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

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

~~Cellceutix Corporation~~INNOVATION PHARMACEUTICALS INC.

(Exact name of registrant as specified in its charter)

(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 or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and ~~“smaller reporting~~“emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

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,~~November 6, 2017 is as follows:

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,~~“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.”

		December 31,			June 30,				September 30,			June 30,
		2016			2016				2017			2017
		(Unaudited)							(Unaudited)
ASSETS	ASSETS							ASSETS
Current Assets:
Cash		$	3,859,000		$	6,310,000			$	2,933,000		$	4,141,000
Prepaid expenses			199,000			272,000				187,000			308,000
Security deposits										78,000			-
Subscription receivable			26,000			26,000				-			26,000
Total Current Assets			4,084,000			6,608,000				3,198,000			4,475,000

Other Assets:
Patent costs - net			4,181,000			4,311,000
Property, plant and equipment -net			139,000			90,000
Deferred offering costs			310,000			358,000
Patents - net										4,138,000			4,212,000
Equipment - net										111,000			120,000
Deferred offering costs - net										212,000			227,000
Security deposits			78,000			78,000				-			78,000
Total Other Assets			4,708,000			4,837,000				4,461,000			4,637,000

Total Assets		$	8,792,000		$	11,445,000			$	7,659,000		$	9,112,000

LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES AND STOCKHOLDERS’ DEFICIENCY								LIABILITIES AND STOCKHOLDERS’ DEFICIENCY
Current Liabilities:
Accounts payable - (including related party payables of approx. $1,504,000 and $1,502,000, respectively)		$	3,223,000		$	3,528,000
Accrued expenses - (including related party accruals of approx. $139,000 and $72,000, respectively)			549,000			97,000
Accrued salaries and payroll taxes -(including related party accrued salaries of approx. $2,777,000 and $2,777,000, respectively)			2,862,000			2,834,000
Note payable - related party			2,022,000			2,022,000
Accounts payable - (including related party payables of approximately $1,511,000 and 1,506,000, respectively)									$	5,410,000		$	4,699,000
Accrued expenses - (including related party accruals of approximately $54,000 and $38,000, respectively)										356,000			711,000
Accrued salaries and payroll taxes - (including related party accrued salaries of approximately $2,953,000 and $2,953,000, respectively)										3,038,000			3,144,000
Convertible note payable - related party										2,022,000			2,022,000
Total Current Liabilities			8,656,000			8,481,000				10,826,000			10,576,000

Total Liabilities			8,656,000			8,481,000				10,826,000			10,576,000

Commitments and contingencies (Note 8)
Commitments and contingencies (Note 7)

Stockholders' Equity
Preferred stock, $0.001 par value, 500,000 designated shares, no shares issued and outstanding			-			-
Common Stock - Class A, $.0001 par value, 300,000,000 shares authorized, 126,008,756 and 123,589,536 issued and outstanding as of December 31, 2016 and June 30, 2016, respectively			13,000			12,000
Common Stock - Class B, (10 votes per share); $.0001 par value, 100,000,000 shares authorized, no shares issued and outstanding as of December 31, 2016 and June 30, 2016, respectively			-			-
Stockholders’ Deficiency
Preferred stock, $0.001 par value, 10,000,000 designated shares, no shares issued and outstanding										-			-
Common Stock - Class A, $0.0001 par value, 300,000,000 shares authorized, 139,055,966 and 135,536,501 issued as of September 30, 2017 and June 30, 2017, respectively, 138,726,830 and 135,274,421 outstanding as of September 30, 2017 and June 30, 2017, respectively										14,000			14,000
Common Stock - Class B, (10 votes per share); $0.0001 par value, 100,000,000 shares authorized, no shares issued and outstanding as of September 30, 2017 and June 30, 2017										-			-
Additional paid-in capital			60,526,000			56,969,000				71,157,000			68,295,000
Accumulated deficit			(60,403,000	)		(54,017,000	)			(74,087,000	)		(69,553,000	)
Total Stockholders' Equity			136,000			2,964,000

Total Liabilities and Stockholders' Equity		$	8,792,000		$	11,445,000
Treasury Stock, at cost (329,136 shares and 262,080 shares as of September 30, 2017 and June 30, 2017, respectively)										(251,000	)		(220,000	)
Total Stockholders’ Deficiency										(3,167,000	)		(1,464,000	)
Total Liabilities and Stockholders’ Deficiency									$	7,659,000		$	9,112,000

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

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2017AND ~~SIX MONTHS ENDED DECEMBER 31, 2016 AND 2015~~2016

	For the Three Months Ended						For the Six Months Ended
	December 31,						December 31,
	2016			2015			2016			2015			2017			2016

Revenues	$	-		$	-		$ -			$ -			$	-		$	-

Operating expenses:
Research and development expenses		2,683,000			2,130,000			4,960,000			3,961,000			3,805,000			2,277,000
General and administrative expenses		344,000			352,000			706,000			691,000			297,000			362,000
Officers' payroll and payroll tax expenses		130,000			130,000			260,000			260,000
Officers’ payroll and payroll tax expenses														130,000			130,000
Professional fees		152,000			662,000			361,000			889,000			252,000			209,000

Total operating expenses		3,309,000			3,274,000			6,287,000			5,801,000			4,484,000			2,978,000

Loss from operations		(3,309,000	)		(3,274,000	)		(6,287,000	)		(5,801,000	)		(4,484,000	)		(2,978,000	)

Other income (expenses)
Other income (expense)
Interest income		1,000			1,000			2,000			2,000			1,000			1,000
Interest expense		(50,000	)		(50,000	)		(101,000	)		(101,000	)		(51,000	)		(51,000	)
Total other income (expenses)		(49,000	)		(49,000	)		(99,000	)		(99,000	)

Total other expense - net														(50,000	)		(50,000	)

Loss before provision for income taxes		(3,358,000	)		(3,323,000	)		(6,386,000	)		(5,900,000	)		(4,534,000	)		(3,028,000	)
Provision for income taxes		-			-			-			-			-			-

Net loss	$	(3,358,000	)	$	(3,323,000	)	$	(6,386,000	)	$	(5,900,000	)	$	(4,534,000	)	$	(3,028,000	)

Basic and diluted loss per share attributable to common stockholders	$	(0.03	)	$	(0.03	)	$	(0.05	)	$	(0.05	)
Basic and diluted loss per share
													$	(0.03	)	$	(0.02	)

Weighted average number of common shares outstanding		125,275,060			118,673,362			124,782,071			118,406,893			137,171,811			124,289,082

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

FOR THE ~~SIX~~THREE MONTHS ENDED ~~DECEMBER 31,~~SEPTEMBER 30, 2017 AND 2016 ~~AND 2015~~

	2016			2015			2017			2016

CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(6,386,000	)	$	(5,900,000	)	$	(4,534,000	)	$	(3,028,000	)
*Adjustments to reconcile net loss to* *net cash used in operating activities:*
Common stock and stock options issued as payment for services		690,000			530,000
Common stock and stock options issued as payment for compensation, services rendered and financing costs								369,000			344,000
Amortization of patent costs		183,000			204,000			96,000			91,000
Depreciation of equipment		15,000			5,000			9,000			5,000
*Changes in operating assets and liabilities:*
Prepaid expenses and other current assets		73,000			172,000
Prepaid expenses and security deposits								121,000			91,000
Other receivable								-			(403,000	)
Accounts payable		(305,000	)		259,000			711,000			190,000
Accrued expenses		452,000			93,000			(355,000	)		73,000
Accrued officers' salaries and payroll taxes		28,000			(3,000	)
Accrued officers’ salaries and payroll taxes								(106,000	)		29,000

Net cash used in operating activities		(5,250,000	)		(4,640,000	)		(3,689,000	)		(2,608,000	)

CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment		(64,000	)		-
Additions to equipment								-			(3,000	)
Patent costs		(53,000	)		(217,000	)		(22,000	)		(26,000	)

Net cash used in investing activities		(117,000	)		(217,000	)		(22,000	)		(29,000	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Sales of common stock		2,916,000			2,618,000
Exercise of stock options and warrants		-			12,000
Sales of common stock, net of offering costs								2,508,000			1,883,000
Purchase of treasury stock								(5,000	)		-

Net cash provided by financing activities		2,916,000			2,630,000			2,503,000			1,883,000

NET DECREASE IN CASH		(2,451,000	)		(2,227,000	)		(1,208,000	)		(754,000	)

CASH, BEGINNING OF PERIOD		6,310,000			8,410,000			4,141,000			6,310,000

CASH, END OF PERIOD	$	3,859,000		$	6,183,000		$	2,933,000		$	5,556,000

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
Cash paid for interest	$	29,000		$	29,000		$	32,000		$	15,000

SUPPLEMENTAL DISCLOSURE OF NON-CASH FLOW
INVESTING AND FINANCING ACTIVITIES
Commitment shares issued as deferred offering costs							$	215,000		$	-
Reversal of subscription receivable to treasury stock							$	26,000			-

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

The accompanying unaudited condensed financial statements of ~~Cellceutix Corporation~~Innovation Pharmaceuticals Inc. 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 (“U.S. GAAP”) 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,~~2017, included in our Annual Report on Form 10-K for the year ended June 30, ~~2016.~~2017.

In the opinion of the management of ~~the Company,~~Innovation Pharmaceuticals Inc., 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"~~“Company”, ~~"we"~~“we”, ~~"us"~~“us” or ~~"our"~~“our” mean ~~Cellceutix Corporation.~~ Innovation Pharmaceuticals Inc.

