Innovation Pharmaceuticals Inc. - Quarter Report: 2016 March (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: March 31, 2016

¨ 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 ¨

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 ¨

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 ¨ No x

The number of shares outstanding of each of the issuer's classes of common equity, as of May 5, 2016 is as follows:

CELLCEUTIX CORPORATION

UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2016

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.

PART 1. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CELLCEUTIX CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(Rounded to nearest thousand except for per share data)

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

CELLCEUTIX CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE MONTHS AND NINE MONTHS ENDED MARCH 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 consolidated financial statements.

CELLCEUTIX CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW

FOR THE NINE MONTHS ENDED MARCH 31, 2016 AND 2015

(Unaudited)

(Rounded to nearest thousand)

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

CELLCEUTIX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2016

 (Unaudited)

1. Basis of Presentation and Nature of Operations

Unaudited Interim Financial Information

The accompanying unaudited condensed consolidated 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 consolidated financial statements and should be read in conjunction with our audited financial statements for the year ended June 30, 2015, included in our Annual Report on Form 10-K for the year ended June 30, 2015.

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 and nine month periods have been made. Results for the interim periods 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. 

Cellceutix Corporation was incorporated 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. Cellceutix Corporation dissolved its subsidiary Cellceutix Pharma, Inc. in 2014. The Company is a clinical stage biopharmaceutical company and has no customers, products or revenues to date.

The Company's Common Stock is quoted on the Over the Counter market (OTC), symbol "CTIX". The Company's application to list its common stock on the NASDAQ Capital Market remains in process.

All amounts, where it is designated in these notes to the financial statements as an approximate amount, are rounded to the nearest thousand dollars.

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 March 31, 2016, we had $5,335,000 in cash and cash equivalents. We have expended substantial funds on the research and development of our product candidates. Our net losses for the nine months ended March 31, 2016 and 2015, amounted to $9,608,000 and $10,044,000, respectively, and a working capital (deficit) of approximately $(2,629,000) and working capital of $1,474,000, respectively at March 31, 2016 and June 30, 2015.

The Company plans to incur expenses of approximately $22 million over the next twelve months, including approximately $17 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 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

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 44.0 million shares and 44.4 million shares were excluded from the computation of diluted earnings (loss) per share for the three months and nine months ended March 31, 2016 and 2015, respectively, because their effect is anti-dilutive.

Accounting for Stock Based Compensation

ASC 505-50-30-11 (previously EITF 96-18) 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 units are 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 method.

The components of stock based compensation related to stock options in the Company's Statement of Operations for the three months and nine months ended March 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"). The 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 is currently evaluating the impact of this standard on our consolidated financial statements.

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 believes that the adoption of this guidance will not have a material impact on our consolidated financial statements.

In June 2015, FASB issued ASU No. 2015-10, Technical Corrections and Updates. ASU No. 2015-10 is intended to correct differences between original guidance and the Codification, clarify the guidance, correct references and make minor improvements affecting a variety of topics. ASU No. 2015-10 covers a wide range of topics in the Codification and is generally categorized as follows: Amendments Related to Differences between Original Guidance and the Codification; Guidance Clarification and Reference Corrections; Simplification; and Minor Improvements. The amendments are effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted. Management believes that the adoption of this guidance will not have a material impact on our consolidated 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 12-17 years from the date of acquisition.

Amortization expense was approximately $105,000 and $100,000, for the three months ended March 31, 2016 and 2015, respectively and was approximately $308,000, and $297,000 for the nine months ended March 31, 2016 and 2015, respectively.

At March 31, 2016, the future amortization period for all patents was approximately 9.43 years to 15.43 years. Future estimated annual amortization expenses are approximately $105,000 for the year ending June 30, 2016, $418,000 for each year from 2017 to 2025, $376,000 for the year ending June 30, 2026, $366,000 for the year ending June 30, 2027, $129,000 for the year ending June 30, 2028, $75,000 for the year ending June 30, 2029 to year 2031 and $24,000 for year ending June 30, 2032.

5. Accrued Expenses

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

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

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

7. 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 and directors of the Company, have co-signed the lease and will sublease 200 square feet of space previously used by the Company and pay the Company $900 per month.

