10-Q

U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One) 

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

For the quarterly period ended: June 30, 2015 

OR 

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

For the transition period from ______________ to ______________ 

Commission File Number 333-170781

Citius Pharmaceuticals, Inc.

(Exact name of registrant as specified in its charter)

Nevada	27-3425913
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)

63 Great Road, Maynard, MA 01754

(Address of principal executive offices and zip code) 

(978) 938-0338

(Registrant's telephone number, including area code) 

________________________________________________________________________

(Former name, former address and former fiscal year, if changed since last report) 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to filed such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ¨ No x

Explanatory Note: Citius Pharmaceuticals, Inc. is not subject to the filing requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act") and files reports with the Securities and Exchange Commission on a voluntary basis. Citius Pharmaceuticals, Inc. has filed all Exchange Act reports for the preceding 12 months. 

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 (Section 232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files). Yes ¨ No x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. 

Large accelerated filer	¨	Accelerated filer	¨
Non-accelerated filer	¨	Smaller reporting company	x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

As of August 7, 2015, there were 33,767,877 shares of common stock, $0.001 par value, of the registrant issued and outstanding.

Citius Pharmaceuticals, Inc.

FORM 10-Q

TABLE OF CONTENTS

June 30, 2015

		Page
PART I.	FINANCIAL INFORMATION:
Item 1.	Financial Statements (Unaudited)	4
	Condensed Consolidated Balance Sheets at June 30, 2015 and September 30, 2014		4
	Condensed Consolidated Statements of Operations for the Three and Nine Months Ended June 30, 2015 and 2014		5
	Condensed Consolidated Statement of Changes in Stockholders' Deficit for the Nine Months Ended June 30, 2015		6
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended June 30, 2015 and 2014		7
	Notes to Condensed Consolidated Financial Statements		8
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations		16
Item 3.	Quantitative and Qualitative Disclosures about Market Risk		21
Item 4.	Controls and Procedures		21
PART II.	OTHER INFORMATION:
Item 1.	Legal Proceedings		23
Item 1A.	Risk Factors		23
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		23
Item 3.	Defaults Upon Senior Securities		23
Item 4.	Mine Safety Disclosures		23
Item 5.	Other Information		23
Item 6.	Exhibits		24
	SIGNATURES		25

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 EXPLANATORY NOTE 

In this Quarterly Report on Form 10-Q, and unless the context otherwise requires the "Company," "we," "us" and "our" refer to Citius Pharmaceuticals, Inc. and its wholly owned subsidiary, Citius Pharmaceuticals, LLC, taken as a whole. 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains "forward-looking statements." Forward-looking statements include, but are not limited to, statements that express our intentions, beliefs, expectations, strategies, predictions or any other statements relating to our future activities or other future events or conditions. These statements are based on current expectations, estimates and projections about our business based, in part, on assumptions made by management. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may, and are likely to, differ materially from what is expressed or forecasted in the forward-looking statements due to numerous factors discussed from time to time in this report and in other documents which we file with the Securities and Exchange Commission. In addition, such statements could be affected by risks and uncertainties related to: 

· our ability to raise funds for general corporate purposes and operations, including our clinical trials;

· the commercial feasibility and success of our technology;

· our ability to recruit qualified management and technical personnel;

· the success of our clinical trials;

· our ability to obtain and maintain required regulatory approvals for our products; and

· the other factors discussed in the "Risk Factors" section and elsewhere in this report.

The foregoing list does not contain all of the risks and uncertainties. Any forward-looking statements speak only as of the date on which they are made, and except as may be required under applicable securities laws; we do not undertake any obligation to update any forward-looking statement to reflect events or circumstances after the filing date of this report.  

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PART I - FINANCIAL INFORMATION 

Item 1. Financial Statements 

CITIUS PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)

	June 30,			September 30,
	2015			2014
ASSETS
Current Assets
Cash and cash equivalents	$	950,997		$	1,552,060
Prepaid expenses		5,918			-
Total Current Assets		956,915			1,552,060
Other Assets
Trademarks		5,401			5,401
Total Assets	$	962,316		$	1,557,461
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Accounts payable	$	334,337		$	106,169
Accrued expenses		26,520			60,317
Accrued interest		-			25,833
Promissory notes		-			600,000
Derivative warrant liability		1,716,847			1,450,943
Due to related party		65,084			56,134
Total Current Liabilities		2,142,788			2,299,396
Commitments and Contingencies
Stockholders' Deficit
Preferred stock - $0.001 par value; 10,000,000 shares authorized; no shares issued and outstanding		-			-
Common stock - $0.001 par value; 90,000,000 shares authorized; 33,226,211 and 30,025,286 shares issued and outstanding at June 30, 2015 and September 30, 2014, respectively		33,226			30,025
Additional paid-in capital		6,918,531			5,366,321
Accumulated deficit		(8,132,229	)		(6,138,281	)
Total Stockholders' Deficit		(1,180,472	)		(741,935	)
Total Liabilities and Stockholders' Deficit	$	962,316		$	1,557,461

See notes to unaudited condensed consolidated financial statements. 

4

CITIUS PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 2015 AND 2014

(Unaudited) 

	Three Months Ended						Nine Months Ended
	June 30,			June 30,			June 30,			June 30,
	2015			2014			2015			2014
Revenues	$	-		$	-		$	-		$	-
Operating Expenses
Research and development		415,531			-			1,174,892			437,397
General and administrative		194,651			1,305			705,580			112,930
Stock-based compensation - general and administrative		163,547			-			381,076			-
Total Operating Expenses		773,729			1,305			2,261,548			550,327
Operating Loss		(773,729	)		(1,305	)		(2,261,548	)		(550,327	)
Other Income (Expense), Net
Interest income		298			-			2,953			-
Gain (loss) on revaluation of derivative warrant liability		(51,541	)		-			272,147			-
Interest expense		-			(33,575	)		(7,500	)		(109,246	)
Total Other Income (Expense), Net		(51,243	)		(33,575	)		267,600			(109,246	)
Loss before Income Taxes		(824,972	)		(34,880	)		(1,993,948	)		(659,573	)
Income tax benefit		-			-			-			-
Net Loss	$	(824,972	)	$	(34,880	)	$	(1,993,948	)	$	(659,573	)
Net Loss Per Share - Basic and Diluted	$	(0.03	)	$	(0.00	)	$	(0.06	)	$	(0.04	)
Weighted Average Common Shares Outstanding
Basic and diluted		32,312,729			17,843,047			31,161,596			17,785,904

See notes to unaudited condensed consolidated financial statements. 

5

CITIUS PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT

FOR THE NINE MONTHS ENDED JUNE 30, 2015

(Unaudited) 

												Total
							Additional					Stockholders'
	Preferred		Common Stock				Paid-In		Accumulated			Equity
	Stock		Shares		Amount		Capital		Deficit			(Deficit)
Balance, October 1, 2014	$	-		30,025,286	$	30,025	$	5,366,321	$	(6,138,281	)	$	(741,935	)
Conversion of promissory notes and accrued interest into common stock		-		1,055,554		1,056		632,277		-			633,333
Issuance of common stock in private placement, net of costs		-		2,145,371		2,145		538,857		-			541,002
Stock-based compensation		-		-		-		381,076		-			381,076
Net loss		-		-		-		-		(1,993,948	)		(1,993,948	)
Balance, June 30, 2015	$	-		33,226,211	$	33,226	$	6,918,531	$	(8,132,229	)	$	(1,180,472	)

See notes to unaudited condensed consolidated financial statements. 

6

CITIUS PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED JUNE 30, 2015 AND 2014

(Unaudited) 

	2015			2014
Cash Flows From Operating Activities:
Net loss	$	(1,993,948	)	$	(659,573	)
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization of debt issuance costs		-			24,500
Gain on revaluation of derivative warrant liability		(272,147	)		-
Stock-based compensation expense		381,076			-
Changes in operating assets and liabilities:
Prepaid expenses		(5,918	)		-
Accounts payable		228,168			(52,964	)
Accrued expenses		(33,797	)		(520	)
Accrued interest		7,500			84,746
Due to related party		8,950			982
Net Cash Used In Operating Activities		(1,680,116	)		(602,829	)
Cash Flows From Financing Activities:
Proceeds from promissory notes		-			600,000
Proceeds from issuance of common stock		-			50,000
Net proceeds from private placement		1,079,053			-
Deferred offering costs		-			(25,000	)
Net Cash Provided By Financing Activities		1,079,053			625,000
Net Change in Cash and Cash Equivalents		(601,063	)		22,171
Cash and Cash Equivalents - Beginning of Period		1,552,060			1,272
Cash and Cash Equivalents - End of Period	$	950,997		$	23,443

Supplemental Disclosures Of Cash Flow Information and Non-cash Transactions:
Interest paid	$	-	$	-
Income taxes paid	$	-	$	-
Conversion of promissory notes and accrued interest into common stock	$	633,333	$	-
Fair value of warrants issued in connection with private placement and recorded as derivative warrant liability	$	538,051	$	-

See notes to unaudited condensed consolidated financial statements. 

7

CITIUS PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED JUNE 30, 2015 AND 2014

(Unaudited)

1. NATURE OF OPERATIONS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business 

Citius Pharmaceuticals, Inc. ("Citius" or the "Company") is a pharmaceutical company headquartered in Maynard, Massachusetts focused on developing innovative formulations aimed at improving the delivery and compliance of approved drugs. The Company was founded as Citius Pharmaceuticals, LLC, a Massachusetts limited liability company, on January 23, 2007. On September 12, 2014, Citius Pharmaceuticals, LLC entered into a Share Exchange and Reorganization Agreement (the "Exchange Agreement"), with Citius Pharmaceuticals, Inc. (formerly Trail One, Inc.), a publicly traded company incorporated under the laws of the State of Nevada. Citius Pharmaceuticals, LLC became a wholly-owned subsidiary of Citius (see "Reverse Acquisition" below).  

The Company currently has one approved and marketed product, Suprenza (phentermine hydrochloride), which it has out licensed for promotion in the United States, Canada and Mexico. Since its inception, the Company has devoted substantially all of its efforts to business planning, research and development, recruiting management and technical staff, and raising capital. 

Citius is subject to a number of risks common to companies in the pharmaceutical industry including, but not limited to, risks related to the development by Citius or its competitors of research and development stage products, market acceptance of its products, competition from larger companies, dependence on key personnel, dependence on key suppliers and strategic partners, the Company's ability to obtain additional financing and the Company's compliance with governmental and other regulations. 

Reverse Acquisition 

On September 12, 2014, Citius completed a reverse acquisition transaction with Citius Pharmaceuticals, LLC, which became a wholly-owned subsidiary of Citius. As part of the reverse acquisition, the former members of Citius Pharmaceuticals, LLC received 21,625,219 shares of the Company's common stock in exchange for their interest in Citius Pharmaceuticals, LLC and, immediately after the transaction, owned 72% of the outstanding common stock. Immediately prior to the transaction, Citius had 5,000,000 shares of common stock outstanding. In connection with the Exchange Agreement, the Company completed the first closing of a Private Offering. Following the acquisition, Citius Pharmaceuticals, LLC began operating as a wholly-owned subsidiary of Citius Pharmaceuticals, Inc.  

Accounting principles generally accepted in the United States generally require that a company whose security holders retain the majority voting interest in the combined business be treated as the acquirer for financial reporting purposes. The acquisition was accounted for as a reverse acquisition whereby Citius Pharmaceuticals, LLC was deemed to be the accounting acquirer. Accordingly, the historical consolidated financial statements are those of Citius Pharmaceuticals, LLC as the accounting acquirer. The post-merger combination of Citius Pharmaceuticals, Inc. and Citius Pharmaceuticals, LLC is referred to throughout these notes to consolidated financial statements as the "Company." As the accounting acquirer, Citius Pharmaceuticals, LLC did not acquire any tangible assets from Citius and did not assume any liabilities of Citius. This transaction is not considered a business combination because Citius, the non-operating public corporation, did not meet the definition of a business. Instead, this transaction is considered to be a capital transaction of Citius Pharmaceuticals, LLC and is equivalent to the issuance of shares by Citius Pharmaceuticals, LLC for the net assets of Citius accompanied by a recapitalization. 

In connection with the reverse acquisition, Citius Pharmaceuticals, LLC adopted the fiscal year end of Citius, thereby changing our fiscal year end from December 31 to September 30.  

Basis of Presentation and Summary of Significant Accounting Policies

Basis of Preparation - As a result of the reverse acquisition, the accompanying consolidated financial statements include the operations of Citius Pharmaceuticals, LLC (the accounting acquirer). The accompanying consolidated financial statements also include the operations of Citius Pharmaceuticals, Inc. (formerly Trail One, Inc.) since the date of the reverse acquisition. All significant inter-company balances and transactions have been eliminated in consolidation.  

