Innovation Pharmaceuticals Inc. - Quarter Report: 2016 December (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended: December 31, 2016

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

For the transition period from ____________to _____________

Commission File Number: 001-37357

100 Cumming Center, Suite 151-B

Beverly, MA 01915

(Address of principal executive offices, Zip Code)

(978)-921-4125

(Registrant’s telephone number, including area code)

____________________________________________________________________

(Former Name, Former Address and Former Fiscal Year if Changed Since Last Report)

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 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 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 o No x

The number of shares outstanding of each of the issuer’s classes of common equity, as of January 27, 2017 is as follows:

CELLCEUTIX CORPORATION

FORM 10-Q

For the Quarter Ended December 31, 2016

TABLE OF CONTENTS

FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended. Any statements contained in this report that are not statements of historical fact may be forward-looking statements. When we use the words “intends,” “estimates,” “predicts,” “potential,” “continues,” “anticipates,” “plans,” “expects,” “believes,” “should,” “could,” “may,” “will” or the negative of these terms or other comparable terminology, we are identifying forward-looking statements. These forward-looking statements include, but are not limited to, statements concerning our future drug development plans and projected timelines for the initiation and completion of preclinical and clinical trials; the potential for the results of ongoing preclinical or clinical trials; other statements regarding our future product development and regulatory strategies, including with respect to specific indications; any statements regarding our future financial performance, results of operations or sufficiency of capital resources to fund our operating requirements; and any other statements which are other than statements of historical fact. Forward-looking statements involve risks and uncertainties, which may cause our actual results, performance or achievements to be materially different from those expressed or implied by forward-looking statements. These factors include, but are not limited to, our ability to continue to fund and successfully progress internal research and development efforts and to create effective, commercially-viable drugs; our ability to effectively and timely conduct clinical trials; our ability to ultimately distribute our drug candidates; compliance with regulatory requirements; and our capital needs, as well as other factors described elsewhere in this report and our other reports filed with the Securities and Exchange Commission (the “SEC”). Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements.

Forward-looking statements speak only as of the date on which they are made. Except as may be required by applicable law, we do not undertake or intend to update or revise our forward-looking statements, and we assume no obligation to update any forward-looking statements contained in this report as a result of new information or future events or developments. Thus, you should not assume that our silence over time means that actual events are bearing out as expressed or implied in such forward-looking statements. You should carefully review and consider the various disclosures we make in this report and our other reports filed with the SEC that attempt to advise interested parties of the risks, uncertainties and other factors that may affect our business. Readers are cautioned not to put undue reliance on forward-looking statements.

For further information about these and other risks, uncertainties and factors, please review the disclosure included in our Annual Report on Form 10-K under “Part I, Item 1A, Risk Factors” and in this report under “Part II, Item 1A, Risk Factors.” 

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CELLCEUTIX CORPORATION

CONDENSED BALANCE SHEETS

(Rounded to nearest thousand except for per share data)

The accompanying notes are an integral part of these condensed financial statements

CELLCEUTIX CORPORATION

CONDENSED STATEMENTS OF OPERATIONS

FOR THE THREE MONTHS AND SIX MONTHS ENDED DECEMBER 31, 2016 AND 2015

(Unaudited)

(Rounded to nearest thousand except for shares and per share data)

The accompanying notes are an integral part of these condensed financial statements.

CELLCEUTIX CORPORATION

CONDENSED STATEMENTS OF CASH FLOW

FOR THE SIX MONTHS ENDED DECEMBER 31, 2016 AND 2015

(Unaudited)

(Rounded to nearest thousand)

The accompanying notes are an integral part of these condensed financial statements.

CELLCEUTIX CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS

DECEMBER 31, 2016

 (Unaudited)

1. Basis of Presentation and Nature of Operations

Unaudited Interim Financial Information

The accompanying unaudited condensed financial statements of Cellceutix Corporation have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission, or the SEC, including the instructions to Form 10-Q and Regulation S-X. Certain information and note disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America have been condensed or omitted from these statements pursuant to such rules and regulations and, accordingly, they do not include all the information and notes necessary for comprehensive financial statements and should be read in conjunction with our audited financial statements for the year ended June 30, 2016, included in our Annual Report on Form 10-K for the year ended June 30, 2016.

In the opinion of the management of the Company, all adjustments, which are of a normal recurring nature, necessary for a fair statement of the results for the three month and six month periods have been made. Results for the interim period presented are not necessarily indicative of the results that might be expected for the entire fiscal year. When used in these notes, the terms "Company", "we", "us" or "our" mean Cellceutix Corporation. 

Basis of Presentation

Cellceutix Corporation was incorporated as Econoshare, Inc. on August 1, 2005, in the State of Nevada. On December 6, 2007, the Company acquired Cellceutix Pharma, Inc., a privately owned corporation formed under the laws of the State of Delaware on June 20, 2007. Following the acquisition, the Company changed its name to Cellceutix Corporation.

The Company’s Common Stock is quoted on OTCQB, symbol “CTIX”.

Nature of Operations -Overview

We are in the business of developing innovative small molecule therapies to treat diseases with significant medical need, particularly in the areas of cancer, antibiotics and inflammatory disease. Our strategy is to use our business and scientific expertise to maximize the value of our pipeline. We will do this by focusing initially on our lead compounds, Brilacidin, Kevetrin and Prurisol and advancing them as quickly as possible along the regulatory pathway. We will develop the highest quality data and broadest intellectual property to support our compounds.

We currently own all development and marketing rights to our products. In order to successfully develop and market our products, we may have to partner with other companies. Prospective partners may require that we grant them significant development and/or commercialization rights in return for agreeing to share the risk of development and/or commercialization.

2. Liquidity

At December 31, 2016, we had $3.9 million in cash. We have expended substantial funds on the research and development of our product candidates. Our net losses incurred for the six months ended December 31, 2016 and 2015, amounted to $6.4 million and $5.9 million, respectively, and we had a working capital deficit of approximately $4.6 million and $1.9 million, respectively at December 31, 2016 and June 30, 2016.

On March 30, 2015, the Company entered into a common stock purchase agreement with Aspire Capital Fund, LLC, an Illinois limited liability company ("Aspire Capital") which provides that, upon the terms and subject to the conditions and limitations set forth therein, Aspire Capital is committed to purchase up to an aggregate of $30.0 million of the Company's common stock over the 36-month term of the Purchase Agreement. As of December 31, 2016, the available balance is approximately $19 million under this stock purchase agreement.

The Company plans to incur expenses of approximately $19 million over the next twelve months, including approximately $15 million for clinical trials. The Company has limited experience with pharmaceutical drug development. As such, the budget estimate may not be accurate. In addition, the actual work to be performed is not known at this time, other than a broad outline, as is normal with any scientific work. As further work is performed, additional work may become necessary or change in plans or workload may occur. Such changes may have an adverse impact on our estimated budget and on our projected timeline of drug development.

Management believes that the amounts available from Aspire Capital and under the Company’s effective shelf registration statement will be sufficient to fund the Company’s operations for the next 12 months.

If we are unable to generate enough working capital from our current financing agreement with Aspire Capital when needed or secure additional sources of funding, it may be necessary to significantly reduce our current rate of spending through reductions in staff and delaying, scaling back or stopping certain research and development programs, including more costly Phase 2 and Phase 3 clinical trials on our wholly-owned development programs as these programs progress into later stage development. Insufficient liquidity may also require us to relinquish greater rights to product candidates at an earlier stage of development or on less favorable terms to us and our stockholders than we would otherwise choose in order to obtain up-front license fees needed to fund operations. These events could prevent us from successfully executing our operating plan.