~~Cellceutix Corporation~~Innovation Pharmaceuticals Inc. (the “Company”) 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. Effective June 5, 2017, the Company amended its Articles of Incorporation and changed its name from Cellceutix Corporation to Innovation Pharmaceuticals Inc. In accordance with Section 92A.180 of the Nevada Revised Statutes, stockholder approval of the name change was not required.

The Company is a clinical stage biopharmaceutical company and has no customers, products or revenues to date. The Company’s ~~Common Stock~~common stock is quoted on OTCQB, symbol ~~“CTIX”~~“IPIX”.

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.

As of June 30, 2017, the Company adopted Accounting Standards Codification 205-40. This guidance amended the existing requirements for disclosing information about an entity’s ability to continue as a going concern and explicitly requires management to assess an entity’s ability to continue as a going concern and to provide related disclosure in certain circumstances. This guidance was effective for annual reporting periods ending after December 15, 2016, and for annual and interim reporting periods thereafter. The following information reflects the results of management’s assessment, plans and conclusion of the Company’s ability to continue as a going concern.

As of September 30, 2017, the Company has an accumulated deficit of $74.1 million, representative of recurring losses since inception. The Company is a development stage pharmaceutical company that has no sales as it does not have any products in the market and will continue to not have any revenues until it begins to market its products after it has obtained the necessary Federal Drug Administration (the “FDA”) approval. As a result, the Company expects to continue to incur losses.

At ~~December 31, 2016, we~~September 30, 2017, the Company’s cash amounted to $2.9 million and current liabilities amounted to $10.8 million, of which $6.6 million were payables to related parties with no immediate payment terms (See Note 8- Related Party Transactions in the Notes to Condensed Financial Statements section below). The Company had ~~$3.9 million in cash. We have~~ expended substantial funds on its clinical trials and expects to increase this spending. The Company’s net cash used in operating activities for the ~~research~~three months ended September 30, 2017 was approximately $3.7 million, and ~~development of our product candidates.~~current projections indicate that the Company will have continued negative cash flows for the foreseeable future. Our net losses incurred for the ~~six~~three months ended ~~December 31,~~September 30, 2017 and 2016, ~~and 2015,~~ amounted to ~~$6.4~~$4.5 million and ~~$5.9~~$3.0 million, respectively, and ~~we had a~~ working capital ~~deficit of~~deficits was approximately ~~$4.6~~$7.6 million and ~~$1.9~~$6.1 million ~~respectively~~ at ~~December 31, 2016~~September 30, 2017 and June 30, ~~2016.~~2017, respectively.

~~On March 30, 2015,~~Accordingly, the ~~Company entered into~~Company’s planned operations, including total budgeted expenditures of approximately $15 million for the next twelve months, raise doubt about its ability to continue as a going concern. The Company’s plans to alleviate the doubt of its ability to continue as a going concern primarily include controlling the timing and spending on its research and development programs and raising additional funds through equity financings from its common stock purchase agreement with Aspire Capital Fund, LLC, an Illinois limited liability company ("(“Aspire ~~Capital"~~Capital”) ~~which provides that, upon the terms~~. The Company may consider other plans to fund operations including: (1) raising additional capital through debt financings or from other sources; (2) additional funding through new relationships to help fund future clinical trial costs (i.e. licensing and ~~subject~~partnerships); (3) reducing spending on one or more research and development programs by discontinuing development; and/or (4) restructuring operations to ~~the conditions and limitations set forth therein, Aspire Capital is committed to purchase up to an aggregate~~change its overhead structure. The Company may issue securities, including shares of ~~$30.0 million of the Company's~~ common stock, ~~over the 36-month term~~shares of ~~the Purchase Agreement. As of December 31, 2016, the available balance is approximately $19 million under this~~preferred stock and stock purchase ~~agreement.~~

~~Table of Contents~~

contracts through private placement transactions or registered public offerings, pursuant to its registration statement on Form S-3 filed with the SEC on September 11, 2017. The Company’s future liquidity needs, and ability to address those needs, will largely be determined by the success of its product candidates and key development and regulatory events and its decisions in the future.

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~~actions discussed above are probable of occurring and alleviating the substantial doubt raised by our historical operating results and satisfying our estimated liquidity needs twelve months from ~~Aspire Capital and under~~ the ~~Company’s effective shelf registration statement will be sufficient to fund~~issuance of the ~~Company’s operations for the next 12 months.~~accompanying financial statements.

~~If we are unable to generate enough working capital from our current financing~~On September 6, 2017, the Company entered into a new $30 million common stock purchase agreement with Aspire Capital ~~when needed or secure additional sources~~(the “2017 Agreement”) to replace the prior 2015 $30 million common stock purchase agreement with Aspire Capital (the “2015 Agreement”). During the period from July 1, 2017 to September 5, 2017, the Company generated proceeds of ~~funding, it may be necessary~~approximately $2.1 million under the 2015 Agreement from the sale of approximately 2.6 million shares of its common stock. During the period from September 6, 2017 to ~~significantly reduce our current rate~~September 30, 2017, the Company generated proceeds 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 stageapproximately $0.4 million under the 2017 Agreement from the sale 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.approximately 0.6 million shares of its common stock. As of September 30, 2017, the available balance under the 2017 equity line agreement is approximately $29.6 million.

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.

The preparation of financial statements in conformity with U.S. 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 and diluted ~~earnings (loss)~~loss per share ~~are~~is 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.~~payable underlying shares and unvested restricted stock. Common share equivalents of ~~45.1 million~~47,242,085 and 45,036,175 shares ~~and 44.0 million shares~~of common stock were excluded from the computation of diluted ~~earnings (loss)~~loss per share for the three months ended September 30, 2017 and ~~six~~2016, respectively, because we incurred net losses for the three months ended ~~December 31,~~September 30, 2017 and 2016, and ~~2015, respectively, because their~~the effect ~~is anti-dilutive.~~of including these potential common shares in the net loss per share calculations would be anti-dilutive and are therefore not included in the calculations.

The Company accounts for treasury stock using the cost method. There were 329,136 shares and 262,080 shares of treasury stock outstanding, purchased at a total cumulative cost of $251,000 and $220,000 at September 30, 2017 and June 30, 2017, respectively (see Note 10).

Treasury stock, representing shares of the Company’s common stock that have been acquired after having been issued, is recorded at its acquisition cost and these shares are no longer considered outstanding.

The stock-based compensation expense incurred by ~~Cellceutix~~the Company 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, an 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~~stock-based compensation ~~related to stock options and stock awards~~expense included in the Company’s Condensed Statement of Operations for the three months ended September 30, 2017 and ~~six months ended December 31,~~ 2016 ~~and 2015~~ are as follows (rounded to nearest thousand):

	Three Months Ended				Six Months Ended				Three months ended September 30
	December 31,				December 31,
	2016		2015		2016		2015
General and administrative expenses
Professional fees	$	-	$	432,000	$	-	$	432,000
									2017		2016
Research and development expenses
Professional fees	$	8,000	$	-	$	50,000	$	78,000	$	-	$	42,000
Employees’ bonus		50,000		-		62,000		-		32,000		13,000
Officers’ bonus		289,000		-		578,000		20,000		337,000		289,000

Total share-based compensation expense	$	347,000	$	432,000	$	690,000	$	530,000
Total stock-based compensation expense									$	369,000	$	344,000

Going Concern — In August 2014, the FASB issued ASU 2014-15, “Presentation of Financial ~~Statements—Going Concern—Disclosure~~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 believes that the adoption of this guidance will not~~2016. We 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 applyimplemented this new ~~guidance when it becomes effective~~accounting standard and ~~has not yet selected a transition method. Management believes that the adoption of this guidance will not have a material impact on~~updated our ~~financial statements.~~liquidity disclosures, as required.

~~In February 2016,~~Deferred Taxes – During November 2015, the FASB issued ASU ~~No. 2016-02, Leases (Topic 842). The guidance~~2015-17, “Balance Sheet Classification of Deferred Taxes”, which simplifies the presentation of deferred income taxes. This ASU requires that deferred tax assets and liabilities be classified on a ~~lessee recognize~~net basis as non-current in ~~the~~a statement of financial ~~position~~position. Early adoption of this ASU did not have an effect on our deferred tax assets and deferred tax liabilities on our accompanying balance sheets.

Debt Issuance Costs - In April 2015, the FASB issued ASU 2015-03, “Simplifying the Presentation of Debt Issuance Costs”. The new standard will more closely align the presentation of debt issuance costs under U.S. GAAP with the presentation under comparable IFRS standards. Debt issuance costs related to 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 leaserecognized debt liability will be ~~initially measured at~~presented on the ~~present value~~balance sheet as a direct deduction from the debt liability, similar to the presentation of debt discounts. The cost of issuing debt will no longer be recorded as a separate asset, except when incurred before receipt of the ~~lease payments, in~~funding from the ~~statement of financial position; interest~~associated debt liability. Under current U.S. generally accepted accounting principles, debt issuance costs are reported on the ~~lease liability~~balance sheet as assets and amortized as interest expense. The costs will continue to be ~~recognized separately~~amortized to interest expense using the effective interest method. Subsequent to the issuance of ASU 2015-03 the SEC staff made an announcement regarding the presentation of debt issuance costs associated with line-of-credit arrangements, which was codified by the FASB in ASU 2015-15. This guidance, which clarifies the exclusion of line-of-credit arrangements from ~~amortization~~the scope of ~~the right-of-use asset in the statement~~ASU 2015-03, is effective upon adoption 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 leaseASU 2015-03. ASU 2015-03 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 public business entities for fiscal years beginning after December 15, ~~2018, including~~2015, and interim periods within those fiscal years. ~~Management has been continuously assessing the impact~~The implementation of this ~~guidance.~~standard did not have a material impact on the Company’s accompanying financial statements.

