obtain regulatory approval for a particular product, the approval might limit the indicated medical uses for the
product, limit our ability to promote, sell, and distribute the product, require that we conduct costly post-marketing surveillance, and/or
require that we conduct ongoing post-marketing studies. Material changes to an approved product, such as, for example, manufacturing
changes or revised labeling, might require further regulatory review and approval. Once obtained, any approvals might be withdrawn,
including, for example, if there is a later discovery of previously unknown problems with the product, such as a previously unknown safety
issue.
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If we, our collaborators, or our contract manufacturers fail to comply with applicable regulatory requirements at any stage during the
regulatory process, such noncompliance could result in, among other things, delays in the approval of applications or supplements to
approved applications; refusal of a regulatory authority, including the FDA, to review pending market approval applications or supplements
to approved applications; warning letters; fines; import and export restrictions; product recalls or seizures; injunctions; total or partial
suspension of production; civil penalties; withdrawals of previously approved marketing applications or licenses; recommendations by the
FDA or other regulatory authorities against governmental contracts; and/or criminal prosecutions.
We might not obtain the necessary U.S. regulatory approvals to commercialize any product candidates.
We cannot assure you that we will receive the approvals necessary to commercialize for sale any product candidates we are currently
developing or that we may acquire or develop in the future. We will need FDA approval to commercialize our product candidates in the
U.S. In order to obtain FDA approval of any product candidate, we must submit to the FDA an NDA demonstrating that the product
candidate is safe for humans and effective for its intended use. This demonstration requires significant research, pre-clinical studies, and
clinical trials. Satisfaction of the FDA’s regulatory requirements typically takes many years, depends upon the type, complexity and
novelty of the product candidate and requires substantial resources for research, development and testing. We cannot predict whether our
research and clinical approaches will result in additional drugs that the FDA considers safe for humans and effective for their indicated
uses. The FDA has substantial discretion in the product approval process and might require us to conduct additional pre-clinical and clinical
testing, perform post-marketing studies or otherwise limit or impose conditions on any additional approvals we obtain. The approval
process might also be delayed by changes in government regulation, future legislation or administrative action or changes in FDA policy
that occur prior to or during our regulatory review. Delays in obtaining regulatory approvals might:
● delay commercialization of, and our ability to derive product revenues from, our product candidates;
● impose costly procedures on us; and
● diminish any competitive advantages that we might otherwise enjoy.
Even if we comply with all FDA requests, the FDA might ultimately reject one or more of our NDAs. We cannot be sure that we will ever
obtain regulatory clearance for our product candidates. Failure to obtain FDA approval of our product candidates will severely undermine
our business by leaving us without saleable products, and therefore without any potential sources of revenues, until another product
candidate could be developed or obtained. There is no guarantee that we will ever be able to develop or acquire any product candidate.
Following any regulatory approval of any product candidates, we will be subject to ongoing regulatory obligations and restrictions,
which may result in significant expense and limit our ability to commercialize our potential drugs.
If one of our product candidates is approved by the FDA or by a foreign regulatory authority, we will be required to comply with extensive
regulations for product manufacturing, labeling, packaging, adverse event reporting, storage, distribution, advertising, promotion and
record keeping. Regulatory approvals may also be subject to significant limitations on the indicated uses or marketing of the products or to
whom and how we may distribute our products. Even if U.S. regulatory approval is obtained, the FDA may still impose significant
restrictions on a drug’s indicated uses or marketing or impose ongoing requirements for potentially costly post-approval studies. For
example, the label ultimately approved for our products, if any, may include restrictions on use, including restrictions based on level of
obesity and duration of treatment. If so, we may be subject to ongoing regulatory obligations and restrictions, which may result in
significant expense and limit our ability to commercialize our products. The FDA could also require a registry to track the patients utilizing
the drug or implement a Risk Evaluation and Mitigation Strategy, or REMS, that could restrict access to the drug, reduce our revenues
and/or increase our costs. Potentially costly post-marketing clinical studies may be required as a condition of approval to further
substantiate safety or efficacy, or to investigate specific issues of interest to the regulatory authority.
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Manufacturers of pharmaceutical products and their facilities are subject to continual review and periodic inspections by the FDA and other
regulatory authorities for compliance with current good manufacturing practices, or cGMP, regulations, which include requirements
relating to quality control and quality assurance as well as the corresponding maintenance of records and documentation. Further,
regulatory agencies must approve these manufacturing facilities before they can be used to manufacture our future approved products, if
any, and these facilities are subject to ongoing regulatory inspections. In addition, regulatory agencies subject a pharmaceutical product, its
manufacturer and the manufacturer’s facilities to continual review and inspections. The subsequent discovery of previously unknown
problems with a product, including adverse events of unanticipated severity or frequency, or problems with the facility where the product is
manufactured, may result in restrictions on the marketing of that product, up to and including, withdrawal of the product from the market.
If the manufacturing facilities of our suppliers fail to comply with applicable regulatory requirements, it could result in regulatory action
and additional costs to us. Failure to comply with applicable FDA and other regulatory requirements may, either before or after product
approval, if any, subject our company to administrative or judicially imposed sanctions, including:
● issuance of Form 483 notices, warning letters and adverse publicity by the FDA or other regulatory agencies;
● imposition of fines and other civil penalties due to product liability or other issues;
● injunctions, suspensions or revocations of regulatory approvals;
● suspension of any ongoing clinical trials;
● total or partial suspension of manufacturing;
● delays in commercialization;
● refusal by the FDA to approve pending applications or supplements to approved applications filed by us or our collaborators;
● refusals to permit medical products to be imported into or exported from the U.S.;
● restrictions on operations, including costly new manufacturing requirements;
● product recalls or seizures; and
● criminal prosecutions.
In addition, the law or regulatory policies governing pharmaceutical products may change. New statutory requirements may be enacted or
additional regulations may be enacted that could prevent or delay regulatory approval of our product candidates. Contract manufacturing
organizations, or CMOs, and their vendors or suppliers may also face changes in regulatory requirements from governmental agencies in
the U.S. and other countries. We cannot predict the likelihood, nature, extent or effects of government regulation that may arise from future
legislation or administrative action, either in the U.S. or elsewhere. If we are not able to maintain regulatory compliance, we might not be
permitted to market any future approved products and our business could suffer.
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We could be forced to pay substantial damage awards if product liability claims that may be brought against us are successful.
The use of any of our product candidates in clinical trials, and the sale of any approved products, may expose us to liability claims and
financial losses resulting from the use or sale of our products. We have obtained limited product liability insurance coverage for our clinical
trials of $2.0 million per occurrence and in the aggregate, subject to a deductible of $50,000 per occurrence. There can be no assurance that
our existing insurance coverage will extend to any other products in the future. Any product liability insurance coverage may not be
sufficient to satisfy all liabilities resulting from product liability claims. A successful claim may prevent us from obtaining adequate
product liability insurance in the future on commercially desirable terms, if at all. Even if a claim is not successful, defending such a claim
would be time consuming and expensive, may damage that product’s and our reputations in the marketplace, and would likely divert
management’s attention, any of which could have a material adverse effect on our company.
Our business depends on protecting our intellectual property.
Risks Related to our Intellectual Property
If we do not obtain protection for our intellectual property rights, our competitors might be able to take advantage of our research and
development efforts to develop competing products. Our success, competitive position and future revenues, if any, depend in part on our
ability and the abilities of our licensors to obtain and maintain patent protection for our products, methods, processes and other
technologies, to preserve our trade secrets, to prevent third parties from infringing on our proprietary rights and to operate without
infringing the proprietary rights of third parties. We anticipate filing additional patent applications both in the U.S. and in other countries,
as appropriate. However, the patent process is subject to numerous risks and uncertainties, and there can be no assurance that we will be
successful in protecting our products by obtaining and defending patents. These risks and uncertainties include the following:
● Our patent rights might be challenged, invalidated, or circumvented, or otherwise might not provide any competitive advantage;
● Our competitors, many of which have substantially greater resources than we do and many of which might make significant
investments in competing technologies, might seek, or might already have obtained, patents that will limit, interfere with, or
eliminate our ability to make, use, and sell our potential products either in the U.S. or in international markets;
● Countries other than the U.S. might have less restrictive patent laws than those upheld by U.S. courts, allowing foreign competitors
the ability to exploit these laws to create, develop, and market competing products; and
● As a matter of public policy regarding worldwide health concerns, there might be significant pressure on the U.S. government and
other international governmental bodies to limit the scope of patent protection both inside and outside the U.S. for disease
treatments that prove successful.
In addition, the U.S. Patent and Trademark Office and patent offices in other jurisdictions have often required that patent applications
concerning pharmaceutical and/or biotechnology-related inventions be limited or narrowed substantially to cover only the specific
innovations exemplified in the patent application, thereby limiting the scope of protection against competitive challenges. Thus, even if we
or our licensors are able to obtain patents, the patents might be substantially narrower than anticipated.
Because the time period from filing a patent application to the issuance, if ever, of the patent is often more than three years and because any
regulatory approval and marketing for a pharmaceutical product often occurs several years after the related patent application is filed, the
resulting market exclusivity afforded by any patent on our drug candidates and technologies will likely be substantially less than 20 years.
In the United States, the European Union and some other jurisdictions, patent term extensions are available for certain delays in either
patent office proceedings or marketing and regulatory approval processes. However, due to the specific requirements for obtaining these
extensions, there is no assurance that our patents will be granted extensions even if we encounter significant delays in patent office
proceedings or marketing and regulatory approval.
26
Patent and other intellectual property protection is crucial to the success of our business and prospects, and there is a substantial risk that
such protections will prove inadequate. Our business and prospects will be harmed if these protections prove insufficient.
We rely on trade secret protections through confidentiality agreements with our employees, customers and other parties, and the breach
of these agreements could adversely affect our business and prospects.
We rely on trade secrets, which we seek to protect, in part, through confidentiality and non-disclosure agreements with our employees,
collaborators, suppliers, and other parties. There can be no assurance that these agreements will not be breached, that we would have
adequate remedies for any such breach or that our trade secrets will not otherwise become known to or independently developed by our
competitors. We might be involved from time to time in litigation to determine the enforceability, scope and validity of our proprietary
rights. Any such litigation could result in substantial cost and divert management’s attention from our operations.
If we infringe the rights of third parties we might have to forego developing and/or selling any approved products, pay damages, or
defend against litigation.
If our product candidates, methods, processes and other technologies infringe the proprietary rights of other parties, we could incur
substantial costs and we might have to:
● obtain licenses, which might not be available on commercially reasonable terms, if at all;
● abandon an infringing product candidate;
● redesign our products or processes to avoid infringement;
● stop using the subject matter claimed in the patents held by others;
● pay damages; and/or
● defend litigation or administrative proceedings which might be costly whether we win or lose, and which could result in a
substantial diversion of our financial and management resources.
Any of these events could substantially harm our earnings, financial condition and operations.
Risks Related to Our Securities
Our failure to meet the continued listing requirements of Nasdaq could result in a delisting of our common stock and warrants.
Our common stock and warrants are currently listed on the Nasdaq Capital Market. If we fail to satisfy the continued listing requirements
of Nasdaq, such as the corporate governance requirements or the minimum closing bid price requirement, Nasdaq may take steps to delist
our common stock and warrants. Such a delisting would likely have a negative effect on the price of our common stock and warrants and
would impair your ability to sell or purchase our common stock and warrants when you wish to do so. In addition, we could face significant
material adverse consequences, including:
● a limited availability of market quotations for our securities;
● a limited amount of news and analyst coverage for us; and
● a decreased ability to issue additional securities or obtain additional financing in the future.
27
In the event of a delisting, we would take actions to restore our compliance with Nasdaq’s listing requirements, but we can provide no
assurance that any such action taken by us would allow our common stock to become listed again, stabilize the market price or improve the
liquidity of our common stock, prevent our common stock from dropping below the Nasdaq minimum bid price requirement or prevent
future non-compliance with Nasdaq’s listing requirements.
If our common stock were delisted and determined to be a “penny stock,” a broker-dealer may find it more difficult to trade our
common stock and an investor may find it more difficult to acquire or dispose of our common stock in the secondary market.
If our common stock were removed from listing with Nasdaq, it may be subject to the so-called “penny stock” rules. The SEC has adopted
regulations that define a “penny stock” to be any equity security that has a market price per share of less than $5.00, subject to certain
exceptions, such as any securities listed on a national securities exchange. For any transaction involving a “penny stock,” unless exempt,
the rules impose additional sales practice requirements on broker-dealers, subject to certain exceptions. If our common stock were delisted
and determined to be a “penny stock,” a broker-dealer may find it more difficult to trade our common stock and an investor may find it
more difficult to acquire or dispose of our common stock on the secondary market.
If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results or detect
fraud. Consequently, shareholders could lose confidence in our financial reporting and this may decrease the trading price of our
common stock.
We are subject to the reporting requirements of the Exchange Act, Sarbanes-Oxley Act of 2002, or SOX, and Nasdaq rules and regulations.
SOX requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial
reporting. We perform system and process evaluation and testing of our internal control over financial reporting to allow management to
report on the effectiveness of our internal controls over financial reporting in our Annual Report on Form 10-K filing for that year, as
required by Section 404 of SOX.. We previously had identified material weaknesses in our internal control over financial reporting related
to ineffective separation of duties due to our limited finance staff, our reliance on consultants to assist with the financial reporting function
and a lack of documented policies and procedures, which weaknesses were reported in fiscal 2016 and 2017. While we remediated these
material weaknesses as of September 30, 2018, such that management has determined that our internal controls over financial reporting
were effective as of that date, we cannot assure that, in the future, a material weakness or significant deficiency will not exist or otherwise
be discovered. If that were to happen, it could harm our operating results and cause shareholders to lose confidence in our reported financial
information. Any such loss of confidence would have a negative effect on the trading price of our securities.
The price of our securities may become volatile, which could lead to losses by shareholders and costly securities litigation.
The trading price of our securities is likely to be highly volatile and could fluctuate in response to factors such as:
● actual or anticipated variations in our operating results;
● announcements of developments by us or our competitors;
● the completion and/or results of our clinical trials;
● regulatory actions regarding our product candidates or any approved products;
● announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures or capital commitments;
● adoption of new accounting standards affecting our industry;
● additions or departures of key personnel;
● introduction of new products by us or our competitors;
● sales of our common stock or other securities in the open market or in private placements; and
● other events or factors, many of which are beyond our control.
The stock market is subject to significant price and volume fluctuations. In the past, following periods of volatility in the market price of a
company’s securities, securities class action litigation has often been initiated against such a company. Any such litigation initiated against
us, whether or not successful, could result in substantial costs and diversion of our management’s attention and resources, which could
harm our business and financial condition.
28
You may experience dilution of your ownership interests because of the future issuance of additional shares of our common stock or
securities convertible into common stock.
In the future, to finance our operations, including possible acquisitions or strategic transactions, we may issue equity securities, resulting in
the dilution of the ownership interests of our present stockholders. We are currently authorized to issue an aggregate of 200,000,000 shares
of common stock and 10,000,000 shares of preferred stock. As of December 1, 2018, there were 17,798,791 shares of common stock
outstanding, 15,193,192 shares underlying warrants with a weighted average exercise price of $2.21 per share (including 721,569 shares
underlying pre-funded warrants with an exercise price of $0.01), and 1,601,039 shares underlying options with a weighted average exercise
price of $4.35 per share. We may also issue additional shares of our common stock or other securities that are convertible into or
exercisable for common stock in connection with hiring or retaining employees, or for other business purposes. The future issuance of any
such additional shares of common stock or common stock equivalents may create downward pressure on the trading price of our common
stock.
The common stock is controlled by insiders.
As of December 1, 2018, our executive officers and directors beneficially owned approximately 58.5% of our outstanding shares of
common stock. Such concentrated control of our company may adversely affect the price of our common stock. If you acquire common
stock, you may have no effective voice in the management of our company. Sales by our directors and executive officers or their affiliates,
along with any other market transactions, could adversely affect the market price of our common stock.
We do not intend to pay dividends for the foreseeable future.
We have paid no dividends on our common stock to date and we do not anticipate that any dividends will be paid to holders of our common
stock in the foreseeable future. While our future dividend policy will be based on the operating results and capital needs of the business, it
is currently anticipated that any earnings will be retained to finance our future expansion and for the implementation of our business plan.
The lack of a dividend can further affect the market value of our stock, and could significantly affect the value of any investment in our
company.
Our Certificate of Incorporation allows for our Board of Directors to create new series of preferred stock without further approval by
our stockholders, which could adversely affect the rights of the holders of the common stock.
Our Board of Directors has the authority to issue up to 10,000,000 shares of preferred stock and to fix and determine the relative rights and
preferences of any such preferred stock without further stockholder approval. As a result, our Board of Directors could authorize the
issuance of a series of preferred stock that would grant preferential rights to our assets upon liquidation, the right to receive dividend
payments before dividends are distributed to the holders of common stock and the right to the redemption of the preferred shares, together
with a premium, prior to the redemption of the common stock. In addition, our Board of Directors could authorize the issuance of a series
of preferred stock that has greater voting power than the common stock or that is convertible into our common stock, which could decrease
the relative voting power of the common stock or result in dilution to our existing stockholders.
29
There is not an active liquid trading market for our common stock.
While our common stock is listed on the Nasdaq National Market, there has not been a regular active trading market in our common stock,
and we cannot give any assurance that an active trading market will develop. If an active market for our common stock were to develop,
there is a significant risk that the stock price could fluctuate dramatically in the future in response to any of the following factors, some of
which are beyond our control:
● the results of our preclinical and clinical trials;
● announcements by us or our competitors of significant contracts, acquisitions, strategic partnerships, joint ventures or capital
commitments;
● general economic slowdowns;
● issuances by us or resales by others of large amounts of our common stock;
● variations in our quarterly operating results; and
● announcements that our revenue or income are below analysts’ expectations.
Sales of a substantial number of shares of our common stock in the public market, or the perception such sales may occur, could cause
the market price of shares of our common stock to fall.