8

All share and per share amounts presented in these consolidated financial statements reflect the one-for-one exchange ratio of Citius Pharmaceuticals, LLC member interests to common shares in the reverse acquisition. 

The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information, without being audited, pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments considered necessary to make the financial statements not misleading have been included. Operating results for the nine months ended June 30, 2015 are not necessarily indicative of the results that may be expected for the year ending September 30, 2015. The unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the nine months ended September 30, 2014 filed with the Securities and Exchange Commission. 

There have been no recently issued accounting pronouncements that have had or are expected to have a material impact on the Company's consolidated financial statements.  

Use of Estimates - Our accounting principles require our management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, and reported amounts of revenues and expenses during the reporting periods. Estimates having relatively higher significance include stock-based compensation, valuation of warrants, and deferred income taxes. Actual results could differ from those estimates. 

Net Income (Loss) per Common Share - Basic net income (loss) per share of common stock has been computed by dividing net income (loss) by the weighted average number of shares outstanding during the period. Diluted net income per share of common stock has been computed by dividing net income by the weighted average number of shares outstanding plus the diluting effect, if any, of outstanding stock options, warrants and convertible securities. Diluted net loss per share of common stock has been computed by dividing the net loss for the period by the weighted average number of shares of common stock outstanding during such period. In a net loss period, options, warrants and convertible securities are anti-dilutive and therefore excluded from diluted loss per share calculations.

2. GOING CONCERN UNCERTAINTY AND MANAGEMENT'S PLAN 

The accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company experienced negative cash flows from operations of $1,680,116 and $602,829 for the nine months ended June 30, 2015 and 2014, respectively. At June 30, 2015, the Company had a working capital deficit of $1,185,873 and a stockholders' deficit of $1,180,472. The Company has no revenue and has relied on proceeds from equity and debt transactions to finance its operations. At June 30, 2015, the Company had limited capital to fund its operations. This raises substantial doubt about the Company's ability to continue as a going concern. 

The Company plans to raise capital through equity financings from outside investors as well as raise additional funds from existing investors. There is no assurance, however, that the Company will be successful in raising the needed capital and, if funding is available, that it will be available on terms acceptable to the Company.

The accompanying condensed consolidated financial statements do not include any adjustments that might result from the outcome of the above uncertainty. 

3. BUSINESS AGREEMENTS 

Alpex Pharma S.A. 

On June 12, 2008, the Company entered into a collaboration and license agreement (the "Alpex Agreement") with Alpex Pharma S.A. ("Alpex"), in which Alpex granted the Company an exclusive right and license to use certain Alpex intellectual property in order to develop and commercialize orally disintegrating tablet formulations of pharmaceutical products in United States, Canada and Mexico. In addition, Alpex manufactures Suprenza, the Company's commercialized pharmaceutical product, on a contract basis. The agreement was amended on November 15, 2011 as part of an Amendment and Coordination Agreement (see the "Three-Party Agreement" below). 

9

Under the terms of the Alpex Agreement, as amended by the Three-Party Agreement dated November 15, 2011 (see below), Alpex is entitled to a payment per tablet manufactured and a percentage of all milestone, royalty and other payments received by the Company from Prenzamax, LLC, pursuant to a sublicense agreement (see below). In addition, under the terms of the Alpex Agreement, Alpex retained the right to use the clinical data generated by the Company to file for regulatory approval and market Suprenza in the rest of the world. In the event that Alpex has such sales, Alpex will pay the Company a percentage royalty on net sales, as defined ("Alpex Revenue"). No milestone, royalty or other payments have been earned or received by the Company through June 30, 2015.

Prenzamax, LLC 

On November 15, 2011, the Company entered into an exclusive license agreement (the "Sublicense Agreement") with Prenzamax, LLC ("Prenzamax"), in which the Company granted Prenzamax and its affiliates the exclusive right to commercialize Suprenza in the United States. Prenzamax is an affiliate of Akrimax, a related party (see Note 7) and was formed for the specific purpose of managing the Sublicense Agreement. Under the terms of the Sublicense Agreement, Prenzamax is to pay the Company a percentage of the product's EBITDA, as defined ("Profit Share Payments"). In addition, Prenzamax is to reimburse the Company directly for certain development costs. These payments are to commence once Prenzamax has achieved profitability, as defined in the Sublicense Agreement. Further, under the terms of the Sublicense Agreement, Prenzamax is required to share in the royalty payment due to Alpex under the Alpex Agreement. In addition, Prenzamax is entitled to a percentage of the Alpex Revenue received by the Company.  

The Company has not been reimbursed for any development costs nor has it earned any Profit Share Payments through June 30, 2015.  

Three-Party Agreement 

On November 15, 2011, the Company, Alpex and Prenzamax entered into the Three-Party Agreement wherein the terms of the Alpex Agreement were modified and Prenzamax and the Company agreed to each pay a portion of certain regulatory filing fees for as long as Prenzamax is purchasing Suprenza from Alpex pursuant to the Three-Party Agreement. 

4. NOTES PAYABLE  

Convertible Promissory Notes 

Between July 12, 2010 and November 30, 2012, the Company issued several convertible promissory notes (collectively the "Convertible Notes") to two existing investors in the aggregate total principal amount of $1,460,000. The Convertible Notes accrue interest at 3.00% per annum and are payable on demand only after their respective 10-year maturities. Between January 1, 2013 and March 25, 2013, the Company issued additional Convertible Notes to existing investors in the aggregate total principal amount of $225,000. The additional Convertible Notes accrue interest at 5.00% per annum and are payable on demand only after their respective 10-year maturities. The unpaid principal and accrued interest are only convertible into common stock following a reorganization or conversion into a corporation at the option of the holder. The unpaid principal and accrued interest will convert into common stock at the greater of the fair value of the common stock on the date of the conversion or $0.25 ($0.69 if the Company's common stock is admitted to trade on a national exchange prior to the date of conversion). 

On July 31, 2014, in anticipation of the completion of the reverse acquisition and the Private Offering, the note holders demanded conversion of the outstanding $1,685,000 Convertible Notes and accrued interest of $151,813 into 3,061,355 shares of common stock at a conversion price of $0.60 per share.  

Promissory Notes 

In November 2013, the Company issued two promissory notes (the "Promissory Notes") to two existing investors in the aggregate total principal amount of $600,000. The Promissory Notes accrue interest at 5.00% per annum and are due at the earliest of (1) December 19, 2014, (2) the occurrence of an event of default as defined in the Promissory Notes, (3) an initial installment of $100,000 principal amount, to each investor, upon the receipt by the Company of a minimum of $6,500,000 in aggregate proceeds under any financing transaction, (4) a second installment of $100,000 principal amount, to each investor, upon the receipt by the Company of a minimum of $8,500,000 in aggregate proceeds under any financing transaction, and (5) a third installment of $100,000 principal amount, to each investor, upon the receipt by the Company of a minimum of $10,000,000 in aggregate proceeds under any financing transaction. At September 30, 2014, the Promissory Notes had an outstanding aggregate principal balance of $600,000. 

On December 31, 2014, the note holders requested conversion of the outstanding $600,000 Promissory Notes and accrued interest of $33,333 into 1,055,554 shares of common stock at a conversion price of $0.60 per share.  

10

Subordinated Convertible Promissory Note 

In 2013, the Company entered into an investment banking agreement ("2013 PPM") to raise up to $6 million of 10% subordinated convertible promissory notes. The agreement contemplated a reverse acquisition with a public company and an automatic conversion of the notes into units of common stock and warrants, as defined therein. In April 2013, the Company issued a $350,000 subordinated convertible promissory note (the "Subordinated Note"). The Subordinated Note accrued interest at 10% per annum and was payable on demand any time after April 2014. If the Company has not repaid the Subordinated Note at the closing of a reverse acquisition, the unpaid principal and accrued interest will automatically convert into common stock by dividing the amount due by a price per unit of $0.65. Also, upon automatic conversion, the purchaser of the Subordinated Note will receive a warrant to purchase the same number of shares in to which the Subordinated Note converts. 

On July 31, 2014, in anticipation of the completion of the reverse acquisition and the Private Offering, the note holder demanded conversion of the outstanding $350,000 Subordinated Note and accrued interest of $44,245 into 606,531 shares of common stock at a conversion price of $0.65 per share.  

Interest Expense

During 2013, the Company incurred $42,000 of debt issuance costs related to the Subordinated Note which was amortized over the term of the underlying debt. Amortization of debt issuance costs recorded as interest expense for the three months ended June 30, 2015 and 2014 amounted to $0 and $3,500, respectively. Amortization of debt issuance costs recorded as interest expense for the nine months ended June 30, 2015 and 2014 amounted to $0 and $24,500, respectively. 

Interest expense on the notes for the three months ended June 30, 2015 and 2014, including non-cash interest related to debt issuance costs, was $0 and $33,575, respectively. Interest expense on the notes for the nine months ended June 30, 2015 and 2014, including non-cash interest related to debt issuance costs, was $7,500 and $109,246, respectively. 

5. DERIVATIVE WARRANT LIABILITY 

Derivative financial instruments are recognized as a liability on the consolidated balance sheet and measured at fair value. At June 30, 2015 and September 30, 2014, the Company had outstanding warrants to purchase 7,225,451 and 5,080,080 shares of its common stock, respectively, that are considered to be derivative instruments since the agreements contain "down round" provisions whereby the exercise price of the warrants is subject to weighted average adjustment in the event that the Company issues common stock for less than $0.60 per share within one year of the issuance of the warrants (see Note 6).  

The Company performs valuations of the warrants using a probability weighted Black-Scholes option pricing model which value was also compared to a Binomial Option Pricing Model for reasonableness. This model requires input of assumptions including the risk-free interest rates, volatility, expected life and dividend rates and has also considered the likelihood of "down round" financings. Selection of these inputs involves management's judgment and may impact net income. Due to our limited operating history and limited number of sales of our common stock, we estimate our volatility based on a number of factors including the volatility of comparable publicly traded pharmaceutical companies. The volatility factor used in the Black-Scholes option pricing model has a significant effect on the resulting valuation of the derivative liabilities on our balance sheet. The volatility calculated at June 30, 2015 was 57%. We used a risk-free interest rate of 1.62%, estimated lives of 4.20 to 4.99 years, which are the remaining contractual lives of the warrants and no dividends to our common stock. The volatility calculated at September 30, 2014 was 54%. We used a risk-free interest rate of 1.78%, an estimated life of 4.95 years, which is the remaining contractual life of the warrants and no dividends to our common stock. 

The table below presents the changes in the derivative warrant liability, which is measured at fair value on a recurring basis and classified as Level 3 in the fair value hierarchy: 

	Nine Months  Ended   June 30,   2015			Nine Months  Ended   June 30,   2014
Derivative warrant liability, beginning of period	$	1,450,943		$	-
Fair value of warrants issued		538,051			-
Total realized/unrealized gains included in net loss (1)		(272,147	)		-
Derivative warrant liability, end of period	$	1,716,847		$	-
________________________
(1)   Included in gain or loss on revaluation of derivative warrant liability in the Condensed Consolidated Statement of Operations.

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6. COMMON STOCK, STOCK OPTIONS AND WARRANTS

Common Stock  

In May 2014, the Company issued 200,000 shares of common stock for $50,000, or $0.25 per share. 

On September 12, 2014, in connection with the Reverse Acquisition, 5,000,000 shares of common stock were recorded in the financial statements of Citius Pharmaceuticals, LLC, the accounting acquirer (See Note 1 - Reverse Acquisition). 

Private Offerings 

In 2014, the Company entered into an investment banking agreement to raise up to $5.1 million and issue up to 8,500,000 Units described below. The agreement contemplated a Reverse Acquisition with a public company. As of December 31, 2013, the Company capitalized as deferred offering costs a $25,000 retainer for legal costs associated with this offering. The $25,000 retainer was charged to additional paid-in capital on completion of the first closing of the offering. 

On September 12, 2014, the Company sold 3,400,067 Units for a purchase price of $0.60 per Unit for gross proceeds of $2,040,040. Each Unit consists of one share of common stock and one five-year warrant (the "Investor Warrants") to purchase one share of common stock at an exercise price of $0.60, (the "Private Offering"). The exercise price of the Investor Warrants is subject to weighted average adjustment, for up to one year, if the Company issues common stock at a price lower than the exercise price, subject to certain exceptions. The 2015 private placement described below did not result in an adjustment of the exercise price. The Investor Warrants will be redeemable by the Company at a price of $0.001 per Investor Warrant at any time subject to the conditions that (i) the common stock has traded for twenty (20) consecutive trading days with a closing price of at least $1.50 per share with an average trading volume of 50,000 shares per day and (ii) the Company provides 20 trading days prior notice of the redemption and the closing price of the common stock is not less than $1.17 for more than any 3 days during such notice period and (iii) the underlying shares of common stock are registered. 