Stock Compensation -In March 2016, the FASB issued ASU 2016-09, ~~Compensation-Stock~~ Compensation ~~(“ASU 2016-09”). Under ASU 2016-09, entities~~– Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which will ~~be required to recognize~~simplify the income tax ~~effects of awards in the income statement when the awards vest or are settled. The guidance on employers’~~consequences, accounting for ~~an employee’s use~~forfeitures and classification on the Statement of Cash Flows (i) excess tax benefits be classified as cash inflows provided by operating activities, and (ii) cash paid to taxing authorities arising from the withholding 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~~from employees be classified as cash outflows used in financing activities. This standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016, with early adoption permitted. This new pronouncement has been adopted on July 1, 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~~did not have a material ~~impact~~effect on ~~our~~the Company’s financial ~~statements.~~

~~Standards Issued and Adopted~~position, results of operations, but had an effect of the classification of cash paid to taxing authorities arising from the withholding of shares from employees (treasury stock), classified as cash outflows used in financing activities.

In June 2014, the FASB issued ASU 2014-12, ~~Compensation -~~ “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~~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~~2015. The implementation of this ~~guidance and it~~standard did not have a material impact on ~~our~~the Company’s accompanying condensed 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 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 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. The Company, due to not having any revenue currently and in the foreseeable future, has concluded that the impact of the adoption of this accounting standard on its financial statements will not be material.

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. The guidance requires the following 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. The guidance requires the following 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 U.S. 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 determined that based on current accounting and lease contract information the adoption of ASU No. 2016-02 is not expected to have a significant impact on the Company’s financial position, results of operations and disclosures. However, management is continually evaluating the future impact of ASU No. 2016-02 based on changes in the Company’s financial statements through the period of adoption.

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments—Measurement of Credit Losses on Financial Instruments”, which requires measurement and recognition of expected credit losses for financial assets held. ASU 2016-13 is effective for the Company beginning January 1, 2020 and we are currently evaluating the impact that ASU 2016-13 will have on our condensed financial statements.

In November 2016, the FASB issued ASU 2016-18, “Restricted Cash”. The amendments in this update address diversity in practice that exists in the classification and presentation of changes in restricted cash and require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. ASU 2016-18 is effective for the Company beginning January 1, 2018 and is required to be applied using a retrospective transition method to each period presented. The Company is currently evaluating the impact that ASU 2016-18 will have on our condensed cash flows.

In January 2017, the FASB issued ASU 2017-01, “Clarifying the Definition of a Business”, which clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. ASU 2017-01 is required to be applied prospectively and will be effective for the Company beginning January 1, 2018. The impact on our condensed financial statements will depend on the facts and circumstances of any specific future transactions.

In February 2017, the FASB issued ASU 2017-05, “Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets”, which defines the term “in-substance nonfinancial asset” and clarifies the scope and accounting of a financial asset that meets the definition. ASU 2017-05 also provides guidance for partial sales of nonfinancial assets. ASU 2017-05 may be adopted under a retrospective or modified retrospective approach and is effective for the Company beginning January 1, 2018. We are currently evaluating the impact that ASU 2017-05 will have on our condensed financial statements.

In March 2017, the FASB issued ASU 2017-07, “Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost”, which requires that the service cost component of the Company’s net periodic pension cost and net periodic postretirement benefit cost be included in the same line item as other compensation costs arising from services rendered by employees, with the other components of net periodic benefit cost being classified outside of a subtotal of income from operations. Of the components of net periodic benefit cost, only the service cost component will be eligible for asset capitalization. ASU 2017-07 is effective for the Company beginning January 1, 2018 and is required to be applied retrospectively for the presentation of the service cost component and the other components of net periodic pension cost and net periodic postretirement benefit cost in the income statement. ASU 2017-07 allows a practical expedient for the estimation basis for applying the retrospective presentation requirements and requires the prospective adoption, on and after the effective date, for the capitalization of the service cost component of net periodic pension cost and net periodic postretirement benefit cost in assets. The Company, due to not having any pension currently and in the foreseeable future, has concluded that the impact of the adoption of this accounting standard on its financial statements will not be material.

	Useful life (years)	December 31, 2016			June 30, 2016			Useful life (years)	September 30, 2017			June 30, 2017
Purchased Patent Rights – Brilacidin, and related compounds	14	$	4,082,000		$	4,082,000		14	$	4,082,000		$	4,082,000
Purchased Patent Rights – Anti-microbial – surfactants and related compounds	12		144,000			144,000		12		144,000			144,000
Patents – Kevetrin and related compounds	17		1,088,000			1,035,000		17		1,330,000			1,308,000
			5,314,000			5,261,000				5,556,000			5,534,000
Less: Accumulated amortization for Brilacidin, Anti-microbial- surfactants and related compounds			(1,007,000	)		(855,000	)			(1,234,000	)		(1,158,000	)
Accumulated amortization for Patents – Kevetrin and related compounds			(126,000	)		(95,000	)
Accumulated amortization for Patents –Kevetrin and related compounds										(184,000	)		(164,000	)
									$	4,138,000		$	4,212,000
		$	4,181,000		$	4,311,000

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,~~September 30, 2017 and 2016 ~~and 2015, respectively and~~ was approximately ~~$183,000,~~$96,000 and ~~$204,000 for the six months ended December 31, 2016 and 2015,~~$91,000, respectively.

~~As of December 31, 2016,~~At September 30, 2017, the future amortization period for all patents was approximately 97.93 years to 1617 years. Future estimated annual amortization expenses are approximately ~~$181,000~~$284,000 for ~~2017, $364,000~~the year ending June 30, 2018, $378,000 for each year from ~~2018~~2019 to 2025, ~~$354,000~~$369,000 for the year ending June 30, 2026, ~~$352,000~~$366,000 for the year ending June 30, 2027, ~~$114,000~~$128,000 for the year ending June 30, 2028, ~~$61,000~~$75,000 for the years ending June 30, 2029 tothrough the years ended 2032, ~~$24,000~~$35,000 for the year ending June 30, 2033 and ~~$1,000~~$10,000 for the year ending June 30, 2034.

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.

	December 31, 2016		June 30, 2016		September 30, 2017		June 30, 2017
Accrued research and development consulting fees	$	411,000	$	25,000	$	302,000	$	673,000
Accrued rent (Note 9) – related party		26,000		32,000
Accrued interest – (Note 10) related party		112,000		40,000

Accrued rent (Note 8) – related parties						18,000		21,000
Accrued interest – (Note 9) related parties						36,000		17,000
Total	$	549,000	$	97,000	$	356,000	$	711,000

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

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

	December 31, 2016		June 30, 2016		September 30, 2017		June 30, 2017
Accrued salaries – related parties	$	2,647,000	$	2,647,000
Accrued payroll taxes – related parties		130,000		130,000
Accrued salaries - related parties						2,823,000		2,823,000
Accrued payroll taxes - related parties						130,000		130,000
Accrued employee bonuses						-		86,000
Withholding tax		85,000		57,000		85,000		105,000

Total	$	2,862,000	$	2,834,000	$	3,038,000	$	3,144,000

8.On December 29, 2010, the Company entered into employment agreements with its two executive officers, Leo Ehrlich, the Company’s Chief Executive Officer, and Dr. Krishna Menon, Chief Scientific Officer. Both agreements provide for a three-year term with each executive receiving an annual base salary of $350,000 per year commencing January 1, 2011, with an annual increase of 10% for each year commencing January 2012. The Board, at its discretion, may increase the base salary based upon relevant circumstances. On January 1, 2014 the Board approved the extension of these employment agreements for a one-year period with a 10% increase in salary from the calendar year 2013 annual salary of $423,500, to an annual salary of $465,850. Until new employment agreements are entered into, we will continue paying these officer’s salaries at this salary rate per annum.

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~~has co-signed the lease and subleases 200 square feet of space previously used by the Company and ~~pay~~pays the Company $900 per month.

As of ~~December 31, 2016,~~September 30, 2017, future minimum lease payments to Cummings Properties required under the non-cancelable operating lease are as follows (rounded to nearest thousand):

Year ending June 30,
2017		109,000
2018		217,000	$	163,000
2019		54,000		54,000

Total minimum payments	$	380,000	$	217,000

Rent expense, net of lease income, under this operating lease agreement was approximately ~~$51,000~~$52,000 and ~~$50,000,~~$51,000 for the three months ended ~~December 31,~~September 30, 2017 and 2016, respectively. Before September 2013, the Company paid rent to Kard Scientific for share of office space and ~~2015, respectively~~details are shown at Note 8 - Related Party Transactions below.

We lease equipment under a non-cancelable operating lease that expires in April, 2018. The future minimum rental commitment for our operating lease for the next twelve months is $6,000, as of September 30, 2017 and was ~~approximately $102,000 and $101,000 for the six months ended December 31, 2016 and 2015, respectively.~~disclosed under Prepaid expenses.

The Company has nototal contractual minimum commitments of approximately $4 million to contract research organizations as of ~~December 31, 2016. Services~~September 30, 2017. Expenses are ~~billed to Cellceutix~~recognized when services are performed by the ~~vendors.~~contract research organizations.