Sales of a substantial number of shares of our common stock in the public market could occur at any time. These sales, or the perception in
the market of such sales or that the holders of a large number of shares intend to sell shares, could reduce the market price of our shares of
our common stock. As of December 1, 2018, we had 17,798,791 shares of common stock outstanding. This includes registered shares of
common stock as well as 4,903,645 shares of our common stock which are available for resale under Rule 144 of the Securities Act of
1933, as amended, or the Securities Act.
Item 1B. Unresolved Staff Comments
Not Applicable
Item 2. Properties
We lease our offices at 11 Commerce Drive, Cranford, New Jersey 07016. The lease runs until April 30, 2019. The annual rent is $26,000.
Item 3. Legal Proceedings
We are not involved in any litigation that we believe could have a material adverse effect on our financial position or results of operations.
There is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory
organization or body pending or, to the knowledge of our executive officers, threatened against or affecting our company or our officers or
directors in their capacities as such.
In the future, we might from time to time become involved in litigation relating to claims arising from our ordinary course of business.
Item 4. Mine Safety Disclosures
Not applicable.
30
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
PART II
Market Information
Our common stock trades on the Nasdaq Capital Market under the symbol “CTXR”.
Recent Sales of Unregistered Securities
None.
Issuer Purchases of Equity Securities
We did not make any purchases of our Common Stock during the three months ended September 30, 2018, which is the fourth quarter of
our fiscal year.
Item 6. Selected Financial Data
Not required.
Item 7. 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 should be read together with our financial
statements and related notes included elsewhere in this annual report on Form 10-K. Management’s discussion and analysis contains
forward-looking statements, such as statements of our plans, objectives, expectations and intentions. Any statements that are not
statements of historical fact are forward-looking statements. When used, the words “believe,” “plan,” “intend,” “anticipate,” “target,”
“estimate,” “expect” and the like, and/or future tense or conditional constructions (“will,” “may,” “could,” “should,” etc.), or similar
expressions, identify certain of these forward-looking statements. These forward-looking statements are subject to risks and uncertainties
including those under “Risk Factors” in Item 1A in this Form 10-K that could cause actual results or events to differ materially from those
expressed or implied by the forward-looking statements. Our actual results and the timing of events could differ materially from those
anticipated in these forward-looking statements as a result of several factors. The Company does not undertake any obligation to update
forward-looking statements to reflect events or circumstances occurring after the filing date of this report.
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”) by issuing 1,942,456
shares of its common stock. As of March 30, 2016, the stockholders of LMB received approximately 41% of the issued and outstanding
common stock of the Company. In addition, the Company converted the outstanding common stock warrants of LMB into 243,020
common stock warrants of the Company and converted the outstanding common stock options of LMB into 77,252 common stock options
of the Company. Management estimated the fair value of the purchase consideration to be $19,015,073.
In connection with the acquisition, the Company acquired net assets of $17,428,277, including identifiable intangible assets of $19,400,000
related to in-process research and development. The Company recorded goodwill of $1,586,796 for the excess of the purchase price over
the net assets acquired.
31
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. 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 September 30, 2018, 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 proprietary products. On July 1, 2016, the Company
announced that it was discontinuing Suprenza, its first commercial product, for strategic reasons and not due to safety or regulatory
concerns, and was focusing on the Phase 3 development of Mino-Lok, an antibiotic lock solution used to treat patients with catheter-related
bloodstream infections, and the Phase 2b development of Hydro-Lido for hemorrhoids. The Company has not yet realized any revenues
from its operations.
Patent and Technology License Agreement
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 increases over five years to $90,000, where it is to 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.
Results of Operations for Year Ended September 30, 2018 compared to Year Ended September 30, 2017
Revenues
Operating expenses:
Research and development
General and administrative
Stock-based compensation – general and administrative
Total operating expenses
Operating loss
Gain on extinguishment of liability
Other income
Gain on revaluation of derivative warrant liability
Interest expense
Net loss
Revenues
Year Ended
September 30,
2018
Year Ended
September 30,
2017
$
- $
-
6,562,925
6,446,517
779,701
13,789,143
(13,789,143)
450,000
818,343
-
(15,838)
2,936,252
6,063,439
986,620
9,986,311
(9,986,311)
-
-
452,147
(850,789)
$ (12,536,638) $ (10,384,953)
We did not generate any revenues for the years ended September 30, 2018 and 2017.
Research and Development Expenses
For the year ended September 30, 2018, research and development expenses were $6,562,925 as compared to $2,936,252 for the year
ended September 30, 2017. The $3,626,673 increase in 2018 was primarily due 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 were $6,121,150 for the year ended
September 30, 2018 as compared to $2,688,937 for the year ended September 30, 2017, an increase of $3,432,213. Research and
development costs for our product candidate for the treatment of hemorrhoids were $441,775 for the year ended September 30, 2018 as
compared to $247,315 for the year ended September 30, 2017, an increase of $194,460. We expect that research and development expenses
will continue to increase as we continue to focus on and expand our Phase 3 trial of Mino-Lok. We are actively seeking additional capital in
order to fund our research and development efforts.
32
General and Administrative Expenses
For the year ended September 30, 2018, general and administrative expenses were $6,446,517 as compared to $6,063,439 for the year
ended September 30, 2017. The increase of $383,078 in 2018 was primarily due to increased compensation costs, increased consulting fees
incurred for financing activities and corporate development services, and increased investor relations fees. In addition, we incurred
$357,400 in settlement costs for the termination of the right of first refusal agreement with the underwriter of our 2017 Public Offering
during the year ended September 30, 2018 compared to $475,885 in settlement costs and $104,138 in financial consulting expenses incurred
related to the issuance of a unit purchase option during the year ended September 30, 2017.
Stock-based Compensation Expense
For the year ended September 30, 2018, stock-based compensation expense was $779,701 as compared to $986,620 for the year ended
September 30, 2017. Stock-based compensation expense includes the expense for options assumed in the March 30, 2016 acquisition of
LMB, as well as grants to employees, directors and consultants. Stock-based compensation expense decreased by $206,919 in comparison
to the prior period as certain options have been fully expensed. At September 30, 2018, unrecognized total compensation cost of
$1,425,957 related to unvested awards is expected to be recognized over the next 2.3 years.
Other Income (Expense)
During the year ended September 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. In addition, during
the year ended September 30, 2018, the Company recorded as other income a refund receivable in the amount of $818,343 from the FDA
for 2016 product and establishment fees. The fees previously paid by the Company exceeded the costs of the FDA’s review of the
associated Suprenza applications.
There was no gain on revaluation of derivative warrant liability for the year ended September 30, 2018 as there were no warrants classified
as derivative warrants during the year. Gain on revaluation of derivative warrant liability for the year ended September 30, 2017 was
$452,147. The fair value of the derivative warrant liability fluctuated with changes in our stock price, volatility, remaining lives of the
warrants, and interest rates.
Interest expense for the year ended September 30, 2018 was $15,838 as borrowings from our Chairman were converted to common stock
on August 8, 2017. Interest expense on the notes payable acquired in the acquisition of LMB and borrowings from our Chairman was
$850,789 for the year ended September 30, 2017, and includes net non-cash interest expense of $762,078 due to the beneficial conversion
feature on the conversion price of $1,595,411 and the amortization of the previously recorded modification premium of $833,333.
Net Loss
For the year ended September 30, 2018, we incurred a net loss of $12,536,638 compared to a net loss of $10,384,953 for the year ended
September 30, 2017. The $2,151,685 increase in the net loss was primarily due to the $3,626,673 increase in research and development
expenses offset by the $1,651,147 increase in net other income (expense).
33
Results of Operations for Year Ended September 30, 2017 compared to Year Ended September 30, 2016
Revenues
Operating expenses:
Research and development
General and administrative
Stock-based compensation – general and administrative
Total operating expenses
Operating loss
Interest income
Gain (loss) on revaluation of derivative warrant liability
Interest expense
Net loss
Revenues
Year Ended
September 30,
2017
Year Ended
September 30,
2016
$
- $
-
2,936,252
6,063,439
986,620
9,986,311
(9,986,311)
-
452,147
(850,789)
$ (10,384,953) $
2,933,199
3,783,941
732,151
7,449,291
(7,449,291)
806
(838,219)
(8,994)
(8,295,698)
We did not generate any revenues for the years ended September 30, 2017 and 2016.
Research and Development Expenses
For the year ended September 30, 2017, research and development expenses were $2,936,252 as compared to $2,933,199 during the year
ended September 30, 2016. The $3,053 increase in 2017 was primarily due to an increase of $776,192 in costs incurred in the development
of Mino-Lok offset by a decrease of $773,139 in costs incurred in the development of our product for the treatment of hemorrhoids and
costs related to Suprenza, including $292,575 received in 2016 from Alpex as reimbursement for regulatory filing fees. We are actively
seeking to raise additional capital in order to fund our research and development efforts.
General and Administrative Expenses
For the year ended September 30, 2017, general and administrative expenses were $6,063,439 as compared to $3,783,941 during the year
ended September 30, 2016. The $2,279,498 increase in 2017 was primarily due to the acquisition of LMB on March 30, 2016, which
resulted in increased compensation costs, increased consulting fees incurred for financing activities and corporate development services,
and increased investor relations fees. In addition, the year ended September 30, 2016 only includes six months of expenses for LMB as the
acquisition was completed on March 30, 2016.
Stock-based Compensation Expense
For the year ended September 30, 2017, stock-based compensation expense was $986,620 as compared to $732,151 for the year ended
September 30, 2016. The $254,469 increase in expense includes the expense for unvested options assumed in the acquisition of LMB, as
well as new grants to directors, employees and consultants.
Other Income (Expense)
There was no interest income earned on our cash balances for the year ended September 30, 2017 and only $806 in interest income earned
for the year ended September 30, 2016.
Gain (loss) on revaluation of derivative warrant liability for the year ended September 30, 2017 was $452,147 compared to $(838,219) for
the year ended September 30, 2016. The fair value of the derivative warrant liability fluctuates with changes in our stock price, volatility,
remaining lives of the warrants, and interest rates. The gain for the year ended September 30, 2017 was primarily due to a decrease in the
fair value of our stock from $9.45 per share at September 30, 2016 to $4.125 per share at August 8, 2017 when the final derivative warrants
were reclassified to equity. The loss for the year ended September 30, 2016 was primarily due to an increase in the fair value of our
common stock from $8.10 at September 30, 2015 to $9.45 at September 30, 2016. At September 30, 2017, the Company has no outstanding
warrants that are considered to be derivative instruments.
34
Interest expense on the notes payable acquired in the acquisition of LMB and recent borrowings from our Chairman was $850,789 for the
year ended September 30, 2017, and includes net non-cash interest expense of $762,078 due to the beneficial conversion feature on the
conversion price of $1,595,411 and the amortization of the previously recorded modification premium of $833,333. After the August 8,
2017 conversions of debt to common stock, the Company has $172,970 in outstanding notes payable at September 30, 2017. Interest
expense on the notes payable acquired in the acquisition of LMB was $8,994 for the year ended September 30, 2016.
Net Loss
For the year ended September 30, 2017, we incurred a net loss of $10,384,953 compared to a net loss for the year ended September 30,
2016 of $8,295,698. The $2,089,255 increase in the net loss was primarily due to the $2,279,498 increase in general and administrative
expenses and the $841,795 increase in interest expense offset by the $1,290,366 change in the (gain) loss on revaluation of the derivative
warrant liability.
LIQUIDITY AND CAPITAL RESOURCES
Going Concern Uncertainty and Working Capital
Citius has incurred losses of $12,536,638, $10,384,953 and $8,295,698 for the years ended September 30, 2018, 2017 and 2016,
respectively. At September 30, 2018, Citius had an accumulated deficit of $40,257,838. Citius’ net cash used in operations during the years
ended September 30, 2018, 2017 and 2016, was $11,318,138, $7,971,205 and $5,900,421, respectively.
Our independent registered accountants report on 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 September 30, 2018, Citius had working capital of $6,875,238. Our limited working capital was attributable to the operating losses
incurred by the Company since inception offset by our capital raising activities. At September 30, 2018, Citius had cash and cash
equivalents of $9,184,003 available to fund its operations. The Company’s only source of cash flow since inception has been from
financing activities. During the years ended September 30, 2018, 2017 and 2016, the Company received net proceeds of $17,298,033,
$6,673,088 and $5,427,688, respectively from the issuance of equity. We also received $4,210,000 from the issuance of notes payable to
our Chairman of the Board, Mr. Leonard Mazur, during the year ended September 30, 2017. Mr. Mazur converted the notes payable to
common stock on August 8, 2017. Our primary uses of operating cash were for product development and commercialization activities,
regulatory expenses, employee compensation, consulting fees, legal and accounting fees, and insurance and travel expenses.
Financing Activities
During the year ended September 30, 2016, the Company sold 290,000 units for a purchase price of $8.10 per unit and 17,778 units for a
purchase price of $9.00 per unit for gross proceeds of $2,509,000. Each unit consisted of one share of common stock and one five-year
warrant to purchase a share of common stock at an exercise price of $9.00.
On March 22, 2016, the Company sold 333,333 shares of Common Stock at $9.00 per share to its Chairman of the Board, Leonard Mazur,
for gross proceeds of $3,000,000.
The Board of Directors authorized revolving demand promissory notes with Leonard Mazur in an aggregate principal amount of up to
$2,500,000 that accrue interest at the prime rate plus 1%. On September 7, 2016, the Company issued a $500,000 note. The Company
issued $2,000,000 of additional notes through the period ended May 10, 2017. On May 10, 2017, the notes were converted into a
$2,500,000 convertible promissory note that is convertible into shares of common stock, at the sole discretion of Mr. Mazur, at a
conversion price equal to 75% of the price per share paid by investors in the Company’s 2017 registered public offering. In connection with
the modification of the note, the Company recorded a charge of $833,333 to additional paid-in capital and increased the carrying value of
the notes to $3,333,333 which is the fair value of the common stock issuable on conversion. On August 8, 2017, Leonard Mazur converted
the $2,500,000 principal balance and accrued interest of $63,174 into 828,500 shares of common stock.
35
On May 10, 2017 and June 23, 2017, the Company executed a $1,500,000 future advance convertible promissory note and a $1,000,000
future advance convertible promissory note, respectively, with Leonard Mazur that accrue interest at the prime rate plus 1%. The notes are
convertible into shares of common stock, at the sole discretion of Mr. Mazur, at a conversion price equal to 75% of the price per share paid
by investors in the Company’s 2017 registered public offering. On August 8, 2017, Leonard Mazur converted the outstanding $2,210,000
principal balances and accrued interest of $13,066 into 718,567 shares of common stock.
In February 2017, the Company sold 128,017 units at $6.00 per unit for gross proceeds of $768,100. Each unit consisted of one share of
common stock and a five-year warrant to purchase one share of common stock at an exercise price of $8.25 per share. On June 8, 2017, the
Company entered into agreements where it was released from the restrictions included in the purchase agreements. In exchange, the
Company agreed to reprice the sale of the units to $4.125 per unit and reprice the warrants to an exercise price of $4.125 per share. During
the year ended September 30, 2017, the Company issued an additional 58,191 shares of common stock to the investors.
On August 8, 2017, the Company closed an underwritten public offering of 1,648,484 shares of common stock and warrants to purchase
1,648,484 shares of common stock at an offering price of $4.125 per share and $0.01 per warrant. The warrants have a per share exercise
price of $4.125, are exercisable immediately and will expire five years from the date of issuance. The gross proceeds to Citius from this
offering were $6,802,469, before deducting underwriting discounts and commissions and other offering expenses of $685,573. The
Company granted the underwriters a 45-day option to purchase up to an additional 247,272 shares of common stock and warrants to
purchase 247,272 shares of common stock to cover over-allotments, if any. On August 8, 2017, the underwriters partially exercised the
over-allotment to purchase an additional 247,272 warrants.
On December 19, 2017, the Company closed a registered direct offering 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. Net proceeds from the offering were $5,482,523.
On March 29, 2018, the Company closed a registered direct offering 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. Net proceeds from the offering were $1,763,576.
On August 13, 2018, the Company closed an offering for the sale of (i) 5,521,569 units, each unit consisted of one share of common stock
and one immediately exercisable five-year warrant to purchase one share at $1.15 per share, and (ii) 2,321,569 pre-funded units, each pre-
funded unit consisted of one pre-funded warrant to purchase one share of common stock and one immediately exercisable five-year warrant
to purchase one share at $1.15 per share. The exercise price of the pre-funded warrant is $0.01 and the pre-funded warrants do not expire.
The offering price was $1.275 per unit and $1.265 per pre-funded unit. Net proceeds from the offering were $8,926,786.
During the year ended September 30, 2018, an aggregate of 272,767 of the August 2017 public offering warrants were exercised at $4.125
per share for net proceeds of $1,125,148.
We expect that we will have sufficient capital to continue our operations through June 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 a timely manner to fully support our operations.
Inflation
Our management believes that inflation has not had a material effect on our results of operations.
36
Off Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been
prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements
requires us to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses and related disclosure of
contingent assets and liabilities. We review our estimates on an ongoing basis. We base our estimates on historical experience and on
various other factors that we believe to be reasonable under the circumstances. Actual results may differ from these estimates. We believe
the judgments and estimates required by the following accounting policies to be critical in the preparation of our financial statements.
Research and Development
Research and development costs, including upfront fees and milestones paid to collaborators who are performing research and development
activities under contractual agreement with us, are expensed as incurred. We defer and capitalize our nonrefundable advance payments that
are for research and development activities until the related goods are delivered or the related services are performed. When we are
reimbursed by a collaboration partner for work we perform, we record the costs incurred as research and development expenses and the
related reimbursement as a reduction to research and development expenses in our statement of operations. Research and development
expenses primarily consist of clinical and non-clinical studies, materials and supplies, third-party costs for contracted services, and
payments related to external collaborations and other research and development related costs.
