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: December 31, 2016

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.)

11 Commerce Drive, First Floor, Cranford, NJ 07016

(Address of principal executive offices and zip code)

(908) 967-6677

(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 x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (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 x No ¨

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

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 January 31, 2017, there were 74,558,992 shares of common stock, $0.001 par value, of the registrant issued and outstanding.

Citius Pharmaceuticals, Inc.

FORM 10-Q

TABLE OF CONTENTS

December 31, 2016

		Page
PART I.	FINANCIAL INFORMATION:
Item 1.	Financial Statements (Unaudited)	4
	Condensed Consolidated Balance Sheets at December 31, 2016 and September 30, 2016	4
	Condensed Consolidated Statements of Operations for the Three Months Ended December 31, 2016 and 2015	5
	Condensed Consolidated Statement of Changes in Stockholders’ Equity for the Three Months Ended December 31, 2016	6
	Condensed Consolidated Statements of Cash Flows for the Three Months Ended December 31, 2016 and 2015	7
	Notes to Condensed Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	18
Item 4.	Controls and Procedures	18
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	19
Item 1A.	Risk Factors	19
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	19
Item 3.	Defaults Upon Senior Securities	19
Item 4.	Mine Safety Disclosures	19
Item 5.	Other Information	19
Item 6.	Exhibits	20
	SIGNATURES	21

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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 subsidiaries, Citius Pharmaceuticals, LLC and Leonard-Meron Biosciences, Inc., 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)

	December 31,			September 30,
	2016			2016
ASSETS
Current Assets:
Cash and cash equivalents	$	46,764		$	294,351
Prepaid expenses		443,526			598,484
Total Current Assets		490,290			892,835
Property and Equipment, Net of Accumulated Depreciation of $5,452 and $4,780		3,070			3,742
Other Assets:
Deposits		2,167			2,167
Deferred offering costs		—			64,801
In-process research and development		19,400,000			19,400,000
Goodwill		1,586,796			1,586,796
Total Other Assets		20,988,963			21,053,764
Total Assets	$	21,482,323		$	21,950,341
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	985,865		$	909,156
Accrued expenses		1,847,062			958,101
Accrued compensation		1,010,500			903,250
Accrued interest		44,099			30,871
Notes payable – related parties		1,492,970			672,970
Derivative warrant liability		910,578			1,681,973
Due to related party		27,637			27,637
Total Current Liabilities		6,318,711			5,183,958
Commitments and Contingencies
Stockholders’ Equity:
Preferred stock – $0.001 par value; 10,000,000 shares authorized; no shares issued and outstanding		—			—
Common stock – $0.001 par value; 200,000,000 shares authorized; 74,113,060 and 73,138,060 shares issued and outstanding at December 31, 2016 and September 30, 2016, respectively		74,113			73,138
Additional paid-in capital		34,601,644			34,029,492
Accumulated deficit		(19,512,145	)		(17,336,247	)
Total Stockholders’ Equity		15,163,612			16,766,383
Total Liabilities and Stockholders’ Equity	$	21,482,323		$	21,950,341

See notes to unaudited condensed consolidated financial statements.

4

CITIUS PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE MONTHS ENDED DECEMBER 31, 2016 AND 2015

(Unaudited)

	Three Months Ended
	December 31,			December 31,
	2016			2015
Revenues	$	—		$	—
Operating Expenses
Research and development		1,411,159			829,156
General and administrative		1,132,183			294,221
Stock-based compensation – general and administrative		241,514			121,299
Total Operating Expenses		2,784,856			1,244,676
Operating Loss		(2,784,856	)		(1,244,676	)
Other Income (Expense), Net
Interest income		—			15
Gain on revaluation of derivative warrant liability		622,186			23,940
Interest expense		(13,228	)		—
Total Other Income (Expense), Net		608,958			23,955
Loss before Income Taxes		(2,175,898	)		(1,220,721	)
Income tax benefit		—			—
Net Loss	$	(2,175,898	)	$	(1,220,721	)
Net Loss Per Share - Basic and Diluted	$	(0.03	)	$	(0.04	)
Weighted Average Common Shares Outstanding
Basic and diluted		73,551,375			34,414,988

See notes to unaudited condensed consolidated financial statements.

5

CITIUS PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY

FOR THE THREE MONTHS ENDED DECEMBER 31, 2016

(Unaudited)

							Additional					Total
	Preferred		Common Stock				Paid-In		Accumulated			Stockholders'
	Stock		Shares		Amount		Capital		Deficit			Equity
Balance, October 1, 2016	$	—		73,138,060	$	73,138	$	34,029,492	$	(17,336,247	)	$	16,766,383
Issuance of common stock in private placements, net of costs		—		975,000		975		181,429		—			182,404
Reclassification of derivative warrant liability to additional paid-in capital		—		—		—		149,209		—			149,209
Stock-based compensation		—		—		—		241,514		—			241,514
Net loss		—		—		—		—		(2,175,898	)		(2,175,898	)
Balance, December 31, 2016	$	—		74,113,060	$	74,113	$	34,601,644	$	(19,512,145	)	$	15,163,612

See notes to unaudited condensed consolidated financial statements.

6

CITIUS PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED DECEMBER 31, 2016 AND 2015

(Unaudited)

	2016			2015
Cash Flows From Operating Activities:
Net loss	$	(2,175,898	)	$	(1,220,721	)
Adjustments to reconcile net loss to net cash used in operating activities:
Gain on revaluation of derivative warrant liability		(622,186	)		(23,940	)
Stock-based compensation expense		241,514			121,299
Depreciation		672			—
Changes in operating assets and liabilities:
Prepaid expenses		154,958			—
Accounts payable		76,709			(100,464	)
Accrued expenses		888,961			526,740
Accrued compensation		107,250			—
Accrued interest		13,228			—
Net Cash Used In Operating Activities		(1,314,792	)		(697,086	)
Cash Flows From Financing Activities:
Proceeds from notes payable - related parties		820,000			—
Net proceeds from private placements		247,205			302,438
Net Cash Provided By Financing Activities		1,067,205			302,438
Net Change in Cash and Cash Equivalents		(247,587	)		(394,648	)
Cash and Cash Equivalents - Beginning of Period		294,351			676,137
Cash and Cash Equivalents - End of Period	$	46,764		$	281,489
Supplemental Disclosures Of Cash Flow Information and Non-cash Transactions:
Interest paid	$	—		$	—
Income taxes paid	$	—		$	—
Fair value of warrants recorded as derivative warrant liability	$	—		$	157,984
Reclassification of derivative warrant liability to additional paid-in capital	$	149,209		$	—

See notes to unaudited condensed consolidated financial statements.

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CITIUS PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED DECEMBER 31, 2016 AND 2015

(Unaudited)

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

Business

Citius Pharmaceuticals, Inc. (“Citius” or the “Company”) is a specialty pharmaceutical company dedicated to the development and commercialization of critical care products targeting unmet needs with a focus on anti-infectives, cancer care and unique prescription products. The Company was founded as Citius Pharmaceuticals, LLC, a Massachusetts limited liability company, on January 23, 2007. On September 12, 2014, Citius Pharmaceuticals, LLC entered into a Share Exchange and Reorganization Agreement with Citius Pharmaceuticals, Inc. (formerly Trail One, Inc.), a publicly traded company incorporated under the laws of the State of Nevada. Citius Pharmaceuticals, LLC became a wholly-owned subsidiary of Citius.

On March 30, 2016, Citius acquired Leonard-Meron Biosciences, Inc. (“LMB”) as a wholly-owned subsidiary (see “Acquisition of Leonard-Meron Biosciences, Inc.” below).

The Company had one approved product, Suprenza (phentermine hydrochloride), which it licensed out for promotion in the United States, Canada and Mexico. On July 1, 2016, the Company announced that it was discontinuing Suprenza. Since its inception, the Company has devoted substantially all of its efforts to business planning, research and development, recruiting management and technical staff, and raising capital.

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

Acquisition of Leonard-Meron Biosciences, Inc.

On March 30, 2016, the Company acquired all of the outstanding stock of Leonard-Meron Biosciences, Inc. (“LMB”) by issuing 29,136,839 shares of its common stock. As of March 30, 2016, the stockholders of LMB received approximately 41% of the issued and outstanding common stock of the Company. In addition, the Company converted the outstanding common stock warrants of LMB into 3,645,297 common stock warrants of the Company and converted the outstanding common stock options of LMB into 1,158,770 common stock options of the Company.

The Company acquired tangible assets consisting of cash of $255,748, prepaid expenses of $20,544, property and equipment of $5,085, deposits of $2,167, and identifiable intangible assets of $19,400,000 related to in-process research and development. The Company assumed accounts payable of $244,776, accrued expenses of $598,659, accrued compensation of $615,000, accrued interest of $23,862, and notes payable of $772,970. Accordingly, the net assets acquired amounted to $17,428,277.