The Placement Agent was paid a commission of ten percent (10%) and a non-accountable expense allowance of three percent (3%) of the funds raised in the Private Offering. As a result of the foregoing arrangement, the Placement Agent was paid commissions and expenses of $265,206. In addition, the Company issued to the Placement Agent and their designees five-year warrants (the "Placement Agent Unit Warrants") to purchase 680,013 Units at an exercise price of $0.60 per Unit. The Placement Agent Unit Warrants are exercisable on a cash or cashless basis with respect to purchase of the Units, and will be exercisable only for cash with respect to warrants received as part of the Units. The exercise price of the warrants underlying the Placement Agent Unit Warrants is subject to weighted-average adjustment, for up to one year, if the Company issues common stock at a price lower than the exercise price, subject to certain exceptions.  

In addition, the Placement Agent was issued warrants to purchase 1,000,000 shares of common stock exercisable for cash at $0.60 per share for investment banking services provided in connection with the transaction (the "Placement Agent Share Warrants"). Other cash expenses related to the private placement totaled $169,000. The Placement Agent may, while the Placement Agent Unit Warrants are outstanding, appoint one person to the Board of Directors, and designate one person who may attend meetings of the Board of Directors as an observer. 

In connection with the Private Offering, the Company entered into a Registration Rights Agreement pursuant to which the Company is required to file a registration statement (the "Registration Statement"), registering for resale all shares of common stock (i) included in the Units; and (ii) issuable upon exercise of the Investor Warrants. The Company has agreed to use its reasonable efforts to cause the Registration Statement to be filed no later than 60 days after the completion of the Private Offering (the "Filing Deadline"), and to have the Registration Statement declared effective within 180 days of the Filing Deadline. The Private Offering is still in progress. Any holders of the shares of common stock removed from the Registration Statement as a result of a Section 415 comment from the SEC shall be included in a subsequent registration statement the Company will file no later than six months after the prior registration statement (or such other period as permitted by SEC rules). 

Between March 19, 2015 and June 26, 2015, the Company sold an additional 2,045,371 Units for a purchase price of $0.54 per Unit and 100,000 Units for a purchase price of $0.60 per Unit for gross proceeds of $1,164,500. Each Unit consists of one share of common stock and one Investor Warrant (see description above). There was no placement agent for the 2015 private placements and other cash expenses related to the placements were $85,447. The investors were granted registration rights as described above. In connection with these financings, the Company credited $541,002 to stockholders' equity (deficit) and $538,051 to derivative warrant liability. 

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Stock Options 

On September 12, 2014, the Board of Directors adopted the 2014 Stock Incentive Plan (the "2014 Plan") and reserved 13,000,000 shares of common stock for issuance to employees, directors and consultants. On September 12, 2014, the stockholders approved the plan. Pursuant to the 2014 Plan, the Board of Directors (or committees and/or executive officers delegated by the Board of Directors) may grant stock options, stock appreciation rights, restricted stock, restricted stock units, other stock-based awards and cash-based awards. As of June 30, 2015, there were options to purchase an aggregate of 3,900,000 shares of common stock outstanding under the 2014 Plan and 9,100,000 shares available for future grants. 

The fair value of each stock option award is estimated on the date of grant using the Black-Scholes option pricing model. Due to its limited operating history and limited number of sales of its Common Stock, the Company estimated its volatility in consideration of a number of factors including the volatility of comparable public companies. The Company uses historical data, as well as subsequent events occurring prior to the issuance of the financial statements, to estimate option exercises and employee terminations within the valuation model. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant commensurate with the expected term assumption. The expected term of stock options granted, all of which qualify as "plain vanilla," is based on the average of the contractual term (generally 10 years) and the vesting period. For non-employee options, the expected term is the contractual term.  

A summary of option activity under the 2014 Plan as of June 30, 2015 and the changes during the nine months then ended is presented below: 

Options	Shares		Weighted-  Average  Exercise  Price		Weighted-  Average  Remaining  Contractual  Term	Aggregate  Intrinsic  Value
Outstanding at October 1, 2014		3,300,000	$	0.45	9.96 years
Granted		600,000		0.60
Exercised		-		-
Forfeited or expired		-		-
Outstanding at June 30, 2015		3,900,000	$	0.47	9.19 years	$	297,000
Exercisable at June 30, 2015		1,550,000	$	0.47	8.99 years	$	117,000

On September 12, 2014, the Board of Directors granted stock options to purchase 3,300,000 shares of common stock at an exercise price of $0.45 per share. The weighted average grant-date fair value of the options granted was estimated at $0.34 per share. These options vest over three years and have a term of 10 years.  

On April 1, 2015, the Board of Directors granted stock options to purchase 100,000 shares of common stock at an exercise price of $0.60 per share. The weighted average grant-date fair value of the options granted was estimated at $0.16 per share. These options vested immediately and have a term of 5 years. On June 1, 2015, the Board of Directors granted stock options to purchase 500,000 shares of common stock at an exercise price of $0.60 per share. The weighted average grant-date fair value of the options granted was estimated at $0.27 per share. These options vested over three years and have a term of 10 years.  

Stock-based compensation expense for the three months ended June 30, 2015 and 2014 was $163,547 and $0, respectively. Stock-based compensation expense for the nine months ended June 30, 2015 and 2014 was $381,076 and $0, respectively.  

At June 30, 2015, unrecognized total compensation cost related to unvested awards of $433,120 is expected to be recognized over a weighted average period of 1.7 years.  

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Warrants 

The Company has reserved 7,905,464 shares of common stock for the exercise of outstanding warrants. The following table summarizes the warrants outstanding at June 30, 2015: 

	Exercise price		Number			Expiration Date
Investor Warrants	$	0.60		3,400,067	(1)	September 12, 2019
Placement Agent Unit Warrants		0.60		680,013		September 12, 2019
Warrants underlying Placement Agent Unit Warrants		0.60		680,013	(1)	September 12, 2019
Placement Agent Share Warrants		0.60		1,000,000	(1)	September 12, 2019
Investor Warrants		0.60		500,000	(1)	March 19, 2020
Investor Warrants		0.60		583,334	(1)	April 22, 2020
Investor Warrants		0.60		258,333	(1)	April 30, 2020
Investor Warrants		0.60		333,334	(1)	June 10, 2020
Investor Warrants		0.60		100,000	(1)	June 22, 2020
Investor Warrants		0.60		370,370	(1)	June 26, 2020
				7,905,464

____________

(1)     Fair value of these warrants are included in the derivative warrant liability 

The weighted average remaining life of the warrants is 4.38 years. At June 30, 2015, all warrants are exercisable and there is no aggregate intrinsic value for the warrants outstanding.  

7. RELATED PARTY TRANSACTIONS

The Company's headquarters is located in the office space of a company affiliated through common ownership. The Company has not recorded any revenue or expense related to the use of the office space as management has determined the usage to be immaterial and the affiliate has not charged for the usage. 

As of June 30, 2015 and September 30, 2014, the Company owed $65,084 and $56,134, respectively to the company affiliated through common ownership for expenses the related party paid on the Company's behalf and services performed by the related party. 

Our Chief Executive Officer is the cofounder and Vice Chairman of Akrimax Pharmaceuticals, LLC ("Akrimax"), a privately held pharmaceutical company specializing in producing cardiovascular and general pharmaceutical products (see Note 3). 

8. EMPLOYMENT AND CONSULTING AGREEMENTS 

Employment Agreement 

The Company entered into a three year employment agreement with its new Chief Executive Officer effective September 12, 2014. Upon expiration, the agreement automatically renews for successive periods of one-year. The agreement requires the Company to pay base compensation plus incentives over the employment term plus severance benefits upon the occurrence of certain events as described in the agreement. Under the agreement, the Chief Executive Officer was granted options to purchase 3,300,000 shares of common stock. 

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Consulting Agreements 

Effective September 1, 2014, the Company entered into three consulting agreements. Two of the agreements are for financial consulting services including accounting, preparation of financial statements and filings with the SEC. The third agreement is for financing activities, product development strategies and corporate development. The agreements may be terminated by the Company or the consultant with 90 days written notice.  

Consulting expense under the agreements for the three months ended June 30, 2015 was $87,000, including $12,000 paid to a consultant who is a stockholder of the Company. Consulting expense under the agreements for the nine months ended June 30, 2015 was $261,000, including $36,000 paid to a consultant who is a stockholder of the Company. In addition, one financial consulting services agreement provides for the grant of options to purchase 500,000 shares of common stock contingent upon approval by the Board of Directors. The option was granted on June 1, 2015. 

Effective January 1, 2015, the Company entered into a consulting agreement for scientific and medical advice related to a Phase 2a clinical trial. Under the terms of the agreement, the consultant will receive fees for participating in telephone and in person meetings. The agreement may be terminated by the Company or the consultant with 90 days written notice. The consultant was also granted an option to purchase 100,000 shares of common stock at $0.60 per share on April 1, 2015. The options vested immediately and expire on March 31, 2020. 

9. SUBSEQUENT EVENTS 

In July 2015, the Company sold an additional 541,666 Units for a purchase price of $0.54 per Unit for gross proceeds of $292,500. Each Unit consists of one share of common stock and one Investor Warrant similar to the Unit description in Note 6.

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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations for the three and nine months ended June 30, 2015 should be read together with our consolidated financial statements and related notes included elsewhere in this report.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the audited financial statements of Citius Pharmaceuticals, Inc. included in the Annual Report on Form 10-K for the period from January 1, 2014 to September 30, 2014 and the unaudited financial statements and related notes included in this report. The following discussion contains "forward-looking statements" that reflect our future plans, estimates, beliefs and expected performance. Our actual results may differ materially from those currently anticipated and expressed in such forward-looking statements as a result of a number of factors. We caution that assumptions, expectations, projections, intentions or beliefs about future events may, and often do, vary from actual results and the differences can be material. Please see "Cautionary Note Regarding Forward-Looking Statements."

Historical Background

Citius Pharmaceuticals, Inc. ("Citius" or the "Company") is a pharmaceutical company focused on developing innovative formulations aimed at improving the delivery and compliance of approved drugs. On September 12, 2014, we acquired Citius Pharmaceuticals, LLC as a wholly-owned subsidiary.  

Citius Pharmaceuticals, LLC was founded in Massachusetts in January 2007. Activities since Citius Pharmaceuticals, LLC's inception through June 30, 2015, were devoted primarily to the development and commercialization of therapeutic products for large and growing markets using innovative patented or proprietary formulations and novel drug delivery technology.  

Through June 30, 2015, the Company has devoted substantially all of its efforts to product development, raising capital, building infrastructure through strategic alliances and coordinating activities relating to its first commercial product Suprenza. The Company has not yet realized any revenues from its planned principal operations.  

Accounting principles generally accepted in the United States require that a company whose security holders retain the majority voting interest in the combined business be treated as the acquirer for financial statement reporting purposes. The acquisition was accounted for as a "Reverse Acquisition" whereby Citius Pharmaceuticals, LLC was deemed to be the accounting acquirer. The historical financial statements of Citius Pharmaceuticals, LLC are presented as our historical financial statements. The historical fiscal year end of Citius Pharmaceuticals, LLC was December 31. In connection with the Reverse Acquisition, we adopted the fiscal year end of Citius Pharmaceuticals, Inc. thereby changing our fiscal year end from December 31 to September 30. The following analysis of our results of operations reflects the accounting treatment required as a result of the Reverse Acquisition. 

Business Agreements

Alpex Pharma S.A. 

On June 12, 2008, the Company entered into a collaboration and license agreement (the "Alpex Agreement") with Alpex Pharma S.A. ("Alpex"), in which Alpex granted the Company an exclusive right and license to use certain Alpex intellectual property in order to develop and commercialize orally disintegrating tablet formulations of pharmaceutical products in United States, Canada and Mexico. In addition, Alpex manufactures Suprenza, the Company's commercialized pharmaceutical product, on a contract basis. The agreement was amended on November 15, 2011 as part of an Amendment and Coordination Agreement (see the "Three-Party Agreement" below). 

Under the terms of the Alpex Agreement, as amended by the Three-Party Agreement dated November 15, 2011 (see below), Alpex is entitled to a payment per tablet manufactured and a percentage of all milestone, royalty and other payments received by the Company from Prenzamax, LLC, pursuant to a sublicense agreement (see below). In addition, under the terms of the Alpex Agreement, Alpex retained the right to use the clinical data generated by the Company to file for regulatory approval and market Suprenza in the rest of the world. In the event that Alpex has such sales, Alpex will pay the Company a percentage royalty on net sales, as defined ("Alpex Revenue"). No milestone, royalty or other payments have been earned or received by the Company through June 30, 2015.