3. Significant Accounting Policies and Recent Accounting Pronouncements

Reclassifications

Certain prior year amounts have been reclassified to conform to current period presentation. Such reclassifications were limited to the Condensed Balance Sheets and did not impact the Condensed Statement of Operations and Condensed Statement of Cash Flows.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect certain reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Significant items subject to such estimates and assumptions include contract research accruals, recoverability of long-lived assets, measurement of stock-based compensation, and the periods of performance under collaborative research and development agreements. The Company bases its estimates on historical experience and various other assumptions that management believes to be reasonable under the circumstances. Changes in estimates are recorded in the period in which they become known. Actual results could differ from those estimates.

Basic Earnings (Loss) per Share

Basic and diluted earnings (loss) per share are computed based on the weighted-average common shares and common share equivalents outstanding during the period. Common share equivalents consist of stock options, warrants and convertible notes payable. Common share equivalents of 45.1 million shares and 44.0 million shares were excluded from the computation of diluted earnings (loss) per share for the three months and six months ended December 31, 2016 and 2015, respectively, because their effect is anti-dilutive.

Accounting for Stock Based Compensation

The stock-based compensation expense incurred by Cellceutix for employees and directors in connection with its stock option plan is based on the employee model of ASC 718, and the fair market value of the options is measured at the grant date. Under ASC 718 employee is defined as “An individual over whom the grantor of a share-based compensation award exercises or has the right to exercise sufficient control to establish an employer-employee relationship based on common law as illustrated in case law and currently under U.S. tax regulations”. Our consultants do not meet the employer-employee relationship as defined by the IRS and therefore are accounted for under ASC 505-50.

ASC 505-50-30-11 further provides that an issuer shall measure the fair value of the equity instruments in these transactions using the stock price and other measurement assumptions as of the earlier of the following dates, referred to as the measurement date:

We have elected to use the Black-Scholes-Merton pricing model to determine the fair value of stock options on the dates of grant. Restricted stock is measured based on the fair market values of the underlying stock on the dates of grant. We recognize stock-based compensation using the straight-line vesting method over the requisite service period of the equity awards.

The components of stock based compensation related to stock options and stock awards in the Company’s Statement of Operations for the three months and six months ended December 31, 2016 and 2015 are as follows (rounded to nearest thousand):

Recent Accounting Pronouncements

Standards Issued Not Yet Adopted

In August 2014, the FASB issued ASU 2014-15, “Presentation of Financial Statements—Going Concern—Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern” (“ASU 2014-15”). ASU 2014-15 requires management to assess an entity’s ability to continue as a going concern, and to provide related footnote disclosures in certain circumstances. ASU 2014-15 is effective for annual periods, and interim periods within those annual periods, starting after December 15, 2016; the Company’s first quarter of fiscal 2018. Management believes that the adoption of this guidance will not have a material impact on our financial statements.

In May 2014, the FASB issued authoritative guidance that defines how companies should report revenues from contracts with customers. The standard requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. It provides companies with a single comprehensive five-step principles based model to use in accounting for revenue and supersedes current revenue recognition requirements, including most industry-specific and transaction-specific revenue guidance. In August 2015, the FASB deferred the effective date of the new revenue standard by one year. As a result, the new standard would not be effective for the Company until fiscal year 2019. In addition, the FASB is allowing companies to early adopt this guidance for non-public entities beginning in fiscal year 2017. The guidance permits an entity to apply the standard retrospectively to all prior periods presented, with certain practical expedients, or apply the requirements in the year of adoption, through a cumulative adjustment. The Company will apply this new guidance when it becomes effective and has not yet selected a transition method. Management believes that the adoption of this guidance will not have a material impact on our financial statements.

In February 2016, FASB issued ASU No. 2016-02, Leases (Topic 842). The guidance requires that a lessee recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right of use asset representing its right to use the underlying asset for the lease term. For finance leases: the right-of-use asset and a lease liability will be initially measured at the present value of the lease payments, in the statement of financial position; interest on the lease liability will be recognized separately from amortization of the right-of-use asset in the statement of comprehensive income; and repayments of the principal portion of the lease liability will be classified within financing activities and payments of interest on the lease liability and variable lease payments within operating activities in the statement of cash flows. For operating leases: the right-of-use asset and a lease liability will be initially measured at the present value of the lease payments, in the statement of financial position; a single lease cost will be recognized, calculated so that the cost of the lease is allocated over the lease term on a generally straight-line basis; and all cash payments will be classified within operating activities in the statement of cash flows. Under Topic 842 the accounting applied by a lessor is largely unchanged from that applied under previous GAAP. The amendments in Topic 842 are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Management has been continuously assessing the impact of this guidance.

In March 2016, the FASB issued ASU 2016-09, Compensation-Stock Compensation (“ASU 2016-09”). Under ASU 2016-09, entities will be required to recognize the income tax effects of awards in the income statement when the awards vest or are settled. The guidance on employers’ accounting for an employee’s use of shares to satisfy the employer’s statutory income tax withholding obligation and for forfeitures is also changing. For public business entities, ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, and interim periods within those years. Early adoption is permitted, but all of the guidance must be adopted in the same period. Management believes that the adoption of this guidance will not have a material impact on our financial statements.

Standards Issued and Adopted

In June 2014, the FASB issued ASU 2014-12, Compensation - Stock Compensation. The amendments in this ASU apply to reporting entities that grant their employees share-based payments in which the terms of the award provide that a performance target can be achieved after the requisite service period. This ASU is the final version of Proposed ASU EITF-13D--Compensation--Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period, which has been deleted. The amendments require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. A reporting entity should apply existing guidance in Topic 718 as it relates to awards with performance conditions that affect vesting to account for such awards. As such, the performance target should not be reflected in estimating the grant-date fair value of the award. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. If the performance target becomes probable of being achieved before the end of the requisite service period, the remaining unrecognized compensation cost should be recognized prospectively over the remaining requisite service period. The total amount of compensation cost recognized during and after the requisite service period should reflect the number of awards that are expected to vest and should be adjusted to reflect those awards that ultimately vest. The requisite service period ends when the employee can cease rendering service and still be eligible to vest in the award if the performance target is achieved. As indicated in the definition of vest, the stated vesting period (which includes the period in which the performance target could be achieved) may differ from the requisite service period. The amendments in this ASU are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015, and early adoption is permitted. Management has adopted this guidance and it did not have a material impact on our condensed financial statements.

4. Patents, net

Patents, net consisted of the following (rounded to nearest thousand):

The patents are amortized on a straight-line basis over the estimated remaining useful lives of the assets, determined to be 12-17 years from the date of acquisition.

Amortization expense was approximately $92,000 and $107,000, for the three months ended December 31, 2016 and 2015, respectively and was approximately $183,000, and $204,000 for the six months ended December 31, 2016 and 2015, respectively.

As of December 31, 2016, the future amortization period for all patents was approximately 9 years to 16 years. Future estimated annual amortization expenses are approximately $181,000 for 2017, $364,000 for each year from 2018 to 2025, $354,000 for the year ending June 30, 2026, $352,000 for the year ending June 30, 2027, $114,000 for the year ending June 30, 2028, $61,000 for the years ending June 30, 2029 to 2032, $24,000 for year ending June 30, 2033 and $1,000 for year ending June 30, 2034.