The fair value of LMB’s net assets acquired on the date of the acquisition, based on management’s analysis of the fair value of the 29,136,839 shares of the Company’s common stock issued for LMB’s outstanding stock, the 3,645,297 Company common stock warrants issued for LMB’s outstanding common stock warrants, and the vested portion of the 1,158,770 Company common stock options issued for LMB’s outstanding common stock options was $19,015,073. The fair value of the common stock issued was estimated at $17,482,093, the fair value of the warrants issued was estimated at $1,071,172 and the fair value of the vested options was estimated at $461,808.

The Company recorded goodwill of $1,586,796 for the excess of the purchase price of $19,015,073 over the net assets acquired of $17,428,277.

In-process research and development represents the value of LMB’s leading drug candidate which is an antibiotic solution used to treat catheter-related bloodstream infections (Mino-Lok™) and is expected to be amortized on a straight-line basis over a period of eight years commencing upon revenue generation. Goodwill represents the value of LMB’s industry relationships and its assembled workforce. Goodwill will not be amortized but will be tested at least annually for impairment.

8

Unaudited pro forma operating results for the three months ended December 31, 2015, assuming the acquisition of LMB had been made as of October 1, 2015, are as follows:

	2015
Revenues	$	—
Net loss	$	(1,640,688	)
Net loss per share – basic and diluted	$	(0.03	)

Basis of Presentation and Summary of Significant Accounting Policies

Basis of Preparation — The accompanying consolidated financial statements include the operations of Citius Pharmaceuticals, Inc., and its wholly-owned subsidiaries, Citius Pharmaceuticals, LLC, and LMB since the March 30, 2016 acquisition. All significant inter-company balances and transactions have been eliminated in consolidation.

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 three months ended December 31, 2016 are not necessarily indicative of the results that may be expected for the year ending September 30, 2017. 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 year ended September 30, 2016 filed with the Securities and Exchange Commission.

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 assets and liabilities at the date of the financial statements, and reported amounts of revenues and expenses during the reporting period. Estimates having relatively higher significance include the accounting for acquisitions, stock-based compensation, valuation of warrants, and income taxes. Actual results could differ from those estimates and changes in estimates may occur.

Basic and Diluted Net Loss per Common Share — Basic and diluted net loss per common share is computed by dividing net loss in each period by the weighted average number of shares of common stock outstanding during such period. For the periods presented, common stock equivalents, consisting of options, warrants and convertible securities were not included in the calculation of the diluted loss per share because they were anti-dilutive.

Recently Issued Accounting Standards

In January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, in an effort to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The amendments of this ASU are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The adoption of this guidance is not expected to have a material impact on our consolidated financial statements.

In January 2017, the FASB issued ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 350). This ASU eliminates step 2 from the goodwill impairment test by comparing the fair value of a reporting unit with the carrying amount of the reporting unit. If the carrying amount exceeds the fair value, an impairment charge for the excess is recorded. The amendments of this ASU are effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is currently evaluating the impact of the adoption of this ASU on the consolidated financial statements.

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 $1,314,792 and $697,086 for the three months ended December 31, 2016 and 2015, respectively. At December 31, 2016, the Company had a working capital deficit of $5,828,421. The Company has no revenue and has relied on proceeds from equity transactions and debt to finance its operations. At December 31, 2016, the Company had limited capital to fund its operations. This raises substantial doubt about the Company’s ability to continue as a going concern.

9

The Company plans to raise capital through equity financings from outside investors as well as raise additional funds from existing investors and continued borrowings under related party debt agreements. 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).

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 were earned or received by the Company except for the reimbursement of certain regulatory fees under the Three-Party Agreement.

On July 1, 2016, the Company announced that it notified the Food and Drug Administration (“FDA”) and Alpex that it was discontinuing Suprenza.

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.

On July 1, 2016, the Company announced that it notified Prenzamax that it was discontinuing Suprenza.

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. During the three months ended March 31, 2016, the Company received $292,575 from Alpex as reimbursement for regulatory filing fees that were previously expensed during the three months ended December 31, 2015. The reimbursement was recorded as a reduction of research and development expenses.

On July 1, 2016, the Company announced that it notified Alpex and Prenzamax that it was discontinuing Suprenza.

10

Patent and Technology License Agreement

LMB has a patent and technology license agreement with Novel Anti-Infective Therapeutics, Inc., (“NAT”) to develop and commercialize Mino-Lok™ on an exclusive, worldwide (except for South America), sub licensable basis. Since May 2014, LMB has paid an annual maintenance fee of $30,000 that increases over five years to $90,000, until commercial sales of a product subject to the license. LMB will also pay annual royalties on net sales of licensed products, with royalties ranging from the mid-single digits to the low double digits. In limited circumstances in which the licensed product is not subject to a valid patent claim and a competitor is selling a competing product, the royalty rate is in the low-single digits. After a commercial sale is obtained, LMB must pay minimum aggregate annual royalties that increase in subsequent years. LMB must also pay NAT up to $1,050,000 upon achieving specified regulatory and sales milestones. Finally, LMB must pay NAT a specified percentage of payments received from any sub licensees.

4. NOTES PAYABLE – RELATED PARTIES

On March 30, 2016, the Company assumed $772,970 of demand notes payable in the acquisition of LMB. The principal balance of the notes payable to our Chairman, Leonard Mazur, was $760,470 and the principal balance of the notes payable to our Chief Executive Officer, Myron Holubiak, was $12,500. Notes with a principal balance of $704,000 accrue interest at the prime rate plus 1.0% per annum and notes with a principal balance of $68,970 accrue interest at 12% per annum. In April 2016, $600,000 of the prime rate plus 1.0% demand notes payable and accrued interest of $1,985 was repaid to Leonard Mazur.

The Board of Directors has authorized revolving demand promissory notes with Leonard Mazur in an aggregate principal amount of up to $2,500,000, of which $1,320,000 is outstanding at December 31, 2016.

On September 7, 2016, the Company issued a $500,000 demand promissory note to our Chairman, Leonard Mazur which matures on demand by the lender. The Company then issued $820,000 of additional demand promissory notes to Leonard Mazur during the three months ended December 31, 2016 which mature on the earlier of December 31, 2017 or demand by the lender. These notes accrue interest at the prime rate plus 1%.

Interest expense on notes payable – related parties was $13,228 for the three months ended December 31, 2016.

5. DERIVATIVE WARRANT LIABILITY

Derivative financial instruments are recognized as a liability on the consolidated balance sheet and measured at fair value. At December 31, 2016 and September 30, 2016, the Company had outstanding warrants to purchase 4,033,334 shares and 4,616,668 shares, respectively, of its common stock that are considered to be derivative instruments since the agreements contain “down round” provisions whereby 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 original issuance of the warrants (see Note 6).

The Company performs valuations of the warrants using the Black-Scholes option pricing model which value was also compared to a Binomial Option Pricing Model for reasonableness. The Black-Scholes option pricing model requires input of assumptions including the risk-free interest rates, volatility, expected life and dividends. Selection of these inputs involves management’s judgment and may impact net loss. 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 December 31, 2016 was 76%. We used a risk-free interest rate of 1.93%, estimated lives of 4.02 to 4.32 years, which are the remaining contractual lives of the warrants subject to “down round” provisions, and no dividends to our common stock. The volatility calculated at September 30, 2016 was 73%. We used a risk-free interest rate of 1.14%, estimated lives of 4.10 to 4.57 years, which are the remaining contractual lives of the warrants subject to “down round” provisions, and no dividends to our common stock.

During the three months ended December 31, 2016, anti-dilution rights related to warrants to purchase 583,334 shares of common stock expired which resulted in a reclassification from derivative warrant liability to additional paid-in capital of $149,209.

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:

	Three Months Ended December 31, 2016			Three Months Ended December 31, 2015
Derivative warrant liability, beginning of period	$	1,681,973		$	738,955
Fair value of warrants issued		—			157,984
Total realized/unrealized gains included in net loss		(622,186	)		(23,940	)
Reclassification of liability to additional paid-in capital		(149,209	)		—
Derivative warrant liability, end of period	$	910,578		$	872,999

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6. COMMON STOCK, STOCK OPTIONS AND WARRANTS

Common Stock

On September 15, 2016, the stockholders approved an increase in the number of shares of authorized common stock from 90,000,000 shares to 200,000,000 shares. In addition, the stockholders granted the Board of Directors the authority to affect a reverse stock split of our common stock by a ratio of not less than 1-for-8 and not more than 1-for-20 at any time prior to September 15, 2017.

Private Offerings

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 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 Company issued 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.

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”).

In connection with the Private Offering, the Company entered into a Registration Rights Agreement pursuant to which the Company filed a 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 filed the Registration Statement on September 11, 2015 and it was declared effective on January 21, 2016.