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Prenzamax, LLC 

On November 15, 2011, the Company entered into an exclusive license agreement (the "Sublicense Agreement") with Prenzamax, LLC ("Prenzamax"), in which the Company granted Prenzamax and its affiliates the exclusive right to commercialize Suprenza in the United States. Prenzamax is an affiliate of Akrimax, a related party and was formed for the specific purpose of managing the Sublicense Agreement. Under the terms of the Sublicense Agreement, Prenzamax is to pay the Company a percentage of the product's EBITDA, as defined ("Profit Share Payments"). In addition, Prenzamax is to reimburse the Company directly for certain development costs. These payments are to commence once Prenzamax has achieved profitability, as defined in the Sublicense Agreement. Further, under the terms of the Sublicense Agreement, Prenzamax is required to share in the royalty payment due to Alpex under the Alpex Agreement. In addition, Prenzamax is entitled to a percentage of the Alpex Revenue received by the Company.  

The Company has not been reimbursed for any development costs nor has it earned any Profit Share Payments through June 30, 2015.  

Three-Party Agreement 

On November 15, 2011, the Company, Alpex and Prenzamax entered into the Three-Party Agreement wherein the terms of the Alpex Agreement were modified and Prenzamax and the Company agreed to each pay a portion of certain regulatory filing fees for as long as Prenzamax is purchasing Suprenza from Alpex pursuant to the Three-Party Agreement. 

RESULTS OF OPERATIONS

Three months ended June 30, 2015 compared with the three months ended June 30, 2014

	Three Months Ended June 30, 2015			Three Months Ended June 30, 2014
Revenues	$	-		$	-
Operating expenses:
Research and development		415,531			-
General and administrative		194,651			1,305
Stock-based compensation - general and administrative		163,547			-
Total operating expenses		773,729			1,305
Operating loss		(773,729	)		(1,305	)
Interest income		298			-
Gain (loss) on revaluation of derivative warrant liability		(51,541	)		-
Interest expense		-			(33,575	)
Net loss	$	(824,972	)	$	(34,880	)

Revenues  

We did not generate any revenues for the three months ended June 30, 2015 and 2014. Beginning in May 2012, our strategic sales and marketing partner, Prenzamax, generated revenues from the sale of Suprenza, our first commercial product. Under the Sublicense Agreement, we were not entitled to any revenues during the three months ended June 30, 2015 and 2014.  

Research and Development Expenses 

For the three months ended June 30, 2015, research and development expenses were $415,531 as compared to no expense during the three months ended June 30, 2014. The $415,531 increase in 2015 was primarily due to costs incurred in the development of our product for the treatment of hemorrhoids. We are actively seeking to raise additional capital in order to fund our research and development efforts. 

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General and Administrative Expenses  

For the three months ended June 30, 2015, general and administrative expenses were $194,651, as compared to $1,305 during the three months ended June 30, 2014. The increase of $193,346 was attributable to additional compensation costs for our new Chief Executive Officer, plus additional financial and accounting consulting expenses, higher insurance costs and increases in professional fees due to being a public company. 

Stock-based Compensation Expense 

For the three months ended June 30, 2015, stock-based compensation expense was $163,547 as compared to no expense for the three months ended June 30, 2014. The $163,547 expense was due to the stock options granted to our Chief Executive Officer in connection with his employment agreement and stock options granted to two consultants. 

Other Income (Expense) 

Interest income earned on the net proceeds of our private offerings was $298 for the three months ended June 30, 2015. There was no interest income for the three months ended June 30, 2014. 

Loss on revaluation of derivative warrant liability for the three months ended June 30, 2015 was $51,541. The loss was primarily due to the increase in the volatility used to calculate the fair value of the derivative warrant liability from 53% at March 31, 2015 to 57% at June 30, 2015. 

For the three months ended June 30, 2015, there was no interest expense compared to interest expense of $33,575 for the three months ended June 30, 2014. Interest expense decreased due to the July 31, 2014 conversion of $2,035,000 of convertible promissory notes and accrued interest of $196,058 to equity and the December 31, 2014 conversion of $600,000 in promissory notes and accrued interest of $33,333 to equity. In addition, we incurred $42,000 in debt issuance costs in April 2013 that were amortized to interest expense over the twelve month term of the note. Amortization expense was $0 and $3,500 for the three months ended June 30, 2015 and 2014, respectively.  

Net Loss 

For the three months ended June 30, 2015, we incurred a net loss of $824,972 compared to a net loss for the three months ended June 30, 2014 of $34,880. The $790,092 increase in the net loss was primarily due to the $772,424 increase in total operating expenses. 

Nine months ended June 30, 2015 compared with the nine months ended June 30, 2014

	Nine Months Ended June 30, 2015			Nine Months Ended June 30, 2014
Revenues	$	-		$	-
Operating expenses:
Research and development		1,174,892			437,397
General and administrative		705,580			112,930
Stock-based compensation - general and administrative		381,076			-
Total operating expenses		2,261,548			550,327
Operating loss		(2,261,548	)		(550,327	)
Interest income		2,953			-
Gain on revaluation of derivative warrant liability		272,147			-
Interest expense		(7,500	)		(109,246	)
Net loss	$	(1,993,948	)	$	(659,573	)

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Revenues  

We did not generate any revenues for the nine months ended June 30, 2015 and 2014. Beginning in May 2012, our strategic sales and marketing partner, Prenzamax, generated revenues from the sale of Suprenza, our first commercial product. Under the Sublicense Agreement, we were not entitled to any revenues during the nine months ended June 30, 2015 and 2014.  

Research and Development Expenses 

For the nine months ended June 30, 2015, research and development expenses were $1,174,892 as compared to $437,397 during the nine months ended June 30, 2014. The $737,495 increase in the current period was primarily due to $724,737 of costs incurred in the development of our product for the treatment of hemorrhoids and a $12,758 increase in costs related to Suprenza. We are actively seeking to raise additional capital in order to fund our research and development efforts. 

General and Administrative Expenses  

For the nine months ended June 30, 2015, general and administrative expenses were $705,580, as compared to $112,930 during the nine months ended June 30, 2014. The increase of $592,650 was attributable to additional compensation costs for our new Chief Executive Officer, plus additional financial and accounting consulting expenses, higher insurance costs and increases in professional fees due to being a public company. 

Stock-based Compensation Expense 

For the nine months ended June 30, 2015, stock-based compensation expense was $381,076 as compared to no expense for the nine months ended June 30, 2014. The $381,076 expense was due to the stock options granted to our Chief Executive Officer in connection with his employment agreement and stock options granted to two consultants. 

Other Income (Expense) 

Interest income earned on the net proceeds of our private offerings was $2,953 for the nine months ended June 30, 2015. There was no interest income for the nine months ended June 30, 2014. 

Gain on revaluation of derivative warrant liability for the nine months ended June 30, 2015 was $272,147. The gain was primarily due to the change in the fair value of the derivative warrant liability that we recognized in connection with the first closing of the Private Offering on September 12, 2014. The gain was primarily due to the decrease in our stock price used to calculate the fair value of the derivative warrant liability from $0.60 at September 30, 2014 to $0.54 at June 30, 2015. 

For the nine months ended June 30, 2015, interest expense decreased by $101,746 in comparison to the nine months ended June 30, 2014. Interest expense decreased due to the July 31, 2014 conversion of $2,035,000 of convertible promissory notes and accrued interest of $196,058 to equity and the December 31, 2014 conversion of $600,000 in promissory notes and accrued interest of $33,333 to equity. In addition, we incurred $42,000 in debt issuance costs in April 2013 that were amortized to interest expense over the twelve month term of the note. Amortization expense was $0 and $24,500 for the nine months ended June 30, 2015 and 2014, respectively.  

Net Loss 

For the nine months ended June 30, 2015, we incurred a net loss of $1,993,948 compared to a net loss for the nine months ended June 30, 2014 of $659,573. The $1,334,375 increase in the net loss was primarily due to the $1,711,221 increase in total operating expenses offset by the $272,147 gain on revaluation of derivative warrant liability and the $101,746 decrease in interest expense. 

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LIQUIDITY AND CAPITAL RESOURCES 

Going Concern Uncertainty and Working Capital 

Citius has incurred operating losses since inception and incurred a net loss of $1,993,948 for the nine months ended June 30, 2015. At June 30, 2015, Citius had a stockholders' deficit of $1,180,472 and an accumulated deficit of $8,132,229. Citius' net cash used in operations during the nine months ended June 30, 2015 was $1,680,116. 

As of June 30, 2015, Citius had a working capital deficit of $1,185,873. The working capital deficit was attributable to the operating losses incurred by the Company since inception offset by our capital raising activities. At June 30, 2015, Citius had cash and cash equivalents of $950,997 available to fund its operations. The Company's primary sources of cash flow since inception have been from financing activities. During the years ended December 31, 2013 and 2012, the Company received proceeds of $1,175,000 and $400,000, respectively from the issuance of debt. During the nine months ended September 30, 2014 and the years ended December 31, 2013 and 2012, the Company received proceeds of $1,680,834, $0 and $500,000, respectively from the issuance of equity. Between March 19, 2015 and June 26, 2015, the Company received net proceeds of $1,079,053 from the issuance of equity. In July 2015, the Company received gross proceeds of $292,500 from the issuance of equity. Our primary uses of operating cash were for product development and commercialization activities, regulatory expenses, employee compensation, consulting fees, legal and accounting fees, insurance and travel expenses. 

On July 31, 2014, the note holders demanded conversion of the $1,685,000 in Convertible Notes, the $350,000 Subordinated Note and the accrued interest of $196,058 into 3,667,886 membership interests of Citius. Citius and the two note holders agreed to convert the Convertible Notes and accrued interest at the 2014 Private Offering price of $0.60 per share of common stock while the Subordinated Note issued in the 2013 private placement converted at $0.65 per share. All the Citius membership interests were exchanged on a one for one basis for shares of common stock in the Reverse Acquisition. 

On September 12, 2014, the Company sold 3,400,067 units ("Units") for a purchase price of $0.60 per Unit for gross proceeds of $2,040,040 and net proceeds of $1,630,834. Each Unit consists of one share of common stock and one five-year warrant (the "Investor Warrants") to purchase one share of common stock at an exercise price of $0.60, (the "Private Offering"). The exercise price of the Investor Warrants is subject to adjustment, for up to one year, if the Company issues common stock at a price lower than the exercise price, subject to certain exceptions. The Investor Warrants will be redeemable by the Company at a price of $0.001 per Investor Warrant at any time subject to the conditions that (i) the common stock has traded for twenty (20) consecutive trading days with a closing price of at least $1.50 per share with an average trading volume of 50,000 shares per day and (ii) the Company provides 20 trading days prior notice of the redemption and the closing price of the common stock is not less than $1.17 for more than any 3 days during such notice period and (iii) the underlying shares of common stock are registered. 

On December 31, 2014, the note holders requested conversion of $600,000 in Promissory Notes and accrued interest of $33,333 into 1,055,554 shares of common stock at a conversion price of $0.60 per share. 

Between March 19, 2015 and June 26, 2015, the Company sold an additional 2,045,371 Units for a purchase price of $0.54 per Unit and 100,000 Units for a purchase price of $0.60 per Unit for gross proceeds of $1,164,500 and in July 2015, the Company sold 541,666 Units for a purchase price of $0.54 per Unit for gross proceeds of $292,500. 

We expect that we will have sufficient funds to continue our operations for the next six months. We plan to raise additional capital in the future to support our operations. There is no assurance, however, that we will be successful in raising the needed capital or that the proceeds will be received in a timely manner to fully support our operations. 

Derivative Warrant Liability 

The Financial Accounting Standards Board ("FASB") Accounting Standard Codification ("ASC") Topic 815-40: Derivatives and Hedging-Contracts in Entity's Own Equity requires freestanding contracts that are settled in a company's own stock, including common stock warrants, to be designated as an equity instrument, asset or a liability. Under the provisions of ASC 815-40, a contract designated as an asset or a liability must be carried at fair value on a company's balance sheet, with any changes in fair value recorded in the company's results of operations. A contract designated as an equity instrument must be included within equity, and no fair value adjustments are required from period to period. The 3,400,067 Investor Warrants, the 680,013 warrants underlying the placement agent's Unit warrants and the 1,000,000 warrants issued for investment banking services in the Private Offering on September 12, 2014 are accounted for as liabilities. In addition, the 2,145,371 Investor Warrants issued between March 19, 2015 and June 26, 2015 are accounted for as liabilities. The warrants are classified as liabilities because the exercise price of the warrants is subject to adjustment in the event that the Company issues common stock for less than $0.60 per share within one-year of the issuance of the warrants. The 2015 private placements did not result in an adjustment of the exercise price.  