As of March 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 $51,000, for the three months ended March 31, 2016 and 2015, respectively and was approximately $152,000 and $157,000 for the nine months ended March 31, 2016 and 2015, respectively.

Contractual Commitments

The Company has no contractual minimum commitments to Contract Research Organizations as of March 31, 2016. Services are billed to Cellceutix, when performed by the vendors.

Litigation

A complaint entitled O'Connell v. Cellceutix Corp. et al. (No. 1:15-cv-07194) was filed in September 2015 by a law firm in the United States District Court for the Southern District of New York against the Company and its officers alleging that the defendants made materially false and misleading statements, and omitted materially adverse facts, about the Company's business, operations and prospects.The Company believes that the claims are without merit and has filed a motion to dismiss this lawsuit. The Court's ruling on this motion is now pending. Cellceutix intends to vigorously defend itself.

8. Related Party Transactions

Office Lease

Dr. Menon, one of the Company's principal shareholders, President, 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 $17,000. 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 will rent approximately 200 square feet of office space, the space previously used by Cellceutix and will pay Cellceutix $900 per month, the same amount Cellceutix previously paid KARD. Innovative Medical paid total rent of approximately $3,000 and $9,000,to Cellceutix for both of the three months and nine months ended March 31, 2016 and 2015, respectively, and the rental payment was offset with the accrued rent owed to KARD.

At March 31, 2016 and June 30, 2015, rent payable to KARD of approximately $34,000 and $42,000, respectively, were included in accrued expenses.

At March 31, 2016 and June 30, 2015, accrued directors' fee of approximately $19,000 and $0, respectively, were included in accounts payable.

Clinical Studies

9.   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 (10) years from the date of issuance.

At March 31, 2016 and June 30, 2015, approximately $151,000 and $73,000 was accrued as interest expense on this note, respectively.

At March 31, 2016 and June 30, 2015, principal balances of the demand note was approximately $2,022,000.

10. Stock Options and Warrants

Stock Options

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

Under the 2010 Equity Incentive 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 shall be 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 Incentive Stock Option 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 Incentive Stock Option 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).

On October 20, 2014 the Board of Directors approved the appointment of Dr. William James Alexander as the Chief Operations Officer of Cellceutix Corporation for the term of one year effective October 27, 2014. Pursuant to his employment agreement, Dr. Alexander received immediately 50,000 shares of the Company's Class A common stock as a sign-on bonus and 50,000 stock options to purchase shares of the Company's Class A common stock at $2.93 per share. The 25,000 stock options vested on July 27, 2015 and its option life of 3 years will expire on July 27, 2018. The remaining 25,000 stock options vested on October 27, 2015. Dr. William James Alexander resigned as the Chief Operations Officer on August 3, 2015 and continued working for the Company as a consultant.

On July 10, 2015, the Company issued 7,028 shares and 50,000 options to a consultant for his one year contract and 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 and charged to additional paid-in capital as of March 31, 2016. The assumptions we used in the Black-Scholes-Merton model were disclosed as above.

On November 5, 2015 the Company issued one million stock options to a law firm for services, valued at approximately $432,000, based on the closing bid price as quoted on the OTC on November 5, 2015 at $1.36 per share. These options were issued with an exercise price of $1.70 and vested immediately, with a three year option term. These options have piggyback registration rights.

On February 16, 2016 the Company issued 119,424 stock options 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 vests immediately, one third vests in six months (August 11, 2016), and the balance will vest on February 11, 2017, and will be valid for a period of three years. These options have piggyback registration rights.

The Company recognized approximately $18,000 and $23,000 of stock based compensation costs related to stock and stock options awards for the three months ended March 31, 2016 and 2015, respectively. The Company recognized approximately $548,000 and $330,000 of stock based compensation costs related to stock and stock options awards for the nine months ended March 31, 2016 and 2015, respectively.

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

Exercise of options

During the three months ended December 31, 2015, the Company recorded subscription receivable of $8,000 for the exercise of 30,000 options at a price from $0.17 to $0.39 (See at Note 11 Equity Transactions).