During the year ended September 30, 2015, the Company sold an additional 2,837,037 Units for a purchase price of $0.54 per Unit and 200,000 Units for a purchase price of $0.60 per Unit for gross proceeds of $1,652,000. Each Unit consists of one share of common stock and one Investor Warrant (see description above).

During the year ended September 30, 2016, the Company sold an additional 4,350,001 Units for a purchase price of $0.54 per Unit and 266,667 Units for a purchase price of $0.60 per Unit for gross proceeds of $2,509,000. Each Unit consists of one share of common stock and one Investor Warrant (see description above). On May 12, 2016, the Company announced that it had completed the final phase of the Private Offering.

On March 22, 2016, the Company sold 5,000,000 shares of common stock at $0.60 per share to its Chairman of the Board, Leonard Mazur, for gross proceeds of $3,000,000. There were no expenses related to this placement.

In October 2016, the Company commenced an offering (the “2016 Offering”) of up to 15,000,000 Units at a price of $0.40 per Unit (the “2016 Offering Units”), each 2016 Offering Unit consists of (i) one share of common stock and (ii) a warrant to purchase one share of common stock (the “2016 Offering Warrants”) for gross proceeds of up to $6,000,000 with an over-subscription allotment of up to $2,000,000. Each 2016 Offering Warrant has an exercise price of $0.55 and is exercisable for five years from the date of issuance. The Placement Agent will receive a 10% cash commission on the gross proceeds of each sale of the 2016 Offering Units. In addition, on each closing the Placement Agent will also receive (i) an expense allowance equal to 3% of the proceeds of the sale, and (ii) warrants to purchase a number of shares of common stock equal to 10% of the 2016 Offering Units sold at an exercise price of $0.55 per share.

On November 23, 2016, the Company sold 975,000 2016 Offering Units for gross proceeds of $390,000. The estimated fair value of the warrants included in the 2016 Offering Units sold to the investors was $234,505. Additionally, a warrant to purchase 97,500 shares of common stock was granted to the Placement Agent pursuant to the above pricing terms. The estimated fair value of the warrant granted to the Placement Agent was $23,451. The Placement agent was paid commissions and an expense allowance of $50,700. Other costs of the placement were $156,896.

12

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 December 31, 2016, there were options to purchase an aggregate of 8,732,770 shares of common stock outstanding under the 2014 Plan and 4,267,230 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 consolidated 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 December 31, 2016 and the changes during the three months then ended is presented below:

Options	Shares		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term	Aggregate Intrinsic Value
Outstanding at October 1, 2016		8,732,770	$	0.54	8.59 years	$	1,355,924
Granted		—		—
Exercised		—		—
Forfeited or expired		—		—
Outstanding at December 31, 2016		8,732,770	$	0.54	8.34 years	$	468,958
Exercisable at December 31, 2016		5,286,654	$	0.45	7.91 years	$	336,484

Stock-based compensation expense for the three months ended December 31, 2016 and 2015 was $241,514 and $121,299, respectively.

At December 31, 2016, unrecognized total compensation cost related to unvested awards of $1,145,334 is expected to be recognized over a weighted average period of 1.58 years.

Warrants

The Company has reserved 19,131,595 shares of common stock for the exercise of outstanding warrants. The following table summarizes the warrants outstanding at December 31, 2016:

	Exercise price		Number		Expiration Dates
Investor Warrants	$	0.60	3,400,067		September 12, 2019
Placement Agent Unit Warrants		0.60	680,013		September 12, 2019
Warrants underlying Placement Agent Unit Warrants		0.60	680,013		September 12, 2019
Placement Agent Share Warrants		0.60	1,000,000		September 12, 2019
Investor Warrants		0.60	2,145,371		March 19, 2020 – June 26, 2020
Investor Warrants		0.60	891,666		July 2, 2020 – September 14, 2020
Investor Warrants		0.60	583,334		November 5, 2020 – November 20, 2020
Investor Warrants		0.60	2,133,334	(1)	January 7, 2021 – March 21, 2021
Investor Warrants		0.60	1,900,000	(1)	April 15, 2021 – April 25, 2021
LMB Warrants		0.41	1,352,266		June 12, 2019 - March 2, 2021
LMB Warrants		0.66	122,319		September 30, 2019 - January 8, 2020
LMB Warrants		1.38	265,814		November 3, 2019 - March 6, 2020
LMB Warrants		0.50	1,108,249		August 18, 2020 – March 14, 2021
LMB Warrants		0.91	796,649		March 24, 2022 – April 29, 2022
Financial Advisor Warrants		0.20	1,000,000		August 15, 2021
2016 Offering Warrants		0.55	975,000		November 23, 2021
2016 Offering Placement Agent Warrants		0.55	97,500		November 23, 2021
			19,131,595

__________

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

13

On November 23, 2016, the Company sold 975,000 2016 Offering Units, at a price of $0.40 per Unit, consisting of (i) one share of common stock and (ii) a warrant to purchase one share of common stock. Each 2016 Offering Warrant has an exercise price of $0.55 and is exercisable for five years from the date of issuance. Additionally, a warrant to purchase 97,500 shares of common stock was granted to the Placement Agent pursuant to the above pricing terms.

At December 31, 2016, the weighted average remaining life of all of the outstanding warrants is 3.59 years, all warrants are exercisable, and the aggregate intrinsic value for the warrants outstanding was $280,568.

7. RELATED PARTY TRANSACTIONS

As of December 31, 2016 and September 30, 2016, the Company owed $27,637 to a company affiliated through common ownership for the expenses the related party paid on the Company’s behalf and services performed by the related party.

Our Chairman of the Board, Leonard Mazur, is the cofounder and Vice Chairman of Akrimax Pharmaceuticals, LLC (“Akrimax”), a privately held pharmaceutical company specializing in producing cardiovascular and general pharmaceutical products (see Note 3).

Our Chairman of the Board, Leonard Mazur, and our Chief Executive Officer, Myron Holubiak, were co-founders and significant shareholders in LMB. In connection with the acquisition of LMB, our Chairman purchased an additional 5,000,000 shares of the Company.

The Company has outstanding debt due to Leonard Mazur and Myron Holubiak (see Note 4).

General and administrative expense for each of the three months ended December 31, 2016 and 2015 includes $12,000 paid to a financial consultant who is a stockholder of the Company.

8. OPERATING LEASE

LMB leases office space from Akrimax (see Note 7) in Cranford, New Jersey at a monthly rental rate of $2,167 pursuant to an agreement which currently expires on October 31, 2017. Rent expense for the three months ended December 31, 2016 was $6,501. There was no rent expense for the three months ended December 31, 2015.

9. SUBSEQUENT EVENTS

During January 2017, the Company issued additional demand notes to its Chairman in the aggregate amount of $260,000 under the same terms as the notes issued during the three months ending December 31, 2016.

During January 2017, the Company issued 445,932 shares of its common stock for investor relations services.

During February 2017, the Company sold an additional 399,750 Offering Units for gross proceeds of $159,900. Additionally, a warrant to purchase 39,975 shares of common stock was granted to the Placement Agent pursuant to the 2016 Offering pricing terms.

14

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 months ended December 31, 2016 should be read together with our unaudited consolidated financial statements and related notes included elsewhere in this report and in conjunction with the audited financial statements of Citius Pharmaceuticals, Inc. included in our Annual Report on Form 10-K for the year ended September 30, 2016. 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 specialty pharmaceutical company dedicated to the development and commercialization of critical care products targeting unmet needs with a focus on anti-infectives, cancer care and unique prescription products. On September 12, 2014, we acquired Citius Pharmaceuticals, LLC as a wholly-owned subsidiary.

Citius Pharmaceuticals, LLC was founded in Massachusetts in January 2007. Activities since Citius Pharmaceuticals, LLC’s inception through December 31, 2016 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.

On March 30, 2016, the Company acquired all of the outstanding stock of Leonard-Meron Biosciences, Inc. (“LMB”) by issuing 29,136,839 shares of its common stock. As of March 30, 2016, the stockholders of LMB received approximately 41% of the issued and outstanding common stock of the Company. In addition, the Company converted the outstanding common stock warrants of LMB into 3,645,297 common stock warrants of the Company and converted the outstanding common stock options of LMB into 1,158,770 common stock options of the Company. Management estimated the fair value of the purchase consideration to be $19,015,073.

In connection with the acquisition, the Company acquired net assets of $17,428,277, including identifiable intangible assets of $19,400,000 related to in-process research and development and other assets and liabilities. The Company recorded goodwill of $1,586,796 for the excess of the purchase price over the net assets acquired.