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The Company performs valuations of the warrants issued in the Private Offering using a probability weighted Black-Scholes pricing model which value was also compared to a Binomial Option Pricing Model for reasonableness. The model uses market-sourced inputs such as underlying stock prices, risk-free interest rates, volatility, expected life and dividend rates and has also considered the likelihood of "down round" financings. Selection of these inputs involves management's judgment and may impact net income. Due to our limited operating history and limited number of sales of our Common Stock, we estimate our volatility based on a number of factors including the volatility of comparable publicly traded pharmaceutical companies. The volatility factor used in the Black-Scholes pricing model has a significant effect on the resulting valuation of the derivative liabilities on our balance sheet. The volatility calculated at June 30, 2015 was 57% and we used a risk-free interest rate of 1.62%, and estimated lives of 4.20 to 4.99 years, which are the remaining contractual lives of the warrants. The volatility calculated at September 30, 2014 was 54% and we used a risk-free interest rate of 1.78%, and an estimated life of 4.95 years, which is the remaining contractual life of the warrants. We assumed no dividends would be paid on our common stock. 

Inflation 

Our management believes that inflation has not had a material effect on our results of operations. 

Off Balance Sheet Arrangements 

We do not have any off balance sheet arrangements. 

Critical Accounting Policies and Estimates

The preparation of our financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities as of the date of the financial statements and the amounts of revenues and expenses recorded during the reporting periods. We base our estimates on historical experience, where applicable and other assumptions that we believe are reasonable under the circumstances. Actual results may differ from our estimates under different assumptions or conditions. 

Our critical accounting policies and use of estimates are discussed in, and should be read in conjunction with, the annual consolidated financial statements and notes included in the Company's Annual Report on Form 10-K for the nine months ended September 30, 2014 as filed with the SEC. 

Item 3. Quantitative and Qualitative Disclosures About Market Risk 

Not applicable. 

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures designed to provide reasonable assurance that information required to be disclosed in reports filed under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), is recorded, processed, summarized and reported within the specified time periods and accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding disclosure. 

21

Our Chief Executive Officer and Principal Financial Officer ("CEO"), evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Exchange Act) as of June 30, 2015. In designing and evaluating disclosure controls and procedures, we recognize that any disclosure controls and procedures, no matter how well designed and operated, can only provide reasonable assurance of achieving the desired control objective. As of June 30, 2015, based on the evaluation of these disclosure controls and procedures, and in light of the material weaknesses found in our internal controls, the CEO concluded that our disclosure controls and procedures were not effective. In our assessment of the effectiveness of internal control over financial reporting as of June 30, 2015, we determined that control deficiencies existed that constituted material weaknesses, as described below: 

1)	the Company does not have an independent board of directors or an audit committee;
2)	lack of documented policies and procedures;
3)	the financial reporting function is carried out by consultants; and
4)	ineffective separation of duties due to limited staff.

In light of the conclusion that our internal controls over financial reporting were ineffective as of June 30, 2015, we have applied procedures and processes as necessary to ensure the reliability of our financial reporting in regards to this quarterly report on Form 10-Q. Accordingly, the Company believes, based on its knowledge, that: (i) this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which they were made, not misleading with respect to the periods covered by this report; and (ii) the financial statements, and other financial information included in this quarterly report, fairly present in all material respects our financial condition, results of operations and cash flows as of and for the periods presented in this quarterly report. 

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended June 30, 2015 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. 

22

PART II - OTHER INFORMATION

Item 1. Legal Proceedings 

None. 

Item 1A. Risk Factors

There has been no change in the Company's risk factors since the Company's Form 10-K filed with the SEC on December 29, 2014. 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 

On December 31, 2014, the note holders requested conversion of $600,000 in Promissory Notes and accrued interest of $33,333 into 1,055,554 shares of common stock at a conversion price of $0.60 per share. The shares were issued in reliance on the exemptions from registration afforded by Section 4(a)(2) of the Securities Act of 1933, as amended. 

Between March 19, 2015 and June 26, 2015, the Company sold 2,045,371 Units for a purchase price of $0.54 per Unit and 100,000 Units for a purchase price of $0.60 per Unit for gross proceeds of $1,164,500. Each Unit consists of one share of common stock and one five-year warrant to purchase one share of common stock at an exercise price of $0.60. The Units were issued in reliance on the exemptions from registration afforded by Section 4(a)(2) of the Securities Act of 1933, as amended, as a sale by the Company not involving a public offering. 

In July 2015, the Company sold 541,666 Units for a purchase price of $0.54 per Unit for gross proceeds of $292,500. Each Unit consists of one share of common stock and one five-year warrant to purchase one share of common stock at an exercise price of $0.60. The Units were issued in reliance on the exemptions from registration afforded by Section 4(a)(2) of the Securities Act of 1933, as amended, as a sale by the Company not involving a public offering. 

Item 3. Defaults Upon Senior Securities 

None. 

Item 4. Mine Safety Disclosures 

Not applicable. 

Item 5. Other Information 

None. 

23

Item 6. Exhibits 

All references to registrant's Forms 8-K, 10-K and 10-Q include reference to File No. 333-170781 

31.1	Certification of the Principal Executive and Financial Officer pursuant to Exchange Act Rule 13a-14(a).*
32.1	Certification of the Principal Executive and Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002.*

EX-101.INS	XBRL INSTANCE DOCUMENT
EX-101.SCH	XBRL TAXONOMY EXTENSION SCHEMA DOCUMENT
EX-101.CAL	XBRL TAXONOMY EXTENSION CALCULATION LINKBASE
EX-101.DEF	XBRL TAXONOMY EXTENSION DEFINITION LINKBASE
EX-101.LAB	XBRL TAXONOMY EXTENSION LABELS LINKBASE
EX-101.PRE	XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE

________

* Filed herewith.  

24

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. 

	CITIUS PHARMACEUTICALS, INC.
Date: August 12, 2015	By:	/s/ Leonard Mazur
		Leonard Mazur
		Chief Executive Officer,  Principal Executive Officer and Principal Financial Officer

25

EX-31.1

EXHIBIT 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

PURSUANT TO SECTION 302 OF THE

SARBANES-OXLEY ACT OF 2002

I, Leonard Mazur, certify that: 

1.	I have reviewed this report on Form 10-Q of Citius Pharmaceuticals, Inc.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)  designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; 

b)  designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; 

c)  evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and 

d)  disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and 

5.  The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): 

a)  all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and 

b)  any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. 

Date: August 12, 2015	By:	/s/ Leonard Mazur
		Leonard Mazur
		Chief Executive Officer,
		Principal Executive Officer and Principal Financial Officer

EX-32.1

EXHIBIT 32.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Citius Pharmaceuticals, Inc. (the “Company”) on Form 10-Q for the period ended June 30, 2015 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Leonard Mazur, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 

(1)	The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: August 12, 2015	By:	/s/ Leonard Mazur
		Leonard Mazur
		Chief Executive Officer,
		Principal Executive Officer and Principal Financial Officer

XML

COMMON STOCK, STOCK OPTIONS AND WARRANTS (Details Narrative) - USD ($)	3 Months Ended		9 Months Ended
	Jun. 30, 2015	Jun. 30, 2014	Jun. 30, 2015	Jun. 30, 2014	Sep. 30, 2014
Stock-based compensation expense	$ 163,547		$ 381,076
2014 Plan [Member]
Common stock outstanding	3,900,000		3,900,000
Shares available for future grants	9,100,000		9,100,000
Warrant [Member]
Common stock outstanding	7,905,464		7,905,464
Weighted average remaining life			4 years 4 months 17 days
Stock Options [Member]
Common stock outstanding	3,900,000		3,900,000		3,300,000
Unrecognized total compensation cost related to unvested awards	$ 433,120		$ 433,120
Weighted average remaining life			9 years 11 months 16 days

XML

BUSINESS AGREEMENTS

9 Months Ended

Jun. 30, 2015

Notes to Financial Statements

NOTE 3. BUSINESS AGREEMENTS

Alpex Pharma S.A. 

On June 12, 2008, the Company entered into a collaboration and license agreement (the "Alpex Agreement") with Alpex Pharma S.A. ("Alpex"), in which Alpex granted the Company an exclusive right and license to use certain Alpex intellectual property in order to develop and commercialize orally disintegrating tablet formulations of pharmaceutical products in United States, Canada and Mexico. In addition, Alpex manufactures Suprenza, the Company's commercialized pharmaceutical product, on a contract basis. The agreement was amended on November 15, 2011 as part of an Amendment and Coordination Agreement (see the "Three-Party Agreement" below). 

Under the terms of the Alpex Agreement, as amended by the Three-Party Agreement dated November 15, 2011 (see below), Alpex is entitled to a payment per tablet manufactured and a percentage of all milestone, royalty and other payments received by the Company from Prenzamax, LLC, pursuant to a sublicense agreement (see below). In addition, under the terms of the Alpex Agreement, Alpex retained the right to use the clinical data generated by the Company to file for regulatory approval and market Suprenza in the rest of the world. In the event that Alpex has such sales, Alpex will pay the Company a percentage royalty on net sales, as defined ("Alpex Revenue"). No milestone, royalty or other payments have been earned or received by the Company through June 30, 2015.

Prenzamax, LLC 

On November 15, 2011, the Company entered into an exclusive license agreement (the "Sublicense Agreement") with Prenzamax, LLC ("Prenzamax"), in which the Company granted Prenzamax and its affiliates the exclusive right to commercialize Suprenza in the United States. Prenzamax is an affiliate of Akrimax, a related party (see Note 7) and was formed for the specific purpose of managing the Sublicense Agreement. Under the terms of the Sublicense Agreement, Prenzamax is to pay the Company a percentage of the product's EBITDA, as defined ("Profit Share Payments"). In addition, Prenzamax is to reimburse the Company directly for certain development costs. These payments are to commence once Prenzamax has achieved profitability, as defined in the Sublicense Agreement. Further, under the terms of the Sublicense Agreement, Prenzamax is required to share in the royalty payment due to Alpex under the Alpex Agreement. In addition, Prenzamax is entitled to a percentage of the Alpex Revenue received by the Company.  

The Company has not been reimbursed for any development costs nor has it earned any Profit Share Payments through June 30, 2015.  

Three-Party Agreement 

On November 15, 2011, the Company, Alpex and Prenzamax entered into the Three-Party Agreement wherein the terms of the Alpex Agreement were modified and Prenzamax and the Company agreed to each pay a portion of certain regulatory filing fees for as long as Prenzamax is purchasing Suprenza from Alpex pursuant to the Three-Party Agreement. 

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GOING CONCERN UNCERTAINTY AND MANAGEMENT'S PLAN

9 Months Ended

Jun. 30, 2015

Notes to Financial Statements

NOTE 2. GOING CONCERN UNCERTAINTY AND MANAGEMENT'S PLAN

The accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company experienced negative cash flows from operations of $1,680,116 and $602,829 for the nine months ended June 30, 2015 and 2014, respectively. At June 30, 2015, the Company had a working capital deficit of $1,185,873 and a stockholders' deficit of $1,180,472. The Company has no revenue and has relied on proceeds from equity and debt transactions to finance its operations. At June 30, 2015, the Company had limited capital to fund its operations. This raises substantial doubt about the Company's ability to continue as a going concern. 

The Company plans to raise capital through equity financings from outside investors as well as raise additional funds from existing investors. There is no assurance, however, that the Company will be successful in raising the needed capital and, if funding is available, that it will be available on terms acceptable to the Company.

The accompanying condensed consolidated financial statements do not include any adjustments that might result from the outcome of the above uncertainty. 