5. Accounts Payable

Accounts payable consisted of the following (rounded to nearest thousand):

During the second quarter of fiscal year 2017, the Company realized that it had improperly estimated that it owed research and development related expenses resulting from invoices under a specific research vendor contract for upfront start-up fees, amounting to $593,000. Changes in the estimated research and development expenses are accounted for in the current period. As a result, in the second quarter of fiscal 2017, the Company recorded $593,000 into income relating to the reversal of this accounts payable that was recorded as of June 30, 2016. The Company believes that the amounts recorded were not material to the Company's consolidated results of operations or consolidated financial position.

6. Accrued Expenses

Accrued expenses consisted of the following (rounded to nearest thousand):

7. Accrued Salaries and Payroll Taxes – Related Parties And Other

Accrued salaries and payroll taxes consisted of the following (rounded to nearest thousand):

8. Commitments and Contingencies

Lease Commitments

Operating Leases

The Company signed a lease extension agreement with Cummings Properties which began on October 1, 2013. The lease is for a term of five years ending on September 30, 2018, and requires monthly payments of approximately $18,000. Innovative Medical Research Inc., a company owned by Leo Ehrlich and Dr. Krishna Menon, officers of the Company, have co-signed the lease and subleases 200 square feet of space previously used by the Company and pay the Company $900 per month.

As of December 31, 2016, future minimum lease payments to Cummings Properties required under the non-cancelable operating lease are as follows (rounded to nearest thousand):

Rent expense, net of lease income, under this operating lease agreement was approximately $51,000 and $50,000, for the three months ended December 31, 2016 and 2015, respectively and was approximately $102,000 and $101,000 for the six months ended December 31, 2016 and 2015, respectively.

Contractual Commitments

The Company has no contractual minimum commitments to contract research organizations as of December 31, 2016. Services are billed to Cellceutix when performed by the vendors.

9. Related Party Transactions

Office Lease

Dr. Menon, one of the Company’s principal shareholders, President of Research and Director, also serves as the Chief Operating Officer and Director of Kard Scientific (“KARD”). On December 7, 2007, the Company began renting office space from KARD, on a month to month basis for $900 per month. This continued through August 2013 and since September 1, 2013, the Company no longer leases space from KARD or pays rent to KARD.

In September 2013, the Company signed a lease extension agreement with Cummings Properties for the Company’s offices and laboratories at 100 Cummings Center, Suite 151-B Beverly, MA 01915. The lease is for a term of five years from October 1, 2013 to September 30, 2018 and requires monthly payments of approximately $18,000. Cellceutix had taken over the space occupied by KARD. In addition, Innovative Medical Research Inc., (“Innovative Medical”) a company owned by Leo Ehrlich and Dr. Krishna Menon, officers and directors of Cellecutix, has co-signed the lease and rents approximately 200 square feet of office space, the space previously used by Cellceutix and pays Cellceutix $900 per month, the same amount Cellceutix previously paid KARD. Innovative Medical paid total rent of approximately $3,000 and $6,000 to Cellceutix for both of the three months and six months ended December 31, 2016 and 2015, respectively, and the rental payment was offset with the accrued rent owed to KARD.

At December 31, 2016 and June 30, 2016, rent payable to KARD of approximately $26,000 and $32,000, respectively, were included in accrued rent – related party.

Clinical Studies

The Company previously engaged KARD to conduct specified pre-clinical studies. The Company did not have an exclusive arrangement with KARD. The Company no longer uses KARD. As of December 31, 2016 and June 30, 2016, the accrued research and development expenses to KARD was approximately $1,486,000 and this amount was included in accounts payable.

10. Note Payable – Related Party

During the year ended June 30, 2010, Mr. Ehrlich loaned the Company a total of approximately $973,000. A condition for this note was that the Ehrlich Promissory Note A and Ehrlich Promissory Note B be replaced with a new note, Ehrlich Promissory Note C. The Ehrlich Promissory Note C is an unsecured demand note that bears 9% simple interest per annum and is convertible into the Company’s common stock at $0.50 per share. The note requires that the interest rate on the amounts due on Ehrlich Promissory Notes A and B be changed retroactively, beginning October 1, 2009, to 9%. On April 1, 2011, the Company amended the Ehrlich Promissory Note C and agreed to retroactively convert accrued interest of approximately $97,000 through December 31, 2010 into additional principal. During the year ended June 30, 2011, Mr. Ehrlich loaned the Company an additional approximate $997,000 which brought the total balance of the demand note to approximately $2,002,000. During the year ended June 30, 2012, Mr. Ehrlich loaned the Company an additional $20,000 which brought the balance of the demand note to approximately $2,022,000.

On May 8, 2012, the Company did not have the ability to repay the Ehrlich Promissory Note C loan and agreed to change the interest rate on the outstanding balance of principal and interest of approximately $2,248,000, as of March 31, 2012, from 9% simple interest to 10% simple interest, and the Company issued 2,000,000 Equity Incentive Options exercisable at $0.51 per share equal to 110% of the closing bid price of $0.46 per share on May 7, 2012. The options are valid for ten years from the date of issuance.

As of December 31, 2016 and June 30, 2016, approximately $112,000 and $40,000, respectively, was accrued as interest expense on this note.

As of December 31, 2016 and June 30, 2016, principal balances of the demand note was approximately $2,022,000.

11. Equity Incentive Plans, Stock-Based Compensation and Warrants

Equity Incentive Plans

2009 Stock Option Plan

On April 5, 2009 the Board of Directors of the Company adopted the 2009 Stock Option Plan (“the 2009 Plan”). The 2009 Plan permits the grant of 2,000,000 shares of both Incentive Stock Options (“ISOs”), intended to qualify under section 422 of the Code, and Non-Qualified Stock Options.

2010 Equity Incentive Plan

Under the 2010 Equity Incentive Plan (the "2010 Plan") adopted by the Board of Directors in December 2010, the total number of shares of common stock reserved and available for issuance under the 2010 Plan is 45,000,000 shares. Shares of common stock under the 2010 Plan may consist, in whole or in part, of authorized and unissued shares or treasury shares. The term of each stock option shall be fixed as provided, however, an ISO may be granted only within the ten-year period commencing from the effective date of the 2010 Plan and may only be exercised within ten years of the date of grant (or five years in the case of an ISO granted to an optionee who, at the time of grant, owns common stock possessing more than 10% of the total combined voting power of all classes of voting stock of the Company).

2016 Equity Incentive Plan

On June 30, 2016, the Board of Directors adopted the Cellceutix Corporation 2016 Equity Incentive Plan (the "2016 Plan"). The 2016 Plan became effective upon adoption by the Board of Directors on June 30, 2016.

Up to 20,000,000 shares of the Company's common stock may be issued under the 2016 Plan (subject to adjustment as described in the 2016 Plan); provided that, no Outside Director (as defined in the 2016 Plan) may be granted awards covering more than 250,000 shares of common stock in any year and no participant shall be granted, during any one year period, options to purchase common stock and stock appreciation rights with respect to more than 4,000,000 shares of common stock in the aggregate or any other awards with respect to more than 2,500,000 shares of common stock in the aggregate. The 2016 Plan permits the grant of ISOs, non-qualified stock options, stock appreciation rights, restricted awards, performance share awards and performance compensation awards to employees, directors, and consultants of the Company and its affiliates.