In-process research and development represents the value of LMB’s leading drug candidate, which is an antibiotic solution used to treat catheter-related bloodstream infections. Goodwill represents the value of LMB’s industry relationships and its assembled workforce. In-process research and development is expected to be amortized on a straight-line basis over a period of eight years commencing upon revenue generation. Goodwill will not be amortized, but will be tested at least annually for impairment.

Through December 31, 2016, 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. On July 1, 2016, the Company announced that it was discontinuing Suprenza and was focusing on the Phase 3 development of Mino-Lok™, an antibiotic lock solution used to treat patients with catheter-related bloodstream infections, and the Phase 2b development of Hydro-Lido for hemorrhoids. The Company has not yet realized any revenues from its planned principal operations.

Patent and Technology License Agreement

In May 2014, LMB entered into a patent and technology license agreement with Novel Anti-Infective Therapeutics, Inc., (“NAT”) to develop and commercialize Mino-Lok™ on an exclusive, worldwide (except for South America), sub licensable basis. Since May 2014, LMB has paid an annual maintenance fee of $30,000 that increases over five years to $90,000, until commercial sales of a product subject to the license. LMB will also pay annual royalties on net sales of licensed products, with royalties ranging from the mid-single digits to the low double digits. In limited circumstances in which the licensed product is not subject to a valid patent claim and a competitor is selling a competing product, the royalty rate is in the low-single digits. After a commercial sale is obtained, LMB must pay minimum aggregate annual royalties that increase in subsequent years. LMB must also pay NAT up to $1,050,000 upon achieving specified regulatory and sales milestones. Finally, LMB must pay NAT a specified percentage of payments received from any sub licensees.

15

RESULTS OF OPERATIONS

Three months ended December 31, 2016 compared with the three months ended December 31, 2015

	Three Months Ended December 31, 2016			Three Months Ended December 31, 2015
Revenues	$	—		$	—
Operating expenses:
Research and development		1,411,159			829,156
General and administrative		1,132,183			294,221
Stock-based compensation		241,514			121,299
Total operating expenses		2,784,856			1,244,676
Operating loss		(2,784,856	)		(1,244,676	)
Interest income		—			15
Gain on revaluation of derivative warrant liability		622,186			23,940
Interest expense		(13,228	)		—
Net loss	$	(2,175,898	)	$	(1,220,721	)

Revenues

We did not generate any revenues for the three months ended December 31, 2016 and 2015.

Research and Development Expenses

For the three months ended December 31, 2016, research and development expenses were $1,411,159 as compared to $829,156 during the three months ended December 31, 2015. The $582,003 increase in 2016 was primarily due to the $1,343,635 in costs incurred by LMB on the development of Mino-Lok™ offset by a decrease of $761,632 in costs incurred in the development of our product for the treatment of hemorrhoids and 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 three months ended December 31, 2016, general and administrative expenses were $1,132,183 as compared to $294,221 during the three months ended December 31, 2015. The $837,962 increase in 2016 was primarily due to the acquisition of LMB which resulted in increased compensation costs, increased consulting fees incurred for financing activities and corporate development services, and increased investor relations fees.

Stock-based Compensation Expense

For the three months ended December 31, 2016, stock-based compensation expense was $241,514 as compared to $121,299 for the three months ended December 31, 2015. The $120,215 increase in expense includes the expense for options assumed in the acquisition of LMB, as well as recent grants to new directors and new employees.

Other Income (Expense)

There was no interest income earned on our cash balances for the three months ended December 31, 2016 and only $15 in interest income earned for the three months ended December 31, 2015.

Gain on revaluation of derivative warrant liability for the three months ended December 31, 2016 was $622,186 compared to $23,940 for the three months ended December 31, 2015. The fair value of the derivative warrant liability fluctuates with changes in our stock price, volatility, remaining lives of the warrants, and interest rates. The gain for the three months ended December 31, 2016 was primarily due to a decrease in the fair value of our stock from $0.63 per share at September 30, 2016 to $0.44 per share at December 31, 2016.

Interest expense on the notes payables acquired in the acquisition of LMB and recent borrowings from our Chairman was $13,228 for the three months ended December 31, 2016. There was no interest expense for the three months ended December 31, 2015.

16

Net Loss

For the three months ended December 31, 2016, we incurred a net loss of $2,175,898 compared to a net loss for the three months ended December 31, 2015 of $1,220,721. The $955,177 increase in the net loss was primarily due to the $582,003 increase in research and development expenses and the increase of $837,962 in general and administrative expenses offset by the $598,246 increase in the gain on the revaluation of derivative warrant liability.

LIQUIDITY AND CAPITAL RESOURCES

Going Concern Uncertainty and Working Capital

Citius has incurred operating losses since inception and incurred a net loss of $2,175,898 for the three months ended December 31, 2016. At December 31, 2016, Citius had an accumulated deficit of $19,512,145. Citius’ net cash used in operations during the three months ended December 31, 2016 was $1,314,792.

As of December 31, 2016, Citius had a working capital deficit of $5,828,421. The working capital deficit was attributable to the operating losses incurred by the Company since inception offset by our capital raising activities. At December 31, 2016, Citius had cash and cash equivalents of $46,764 available to fund its operations. The Company’s primary sources of cash flow since inception have been from financing activities. During the three months ended December 31, 2016, the Company received net proceeds of $247,205 from the issuance of equity and $820,000 from the issuance of notes payable to our Chairman, Leonard Mazur. 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 September 7, 2016, the Company issued a $500,000 demand promissory note to our Chairman, Leonard Mazur which matures on demand by the lender. The Company issued $820,000 of additional demand promissory notes to Leonard Mazur during the three months ended December 31, 2016 which mature on the earlier of December 31, 2017 or demand by the lender. These notes accrue interest at the prime rate plus 1%. The Board of Directors has authorized additional revolving demand promissory notes with Leonard Mazur on substantially similar terms in an aggregate principal amount of up to $2,500,000, of which $1,320,000 is outstanding at December 31, 2016.

In October 2016, the Company commenced an offering (the “2016 Offering”) of up to 15,000,000 units at a price of $0.40 (the “2016 Offering Units”), each 2016 Offering Unit consists of (i) one share of common stock and (ii) a warrant to purchase one share of common stock (the “2016 Offering Warrants”) for gross proceeds of up to $6,000,000 with an over-subscription allotment of up to $2,000,000. Each 2016 Offering Warrant has an exercise price of $0.55 and is exercisable for five years from the date of issuance. The Placement Agent will receive a 10% cash commission on the gross proceeds of each sale of the 2016 Offering Units. In addition, on each closing the Placement Agent will also receive (i) an expense allowance equal to 3% of the proceeds of the sale, and (ii) warrants to purchase a number of shares of common stock equal to 10% of the 2016 Offering Units sold at an exercise price of $0.55 per share.

On November 23, 2016, the Company sold 975,000 2016 Offering Units for gross proceeds of $390,000. Additionally, a warrant to purchase 97,500 shares of common stock was granted to the Placement Agent pursuant to the above pricing terms. The Placement agent was paid commissions and an expense allowance of $50,700. Other costs of the placement were $156,896.

We expect that we will have sufficient funds to continue our operations for the next three 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.

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.

17

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 year ended September 30, 2016 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.

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 December 31, 2016. 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 December 31, 2016, 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 December 31, 2016, we determined that control deficiencies existed that constituted material weaknesses, as described below:

1)	lack of documented policies and procedures;
2)	the financial reporting function is carried out by consultants; and
3)	ineffective separation of duties due to limited staff.

In light of the conclusion that our internal controls over financial reporting were ineffective as of December 31, 2016, 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 December 31, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

18

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 23, 2016.

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

On November 23, 2016, the Company sold 975,000 2016 Offering Units for a purchase price of $0.40 per unit for gross proceeds of $390,000.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

19

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.