During the three months ended September 30, 2015, the Company recorded subscription receivable of $17,400 for the exercise of 30,000 options at a price from $0.49 to $0.64 (See at Note 11 Equity Transactions).

Stock Warrants

For the nine months ended March 31, 2016

The following table summarizes stock warrants:

11. Equity Transactions

(1) Issuance of Common Stock for Cash

$30 million Class A Common Stock Purchase Agreement with Aspire Capital Fund, LLC – ("March 2015 Agreement")

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 $75,000,000 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 period from March 30, 2015 to March 31, 2016, the Company had completed sales to Aspire totaling 3,700,000 shares of common stock generating gross proceeds of approximately $5.3 million.

(2) Issuance of Common Stock by Exercise of Common Stock Options

The Board of Directors approved the exercise of 60,000 Common Stock options at a range of $0.17 to $0.64 per share for $25,400 during the nine months ended March 31, 2016.

(3) Issuance of Common Stock to Consultants For Services

On July 10, 2015, the Company issued 7,028 Class A common shares to a consultant for service, valued at $17,500 based on the closing bid price as quoted on the OTC on July 10, 2015 at $2.49 per share.

On February 9, 2016, the Company issued 10,000 Class A common shares to a consultant for service, valued at $11,200 based on the closing bid price as quoted on the OTC on February 9, 2016 at $1.12 per share.

12. Subsequent Events

On April 6, 2016, the Company issued 25,000 shares and 25,000 options to a consultant for service, exercisable for 3 years at $1.77 per share of common stock. The value of these 25,000 shares at $1.61 per share and 25,000 options was approximately $40,000 and $14,000, respectively, with total of approximately $54,000.

From April 1, 2016 to May 5, 2016, the Company has generated additional proceeds of approximately $1.7 million under the Common Stock Purchase Agreement with Aspire from the sale of 1,100,000 shares of its common stock.

ITEM 2. MANAGEMENT'S DISCUSSION AND 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

The Company devotes most of its efforts and resources on its compounds already in clinical trials. These trials are evaluating our drug Kevetrin for the treatment of cancers, Prurisol for the treatment of psoriasis, and Brilacidin for the treatment of skin infections and prevention of oral mucositis complicating chemoradiation treatment for cancer. 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. 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.

We are a clinical stage company. We have no product sales to date and we will not receive any product revenue until we receive approval from the FDA or equivalent foreign regulatory agencies to begin marketing a pharmaceutical product. Developing pharmaceutical products, however, is a lengthy and very expensive process. Assuming we do not encounter any unforeseen safety or efficacy issues during the course of developing our product candidates, we do not expect to complete the development of a product candidate for several years, if ever.

 Below is a list of our wholly-owned proprietary clinical programs and their stage in the drug development process:

Active Programs in Clinical Development

Kevetrin

Kevetrin, our anti-cancer compound, is being studied in a Phase 1 trial at Dana-Farber Cancer Institute and Beth Israel Deaconess Medical Center. The clinical trial is evaluating the safety and potential efficacy of Kevetrin in patients with advanced-stage solid tumors of various types. The primary endpoints for the study are safety, determining the maximum tolerated dose, and establishing the dose for future Phase 2 clinical trials.

The study has completed its dose escalation phase to determine the maximum tolerated dose in a single intravenous infusion. Exposure to Kevetrin as measured by plasma concentrations have been achieved which are greater than concentrations shown to induce apoptosis in non-clinical studies. While the trial is primarily to evaluate safety of repeated cycles of Kevetrin, it is encouraging that some patients have had stabilization of tumor status during treatment. Further, Kevetrin appears to be having the expected effects to activate p53 in a number of the patients treated, as measured by increases in the levels of the downstream protein p21 biomarker.

Presently the Phase 1 trial is active but not recruiting patients. We may continue the Phase 1 study while also requesting FDA permission to advance to a Phase 2 study. The purpose of continuing the Phase 1 is to further study Kevetrin's mode of action and its potential benefits to patients. The Phase 1 data were used to design the dosing regimen for the planned clinical study of patients with advanced ovarian carcinoma, subject to FDA guidance and authorization. To date, pharmacokinetic profiles found that the plasma half-life of Kevetrin is relatively short, supporting the projected administration of multiple infusions each week in the next study. The half-lives after the first dose and after the sixth dose do not differ appreciably. Longer durations of Kevetrin infusion have shown prolonged exposure to the drug. Prolonged exposure and high area-under-the-curve (AUC) may be desirable in therapy of solid tumors especially with Kevetrin since activation of cell death signaling requires multiple gene synthesis and the phase or phases of the tumor cell cycle most susceptible to the effect(s) of Kevetrin is not known.