In-process Research and Development and Goodwill
In process research and development represents the value of LMB’s leading drug candidate, Mino-Lok, an antibiotic lock solution in phase
3 clinical development, which if approved, would be used to assist in the treatment of catheter related bloodstream infections and is
expected to be amortized on a straight-line basis over 8 years upon revenue generation. Goodwill represents the value of LMB’s industry
relationships and its assembled workforce. Goodwill will not be amortized and will be tested at least annually for impairment.
The Company reviews intangible assets annually to determine if any adverse conditions exist or a change in circumstances has occurred
that would indicate impairment or a change in the remaining useful life of any intangible asset. If the carry value of an asset exceeds its
undiscounted cash flows, the Company writes down the carrying value of the intangible asset to its fair value for the period identified. No
triggering events occurred since the acquisition of LMB that would suggest a potential impairment may have occurred through September
30, 2018.
The Company evaluates the recoverability of goodwill annually or more frequently if events or changes in circumstances indicate that the
carrying value of an asset may be impaired. Goodwill is first qualitatively assessed to determine whether further impairment testing is
necessary. Factors that management considers in the assessment include macroeconomic conditions, industry and market conditions, overall
financial performance, (both current and projected), changes in management and strategy as well as changes in the composition of the
carrying amount of net assets. If this qualitative assessment indicates that it is more likely that not that the fair value of a reporting unit is
less than its carrying amount, a two-step process is then performed.
The Company performed a qualitative assessment for its 2018 analysis of goodwill. Based on this assessment, management does not
believe that it is more likely than not, that the carrying value of the reporting unit exceeds its fair value. Accordingly, no further testing was
performed as management believes that there are no impairment issues with respect to goodwill as of September 30, 2018.
Income Taxes
We follow accounting guidance regarding the recognition, measurement, presentation and disclosure of uncertain tax positions in the
financial statements. Tax positions taken or expected to be taken in the course of preparing our tax returns are required to be evaluated to
determine whether the tax positions are “more-likely-than-not” of being sustained by the applicable tax authorities. Tax positions not
deemed to meet a more-likely-than-not threshold would be recorded in the financial statements.
We recognize deferred tax assets and liabilities based on differences between the financial reporting and tax basis of assets and liabilities
using the enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. We provide a valuation
allowance for deferred tax assets for which we do not consider realization of such assets to be more likely than not.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Not required.
37
Item 8. Financial Statements and Supplementary Data
CITIUS PHARMACEUTICALS, INC.
CONSOLIDATED FINANCIAL STATEMENTS
INDEX
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Changes in Stockholders’ Equity (Deficit)
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
F-1
Page
F-2
F-3
F-4
F-5
F-6
F-7
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors of Citius Pharmaceuticals, Inc.:
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Citius Pharmaceuticals, Inc. (the “Company”) as of September 30, 2018
and 2017, and the related consolidated statements of operations, changes in stockholders’ equity (deficit) and cash flows for each of the
years in the three-year period ended September 30, 2018, and the related notes to the consolidated financial statements (collectively, the
“financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the
Company as of September 30, 2018 and 2017, and the results of its operations and its cash flows for each of the years in the three-year
period ended September 30, 2018, in conformity with accounting principles generally accepted in the United States of America.
Emphasis of Matter – Ability to Continue as a Going Concern
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in
Note 2 to the financial statements, the Company has suffered recurring losses from operations, has negative cash flows from operations and
a significant accumulated deficit. These conditions raise substantial doubt about the Company’s ability to continue as a going concern.
Management’s plans in regard to these matters are described in Note 2. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the
Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting
Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S.
federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The
Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our
audits we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or
fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the
amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits
provide a reasonable basis for our opinion.
/s/ Wolf & Company, P.C.
Boston, Massachusetts
December 11, 2018
We have served as the Company’s auditor since 2014.
F-2
CITIUS PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2018 AND 2017
ASSETS
Current Assets:
Cash and cash equivalents
Other receivables
Prepaid expenses
Total Current Assets
Property and equipment, net
Other Assets:
Deposits
In-process research and development
Goodwill
Total Other Assets
Total Assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable
Accrued expenses
Accrued compensation
Accrued interest – related parties
Notes payable – related parties
Due to related party
Total Current Liabilities
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; 16,198,791 and 8,345,844 shares issued
and outstanding at September 30, 2018 and 2017, respectively
Additional paid-in capital
Accumulated deficit
Total Stockholders’ Equity
Total Liabilities and Stockholders’ Equity
2018
2017
$
9,184,003 $
818,343
57,732
10,060,078
3,204,108
—
220,246
3,424,354
1,483
3,236
2,167
2,167
19,400,000 19,400,000
1,586,796
1,586,796
20,988,963 20,988,963
$ 31,050,524 $ 24,416,553
$
1,573,444 $
181,657
1,198,915
57,854
172,970
—
3,184,840
602,431
560,918
1,063,000
42,209
172,970
27,637
2,469,165
—
—
16,199
8,346
68,107,323 49,660,242
(40,257,838) (27,721,200)
27,865,684 21,947,388
$ 31,050,524 $ 24,416,553
See accompanying report of independent registered public accounting firm and notes to the consolidated financial statements.
F-3
CITIUS PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 2018, 2017 AND 2016
Revenues
Operating Expenses:
Research and development
General and administrative
Stock-based compensation – general and administrative
Total Operating Expenses
Operating Loss
Other Income (Expense), Net:
Interest income
Gain on extinguishment of liability
Other income
Gain (loss) on revaluation of derivative warrant liability
Interest expense
Total Other Income (Expense), Net
Loss before Income Taxes
Income tax benefit
Net Loss
2018
2017
2016
$
— $
— $
—
6,562,925
6,446,517
779,701
13,789,143
2,936,252
6,063,439
986,620
9,986,311
2,933,199
3,783,941
732,151
7,449,291
(13,789,143)
(9,986,311)
(7,449,291)
—
450,000
818,343
—
(15,838)
1,252,505
—
—
—
452,147
(850,789)
(398,642)
806
—
—
(838,219)
(8,994)
(846,407)
(12,536,638)
—
(10,384,953)
—
(8,295,698)
—
$ (12,536,638) $ (10,384,953) $ (8,295,698)
Net Loss Per Share - Basic and Diluted
$
(1.17) $
(1.89) $
(2.29)
Weighted Average Common Shares Outstanding
Basic and diluted
10,731,875
5,482,494
3,623,208
See accompanying report of independent registered public accounting firm and notes to the consolidated financial statements.
F-4
CITIUS PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)
FOR THE YEARS ENDED SEPTEMBER 30, 2018, 2017 AND 2016
Preferred
Common Stock
Stock
Shares
Amount
Additional
Paid-In
Capital
Accumulated
Deficit
Total
Stockholders’
Equity
(Deficit)
Balance, September 30, 2015
Issuance of common stock in private
$
placement, net of costs
Issuance of common stock for services
Issuance of common stock, warrants
and stock options for acquisition
Issuance of warrants for services
Reclassification of derivative warrant
liability to additional paid-in capital
Stock-based compensation
Net loss
Balance, September 30, 2016
Issuance of common stock in private
placement, net of costs
Issuance of common stock in public
offering, net of costs
Issuance of common stock for services
and release agreements
Issuance of fractional shares for 1-for-
15 reverse stock split
Stock options exercised
Conversion of convertible promissory
notes – related party to common
stock
Beneficial conversion feature on
convertible promissory notes –
related party
Premium on convertible promissory
notes – related party
Issuance of unit purchase options
Issuance of warrants in settlement of
liabilities
Reclassification of derivative warrant
liability to additional paid-in capital,
net
Stock-based compensation
Net loss
Balance, September 30, 2017
Issuance of common stock in registered
direct offering, net of costs of
$760,459
Issuance of common stock, net of
issuance costs and underwriting
discount of $1,049,999
Issuance of common stock upon
exercise of warrants
Issuance of common stock for services
and release agreement
—
2,274,526 $
2,275 $
8,403,061 $ (9,040,549) $
(635,213)
—
—
641,111
17,778
641
18
4,228,483
149,982
—
—
4,229,124
150,000
—
—
1,942,456
—
1,942 19,013,131
477,181
—
—
—
19,015,073
477,181
—
—
—
—
—
—
—
—
—
1,093,765
732,151
—
—
—
(8,295,698)
1,093,765
732,151
(8,295,698)
—
4,875,871
4,876 34,097,754 (17,336,247)
16,766,383
—
128,016
128
491,223
—
491,351
—
1,648,484
1,648
6,115,248
6,116,896
—
140,843
141
703,878
—
704,019
—
—
734
4,829
1
5
(1)
35
—
—
—
40
1,547,067
1,547
4,784,693
—
4,786,240
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
1,595,411
—
1,595,411
—
—
(833,333)
297,998
—
—
(833,333)
297,998
—
190,890
—
190,890
—
—
—
1,229,826
986,620
—
—
— (10,384,953)
1,229,826
986,620
(10,384,953)
—
8,345,844
8,346 49,660,242 (27,721,200)
21,947,388
—
1,949,864
1,949
7,244,150
—
7,246,099
—
5,521,569
5,522
8,921,264
—
8,926,786
—
289,314
290
1,124,858
—
1,125,148
—
92,200
92
377,108
—
377,200
Stock-based compensation expense
Net loss
—
—
—
779,701
—
— (12,536,638)
779,701
(12,536,638)
Balance, September 30, 2018
— 16,198,791 $
16,199 $ 68,107,323 $ (40,257,838) $ 27,865,684
See accompanying report of independent registered public accounting firm and notes to the consolidated financial statements.
F-5
CITIUS PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 2018, 2017 AND 2016
Cash Flows From Operating Activities:
Net loss
Adjustments to reconcile net loss to net cash used in operating activities:
Stock-based compensation
(Gain) loss on revaluation of derivative warrant liability
Gain on extinguishment of liability
Issuance of common stock for services and release agreements
Fair value of options issued to purchase units of common stock
Warrants issued and repriced in settlement agreements
Non-cash interest expense
Depreciation
Write-off of abandoned trademarks
Changes in operating assets and liabilities:
Other receivables
Prepaid expenses
Accounts payable
Accrued expenses
Accrued compensation
Accrued interest – related parties
Due to related party
Net Cash Used In Operating Activities
Cash Flows From Investing Activities:
Cash acquired in acquisition
Purchase of property and equipment
Net Cash Provided By (Used In) Investing Activities
Cash Flows From Financing Activities:
Proceeds from notes payable – related parties
Repayment of notes payable – related parties
Proceeds from common stock warrant exercises
Proceeds from stock option exercise
Net proceeds from common stock and warrants in August 2018 offering
Net proceeds from registered direct offering
Net proceeds from private placement
Net proceeds from public offering
Deferred offering costs
Net Cash Provided By Financing Activities
Increase (Decrease) in Cash and Cash Equivalents
Cash and Cash Equivalents – Beginning of Year
2018
2017
2016
$ (12,536,638) $ (10,384,953) $ (8,295,698)
779,701
—
(450,000)
377,200
—
—
—
1,753
—
986,620
(452,147)
—
704,019
104,138
190,890
762,078
2,632
—
732,151
838,219
—
150,000
—
—
—
1,343
5,401
(818,343)
162,514
971,013
70,739
135,915
15,645
(27,637)
(11,318,138)
—
572,098
(306,725)
(397,183)
159,750
87,578
—
(7,971,205)
—
(40,759)
105,230
351,182
288,250
7,009
(42,749)
(5,900,421)
—
—
—
—
255,748
(2,126)
(2,126)
—
255,748
—
—
1,125,148
—
8,926,786
7,246,099
—
—
—
17,298,033
4,210,000
—
—
40
—
—
556,152
6,116,896
—
10,883,088
500,000
(600,000)
—
—
—
—
5,427,688
—
(64,801)
5,262,887
5,979,895
3,204,108
2,909,757
294,351
(381,786)
676,137
Cash and Cash Equivalents – End of Year
$
9,184,003 $
3,204,108 $
294,351
Supplemental Disclosures of Cash Flow Information and Non-cash Transactions:
Interest paid
Premium on convertible promissory notes – related party
Fair value of unit purchase option issued for future services
Fair value of warrants recorded as derivative warrant liability
Fair value of warrants issued for future services
Reclassification of derivative warrant liability to additional paid-in capital
Beneficial conversion feature on convertible promissory notes – related party
Conversion of convertible promissory notes – related party and related accrued interest
into common stock
Par value of common stock issued upon cashless exercise of warrants
$
$
$
$
$
$
$
$
$
193 $
— $
— $
— $
— $
— $
— $
1,133 $
833,333 $
193,860 $
641,385 $
—
1,229,826 $
1,595,411 $
1,985
—
—
1,198,564
477,181
1,093,765
—
— $
17 $
4,786,240 $
— $
—
—
See accompanying report of independent registered public accounting firm and notes to the consolidated financial statements.
F-6
CITIUS PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 2018, 2017 AND 2016
1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION
Business
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 March 30, 2016, Citius acquired Leonard-Meron Biosciences, Inc. (“LMB”) as a wholly-owned subsidiary (see “Acquisition of
Leonard-Meron Biosciences, Inc.” below). Since its inception, the Company has devoted substantially all of its efforts to business planning,
research and development, recruiting management and technical staff, and raising capital.
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 products, market acceptance of its products, competition from
larger companies, dependence on key personnel, dependence on key suppliers and strategic partners, the Company’s ability to obtain
additional financing and the Company’s compliance with governmental and other regulations.
Acquisition of Leonard-Meron Biosciences, Inc.
On March 30, 2016, the Company acquired all of the outstanding stock of LMB by issuing 1,942,456 shares of Company common stock.
As of March 30, 2016, the stockholders of LMB received approximately 41% of the issued and outstanding common stock of the
Company. In addition, the Company converted the outstanding common stock warrants of LMB into 243,020 common stock warrants of
the Company and converted the outstanding common stock options of LMB into 77,252 common stock options of the Company.
The Company recorded goodwill of $1,586,796 for the excess of the purchase price over the net assets acquired.
See report of independent accounting firm
F-7
Unaudited pro forma operating results for the year ended September 30, 2016, assuming the acquisition of LMB had been made as of
October 1, 2015, are as follows:
Revenues
Net loss
Net loss per share – basic and diluted
Basis of Presentation
$
—
$ (11,548,647)
(2.52)
$
The accompanying consolidated financial statements include the operations of Citius Pharmaceuticals, Inc., and its wholly-owned
subsidiaries, Citius Pharmaceuticals, LLC and LMB since the March 30, 2016 acquisition. All significant inter-company balances and
transactions have been eliminated in consolidation.
2. GOING CONCERN UNCERTAINTY AND MANAGEMENT’S PLAN
The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of business. The Company experienced negative cash flows from operations of
$11,318,138, $7,971,205 and $5,900,421, for the years ended September 30, 2018, 2017 and 2016, respectively. The Company has no
revenue and has relied on proceeds from equity transactions and debt to finance its operations. At September 30, 2018, the Company had
limited capital to fund its operations. This raises substantial doubt about the Company’s ability to continue as a going concern within one
year after the date that the accompanying consolidated financial statements are issued.
The Company plans to raise capital through equity financings from outside investors as well as raise additional funds from existing
investors. 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 on terms acceptable to the Company. The accompanying consolidated financial statements do not include any
adjustments that might result from the outcome of the above uncertainty.
3. PATENT AND TECHNOLOGY LICENSE AGREEMENT
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 in June until commercial
sales of a product subject to the license commence. The Company recorded maintenance fee expense of $75,000, $50,000 and $45,000 in
2018, 2017 and 2016, respectively under the terms of this agreement.
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.
See report of independent accounting firm
F-8
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies followed by the Company in the preparation of the consolidated financial statements is
as follows:
Use of Estimates
The process of preparing financial statements in conformity with accounting principles generally accepted in the United States of America
(“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of financial statements and the reported amounts of revenues and expenses during the
reporting period.
Cash and Cash Equivalents
The Company considers all highly liquid instruments with maturities of less than three months at the time of purchase to be cash
equivalents. From time to time, the Company may have cash balances in financial institutions in excess of insurance limits. The Company
has never experienced any losses related to these balances.
Property and Equipment
Property and equipment are valued at cost and are being depreciated over their useful lives using the straight-line method for financial
reporting purposes. Routine maintenance and repairs are charged to expense as incurred. Expenditures which materially increase the value
or extend useful lives are capitalized. Property and equipment are depreciated over estimated useful lives of three to five years.
Research and Development
Research and development costs, including upfront fees and milestones paid to collaborators who are performing research and development
activities under contractual agreement with the Company, are expensed as incurred. The Company defers and capitalizes its nonrefundable
advance payments that are for research and development activities until the related goods are delivered or the related services are
performed. When the Company is reimbursed by a collaboration partner for work the Company performs, it records the costs incurred as
research and development expenses and the related reimbursement as a reduction to research and development expenses in its consolidated
statement of operations. Research and development expenses primarily consist of clinical and non-clinical studies, materials and supplies,
third-party costs for contracted services, and payments related to external collaborations and other research and development related costs.
See report of independent accounting firm
F-9
In-process Research and Development and Goodwill
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.
The Company reviews intangible assets annually to determine if any adverse conditions exist or a change in circumstances has occurred
that would indicate impairment or a change in the remaining useful life of any intangible asset. If the carrying value of an asset exceeds its
undiscounted cash flows, the Company writes down the carrying value of the intangible asset to its fair value in the period identified. No
triggering events occurred since the acquisition of LMB that would suggest that a potential impairment may have occurred through
September 30, 2018.
The Company evaluates the recoverability of goodwill annually or more frequently if events or changes in circumstances indicate that the
carrying value of an asset might be impaired. Goodwill is first qualitatively assessed to determine whether further impairment testing is
necessary. Factors that management considers in this assessment include macroeconomic conditions, industry and market considerations,
overall financial performance (both current and projected), changes in management and strategy and changes in the composition or carrying
amount of net assets. If this qualitative assessment indicates that it is more likely than not that the fair value of a reporting unit is less than
its carrying amount, a two-step process is then performed. The two-step test first compares the fair value of the reporting unit to its carrying
value. If the fair value exceeds the carrying value, no impairment exists, and the second step is not performed. If the fair value of the
reporting unit is less than its carrying value, an impairment loss is recorded as part of the second step of the test, to the extent that the
implied fair value of the reporting unit goodwill is less than the carrying value.