20

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: February 14, 2017	By:	/s/ Myron Holubiak
		Myron Holubiak
		Chief Executive Officer, Principal Executive Officer and Principal Financial Officer

21

EX-31.1

EXHIBIT 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

PURSUANT TO SECTION 302 OF THE

SARBANES-OXLEY ACT OF 2002

I, Myron Holubiak, certify that:

1.	I have reviewed this report on Form 10-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: February 14, 2017	By:	/s/ Myron Holubiak
		Myron Holubiak
		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 December 31, 2016 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Myron Holubiak, 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: February 14, 2017	By:	/s/ Myron Holubiak
		Myron Holubiak
		Chief Executive Officer,
		Principal Executive Officer and Principal Financial Officer

XML

Document and Entity Information - shares	3 Months Ended
	Dec. 31, 2016	Jan. 31, 2017
Document And Entity Information
Entity Registrant Name	Citius Pharmaceuticals, Inc.
Entity Central Index Key	0001506251
Document Type	10-Q
Document Period End Date	Dec. 31, 2016
Amendment Flag	false
Current Fiscal Year End Date	--09-30
Is Entity a Well-known Seasoned Issuer?	No
Is Entity a Voluntary Filer?	No
Is Entity's Reporting Status Current?	Yes
Entity Filer Category	Smaller Reporting Company
Entity Common Stock, Shares Outstanding		74,558,992
Document Fiscal Period Focus	Q1
Document Fiscal Year Focus	2017

XML

CONDENSED CONSOLIDATED BALANCE SHEETS - USD ($)	Dec. 31, 2016	Sep. 30, 2016
Current Assets
Cash and cash equivalents	$ 46,764	$ 294,351
Prepaid expenses	443,526	598,484
Total Current Assets	490,290	892,835
Property and Equipment, Net of Accumulated Depreciation of $5,452 and $4,780	3,070	3,742
Other Assets
Deposits	2,167	2,167
Deferred offering costs		64,801
In-process research and development	19,400,000	19,400,000
Goodwill	1,586,796	1,586,796
Total Other Assets	20,988,963	21,053,764
Total Assets	21,482,323	21,950,341
Current liabilities:
Accounts payable	985,865	909,156
Accrued expenses	1,847,062	958,101
Accrued compensation	1,010,500	903,250
Accrued interest	44,099	30,871
Notes payable - related parties	1,492,970	672,970
Derivative warrant liability	910,578	1,681,973
Due to related party	27,637	27,637
Total Current Liabilities	6,318,711	5,183,958
Commitments and contingencies
Stockholders' Equity
Preferred stock - $0.001 par value; 10,000,000 shares authorized; no shares issued and outstanding
Common stock - $0.001 par value; 200,000,000 shares authorized; 74,113,060 and 73,138,060 shares issued and outstanding at December 31, 2016 and September 30, 2016,	74,113	73,138
Additional paid-in capital	34,601,644	34,029,492
Accumulated deficit	(19,512,145)	(17,336,247)
Total Stockholders' Equity	15,163,612	16,766,383
Total Liabilities and Stockholders' Equity	$ 21,482,323	$ 21,950,341

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CONDENSED CONSOLIDATED BALANCE SHEETS (Parenthetical) - USD ($)	Dec. 31, 2016	Sep. 30, 2016
ASSETS
Property and Equipment, Net of Accumulated Depreciation	$ 5,452	$ 4,780
Stockholders' Equity (Deficit)
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	200,000,000	200,000,000
Common Stock Shares Issued	74,113,060	73,138,060
Common Stock Shares Outstanding	74,113,060	73,138,060

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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) - USD ($)	3 Months Ended
	Dec. 31, 2016	Dec. 31, 2015
Condensed Consolidated Statements Of Operations
Revenues
Operating Expenses
Research and development	1,411,159	829,156
General and administrative	1,132,183	294,221
Stock-based compensation - general and administrative	241,514	121,299
Total Operating Expenses	2,784,856	1,244,676
Operating Loss	(2,784,856)	(1,244,676)
Other Income (Expense), Net:
Interest income		15
Gain on revaluation of derivative warrant liability	622,186	23,940
Interest expense	(13,228)
Total Other Income (Expense), Net	608,958	23,955
Loss before Income Taxes	(2,175,898)	(1,220,721)
Income tax benefit
Net Loss	$ (2,175,898)	$ (1,220,721)
Net Loss Per Share - Basic and Diluted	$ (0.03)	$ (0.04)
Weighted Average Common Shares Outstanding Basic and diluted	73,551,375	34,414,988

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CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT (Unaudited) - 3 months ended Dec. 31, 2016 - USD ($)	Preferred Stock	Common Stock	Additional Paid-In Capital	Accumulated Deficit	Total
Beginning balance, Amount at Sep. 30, 2016		$ 73,138	$ 34,029,492	$ (17,336,247)	$ 16,766,383
Beginning balance, Shares at Sep. 30, 2016		73,138,060
Issuance of common stock in private placement, net of costs, Amount		$ 975	181,429		182,404
Issuance of common stock in private placement, net of costs, Shares		975,000
Reclassification of derivative warrant liability to additional paid-in capital			149,209		149,209
Stock-based compensation			241,514		241,514
Net loss				(2,175,898)	(2,175,898)
Ending balance, Amount at Dec. 31, 2016		$ 74,113	$ 34,601,644	$ (19,512,145)	$ 15,163,612
Ending balance, Shares at Dec. 31, 2016		74,113,060

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) - USD ($)	3 Months Ended
	Dec. 31, 2016	Dec. 31, 2015
Cash Flows From Operating Activities:
Net loss	$ (2,175,898)	$ (1,220,721)
Adjustments to reconcile net loss to net cash used in operating activities:
Gain on revaluation of derivative warrant liability	(622,186)	(23,940)
Stock-based compensation expense	241,514	121,299
Depreciation	672
Changes in operating assets and liabilities
Prepaid expenses	154,958
Accounts payable	76,709	(100,464)
Accrued expenses	888,961	526,740
Accrued compensation	107,250
Accrued interest	13,228
Net Cash Used In Operating Activities	(1,314,792)	(697,086)
Cash Flows From Financing Activities:
Proceeds from notes payable - related parties	820,000
Net proceeds from private placement	247,205	302,438
Net Cash Provided by Financing Activities	1,067,205	302,438
Net Change in Cash and Cash Equivalents	(247,587)	(394,648)
Cash and Cash Equivalents - Beginning of Period	294,351	676,137
Cash and Cash Equivalents - End of Period	46,764	281,489
Supplemental Disclosures of Cash Flow Information and Non-cash Transactions:
Interest paid
Income taxes paid
Fair value of private placement warrants recorded as derivative warrant liability		157,984
Reclassification of derivative warrant liability to additional paid-in capital	$ 149,209

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

3 Months Ended

Dec. 31, 2016

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 specialty pharmaceutical company dedicated to the development and commercialization of critical care products targeting unmet needs with a focus on anti-infectives, cancer care and unique prescription products. The Company was founded as Citius Pharmaceuticals, LLC, a Massachusetts limited liability company, on January 23, 2007. On September 12, 2014, Citius Pharmaceuticals, LLC entered into a Share Exchange and Reorganization Agreement with Citius Pharmaceuticals, Inc. (formerly Trail One, Inc.), a publicly traded company incorporated under the laws of the State of Nevada. Citius Pharmaceuticals, LLC became a wholly-owned subsidiary of Citius.

On March 30, 2016, Citius acquired Leonard-Meron Biosciences, Inc. (“LMB”) as a wholly-owned subsidiary (see “Acquisition of Leonard-Meron Biosciences, Inc.” below).

The Company had one approved product, Suprenza (phentermine hydrochloride), which it licensed out for promotion in the United States, Canada and Mexico. On July 1, 2016, the Company announced that it was discontinuing Suprenza. Since its inception, the Company has devoted substantially all of its efforts to business planning, research and development, recruiting management and technical staff, and raising capital.

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

Acquisition of Leonard-Meron Biosciences, Inc.

On March 30, 2016, the Company acquired all of the outstanding stock of Leonard-Meron Biosciences, Inc. (“LMB”) by issuing 29,136,839 shares of its common stock. As of March 30, 2016, the stockholders of LMB received approximately 41% of the issued and outstanding common stock of the Company. In addition, the Company converted the outstanding common stock warrants of LMB into 3,645,297 common stock warrants of the Company and converted the outstanding common stock options of LMB into 1,158,770 common stock options of the Company.

The Company acquired tangible assets consisting of cash of $255,748, prepaid expenses of $20,544, property and equipment of $5,085, deposits of $2,167, and identifiable intangible assets of $19,400,000 related to in-process research and development. The Company assumed accounts payable of $244,776, accrued expenses of $598,659, accrued compensation of $615,000, accrued interest of $23,862, and notes payable of $772,970. Accordingly, the net assets acquired amounted to $17,428,277.

The fair value of LMB’s net assets acquired on the date of the acquisition, based on management’s analysis of the fair value of the 29,136,839 shares of the Company’s common stock issued for LMB’s outstanding stock, the 3,645,297 Company common stock warrants issued for LMB’s outstanding common stock warrants, and the vested portion of the 1,158,770 Company common stock options issued for LMB’s outstanding common stock options was $19,015,073. The fair value of the common stock issued was estimated at $17,482,093, the fair value of the warrants issued was estimated at $1,071,172 and the fair value of the vested options was estimated at $461,808.

The Company recorded goodwill of $1,586,796 for the excess of the purchase price of $19,015,073 over the net assets acquired of $17,428,277.

In-process research and development represents the value of LMB’s leading drug candidate which is an antibiotic solution used to treat catheter-related bloodstream infections (Mino-Lok™) and is expected to be amortized on a straight-line basis over a period of eight years commencing upon revenue generation. Goodwill represents the value of LMB’s industry relationships and its assembled workforce. Goodwill will not be amortized but will be tested at least annually for impairment.