Dr. Menon, ~~one of~~ the Company’s principal ~~shareholders,~~shareholder, 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. At September 30, 2017 and June 30, 2017, rent payable to KARD ~~or pays rent to KARD.~~of approximately $18,000 and $21,000, respectively, were included in accrued expenses.

In September 2013, the Company signed a lease extension agreement with Cummings Properties for the ~~Company’s~~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~~The Company had taken over the space occupied by KARD. In addition, Innovative Medical Research Inc., (“Innovative Medical”) a company owned by ~~Leo~~Mr. Ehrlich and Dr. ~~Krishna~~ Menon, officers ~~and directors~~ of ~~Cellecutix,~~the Company, has co-signed the lease and rents approximately 200 square feet of office space, the space previously used by ~~Cellceutix~~the Company and pays ~~Cellceutix~~the Company $900 per month, the same amount ~~Cellceutix~~the Company previously paid KARD. Innovative Medical paid total rent of approximately $3,000, ~~and $6,000~~ to ~~Cellceutix~~The Company for both of the three months ~~and six months~~ ended ~~December 31,~~September 30, 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.~~

The Company previously engaged KARD to conduct specified pre-clinical studies. The Company did not have an exclusive arrangement with KARD. All work performed by KARD needed prior approval by the executive officers of the Company, and the Company retained all intellectual property resulting from the services by KARD. The Company now has its own research study capabilities and no longer uses KARD. ~~As of December 31, 2016~~At September 30, 2017 and June 30, ~~2016,~~2017, the accrued research and development expenses payable to KARD was approximately $1,486,000 and this amount was included in accounts payable.

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. 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 Class A 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~~(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~~this 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~~Options are valid for ten (10) years from the date of issuance.

~~As of December 31, 2016~~At September 30, 2017 and June 30, ~~2016,~~2017, approximately ~~$112,000~~$36,000 and ~~$40,000,~~$17,000, respectively, ~~was~~is the accrued as interest ~~expense~~payable on this note.

~~As of December 31, 2016~~At September 30, 2017 and June 30, ~~2016,~~2017, principal ~~balances~~balance of ~~the~~this demand note was approximately $2,022,000.

~~11.~~Note 10. Equity Incentive Plans, Stock-Based Compensation, Exercise of Options and Warrants Outstanding

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.

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).

On June 30, 2016, the Board of Directors adopted the ~~Cellceutix Corporation~~Company’s 2016 Equity Incentive Plan (the ~~"2016 Plan"~~“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~~Company’s Class A common stock may be issued under the 2016 Plan (subject to adjustment as described in the 2016 Plan); provided that (1) 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 (2) 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~~Company’s equity incentive plans:

The fair value of options granted for the ~~six~~three months ended ~~December 31,~~September 30, 2017 and 2016 ~~and 2015~~ was estimated on the date of grant using the Black Scholes model that uses assumptions noted in the following table.

	Six Months Ended
	December 31,		Three months ended September 30,
	2016	2015	2017			2016
Expected term (in years)	3 - 10	3		10		3-10
Expected stock price volatility	57.63% to 111.62%	56.52% to 65.76%		106.01	%	57.63%-111.62		%
Risk-free interest rate	0.71% to 1.73%	1.04% to 1.16%		2.15	%	0.71%-1.73		%
Expected dividend yield	0	0		-			-

The Company recognized approximately ~~$347,000~~$369,000 and ~~$432,000~~$344,000 of total stock-based compensation costs related to ~~stock and stock options~~equity grant awards for the three months ended ~~December 31,~~September 30, 2017 and 2016, ~~and 2015,~~ respectively. The ~~Company recognized approximately $690,000 and $530,000~~$369,000 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~~based compensation expense for the ~~six~~three months ended ~~December 31, 2016~~September 30, 2017 included approximately ~~$272,000~~$141,000 of stock options expense and ~~$418,000~~$228,000 of restricted stock ~~awards (see Note 12).~~awards.

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,September 1, 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. Arthur Bertolino, the President and Chief Medical Officer of the Company, 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~~Company’s Class A common stock at an exercise price of ~~$1.39~~$0.705 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~~date; (2) ~~completion~~shares of ~~both a Phase 2b psoriasis study and a Phase 2 oral mucositis study; (3)~~ the Company’s common stock ~~closes~~close above $3.00 per share (as may be adjusted for any stock splits or similar actions); ~~(4)~~(3) the commencement of trading of shares of the Company’s common stock on a national securities ~~exchange (e.g. Nasdaq~~exchange; or ~~the NYSE); or (5)~~(4) upon a ~~Change~~change in ~~Control (as defined in the employment agreement)~~control of the Company. The 1,066,667 shares were valued at approximately $752,000 and the 617,839 stock options valued at approximately $399,000. Both shares and options will be amortized over 2 years to September 1, 2019 unless the other vesting requirements are met sooner. At September 30, 2017, the Company ~~could not conclude~~determined that it was not probable that these ~~awards will fully~~accelerated vesting provisions would occur earlier than the scheduled vesting date and recorded approximately $48,000 of stock-based compensation expense for these equity grants, including approximately $17,000 of stock option expense and $31,000 for the stock awards.

On September 1, 2017, the Company agreed to grant to Ms. Jane Harness, the Vice President, Clinical Sciences and Portfolio Management of the Company under the 2016 Plan (i) 58,394 shares of restricted stock and (ii) a ten-year option to purchase 172,987 shares of the Company’s Class A common stock at an exercise price of $0.705 per share. Both shares and options shall vest ~~until~~upon the earliest to occur of the following: (1) one third upon the first anniversary of the effective date, one third upon the second anniversary of the effective date, ~~because such events listed above are outside~~and the ~~Company’s control.~~remaining one third upon the third anniversary of the effective date; or (2) upon a change in control of the Company. The ~~Company will evaluate the probability of these events occurring for each reporting period. The 1,066,667~~58,394 shares were valued at approximately ~~$1.5 million, which~~$41,000 and the 172,987 stock options valued at approximately $112,000. Both shares and options will be amortized over ~~two~~3 years to ~~June 27, 2018. The 617,839~~September 1, 2020 unless the other vesting requirements are met sooner. During the three months ended September 30, 2017, the Company recorded approximately $4,000 of stock-based compensation expense for these equity grants, including approximately $3,000 of stock option expense and $1,000 for the stock awards.

On September 1, 2017, the Company agreed to grant to Ms. Ponugoti, under the 2016 Plan, ten-year options ~~were valued at approximately $800,000 and will be exercisable for 10 years~~to purchase 5,000 shares of the Company’s common stock at an exercise price of ~~$1.39~~$0.705 per ~~share. They~~share, which shall vest upon the earliest to occur of the following: (1) one third upon the first anniversary of the effective date, one-third upon the second anniversary of the effective date, and the remaining one-third upon the third anniversary of the effective date; or (2) upon a change in control of the Company. The 5,000 stock options valued at approximately $3,000 and it will be amortized over 23 years to ~~June 27, 2018 or sooner if~~September 1, 2020 unless the ~~Company determines that it is probable that one of the events listed above will occur.~~other vesting requirements are met sooner. During the three months ~~and six months~~ ended ~~December 31, 2016,~~September 30, 2017, 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~~$100 of stock option expense for this option grant.

Purchase of Treasury Stock - cash paid to Federal and ~~$188,000~~State Taxing Authorities arising from the withholding of common shares from an officer’s vested restricted stock ~~awards.~~grant issuance and issuance of Treasury Stock and the reversal of outstanding stock subscription receivable

On September 1, 2017, 19,465 shares of the Company’s restricted stock vested to Ms. Harness according to Ms. Harness’s employment agreement. The ~~$578,000 of stock based~~total taxable compensation ~~expense~~to Ms. Harness for the ~~six months ended December 31, 2016 included~~19,465 vested shares was $14,000, which is priced at the closing stock price on September 1, 2017 at $0.705 a share.

The Company issued 12,409 common shares (net share issuance amount), which is approximately ~~$202,000~~64% of the total vested common share amount of 19,465 common shares due to be issued to Ms. Harness. The remaining 7,056 shares of common stock ~~option expense~~were withheld from Ms. Harness for the payment of payroll taxes to the Federal and ~~$376,000~~State taxing authorities and these shares withheld are being reported by the Company as treasury stock, at cost, on the Company’s accompanying balance sheets.

In addition, the Company reversed an outstanding subscription receivable of $26,000 for 60,000 shares of common stock ~~awards.~~and recorded this amount as the cost of treasury stock. There were 329,136 shares and 262,080 shares of treasury stock outstanding, purchased at a total cumulative cost of $251,000 and $220,000 at September 30, 2017 and June 30, 2017, respectively.

The ~~Company may award Dr. Arthur P. Bertolino an annual bonus~~following summarizes our restricted stock activity for our restricted stock issuances:

Scheduled vesting for outstanding restricted stock awards at September 30, 2017 is as follows:

As of September 30, 2017, there was $1.4 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 $0.9 million of compensation expected to be expensed over the ~~sole discretion of~~next twelve months, and the ~~Board of Directors of the Company. The Company may accelerate the amortization of the $1.1 million~~total unrecognized stock-based compensation expense ~~if there are conditions which will accelerate~~having a weighted average recognition period of 1.48 years.