XML

CONDENSED CONSOLIDATED BALANCE SHEETS - USD ($)	Jun. 30, 2015	Sep. 30, 2014
Current Assets
Cash and cash equivalents	$ 950,997	$ 1,552,060
Prepaid expenses	5,918
Total Current Assets	956,915	$ 1,552,060
Other Assets
Trademarks	5,401	5,401
Total Assets	962,316	1,557,461
Current liabilities:
Accounts payable	334,337	106,169
Accrued expenses	$ 26,520	60,317
Accrued interest		25,833
Promissory notes		600,000
Derivative warrant liability	$ 1,716,847	1,450,943
Due to related party	65,084	56,134
Total Current Liabilities	$ 2,142,788	$ 2,299,396
Commitments and contingencies
Stockholders' Deficit
Preferred stock - $0.001 par value; 10,000,000 shares authorized; no shares issued and outstanding
Common stock - $0.001 par value; 90,000,000 shares authorized; 333,226,211 and 30,025,286 shares issued and outstanding at June 30, 2015 and September 30, 2014, respectively	$ 33,226	$ 30,025
Additional paid-in capital	6,918,531	5,366,321
Accumulated deficit	(8,132,229)	(6,138,281)
Total Stockholders' Deficit	(1,180,472)	(741,935)
Total Liabilities and Stockholders' Deficit	$ 962,316	$ 1,557,461

XML

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) - USD ($)	9 Months Ended
	Jun. 30, 2015	Jun. 30, 2014
Cash flows from operating activities:
Net loss	$ (1,993,948)	$ (659,573)
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization of debt issuance costs		$ 24,500
Gain on revaluation of derivative warrant liability	$ (272,147)
Stock-based compensation expense	381,076
Changes in operating assets and liabilities:
Prepaid expenses	(5,918)
Accounts payable	228,168	$ (52,964)
Accrued expenses	(33,797)	(520)
Accrued interest	7,500	84,746
Due to related party	8,950	982
Net Cash Used In Operating Activities	$ (1,680,116)	(602,829)
Cash flows from financing activities:
Proceeds from promissory notes		600,000
Proceeds from issuance of common stock		$ 50,000
Net proceeds from private placement	$ 1,079,053
Deferred offering costs		$ (25,000)
Net Cash Provided by Financing Activities	$ 1,079,053	625,000
Net Change in Cash and Cash Equivalents	(601,063)	22,171
Cash and Cash Equivalents - Beginning of Period	1,552,060	1,272
Cash and Cash Equivalents - End of Period	$ 950,997	$ 23,443
Supplemental Disclosures of Cash Flow Information and Non-cash Transactions:
Interest paid
Income taxes paid
Conversion of promissory notes and accrued interest into common stock	$ 633,333
Fair value of warrants issued in connection with private placement and recorded as derivative warrant liability	$ 538,051

XML

DERIVATIVE WARRANT LIABILITY (Details Narrative) - shares	9 Months Ended	12 Months Ended
	Jun. 30, 2015	Sep. 30, 2014
Outstanding warrants to purchase of its common stock	7,225,451	5,080,080
Volatility rate	57.00%	54.00%
Risk-free interest rate	1.62%	1.78%
Estimated life		4 years 11 months 12 days
Minimum [Member]
Estimated life	4 years 2 months 12 days
Maximum [Member]
Estimated life	4 years 11 months 27 days

XML

COMMON STOCK, STOCK OPTIONS AND WARRANTS (Details 1) - Jun. 30, 2015 - $ / shares	Total
Investor Warrants [Member]
Exercise price	$ 0.60
Number	3,400,067
Expiration Date	Sep. 12, 2019
Placement Agent Unit Warrants [Member]
Exercise price	$ 0.60
Number	680,013
Expiration Date	Sep. 12, 2019
Warrants underlying Placement Agent Unit Warrants [Member]
Exercise price	$ 0.60
Number	680,013
Expiration Date	Sep. 12, 2019
Placement Agent Share Warrants [Member]
Exercise price	$ 0.60
Number	1,000,000
Expiration Date	Sep. 12, 2019
Investor Warrants One [Member]
Exercise price	$ 0.60
Number	500,000
Expiration Date	Mar. 19, 2020
Investor Warrants Two [Member]
Exercise price	$ 0.60
Number	583,334
Expiration Date	Apr. 22, 2020
Investor Warrants Three [Member]
Exercise price	$ 0.60
Number	258,333
Expiration Date	Apr. 30, 2020
Investor Warrants Four [Member]
Exercise price	$ 0.60
Number	333,334
Expiration Date	Jun. 10, 2020
Investor Warrants Five [Member]
Exercise price	$ 0.60
Number	100,000
Expiration Date	Jun. 22, 2020
Investor Warrants Six [Member]
Exercise price	$ 0.60
Number	370,370
Expiration Date	Jun. 26, 2020
Warrant [Member]
Number	7,905,464

XML

NATURE OF OPERATIONS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

9 Months Ended

Jun. 30, 2015

Notes to Financial Statements

NOTE 1. NATURE OF OPERATIONS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business 

Citius Pharmaceuticals, Inc. ("Citius" or the "Company") is a pharmaceutical company headquartered in Maynard, Massachusetts focused on developing innovative formulations aimed at improving the delivery and compliance of approved drugs. The Company was founded as Citius Pharmaceuticals, LLC, a Massachusetts limited liability company, on January 23, 2007. On September 12, 2014, Citius Pharmaceuticals, LLC entered into a Share Exchange and Reorganization Agreement (the "Exchange Agreement"), with Citius Pharmaceuticals, Inc. (formerly Trail One, Inc.), a publicly traded company incorporated under the laws of the State of Nevada. Citius Pharmaceuticals, LLC became a wholly-owned subsidiary of Citius (see "Reverse Acquisition" below).  

The Company currently has one approved and marketed product, Suprenza (phentermine hydrochloride), which it has out licensed for promotion in the United States, Canada and Mexico. Since its inception, the Company has devoted substantially all of its efforts to business planning, research and development, recruiting management and technical staff, and raising capital. 

Citius is subject to a number of risks common to companies in the pharmaceutical industry including, but not limited to, risks related to the development by Citius or its competitors of research and development stage products, market acceptance of its products, competition from larger companies, dependence on key personnel, dependence on key suppliers and strategic partners, the Company's ability to obtain additional financing and the Company's compliance with governmental and other regulations. 

Reverse Acquisition 

On September 12, 2014, Citius completed a reverse acquisition transaction with Citius Pharmaceuticals, LLC, which became a wholly-owned subsidiary of Citius. As part of the reverse acquisition, the former members of Citius Pharmaceuticals, LLC received 21,625,219 shares of the Company's common stock in exchange for their interest in Citius Pharmaceuticals, LLC and, immediately after the transaction, owned 72% of the outstanding common stock. Immediately prior to the transaction, Citius had 5,000,000 shares of common stock outstanding. In connection with the Exchange Agreement, the Company completed the first closing of a Private Offering. Following the acquisition, Citius Pharmaceuticals, LLC began operating as a wholly-owned subsidiary of Citius Pharmaceuticals, Inc.  

Accounting principles generally accepted in the United States generally require that a company whose security holders retain the majority voting interest in the combined business be treated as the acquirer for financial reporting purposes. The acquisition was accounted for as a reverse acquisition whereby Citius Pharmaceuticals, LLC was deemed to be the accounting acquirer. Accordingly, the historical consolidated financial statements are those of Citius Pharmaceuticals, LLC as the accounting acquirer. The post-merger combination of Citius Pharmaceuticals, Inc. and Citius Pharmaceuticals, LLC is referred to throughout these notes to consolidated financial statements as the "Company." As the accounting acquirer, Citius Pharmaceuticals, LLC did not acquire any tangible assets from Citius and did not assume any liabilities of Citius. This transaction is not considered a business combination because Citius, the non-operating public corporation, did not meet the definition of a business. Instead, this transaction is considered to be a capital transaction of Citius Pharmaceuticals, LLC and is equivalent to the issuance of shares by Citius Pharmaceuticals, LLC for the net assets of Citius accompanied by a recapitalization. 

In connection with the reverse acquisition, Citius Pharmaceuticals, LLC adopted the fiscal year end of Citius, thereby changing our fiscal year end from December 31 to September 30.  

Basis of Presentation and Summary of Significant Accounting Policies

Basis of Preparation - As a result of the reverse acquisition, the accompanying consolidated financial statements include the operations of Citius Pharmaceuticals, LLC (the accounting acquirer). The accompanying consolidated financial statements also include the operations of Citius Pharmaceuticals, Inc. (formerly Trail One, Inc.) since the date of the reverse acquisition. All significant inter-company balances and transactions have been eliminated in consolidation.  

All share and per share amounts presented in these consolidated financial statements reflect the one-for-one exchange ratio of Citius Pharmaceuticals, LLC member interests to common shares in the reverse acquisition. 

The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information, without being audited, pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments considered necessary to make the financial statements not misleading have been included. Operating results for the nine months ended June 30, 2015 are not necessarily indicative of the results that may be expected for the year ending September 30, 2015. The unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the nine months ended September 30, 2014 filed with the Securities and Exchange Commission. 

There have been no recently issued accounting pronouncements that have had or are expected to have a material impact on the Company's consolidated financial statements.  

Use of Estimates - Our accounting principles require our management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, and reported amounts of revenues and expenses during the reporting periods. Estimates having relatively higher significance include stock-based compensation, valuation of warrants, and deferred income taxes. Actual results could differ from those estimates. 

Net Income (Loss) per Common Share - Basic net income (loss) per share of common stock has been computed by dividing net income (loss) by the weighted average number of shares outstanding during the period. Diluted net income per share of common stock has been computed by dividing net income by the weighted average number of shares outstanding plus the diluting effect, if any, of outstanding stock options, warrants and convertible securities. Diluted net loss per share of common stock has been computed by dividing the net loss for the period by the weighted average number of shares of common stock outstanding during such period. In a net loss period, options, warrants and convertible securities are anti-dilutive and therefore excluded from diluted loss per share calculations.

XML

CONDENSED CONSOLIDATED BALANCE SHEETS (Parenthetical) - $ / shares	Jun. 30, 2015	Sep. 30, 2014
Condensed Consolidated Balance Sheets Parenthetical
Preferred Stock Par Value	$ 0.001	$ 0.001
Preferred Stock Shares Authorized	10,000,000	10,000,000
Preferred Stock Shares Issued	0	0
Preferred Stock Shares Outstanding	0	0
Common Stock Par Value	$ 0.001	$ 0.001
Common Stock Shares Authorized	90,000,000	90,000,000
Common Stock Shares Issued	33,226,211	30,025,286
Common Stock Shares Outstanding	33,226,211	30,025,286

XML

DERIVATIVE WARRANT LIABILITY (Tables)

9 Months Ended

Jun. 30, 2015

Derivative Warrant Liability Tables

Schedule of derivative warrant liabilities

The table below presents the changes in the derivative warrant liability, which is measured at fair value on a recurring basis and classified as Level 3 in the fair value hierarchy: 

	Nine Months  Ended   June 30,   2015			Nine Months  Ended   June 30,   2014
Derivative warrant liability, beginning of period	$	1,450,943		$	-
Fair value of warrants issued		538,051			-
Total realized/unrealized gains included in net loss (1)		(272,147	)		-
Derivative warrant liability, end of period	$	1,716,847		$	-
________________________
(1)   Included in gain or loss on revaluation of derivative warrant liability in the Condensed Consolidated Statement of Operations.

XML

Document and Entity Information - shares	9 Months Ended
	Jun. 30, 2015	Aug. 07, 2015
Document And Entity Information
Entity Registrant Name	Citius Pharmaceuticals, Inc.
Entity Central Index Key	0001506251
Document Type	10-Q
Document Period End Date	Jun. 30, 2015
Amendment Flag	false
Current Fiscal Year End Date	--09-30
Is Entity a Well-known Seasoned Issuer?	No
Is Entity a Voluntary Filer?	Yes
Is Entity's Reporting Status Current?	Yes
Entity Filer Category	Smaller Reporting Company
Entity Common Stock, Shares Outstanding		33,767,877
Document Fiscal Period Focus	Q3
Document Fiscal Year Focus	2015

XML

COMMON STOCK, STOCK OPTIONS AND WARRANTS (Tables)

9 Months Ended

Jun. 30, 2015

Common Stock Stock Options And Warrants Tables

Schedule of stock option activity

A summary of option activity under the 2014 Plan as of June 30, 2015 and the changes during the nine months then ended is presented below: 

Options	Shares		Weighted-  Average  Exercise  Price		Weighted-  Average  Remaining  Contractual  Term	Aggregate  Intrinsic  Value
Outstanding at October 1, 2014		3,300,000	$	0.45	9.96 years
Granted		600,000		0.60
Exercised		-		-
Forfeited or expired		-		-
Outstanding at June 30, 2015		3,900,000	$	0.47	9.19 years	$	297,000
Exercisable at June 30, 2015		1,550,000	$	0.47	8.99 years	$	117,000

Schedule of Warrants

The following table summarizes the warrants outstanding at June 30, 2015: 

	Exercise price		Number			Expiration Date
Investor Warrants	$	0.60		3,400,067	(1)	September 12, 2019
Placement Agent Unit Warrants		0.60		680,013		September 12, 2019
Warrants underlying Placement Agent Unit Warrants		0.60		680,013	(1)	September 12, 2019
Placement Agent Share Warrants		0.60		1,000,000	(1)	September 12, 2019
Investor Warrants		0.60		500,000	(1)	March 19, 2020
Investor Warrants		0.60		583,334	(1)	April 22, 2020
Investor Warrants		0.60		258,333	(1)	April 30, 2020
Investor Warrants		0.60		333,334	(1)	June 10, 2020
Investor Warrants		0.60		100,000	(1)	June 22, 2020
Investor Warrants		0.60		370,370	(1)	June 26, 2020
				7,905,464

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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) - USD ($)	3 Months Ended		9 Months Ended
	Jun. 30, 2015	Jun. 30, 2014	Jun. 30, 2015	Jun. 30, 2014
Condensed Consolidated Statements Of Operations
Revenues
Operating Expenses
Research and development	$ 415,531		$ 1,174,892	$ 437,397
General and administrative	194,651	$ 1,305	705,580	$ 112,930
Stock-based compensation - general and administrative	163,547		381,076
Total Operating Expenses	773,729	$ 1,305	2,261,548	$ 550,327
Operating Loss	(773,729)	$ (1,305)	(2,261,548)	$ (550,327)
Other Income (Expense), Net:
Interest income	298		2,953
Gain (loss) on revaluation of derivative warrant liability	$ (51,541)		272,147
Interest expense		$ (33,575)	(7,500)	$ (109,246)
Total Other Income (Expense), Net	$ (51,243)	(33,575)	267,600	(109,246)
Loss before Income Taxes	$ (824,972)	$ (34,880)	$ (1,993,948)	$ (659,573)
Income tax benefit
Net Loss	$ (824,972)	$ (34,880)	$ (1,993,948)	$ (659,573)
Net Loss Per Share - Basic and Diluted	$ (0.03)	$ (0.00)	$ (0.06)	$ (0.04)
Weighted Average Common Shares Outstanding Basic and diluted	32,312,729	17,843,047	31,161,596	17,785,904

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COMMON STOCK, STOCK OPTIONS AND WARRANTS

9 Months Ended

Jun. 30, 2015

Notes to Financial Statements

NOTE 6. COMMON STOCK, STOCK OPTIONS AND WARRANTS

Common Stock  

In May 2014, the Company issued 200,000 shares of common stock for $50,000, or $0.25 per share. 