The Company performed a qualitative assessment for our 2018 analysis of goodwill. Based on this assessment, management does not
believe that it is more likely than not that the carrying value of the reporting unit exceeds its fair value. Accordingly, no further testing was
performed as management believes that there are no impairment issues in regards to goodwill as of September 30, 2018.
Patents and Trademarks
Certain costs of outside legal counsel related to obtaining trademarks for the Company are capitalized. Patent costs are amortized over the
legal life of the patents, generally twenty years, starting at the patent issuance date. There are no capitalized patents and trademarks as of
September 30, 2018.
The costs of unsuccessful and abandoned applications are expensed when abandoned. The cost of maintaining existing patents are
expensed as incurred.
Stock-Based Compensation
The Company recognizes compensation costs resulting from the issuance of stock-based awards to employees and directors as an expense
in the consolidated statement of operations over the requisite service period based on the fair value for each stock award on the grant date,
net of actual forfeitures. The fair value of each option grant is estimated as of the date of grant using the Black-Scholes option pricing
model. Due to its limited operating history, limited number of sales of its common stock and limited history of its shares being publicly
traded, the Company estimates its volatility in consideration of a number of factors including the volatility of comparable public
companies. Because our stock options have characteristics significantly different from those of traded options, and because changes in the
input assumptions can materially affect the fair value estimate, the existing model may not necessarily provide a reliable single measure of
fair value of our stock options.
The Company recognizes compensation costs resulting from the issuance of stock-based awards to non-employees as an expense in the
consolidated statement of operations over the service period based on the measurement of fair value for each stock award.
See report of independent accounting firm
F-10
Derivative Instruments
The Company generally does not use derivative instruments to hedge exposures to cash-flow or market risks; however, certain warrants to
purchase common stock that did not meet the requirements for classification as equity were classified as liabilities. In such instances, net-
cash settlement was assumed for financial reporting purposes, even when the terms of the underlying contracts do not provide for a net-
cash settlement. Such financial instruments were initially recorded at fair value with subsequent changes in fair value charged (credited) to
operations in each reporting period. When these instruments subsequently met the requirements for classification as equity, the Company
reclassified the fair value to equity.
Income Taxes
The Company follows accounting guidance regarding the recognition, measurement, presentation and disclosure of uncertain tax positions
in the consolidated financial statements. Tax positions taken or expected to be taken in the course of preparing our tax returns are required
to be evaluated to determine whether the tax positions are “more-likely-than-not” of being sustained by the applicable tax authorities. Tax
positions not deemed to meet a more-likely-than-not threshold would be recorded in the consolidated financial statements. There are no
uncertain tax positions that require accrual or disclosure as of September 30, 2018.
Any interest or penalties are charged to expense. During the years ended September 30, 2018, 2017 and 2016, the Company did not
recognize any interest and penalties. Tax years subsequent to September 30, 2014 are subject to examination by federal and state
authorities.
We recognize deferred tax assets and liabilities based on differences between the financial reporting and tax basis of assets and liabilities,
and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using the enacted tax rates and laws that
are expected to be in effect when the differences are expected to reverse. We provide a valuation allowance, if necessary, for deferred tax
assets for which we do not consider realization of such assets to be “more-likely-than-not”. The deferred tax benefit or expense for the
period represents the change in the deferred tax asset or liability from the beginning to the end of the period.
Basic and Diluted Net Loss per Common Share
Basic and diluted net loss per common share 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 options, warrants and
convertible securities were not included in the calculation of the diluted loss per share because they were anti-dilutive.
Fair Value of Financial Instruments
The financial statements include various estimated fair value information. Financial instruments are initially recorded at historical cost. If
subsequent circumstances indicate that a decline in the fair value of a financial asset is other than temporary, the financial asset is written
down to its fair value.
Unless otherwise indicated, the fair values of financial instruments approximate their carrying amounts. By their nature, all financial
instruments involve risk, including credit risk for non-performance by counterparties. The fair values of cash and cash equivalents,
accounts payable, accrued interest, accrued expenses, notes payable and due to related party approximate their recorded amounts because of
their relatively short settlement terms.
See report of independent accounting firm
F-11
The Company groups its assets and liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities
are traded and the reliability of the assumptions used to determine fair value.
Level 1: Valuation is based on quoted prices in active markets for identical assets or liabilities. Level 1 assets and liabilities generally
include debt and equity securities that are traded in an active exchange market. Valuations are obtained from readily available
pricing sources for market transactions involving identical assets or liabilities.
Level 2: Valuation is based on observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted
prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for
substantially the full term of the assets or liabilities. For example, Level 2 assets and liabilities may include debt securities with
quoted prices that are traded less frequently than exchange-traded instruments.
Level 3: Valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair
value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using
pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of
fair value requires significant management judgment or estimation. This category generally includes certain private equity
investments and long-term derivative contracts.
The Company’s financial liabilities measured at fair value as of September 30, 2016 consisted solely of the derivative warrant liability
which was classified as Level 3 in fair value hierarchy (see Note 6). The Company used a valuation method, the Black-Scholes option
pricing model, and the requisite assumptions in estimating the fair value for the warrants considered to be derivative instruments. The
Company has no financial assets measured at fair value as of September 30, 2018 and September 30, 2017.
The Company may also be required, from time to time, to measure certain other financial assets at fair value on a nonrecurring basis. These
adjustments to fair value usually result from application of lower-of-cost-or-market accounting or write-downs of individual assets. There
were no such adjustments in the years ended September 30, 2018, 2017 and 2016.
Segment Reporting
The Company currently operates as a single segment.
Concentrations of Credit Risk
The Company has no significant off-balance-sheet concentration of credit risk such as foreign exchange contracts, option contracts or other
hedging arrangements.
Recently Issued Accounting Standards
In June 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-07, Compensation
– Stock Compensation (Topic 718): Improvements to Non-employee Share-Based Payment Accounting. ASU 2018-07 expands the scope
of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. An entity should apply the
requirements of Topic 718 to non-employees awards except for specific guidance on inputs to an option pricing model and the attribution of
cost. The amendments in this ASU are effective for public business entities for fiscal years, and for interim periods within those fiscal
years, beginning after December 15, 2018. Early adoption is permitted. The Company is in the process of evaluating the impact of this
ASU on its consolidated results of operations, financial position or disclosures.
5. NOTES PAYABLE
A summary of notes payable outstanding as of September 30, 2018 and 2017 is as follows:
Demand notes payable – Leonard Mazur
Demand notes payable – Myron Holubiak
Notes payable
2018
2017
160,470 $
12,500
172,970 $
160,470
12,500
172,970
$
$
See report of independent accounting firm
F-12
Notes Payable - Related Parties
On March 30, 2016, the Company assumed $772,970 of demand notes payable in the acquisition of LMB, including $760,470 to our
Chairman, Leonard Mazur, and $12,500 to our Chief Executive Officer, Myron Holubiak. Notes with a principal balance of $704,000
accrue interest at the “Prime Rate”, as published in the Wall Street Journal on the last day of each month plus 1% and notes with a principal
balance of $68,970 accrue interest at 12% per annum. In April 2016, $600,000 of the “Prime Rate” plus 1% demand notes payable and
accrued interest of $1,985 was repaid to Leonard Mazur.
The Board of Directors authorized revolving demand promissory notes with Leonard Mazur in an aggregate principal amount of up to
$2,500,000 that accrued interest at the prime rate plus 1%. On September 7, 2016, the Company issued a $500,000 note. The Company
issued $2,000,000 of additional notes through the period ended May 10, 2017. On May 10, 2017, the notes were converted into a
$2,500,000 convertible promissory note. The note was convertible into shares of common stock, at the sole discretion of Mr. Mazur, at a
conversion price equal to 75% of the price per share paid by investors in the Company’s 2017 registered public offering. In connection with
the modification of the note, in 2017 the Company recorded a charge of $833,333 to additional paid-in capital and increased the carrying
value of the notes to $3,333,333 which was the fair value of the common stock issuable on conversion. On August 8, 2017, Leonard Mazur
converted the $2,500,000 principal balance and accrued interest of $63,174 into 828,500 shares of common stock.
On May 10, 2017 and June 23, 2017, the Company executed future advance convertible promissory notes with Leonard Mazur that were
scheduled to mature on December 31, 2017 and accrue interest at the prime rate plus 1%. The notes were convertible into shares of
common stock, at the sole discretion of Mr. Mazur, at a conversion price equal to 75% of the price per share paid by investors in the
Company’s 2017 registered public offering. On August 8, 2017, Leonard Mazur converted the outstanding $2,210,000 principal balances
and accrued interest of $13,066 into 718,567 shares of common stock.
In connection with the conversions, the Company recorded net non-cash interest expense of $762,078 due to the beneficial conversion
feature on the conversion price of $1,595,411 and the amortization of the previously recorded modification premium of $833,333.
The Company evaluated all terms of the future advance convertible promissory notes, including the Change in Control provision, to
identify any embedded features that required bifurcation and recording as derivative instruments. The Company determined that there were
no such features requiring separate accounting.
Interest Expense
Interest expense on notes payable for the years ended September 30, 2018, 2017 and 2016 was $15,645, $850,789 and $8,994, respectively.
6. DERIVATIVE WARRANT LIABILITY
Derivative financial instruments are recognized as a liability on the consolidated balance sheet and measured at fair value.
The Company performed valuations of the warrants using a probability weighted Black-Scholes option pricing model which value was also
compared to a Binomial Option Pricing Model for reasonableness. This model requires input of assumptions including the risk-free interest
rates, volatility, expected life and dividend rates, and has also considered the likelihood of “down-round” financings. Selection of these
inputs involves management’s judgment and may impact net income. Due to our limited operating history and limited number of sales of
our common stock, we estimate our volatility based on a number of factors including the volatility of comparable publicly traded
pharmaceutical companies. The volatility factor used in the Black-Scholes option pricing model has a significant effect on the resulting
valuation of the derivative liabilities on our balance sheet.
See report of independent accounting firm
F-13
The table below presents the changes in the derivative warrant liability for the years ended September 30, 2017 and 2016, which were
measured at fair value on a recurring basis and classified as Level 3 in the fair value hierarchy (see Note 4). No warrants are classified as
derivative warrant liabilities as of September 30, 2018 and 2017:
Derivative warrant liability, beginning of year
Fair value of warrants issued
Total realized/unrealized losses (gains) included in net loss
Reclassification of liability to additional paid-in capital
Derivative warrant liability, end of year
7. COMMON STOCK, STOCK OPTIONS AND WARRANTS
Private Offerings and Common Stock Issued for Services and Release Agreements
2017
1,681,973 $
641,385
(452,147)
(1,871,211)
- $
2016
738,955
1,198,564
838,219
(1,093,765)
1,681,973
$
$
During the year ended September 30, 2016, the Company sold 290,000 Units for a purchase price of $8.10 per Unit and 17,778 Units for a
purchase price of $9.00 per Unit for gross proceeds of $2,509,000. There was no placement agent for these private placements and other
cash expenses related to the placements were $81,312. In connection with these placements, the Company credited $1,229,124 to
stockholders’ equity and $1,198,564 to derivative warrant liability.
On March 22, 2016, the Company sold 333,333 shares of common stock at $9.00 per share to its Chairman of the Board, Leonard Mazur,
for gross proceeds of $3,000,000. There were no expenses related to this placement.
In February 2017, the Company completed its 2016 Offering. The Company sold 128,017 units at $6.00 per unit for gross proceeds of
$768,100. Each unit consisted of (i) one share of common stock and (ii) a five-year warrant to purchase one share of common stock at an
exercise price of $8.25 per share. The placement agent received a 10% cash commission on the gross proceeds, an expense allowance equal
to 3% of the proceeds, and warrants to purchase 12,802 shares of common stock at an exercise price of $8.25 per share. The estimated fair
value of the 128,017 warrants issued to the investors was $587,592 and the estimated fair value of the 12,802 warrants issued to the
placement agent was $58,759. The placement agent commissions and expense allowance was $99,853. Other costs of the placement were
$176,896.
See report of independent accounting firm
F-14
During January 2017, the Company issued 29,729 shares of its common stock for investor relations services. The $298,774 fair value of the
common stock was expensed during the year ended September 30, 2017.
On May 5, 2017, the Company issued 11,400 shares of common stock valued at $77,748 in connection with a settlement agreement and
release with a consultant that had an agreement with Leonard-Meron Biosciences. The Company expensed the $77,748 as a settlement
expense during the year ended September 30, 2017.
On June 7, 2017, the Company entered into a release agreement with the placement agent for the 2016 Offering. The placement agent
consented to future financings and waived certain covenants contained in the 2016 Offering agreements. As consideration for the release,
the Company issued 6,668 shares of common stock valued at $45,476 to the placement agent. The Company expensed the $45,476 as a
settlement expense during the year ended September 30, 2017.
On June 8, 2017, the Company entered into release agreements with the investors in the 2016 Offering where each investor released the
Company from the restrictions included in the unit purchase agreements. In exchange, the Company agreed that (i) in the event that a
financing is conducted at a price per share or price per unit lower than $6.00, then the Company will issue additional shares to each investor
sufficient to effectively reprice the sale of the 2016 Offering units to the lower price; (ii) in the event that the financing is conducted at a
price per share or price per unit less than the $8.25 exercise price of the warrants issued in the 2016 Offering then the exercise price of the
warrants shall be reduced to the lower price; and (iii) the Company will give each investor no less than 6 hours of notice before the closing
of any subsequent financing, through and including the Company’s 2017 registered public offering, and each investor shall have a 6-hour
option to purchase up to 20% of the securities sold in such offering. In connection with these agreements the Company reclassified the
$641,385 fair value of the 140,819 warrants issued in the 2016 Offering to derivative warrant liability on June 8, 2017 (see Note 6). On
August 8, 2017, the Company completed the 2017 public offering and issued 58,191 shares of common stock to the investors in the 2016
Offering to reprice the sale of the 2016 Offering units to $4.125 per unit and repriced the 2016 Offering Warrants to an exercise price of
$4.125 per share. During the year ended September 30, 2017, the Company recorded a settlement expense of $161,771 in connection with
the issuance of the additional 58,191 shares of common stock and reclassified the current fair value of the warrants to additional paid-in
capital.
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.
2017 Public Offering and Release Agreement
On August 8, 2017, the Company closed an underwritten public offering of 1,648,484 shares of common stock and warrants to purchase
1,648,484 shares of common stock at an offering price of $4.125 per share and $0.01 per warrant. The warrants have a per share exercise
price of $4.125, are exercisable immediately and will expire five years from the date of issuance. Gross proceeds were $6,802,469, before
deducting underwriting discounts and commissions and other estimated offering expenses of $685,573. The Company granted the
underwriters a 45-day option to purchase up to an additional 247,272 shares of common stock and warrants to purchase 247,272 shares of
common stock to cover over-allotments, if any. On August 8, 2017, the underwriters partially exercised the over-allotment to purchase an
additional 247,272 warrants. The estimated fair value of the 1,895,756 warrants issued to the investors was $4,160,195 and the estimated
fair value of the 65,940 warrants issued to the underwriters was $142,419.
On November 7, 2017, the Company entered into a release agreement with the underwriter. 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 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.
See report of independent accounting firm
F-15
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 sold the investors
640,180 immediately exercisable five and a half year warrants at $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 at
$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 sold to the investors 669,504
immediately exercisable five and a half year warrants at $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 at $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.
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 at $1.15 per share, and (ii) 2,321,569 pre-funded units, each pre-
funded unit consists of one pre-funded warrant to purchase one share and one immediately exercisable five-year warrant to purchase one
share at $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 at $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 to a consultant 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. The
consultant provided the Company with business development and financing assistance for the three months ended June 30, 2017. The
Company estimated the fair value of the unit purchase option agreement at $104,138 and expensed it during the year ended September 30,
2017.
On June 29, 2017, the Company issued a three-year Unit Purchase Option Agreement to a consultant 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
consultant will provide the Company with business development and financing assistance through December 31, 2017. 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 year ended September 30, 2018.
See report of independent accounting firm
F-16
Stock Option Plans
On September 12, 2014, the Board of Directors adopted the 2014 Stock Incentive Plan (the “2014 Plan”) and reserved 866,667 shares of
common stock for issuance to employees, directors and consultants. On September 12, 2014, our stockholders approved the plan. Pursuant
to the 2014 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 September
30, 2018, there were options to purchase 856,039 shares outstanding under the 2014 Plan, options to purchase 4,829 shares were exercised,
and 5,799 shares were 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 September 30, 2018, there were options to purchase
745,000 shares outstanding under the 2018 Plan and 1,255,000 shares were 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. The risk-free interest rate is based on the U.S. Treasury yield curve in
effect at the time of grant commensurate with the expected term assumption. The expected term of stock options granted to employees and
directors, all of which qualify as “plain vanilla,” is based on the average of the contractual term (generally 10 years) and the vesting period.
For non-employee options, the expected term is the contractual term.
The following assumptions were used in determining the fair value of stock option grants for the years ended September 30, 2018, 2017
and 2016:
2018
2017
2016
Risk-free interest rate
Expected dividend yield
Expected term
Expected volatility
2.78 – 2.99 %
%
0
6.50 – 10 years
116
%
1.79 – 1.90 % 0.95 – 1.40 %
%
%
0
4.75 – 9 years
0
6.50 – 10 years
85 – 108 %
57 – 74 %
A summary of option activity under the 2014 Plan and 2018 Plan is presented below:
Outstanding at September 30, 2017
Granted
Exercised
Forfeited or expired
Outstanding at September 30, 2018
Exercisable at September 30, 2018
Weighted-
Average
Exercise
Price
Weighted-
Average
Remaining
Contractual
Term
Aggregate
Intrinsic
Value
6.69
1.63
—
3.45
4.35
7.15
8.56 years $
7.10 years $
173,291
112,541
Shares
861,039 $
745,000
—
(5,000)
1,601,039 $
729,675 $
See report of independent accounting firm
F-17
On March 30, 2016, the Company assumed stock options to purchase 77,252 shares of common stock in connection with the acquisition of
LMB. The LMB option holders received stock options to purchase 71,217 shares at an exercise price of $0.01 per share and 6,035 shares at
an exercise price of $13.65 per share. Pursuant to the original grants, options to purchase 4,829 shares were immediately vested and options
to purchase 72,423 shares vest over three years. These options all had original terms of 10 years.