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

On June 27, 2016, the Company and Dr. Bertolino entered into an executive employment agreement as ~~mentioned above. At December 31,~~our President and Chief Medical Officer of the Company, effective on June 27, 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~~the Company agreed to grant to Dr. Bertolino under the Company’s 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. See Note 10 for additional information concerning the ~~contingent acceleration of this stock-based compensation expense.~~restricted stock and stock options granted to Dr. Bertolino.

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~~services 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,~~September 30, 2016, the Company recorded approximately ~~$0 and~~ $4,000 of ~~total~~ stock option expense ~~respectively.~~for this option grant.

On September 1, 2016, the Company and ~~Jane~~Ms. Harness entered into an executive employment agreement as the Company’s VP, Clinical Sciences and ~~Project~~Portfolio 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 %)~~one-third upon the second anniversary of the effective date, and the remaining ~~one third (33 1/3 %)~~one-third 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~~Company, and (ii) 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 %)~~one-third 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,~~September 30, 2017 and 2016, the Company recorded approximately $25,000 and ~~$33,000~~$8,000 of ~~total~~ stock-based ~~compensation, respectively. The $25,000 of stock based~~ compensation expense for ~~the three months ended December 31, 2016~~these equity grants, respectively. The $25,000 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~~stock awards and the $8,000 included approximately ~~$24,000~~$6,000 of stock option expense and ~~$9,000 of~~$2,000 for the stock awards.

On September 15, 2016, the Company and ~~LaVonne~~Dr. 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 %)~~one-third 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 %)~~one-third 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~~Company, and (ii) 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 %)~~one-third 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~~188,262 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,~~September 30, 2017 and 2016, the Company recorded approximately ~~$25,000~~$0 and ~~$29,000~~$4,000 of ~~total~~ stock-based ~~compensation, respectively. The $25,000 of stock based~~ compensation expense for these equity grants, respectively. There was no stock-based compensation expense for Dr. Lang since she resigned on March 17, 2017 and the ~~three months ended December 31, 2016~~63,492 restricted shares and the 188,262 stock options were forfeited. The $4,000 included approximately ~~$18,000~~$3,000 of stock option expense and ~~$7,000 of stock awards. The $29,000 of stock based compensation expense~~$1,000 for the ~~six months ended December 31, 2016 included approximately $21,000 of stock option expense and $8,000 of~~ stock awards.

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.

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

~~$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.

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

~~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.~~

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.~~service rendered. The value of these 11,720 shares at $1.28 per share was approximately $15,000.

~~On July 10, 2015,~~During the ~~Company issued 7,028 shares of restricted Class A common shares to a consultant for services rendered. The shares~~three months ended September 30, 2017 and 2016, there were ~~granted and vested on July 10, 2015. The value of these 7,028 shares at $2.49 per share was approximately $17,500.~~no stock options exercised.

~~Issuances of Common~~ Stock ~~and Stock Options – Pursuant to Employment Agreements~~Warrants Outstanding

There were no warrants outstanding as of September 30, 2017 and December 31, 2016.

On September ~~1, 2016,~~6, 2017, the Company ~~and Jane Harness~~ entered into a common stock purchase agreement with Aspire Capital, which replaced the prior 2015 $30 million Aspire Capital stock purchase agreement and provides that, upon the terms and subject to the conditions and limitations set forth therein, Aspire Capital is committed to purchase up to an ~~executive employment agreement as~~aggregate of $30.0 million of the Company’s ~~VP, Clinical Sciences and Project Management, effective on September 1, 2016. Pursuant to~~common stock over the ~~employment agreement,~~36-month term of the Stock Purchase Agreement. The Company issued ~~58,394~~300,000 shares of ~~restricted stock and options to purchase 172,987 shares of~~its Class A 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~~Aspire Capital as a commitment fee. The commitment fee of approximately $215,000 is amortized pro-rata as the ~~Company’s VP, Regulatory Affairs, effective~~funding is received. The amortized amount of $3,000 was recorded to additional paid-in capital for the three months ended September 30, 2017. The unamortized portion is carried on the balance sheet as deferred offering costs and was $212,000 at September ~~15, 2016. Pursuant to~~30, 2017. The Company registered the ~~employment agreement,~~resale of all shares that Aspire Capital will purchase under this common stock purchase agreement. To the ~~Company issued 63,492~~extent Aspire Capital purchases shares under this Purchase Agreement and subsequently sells those shares purchased, the other holders of shares of ~~restricted~~our Class A common stock ~~and options to purchase 188,263~~may experience dilution, which may be substantial. In addition, the sale of a substantial number of shares of our Class A common stock by Aspire Capital, or anticipation of such sales, could make it more difficult for us to ~~Dr. Lang under~~sell equity or equity-related securities in the ~~Cellceutix Corporation 2016 Equity Incentive Plan. See Note 11 for additional information concerning the restricted stock~~future at a time and ~~stock options granted~~price that we might otherwise wish to ~~Dr. Lang.~~effect sales.

~~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:~~During the period from September 6, 2017 to September 30, 2017, the Company generated proceeds of approximately $0.4 million under the new 2017 agreement with Aspire Capital from the sale of approximately 0.6 million shares of its common stock. As of September 30, 2017, the available balance under the new equity line agreement was approximately $29.6 million.

AsOn March 30, 2015, the Company entered into its prior common stock 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 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$30.0 million of the ~~compensation expected~~Company’s common stock over the 36-month term of the Purchase Agreement. In consideration for entering into this stock purchase agreement, the Company issued to ~~be expensed in~~Aspire Capital 160,000 shares of its Class A common stock as a commitment fee. The commitment fee of approximately $499,000 was amortized as the ~~next twelve~~funding is received. The unamortized portion of deferred offering costs from this stock purchase agreement of $227,000, was recorded to additional paid-in capital during the three months ~~and~~ended September 30, 2017, since the ~~total unrecognized compensation~~Company entered into a new $30 million common stock purchase agreement with Aspire Capital, to replace this prior $30 million 2015 Aspire Capital agreement, on September 6, 2017. During the period from July 1, 2017 to September 5, 2017, the Company has ~~a weighted average recognition period~~generated proceeds of ~~1.62 years.~~approximately $2.1 million under this 2015 agreement with Aspire Capital, from the sale of approximately 2.6 million shares of its common stock.

From ~~January 4,~~October 1, 2017 to ~~January 20,~~November 6, 2017, the Company has generated additional proceeds of approximately ~~$455,000~~$0.9 million under the 2017 Common Stock Purchase Agreement with Aspire Capital from the sale ~~400,000~~of approximately 1.4 million shares of its common stock.

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.~~statements in Item 1 of this Part I. 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.

~~Cellceutix~~Innovation Pharmaceuticals Inc. is a clinical stage biopharmaceutical company developing innovative therapies with dermatology, oncology, ~~dermatology~~anti-inflammatory and ~~antimicrobial~~antibiotic applications. ~~Cellceutix~~The Company 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.~~defensin-mimetics; and Kevetrin (thioureidobutyronitrile), our lead anti-cancer compound.

Effective June 5, 2017, the Company changed its name from Cellceutix Corporation to Innovation Pharmaceuticals Inc.

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,~~trials: Prurisol for the treatment of psoriasis, Kevetrin for the treatment of ovarian cancer, and Brilacidin for treatments of skin infections, ulcerative proctitis (Inflammatory Bowel Disease) and prevention of oral mucositis complicating chemoradiation treatment for ~~cancer, and ulcerative proctitis.~~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.

Compound	Target/Indication	Clinical Status
Prurisol	Psoriasis	Phase 2b
Brilacidin	*ABSSSI	Phase 2 (Completed)
	Oral Mucositis	Phase 2 (Fast Track)
	Inflammatory Bowel Disease	Phase 2 (Proof of Concept) Study (Completed)
Kevetrin	Ovarian Cancer	Phase 2

~~At this time the Company is focusing its research~~Research and development efforts are concentrated on ~~Kevetrin,~~ Prurisol, Brilacidin, and Kevetrin:

	·	Prurisol - Prurisol, our lead anti-psoriasis drug candidate, is a small molecule compound acting on the principles of immune modulation and PRINS (Psoriasis susceptibility-related RNA Gene Induced by Stress) reduction that has been found to be effective against psoriasis in animal models, both in induced psoriasis as well as a xenograft model with human psoriatic tissue. It is currently in the Phase 2 clinical development study below:

		Active Clinical Trials: Phase 2b, Multi-center, Randomized, Double Blind, Parallel Group, Placebo-controlled Trial to Study the Efficacy and Safety of Two Oral Doses of Prurisol Administered Twice Daily for Twelve Weeks to Subjects with Moderate to Severe Chronic Plaque Psoriasis