On September 12, 2014, in connection with the Reverse Acquisition, 5,000,000 shares of common stock were recorded in the financial statements of Citius Pharmaceuticals, LLC, the accounting acquirer (See Note 1 - Reverse Acquisition). 

Private Offerings 

In 2014, the Company entered into an investment banking agreement to raise up to $5.1 million and issue up to 8,500,000 Units described below. The agreement contemplated a Reverse Acquisition with a public company. As of December 31, 2013, the Company capitalized as deferred offering costs a $25,000 retainer for legal costs associated with this offering. The $25,000 retainer was charged to additional paid-in capital on completion of the first closing of the offering. 

On September 12, 2014, the Company sold 3,400,067 Units for a purchase price of $0.60 per Unit for gross proceeds of $2,040,040. Each Unit consists of one share of common stock and one five-year warrant (the "Investor Warrants") to purchase one share of common stock at an exercise price of $0.60, (the "Private Offering"). The exercise price of the Investor Warrants is subject to weighted average adjustment, for up to one year, if the Company issues common stock at a price lower than the exercise price, subject to certain exceptions. The 2015 private placement described below did not result in an adjustment of the exercise price. The Investor Warrants will be redeemable by the Company at a price of $0.001 per Investor Warrant at any time subject to the conditions that (i) the common stock has traded for twenty (20) consecutive trading days with a closing price of at least $1.50 per share with an average trading volume of 50,000 shares per day and (ii) the Company provides 20 trading days prior notice of the redemption and the closing price of the common stock is not less than $1.17 for more than any 3 days during such notice period and (iii) the underlying shares of common stock are registered. 

The Placement Agent was paid a commission of ten percent (10%) and a non-accountable expense allowance of three percent (3%) of the funds raised in the Private Offering. As a result of the foregoing arrangement, the Placement Agent was paid commissions and expenses of $265,206. In addition, the Company issued to the Placement Agent and their designees five-year warrants (the "Placement Agent Unit Warrants") to purchase 680,013 Units at an exercise price of $0.60 per Unit. The Placement Agent Unit Warrants are exercisable on a cash or cashless basis with respect to purchase of the Units, and will be exercisable only for cash with respect to warrants received as part of the Units. The exercise price of the warrants underlying the Placement Agent Unit Warrants is subject to weighted-average adjustment, for up to one year, if the Company issues common stock at a price lower than the exercise price, subject to certain exceptions.  

In addition, the Placement Agent was issued warrants to purchase 1,000,000 shares of common stock exercisable for cash at $0.60 per share for investment banking services provided in connection with the transaction (the "Placement Agent Share Warrants"). Other cash expenses related to the private placement totaled $169,000. The Placement Agent may, while the Placement Agent Unit Warrants are outstanding, appoint one person to the Board of Directors, and designate one person who may attend meetings of the Board of Directors as an observer. 

In connection with the Private Offering, the Company entered into a Registration Rights Agreement pursuant to which the Company is required to file a registration statement (the "Registration Statement"), registering for resale all shares of common stock (i) included in the Units; and (ii) issuable upon exercise of the Investor Warrants. The Company has agreed to use its reasonable efforts to cause the Registration Statement to be filed no later than 60 days after the completion of the Private Offering (the "Filing Deadline"), and to have the Registration Statement declared effective within 180 days of the Filing Deadline. The Private Offering is still in progress. Any holders of the shares of common stock removed from the Registration Statement as a result of a Section 415 comment from the SEC shall be included in a subsequent registration statement the Company will file no later than six months after the prior registration statement (or such other period as permitted by SEC rules). 

Between March 19, 2015 and June 26, 2015, the Company sold an additional 2,045,371 Units for a purchase price of $0.54 per Unit and 100,000 Units for a purchase price of $0.60 per Unit for gross proceeds of $1,164,500. Each Unit consists of one share of common stock and one Investor Warrant (see description above). There was no placement agent for the 2015 private placements and other cash expenses related to the placements were $85,447. The investors were granted registration rights as described above. In connection with these financings, the Company credited $541,002 to stockholders' equity (deficit) and $538,051 to derivative warrant liability. 

Stock Options 

On September 12, 2014, the Board of Directors adopted the 2014 Stock Incentive Plan (the "2014 Plan") and reserved 13,000,000 shares of common stock for issuance to employees, directors and consultants. On September 12, 2014, the stockholders approved the plan. Pursuant to the 2014 Plan, the Board of Directors (or committees and/or executive officers delegated by the Board of Directors) may grant stock options, stock appreciation rights, restricted stock, restricted stock units, other stock-based awards and cash-based awards. As of June 30, 2015, there were options to purchase an aggregate of 3,900,000 shares of common stock outstanding under the 2014 Plan and 9,100,000 shares available for future grants. 

The fair value of each stock option award is estimated on the date of grant using the Black-Scholes option pricing model. Due to its limited operating history and limited number of sales of its Common Stock, the Company estimated its volatility in consideration of a number of factors including the volatility of comparable public companies. The Company uses historical data, as well as subsequent events occurring prior to the issuance of the financial statements, to estimate option exercises and employee terminations within the valuation model. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant commensurate with the expected term assumption. The expected term of stock options granted, all of which qualify as "plain vanilla," is based on the average of the contractual term (generally 10 years) and the vesting period. For non-employee options, the expected term is the contractual term.  

A summary of option activity under the 2014 Plan as of June 30, 2015 and the changes during the nine months then ended is presented below: 

Options	Shares		Weighted-  Average  Exercise  Price		Weighted-  Average  Remaining  Contractual  Term	Aggregate  Intrinsic  Value
Outstanding at October 1, 2014		3,300,000	$	0.45	9.96 years
Granted		600,000		0.60
Exercised		-		-
Forfeited or expired		-		-
Outstanding at June 30, 2015		3,900,000	$	0.47	9.19 years	$	297,000
Exercisable at June 30, 2015		1,550,000	$	0.47	8.99 years	$	117,000

On September 12, 2014, the Board of Directors granted stock options to purchase 3,300,000 shares of common stock at an exercise price of $0.45 per share. The weighted average grant-date fair value of the options granted was estimated at $0.34 per share. These options vest over three years and have a term of 10 years.  

On April 1, 2015, the Board of Directors granted stock options to purchase 100,000 shares of common stock at an exercise price of $0.60 per share. The weighted average grant-date fair value of the options granted was estimated at $0.16 per share. These options vested immediately and have a term of 5 years. On June 1, 2015, the Board of Directors granted stock options to purchase 500,000 shares of common stock at an exercise price of $0.60 per share. The weighted average grant-date fair value of the options granted was estimated at $0.27 per share. These options vested over three years and have a term of 10 years.  

Stock-based compensation expense for the three months ended June 30, 2015 and 2014 was $163,547 and $0, respectively. Stock-based compensation expense for the nine months ended June 30, 2015 and 2014 was $381,076 and $0, respectively.  

At June 30, 2015, unrecognized total compensation cost related to unvested awards of $433,120 is expected to be recognized over a weighted average period of 1.7 years.

Warrants 

The Company has reserved 7,905,464 shares of common stock for the exercise of outstanding warrants. The following table summarizes the warrants outstanding at June 30, 2015: 

	Exercise price		Number			Expiration Date
Investor Warrants	$	0.60		3,400,067	(1)	September 12, 2019
Placement Agent Unit Warrants		0.60		680,013		September 12, 2019
Warrants underlying Placement Agent Unit Warrants		0.60		680,013	(1)	September 12, 2019
Placement Agent Share Warrants		0.60		1,000,000	(1)	September 12, 2019
Investor Warrants		0.60		500,000	(1)	March 19, 2020
Investor Warrants		0.60		583,334	(1)	April 22, 2020
Investor Warrants		0.60		258,333	(1)	April 30, 2020
Investor Warrants		0.60		333,334	(1)	June 10, 2020
Investor Warrants		0.60		100,000	(1)	June 22, 2020
Investor Warrants		0.60		370,370	(1)	June 26, 2020
				7,905,464

(1)     Fair value of these warrants are included in the derivative warrant liability 

The weighted average remaining life of the warrants is 4.38 years. At June 30, 2015, all warrants are exercisable and there is no aggregate intrinsic value for the warrants outstanding.  

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DERIVATIVE WARRANT LIABILITY

9 Months Ended

Jun. 30, 2015

Notes to Financial Statements

NOTE 5. DERIVATIVE WARRANT LIABILITY

Derivative financial instruments are recognized as a liability on the consolidated balance sheet and measured at fair value. At June 30, 2015 and September 30, 2014, the Company had outstanding warrants to purchase 7,225,451 and 5,080,080 shares of its common stock, respectively, that are considered to be derivative instruments since the agreements contain "down round" provisions whereby the exercise price of the warrants is subject to weighted average adjustment in the event that the Company issues common stock for less than $0.60 per share within one year of the issuance of the warrants (see Note 6).  

The Company performs valuations of the warrants using a probability weighted Black-Scholes option pricing model which value was also compared to a Binomial Option Pricing Model for reasonableness. This model requires input of assumptions including the risk-free interest rates, volatility, expected life and dividend rates and has also considered the likelihood of "down round" financings. Selection of these inputs involves management's judgment and may impact net income. Due to our limited operating history and limited number of sales of our common stock, we estimate our volatility based on a number of factors including the volatility of comparable publicly traded pharmaceutical companies. The volatility factor used in the Black-Scholes option pricing model has a significant effect on the resulting valuation of the derivative liabilities on our balance sheet. The volatility calculated at June 30, 2015 was 57%. We used a risk-free interest rate of 1.62%, estimated lives of 4.20 to 4.99 years, which are the remaining contractual lives of the warrants and no dividends to our common stock. The volatility calculated at September 30, 2014 was 54%. We used a risk-free interest rate of 1.78%, an estimated life of 4.95 years, which is the remaining contractual life of the warrants and no dividends to our common stock. 

The table below presents the changes in the derivative warrant liability, which is measured at fair value on a recurring basis and classified as Level 3 in the fair value hierarchy: 

	Nine Months  Ended   June 30,   2015			Nine Months  Ended   June 30,   2014
Derivative warrant liability, beginning of period	$	1,450,943		$	-
Fair value of warrants issued		538,051			-
Total realized/unrealized gains included in net loss (1)		(272,147	)		-
Derivative warrant liability, end of period	$	1,716,847		$	-
________________________
(1)   Included in gain or loss on revaluation of derivative warrant liability in the Condensed Consolidated Statement of Operations.