On June 23, 2016, the Board of Directors granted stock options to four directors. Each director received an option to purchase 13,333
shares of common stock at an exercise price of $12.00 per share in consideration for their services. These options vest in full on June 23,
2017 and have a term of 10 years.
In July 2016, the Board of Directors granted stock options to purchase a total of 138,267 shares to three employees at prices ranging from
$10.50 to $13.50 per share. These options vest over terms of 19 to 36 months and have a term of 10 years.
On January 1, 2017, the Board of Directors granted stock options to purchase a total of 8,669 shares to four consultants at $10.05 per share.
These options vest over terms of 12 to 36 months and have a term of 10 years.
In September 2017, the Board of Directors granted stock options to purchase a total of 225,000 shares to 12 employees and 50,000 options
to two consultants at $3.45 per share. These options vest over terms of 12 to 36 months and have a term of 10 years.
In September 2018, the Board of Directors granted stock options to purchase a total of 520,000 shares to six employees, 75,000 options to
five directors, and 80,000 options to three consultants at $1.62 per share. In addition, the Board granted stock options to purchase 70,000
shares to a financial consultant at $1.75 per share. These options vest over terms of 12 to 36 months and have a term of 10 years.
Stock-based compensation expense for the years ended September 30, 2018, 2017 and 2016 was $779,701, $986,620 and $732,151,
respectively.
At September 30, 2018, unrecognized total compensation cost related to unvested awards of $1,425,957 is expected to be recognized over a
weighted average period of 2.3 years.
See report of independent accounting firm
F-18
Warrants
The Company has reserved 15,193,192 shares of common stock for the exercise of outstanding warrants. The following table summarizes
the warrants outstanding at September 30, 2018:
Investor and Placement Agent Warrants
Investor Warrants
Investor Warrants
LMB Warrants
LMB Warrants
LMB Warrants
LMB Warrants
LMB Warrants
Financial Advisor Warrants
2016 Offering Warrants
Convertible Note Warrants
2017 Public Offering Warrants
2017 Public Offering Underwriter Warrants
December 2017 Registered Direct/Private
Placement Offering Investor Warrants
December 2017 Registered Direct/Private
Placement Offering Agent Warrants
March 2018 Registered Direct/Private Placement
Offering Investor Warrants
March 2018 Registered Direct/Private Placement
Offering Agent Warrants
August 2018 Offering Investor Warrants
August 2018 Offering Pre-Funded Unit Warrants
August 2018 Offering Agent Warrants
$
Exercise
price
Number
9.00
9.00
9.00
6.15
9.90
20.70
7.50
7.50
3.00
4.13
9.75
4.13
4.54
384,006
202,469
307,778
90,151
8,155
17,721
73,883
53,110
25,833
140,819
40,436
1,622,989
65,940
Expiration Dates
September 12, 2019
March 19, 2020 – September 14, 2020
November 5, 2020 – April 25, 2021
June 12, 2019 – March 2, 2021
September 30, 2019 – January 8, 2020
November 3, 2019 – March 6, 2020
August 18, 2020 – March 14, 2021
March 24, 2022 – April 29, 2022
August 15, 2021
November 23, 2021 – February 27, 2022
September 12, 2019
August 2, 2022
February 2, 2023
4.63
640,180
June 19, 2023
5.87
89,625
December 19, 2022
2.86
669,504
October 2, 2023
3.73
1.15
0.01
1.59
46,866
7,843,138
2,321,569
549,020
15,193,192
March 28, 2023
August 14, 2023
No expiration date
August 8, 2023
On March 30, 2016, the Company granted warrants to purchase 243,020 shares of common stock in connection with the acquisition of
LMB. The warrants have exercise prices between $6.15 and $20.70 per share. All warrants were vested at March 30, 2016. The fair value
of the warrants was estimated at $1,071,172 and has been included in the purchase price of LMB.
On August 16, 2016, the Company granted warrants to purchase 66,667 shares of common stock in connection with a one-year financial
advisory agreement. The warrants were vested on issuance, have an exercise price of $3.00 per share and are exercisable on a cash or
cashless basis. The fair value of the warrants was estimated at $477,181 and recorded as a prepaid expense on the issuance date. During the
years ended September 30, 2017 and 2016, the Company expensed $417,181 and $60,000, respectively, in connection with the agreement.
During the year ended September 30, 2018, 40,834 warrants were exercised on a cashless basis resulting in the issuance of 16,547 shares of
common stock.
During the year ended September 30, 2017, the Company sold 128,017 2016 Offering Units, at a price of $6.00 per Unit, consisting of (i)
one share of common stock and (ii) a warrant to purchase one share of common stock. Each 2016 Offering Warrant had an exercise price of
$8.25 and is exercisable for five years from the date of issuance. Additionally, warrants to purchase 12,802 shares of common stock were
granted to the Placement Agent pursuant to the above pricing terms. On June 8, 2017, the Company entered into release agreements with
the investors and as a result the Company repriced the 2016 Offering Warrants to an exercise price of $4.125 per share on August 8, 2017.
On June 7, 2017, the Company issued a warrant to purchase 40,436 shares of common stock at $9.75 per share in settlement of issues
related to the July 31, 2014 conversion of a subordinated convertible promissory note. The Company charged the $119,402 estimated fair
value of the warrant to settlement expenses during the year ended September 30, 2017.
Effective June 16, 2017, the Company amended warrants associated with the Leonard-Meron Biosciences, Inc. 2015 private placement
offering. The warrant amendments removed the exercise price reset provisions, adjusted the exercise price of the warrants to $7.50 per
share and extended the term of the warrants by three years. The estimated fair value of the warrants on June 16, 2017 after the amendments
was $250,733. As a result of the amendment, the Company recorded an incremental cost of $71,488 as a settlement expense during the year
ended September 30, 2017.
See report of independent accounting firm
F-19
See Note 7 above for descriptions of the warrants issued in the 2017 public offering, the December 2017 and March 2018 registered
direct/private placement offerings, and the August 2018 offering. During the year ended September 30, 2018, 272,767 of the 2017 public
offering warrants were exercised at $4.25 per share for net proceeds of $1,125,148.
At September 30, 2018, the weighted average remaining life of all of the outstanding warrants is 3.89 years, all warrants are exercisable,
and the aggregate intrinsic value for the warrants outstanding was $8,402,648.
Common Stock Reserved
A summary of common stock reserved for future issuances as of September 30, 2018 is as follows:
Stock plan options outstanding
Stock plan shares available for future grants
Warrants
Unit purchase options
Total
8. RELATED PARTY TRANSACTIONS
1,601,039
1,260,799
15,193,192
201,334
18,256,364
The Company’s headquarters were previously located in Maynard, MA in the office space of a company affiliated through common
ownership. In connection with the March 30, 2016 acquisition of LMB, the Company moved its principal executive offices to Cranford,
NJ. The Company did not record any revenue or expense related to the use of the Maynard, MA office space as management has
determined the usage to be immaterial and the affiliate has not charged for the usage.
As of September 30, 2018 and 2017, the Company owed $0 and $27,637 to a company affiliated through common ownership for the
expenses the related party paid on the Company’s behalf and services performed by the related party.
Our Chairman of the Board, Leonard Mazur, is 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 leases
office space from Akrimax (see Note 9).
Our Chairman of the Board, Leonard Mazur, and our Chief Executive Officer, Myron Holubiak, are co-founders and were significant
shareholders in LMB. In connection with the acquisition of LMB, our Chairman purchased an additional 333,333 shares of the Company.
See Note 5 for a description of related party debt transactions.
In connection with the 2017 Public Offering, Mr. Mazur purchased 421,400 units consisting of 421,400 shares of common stock at $4.125
per share and 421,400 warrants at $0.01 per warrant and converted certain notes payable to common stock (See Note 5).
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 exercisable at $4.63 per share. 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 exercisable at $2.86 per share. 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 exercisable at $1.15 per share, and Mr. Holubiak purchased 784,314 shares of common stock at $1.275 per share and
received 784,314 warrants exercisable at $1.15 per share. The purchases were made on the same terms as for all other investors.
See report of independent accounting firm
F-20
9. EMPLOYMENT AND CONSULTING AGREEMENTS
Employment Agreements
On October 19, 2017, the Company and Mr. Mazur, entered into an amended employment agreement with a three-year term. Under the
terms of the amended agreement, the Company is required to pay base compensation plus incentives over the employment term plus
severance benefits upon the occurrence of certain events as described in the agreement.
On March 30, 2016, in connection with the acquisition of LMB, the Company entered into a three-year employment agreement with Myron
Holubiak to serve as Chief Executive Officer. Upon expiration, the agreement automatically renews for successive periods of one-year.
The agreement requires the Company to pay base compensation plus incentives over the employment term plus severance benefits upon the
occurrence of certain events as described in the agreement.
The Company has employment agreements with certain other employees that require the Company to pay base compensation plus
incentives over the employment term plus severance benefits upon the occurrence of certain events as described in the agreement.
Consulting Agreements
Effective September 1, 2014, the Company entered into three consulting agreements. Two of the agreements are for financial consulting
services including accounting, preparation of financial statements and filings with the SEC. The third agreement is for financing activities,
product development strategies and corporate development. The agreements may be terminated by the Company or the consultant with 90
days written notice.
Consulting expense under the agreements for the years ended September 30, 2018, 2017 and 2016 was $422,000, $372,000, and $460,000,
respectively. Consulting expense for the years ended September 30, 2018, 2017 and 2016 includes $48,000, $48,000 and $48,000,
respectively, paid to a financial consultant who is a stockholder of the Company. In addition, one financial consulting services agreement
provides for the grant of options to purchase 33,333 shares of common stock contingent upon approval by the Board of Directors. The
options were granted on June 1, 2015.
10. FDA REFUND
On August 29, 2018, the Company received notification from the Food and Drug Administration (“FDA”) that the Company was being
refunded $818,343 of 2016 product and establishment fees because the fees paid by the Company exceeded the costs of the FDA’s review
of the associated Suprenza applications. The Company recorded as other income in the statements of operations the $818,343 receivable
from the FDA as of September 30, 2018. The Company received the refund in full on October 1, 2018.
11. COMMITMENTS AND CONTINGENCIES
Operating Lease
The Company leases office space from Akrimax, a related party (see Note 8), in Cranford, New Jersey at a monthly rental rate of $2,167
pursuant to an agreement which currently expires on April 30, 2019. Rent expense for the years ended September 30, 2018, 2017 and 2016
was $26,000, $26,000 and $13,002. Future minimum rentals for the year ending September 30, 2019 are $15,167.
See report of independent accounting firm
F-21
Legal Proceedings
The Company is not involved in any litigation that we believe could have a material adverse effect on our financial position or results of
operations. There is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-
regulatory organization or body pending or, to the knowledge of our executive officers, threatened against or affecting our company or our
officers or directors in their capacities as such.
12. INCOME TAXES
There was no provision for federal or state income taxes for the years ended September 30, 2018, 2017 and 2016 due to the Company’s
operating losses and a full valuation reserve on deferred tax assets.
On December 22, 2017, the Tax Cuts and Jobs Act (the “Act”), was signed into law by the President of the United States. The Act includes
a number of changes, including the lowering of the U.S. corporate tax rate from 35% to 21%, effective January 1, 2018, and the
establishment of a territorial-style system for taxing foreign-source income of domestic multinational corporations. The Company has
recognized provisional tax impacts related to the revaluation of the Company’s deferred tax assets and the impact of revaluation of those
deferred tax assets on the Company’s valuation allowance and included those amounts in the consolidated financial statements for the year
ended September 30, 2018. The actual impact of the Act may differ from the Company’s estimates due to, among other things, changes in
interpretations and assumptions made and guidance that may be issued as a result of the Tax Act.
The income tax benefit differs from the amount of income tax determined by applying the U.S. federal income tax rate to pretax income for
the years ended September 30, 2018, 2017 and 2016 due to the following:
Computed “expected” tax benefit
Increase (decrease) in income taxes resulting from:
State taxes, net of federal benefit
Permanent differences
Increase in the valuation reserve
2018
2017
2016
(24.5%)
(35.0%)
(35.0%)
(6.0%)
0.0%
30.5%
0.0%
(5.2%)
1.3%
38.9%
0.0%
(5.2%)
4.2%
36.0%
0.0%
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets
and liabilities are as follows:
Deferred tax assets:
Net operating loss carryforward
Stock-based compensation
Valuation allowance
Deferred tax assets
September 30,
2018
September 30,
2017
$
$
8,962,000 $
1,350,000
(10,312,000)
— $
7,123,000
1,425,000
(8,548,000)
—
The Company has recorded a valuation allowance against deferred tax assets as the utilization of the net operating loss carryforward and
other deferred tax assets is uncertain. During the years ended September 30, 2018, 2017 and 2016, the valuation allowance increased by
$1,764,000, $4,044,000 and $2,989,000, respectively. The increase in the valuation allowance during the years ended September 30, 2018,
2017 and 2016 was primarily due to the Company’s net operating loss offset by the decrease in the effective U.S. federal income tax rate
from 35% to 21%. At September 30, 2018, the Company has a net operating loss carryforward of approximately $29,344,000 which begins
expiring in 2034.
13. SUBSEQUENT EVENTS
Exercise of Pre-Funded Unit Warrants
On October 3, 2018 the Company received a notice of exercise for the purchase of 1,600,000 shares of common stock at $0.01 per share
pursuant to its pre-funded unit warrants issued in the August 2018 offering. Proceeds from the exercise were $16,000.
See report of independent accounting firm
F-22
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
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 September 30, 2018, the end of our fiscal year. 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 September 30, 2018, 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.
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining effective internal control over financial reporting as defined in Rule 13a-
15(f) under the Exchange Act. Because of its inherent limitations, internal control over financial reporting is not intended to provide
absolute assurance that a misstatement of our financial statements would be prevented or detected. Under the supervision of our Chief
Executive Officer and Chief Financial Officer, the Company conducted an evaluation of the effectiveness of our internal control over
financial reporting as of September 30, 2018 using the criteria established in Internal Control—Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) (2013 Framework).
Based on this evaluation, management has concluded that our internal controls were effective and that we maintained effective controls
over our financial reporting as of September 30, 2018.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of
any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Changes in Internal Controls over Financial Reporting
In the fourth quarter of fiscal 2018, as part of our then ongoing efforts to remediate the material weaknesses in our internal controls over
financial reporting, we completed documenting various policies and procedures, and implemented sufficient separation of duties by
developing appropriate review, signoffs and grants of authority, as well as consolidating key financial functions which are administered
solely by employees at our Company’s Cranford, New Jersey office. As a result of these remedial efforts, our management was able to
determine that our internal controls over financial reporting were effective as of September 30, 2018.
Other than as described above, there were no other changes in our internal controls over financial reporting during the fourth quarter of
fiscal 2018 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. Other Information.
None.
38
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
PART III
We have adopted a written Code of Ethics and Business Conduct that applies to our directors, officers and all employees. We intend to
disclose any amendments to, or waivers from, our code of ethics and business conduct that are required to be publicly disclosed pursuant to
rules of the SEC by filing such amendment or waiver with the SEC. This code of ethics and business conduct can be found in the “Investors
- Corporate Governance” section of our website, www.citiuspharma.com.
The other information required by this Item concerning our directors and executive officers is incorporated by reference to the section
captioned “Proposal No. 1—Election of Directors” and “Corporate Governance” to be contained in our proxy statement related to the 2019
Annual Meeting of Stockholders (the “Proxy Statement”), which information is expected to be filed with the SEC within 120 days of the
end of our fiscal year pursuant to General Instruction G(3) of Form 10-K. The information required by this Item concerning compliance
with Section 16(a) of the Exchange Act by our directors, executive officers and persons who own more than 10% of our outstanding
common stock is incorporated by reference from the section captioned “Section 16(a) Beneficial Ownership Reporting Compliance” to be
contained in the Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item concerning directors and executive compensation is incorporated by reference from the sections
captioned “Director Compensation” and “Executive Compensation”, respectively, to be contained in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
The following table sets forth the indicated information as of September 30, 2018 with respect to our equity compensation plans:
Plan Category
Equity compensation plans approved by security holders
2014 Stock Incentive Plan
2018 Omnibus Stock Incentive Plan
Total
Number of
securities to
be issued
upon
exercise of
outstanding
options,
warrants
and rights
Weighted-
average
exercise price
of outstanding
options,
warrants and
rights
Number of
securities
remaining
available for
future
issuance
under equity
compensation
plans
856,039 $
745,000 $
6.71
1.63
5,799
1,255,000
1,601,039 $
4.35
1,260,799
Our equity compensation plans consist of the Citius Pharmaceuticals, Inc. 2018 Omnibus Stock Incentive Plan and 2014 Stock Incentive
Plan, which were both approved by our stockholders. We do not have any equity compensation plans or arrangements that have not been
approved by our stockholders.
The other information required by this Item is incorporated by reference to the information under the section captioned “Security
Ownership of Certain Beneficial Owners and Management” contained in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this Item is incorporated by reference to the information under the section captioned “Certain Relationships
and Related Transactions” and “Proposal No. 1—Election of Directors” to be contained in the Proxy Statement.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this Item is incorporated by reference to the information under the section captioned “Auditor and Audit
Committee Matters” to be contained in the Proxy Statement.