Unaudited pro forma operating results for the three months ended December 31, 2015, assuming the acquisition of LMB had been made as of October 1, 2015, are as follows:

	2015
Revenues	$	—
Net loss	$	(1,640,688	)
Net loss per share – basic and diluted	$	(0.03	)

Basis of Presentation and Summary of Significant Accounting Policies

Basis of Preparation — The accompanying consolidated financial statements include the operations of Citius Pharmaceuticals, Inc., and its wholly-owned subsidiaries, Citius Pharmaceuticals, LLC, and LMB since the March 30, 2016 acquisition. All significant inter-company balances and transactions have been eliminated in consolidation.

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 three months ended December 31, 2016 are not necessarily indicative of the results that may be expected for the year ending September 30, 2017. 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 year ended September 30, 2016 filed with the Securities and Exchange Commission.

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 assets and liabilities at the date of the financial statements, and reported amounts of revenues and expenses during the reporting period. Estimates having relatively higher significance include the accounting for acquisitions, stock-based compensation, valuation of warrants, and income taxes. Actual results could differ from those estimates and changes in estimates may occur.

Basic and Diluted Net Loss per Common Share — Basic and diluted net loss per common share is computed by dividing net loss in each period by the weighted average number of shares of common stock outstanding during such period. For the periods presented, common stock equivalents, consisting of options, warrants and convertible securities were not included in the calculation of the diluted loss per share because they were anti-dilutive.

Recently Issued Accounting Standards

In January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, in an effort to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The amendments of this ASU are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The adoption of this guidance is not expected to have a material impact on our consolidated financial statements.

In January 2017, the FASB issued ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 350). This ASU eliminates step 2 from the goodwill impairment test by comparing the fair value of a reporting unit with the carrying amount of the reporting unit. If the carrying amount exceeds the fair value, an impairment charge for the excess is recorded. The amendments of this ASU are effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is currently evaluating the impact of the adoption of this ASU on the consolidated financial statements.

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GOING CONCERN UNCERTAINTY AND MANAGEMENT'S PLAN

3 Months Ended

Dec. 31, 2016

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 $1,314,792 and $697,086 for the three months ended December 31, 2016 and 2015, respectively. At December 31, 2016, the Company had a working capital deficit of $5,828,421. The Company has no revenue and has relied on proceeds from equity transactions and debt to finance its operations. At December 31, 2016, 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 and continued borrowings under related party debt agreements. 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.

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BUSINESS AGREEMENTS

3 Months Ended

Dec. 31, 2016

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 were earned or received by the Company except for the reimbursement of certain regulatory fees under the Three-Party Agreement.

On July 1, 2016, the Company announced that it notified the Food and Drug Administration (“FDA”) and Alpex that it was discontinuing Suprenza.

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.

On July 1, 2016, the Company announced that it notified Prenzamax that it was discontinuing Suprenza.

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. During the three months ended March 31, 2016, the Company received $292,575 from Alpex as reimbursement for regulatory filing fees that were previously expensed during the three months ended December 31, 2015. The reimbursement was recorded as a reduction of research and development expenses.

On July 1, 2016, the Company announced that it notified Alpex and Prenzamax that it was discontinuing Suprenza.

Patent and Technology License Agreement

LMB has a patent and technology license agreement with Novel Anti-Infective Therapeutics, Inc., (“NAT”) to develop and commercialize Mino-Lok™ on an exclusive, worldwide (except for South America), sub licensable basis. Since May 2014, LMB has paid an annual maintenance fee of $30,000 that increases over five years to $90,000, until commercial sales of a product subject to the license. LMB will also pay annual royalties on net sales of licensed products, with royalties ranging from the mid-single digits to the low double digits. In limited circumstances in which the licensed product is not subject to a valid patent claim and a competitor is selling a competing product, the royalty rate is in the low-single digits. After a commercial sale is obtained, LMB must pay minimum aggregate annual royalties that increase in subsequent years. LMB must also pay NAT up to $1,050,000 upon achieving specified regulatory and sales milestones. Finally, LMB must pay NAT a specified percentage of payments received from any sub licensees.

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NOTES PAYABLE RELATED PARTIES

3 Months Ended

Dec. 31, 2016

Notes to Financial Statements

NOTE 4. NOTES PAYABLE RELATED PARTIES

On March 30, 2016, the Company assumed $772,970 of demand notes payable in the acquisition of LMB. The principal balance of the notes payable to our Chairman, Leonard Mazur, was $760,470 and the principal balance of the notes payable to our Chief Executive Officer, Myron Holubiak, was $12,500. Notes with a principal balance of $704,000 accrue interest at the prime rate plus 1.0% per annum and notes with a principal balance of $68,970 accrue interest at 12% per annum. In April 2016, $600,000 of the prime rate plus 1.0% demand notes payable and accrued interest of $1,985 was repaid to Leonard Mazur.

The Board of Directors has authorized revolving demand promissory notes with Leonard Mazur in an aggregate principal amount of up to $2,500,000, of which $1,320,000 is outstanding at December 31, 2016.

On September 7, 2016, the Company issued a $500,000 demand promissory note to our Chairman, Leonard Mazur which matures on demand by the lender. The Company then issued $820,000 of additional demand promissory notes to Leonard Mazur during the three months ended December 31, 2016 which mature on the earlier of December 31, 2017 or demand by the lender. These notes accrue interest at the prime rate plus 1%.

Interest expense on notes payable – related parties was $13,228 for the three months ended December 31, 2016.

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DERIVATIVE WARRANT LIABILITY

3 Months Ended

Dec. 31, 2016

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 December 31, 2016 and September 30, 2016, the Company had outstanding warrants to purchase 4,033,334 shares and 4,616,668 shares, respectively, of its common stock that are considered to be derivative instruments since the agreements contain “down round” provisions whereby 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 original issuance of the warrants (see Note 6).

The Company performs valuations of the warrants using the Black-Scholes option pricing model which value was also compared to a Binomial Option Pricing Model for reasonableness. The Black-Scholes option pricing model requires input of assumptions including the risk-free interest rates, volatility, expected life and dividends. Selection of these inputs involves management’s judgment and may impact net loss. 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 December 31, 2016 was 76%. We used a risk-free interest rate of 1.93%, estimated lives of 4.02 to 4.32 years, which are the remaining contractual lives of the warrants subject to “down round” provisions, and no dividends to our common stock. The volatility calculated at September 30, 2016 was 73%. We used a risk-free interest rate of 1.14%, estimated lives of 4.10 to 4.57 years, which are the remaining contractual lives of the warrants subject to “down round” provisions, and no dividends to our common stock.

During the three months ended December 31, 2016, anti-dilution rights related to warrants to purchase 583,334 shares of common stock expired which resulted in a reclassification from derivative warrant liability to additional paid-in capital of $149,209.

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:

	Three Months Ended December 31, 2016			Three Months Ended December 31, 2015
Derivative warrant liability, beginning of period	$	1,681,973		$	738,955
Fair value of warrants issued		—			157,984
Total realized/unrealized gains included in net loss		(622,186	)		(23,940	)
Reclassification of liability to additional paid-in capital		(149,209	)		—
Derivative warrant liability, end of period	$	910,578		$	872,999

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COMMON STOCK, STOCK OPTIONS AND WARRANTS

3 Months Ended

Dec. 31, 2016

Notes to Financial Statements

NOTE 6. COMMON STOCK, STOCK OPTIONS AND WARRANTS

Common Stock

On September 15, 2016, the stockholders approved an increase in the number of shares of authorized common stock from 90,000,000 shares to 200,000,000 shares. In addition, the stockholders granted the Board of Directors the authority to affect a reverse stock split of our common stock by a ratio of not less than 1-for-8 and not more than 1-for-20 at any time prior to September 15, 2017.

Private Offerings

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 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 Company issued 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.

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”).

In connection with the Private Offering, the Company entered into a Registration Rights Agreement pursuant to which the Company filed a 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 filed the Registration Statement on September 11, 2015 and it was declared effective on January 21, 2016.

During the year ended September 30, 2015, the Company sold an additional 2,837,037 Units for a purchase price of $0.54 per Unit and 200,000 Units for a purchase price of $0.60 per Unit for gross proceeds of $1,652,000. Each Unit consists of one share of common stock and one Investor Warrant (see description above).

During the year ended September 30, 2016, the Company sold an additional 4,350,001 Units for a purchase price of $0.54 per Unit and 266,667 Units for a purchase price of $0.60 per Unit for gross proceeds of $2,509,000. Each Unit consists of one share of common stock and one Investor Warrant (see description above). On May 12, 2016, the Company announced that it had completed the final phase of the Private Offering.

On March 22, 2016, the Company sold 5,000,000 shares of common stock at $0.60 per share to its Chairman of the Board, Leonard Mazur, for gross proceeds of $3,000,000. There were no expenses related to this placement.