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COMMON STOCK, STOCK OPTIONS AND WARRANTS (Details) - 9 months ended Jun. 30, 2015 - Stock Options [Member] - USD ($)	Total
Stock Options
Outstanding, beginning balance	3,300,000
Granted	600,000
Exercised
Forfeited or expired
Outstanding, ending balance	3,900,000
Exercisable, ending balance	1,550,000
Weighted Average Exercise Price
Outstanding, beginning balance	$ 0.45
Granted	$ 0.60
Exercised
Forfeited or expired
Outstanding, ending balance	$ 0.47
Exercisable, ending balance	$ 0.47
Weighted Average Remaining Contractual Life (years)
Weighted Average Remaining Contractual Life (years), Beginning	9 years 11 months 16 days
Weighted Average Remaining Contractual Life (years), Ending	9 years 2 months 9 days
Exercisable Remaining Contractual Life (years)	8 years 11 months 27 days
Aggregate Intrinsic value
Outstanding ending balance	$ 297,000
Exercisable ending balance	$ 117,000

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GOING CONCERN UNCERTAINTY AND MANAGEMENT'S PLAN (Details Narrative) - USD ($)	9 Months Ended
	Jun. 30, 2015	Jun. 30, 2014	Sep. 30, 2014
Going Concern Uncertainty And Managements Plan Details Narrative
Cash flows from operations	$ (1,680,116)	$ (602,829)
Working capital deficit	1,185,873
Stockholders' Deficit	$ (1,180,472)		$ (741,935)

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SUBSEQUENT EVENTS

9 Months Ended

Jun. 30, 2015

Notes to Financial Statements

NOTE 9. SUBSEQUENT EVENTS

In July 2015, the Company sold an additional 541,666 Units for a purchase price of $0.54 per Unit for gross proceeds of $292,500. Each Unit consists of one share of common stock and one Investor Warrant similar to the Unit description in Note 6.

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RELATED PARTY TRANSACTIONS

9 Months Ended

Jun. 30, 2015

Notes to Financial Statements

NOTE 7. RELATED PARTY TRANSACTIONS

The Company's headquarters is located in the office space of a company affiliated through common ownership. The Company has not recorded any revenue or expense related to the use of the office space as management has determined the usage to be immaterial and the affiliate has not charged for the usage. 

As of June 30, 2015 and September 30, 2014, the Company owed $65,084 and $56,134, respectively to the company affiliated through common ownership for expenses the related party paid on the Company's behalf and services performed by the related party. 

Our Chief Executive Officer is the cofounder and Vice Chairman of Akrimax Pharmaceuticals, LLC ("Akrimax"), a privately held pharmaceutical company specializing in producing cardiovascular and general pharmaceutical products (see Note 3). 

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EMPLOYMENT AND CONSULTING AGREEMENTS

9 Months Ended

Jun. 30, 2015

Notes to Financial Statements

NOTE 8. EMPLOYMENT AND CONSULTING AGREEMENTS

Employment Agreement 

The Company entered into a three year employment agreement with its new Chief Executive Officer effective September 12, 2014. Upon expiration, the agreement automatically renews for successive periods of one-year. The agreement requires the Company to pay base compensation plus incentives over the employment term plus severance benefits upon the occurrence of certain events as described in the agreement. Under the agreement, the Chief Executive Officer was granted options to purchase 3,300,000 shares of common stock. 

Consulting Agreements 

Effective September 1, 2014, the Company entered into three consulting agreements. Two of the agreements are for financial consulting services including accounting, preparation of financial statements and filings with the SEC. The third agreement is for financing activities, product development strategies and corporate development. The agreements may be terminated by the Company or the consultant with 90 days written notice.  

Consulting expense under the agreements for the three months ended June 30, 2015 was $87,000, including $12,000 paid to a consultant who is a stockholder of the Company. Consulting expense under the agreements for the nine months ended June 30, 2015 was $261,000, including $36,000 paid to a consultant who is a stockholder of the Company. In addition, one financial consulting services agreement provides for the grant of options to purchase 500,000 shares of common stock contingent upon approval by the Board of Directors. The option was granted on June 1, 2015. 

Effective January 1, 2015, the Company entered into a consulting agreement for scientific and medical advice related to a Phase 2a clinical trial. Under the terms of the agreement, the consultant will receive fees for participating in telephone and in person meetings. The agreement may be terminated by the Company or the consultant with 90 days written notice. The consultant was also granted an option to purchase 100,000 shares of common stock at $0.60 per share on April 1, 2015. The options vested immediately and expire on March 31, 2020. 

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NATURE OF OPERATIONS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies)

9 Months Ended

Jun. 30, 2015

Nature Of Operations Basis Of Presentation And Summary Of Significant Accounting Policies Policies

Basis of Preparation

As a result of the reverse acquisition, the accompanying consolidated financial statements include the operations of Citius Pharmaceuticals, LLC (the accounting acquirer). The accompanying consolidated financial statements also include the operations of Citius Pharmaceuticals, Inc. (formerly Trail One, Inc.) since the date of the reverse acquisition. All significant inter-company balances and transactions have been eliminated in consolidation.  

All share and per share amounts presented in these consolidated financial statements reflect the one-for-one exchange ratio of Citius Pharmaceuticals, LLC member interests to common shares in the reverse acquisition. 

The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information, without being audited, pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments considered necessary to make the financial statements not misleading have been included. Operating results for the nine months ended June 30, 2015 are not necessarily indicative of the results that may be expected for the year ending September 30, 2015. The unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the nine months ended September 30, 2014 filed with the Securities and Exchange Commission. 

There have been no recently issued accounting pronouncements that have had or are expected to have a material impact on the Company's consolidated financial statements.  

Use of Estimates

Our accounting principles require our management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, and reported amounts of revenues and expenses during the reporting periods. Estimates having relatively higher significance include stock-based compensation, valuation of warrants, and deferred income taxes. Actual results could differ from those estimates. 

Net Income (Loss) per Common Share

Basic net income (loss) per share of common stock has been computed by dividing net income (loss) by the weighted average number of shares outstanding during the period. Diluted net income per share of common stock has been computed by dividing net income by the weighted average number of shares outstanding plus the diluting effect, if any, of outstanding stock options, warrants and convertible securities. Diluted net loss per share of common stock has been computed by dividing the net loss for the period by the weighted average number of shares of common stock outstanding during such period. In a net loss period, options, warrants and convertible securities are anti-dilutive and therefore excluded from diluted loss per share calculations.

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DERIVATIVE WARRANT LIABILITY (Details) - USD ($)		9 Months Ended
		Jun. 30, 2015	Jun. 30, 2014
Derivative Warrant Liability Details
Derivative warrant liability, beginning of period		$ 1,450,943
Fair value of warrants issued		538,051
Total realized/unrealized losses included in net loss	[1]	(272,147)
Derivative warrant liability, end of period		$ 1,716,847

[1] Included in gain or loss on revaluation of derivative warrant liability in the Condensed Consolidated Statement of Operations.

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RELATED PARTY TRANSACTIONS (Details Narrative) - USD ($)	Jun. 30, 2015	Sep. 30, 2014
Related Party Transactions Details Narrative
Company owes to related party	$ 65,084	$ 56,134

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CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT (Unaudited) - 9 months ended Jun. 30, 2015 - USD ($)	Preferred Stock	Common Stock	Additional Paid-In Capital	Accumulated Deficit	Total
Beginning balance, Amount at Sep. 30, 2014		$ 30,025	$ 5,366,321	$ (6,138,281)	$ (741,935)
Beginning balance, Shares at Sep. 30, 2014		30,025,286
Conversion of promissory notes and accrued interest into common stock, Amount		$ 1,056	632,277		633,333
Conversion of promissory notes and accrued interest into common stock, Shares		1,055,554
Issuance of common stock in private placement, net of costs, Amount		$ 2,145	538,857		541,002
Issuance of common stock in private placement, net of costs, Shares		2,145,371
Stock-based compensation			381,076		381,076
Net loss				$ (1,993,948)	(1,993,948)
Ending balance, Amount at Jun. 30, 2015		$ 33,226	$ 6,918,531	$ (8,132,229)	$ (1,180,472)
Ending balance, Shares at Jun. 30, 2015		33,226,211

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NOTES PAYABLE

9 Months Ended

Jun. 30, 2015

Notes to Financial Statements

NOTE 4. NOTES PAYABLE

Convertible Promissory Notes 

Between July 12, 2010 and November 30, 2012, the Company issued several convertible promissory notes (collectively the "Convertible Notes") to two existing investors in the aggregate total principal amount of $1,460,000. The Convertible Notes accrue interest at 3.00% per annum and are payable on demand only after their respective 10-year maturities. Between January 1, 2013 and March 25, 2013, the Company issued additional Convertible Notes to existing investors in the aggregate total principal amount of $225,000. The additional Convertible Notes accrue interest at 5.00% per annum and are payable on demand only after their respective 10-year maturities. The unpaid principal and accrued interest are only convertible into common stock following a reorganization or conversion into a corporation at the option of the holder. The unpaid principal and accrued interest will convert into common stock at the greater of the fair value of the common stock on the date of the conversion or $0.25 ($0.69 if the Company's common stock is admitted to trade on a national exchange prior to the date of conversion). 

On July 31, 2014, in anticipation of the completion of the reverse acquisition and the Private Offering, the note holders demanded conversion of the outstanding $1,685,000 Convertible Notes and accrued interest of $151,813 into 3,061,355 shares of common stock at a conversion price of $0.60 per share.  

Promissory Notes 

In November 2013, the Company issued two promissory notes (the "Promissory Notes") to two existing investors in the aggregate total principal amount of $600,000. The Promissory Notes accrue interest at 5.00% per annum and are due at the earliest of (1) December 19, 2014, (2) the occurrence of an event of default as defined in the Promissory Notes, (3) an initial installment of $100,000 principal amount, to each investor, upon the receipt by the Company of a minimum of $6,500,000 in aggregate proceeds under any financing transaction, (4) a second installment of $100,000 principal amount, to each investor, upon the receipt by the Company of a minimum of $8,500,000 in aggregate proceeds under any financing transaction, and (5) a third installment of $100,000 principal amount, to each investor, upon the receipt by the Company of a minimum of $10,000,000 in aggregate proceeds under any financing transaction. At September 30, 2014, the Promissory Notes had an outstanding aggregate principal balance of $600,000. 

On December 31, 2014, the note holders requested conversion of the outstanding $600,000 Promissory Notes and accrued interest of $33,333 into 1,055,554 shares of common stock at a conversion price of $0.60 per share.

Subordinated Convertible Promissory Note 

In 2013, the Company entered into an investment banking agreement ("2013 PPM") to raise up to $6 million of 10% subordinated convertible promissory notes. The agreement contemplated a reverse acquisition with a public company and an automatic conversion of the notes into units of common stock and warrants, as defined therein. In April 2013, the Company issued a $350,000 subordinated convertible promissory note (the "Subordinated Note"). The Subordinated Note accrued interest at 10% per annum and was payable on demand any time after April 2014. If the Company has not repaid the Subordinated Note at the closing of a reverse acquisition, the unpaid principal and accrued interest will automatically convert into common stock by dividing the amount due by a price per unit of $0.65. Also, upon automatic conversion, the purchaser of the Subordinated Note will receive a warrant to purchase the same number of shares in to which the Subordinated Note converts. 

On July 31, 2014, in anticipation of the completion of the reverse acquisition and the Private Offering, the note holder demanded conversion of the outstanding $350,000 Subordinated Note and accrued interest of $44,245 into 606,531 shares of common stock at a conversion price of $0.65 per share.  

Interest Expense

During 2013, the Company incurred $42,000 of debt issuance costs related to the Subordinated Note which was amortized over the term of the underlying debt. Amortization of debt issuance costs recorded as interest expense for the three months ended June 30, 2015 and 2014 amounted to $0 and $3,500, respectively. Amortization of debt issuance costs recorded as interest expense for the nine months ended June 30, 2015 and 2014 amounted to $0 and $24,500, respectively. 

Interest expense on the notes for the three months ended June 30, 2015 and 2014, including non-cash interest related to debt issuance costs, was $0 and $33,575, respectively. Interest expense on the notes for the nine months ended June 30, 2015 and 2014, including non-cash interest related to debt issuance costs, was $7,500 and $109,246, respectively. 

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EMPLOYMENT AND CONSULTING AGREEMENTS (Details Narrative) - Jun. 30, 2015 - USD ($)	Total	Total
Employment And Consulting Agreements Details Narrative
Consulting expense	$ 87,000	$ 261,000
Payment to stockholder under counsulting fee	$ 12,000	$ 36,000
Granted options to purchase common stock		500,000

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NOTES PAYABLE (Details Narrative) - USD ($)	3 Months Ended		9 Months Ended		12 Months Ended
	Jun. 30, 2015	Jun. 30, 2014	Jun. 30, 2015	Jun. 30, 2014	Dec. 31, 2013	Dec. 31, 2014	Sep. 30, 2014
Outstanding aggregate principal balance							$ 600,000
Interest expense		$ 33,575	$ 7,500	$ 109,246
Amortization of debt issuance costs		$ 3,500		$ 24,500
Accrued interest							$ 25,833
Promissory Notes [Member]
Outstanding aggregate principal balance						$ 600,000
Common stock for conversion						1,055,554
Conversion price						$ 0.60
Accrued interest						$ 33,333
Subordinated Note [Member]
Debt issuance costs					$ 42,000