39
PART IV
Item 15. Exhibits, Financial Statement Schedules
Exhibit
Number
2.1
Description of Document
Share Exchange and Reorganization Agreement, among Citius
Pharmaceuticals, LLC, Trail One, Inc. and the beneficial holders of
the membership interests of Citius Pharmaceuticals, LLC identified
in the Agreement, dated as of September 12, 2014.
Registrant’s
Form
8-K
Dated
9/18/2014
Exhibit
Number
2.1
Filed
Herewith
2.2
Agreement and Plan of Merger among Citius LMB Acquisition
8-K
4/5/2016
3.1
3.2
Corporation, Leonard-Meron Biosciences, Inc. and Citius
Pharmaceuticals Holdings, Inc., dated March 30, 2016.
Amended and Restated Articles of Incorporation of Citius
Pharmaceuticals, Inc.
Certificate of Amendment to the Amended and Restated Articles of
Incorporation of Citius Pharmaceuticals, Inc., effective September
16, 2016.
8-K
8-K
9/18/2014
9/21/2016
3.3
Certificate of Amendment to the Amended and Restated Articles of
8-K
6/8/2017
2.1
3.1
3.1
3.1
3.4
4.1
Incorporation of Citius Pharmaceuticals, Inc., effective June 9,
2017.
Amended and Restated Bylaws of Citius Pharmaceuticals, Inc.
Form of Registration Rights Agreement between the Purchasers
named therein and Citius Pharmaceuticals Holdings, Inc., dated
September 12, 2014.
8-K
8-K
2/9/2018
9/18/2014
3.1
10.2
4.2
Placement Agent’s Unit Warrant in favor of Merriman Capital, Inc.,
S-1/A
12/29/2015
10.12
dated September 12, 2014.
4.3
4.4
4.5
4.6
4.7
4.8
4.9
4.10
4.11
Form of Investor Warrant, dated September 12, 2014.
Form of Common Stock Purchase Warrant, dated May 10, 2017.
Form of Representative’s Warrant, dated August 3, 2017.
Form of Investor Warrant, dated December 15, 2017.
Form of Placement Agent Warrant, dated December 15, 2017.
Form of Investor Warrant, dated March 28, 2018.
Form of Placement Agent Warrant, dated March 28, 2018.
Form of Common Stock Purchase Warrant, dated August 13, 2018.
Form of Pre-Funded Common Stock Purchase Warrant, dated
August 13, 2018.
4.12
Form of Underwriter’s Common Stock Purchase Warrant, dated
August 13, 2018.
8-K
10-Q
8-K
8-K
8-K
8-K
8-K
8-K
8-K
8-K
9/18/2014
5/15/2017
8/4/2017
12/19/2017
12/19/2017
3/29/2018
3/29/2018
8/13/2018
8/13/2018
8/13/2018
10.1
Collaboration and License Agreement between Alpex Pharma S.A.
S-1/A
10/16/2015
and Citius Pharmaceuticals, LLC, dated June 12, 2008.
10.2
Product Development and Pilot Lot Manufacturing Proposal
S-1/A
10/16/2015
Version 01 between IGI, Inc. and Citius Pharmaceuticals, Inc.,
dated July 21, 2010.
10.3
Exclusive License Agreement between Prenzamax, LLC and Citius
S-1/A
10/16/2015
Pharmaceuticals, Inc., dated November 15, 2011.
10.4
Amendment and Coordination Agreement among Prenzamax LLC,
Akrimax Pharmaceuticals, LLC, Citius Pharmaceuticals LLC and
Alpex Pharma S.A., dated November 15, 2011.
S-1/A
10/16/2015
10.3
10.4
4.2
4.1
4.2
4.1
4.2
4.1
4.2
4.3
10.6
10.9
10.8
10.5
10.5
Supply Agreement between Prenzamax, LLC and Alpex Pharma
S-1/A
10/16/2015
10.10
S.A., dated November 15, 2011.
10.6
Technical and Quality Agreement among Citius Pharmaceuticals
LLC, Alpex Pharma S.A. and Akrimax Pharmaceuticals, LLC,
dated November 15, 2011.
S-1/A
10/16/2015
10.11
40
Exhibit
Number
10.7
Description of Document
Consultant Services Agreement between Neeta Wadekar and Citius
Pharmaceuticals, Inc., dated September 1, 2014.
10.8
Employment Agreement between Leonard Mazur and Citius
Pharmaceuticals, Inc., dated September 12, 2014.
10.9
10.10
Citius Pharmaceuticals, Inc. 2014 Stock Incentive Plan.
Form of Citius Pharmaceuticals, Inc. 2014 Stock Incentive Plan
Nonqualified Stock Option.
10.11
Employment Agreement between Myron Holubiak and Citius
Pharmaceuticals, Inc., executed March 30, 2016, effective March 1,
2016.
Registrant’s
Form
S-1/A
10-K
10-Q
10-Q
8-K
Dated
10/16/2015
12/29/2014
8/15/2016
8/15/2016
4/5/2016
Exhibit
Number
10.7
Filed
Herewith
10.4
10.1
10.2
10.2
10.12
Voting Agreement among Citius Pharmaceuticals, Inc., Leonard
8-K
4/5/2016
10.3
Mazur and certain other stockholders of the Company, dated March
30, 2016.
10.13
Form of Unit Purchase Agreement, between each investor and
Citius Pharmaceuticals, Inc., dated September 27, 2016.
10.14
Placement Agency Agreement between Garden State Securities, Inc.
10.15
and Citius Pharmaceuticals, Inc., dated September 27, 2016.
Amendment to Placement Agency Agreement between Garden State
Securities, Inc. and Citius Pharmaceuticals, Inc., dated November
23, 2016.
10-Q
10-Q
10-Q
5/15/2017
5/15/2017
5/15/2017
10.5
10.6
10.7
10.16
Second Amendment to the Patent and Technology License
10-Q
5/15/2017
10.8
Agreement between Novel Anti-Infective Technologies, LLC and
Leonard-Meron Biosciences, Inc., dated March 20, 2017.
10.17
Future Advance Convertible Promissory Note between Leonard
Mazur and Citius Pharmaceuticals, Inc., dated May 10, 2017.
10.18
Conversion Agreement between Leonard Mazur and Citius
Pharmaceuticals, Inc., dated May 10, 2017.
10.19
Amended and Restated Demand Convertible Promissory Note
between Leonard Mazur and Citius Pharmaceuticals, Inc., dated
May 10, 2017.
10.20
Release Agreement between Garden State Securities, Inc. and Citius
Pharmaceuticals, Inc., dated June 7, 2017.
10.21
Form of Release Agreement between Citius Pharmaceuticals, Inc.
and each investor, dated June 8, 2017.
10.22
Warrant Agent Agreement between VStock Transfer, LLC and
Citius Pharmaceuticals, Inc., dated August 3, 2017.
10.23
Amended and Restated Employment Agreement between Leonard
Mazur and Citius Pharmaceuticals, Inc., dated October 19, 2017.
10-Q
10-Q
10-Q
8-K
8-K
8-K
--
5/15/2017
5/15/2017
5/15/2017
6/13/2017
6/13/2017
8/4/2017
--
10.24
Release Agreement between Aegis Capital Corp. and Citius
10-Q
2/14/2018
Pharmaceuticals, Inc., dated November 7, 2017.
10.25
Employment Agreement between Jaime Bartushak and Citius
Pharmaceuticals, Inc., dated November 27, 2017.
10.26
Form of Securities Purchase Agreement between Citius
Pharmaceuticals, Inc. and the purchasers named therein, dated
December 15, 2017.
10.27
Engagement Letter between H.C. Wainwright & Co., LLC and
Citius Pharmaceuticals, Inc., dated December 15, 2017.
10.28
10.29
Citius Pharmaceuticals, Inc. 2018 Omnibus Stock Incentive Plan
Form of Securities Purchase Agreement between Citius
Pharmaceuticals, Inc. and the purchasers named therein, dated
March 28, 2018.
8-K
8-K
8-K
10-Q
8-K
12/1/2017
12/19/2017
12/19/2017
2/14/2018
3/29/2018
10.1
10.2
10.3
10.1
10.2
4.1
--
10.1
10.1
10.1
10.2
10.2
10.1
10.30
Engagement Letter between H.C. Wainwright & Co., LLC and
8-K
3/29/2018
10.2
Citius Pharmaceuticals, Inc., dated March 28, 2018.
21
23.1
31.1
Subsidiaries.
Consent of Independent Registered Public Accounting Firm.
Certification of the Chief Executive Officer pursuant to Exchange
Act Rule 13a-14(a).
10-K
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12/13/2017
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21
--
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X
X
X
41
Exhibit
Number
31.2
Description of Document
Certification of the Chief Financial Officer pursuant to Exchange
Act Rule 13a-14(a).
32.1
Certification of the Chief Executive Officer pursuant to 18 U.S.C.
1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act
of 2002.
32.2
Certification of the Chief 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*
EX-
101.SCH*
EX-
101.CAL*
EX-
101.DEF*
EX-
101.LAB*
EX-
101.PRE*
XBRL INSTANCE DOCUMENT
XBRL TAXONOMY EXTENSION SCHEMA DOCUMENT
XBRL TAXONOMY EXTENSION CALCULATION LINKBASE
XBRL TAXONOMY EXTENSION DEFINITION LINKBASE
XBRL TAXONOMY EXTENSION LABELS LINKBASE
XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE
Registrant’s
Form
Dated
Exhibit
Number
Filed
Herewith
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
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X
X
X
X
X
X
X
X
X
*
Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files in Exhibit 101 hereto are deemed not filed or part of a registration
statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes
of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.
42
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.
Signatures
Date: December 11, 2018
CITIUS PHARMACEUTICALS, INC.
By: /s/ Myron Holubiak
Myron Holubiak
President and Chief Executive Officer
(Principal Executive Officer)
In accordance with the Exchange Act, this Report has been signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
Signature
/s/ Leonard Mazur
Leonard Mazur
/s/ Myron Holubiak
Myron Holubiak
/s/ Jaime Bartushak
Jaime Bartushak
/s/ Suren Dutia
Suren Dutia
/s/ Carol Webb
Carol Webb
/s/ William Kane
William Kane
/s/ Howard Safir
Howard Safir
/s/ Eugene Holuka
Eugene Holuka
Title
Date
Executive Chairman of the Board of Directors
December 11, 2018
President and Chief Executive Officer and Director
December 11, 2018
(Principal Executive Officer)
Chief Financial Officer and Chief Accounting Officer
(Principal Financial Officer and Principal Accounting
December 11, 2018
Officer)
Director
Director
Director
Director
Director
43
December 11, 2018
December 11, 2018
December 11, 2018
December 11, 2018
December 11, 2018
Exhibit 10.23
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
This Employment Agreement (the “Agreement”) is made as of October 19, 2017 (the “Effective Date”), by and between Citius
Pharmaceuticals, Inc. (the “Employer”), and Leonard L. Mazur (the “Executive”). In consideration of the mutual covenants contained in
this Agreement, the Employer and the Executive agree as follows:
1. Employment. The Employer agrees to employ the Executive and the Executive agrees to be employed by the Employer on the
terms and conditions set forth in this Agreement.
2. Term. The initial term (the “Initial Term”) of this Agreement shall begin as of the Effective Date and shall continue for three (3)
years, until the third anniversary of the Effective Date, unless sooner terminated by either party as set forth below. Effective upon the
expiration of the Initial Term and of each Renewal Term (as defined below), if any, the term of this Agreement shall automatically renew
for successive periods of one-year (each, a “Renewal Term”) unless the Employer gives written notice to the Executive at least ninety (90)
days prior to the end of the Initial Term or at least ninety (90) days prior to the end of any Renewal Term that the term of the Agreement
shall not be further extended. As used in this Agreement, the “Term” shall refer to the Initial Term and any Renewal Term.
3. Capacity. The Executive shall serve as Executive Chairman of the Employer’s Board (as defined below). The Executive shall
also serve the Employer in such other or additional offices as the Executive and Employer’s Board of Directors (the “Board”) mutually
may agree, provided that such other or additional offices are consistent with the Executive’s position and the terms of Section 6 below. In
such capacity or capacities, the Executive shall serve as chair of the board of directors, develop agendas for board meetings, participate in
the Company’s executive meetings, represent the Company to the investor community, lead capital raise efforts, engage in strategic
business opportunities and negotiations for the Company, and perform such other services and duties in connection with the business,
affairs and operations of the Employer and consistent with his position(s) and the terms of Section 6 below; provided, however, it is
understood and agreed that, in the event of a dispute between the Employer and Akrimax (as defined in Section 6 below and/or Prezamax
(as defined in Section 6 below), the Executive shall not be required to provide any services to the Employer related to such dispute.
Employer shall use its best efforts to cause the Executive to be elected as a voting member of its Board throughout the Term and shall
include him in the management slate for election as a director at every stockholders meeting during the Term at which his term as a director
would otherwise expire. The Executive agrees to accept election, and to serve during the Term, as a member of the Board without any
compensation therefore other than as specified in this Agreement.
4. Compensation and Benefits. The regular compensation and benefits payable to the Executive under this Agreement shall be as
follows:
(a) Salary. For all services rendered by the Executive under this Agreement, the Employer shall pay the Executive a
salary (the “Salary”) at the annual rate of two hundred and fifty thousand dollars ($250,000). The Salary shall be payable in periodic
installments in accordance with the Employer’s usual practice for its senior executives.
(b) Annual Milestone Bonus. Executive will receive a discretionary bonus on each anniversary of the Effective Date
during the Term (the “Annual Milestone Bonus”) in an amount up to fifty percent (50%) of his then current Base Salary based on the
attainment by the Executive of certain financial, clinical development and business milestones (the “Milestones”) as established annually
by the Board (or a committee thereof), after consultation with the Executive. The Annual Milestone Bonus shall be payable as a lump-sum
payment by no later than March 15 of the year following the close of the year to which such bonus relates.
(c) Regular Benefits. The Executive shall also be entitled to participate in any medical insurance plans, life insurance
plans, disability income plans, retirement plans, vacation and other paid time off plans and policies, expense reimbursement plans and
policies and other benefit plans and policies, which the Employer may from time to time establish and have in effect for all or most of its
senior executives. Such participation shall be subject to the terms of the applicable plan documents and policies, and applicable law.
Nothing contained in this Agreement shall be construed to create any obligation on the part of the Employer to establish any such plan or to
maintain the effectiveness of any such plan which may be in effect from time to time. The Executive shall be entitled to four (4) weeks of
paid vacation each calendar year, which vacation shall be taken in accordance with the Employer’s vacation plans and policies.
(d) Equity Grants.
(i) On the September 12, 2014, the Employer granted the Executive an option to purchase 3,300,000 shares of
common stock of the Employer, at an exercise price of $0.45 cents per share (the “Option”). The Company executed a 1 for 15
reverse stock split on June 9, 2017, the (“Split”). The impact of the split was such that the Option now consisted of 220,000 shares
of common stock at an exercise price of $6.75 per share The Option has fully vested as of September 12, 2017.
(ii) On the September 15, 2017, the Citius Board of Directors granted the Executive an option to purchase 40,000
shares of common stock of the Employer, at an exercise price of $3.45 cents per share (the “2017 Option”). The options will vest
1/3 on the one year anniversary of the Vesting Commencement Date, and then vest monthly at the end of each month for the next
two years in equal amounts for the remaining 2/3 of the options, provided that the Optionee provides Continuous Service to the
Company as of each such vesting date.
(iii) If application of the vesting percentages causes a fractional Share or Unit, such fractional Share shall be
rounded down to the nearest whole Share or Unit for each vesting date except for the last vesting date, on which the Option shall
become exercisable for the full remainder of the Shares.
(iv) Notwithstanding anything to the contrary, upon a Change of Control (as defined in Section 8), all options
granted to the Executive by the Employer, including, but not limited to the Option, shall immediately accelerate and become
exercisable or non-forfeitable as of the consummation of such Change of Control.
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( v ) The Option was granted pursuant to and subject to the terms and conditions established in the Citius
Pharmaceuticals, Inc. 2014 Stock Incentive Plan, a copy of which is attached hereto as Exhibit A (“Stock Incentive Plan”) and the
award agreement (the “Option Award Agreement”) in the form attached hereto as Exhibit B.
(vi) Subject to the terms of this Section 4(d), the Executive shall also be entitled to any other rights and benefits
with respect to option awards, to the extent and upon the terms provided in the employee option plan or any agreement or other
instrument attendant thereto pursuant to which such options were granted.
(e) Taxation of Payments and Benefits . The Employer shall undertake to make deductions, withholdings and tax reports
with respect to payments and benefits under this Agreement to the extent that it reasonably and in good faith believes that it is required to
make such deductions, withholdings and tax reports. Payments under this Agreement shall be in amounts net of any such deductions or
withholdings. Nothing in this Agreement shall be construed to require the Employer to make any payments to compensate the Executive for
any adverse tax effect associated with any payments or benefits or for any deduction or withholding from any payment or benefit.
provided under this Agreement, or as otherwise agreed between the Executive and the Employer.
(f) Exclusivity of Salary and Benefits. The Executive shall not be entitled to any payments or benefits other than those
5. Principal Place of Business. Executive shall perform services under this Agreement in the Employer’s office space located in
New Jersey, USA. At all times during the Term of this Agreement, Employer shall provide Executive with appropriate and reasonable
administrative support for the performance of his services under this Agreement.