We met with the FDA division responsible for ovarian cancer trials to discuss our clinical path forward. We were given guidance by the Agency in the design of trials for a quicker regulatory path towards (our goal of) regulatory approval. Based on this guidance, we intend to use a combination treatment exclusively in this study. The plan is for Kevetrin to be dosed in combination with liposomal doxorubicin (a drug already approved for treating ovarian cancer) due to Kevetrin's safety profile, potential ability to sensitize the tumor, as well as its abilities to cause apoptosis in cancer cells. In vitro and in vivo animal studies evaluating combinations of Kevetrin and various chemotherapies used in treatment of ovarian cancer have been completed and are supportive of the approach planned. The clinical trial protocol is planned for submission to FDA in May 2016.

Kevetrin was granted FDA Orphan Drug Designations for the treatment of ovarian cancer and pancreatic cancer.

Kevetrin was granted FDA Rare Disease Designation for the treatment of pediatric retinoblastoma.

The University of Bologna in Italy (the "University") and The Italian Cooperative Study Group on Chronic Myeloid Leukemia (ICSG on CML) and Acute Leukemia (GIMEMA Group) after testing Kevetrin in preclinical studies, approached us to test Kevetrin in a clinical trial against Acute Myelogenous Leukemia (AML). The study proposed is a Phase 2 trial evaluating Kevetrin as a single agent or in combination with cytarabine in patients with Acute Myelogenous Leukemia (AML). The protocol was submitted in May 2015 by the principal investigator to the institutional committee. In October 2015, we were advised by the Principal Investigator that there are difficulties with the funding in Italy and asked whether we would be interested in contributing financially to the study. At this time we have put this project on hold as we advance Kevetrin through the regulatory process. We expect to turn our attention back to this project once we further Kevetrin in ovarian cancer studies as the University data of its Kevetrin studies in AML has been encouraging.

In June 2013, we signed a Material Transfer Agreement with the University of Texas, MD Anderson Cancer Center. MD Anderson intends to utilize in vivo and in vitro methods to research specific pathways, gene expression, mechanism of action and apoptotic activity of Kevetrin in a range of concentrations and time points in both mutant and wild-type p53 Myeloma and Lymphoma cell lines. The National Cancer Institute estimates that more than 24,000 individuals will be diagnosed with myeloma in the United States in 2014, and more than 11,000 will die from this disease. They also wish to study our other cancer compounds against a broad array of Multiple Myeloma cell lines that are resistant to today's FDA-approved chemotherapies. MD Anderson is covering the expenses of the research, with Cellceutix only supplying the drugs. In May 2016, we sent requested Phase 1 pharmacokinetic data to MD Anderson.

Prurisol – Plaque Psoriasis

In August 2015, we commenced a Phase 2 trial of Prurisol, an orally administered small molecule for the treatment of plaque psoriasis. We are developing Prurisol under FDA guidance that a 505(b)(2) drug approval pathway is an acceptable pathway for its development. This offers the benefits of a faster development process. Prurisol was eligible because its active moiety of abacavir is the same as that of the marketed drug ZiagenÒ (abacavir sulfate). A murine xenograft model with human psoriatic tissue has shown robust activity of Prurisol in resolution of all signs of psoriasis without reoccurrence. Given that psoriasis is a chronic condition with limited effective therapies that the National Psoriasis Foundation lists as affecting 125 million people worldwide, we see a tremendous market opportunity for an effective new oral treatment. We have completed enrollment and expect topline data approximately in May 2016.

Brilacidin - Acute Bacterial Skin and Skin Structure Infections (ABSSSI)

The intravenous formulation of our lead antibiotic candidate, Brilacidin, has the potential to treat a variety of infections, including Acute Bacterial Skin and Skin Structure Infections ("ABSSSI"), caused by drug-sensitive or drug-resistant strains of Staphylococcus aureus, including Methicillin-Resistant Staphylococcus aureus (MRSA), and by other Gram-positive bacteria.