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	·	Brilacidin - This lead drug candidate is in a new immunomodulatory classwith anti-inflammatory and antibiotic propertiescalled defensin-mimetics. Modeled after Host Defense Proteins (HDPs), the “front-line” of defense in the immune system, it is a small, non-peptidic, synthetic molecule that kills pathogens swiftly and thoroughly. Just as importantly, Brilacidin also functions in a robust immunomodulatory capacity, lessening inflammation and promoting healing. In June 2017, the Company completed an open-label Phase 2 Proof-of-Concept (PoC) trial of Brilacidin for the treatment by daily enema of ulcerative proctitis (UP)/ ulcerative proctosigmoiditis (UPS), two types of Inflammatory Bowel Diseases (IBD). Study results showed significant patient benefit and low systemic absorption. The Company is also studying Brilacidin’s effect on Oral Mucositis (under Fast Track designation) and, in August 2017, announced it had completed recruitment of subjects to the Phase 2 study below:
	·	Brilacidin - This lead drug candidate is in a new immunomodulatory class with anti-inflammatory and antibiotic properties called defensin-mimetics. Modeled after Host Defense Proteins (HDPs), the “front-line” of defense in the immune system, it is a small, non-peptidic, synthetic molecule that kills pathogens swiftly and thoroughly. Just as importantly, Brilacidin also functions in a robust immunomodulatory capacity, lessening inflammation and promoting healing. In June 2017, the Company completed an open-label Phase 2 Proof-of-Concept (PoC) trial of Brilacidin for the treatment by daily enema of ulcerative proctitis (UP)/ ulcerative proctosigmoiditis (UPS), two types of Inflammatory Bowel Diseases (IBD). Study results showed significant patient benefit and low systemic absorption. The Company is also studying Brilacidin’s effect on Oral Mucositis (under Fast Track designation) and, in August 2017, announced it had completed recruitment of subjects to the Phase 2 study below:


		Active Clinical Trials: 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
		Active Clinical Trials: 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


	·	Kevetrin - Our lead anti-cancer compound, is a small molecule compound that modulates p53, a protein involved in controlling cell mutations. In the majority of all cancers, regardless of origin, the p53 pathway is mutated, compromising its anti-tumor functions. In particular, most epithelial ovarian cancer patients have high-grade serous cancer, characterized by near universal p53 gene abnormalities. Pre-clinical research has demonstrated Kevetrin’s unique mechanism of action to induce apoptosis, slow tumor progression and reduce tumor volume in many types of cancers, including lung, breast, colon, prostate, squamous cell carcinoma and a leukemia tumor model. The FDA has awarded Orphan Drug designations for Kevetrin for ovarian cancer, retinoblastoma and pancreatic cancer as well as Rare Pediatric Disease designation for Retinoblastoma. It is currently in the Phase 2 clinical development study below:
	·	Kevetrin - Our lead anti-cancer compound, is a small molecule compound that modulates p53, a protein involved in controlling cell mutations. In the majority of all cancers, regardless of origin, the p53 pathway is mutated, compromising its anti-tumor functions. In particular, most epithelial ovarian cancer patients have high-grade serous cancer, characterized by near universal p53 gene abnormalities. Pre-clinical research has demonstrated Kevetrin’s unique mechanism of action to induce apoptosis, slow tumor progression and reduce tumor volume in many types of cancers, including lung, breast, colon, prostate, squamous cell carcinoma and a leukemia tumor model. The FDA has awarded Orphan Drug designations for Kevetrin for ovarian cancer, retinoblastoma and pancreatic cancer as well as Rare Pediatric Disease designation for Retinoblastoma. It is currently in the Phase 2 clinical development study below:


		Active Clinical Trials: A Phase 2 study of Kevetrin (thioureidobutyronitrile) in Subjects with Platinum-Resistant/Refractory Ovarian Cancer
		Active Clinical Trials: A Phase 2 study of Kevetrin (thioureidobutyronitrile) in Subjects with Platinum-Resistant/Refractory Ovarian Cancer

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 ~~lesser extent~~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.

The Company’s common stock traded under the stock symbol “CTIX” on ~~our other anti-bacterial~~the OTCQB until the market close of June 8, 2017. As of June 9, 2017, trading on the OTCQB began under the new Innovation Pharmaceuticals name and ~~anti-fungal compounds.~~ ticker symbol “IPIX”.

Set forth below is an overview of our research and development efforts on Prurisol, Kevetrin, ~~Prurisol~~ and Brilacidin ~~for the six months ended December 31, 2016~~during fiscal 2018 and through the date of this Quarterly Report on Form ~~10-Q:~~10-Q. We have entered into multiple non-disclosure agreements with large pharmaceutical companies that enable us to continue ongoing discussions regarding potential partnering should the below trial results support such a relationship.

The Company has commenced a randomized, double-blind, parallel-group, placebo-controlled Phase 2b trial of Prurisol for subjects with moderate to severe plaque psoriasis. The treatment group arms are Prurisol 300mg, Placebo, Prurisol 400mg (Ratio 3:3:1) with a treatment duration of twelve weeks.

We have currently completed enrollment of all subjects (up to 199). Subject recruitment was slower than projected due to competitive trials. In response, we added additional investigator sites. We expect to complete the trial by calendar year end 2017. Our expenditures on Prurisol were approximately $1.8 million and $0.4 million during the quarter ended September 30, 2017 and 2016, respectively.

We expect expenditures on Prurisol to increase in future reporting periods, as we complete the study.

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 forcompany has commenced 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~~the trial focuses on confirming the modulation by Kevetrin of p53 pathways in tumors, as well as monitoring the 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 Phase 1 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~~the Company will be successful in completing development of an oral ~~formulation of Kevetrin.~~formulation. Toxicology studies for the oral formulation of Kevetrin began January 2017.

~~Cellceutix’s~~Our expenditures on Kevetrin were approximately ~~$0.2~~$0.1 million and ~~$0.3~~$0.06 million during the ~~three months~~quarter ended September 30, 2017 and ~~six months ended December 31,~~ 2016, respectively.

~~Prurisol~~Topical Brilacidin Clinical Studies (Trials). 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~~One 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~~as a double-blind Phase 2 clinical trial of Brilacidin-OM for the treatment of oral mucositis (OM), and another was recently completed as an open-label Phase 2 Proof-of-Concept ~~(P-o-C)~~(PoC) trial of Brilacidin for the treatment of ulcerative proctitis ~~(UP) or ulcerative proctosigmoiditis (UPS)~~/proctosigmoiditis (UP/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),~~

We see significant opportunities in treating IBD with ~~progressive dose escalation by cohort—50 mg, 100 mg,~~Brilacidin. Our development programs depending on available financial resources include new formulations (oral and ~~200 mg, respectively. Treatment~~foam type) 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,potential associated toxicology studies and clinical studies 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.~~ defined.

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~~

In February 2016, the ~~second of three cohorts have been recruited~~Company submitted a Special Protocol Assessment (SPA) request, along with a final protocol, to the ~~study, with the cohort’s completion anticipated~~FDA, for ~~late February 2017.~~

~~Additional reporting of results from the~~a Phase ~~2 P-o-C~~3 clinical trial of ~~Brilacidin-UP/UPS~~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 comments and considerations from the FDA 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 approximate $30 million costs required for this study which would result in significant dilution to our shareholders. Our strategy for now 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~~to achieve success with other trials and attract partnering opportunities with significant down-payments and milestone payments which can fund these trials.

Our expenditures on Brilacidin were approximately ~~$0.1~~$0.6 million and ~~$0.8~~$0.7 million during the ~~three months~~quarter ended September 30, 2017 and ~~six months ended December 31,~~ 2016, respectively.

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~~the Company 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.

~~Management's~~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~~“Critical Accounting Policies and ~~Estimates"~~Estimates” in our Annual Report on Form 10-K for the year ended June 30, ~~2016.~~2017. 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.~~2017.

~~See~~Please 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.

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 12twelve months and beyond, ~~management~~we will ~~seek~~need additional working capital to meet ~~the Company’s~~our anticipated clinical trial obligations and ~~Company overhead.~~

~~For the three months ended December 31, 2016 and 2015~~other working capital requirements.

We generated no revenue and incurred operating expenses of ~~$3.3~~$4.5 million and ~~$3.3~~$3.0 million for the three months ended ~~December 31,~~September 30, 2017 and 2016, ~~and 2015,~~ respectively.

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,~~September 30, 2017 and 2016, ~~and 2015,~~ respectively (rounded to nearest thousand):

Research and development expenses for proprietary programs increased during the three months ended ~~December 31, 2016,~~September 30, 2017 primarily due to higher spending on our ~~Kevetrin~~Brilacidin program and Prurisol ~~program offset by the final settlement of disputed accounts payable related to Brilacidin program of approximately $600,000.~~program.

~~Officers'~~Officers’ payroll and payroll tax expenses related to R&D ~~department~~Department decreased during the three months ended September 30, 2017 primarily related to the inclusion of 4 more days of payroll in 2016, which was paid to our President and Chief Medical Officer as he joined our Company on June 27, 2016.

Employees payroll and payroll tax expenses increased during the three months ended ~~December 31, 2016 primarily~~September 30, 2017 largely related to the hiring of our ~~President and Chief Medical Officer~~Associate Director, Clinical Sciences, who joined ~~us on June 27, 2016.~~the Company in February 2017.

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

~~Stock-based~~Stock- Based Compensation - Officers compensation ~~– officers~~ increased during the three months ended ~~December 31, 2016~~September 30, 2017 primarily related to the stock-based compensation given to our new President and Chief Medical Officer ~~who joined us~~ on ~~June 27, 2016.~~September 1, 2017.

~~Stock-based compensation- employee~~Stock- Based Compensation- Employee compensation increased during the three months ended ~~December 31, 2016~~September 30, 2017 primarily related to the stock-based compensation given to our ~~new VP Regulatory Affairs and our~~Senior VP, Clinical ~~Services~~Sciences and Project Management ~~who joined us in September, 2016.~~and our Associate Director, Clinical Sciences.

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~~Stock- Based Compensation- Consultant compensation decreased during the three months ended ~~December 31, 2016~~September 30, 2017 due to ~~less amortization expenses on those patent cost being written off at last~~granting fewer stock awards to consultants in the first quarter of fiscal ~~year.~~2018.