In connection with adoption of the 2016 Plan, the Board of Directors also approved forms of Incentive Stock Option Agreement for Employees, Non-qualified Stock Option Agreement for Employees, Non-qualified Stock Option Agreement for Non-Employee Directors, Restricted Stock Award Agreement for Employees and Restricted Stock Award Agreement for Non-Employee Directors that will be utilized by the Company to grant options and restricted shares under the 2016 Plan.

The following table summarizes all stock option activity under the above equity incentive plans:

The fair value of options granted for the six months ended December 31, 2016 and 2015 was estimated on the date of grant using the Black Scholes model that uses assumptions noted in the following table.

Stock-Based Compensation

The Company recognized approximately $347,000 and $432,000 of total stock-based compensation costs related to stock and stock options awards for the three months ended December 31, 2016 and 2015, respectively. The Company recognized approximately $690,000 and $530,000 of total stock-based compensation costs related to stock and stock options awards for the six months ended December 31, 2016 and 2015, respectively.

The $690,000 of total stock-based compensation expense for the six months ended December 31, 2016 included approximately $272,000 of stock options expense and $418,000 of stock awards (see Note 12).

For the six months ended December 31, 2016

On February 16, 2016, the Company issued 119,424 stock options to purchase shares of the Company’s common stock, par value $0.0001 per share to two consultants for services, valued at approximately $55,000, based on the closing bid price as quoted on the OTC on February 16, 2016 at $1.15 per share. These options were issued with an exercise price of $1.105. One third vested immediately, one third vested in six months (August 11, 2016), and the balance will be vested on February 11, 2017, and will be valid for a period of three years. These options have piggyback registration rights. The Company recorded approximately $5,000 and $14,000 of stock options expense during the three months and six months ended December 31, 2016, respectively.

On April 6, 2016, the Company issued 25,000 shares and 25,000 stock options to purchase shares of the Company’s common stock, par value $0.0001 per share to a consultant for service. The stock options were valued at approximately $14,000, based on the closing bid price as quoted on the OTC on April 6, 2016 at $1.61 per share. These options were issued with an exercise price of $1.77 and shall vest on April 30, 2017, with a three year option term. These options have piggyback registration rights. The Company recorded approximately $3,000 and $6,000 of stock option expenses for the three months and six months ended December 31, 2016, respectively. The value of these 25,000 shares at $1.61 per share was approximately $40,250.

On June 27, 2016, the Company and Dr. Bertolino entered into an executive employment agreement as our President and Chief Medical Officer, effective on June 27, 2016. Commencing on June 27, 2016, the Company agreed to pay Dr. Bertolino an annual salary of $440,000. In addition, the Company agreed to grant to Dr. Bertolino under the Cellceutix Corporation 2016 Equity Incentive Plan (i) 1,066,667 shares of restricted stock and (ii) a ten-year option to purchase 617,839 shares of the Company's Class A common stock at an exercise price of $1.39 per share. Both shares and options shall vest upon the earliest to occur of the following: (1) 50% upon the first anniversary of the effective date, and the remaining 50% upon the second anniversary of the effective date (2) completion of both a Phase 2b psoriasis study and a Phase 2 oral mucositis study; (3) the Company’s common stock closes above $3.00 per share (as may be adjusted for any stock splits or similar actions); (4) the commencement of trading of the Company’s common stock on a national securities exchange (e.g. Nasdaq or the NYSE); or (5) upon a Change in Control (as defined in the employment agreement) of the Company. The Company could not conclude that it was probable that these awards will fully vest until the second anniversary of the effective date, because such events listed above are outside the Company’s control. The Company will evaluate the probability of these events occurring for each reporting period. The 1,066,667 shares were valued at approximately $1.5 million, which will be amortized over two years to June 27, 2018. The 617,839 stock options were valued at approximately $800,000 and will be exercisable for 10 years at an exercise price of $1.39 per share. They will be amortized over 2 years to June 27, 2018 or sooner if the Company determines that it is probable that one of the events listed above will occur. During the three months and six months ended December 31, 2016, the Company recorded approximately $289,000 and $578,000 of total stock-based compensation, respectively. The $289,000 of stock based compensation expense for the three months ended December 31, 2016 included approximately $101,000 of stock option expense and $188,000 of stock awards. The $578,000 of stock based compensation expense for the six months ended December 31, 2016 included approximately $202,000 of stock option expense and $376,000 of stock awards.

The Company may award Dr. Arthur P. Bertolino an annual bonus at the sole discretion of the Board of Directors of the Company. The Company may accelerate the amortization of the $1.1 million stock-based compensation expense if there are conditions which will accelerate the vesting, as mentioned above. At December 31, 2016, it was determined by management that is was not probable that these accelerated vesting conditions would occur and therefore there was no accrual recorded for the contingent acceleration of this stock-based compensation expense.

On July 18, 2016, the Company issued 7,500 stock options to purchase shares of the Company’s common stock to a consultant for service rendered, exercisable for 3 years at $1.38 per share of common stock. The value of these 7,500 options was approximately $4,000. During the three months and six months ended December 31, 2016, the Company recorded approximately $0 and $4,000 of total stock option expense, respectively.

On September 1, 2016, the Company and Jane Harness entered into an executive employment agreement as the Company’s VP, Clinical Sciences and Project Management, effective on September 1, 2016. Commencing on September 1, 2016, the Company agreed to pay Ms. Harness an annual salary of $250,000. In addition, the Company agreed to grant to Ms. Harness under the Cellceutix Corporation 2016 Equity Incentive Plan (i) 58,394 shares of restricted stock, which shall vest upon the earliest to occur of the following: (1) one third (33 1/3 %) upon the first anniversary of the effective date, one third (33 1/3 %) upon the second anniversary of the effective date, and the remaining one third (33 1/3 %) upon the third anniversary of the effective date; or (2) upon a Change in Control (as defined in the employment agreement) of the Company. Ten-year options to purchase 172,987 shares of the Company’s common stock were also granted at an exercise price of $1.37 per share, which shall vest upon the earliest to occur of the following: (1) one third (33 1/3 %) upon the first anniversary of the effective date, and the remaining balance vesting monthly in equal portions over the following 24 months; and (2) upon a Change in Control (as defined in the employment agreement) of the Company. The 58,394 shares were valued at approximately $80,000, which will be amortized over three years to September 1, 2019. The 172,987 stock options were valued at approximately $220,000 and will be exercisable for 10 years at an exercise price of $1.26 per share. They will be amortized over 3 years to September 1, 2019. During the three months and six months ended December 31, 2016, the Company recorded approximately $25,000 and $33,000 of total stock-based compensation, respectively. The $25,000 of stock based compensation expense for the three months ended December 31, 2016 included approximately $18,000 of stock option expense and $7,000 of stock awards. The $33,000 of stock based compensation expense for the six months ended December 31, 2016 included approximately $24,000 of stock option expense and $9,000 of stock awards.