The Phase 2b trial entitled "A Randomized, Double-Blind Study Comparing Three Dosing Regimens of Brilacidin to Daptomycin in the Treatment of Acute Bacterial Skin and Skin Structure Infections (ABSSSI)" completed enrollment in August 2014. On October 23, 2014, we announced positive top-line efficacy data from this Phase 2b ABSSSI trial, and on January 5, 2015, we reported the corresponding 95% confidence intervals. In April 2015, safety and efficacy results from this 215-patient study of brilacidin in patients with ABSSSI, were presented at the 25th European Congress of Clinical Microbiology and Infectious Diseases (ECCMID). In addition, population pharmacokinetic data from this study were presented in a poster at the Interscience Conference on Antimicrobial Agents and Chemotherapy (ICAAC) in San Diego in September 2015.

In July 2015, at an End-of-Phase 2 Meeting, Cellceutix and FDA discussed data supporting advancement of brilacidin into Phase 3, as well as the basic elements of a Phase 3 program in ABSSSI. This is the first Host Defense Protein (HDP) mimic to advance through Phase 2. Because HDP mimics, such as brilacidin, represent an entirely new class of antibiotics, there is no potential cross-resistance with currently marketed antibiotics, and due to its unique mechanism of action, resistance to brilacidin is unlikely to develop. For this and other reasons, such as its high activity against methicillin-resistant Staphylococcus aureus (a leading cause of ABSSSI) brilacidin received designation as a Qualified Infectious Disease Product (QIDP) in November 2014. The QIDP designation was established as part of the Generating Antibiotic Incentives Now (GAIN) Act, passed by the U.S. Congress in July 2012, for the purpose of encouraging pharmaceutical companies to develop new antimicrobial drugs to treat serious and life-threatening infections. Receiving QIDP designation means that Brilacidin is now eligible for additional FDA incentives in the approval and marketing path, including Fast Track designation and Priority Review for development and a five-year extension of market exclusivity.

The Phase 3 ABSSSI program would include two Phase 3 ABSSSI studies, as required by FDA Guidance (October 2013), of approximately 700 subjects in each study. The two studies may enroll subjects simultaneously. In addition, the first study would include an interim analysis after a portion of the patients has been enrolled. This would provide an early assessment of both safety and efficacy.

The Company submitted a Special Protocol Assessment ("SPA") request, along with a protocol to FDA, for the Phase 3 clinical trial. A SPA is a written agreement between the FDA and a drug sponsor detailing the clinical trial design, endpoints and other clinical trial facets that can be used to support regulatory approval, thereby potentially reducing our risk of bringing a drug to market. The title of the protocol submitted is: "A Phase 3, Multicenter, Double-Blind, Randomized Study to Evaluate the Efficacy and Safety of Single-Dose IV Brilacidin versus IV Vancomycin Followed by Optional PO Linezolid for the Treatment of Patients with Acute Bacterial Skin and Skin Structure Infections (ABSSSI)". 

We have received back from FDA comments and considerations for incorporation into our study design. An additional round of review and/or a formal meeting is anticipated, both of which can extend the review period and be beneficial in reaching agreement with the FDA on design elements. Based on the FDA's feedback, we may reach final agreement with FDA or may decide to incorporate the advice into the design of the Phase 3 clinical study without undergoing additional rounds of review. FDA's assessment of the SPA request, and all related feedback, will be very valuable in our planned Phase 3 clinical study for the development of Brilacidin for ABSSSI. The Company can offer no assurance that a SPA agreement will be reached with FDA.