Our research and development expenses include costs related to preclinical and clinical trials, outsourced services and consulting, ~~officers'~~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 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,~~September 30, 2017 and 2016, ~~and 2015,~~ respectively (rounded to nearest thousand):

	Three months ended										For the three months ended				Change
	December 31				2016 vs. 2015						September 30,				2017 vs. 2016
	2016		2015		$			%			2017		2016		$			%

Insurance and health expense	$	121,000	$	128,000		(7,000	)		(5	)%	$	127,000	$	136,000		(9,000	)		-7	%
Patent expenses												-		2,000		(2,000	)		-100	%
Rent and utility expense		69,000		64,000		5,000			8	%		62,000		62,000		-			0	%
Other G&A		154,000		160,000		(6,000	)		(4	)%		108,000		162,000		(54,000	)		-33	%
Total	$	344,000	$	352,000		(8,000	)		(2	)%	$	297,000	$	362,000		(65,000	)		-18	%

~~Table of Contents~~

General and administrative expenses decreased during the three months ended September 30, 2017 primarily related to decreases in promotion, advertising and office expenses.

~~Officers' payroll~~Officers’ Payroll and ~~payroll tax expenses~~Payroll Tax Expenses

Below is a summary of our ~~Officers'~~Officers’ payroll and payroll tax expenses for the three months ended ~~December 31,~~September 30, 2017 and 2016, ~~and 2015,~~ respectively (rounded to nearest thousand):

There was no change in ~~Officers'~~Officers’ payroll and payroll tax expenses for the Company during the three months ended ~~December 31, 2016~~September 30, 2017 and ~~2015.~~2016. 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.~~Dr. Menon. The Company recorded 90% of annual payroll paid to ~~Mr.~~Dr. Menon and ~~his~~the related payroll tax expenses under Research and Development Expense.

Below is a summary of our Professional fees for the three months ended ~~December 31,~~September 30, 2017 and 2016, ~~and 2015,~~ respectively (rounded to nearest thousand):

Professional fees ~~decreased~~increased during the three months ended ~~December 31, 2016~~September 30, 2017 primarily related to ~~decrease~~increase 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).~~legal and accounting fees.

Below is a summary of our other income (expense) for the three months ended ~~December 31,~~September 30, 2017 and 2016, ~~and 2015,~~ respectively (rounded to nearest thousand):

	Three months ended											Three months ended						Change
	December 31,						2016 vs. 2015					September 30,						2017 vs. 2016
	2016			2015			$		%			2017			2016			$		%

Interest Income	$	1,000		$	1,000			-		-		$	1,000		$	1,000			-		-
Interest Expenses		(50,000	)		(50,000	)		-		-	%		(51,000	)		(51,000	)		-		-
*Other Income (Expense), net*	$	(49,000	)	$	(49,000	)		-		-	%	$	(50,000	)	$	(50,000	)		-		-

There was no change in Interest Income received from banks and interest expenses paid on the note payable – related party (see ~~note 10 in~~Note 9 to the ~~accompanying Notes~~notes to ~~Condensed Financial Statements)~~the condensed financial statements).

~~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.~~

~~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.~~

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.

~~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):~~

~~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.

~~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).

~~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).~~

We incurred net losses of ~~$6.4~~$4.5 million and ~~$5.9~~$3.0 million for the ~~six~~three months ended ~~December 31,~~September 30, 2017 and 2016, ~~and 2015,~~ respectively because of the ~~above~~above-mentioned factors.

As of ~~December 31, 2016,~~September 30, 2017, we had approximately ~~$3.9~~$2.9 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~~$4.1 million of cash as of June 30, ~~2016.~~2017. We anticipate that future budget expenditures will be approximately ~~$19~~$15 million ~~over~~for the next 12twelve months, including approximately ~~$15~~$10 million for clinical ~~trials.~~activities, supportive research, and drug product development.

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,~~2018 in order to meet our working capital ~~requirements for our planned clinical trials.~~requirements. 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.

On September 6, 2017, the Company entered into a $30 million common stock purchase agreement with Aspire Capital which replaced the prior $30 million Aspire Capital stock purchase agreement and 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. During the period from September 6, 2017 to September 30, 2017, the Company has generated proceeds of approximately $0.4 million under this agreement with Aspire Capital from the sale of approximately 0.6 million shares of its common stock. As of September 30, 2017, the available balance is approximately $29.6 million.

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"~~“Risk Factors” in Part I, Item 1A and elsewhere in our Annual Report on Form 10-K we filed with the SEC on September 11, 2017 and in other ~~reports we file with the SEC.~~reports.

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 from others, it ~~may~~will 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 the more costly Phase 2 clinical trials and potential future Phase 3 clinical trials on our wholly-owned development programs, as these ~~programs~~clinical trials progress into a later stage of 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 liquidity events could prevent us from successfully executing our current operating plan.

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 the Form S-3 with the ~~Securities and Exchange Commission a prospectus supplement, dated March 31, 2015,~~SEC on September 11, 2017, which included registering ~~up to~~the shares underlying the 2017 $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.~~stock purchase agreement.

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.

The following table provides information regarding our cash position, cash flows and capital expenditures for the ~~six~~three months ended ~~December 31,~~September 30, 2017 and 2016 ~~and 2015~~ (rounded to nearest thousand):

	Six Months Ended December 31,						% Change Increase/			Three Months Ended September 30,						% Change Increase/
	2016			2015			(decrease)			2017			2016			(Decrease)

Net cash used in operating activities	$	(5,250,000	)	$	(4,640,000	)		13	%	$	(3,689,000	)	$	(2,608,000	)		41	%
Net cash used in investing activities		(117,000	)		(217,000	)		(46	)%		(22,000	)		(29,000	)		(24	)%
Net cash provided by financing activities		2,916,000			2,630,000			11	%		2,503,000			1,883,000			33	%
Net (decrease) increase in cash	$	(2,451,000	)	$	(2,227,000	)		10	%
Net decrease in cash										$	(1,208,000	)	$	(754,000	)		60	%

The increase in net cash used in operating activities of ~~$0.6~~$1.1 million versus the prior-year ~~six-month~~three-month period was mainly due to ~~increase~~increases in our losses from operations of ~~$0.5 million.~~$1.5 million, largely attributable to our increase spending for research and development expenses.

Our operating activities used cash of ~~$5.3~~$3.7 million and ~~$4.6~~$2.6 million for the ~~six~~three months ended ~~December 31,~~September 30, 2017 and 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, amortization and depreciation, and changes in our working capital accounts.

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

During the ~~six~~three months ended ~~December 31,~~September 30, 2017, our investing activities used cash of $0.02 million, consisting of spending on patent costs of $0.02 million. During the three months ended September 30, 2016, our investing activities used cash of ~~$0.1~~$0.03 million ~~including the purchases~~consisting 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.spending on patent costs.

The increase in net cash provided by financing activities of ~~$0.3~~approximately $0.6 million versus the prior-year ~~six-month~~three-month period was due to an increase in sales of shares of our common stock to ~~Aspire.~~Aspire Capital.

During the ~~six~~three months ended ~~December 31, 2016,~~September 30, 2017, we raised approximately ~~$2.9~~$2.5 million in net cash proceeds ~~including $2.9 million in net proceeds~~ from the sale of ~~2.4~~3.2 million shares of our common stock to ~~Aspire.~~

Aspire Capital. During the ~~six~~three months ended ~~December 31, 2015,~~September 30, 2016, we raised approximately ~~$2.6~~$1.9 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.~~

The Company plans to incur total expenses of approximately ~~$19~~$15 million ~~over~~for the next twelve months, including approximately ~~$15~~$10 million for clinical ~~trials.~~activities, supportive research, and drug product development. 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 a 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~~or staffing costs without accessing ~~(as per current management’s budgets) the remaining~~its financing available with Aspire Capital of approximately ~~$19~~$29.6 million as of September 30, 2017. Management has put in place this new 2017 equity purchase agreement with Aspire Capital to fund its future clinical trial expenses and overhead expenses over the next twelve months. This purchase agreement 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. Management believes, as of the date of this filing ~~or accessing additional sources~~that the funding amount from Aspire Capital will be available as needed by the Company and that adverse market conditions in the Company’s per share price of its common stock and its trading volume will not prevent the Company from funding its working capital ~~under~~requirements for the ~~Company’s effective shelf registration statement.~~next twelve months from the date of this filing.

In the event that we are unable to generate sufficient cash from our Aspire Capital purchase agreement or raise additional funds from others, we will be required to delay, reduce or severely curtail our operations or otherwise impede our on-going business efforts, which could have a material adverse effect on our future business, operating results, financial condition and long-term prospects. The Company expects to seek to obtain additional funding through business development activities (i.e. licensing and partnerships) and future equity issuances. There can be no assurance as to the availability or terms upon which such financing and capital might be available to us.

Below is a table that presents our contractual obligations and commercial commitments as of ~~December 31, 2016~~September 30, 2017 (rounded to the nearest ~~thousand)~~million):

From October 1, 2017 to November 6, 2017, the Company has generated additional proceeds of approximately $0.9 million under the Common Stock Purchase Agreement with Aspire Capital from the sale of approximately 1.4 million shares of its common stock.

~~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.~~

The Company does not have any off-balance sheet arrangements, as defined in Item ~~303(a)~~304(a)(4)(ii) of Regulation S-K.