On September 15, 2016, the Company and LaVonne Lang entered into an executive employment agreement as the Company’s VP, Regulatory Affairs, effective on September 15, 2016. Commencing on September 15, 2016, the Company agreed to pay Dr. Lang an annual salary of $250,000. In addition, the Company agreed to grant to Dr. Lang under the Cellceutix Corporation 2016 Equity Incentive Plan (i) 63,492 shares of restricted stock, which shall vest upon the earliest to occur of the following: (1) one third (33 1/3 %) upon the first anniversary of the effective date, one third (33 1/3 %) upon the second anniversary of the effective date, and the remaining one third (33 1/3 %) upon the third anniversary of the effective date; or (2) upon a Change in Control (as defined in the employment agreement) of the Company. Ten-year options to purchase 188,262 shares of the Company’s common stock were also granted at an exercise price of $1.26 per share, which shall vest upon the earliest to occur of the following: (1) one third (33 1/3 %) upon the first anniversary of the effective date, and the remaining balance vesting monthly in equal portions over the following 24 months; and (2) upon a Change in Control (as defined in the employment agreement) of the Company. The 63,492 shares were valued at approximately $80,000, which will be amortized over three years to September 15, 2019. The 188,263 stock options were valued at approximately $220,000 and will be exercisable for 10 years at an exercise price of $1.26 per share. They will be amortized over 3 years to September 15, 2019. During the three months and six months ended December 31, 2016, the Company recorded approximately $25,000 and $29,000 of total stock-based compensation, respectively. The $25,000 of stock based compensation expense for the three months ended December 31, 2016 included approximately $18,000 of stock option expense and $7,000 of stock awards. The $29,000 of stock based compensation expense for the six months ended December 31, 2016 included approximately $21,000 of stock option expense and $8,000 of stock awards.

For the six months ended December 31, 2015

On July 10, 2015, the Company issued 7,028 shares and 50,000 options to a consultant for his one year contract, which options are exercisable for 3 years at $2.49 per share of common stock. The total value of these 50,000 options was approximately $60,000 and we recognized approximately $60,000 of stock based compensation costs that was charged to Research and Development expense as of December 31, 2015. The assumptions we used in the Black Scholes option-pricing model were disclosed as above.

Stock Warrants

For the six months ended December 31, 2016

During the six months ended December 31, 2016, there were no warrants issued or exercised.

The following table summarizes stock warrants:

12. Equity Transactions

Issuance of Common Stock for Cash

$30 million Class A Common Stock Purchase Agreement with Aspire Capital Fund, LLC

On March 30, 2015, the Company entered into a common stock purchase agreement (the "Purchase Agreement") with Aspire Capital, which provides that, upon the terms and subject to the conditions and limitations set forth therein, Aspire Capital is committed to purchase up to an aggregate of $30.0 million of the Company's common stock over the 36-month term of the Purchase Agreement. In consideration for entering into the Purchase Agreement, the Company issued to Aspire Capital 160,000 shares of its Class A common stock as a commitment fee. The commitment fee of approximately $499,000 will be amortized as the funding is received. The amortized amount of $48,000 and $44,000 were recorded to additional paid-in capital during the six months ended December 31, 2016 and 2015. The unamortized portion is carried on the balance sheet as deferred offering costs and was $310,000 and $358,000 at December 31, 2016 and June 30, 2016, respectively. During the period from March 30, 2015 to December 31, 2016, the Company had completed sales to Aspire totaling 8.2 million shares of common stock generating gross proceeds of approximately $11 million.

Concurrently with entering into the Purchase Agreement, the Company also entered into a registration rights agreement with Aspire Capital, in which the Company agreed to file one or more registration statements, as permissible and necessary to register, under the Securities Act of 1933, as amended, the sale of the shares of the Company's common stock that have been and may be issued to Aspire Capital under the Purchase Agreement. The Company has filed with the Securities and Exchange Commission a prospectus supplement, dated March 31, 2015, to the Company's prospectus filed as part of the Company's effective $75 million shelf registration statement on Form S-3, File No. 333-199725, registering all of the shares of common stock that have been or may be offered and sold to Aspire Capital from time to time.

During the six months ended December 31, 2016 and 2015, the Company had completed sales to Aspire totaling 2.4 million shares and 1.5 million shares of common stock generating gross proceeds of approximately $2.9 million and $2.6 million, respectively.

Issuance of Common Stock by Exercise of Common Stock Options

For the six months ended December 31, 2016

During the six months ended December 31, 2016, the Company has no issuance of common stock by exercise of common stock options.

For the six months ended December 31, 2015

During the six months ended December 31, 2015, the Company recorded subscription receivable of $25,400 for the exercise of 60,000 Common Stock options at $0.42 per share.

Issuance of Common Stock to Consultants For Services

For the six months ended December 31, 2016

On July 18, 2016, the Company issued 7,500 shares to a consultant for service rendered. The value of these 7,500 shares at $1.38 per share was approximately $10,000.

On August 1, 2016, the Company issued 11,720 restricted shares to a consultant for service. The value of these 11,720 shares at $1.28 per share was approximately $15,000.

For the six months ended December 31, 2015

On July 10, 2015, the Company issued 7,028 shares of restricted Class A common shares to a consultant for services rendered. The shares were granted and vested on July 10, 2015. The value of these 7,028 shares at $2.49 per share was approximately $17,500.

Issuances of Common Stock and Stock Options – Pursuant to Employment Agreements

For the six months ended December 31, 2016

On September 1, 2016, the Company and Jane Harness entered into an executive employment agreement as the Company’s VP, Clinical Sciences and Project Management, effective on September 1, 2016. Pursuant to the employment agreement, the Company issued 58,394 shares of restricted stock and options to purchase 172,987 shares of common stock to Ms. Harness under the Cellceutix Corporation 2016 Equity Incentive Plan. See Note 11 for additional information concerning the restricted stock and stock options granted to Ms. Harness.

On September 15, 2016, the Company and LaVonne Lang entered into an executive employment agreement as the Company’s VP, Regulatory Affairs, effective on September 15, 2016. Pursuant to the employment agreement, the Company issued 63,492 shares of restricted stock and options to purchase 188,263 shares of common stock to Dr. Lang under the Cellceutix Corporation 2016 Equity Incentive Plan. See Note 11 for additional information concerning the restricted stock and stock options granted to Dr. Lang.

The following summarizes our restricted stock activity for the above restricted stock issuances:

Scheduled vesting for outstanding restricted stock at December 31, 2016 is as follows:

As of December 31, 2016, there was $1.3 million of net unrecognized compensation cost related to unvested restricted stock-based compensation arrangements. This compensation is recognized on a straight line basis resulting in approximately $0.8 million of the compensation expected to be expensed in the next twelve months, and the total unrecognized compensation has a weighted average recognition period of 1.62 years.

13. Subsequent Events

From January 4, 2017 to January 20, 2017, the Company has generated additional proceeds of approximately $455,000 under the Common Stock Purchase Agreement with Aspire Capital from the sale 400,000 shares of its common stock.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and plan of operations should be read in conjunction with the financial statements and the notes to those statements included in this Form 10-Q. This discussion includes forward-looking statements that involve risk and uncertainties. You should review our important note about forward-looking statements preceding the financial statements. As a result of many factors, such as those set forth under “Risk Factors” in this Form 10-Q and in our Annual Report on Form 10-K, actual results may differ materially from those anticipated in these forward-looking statements.

Management’s Plan of Operation

Overview

Cellceutix is a clinical stage biopharmaceutical company developing innovative therapies with oncology, dermatology and antimicrobial applications. Cellceutix owns the rights to numerous drug compounds, including Kevetrin (thioureidobutyronitrile), our lead anti-cancer compound; Prurisol (KM-133), which is in development for psoriasis; and Brilacidin, our lead drug in a new class of compounds called defensin-mimetics.