About SPA Agreements - A SPA is a written agreement between the U.S. Food and Drug Administration (FDA) and a drug sponsor detailing the clinical trial design, endpoints and other clinical trial facets that can be used to support regulatory approval, thereby potentially reducing the risk of bringing a drug to market. Obtaining Special Protocol Assessment (SPA) designation from the FDA is an important step as it reinforces the potential of a promising drug in clinical development. The SPA agreement delineates key statistical and clinical endpoint requirements, streamlining the process toward a product gaining FDA approval should the agreed upon criteria and outcomes be met. The SPA process itself can be iterative in nature. In fact, according to industry data, 78 percent of SPAs require multiple review cycles and an average of three months to finalize the SPA. For more information about the FDA's SPA program, please visit:http://www.fda.gov/downloads/Drugs/GuidanceComplianceRegulatoryInformation/Guidances/ucm080571.pdf

Brilacidin for Oral Mucositis (OM)

The Company is engaged in a clinical trial titled a "Phase 2, Multi-center, Randomized, Double-blind, Placebo-controlled Study to Evaluate the Efficacy and Safety of Brilacidin Oral Rinse Administered Daily for 7 Weeks in Attenuating Oral Mucositis in Patients with Head and Neck Cancer Receiving Concurrent Chemotherapy and Radiotherapy". Trial recruitment is slower then what was projected by the hospitals we engaged. We believe this is happening because there are numerous competing trials for a limited patient population of Head and Neck cancer patients who meet the strict trial inclusion and exclusion requirements. To help hasten the completion of the study we have replaced our previous contract research organization (CRO) with another who has a proven track record in clinical trials for this indication. In addition, we brought on Dr. Steven Sonis, an expert in the treatment of OM as an advisor, and have authorized the opening of additional sites, to help us complete this trial.

OM represents a great area of unmet medical need and is potentially a very important and valuable asset in the Brilacidin development pathway.

Brilacidin -- Ulcerative Proctitis / Colitis

We have identified inflammatory gastrointestinal diseases such as Ulcerative Proctitis, Ulcerative Colitis, and Crohn's disease as potential indications for treatment with Brilacidin. We will begin with treating ulcerative proctitis. The Company plans for a Phase 2 proof of concept trial for ulcerative proctitis to begin in May 2016. Cellceutix is now awaiting the country's Ministry of Health permission so it may begin exporting Brilacidin into the country and directly to the clinical sites. The location of the trial isn't currently being disclosed for competitive reasons.

Brilacidin -- Hidradenitis Suppurativa

We have also identified an inflammatory skin disease, hidradenitis suppurativa, as an indication for treatment with Brilacidin. Based on detailed discussion with multiple experts in the field of Dermatology, in April 2016, the Company reactivated a request, for a Pre-IND (investigational new drug) meeting with FDA to discuss the clinical path forward. The meeting is expected to occur in June 2016.

Brilacidin for Topical Applications and Otic Infections and Related Formulation Work

Cellceutix is formulating and conducting preclinical experiments on topical Brilacidin for use in topical skin applications such as diabetic foot ulcer infections, and for ear-related infections, such as otitis externa or draining otitis media. On July 14, 2014, the Company announced that a significant breakthrough had been made in the formulation of Brilacidin. Previously, Brilacidin was stored in a refrigerated state. The Company has now developed the formulation of Brilacidin to be stable at room temperature. However, further formulation work is still needed for each indication. The Company has engaged a university for the testing of different concentrations of Brilacidin for ototoxicity. Testing is scheduled to begin in June 2016. Should testing be successful, we intend on advancing this program to develop ear treatments for Methicillin-resistant Staphylococcus aureus (MRSA) infections.

Advancing the Platform and Developing Compounds with Activity Against Gram-Negative Bacteria and Fungi

In our anti-fungal program, we have identified a series of HDP mimics that are highly active against Candida species and exhibit very low cytotoxicity against mammalian cell types. Last year, we announced our collaboration with Fox Chase Chemical Diversity Center, which led to the award of a $1.5 million Phase 2B Small Business Innovation Research (SBIR) Grant. Laboratory experiments have shown that, like the antibacterial HDP mimics, the potential for resistance development by Candida is very low. Early studies have delivered promising results in mouse models of Candida in both topical and systemic applications. Additional studies of our HDP mimics suggest possible new treatments for other fungal pathogens, including Aspergillus strains. 