In October 2016, the Company commenced an offering (the “2016 Offering”) of up to 15,000,000 Units at a price of $0.40 per Unit (the “2016 Offering Units”), each 2016 Offering Unit consists of (i) one share of common stock and (ii) a warrant to purchase one share of common stock (the “2016 Offering Warrants”) for gross proceeds of up to $6,000,000 with an over-subscription allotment of up to $2,000,000. Each 2016 Offering Warrant has an exercise price of $0.55 and is exercisable for five years from the date of issuance. The Placement Agent will receive a 10% cash commission on the gross proceeds of each sale of the 2016 Offering Units. In addition, on each closing the Placement Agent will also receive (i) an expense allowance equal to 3% of the proceeds of the sale, and (ii) warrants to purchase a number of shares of common stock equal to 10% of the 2016 Offering Units sold at an exercise price of $0.55 per share.

On November 23, 2016, the Company sold 975,000 2016 Offering Units for gross proceeds of $390,000. The estimated fair value of the warrants included in the 2016 Offering Units sold to the investors was $234,505. Additionally, a warrant to purchase 97,500 shares of common stock was granted to the Placement Agent pursuant to the above pricing terms. The estimated fair value of the warrant granted to the Placement Agent was $23,451. The Placement agent was paid commissions and an expense allowance of $50,700. Other costs of the placement were $156,896.

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 December 31, 2016, there were options to purchase an aggregate of 8,732,770 shares of common stock outstanding under the 2014 Plan and 4,267,230 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 consolidated 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 December 31, 2016 and the changes during the three months then ended is presented below:

Options	Shares		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term	Aggregate Intrinsic Value
Outstanding at October 1, 2016		8,732,770	$	0.54	8.59 years	$	1,355,924
Granted		—		—
Exercised		—		—
Forfeited or expired		—		—
Outstanding at December 31, 2016		8,732,770	$	0.54	8.34 years	$	468,958
Exercisable at December 31, 2016		5,286,654	$	0.45	7.91 years	$	336,484

Stock-based compensation expense for the three months ended December 31, 2016 and 2015 was $241,514 and $121,299, respectively.

At December 31, 2016, unrecognized total compensation cost related to unvested awards of $1,145,334 is expected to be recognized over a weighted average period of 1.58 years.

Warrants

The Company has reserved 19,131,595 shares of common stock for the exercise of outstanding warrants. The following table summarizes the warrants outstanding at December 31, 2016:

	Exercise price		Number		Expiration Dates
Investor Warrants	$	0.60	3,400,067		September 12, 2019
Placement Agent Unit Warrants		0.60	680,013		September 12, 2019
Warrants underlying Placement Agent Unit Warrants		0.60	680,013		September 12, 2019
Placement Agent Share Warrants		0.60	1,000,000		September 12, 2019
Investor Warrants		0.60	2,145,371		March 19, 2020 – June 26, 2020
Investor Warrants		0.60	891,666		July 2, 2020 – September 14, 2020
Investor Warrants		0.60	583,334		November 5, 2020 – November 20, 2020
Investor Warrants		0.60	2,133,334	(1)	January 7, 2021 – March 21, 2021
Investor Warrants		0.60	1,900,000	(1)	April 15, 2021 – April 25, 2021
LMB Warrants		0.41	1,352,266		June 12, 2019 - March 2, 2021
LMB Warrants		0.66	122,319		September 30, 2019 - January 8, 2020
LMB Warrants		1.38	265,814		November 3, 2019 - March 6, 2020
LMB Warrants		0.50	1,108,249		August 18, 2020 – March 14, 2021
LMB Warrants		0.91	796,649		March 24, 2022 – April 29, 2022
Financial Advisor Warrants		0.20	1,000,000		August 15, 2021
2016 Offering Warrants		0.55	975,000		November 23, 2021
2016 Offering Placement Agent Warrants		0.55	97,500		November 23, 2021
			19,131,595

__________

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

On November 23, 2016, the Company sold 975,000 2016 Offering Units, at a price of $0.40 per Unit, consisting of (i) one share of common stock and (ii) a warrant to purchase one share of common stock. Each 2016 Offering Warrant has an exercise price of $0.55 and is exercisable for five years from the date of issuance. Additionally, a warrant to purchase 97,500 shares of common stock was granted to the Placement Agent pursuant to the above pricing terms.

At December 31, 2016, the weighted average remaining life of all of the outstanding warrants is 3.59 years, all warrants are exercisable, and the aggregate intrinsic value for the warrants outstanding was $280,568.

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RELATED PARTY TRANSACTIONS

3 Months Ended

Dec. 31, 2016

Notes to Financial Statements

NOTE 7. RELATED PARTY TRANSACTIONS

As of December 31, 2016 and September 30, 2016, the Company owed $27,637 to a company affiliated through common ownership for the expenses the related party paid on the Company’s behalf and services performed by the related party.

Our Chairman of the Board, Leonard Mazur, is the cofounder and Vice Chairman of Akrimax Pharmaceuticals, LLC (“Akrimax”), a privately held pharmaceutical company specializing in producing cardiovascular and general pharmaceutical products (see Note 3).

Our Chairman of the Board, Leonard Mazur, and our Chief Executive Officer, Myron Holubiak, were co-founders and significant shareholders in LMB. In connection with the acquisition of LMB, our Chairman purchased an additional 5,000,000 shares of the Company.

The Company has outstanding debt due to Leonard Mazur and Myron Holubiak (see Note 4).

General and administrative expense for each of the three months ended December 31, 2016 and 2015 includes $12,000 paid to a financial consultant who is a stockholder of the Company.

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OPERATING LEASE

3 Months Ended

Dec. 31, 2016

Notes to Financial Statements

NOTE 8. OPERATING LEASE

LMB leases office space from Akrimax (see Note 7) in Cranford, New Jersey at a monthly rental rate of $2,167 pursuant to an agreement which currently expires on October 31, 2017. Rent expense for the three months ended December 31, 2016 was $6,501. There was no rent expense for the three months ended December 31, 2015.

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SUBSEQUENT EVENTS

3 Months Ended

Dec. 31, 2016

Notes to Financial Statements

NOTE 9. SUBSEQUENT EVENTS

During January 2017, the Company issued additional demand notes to its Chairman in the aggregate amount of $260,000 under the same terms as the notes issued during the three months ending December 31, 2016.

During January 2017, the Company issued 445,932 shares of its common stock for investor relations services.

During February 2017, the Company sold an additional 399,750 Offering Units for gross proceeds of $159,900. Additionally, a warrant to purchase 39,975 shares of common stock was granted to the Placement Agent pursuant to the 2016 Offering pricing terms. 

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies)

3 Months Ended

Dec. 31, 2016

Summary Of Significant Accounting Policies Policies

Basis of Preparation

The accompanying consolidated financial statements include the operations of Citius Pharmaceuticals, Inc., and its wholly-owned subsidiaries, Citius Pharmaceuticals, LLC, and LMB since the March 30, 2016 acquisition. All significant inter-company balances and transactions have been eliminated in consolidation.

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 three months ended December 31, 2016 are not necessarily indicative of the results that may be expected for the year ending September 30, 2017. 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 year ended September 30, 2016 filed with the Securities and Exchange Commission.

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 assets and liabilities at the date of the financial statements, and reported amounts of revenues and expenses during the reporting period. Estimates having relatively higher significance include the accounting for acquisitions, stock-based compensation, valuation of warrants, and income taxes. Actual results could differ from those estimates and changes in estimates may occur.

Basic and Diluted Net Loss per Common Share

Basic and diluted net loss per common share is computed by dividing net loss in each period by the weighted average number of shares of common stock outstanding during such period. For the periods presented, common stock equivalents, consisting of options, warrants and convertible securities were not included in the calculation of the diluted loss per share because they were anti-dilutive.

Recently Issued Accounting Standards

In January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, in an effort to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The amendments of this ASU are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The adoption of this guidance is not expected to have a material impact on our consolidated financial statements.

In January 2017, the FASB issued ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 350). This ASU eliminates step 2 from the goodwill impairment test by comparing the fair value of a reporting unit with the carrying amount of the reporting unit. If the carrying amount exceeds the fair value, an impairment charge for the excess is recorded. The amendments of this ASU are effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is currently evaluating the impact of the adoption of this ASU on the consolidated financial statements.