The Company devotes most of its efforts and resources on its compounds already in clinical trials. These trials are evaluating our drug candidates: Kevetrin for the treatment of cancers, Prurisol for the treatment of psoriasis, and Brilacidin for treatments of skin infections, prevention of oral mucositis complicating chemoradiation treatment for cancer, and ulcerative proctitis. We anticipate using our expertise to manage and perform what we believe are the most critical aspects of the product development process which include: (i) design and oversight of clinical trials; (ii) development and execution of strategies for the protection and maintenance of intellectual property rights; and (iii) interactions with regulatory authorities domestically and internationally. We expect to concentrate on product development and engage in a limited way in product discovery, avoiding the significant investment of time and financial resources that is generally required for a promising compound to be identified and brought into clinical trials.

Recent Developments

At this time the Company is focusing its research and development efforts on Kevetrin, Prurisol, Brilacidin, and to a lesser extent on our other anti-bacterial and anti-fungal compounds. Set forth below is an overview our research and development efforts on Kevetrin, Prurisol and Brilacidin for the six months ended December 31, 2016 and through the date of this Quarterly Report on Form 10-Q:

Kevetrin. The first-in-human clinical trial evaluating the safety and pharmacokinetics of Kevetrin was completed at Dana-Farber Cancer Institute and Beth Israel Deaconess Medical Center. The study enrolled a total of 48 patients, who had failed previous therapies, with various types of advanced solid tumors, including 11 patients with advanced ovarian cancer. A dose-escalation design was used with patients enrolled in 11 cohorts with the maximum dose administered at 750 mg/m2. Kevetrin appeared to be safe and well tolerated, with no dose-limiting toxicities occurring among patients who received even the highest dose of Kevetrin. Cellceutix is currently preparing for a Phase 2a trial of Kevetrin in treating late-stage ovarian cancer. The clinical protocol was submitted to and approved by the study site’s institutional review board (IRB) and we anticipate start of the study 1Q2017 after submission to the FDA. The main objective of this trial focuses on confirming the modulation by Kevetrin of p53 pathways in tumors, as well as monitoring response of tumors to the treatment. Presently and planned concurrent with the Phase 2a trial is the development of an oral formulation of Kevetrin for treating cancer. Pharmacokinetic data collected on Kevetrin during the initial clinical trial demonstrates that the compound has a short half-life of approximately two hours. Kevetrin’s short half-life makes it a compelling candidate for an oral drug delivery treatment for the main purpose of allowing simple daily, or multiple-times daily, administrations within or outside the hospital setting. Compared to injectable or intravenous treatments, oral therapy is the preferred drug delivery method of patients. Preliminary laboratory studies are encouraging and support the potential of developing an oral formulation of Kevetrin, but there are no assurances made or implied that Cellceutix will be successful in completing development of an oral formulation of Kevetrin. Toxicology studies for the oral formulation of Kevetrin began January 2017.

Cellceutix’s expenditures on Kevetrin were approximately $0.2 million and $0.3 million during the three months and six months ended December 31, 2016, respectively.

Prurisol. The Company completed an initial Phase 2 trial of oral Prurisol for mild to moderate plaque psoriasis. After a detailed analysis, the data showed that the most robust response to Prurisol was in patients with moderate psoriasis in the trial’s highest dosing arm (200mg), with no serious adverse events reported in that arm. Among these patients (with the severest form of psoriasis in study), those having a baseline IGA score of 3 (“moderate”), the primary endpoint was met in 46% (Per Protocol) and 40% (Intent-to-Treat) of patients who received 200 mg of Prurisol per day. These data were derived from analyses of all patients. Benefits were apparent by two weeks and showed further improvement by the end of the study at 12 weeks.

Cellceutix has commenced a randomized, double-blind, parallel-group, placebo-controlled Phase 2b trial of Prurisol for approximately 189 subjects with moderate to severe plaque psoriasis. Daily Prurisol dosage has been increased from 200mg. The treatment group arms are Prurisol 300mg, Placebo, Prurisol 400mg (Ratio 3:3:1) with a treatment duration of 12 weeks.

The Company expects interim analysis top-line results in the second quarter of calendar 2017. Cellceutix’s expenditures on Prurisol were approximately $1.2 million and $1.6 million during the three months and six months ended December 31, 2016, respectively. We expect our expenditures on Prurisol to increase in future reporting periods, depending on the Company’s future financing.

In December 2016 management reviewed Cellceutix’s development of Prurisol (KM133) and determined that no royalties on its sales would be due to outside parties.

Brilacidin. ABSSSI - In February 2016, Cellceutix submitted a Special Protocol Assessment (SPA) request, along with a final protocol, to the FDA, for a Phase 3 clinical trial of Brilacidin for the treatment of Acute Bacterial Skin and Skin Structure Infection (ABSSSI) caused by Gram-positive bacteria, including methicillin-resistant Staphylococcus aureus (MRSA). We received from the FDA comments and considerations for incorporation into our study design. Management has decided to delay its response to FDA due to the low price per share of our common stock and the approximately $30 million costs required for this study which would result in significant dilution to our shareholders. Our strategy for now is to achieve success with other trials and attract partnering opportunities with significant down payments and milestone payments which can fund these trials.

Topical Brilacidin- Other trials of Brilacidin remain ongoing, including a double-blind Phase 2 clinical trial of Brilacidin-OM for the treatment of oral mucositis (OM), and an open-label Phase 2 Proof-of-Concept (P-o-C) trial of Brilacidin for the treatment of ulcerative proctitis (UP) or ulcerative proctosigmoiditis (UPS), two types of Inflammatory Bowel Diseases (IBD).

In October 2016, Cellceutix disclosed the first of interim results from the UP/UPS study. The ongoing Phase 2 trial comprises three sequential cohorts (6 patients per cohort), with progressive dose escalation by cohort—50 mg, 100 mg, and 200 mg, respectively. Treatment with Brilacidin by daily enema administration is performed for 42 days. At the time of interim data release, four of six patients in the lowest dosing cohort (50 mg) completed the study. Comparison to baseline after six weeks of treatment showed that all four patients completing the study experienced a clinically meaningful response, as measured by the partial or full Modified Mayo Disease Activity Index (MMDAI), without measurable plasma drug levels. More specifically, measurements of concentrations of Brilacidin in plasma showed all levels, across all time points, to be below the lower limit of quantification (i.e., <100 ng/mL), which is consistent with limited systemic exposure from administration per rectum by enema. These data suggest that other inflammatory conditions may, likewise, be treated locally and efficaciously with Brilacidin without significant systemic absorption, better ensuring a safe and well-tolerated therapeutic profile. Given Brilacidin’s low level of systemic exposure, moderate-to-high dosing of the drug by topical application to the skin might also be supported in treating various dermatology disorders and conditions. All six patients for the second of three cohorts have been recruited to the study, with the cohort’s completion anticipated for late February 2017.

Additional reporting of results from the Phase 2 P-o-C clinical trial of Brilacidin-UP/UPS is anticipated over the coming months, as is an interim analysis in the first half of 2017 of the Phase 2 clinical trial of Brilacidin-OM. Cellceutix’s expenditures on Brilacidin were approximately $0.1 million and $0.8 million during the three months and six months ended December 31, 2016, respectively.

Compounds with Activity Against Gram-Negative Bacteria and Fungi

We have further reduced costs associated with the licensing of intellectual property for these diseases by returning certain patent portfolios back to the university licensor. Research at Cellceutix is now focused on supporting our clinical trials. As business conditions warrant, we will determine our financial commitment to the gram-negative bacteria and fungi programs.