Other

In addition to their antimicrobial activity, we are evaluating the use of current and future host defense protein (HDP) mimics for disorders of barrier function, where the innate immune system plays a vital role. For these disorders, the goal is to exploit the anti-inflammatory and anti-biofilm properties to restore and maintain healthy skin and mucous membranes, and to treat refractory biofilm-related infections on natural and artificial surfaces. This would include inflammatory or trauma-related conditions of the skin, eyes, GI tract, and respiratory mucosa; exacerbations of chronic bronchitis and cystic fibrosis; and infections of catheters, valves, and prosthetic joints.

Polymedix Asset Acquisition

On September 4, 2013, the Company purchased substantially all of the assets of Polymedix Inc, and Polymedix Pharmaceuticals, Inc. from the U.S. Bankruptcy Court. PolyMedix Inc. was founded in 2002 based on technology licensed from the University of Pennsylvania (Penn). The purchased bankruptcy estate included two license agreements from Penn, an exclusive patent license agreement and a nonexclusive software license agreement. The list of material intellectual property, patents, and licenses acquired and their expiration dates was disclosed at "Part I, Item 1. Intellectual Property, Patents and Licenses Acquired" of our Annual Report for the year ended June 30, 2014.

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 I, Item 7, "Critical Accounting Policies and Estimates" in our Annual Report on Form 10-K for the year ended June 30, 2015. 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, 2015.

Recently Issued Accounting Pronouncements

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, we currently expect to have sufficient cash reserves and financing available to us to meet all of our anticipated obligations.

For the Three Months Ended March 31, 2016 and 2015

Revenue

We generated no revenue and incurred operating expenses of $3.7 million and $2.8 million for the three months ended March 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 March 31, 2016 and 2015, respectively (rounded to nearest thousand):

Research and development expenses for proprietary programs increased during the three months ended March 31, 2016 primarily due to more spending on our Brilacidin program.

The R&D- Officers' payroll and payroll tax expenses decreased during the three months ended March 31, 2016 primarily related to the decrease in payroll paid to our Chief Operations Officer of $95,000 who joined in 2014 and resigned on August 8, 2015.

The R&D staff- Other wages, payroll tax expenses increased primarily related to the increases in wages and numbers of employees in our research and development department.

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, share-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 March 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 March 31, 2016 and 2015, respectively (rounded to nearest thousand):

There was no change in Officers' payroll and payroll tax expenses during the three months ended March 31, 2016 and 2015.

Professional Fees

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

Professional fees increased during the three months ended March 31, 2016 primarily related to more audit and legal fees (see Note 10 in the accompanying Notes to Condensed Consolidated Financial Statements).

Other Income (Expense)

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

Net Losses

We incurred net losses of $3.7 million and $2.9 million for the three months ended March 31, 2016 and 2015, respectively, the increase due to the above mentioned operating expenses. 

For the Nine Months Ended March 31, 2016 and 2015

Revenue

We generated no revenue and incurred operating expenses of $9.5 million and $9.9 million for the nine months ended March 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 nine months ended March 31, 2016 and 2015, respectively (rounded to nearest thousand):

Research and development expenses for proprietary programs decreased during the nine months ended March 31, 2016 primarily due to lower spending on our ABSSSI program, which trial was completed in early 2015.

The Officers' payroll and payroll tax expenses decreased during the nine months ended March 31, 2016 primarily related to the decrease in payroll paid to our Chief Operations Officer of $161,000 who joined in 2014 and resigned on August 8, 2015 and a decrease in year-end bonus of $225,000 paid to our executive officers in 2015.

The R&D staff - Other wages and payroll tax expenses increased primarily related to the increases in wages and numbers of employees in our research and development department.

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 nine months ended March 31, 2016 and 2015, respectively (rounded to nearest thousand):

General and administrative expenses increased during the nine months ended March 31, 2016 primarily related to increases in Directors D&O insurance and employee health insurance expenses, rental expenses and travel expenses for meetings for our clinical trials and to the FDA, to further develop our compounds.

Officers' Payroll and Payroll Tax Expenses

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

Professional Fees

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

Professional fees increased during the nine months ended March 31, 2016 primarily related to increase in legal fees of $278,000 and the one million stock options issued to a law firm for services, valued at approximately $432,000 on November 5, 2015 (see Note 10 in the accompanying Notes to Condensed Consolidated Financial Statements).

Other Income (Expense)

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