The Company maintains an investment portfolio in accordance with our investment policy. The primary objectives of our investment policy is to preserve principal, maintain proper liquidity to meet operating needs and maximize yields. The Company holds investments that are subject to credit risk, but not interest rate risks. The Company does not own derivative financial instruments in our investment portfolio. Accordingly, the Company does not believe there is any material market risk exposure that would require disclosure under this item.

We have established disclosure controls and procedures to ensure that the information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and that such information is accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

As of ~~December 31, 2016,~~September 30, 2017, management, with the participation of our principal executive officer and principal financial officer, carried out an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act). Based on such evaluation, as of ~~December 31, 2016,~~September 30, 2017, the principal executive officer and principal financial officer of the Company have concluded that the Company’s disclosure controls and procedures are effective.

There have been no changes in our internal control over financial reporting during the quarter ended ~~December 31, 2016,~~September 30, 2017, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.

Our operations and financial results are subject to various risks and uncertainties, including those described in Part I, Item 1A, ~~"Risk Factors"~~“Risk Factors” in our Annual Report on Form 10-K for the year ended June 30, ~~2016,~~2017, which could adversely affect our business, financial condition, results of operations, cash flows, and the trading price of our common and capital stock. There have been no material changes to our risk factors since our Annual Report on Form 10-K for the year ended June 30, ~~2016.~~2017.

Large Accelerated Filer	¨ o	Accelerated Filer	x
Non-Accelerated Filer	¨o	Smaller reporting company	¨ o
(Do not check if a smaller reporting company)		Emerging growth company	o

Class of Securities		Shares Outstanding
Common Stock Class A, $0.0001 par value	~~126,408,756~~	140,126,830
Common Stock Class B, $0.0001 par value		None

PART I – FINANCIAL INFORMATION

Item 1.	Financial Statements	4
	Condensed Balance Sheets as of September 30, 2017 (unaudited) and June 30, 2017 (audited)	4
	Condensed Statements of Operations (unaudited) for the three months ended September 30, 2017 and 2016	5
	Condensed Statements of Cash Flows (unaudited) for the three months ended September 30, 2017 and 2016	6
	Notes to Condensed Financial Statements (unaudited)	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	29
Item 4.	Controls and Procedures	29

PART II – OTHER INFORMATION

Item 1.	~~Financial Statements (unaudited)~~Legal Proceedings		4
	~~Condensed Balance Sheets as of December 31, 2016 (unaudited) and June 30, 2016 (audited)~~		4
	~~Condensed Statements of Operations (unaudited) for the three months and six months ended December 31, 2016 and 2015~~		5
	~~Condensed Statements of Cash Flows (unaudited) for the six months ended December 31, 2016 and 2015~~		6
	~~Notes to Condensed Financial Statements (unaudited)~~		7
~~Item 2.~~	~~Management’s Discussion and Analysis of Financial Condition and Results of Operations~~		20
~~Item 3.~~	~~Quantitative and Qualitative Disclosures About Market Risk~~		29
~~Item 4.~~	~~Controls and Procedures~~		30
		30
~~PART II – OTHER INFORMATION~~

~~Item 1.~~	~~Legal Proceedings~~	31
Item 1A	Risk Factors	3130
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	3130
Item 3.	Defaults Upon Senior Securities	3130
Item 4.	Mine Safety Disclosures	3130
Item 5.	Other Information	3130
Item 6.	Exhibits	3231

SIGNATURES		3332

	i.	The date at which a commitment for performance by the counterparty to earn the equity instruments is reached (a performance commitment); and
	ii.	The date at which the counterparty’s performance is complete.

	Number of Options		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (Years)		Aggregate Intrinsic Value
Outstanding at June 30, 2016		40,444,728	$	0.22		4.58	$	48,185,911

Granted		368,779		1.31		9.55		-
Exercised		-		-		-		-
Forfeited/expired		-		-		-		-
Outstanding at December 31, 2016		40,813,507	$	0.23		4.13	$	39,336,598

Exercisable at December 31, 2016		39,769,611	$	0.20		4.00	$	39,334,409

	Number of Options			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (Years)		Aggregate Intrinsic Value
Outstanding at June 30, 2017		40,655,245		$	0.22		3.61	$	31,662,730

Granted		795,826			0.71				-
Forfeited/expired		(32,500	)		0.59				-
Outstanding at September 30, 2017		41,418,571		$	0.23		3.49	$	22,864,396

Exercisable at September 30, 2017		40,168,501		$	0.21		3.30	$	22,844,500

				Weighted
				Average
				Grant
	Number of			Date Fair
	Shares			Value

Total awards outstanding at June 30, 2017		601,728		$	1.39
Total shares granted		1,125,061			0.71
Total shares vested		(19,465	)		1.37
Total shares forfeited		-
Total unvested shares outstanding at September 30, 2017		1,707,324		$	0.94

	Year Ending June 30,
	2018		2019		2020		2021		Total

Scheduled vesting		1,070,000		575,597		42,263		19,464		1,707,324

	Warrants		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (Years)		Aggregate Intrinsic Value

Outstanding at June 30, 2016		25,000	$	1.79		0.56	$	-

Extended		-		-		-
Granted		-		-		-
Exercised		-		-		-
Expired		-		-		-
Outstanding at December 31, 2016		25,000	$	1.79		0.06	$	-

Exercisable at December 31, 2016		25,000	$	1.79		0.06	$	-

	·	Oral Mucositis (OM): Study - In the ongoing randomized, double-blind Phase 2 study of Brilacidin for the prevention and control of Oral Mucositis (OM) in patients receiving chemoradiation for treatment of head and neck cancer, interim analysis of patients who received at least 55 Gy cumulative units of radiation showed that Brilacidin markedly reduced the rate of Severe OM (WHOGrade ≥ 3): Active Arm (Brilacidin): 2 of 9 patients (22.2 percent); Control Arm (Placebo): 7 of 10 patients (70 percent). Completion of the trial is expected by late 2017.

	·	UP/UPS: Study - This recently completed Phase 2a trial comprises three sequential cohorts, with progressive dose escalation by cohort—Cohort A (6 patients) -50 mg, Cohort B (6 patients) -100 mg, and Cohort C (5 patients) - 200 mg, respectively. Treatment with Brilacidin by daily enema administration was performed for 42 days. The Primary Efficacy Endpoint of Clinical Remission (accounting for Stool Frequency, Rectal Bleeding and Endoscopy Findings subscores) was met by the majority of patients across the cohorts. Brilacidin was generally well-tolerated. Patient Quality of Life (as assessed by the Short Inflammatory Bowel Disease Questionnaire or “SIBDQ”) showed notable improvements. Limited systemic exposure to Brilacidin was demonstrated as measured by plasma Brilacidin concentrations. Further analyses of data are ongoing.

	For the three months ended
	December 31,				2016 vs. 2015
	2016		2015		$			%

Clinical studies and development research	$	1,662,000	$	1,615,000		47,000			3	%
Officers' payroll and payroll tax expenses related to R&D department		218,000		106,000		112,000			106	%
Employees payroll and payroll tax expenses related to R&D department		354,000		299,000		55,000			18	%
Stock-based compensation - officers		289,000		-		289,000			-
Stock-based compensation - employee		50,000		-		50,000			-
Stock-based compensation - consultants		8,000		-		8,000			-
Depreciation and amortization Expenses		102,000		110,000		(8,000	)		(7	)%

Total	$	2,683,000	$	2,130,000		553,000			26	%

	Three months ended				Change
	September 30				2017 vs. 2016
	2017		2016		$		%

Officers’ payroll and payroll tax expenses	$	130,000	$	130,000		-		-

	Payments Due by Period
	Total		Less than One Year		2 Year		3-5 Years		More than 5 Years
Lease obligations (1)	$	380,000	$	109,000	$	217,000	$	54,000	$	-

Total (2)	$	380,000	$	109,000	$	217,000	$	54,000	$	-

(1)	The Company has contractual minimum commitments to Contract Research Organizations as of September 30, 2017.

(2)	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. The Company will receive $900 per month from the sublease of 200 square feet of space to Innovative Medical Research Inc., a company owned by Leo Ehrlich and Dr. Krishna Menon, officers ~~and directors~~ of our Company, which is not included in the table above.

Exhibit No.	Title	Method of Filing

31.1	President of Research Certifications required under Section 302 of the Sarbanes Oxley Act of 2002	Filed herewith

31.2	Chief Executive Officer and Chief Financial Officer Certifications required under Section 302 of the Sarbanes Oxley Act of 2002	Filed herewith

32.1	President of Research Certifications required under Section 906 of the Sarbanes Oxley Act of 2002	Furnished herewith

32.2	Chief Executive Officer and Chief Financial Officer Certifications required under Section 906 of the Sarbanes Oxley Act of 2002	Furnished herewith

101	The following materials from the Company’s Quarterly Report on Form 10-Q for the three months ~~and six months~~ ended ~~December 31, 2016~~September 30, 2017 formatted in Extensible Business Reporting Language (XBRL): (i) the Condensed Statements of Income, (ii) the Condensed Statements of Comprehensive Income, (iii) the Condensed Balance Sheets, (iv) the Condensed Statements of Cash Flows, and (v) related notes	Filed herewith

	INNOVATION PHARMACEUTICALS INC.

Dated: November 8, 2017	By:	/s/ Leo Ehrlich
		Leo Ehrlich
		Chief Executive Officer and Chief Financial Officer
	(Principal Executive, Accounting and Financial Officer)

	By:	/s/ Krishna Menon
		Krishna Menon
		President of Research

	~~Dated: February 9, 2017~~