Critical Accounting Policies and Estimates

Management's discussion and analysis of financial condition and results of operations are based upon our accompanying financial statements, which have been prepared in conformity with U.S. generally accepted accounting principles, or U.S. GAAP, and which requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. These estimates are the basis for our judgments about the carrying values of assets and liabilities, which in turn may impact our reported revenue and expenses. Our actual results could differ significantly from these estimates under different assumptions or conditions.

Please see Note 3 of Part I, Item 1 of this Quarterly Report on Form 10-Q for the summary of significant accounting policies. In addition, please see Part II Item 7, "Critical Accounting Policies and Estimates" in our Annual Report on Form 10-K for the year ended June 30, 2016. There have been no material changes to our critical accounting policies and estimates since our Annual Report on Form 10-K for the year ended June 30, 2016.

Recently Issued Accounting Pronouncements

See Note 3 to the Financial Statements, Significant Accounting Policies and Recent Accounting Pronouncements, in the accompanying notes to Financial Statements for a discussion of recent accounting pronouncements and their effect, if any, on our financial statements.

Results of Operations

We expect to incur losses from operations for the next few years. We expect to incur increasing research and development expenses, including expenses related to additional clinical trials for our proprietary programs. We expect that our general and administrative expenses will also increase in the future as we expand our business development, by adding employees, consultants, additional infrastructure and incurring other additional costs. Based upon our expected rate of expenditures over the next 12 months and beyond, management will seek additional working capital to meet the Company’s anticipated clinical trial obligations and Company overhead. 

For the three months ended December 31, 2016 and 2015

Revenue

We generated no revenue and incurred operating expenses of $3.3 million and $3.3 million for the three months ended December 31, 2016 and 2015, respectively. 

Research and Development Expenses for Proprietary Programs

Below is a summary of our research and development expenses for our proprietary programs by categories of costs for the three months ended December 31, 2016 and 2015, respectively (rounded to nearest thousand):

Research and development expenses for proprietary programs increased during the three months ended December 31, 2016, due to higher spending on our Kevetrin program and Prurisol program offset by the final settlement of disputed accounts payable related to Brilacidin program of approximately $600,000.

Officers' payroll and payroll tax expenses related to R&D department increased during the three months ended December 31, 2016 primarily related to the hiring of our President and Chief Medical Officer who joined us on June 27, 2016.

Employees’ payroll and payroll tax expenses increased primarily related to the hiring of our VP Clinical Services and Project Management.

Stock-based compensation – officers increased during the three months ended December 31, 2016 primarily related to the stock-based compensation given to our new President and Chief Medical Officer who joined us on June 27, 2016.

Stock-based compensation- employee increased during the three months ended December 31, 2016 primarily related to the stock-based compensation given to our new VP Regulatory Affairs and our VP Clinical Services and Project Management who joined us in September, 2016.

Stock-based compensation- consultants increased during the three months ended December 31, 2016 due to amortization of stock awards granted in previous periods. There were no new stock awards during the second quarter of fiscal 2017 and no stock awards in the second quarter of fiscal 2016.

Depreciation and amortization expenses decreased during the three months ended December 31, 2016 due to less amortization expenses on those patent cost being written off at last fiscal year.

Our research and development expenses include costs related to preclinical and clinical trials, outsourced services and consulting, officers' payroll and related payroll tax expenses, other wages and related payroll tax expenses, stock-based compensation, depreciation and amortization expenses. We manage our proprietary programs based on scientific data and achievement of research plan goals. Our scientists record their time to specific projects when possible; however, many activities occurring simultaneously benefit multiple projects and cannot be readily attributed to a specific project. Accordingly, the accurate assignment of time and costs to a specific project is difficult and may not give a true indication of the actual costs of a particular project. As a result, we do not report costs on an individual program basis.

General and Administrative Expenses

General and administrative expenses consist mainly of compensation and associated fringe benefits not included in cost of research and development expenses for proprietary programs and include other management, business development, accounting, information technology and administration costs, including patent filing and prosecution, recruiting, consulting and professional services, travel and meals, facilities, depreciation and other office expenses.

Below is a summary of our general and administrative expenses for the three months ended December 31, 2016 and 2015, respectively (rounded to nearest thousand):

Officers' payroll and payroll tax expenses

Below is a summary of our Officers' payroll and payroll tax expenses for the three months ended December 31, 2016 and 2015, respectively (rounded to nearest thousand):

There was no change in Officers' payroll and payroll tax expenses for the Company during the three months ended December 31, 2016 and 2015. The officers’ payroll and payroll tax expenses represented one officer’s annual payroll and payroll tax expenses and 10% of payroll and payroll tax expenses paid for Mr. Menon. The Company recorded 90% of annual payroll paid to Mr. Menon and his payroll tax expenses under Research and Development Expense.

Professional fees

Below is a summary of our Professional fees for the three months ended December 31, 2016 and 2015, respectively (rounded to nearest thousand):

Professional fees decreased during the three months ended December 31, 2016 primarily related to decrease in stock options paid to a law firm for services, valued at approximately $432,000 on November 5, 2015 (see Note 11 in the accompanying Notes to Condensed Financial Statements).

Other Income (Expense)

Below is a summary of our other income (expense) for the three months ended December 31, 2016 and 2015, respectively (rounded to nearest thousand):

There was no change in Interest Income received from banks and interest expenses paid on the note payable – related party (see note 10 in the accompanying Notes to Condensed Financial Statements).

Net Losses

We incurred net losses of $3.4 million and $3.3 million for the three months ended December 31, 2016 and 2015, respectively because of the above factors.

For the six months ended December 31, 2016 and 2015

Revenue

We generated no revenue and incurred operating expenses of $6.3 million and $5.8 million for the six months ended December 31, 2016 and 2015, respectively. 

Research and Development Expenses for Proprietary Programs

Below is a summary of our research and development expenses for our proprietary programs by categories of costs for the six months ended December 31, 2016 and 2015, respectively (rounded to nearest thousand):

Research and development expenses for proprietary programs increased during the six months ended December 31, 2016 primarily due to higher spending on our Kevetrin program and Prurisol program offset by the final settlement of disputed accounts payable related to Brilacidin program of approximately $600,000.

Officers' payroll and payroll tax expenses related to R&D department increased during the six months ended December 31, 2016 primarily related to the hiring of our President and Chief Medical Officer who joined us on June 27, 2016.

Employees’ payroll and payroll tax expenses increased primarily related to the hiring of our VP Clinical Services and Project Management.

Stock-based compensation – officers increased during the six months ended December 31, 2016 primarily related to the stock-based compensation given to our new President and Chief Medical Officer who joined us on June 27, 2016.

Stock-based compensation- employee increased during the six months ended December 31, 2016 primarily related to the stock-based compensation given to our new VP Regulatory Affairs and our VP Clinical Services and Project Management who joined us in September, 2016.

Stock-based compensation- consultants decreased during the six months ended December 31, 2016 due to granting less stock awards to consultants in the first quarter of fiscal 2017 compared with the first quarter of fiscal 2016.

Depreciation and amortization expenses decreased during the three months ended December 31, 2016 due to less amortization expenses on those patent cost being written off at last fiscal year.