6. Extent of Service. During the Executive’s employment under this Agreement, the Executive shall, subject to the direction and
supervision of the Board, devote the Executive’s best efforts and business judgment, skill and knowledge to the advancement of the
Employer’s interests and to the discharge of the Executive’s duties and responsibilities under this Agreement; provided, however, that the
Executive may engage in the Permitted Activities (as defined below) both during and outside of regular business hours, provided that such
Permitted Activities during regular business hours do not impair the Executive’s ability to fulfill the Executive’s duties and responsibilities
under this Agreement. “Permitted Activities” means (a) serving on the board of directors or similar governing body (and any committee
thereof) of IntelliCell Biosciences (“IntelliCell”), Leonard Meron Biosciences (“Meron”), Akrimax Pharmaceuticals (“Akrimax”),
Prenzamax LLC (“Prenzamax”), Rouses Point Pharmaceuticals, LLC (“Rouses”), Novellus, Inc. (“Novellus”), their respective subsidiaries
and any of their respective successors and assigns (together, the “Excluded Businesses”), (b) serving as interim Chief Executive Officer of
Novellus, (c) continuing to have an equity interest in and/or investing in the Excluded Businesses, and (d) activities in connection with the
operations or affairs of the Excluded Businesses. During the Executive’s employment under this Agreement, the Executive shall not engage
in any other competing business activity, except for such other business activities as may be previously approved by the Board; provided,
however, for the avoidance of doubt, the Permitted Activities shall in no event be deemed a “competing business activity” In addition to the
express understanding that Executive may engage in the Permitted Activities, nothing in this Agreement shall be construed as preventing
the Executive from:
(a) investing the Executive’s assets in any company or other entity in a manner not prohibited by Section 9(d) and in such
form or manner as shall not require any activities on the Executive’s part in connection with the operations or affairs of the companies or
other entities in which such investments are made or otherwise impair the Executive’s ability to fulfill the Executive’s duties and
responsibilities under this Agreement; or
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to fulfill the Executive’s duties and responsibilities under this Agreement.
(b) engaging in religious, charitable or other community or non-profit activities that do not impair the Executive’s ability
7. Termination. The Executive’s employment under this Agreement shall terminate under the following circumstances.
(a) Termination by the Employer for Cause. The Executive’s employment under this Agreement may be terminated for
Cause without further liability (other than to pay or provide the Accrued Benefits) on the part of the Employer effective immediately upon
a vote of the Board and written notice to the Executive. Only the following shall constitute “Cause” for such termination:
the Employer, as reasonably determined in good faith by the Board;
(i) any act of fraud, dishonesty or gross willful misconduct that is demonstrated to have caused material harm to
moral turpitude or fraud.
(ii) the indictment of the Executive for the Executive’s commission of a (x) felony or (y) misdemeanor involving
(iii) failure of the Executive to make a good faith effort to perform the Executive’s material duties and
responsibilities lawfully assigned or delegated by the Board under this Agreement, which failure continues uncured (in the
reasonable judgment of the Board, acting in good faith) for more than thirty (30) days after written notice describing the particulars
of such alleged failure is given to the Executive by the Board; or
(iv) a material and willful breach by the Executive of any of the Executive’s material obligations under this
Agreement, which breach continues uncured (in the reasonable judgment of the Board acting in good faith) for more than thirty (30)
days, after written notice describing the particulars of such alleged breach is given to the Executive by the Board.
For purposes of this definition of “Cause,” no act or failure to act, on the part of the Executive, shall be considered “willful” unless it is
done, or omitted to be done, by the Executive in bad faith or without reasonable belief that the Executive’s action or omission was in the
best interests of the Employer.
-4-
(b) Termination by the Executive for Good Reason . Subject to the payment of Termination Benefits pursuant to Section
8(c) or Section 8(d), as applicable, the Executive’s employment under this Agreement may be terminated by the Executive for Good
Reason, provided that the Executive first provides written notice (“Good Reason Notice”) to the Board not later than forty-five (45) days
following the initial occurrence of the act or failure to act that constitutes Good Reason setting forth the act or failure to act that constitutes
Good Reason. The Employer shall have a period of thirty (30) days in which it may correct the act or failure to act that constitutes the
grounds for Good Reason as set forth in the Executive’s Good Reason Notice (the “Good Reason Cure Period”). If the Employer does not
correct the act or failure to act, the Executive must terminate his employment for Good Reason within thirty (30) days after the end of the
Good Reason Cure Period, in order for the termination to be considered a Good Reason termination. Good Reason shall mean the
occurrence of one or more of the following, without the Executive’s consent:
(i) a reduction of the Executive’s Salary, other than a reduction of the Executive’s Salary by a percentage that is
not greater than 10% in connection with a general reduction in base compensation that affects all of the Employer’s executives in
substantially the same proportions;
(ii) a material diminution in the Executive’s authority, responsibilities or duties;
(iii) a material relocation of the geographic location at which the Executive must perform services for the
Employer, which, for purposes of this Agreement, means the relocation of the geographic location at which the Executive must
perform services for the Employer to a location more than fifty (50) miles from such geographic location prior to the relocation
(“Relocation”);
(iv) the Executive is not elected or re-elected, as applicable, to serve on the Board; or
(v) a material breach by the Employer of this Agreement, including, but not limited to Section 13 below.
(c) Termination by the Employer Without Cause. Subject to the payment of Termination Benefits pursuant to Section 8(c)
or Section 8(d), as applicable, the Executive’s employment under this Agreement may be terminated by the Employer without Cause upon
at least thirty (30) days advance written notice to the Executive.
the Executive voluntarily without Good Reason upon at least thirty (30) days advance written notice to the Employer.
(d) Voluntary Termination by the Executive without Good Reason . The Executive’s employment may be terminated by
(e) Death. The Executive’s employment with the Employer shall terminate upon his death.
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(f) Disability. If the Executive shall incur a “Disability” so as to be unable to perform the essential functions of the
Executive’s then existing position or positions under this Agreement, with or without reasonable accommodation, the Board may relieve
him from any responsibilities during the period of such Disability. Notwithstanding any such removal or reassignment, the Executive shall
continue to receive the Executive’s full Salary (less any Disability pay or sick pay benefits to which the Executive may be entitled under the
Employer’s plans or policies) and benefits under Section 5 of this Agreement (except to the extent that the Executive may be ineligible for
one or more such benefits under applicable plan terms) for up to ninety (90) or more consecutive days or one hundred eighty (180) days in
the aggregate during any consecutive twelve (12) month period, and the Executive’s employment may be terminated by the Employer on
account of Disability at any time thereafter. For purposes of this Agreement, “Disability” shall mean the Executive is eligible to receive
long-term disability benefits under the Employer’s long-term disability plan, provided, however, that if the Employer does not maintain a
long-term disability plan, “Disability” shall mean a medical determination by physician(s) selected by the Employer to whom the
Executive or the Executive’s guardian has no reasonable objections that due to the Executive’s illness or other physical or mental
disability, the Executive was or will be unable to substantially perform the essential functions of the Executive’s employment under this
Agreement, with or without reasonable accommodation, for a period of ninety (90) or more consecutive days or for one hundred eighty
(180) days in the aggregate during any consecutive twelve (12) month period. Nothing in this Section 7(g) shall be construed to waive the
Executive’s rights, if any, under existing law including, without limitation, the Family and Medical Leave Act of 1993, 29 U.S.C. §2601 et
seq. and the Americans with Disabilities Act, 42 U.S.C. §12101 et seq.
8. Compensation Upon Termination.
(a) Termination Generally. If the Executive’s employment with the Employer is terminated for any reason, the Employer
shall pay or provide to the Executive (or to his authorized representative or estate) any earned but unpaid Salary (which earned, but unpaid
Salary shall be paid on or before the time required by law, but in no event more than sixty (60) days after the last day of the Executive’s
employment), unpaid expense reimbursements (which unpaid expense reimbursements shall be paid on or before the time required by law,
but in no event more than sixty (60) days after the last day of the Executive employment), accrued but unused vacation (which accrued but
unused vacation shall be paid on or before the time required by law, but in no event more than sixty (60) days after the last day of the
Executive’s employment), any bonus Executive has earned under Section 4(b) of the Agreement (which bonus shall be paid according to
the time set forth in Section 4(b) above), and any vested benefits the Executive may have under any employee benefit plan of the Employer
(which benefits shall be paid and/or provided in accordance with the terms of the applicable plan) (the “Accrued Benefit”).
(b) Voluntary Termination without Good Reason. If the Executive elects voluntarily to terminate his employment without
Good Reason in accordance with Section 7(b), the Employer shall have no further obligation to the Executive other than to pay and/or
provide his Accrued Benefit through the date of termination (which Accrued Benefit will be paid and/or provided in accordance with
Section 8(a) above).
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(c) Termination by the Employer Without Cause or by the Executive for Good Reason. In the event of a termination of
the Executive’s employment with the Employer by the Employer without Cause or by the Executive for Good Reason, and subject to the
Executive’s execution and non-revocation of a release of any and all legal claims in the form annexed hereto as Exhibit C (the “Release”),
in addition to the Accrued Benefit, the Employer shall provide to the Executive the following termination benefits (“Termination
Benefits”):
preceding the date of termination;
(i) continuation of the Executive’s Salary at the highest annual rate applicable within the four (4) months
(ii) provided the Executive timely elects continued coverage under any of Employer’s group health, dental, vision
or prescription drug plan benefits in which he participates on the date of his termination of employment to the extent authorized by
and consistent with 29 U.S.C. § 1161 et seq. (commonly known as “COBRA”), monthly reimbursement for COBRA premiums paid
by the Executive for such continued coverage, less the amount that the Executive would be required to contribute for such coverage
if the Executive were an active employee of the Employer;
(iii) immediate vesting in any options that would have vested at the next immediate vesting event following the
date the Executive’s employment is terminated, provided, however, that the Executive must continue to comply with his obligations
under this Agreement to be eligible for such vesting, including, without limitation, his post-employment obligations set forth in
Section 9 below.
The Termination Benefits set forth in Sections 8(c)(i) and (ii) above shall continue effective for twelve (12) months after the date of
termination (the “Termination Benefits Period”). The Salary continuation payments under Section 8(c)(i) will be paid in installments in
accordance with the Employer’s regular payroll practices, commencing with the first regular payroll date on or following sixty (60) days
following the date of the Executive’s termination of employment, and the first payment will include any payments not yet paid during the
period between the date of termination of employment and the date of the first payment.
(d) Termination by the Employer Without Cause or by the Executive for Good Reason and Within Ninety (90) Days Prior
to a Change of Control or Within Two Years Following a Change of Control . Notwithstanding the foregoing, in the event of a termination
of the Executive’s employment with the Employer by the Employer without Cause or by the Executive for Good Reason and within
ninety (90) days prior to a Change of Control or within two (2) years following a Change of Control, and subject to the Executive’s
execution and non-revocation of the Release, the Executive will receive (in addition to the Accrued Benefit) all of the payments and
benefits as set forth in Section 8(c), except that the Termination Benefits Period shall be eighteen (18) months instead of twelve (12)
months, and any such options shall immediately vest and be exercisable in full and, in the event of a termination on or within two (2) years
following a Change of Control, the Salary continuation payments under Section 8(c)(i) shall be paid in a lump sum no later than sixty (60)
days following the termination of the Executive’s employment.
the Employer shall have no further obligation to the Executive other than payment of his Accrued Benefit.
(e) Termination by the Employer with Cause. If the Executive’s employment is terminated by the Employer with Cause,
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(f) Additional Limitation.
(i) In the event that it shall be determined that any benefit or payment in the nature of compensation (within the
meaning of Section 280G(b)(2) of the Code) to or for the benefit of the Executive under this Agreement, or any other plan, arrangement, or
agreement with the Employer (the “Payments”) would constitute a “parachute payment” within the meaning of Section 280G of the Code
and (but for this sentence) be subject to the tax (the “Excise Tax”) imposed by Section 4999 of the Code (or any similar tax that may
hereafter be imposed), the aggregate present value of the Payments under this Agreement, and such other plan, arrangement or agreement
with the Employer, shall be reduced (but not below zero) to the Reduced Amount. The “Reduced Amount” shall be either (A) the largest
portion of the Payments that would result in no portion of the Payments being subject to the Excise Tax or (B) the largest portion, up to
and including the total, of the Payments, whichever amount, after taking into account all applicable federal, state and local employment
taxes, income taxes, and the Excise Tax, results in the Executive’s receipt, on an after-tax basis, of the greater amount of the Payments
notwithstanding that all or some portion of the Payments may be subject to the Excise Tax. If a reduction in payments or benefits
constituting “parachute payments” is necessary so that the Payments equal the Reduced Amount, the Employer shall reduce the Payments
by first reducing or eliminating any cash payments (with the Payments to be made furthest in the future being reduced first), then by
reducing or eliminating accelerated vesting of stock options or similar awards, and then by reducing or eliminating any other remaining
Payments, provided that with each category the reduction shall be done on a basis resulting in the highest amount retained by the
Executive; and provided, further, that to the extent permitted by Section 409A of the Code and Sections 280G and 4999 of the Code, if a
different reduction procedure would be permitted without violating Section 409A of the Code or losing the benefit of the reduction under
Sections 280G and 4999 of the Code, the Executive may designate a different order of reduction.
(ii) All determinations to be made under this Section 8(f) shall be made by an independent certified public
accounting firm selected by the Employer and approved by the Executive (the “Accounting Firm”), which shall provide its determinations
and any supporting calculations both to the Employer and the Executive within ten (10) days following the Change of Control. For
purposes of this Section 8(f), the Accounting Firm shall take into account all applicable federal, state and local income and employment
taxes and the Excise Tax (all computed at the Executive’s actual marginal tax rate). Any determinations by the Accounting Firm in
accordance with this Section 8(f) shall be binding upon the Employer and the Executive. All of the fees and expenses of the Accounting
Firm in performing the determinations referred to in this Section 8(f) shall be borne solely by the Employer.
(iii) Notwithstanding anything herein to the contrary, for purposes of Section 409A of the Internal Revenue Code
of 1986, as amended (the “Code”), if the Executive is a “specified employee” of a publicly held corporation at his termination date, the
postponement provisions of Section 409A of the Code, as described in Section 18(a) below, shall apply, if applicable. Additionally,
notwithstanding anything herein to the contrary, in no event shall the timing of the Executive’s execution of the Release, directly or
indirectly, result in the Executive designating the calendar year of payment, and if a payment that is subject to execution of the Release
could be made in more than one taxable year, payment shall be made in the later taxable year. The Employer’s liability for Salary
continuation pursuant to Section 8(c)(i) shall be reduced by the amount of any severance actually paid to the Executive pursuant to any
severance pay plan of the Employer. Nothing in Section 8(c) or Section 8(d) shall be construed to affect the Executive’s right to receive
COBRA continuation entirely at the Executive’s own cost to the extent that the Executive may continue to be entitled to COBRA
continuation after the Executive’s right to reimbursements under Section 8(c)(ii) or Section 8(d) ceases.
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clause (A) below or (y) a change in the ownership of a substantial portion of the assets of the Employer under clause (B) below:
(iv) As used in this Agreement, “Change of Control” means (x) a change in ownership of the Employer under
(A) Change in the Ownership of the Employer. A change in the ownership of the Employer
shall occur on the date that any one person, or more than one person acting as a group (as defined in clause (C)
below), acquires ownership of capital stock of the Employer that, together with capital stock held by such person
or group, constitutes more than 50 percent of the total fair market value or total voting power of the capital stock
of the Employer. However, if any one person or more than one person acting as a group, is considered to own
more than 50 percent of the total fair market value or total voting power of the capital stock of the Employer, the
acquisition of additional capital stock by the same person or persons shall not be considered to be a change in the
ownership of the Employer. An increase in the percentage of capital stock owned by any one person, or persons
acting as a group, as a result of a transaction in which the Employer acquires capital stock in the Employer in
exchange for property will be treated as an acquisition of stock for purposes of this paragraph.
(B) Change in the Ownership of a Substantial Portion of the Employer’s Assets. A change in the
ownership of a substantial portion of the Employer’s assets shall occur on the date that any one person, or more
than one person acting as a group (as defined in clause (C) below), acquires (or has acquired during the 12-month
period ending on the date of the most recent acquisition by such person or persons) assets from the Employer that
have a total gross fair market value equal to or more than 80 percent of the total gross fair market value of all of
the assets of the Employer immediately prior to such acquisition or acquisitions. For this purpose, gross fair
market value means the value of the assets of the Employer, or the value of the assets being disposed of,
determined without regard to any liabilities associated with such assets. There is no Change of Control under this
clause (B) when there is a transfer to an entity that is controlled by the shareholders of the Employer immediately
after the transfer, as provided below in this clause (B). A transfer of assets by the Employer is not treated as a
change in the ownership of such assets if the assets are transferred to (1) a shareholder of the Employer
(immediately before the asset transfer) in exchange for or with respect to its capital stock, (2) an entity, 50 percent
or more of the total value or voting power of which is owned, directly or indirectly, by the Employer, (3) a person,
or more than one person acting as a group, that owns, directly or indirectly, 50 percent or more of the total value
or voting power of all the outstanding capital stock of the Employer, or (4) an entity, at least 50 percent of the
total value or voting power of which is owned, directly or indirectly, by a person described in clause (B)(3) of this
paragraph. For purposes of this clause (B), a person’s status is determined immediately after the transfer of the
assets.
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(C) Persons Acting as a Group . For purposes of clauses (A) and (B) above, persons will not be
considered to be acting as a group solely because they purchase or own capital stock or purchase assets of the
Employer at the same time. However, persons will be considered to be acting as a group if they are owners of a
corporation that enters into a merger, consolidation, purchase or acquisition of assets or capital stock, or similar
business transaction with the Employer. If a person, including an entity, owns stock in both corporations that enter
into a merger, consolidation, purchase or acquisition of assets or capital stock, or similar transaction, such
shareholder is considered to be acting as a group with other shareholders in a corporation only with respect to the
ownership in that corporation before the transaction giving rise to the change and not with respect to the
ownership interest in the other corporation. For purposes of this paragraph, the term “corporation” shall have the
meaning assigned such term under Treasury Regulation section 1.280G-1, Q&A-45.
(D) Each of clauses (A) through (C) above shall be construed and interpreted consistent with the
requirements of Section 409A and any Treasury Regulations or other guidance issued thereunder. For the
avoidance of doubt, the Transaction or a similar financing or recapitalization, including a financing or
recapitalization that results in any person or entity acquiring a majority interest of the Employer’s outstanding
equity, shall not be a “Change of Control” for purposes of this Agreement.