Our research and development expenses include costs related to preclinical and clinical trials, outsourced services and consulting, officers' payroll and related payroll tax expenses, other wages and related payroll tax expenses, stock-based compensation, depreciation and amortization expenses. We manage our proprietary programs based on scientific data and achievement of research plan goals. Our scientists record their time to specific projects when possible; however, many activities occurring simultaneously benefit multiple projects and cannot be readily attributed to a specific project. Accordingly, the accurate assignment of time and costs to a specific project is difficult and may not give a true indication of the actual costs of a particular project. As a result, we do not report costs on an individual program basis.

General and Administrative Expenses

General and administrative expenses consist mainly of compensation and associated fringe benefits not included in cost of research and development expenses for proprietary programs and include other management, business development, accounting, information technology and administration costs, including patent filing and prosecution, recruiting, consulting and professional services, travel and meals, facilities, depreciation and other office expenses.

Below is a summary of our general and administrative expenses for the six months ended December 31, 2016 and 2015, respectively (rounded to nearest thousand):

Officers' payroll and payroll tax expenses

Below is a summary of our Officers' payroll and payroll tax expenses for the six months ended December 31, 2016 and 2015, respectively (rounded to nearest thousand):

There was no change in Officers' payroll and payroll tax expenses for the Company during the six months ended December 31, 2016 and 2015. The officers’ payroll and payroll tax expenses represented one officer’s annual payroll and payroll tax expenses and 10% of payroll and payroll tax expenses paid for Mr. Menon. The Company recorded 90% of annual payroll paid to Mr. Menon and his payroll tax expenses under Research and Development Expense.

Professional fees

Below is a summary of our Professional fees for the six months ended December 31, 2016 and 2015, respectively (rounded to nearest thousand):

Professional fees decreased during the six months ended December 31, 2016 primarily related to decrease in stock options paid to a law firm for services, valued at approximately $432,000 on November 5, 2015 (see Note 11 in the accompanying Notes to Condensed Financial Statements).

Other Income (Expense)

Below is a summary of our other income (expense) for the six months ended December 31, 2016 and 2015, respectively (rounded to nearest thousand):

There was no change in Interest Income received from banks and interest expenses paid on the note payable – related party (see note 10 in the accompanying Notes to Condensed Financial Statements).

Net Losses

We incurred net losses of $6.4 million and $5.9 million for the six months ended December 31, 2016 and 2015, respectively because of the above factors.

Liquidity and Capital Resources

Projected Future Working Capital Requirements – Next 12 Months

As of December 31, 2016, we had approximately $3.9 million in cash and $19 million remaining available for stock sales under the terms of the purchase agreement with Aspire Capital, compared to $6.3 million of cash as of June 30, 2016. We anticipate that future budget expenditures will be approximately $19 million over the next 12 months, including approximately $15 million for clinical trials.

Alternatively, if we decide to pursue a more aggressive plan with our clinical trials, we will require additional sources of equity capital during the fiscal year ended June 30, 2017, to meet our working capital requirements for our planned clinical trials. This assessment is based on current estimates and assumptions regarding our clinical development programs and business needs. Actual working capital requirements could differ materially from this above working capital projection.

Our ability to successfully raise sufficient funds through the sale of equity securities, when needed, is subject to many risks and uncertainties and even if we are successful, future equity issuances would result in dilution to our existing stockholders. Our risk factors are described under the heading "Risk Factors" in Part I Item 1A and elsewhere in our Annual Report on Form 10-K and in other reports we file with the SEC.

If we are unable to generate enough working capital from our current financing agreement with Aspire Capital when needed or secure additional sources of funding, it may be necessary to significantly reduce our current rate of spending through reductions in staff and delaying, scaling back or stopping certain research and development programs, including more costly Phase 2 and Phase 3 clinical trials on our wholly-owned development programs as these programs progress into later stage development. Insufficient liquidity may also require us to relinquish greater rights to product candidates at an earlier stage of development or on less favorable terms to us and our stockholders than we would otherwise choose in order to obtain up-front license fees needed to fund operations. These events could prevent us from successfully executing our operating plan.

$75 Million Shelf Registration Statement

The Company has an effective shelf registration statement on Form S-3, registering the sale of up to $75 million of the Company’s securities. The Company filed with the Securities and Exchange Commission a prospectus supplement, dated March 31, 2015, registering up to $30 million of our common stock that have been or may be offered and sold to Aspire Capital from time to time, leaving $45 million available under the Company’s effective shelf registration statement.

Aspire Capital Agreement and Other Equity Issuances

On March 30, 2015, the Company entered into a new common stock purchase agreement (the “March 2015 Agreement”) with Aspire Capital which provides that, upon the terms and subject to the conditions and limitations set forth therein, Aspire Capital is committed to purchase up to an aggregate of $30.0 million of the Company's common stock over the 36-month term of the March 2015 Agreement.

During the period from March 30, 2015 to December 31, 2016, the Company had completed sales to Aspire totaling 8.2 million shares of common stock generating gross proceeds of approximately $11 million relating to this $30 million purchase agreement. The Company has $19 million remaining available for stock sales under the terms of the purchase agreement with Aspire Capital. Other Equity Issuances are disclosed in Note 12 in the accompanying Notes to Condensed Financial Statements.

Cash Flows

The following table provides information regarding our cash position, cash flows and capital expenditures for the six months ended December 31, 2016 and 2015 (rounded to nearest thousand):

Operating activities

The increase in net cash used in operating activities of $0.6 million versus the prior-year six-month period was mainly due to increase in our losses from operations of $0.5 million.

Our operating activities used cash of $5.3 million and $4.6 million for the six months ended December 31, 2016 and 2015, respectively. The use of cash in these periods principally resulted from our losses from operations, as adjusted for non-cash charges for stock-based compensation and depreciation, and changes in our working capital accounts.

Investing activities

The decrease in net cash used in investing activities of $0.1 million versus the prior-year six-month period was due to a decrease in acquiring patents of $0.1 million.

During the six months ended December 31, 2016, our investing activities used cash of $0.1 million, including the purchases of fixed assets of $0.05 million and the purchases of patents of $0.05 million. During the six months ended December 31, 2015, our investing activities used cash of $0.2 million, including the purchases of patents of $0.2 million.

Financing activities

The increase in net cash provided by financing activities of $0.3 million versus the prior-year six-month period was due to an increase in sales of our common stock to Aspire.

During the six months ended December 31, 2016, we raised approximately $2.9 million in net cash proceeds, including $2.9 million in net proceeds from the sale of 2.4 million shares of our common stock to Aspire.

During the six months ended December 31, 2015, we raised approximately $2.6 million in net cash proceeds, including $2.6 million in net proceeds from the sale of 1.5 million shares of our common stock to Aspire.

Requirement for Additional Working Capital

The Company plans to incur expenses of approximately $19 million over the next twelve months, including approximately $15 million for clinical trials. The Company has limited experience with pharmaceutical drug development. As such, the budget estimate may not be accurate. In addition, the actual work to be performed is not known at this time, other than a broad outline, as is normal with any scientific work. As further work is performed, additional work may become necessary or change in plans or workload may occur. Such changes may have an adverse impact on our estimated budget and on our projected timeline of drug development.

The Company will be unable to proceed with its full planned drug development programs, meet its administrative expense requirements, capital costs and staffing costs without accessing (as per current management’s budgets) the remaining financing available with Aspire Capital, of approximately $19 million as of the date of this filing, or accessing additional sources of working capital under the Company’s effective shelf registration statement.

Contractual Obligations

Below is a table that presents our contractual obligations and commercial commitments as of December 31, 2016 (rounded to the nearest thousand):