9. Confidential Information, Noncompetition and Cooperation.
(a) Confidential Information. As used in this Agreement, “Confidential Information” means information belonging to the
Employer which is of value to the Employer in the course of conducting its business and is maintained as confidential by the Employer and
the disclosure of which could result in a competitive or other disadvantage to the Employer. Confidential Information includes, without
limitation, financial information, reports, and forecasts; inventions, improvements and other intellectual property; trade secrets; know-how;
designs, processes or formulae; software; market or sales information or plans; customer lists; and business plans, prospects and
opportunities (such as possible acquisitions or dispositions of businesses or facilities) which have been discussed or considered by the
management of the Employer. Confidential Information includes information developed by the Executive in the course of the Executive’s
employment by the Employer, as well as other information to which the Executive may have access in connection with the Executive’s
employment. Confidential Information also includes the confidential information of others with which the Employer has a business
relationship. Notwithstanding the foregoing, Confidential Information does not include: (i) information in the public domain unless due to
breach of the Executive’s duties under Section 9(b); (ii) information known to the Executive prior to such information being disclosed to
the Executive in connection with his employment hereunder; (iii) is disclosed to the Executive at any time other than in the course of the
Executive’s performance of his duties as an employee of Employer, by any third party not bound at the time of the disclosure directly or
indirectly, by any confidentiality agreement with Employer.
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(b) Confidentiality. The Executive understands and agrees that the Executive’s employment creates a relationship of
confidence and trust between the Executive and the Employer with respect to all Confidential Information. At all times, both during the
Executive’s employment with the Employer and after its termination, the Executive will keep in confidence and trust all such Confidential
Information, and will not use or disclose any such Confidential Information without the written consent of the Employer, except (i) as may
be necessary in the ordinary course of performing the Executive’s duties to the Employer, (ii) to enforce any rights or defend any claims
hereunder or under any other agreement to which the Executive is a party, provided that such disclosure is relevant to the enforcement of
such rights or defense of such claims and is only disclosed to the extent necessary in the formal proceedings related thereto, or (iii) when
required to do so by a court of law, by any governmental agency having supervisory authority over the business of the Employer or by any
administrative or legislative body (including a committee thereof) with jurisdiction to order the Executive to divulge, disclose or make
accessible such information, provided that the Executive shall give prompt written notice to the Employer of such requirement, disclose no
more information than is so required, and reasonably cooperate with any attempt by the Employer to obtain a protective order or similar
treatment.
(c) Documents, Records, etc. All documents, records, data, apparatus, equipment and other physical property, whether or
not pertaining to Confidential Information, which are furnished to the Executive by the Employer or are produced by the Executive in
connection with the Executive’s employment will be and remain the sole property of the Employer. The Executive will return to the
Employer all such materials and property as and when requested by the Employer. In any event, the Executive will return all such materials
and property immediately upon termination of the Executive’s employment for any reason. The Executive will not retain with the
Executive any such material or property or any copies thereof after such termination.
(d) Noncompetition and Nonsolicitation.
(i) During the term of the Executive’s employment with the Employer hereunder and for nine (9) months
thereafter, the Executive will not, directly or indirectly, whether as owner, partner, shareholder, consultant, agent, employee, co-
venturer or otherwise, engage, participate, assist or invest in any Competing Business (as defined below in this Section 9(d) below).
(ii) During the term of the Executive’s employment with the Employer and for two (2) years thereafter, the
Executive will not, directly or indirectly, whether as owner, partner, shareholder, consultant, agent, employee, co-venturer or
otherwise; (A) attempt to employ, recruit or otherwise solicit, induce or influence any person to leave employment with the
Employer (other than terminations of employment of employees undertaken in the course of the Executive’s employment with the
Employer and/or in the Executive’s capacity as a member of the Board); and (B) solicit or encourage any customer or supplier to
terminate or otherwise modify adversely its business relationship with the Employer; provided, that neither (1) the general
advertisement for employees or service providers (i.e., not targeted toward any of the Employer’s employees) nor (2) the Executive
being named as an reference for an employee of the Employer and responding to ordinary course inquiries made of the Executive by
prospective employers or service recipients of such employee in connection with such reference so long as the reference is for
employment with an employer that does not engaging a Competing Business with Employer, shall be deemed a violation of this
Section 9(d)(ii). Further, for the avoidance of doubt, nothing in this Section 9(d)(ii) shall be deemed to prohibit senior level general
solicitations in connection with any activities that are not prohibited by Section 9(d)(i) above shall not be deemed a violation of this
Section 9(d)(ii).
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The Executive understands that the restrictions set forth in this Section 9(d) are intended to protect the
Employer’s interest in its Confidential Information and established employee, customer and supplier relationships and goodwill, and
agrees that such restrictions are reasonable and appropriate for this purpose. For purposes of this Agreement, the term “Competing
Business” shall mean a biopharmaceuticals business conducted anywhere in the United States which is focused on therapies for
obesity, or topical therapies for hemorrhoids and/or other anal rectal diseases or disorders, or on other therapeutic categories to be
identified and added to Addendum A to this Agreement from time to time during the employment of the Executive; provided,
however, in no event shall any of the Excluded Businesses be deemed a Competing Business, and provided further, however, that
any other therapeutic categories identified and added to Addendum A of this Agreement shall relate to therapeutic categories with
respect to which the Employer is actively conducting business or which are actively under development by the Employer.
Notwithstanding the foregoing, the Executive may own up to one percent (1%) of the outstanding stock of a publicly held
corporation which constitutes or is affiliated with a Competing Business.
(e) Third-Party Agreements and Rights. The Executive hereby confirms that the Executive is not bound by the terms of
any non-competition and/or non-solicitation agreement with any previous employer, other current employer or other party which prohibits
or materially limits the performance by the Executive of his duties to Employer hereunder. The Executive represents to the Employer that
the Executive’s execution of this Agreement, the Executive’s employment with the Employer and the performance of the Executive’s
proposed duties for the Employer will not violate any obligations the Executive may have to any such previous employer, other current
employer or other party. In the Executive’s work for the Employer, the Executive will not disclose or make use of any information in
violation of any agreements with or rights of any such previous employer, current employer or other party, and the Executive will not bring
to the premises of the Employer any copies or other tangible embodiments of non-public information belonging to or obtained from any
such previous employment, concurrent employment or other party.
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(f) Litigation and Regulatory Cooperation. During and after the Executive’s employment, the Executive shall reasonably
cooperate with the Employer in the defense or prosecution of any claims or actions now in existence or which may be brought in the future
against or on behalf of the Employer which relate to events or occurrences that transpired while the Executive was employed by the
Employer. The Executive’s cooperation in connection with such claims or actions shall include, but not be limited to, being reasonably
available to meet with counsel to prepare for discovery or trial and to act as a witness on behalf of the Employer at mutually convenient
times. During and after the Executive’s employment, the Executive also shall reasonably cooperate with the Employer in connection with
any investigation or review of any federal, state or local regulatory authority as any such investigation or review relates to events or
occurrences that transpired while the Executive was employed by the Employer. The Employer shall reimburse the Executive for any
reasonable out-of-pocket expenses incurred in connection with the Executive’s performance of obligations pursuant to this Section 9(f),
including Executive’s attorneys’ fees to the extent the Executive reasonably determines that the Executive should be represented by his
own counsel.
(g) Injunction. The Executive agrees that it would be difficult to measure any damages caused to the Employer which
might result from any breach by the Executive of the promises set forth in this Section 9, and that in any event money damages would be an
inadequate remedy for any such breach. Accordingly, subject to Section 10 of this Agreement, the Executive agrees that if the Executive
breaches, or proposes to breach, any portion of this Agreement, the Employer shall be entitled, in addition to all other remedies that it may
have, to seek an injunction or other appropriate equitable relief to restrain any such breach without showing or proving any actual damage
to the Employer.
10. Arbitration of Disputes. Any controversy or claim arising out of or relating to this Agreement or the breach thereof or
otherwise arising out of the Executive’s employment or the termination of that employment (including, without limitation, any claims of
unlawful employment discrimination whether based on age or otherwise) shall, to the fullest extent permitted by law, be settled by
arbitration in any forum and form agreed upon by the parties or, in the absence of such an agreement, under the auspices of the American
Arbitration Association (“AAA”) in Boston, Massachusetts in accordance with the Employment Dispute Resolution Rules of the AAA,
including, but not limited to, the rules and procedures applicable to the selection of arbitrators. In the event that any person or entity other
than the Executive or the Employer may be a party with regard to any such controversy or claim, such controversy or claim shall be
submitted to arbitration subject to such other person or entity’s agreement. Judgment upon the award rendered by the arbitrator may be
entered in any court having jurisdiction thereof. This Section 10 shall be specifically enforceable. Notwithstanding the foregoing, this
Section 10 shall not preclude either party from pursuing a court action for the sole purpose of obtaining a temporary restraining order or a
preliminary injunction in circumstances in which such relief is appropriate, provided that any other relief shall be pursued through an
arbitration proceeding pursuant to this Section 10. The Employer shall bear the cost of all arbitration fees, but each party shall be
responsible for its own attorneys’ fees.
11. Consent to Jurisdiction. To the extent that any court action is permitted consistent with or to enforce Section 10 of this
Agreement, the parties hereby consent to the jurisdiction of the Superior Court of the State of New Jersey and the United States District
Court for the District of New Jersey. Accordingly, with respect to any such court action, the Executive (a) submits to the personal
jurisdiction of such courts; (b) consents to service of process; and (c) waives any other requirement (whether imposed by statute, rule of
court, or otherwise) with respect to personal jurisdiction or service of process.
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12. Integration. This Agreement, the Stock Incentive Plan and the Option Award Agreement constitute the entire agreement
between the parties with respect to the subject matter hereof and supersede all prior agreements between the parties with respect to any
related subject matter.
1 3 . Indemnification; Liability Insurance. The Employer shall indemnify and hold Executive harmless to the fullest extent
permitted by the laws of the Employer’s state of organization or incorporation in effect at the time against and in respect of any and all
actions, suits, proceedings, claims, demands, judgments, costs, expenses (including advancement of reasonable attorney’s fees), losses, and
damages resulting from the Executive’s performance of the Executive’s duties and obligations with the Employer. Executive will be
entitled to be covered, both during and, while potential liability exists, by the insurance policies the Employer may elect to maintain
generally for the benefit of officers and directors of the Employer against all costs, charges and expenses incurred in connection with any
action, suit or proceeding to which the Executive may be made a party by reason of being an officer or director of the Employer in the same
amount and to the same extent as the Employer covers its other officers and directors. Without limitation of the foregoing, the Employer
agrees to continue and maintain a directors’ and officers’ liability insurance policy covering the Executive in an amount, and on terms and
conditions (including without limitation, with respect to scope, exclusions, sub-amounts and deductibles), no less favorable to him than (x)
the coverage the Employer provides other senior executives and directors from time to time or, if greater, (y) the coverage provided to
senior executives and directors on the Effective Date. These obligations shall survive the termination of Executive’s employment with the
Employer.
14. Assignment; Successors and Assigns, etc . Except as otherwise set forth in this Section 14, neither the Employer nor the
Executive may make any assignment of this Agreement or any interest herein, by operation of law or otherwise, without the prior written
consent of the other party. Notwithstanding the foregoing, the Employer may assign its rights under this Agreement without the consent of
the Executive to a successor in the event that the Employer shall effect a reorganization, consolidate with or merge into any other
corporation, partnership, organization or other entity, or transfer all of substantially all of its properties or assets to any other corporation,
partnership, organization or other entity and such successor shall assume and agree to perform this Agreement in the same manner and to
the same extent that the Employer would be required to perform it if no such succession had taken place. As used in this Agreement,
“Employer” shall mean the Employer and any such successor which assumes and agrees to perform the duties and obligations of the
Employer under this Agreement by operation of law or otherwise. This Agreement shall inure to the benefit of and be binding upon the
Employer and the Executive, their respective successors, executors, administrators, heirs and permitted assigns.
15. Enforceability. If any portion or provision of this Agreement (including, without limitation, any portion or provision of any
section of this Agreement) shall to any extent be declared illegal or unenforceable by a court of competent jurisdiction, then the remainder
of this Agreement, or the application of such portion or provision in circumstances other than those as to which it is so declared illegal or
unenforceable, shall not be affected thereby, and each portion and provision of this Agreement shall be valid and enforceable to the fullest
extent permitted by law.
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16. Waiver. No waiver of any provision hereof shall be effective unless made in writing and signed by the waiving party. The
failure of any party to require the performance of any term or obligation of this Agreement, or the waiver by any party of any breach of this
Agreement, shall not prevent any subsequent enforcement of such term or obligation or be deemed a waiver of any subsequent breach.
17. Notices. Any notices, requests, demands and other communications provided for by this Agreement shall be sufficient if in
writing and delivered in person or sent by a nationally recognized overnight courier service or by registered or certified mail, postage
prepaid, return receipt requested, to the Executive at the last address the Executive has filed in writing with the Employer or, in the case of
the Employer, at its main offices, attention of the Board, and shall be effective on the date of delivery in person or by courier or three (3)
days after the date mailed.
18. Section 409A.
(a) This Agreement is intended to comply with Section 409A of the Code and its corresponding regulations, or an exemption, and
payments may only be made under this Agreement upon an event and in a manner permitted by Section 409A of the Code, to the extent
applicable. To the extent that any provision in this Agreement is ambiguous as to its compliance with Section 409A of the Code, or to the
extent any provision in this Agreement must be modified to comply with Section 409A of the Code, such provision shall be read in such a
manner so that no payment due to the Executive shall be subject to an “additional tax” within the meaning of Section 409A(a)(1)(B) of the
Code. Severance benefits under the Agreement are intended to be exempt from Section 409A of the Code under the “short-term deferral”
exception, to the maximum extent applicable, and then under the “separation pay” exception, to the maximum extent applicable.
Notwithstanding anything in this Agreement to the contrary, if required by Section 409A of the Code, if the Executive is considered a
“specified employee” for purposes of Section 409A of the Code and if payment of any amounts under this Agreement is required to be
delayed for a period of six (6) months after separation from service pursuant to Section 409A of the Code, payment of such amounts shall
be delayed as required by Section 409A of the Code, and the accumulated amounts shall be paid in a lump sum payment within ten (10)
days after the end of the six (6) month period. If the Executive dies during the postponement period prior to the payment of benefits, the
amounts withheld on account of Section 409A of the Code shall be paid to the personal representative of the Executive’s estate within sixty
(60) days after the date of the Executive’s death.
(b) To the extent required to comply with Section 409A of the Code, any Termination Benefits or other payments to be made upon
a termination of employment under this Agreement may only be made upon a “separation from service” as defined under Section 409A of
the Code. For purposes of Section 409A of the Code, each payment hereunder shall be treated as a separate payment and the right to a
series of installment payments under this Agreement shall be treated as a right to a series of separate payments. In no event may the
Executive, directly or indirectly, designate the calendar year of a payment. All reimbursements and in-kind benefits provided under the
Agreement shall be made or provided in accordance with the requirements of Section 409A of the Code.
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19. Amendment. This Agreement may be amended or modified only by a written instrument signed by the Executive and by a duly
authorized representative of the Employer.
20. Governing Law. This is a New Jersey contract and shall be construed under and be governed in all respects by the laws of the
state of New Jersey, without giving effect to the conflict of laws principles of such state. With respect to any disputes concerning federal
law, such disputes shall be determined in accordance with the law as it would be interpreted and applied by the United States Court of
Appeals for the Third Circuit.
21. Counterparts. This Agreement may be executed in any number of counterparts, each of which when so executed and delivered
shall be taken to be an original; but such counterparts shall together constitute one and the same document.
IN WITNESS WHEREOF, this Agreement has been executed as a sealed instrument by the Employer, by its duly authorized
member, and by the Executive, as of the Effective Date.
LEONARD MAZUR
/s/ Leonard Mazur
CITIUS PHARMACEUTICALS, INC.
/s/ Myron Holubiak
By: Myron Holubiak
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CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the Registration Statements on Forms S-1 (333-224386 and 333-226395) and on Form S-3
(File No. 333-221492) of Citius Pharmaceuticals, Inc. of our report dated December 11, 2018, relating to the consolidated financial
statements of Citius Pharmaceuticals, Inc., appearing in the Annual Report on Form 10-K for the year ended September 30, 2018.
Exhibit 23.1
/s/ Wolf & Company, P.C.
Wolf & Company, P.C.
Boston, Massachusetts
December 11, 2018
EXHIBIT 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, Myron Holubiak, certify that:
1. I have reviewed this report on Form 10-K of Citius Pharmaceuticals, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect
to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this
report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in
Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles;
c)
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on
such evaluation; and
d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the
equivalent functions):
a)
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information;
and
b)
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting.
December 11, 2018
By:
/s/ Myron Holubiak
Myron Holubiak
President and Chief Executive Officer
(Principal Executive Officer)
EXHIBIT 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, Jaime Bartushak, certify that:
1. I have reviewed this report on Form 10-K of Citius Pharmaceuticals, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect
to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this
report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in
Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles;
c)
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on
such evaluation; and
d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the
equivalent functions):
a)
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information;
and
b)
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting.
December 11, 2018
By:
/s/ Jaime Bartushak
Jaime Bartushak
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
In connection with the Annual Report of Citius Pharmaceuticals, Inc. (the “Company”) on Form 10-K for the year ended
September 30, 2018 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Myron Holubiak, President
and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations
of the Company.
Date: December 11, 2018
By:
/s/ Myron Holubiak
Myron Holubiak
President and Chief Executive Officer
(Principal Executive Officer, Principal Financial
Officer and Principal Accounting Officer)
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.2
In connection with the Annual Report of Citius Pharmaceuticals, Inc. (the “Company”) on Form 10-K for the year ended
September 30, 2018 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Jaime Bartushak, Chief
Financial Officer of the Company, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations
of the Company.
Date: December 11, 2018
By:
/s/ Jaime Bartushak
Jaime Bartushak
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)