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

3 Months Ended

Dec. 31, 2016

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

Acquisition Pro forma information

	2015
Revenues	$	—
Net loss	$	(1,640,688	)
Net loss per share – basic and diluted	$	(0.03	)

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DERIVATIVE WARRANT LIABILITY (Tables)

3 Months Ended

Dec. 31, 2016

Derivative Warrant Liability Tables

Schedule of derivative warrant liabilities

	Three Months Ended December 31, 2016			Three Months Ended December 31, 2015
Derivative warrant liability, beginning of period	$	1,681,973		$	738,955
Fair value of warrants issued		—			157,984
Total realized/unrealized gains included in net loss		(622,186	)		(23,940	)
Reclassification of liability to additional paid-in capital		(149,209	)		—
Derivative warrant liability, end of period	$	910,578		$	872,999

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COMMON STOCK, STOCK OPTIONS AND WARRANTS (Tables)

3 Months Ended

Dec. 31, 2016

Common Stock Stock Options And Warrants Tables

Schedule of stock option activity

Options	Shares		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term	Aggregate Intrinsic Value
Outstanding at October 1, 2016		8,732,770	$	0.54	8.59 years	$	1,355,924
Granted		—		—
Exercised		—		—
Forfeited or expired		—		—
Outstanding at December 31, 2016		8,732,770	$	0.54	8.34 years	$	468,958
Exercisable at December 31, 2016		5,286,654	$	0.45	7.91 years	$	336,484

Schedule of Warrants

	Exercise price		Number		Expiration Dates
Investor Warrants	$	0.60	3,400,067		September 12, 2019
Placement Agent Unit Warrants		0.60	680,013		September 12, 2019
Warrants underlying Placement Agent Unit Warrants		0.60	680,013		September 12, 2019
Placement Agent Share Warrants		0.60	1,000,000		September 12, 2019
Investor Warrants		0.60	2,145,371		March 19, 2020 – June 26, 2020
Investor Warrants		0.60	891,666		July 2, 2020 – September 14, 2020
Investor Warrants		0.60	583,334		November 5, 2020 – November 20, 2020
Investor Warrants		0.60	2,133,334	(1)	January 7, 2021 – March 21, 2021
Investor Warrants		0.60	1,900,000	(1)	April 15, 2021 – April 25, 2021
LMB Warrants		0.41	1,352,266		June 12, 2019 - March 2, 2021
LMB Warrants		0.66	122,319		September 30, 2019 - January 8, 2020
LMB Warrants		1.38	265,814		November 3, 2019 - March 6, 2020
LMB Warrants		0.50	1,108,249		August 18, 2020 – March 14, 2021
LMB Warrants		0.91	796,649		March 24, 2022 – April 29, 2022
Financial Advisor Warrants		0.20	1,000,000		August 15, 2021
2016 Offering Warrants		0.55	975,000		November 23, 2021
2016 Offering Placement Agent Warrants		0.55	97,500		November 23, 2021
			19,131,595

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NATURE OF OPERATIONS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Details)	3 Months Ended
	Dec. 31, 2015 USD ($) $ / shares
Nature Of Operations Basis Of Presentation And Summary Of Significant Accounting Policies Details
Revenues
Net loss	$ (1,640,688)
Net loss per share – basic and diluted | $ / shares	$ (0.03)

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NATURE OF OPERATIONS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Details Narrative) - USD ($)	3 Months Ended
	Dec. 31, 2016	Dec. 31, 2015	Sep. 30, 2016	Mar. 30, 2016
Common stock shares issued	74,113,060		73,138,060
Common stock warrants outstanding	74,113,060		73,138,060
Prepaid expenses	$ 443,526		$ 598,484
Accounts payable	985,865		909,156
Accrued expenses	1,847,062		958,101
Accrued interest	44,099		30,871
Notes payable	1,492,970		672,970
Common stock options value outstanding	74,113		73,138
Estimated fair value warrant issued		$ 157,984
Goodwill	1,586,796		$ 1,586,796
Leonard-Meron Biosciences [Member]
Common stock shares issued				29,136,839
Issued and outstanding common stock				41.00%
Common stock warrants outstanding				3,645,297
Common stock options outstanding				1,158,770
Tangible assets consisting of cash	255,748
Prepaid expenses	20,544
Property and equipment	5,085
Deposits	2,167
Intangible assets	19,400,000
Accounts payable	244,776
Accrued expenses	598,659
Accrued compensation	615,000
Accrued interest	23,862
Notes payable	$ 772,970
Fair value of common stock shares issued	29,136,839
Fair value of common stock warrants issued	3,645,297
Vested portion of common stock options issued	1,158,770
Common stock options value outstanding	$ 19,015,073
Estimated fair value	17,482,093
Estimated fair value warrant issued	1,071,172
Estimated vested options of fair value	461,808
Goodwill	1,586,796
Purchase price	19,015,073
Assets acquired	$ 17,428,277

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GOING CONCERN UNCERTAINTY AND MANAGEMENT'S PLAN (Details Narrative) - USD ($)	3 Months Ended
	Dec. 31, 2016	Dec. 31, 2015
Going Concern Uncertainty And Managements Plan Details Narrative
Cash flows from operations	$ (1,314,792)	$ (697,086)
Working capital deficit	$ 5,828,421

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BUSINESS AGREEMENTS (Details Narrative)	3 Months Ended
	Mar. 31, 2016 USD ($)
Business Agreements Details Narrative
Reimbursement	$ 292,575
License annual maintenance fee	30,000
Increase in annual maintenance fee	90,000
Payable amount to NAT	$ 1,050,000

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NOTES PAYABLE RELATED PARTIES (Details Narrative) - USD ($)	1 Months Ended		3 Months Ended
	Apr. 30, 2016	Mar. 30, 2016	Dec. 31, 2016	Dec. 31, 2015	Sep. 07, 2016
Notes assumed		$ 772,970
Principal amount			$ 2,500,000
Outstanding amount			$ 1,320,000
Percentage of accrued interest above prime rate			1.00%
Interest expense			$ 13,228
Additional notes payable			$ 820,000
Chairman [Member]
Percentage of accrued interest above prime rate	1.00%
Repayment of principal amount	$ 600,000
Repayment of accured interest	$ 1,985
Notes Payable One [Member]
Principal amount		$ 68,970
Interest rate		12.00%
Notes Payable [Member]
Principal amount		$ 704,000
Percentage of accrued interest above prime rate		1.00%
Chairman [Member]
Principal amount		$ 760,470
Notes payable					$ 500,000
Chief Executive Officer [Member]
Principal amount		$ 12,500

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DERIVATIVE WARRANT LIABILITY (Details) - USD ($)	3 Months Ended
	Dec. 31, 2016	Dec. 31, 2015
Derivative Warrant Liability Details
Derivative warrant liability, beginning of period	$ 1,681,973	$ 738,955
Fair value of warrants issued		157,984
Total realized/unrealized losses included in net loss	(622,186)	(23,940)
Reclassification of liability to additional paid-in capital	(149,209)
Derivative warrant liability, end of period	$ 910,578	$ 872,999

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DERIVATIVE WARRANT LIABILITY (Details Narrative) - USD ($)	3 Months Ended	12 Months Ended
	Dec. 31, 2016	Sep. 30, 2015
Outstanding warrants to purchase common stock	4,033,334	4,616,668
Exercise price of warrant	$ 0.60
Volatility rate	76.00%	73.00%
Risk-free interest rate	1.93%	1.14%
Anti dilution warrants expired	583,334
Reclassification from derivative warrant liability to additional paid-in capital	$ 149,209
Minimum [Member]
Estimated life	4 years 7 days	4 years 1 month 6 days
Maximum [Member]
Estimated life	4 years 3 months 26 days	4 years 6 months 26 days

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COMMON STOCK, STOCK OPTIONS AND WARRANTS (Details) - Stock Options [Member]	3 Months Ended
	Dec. 31, 2016 USD ($) $ / shares shares
Stock Options
Outstanding, beginning balance | shares	8,732,770
Granted | shares
Assumed in acquisition | $
Exercised | shares
Forfeited or expired | shares
Outstanding, ending balance | shares	8,732,770
Exercisable, ending balance | shares	5,286,654
Weighted Average Exercise Price
Outstanding, beginning balance	$ 0.54
Granted
Assumed in acquisition
Exercised
Forfeited or expired
Outstanding, ending balance	0.54
Exercisable, ending balance	$ 0.45
Weighted Average Remaining Contractual Life (years)
Weighted Average Remaining Contractual Life (years), Beginning	8 years 7 months 2 days
Weighted Average Remaining Contractual Life (years), Ending	8 years 4 months 2 days
Exercisable Remaining Contractual Life (years)	7 years 10 months 28 days
Aggregate Intrinsic value
Outstanding beginning balance | $	$ 1,355,924
Outstanding ending balance | $	468,958
Exercisable ending balance | $	$ 336,484

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COMMON STOCK, STOCK OPTIONS AND WARRANTS (Details 1)	3 Months Ended
	Dec. 31, 2016 $ / shares shares
Investor Warrants [Member]
Exercise price | $ / shares	$ 0.60
Number | shares	3,400,067
Expiration Date	September 12, 2019
Placement Agent Unit Warrants [Member]
Exercise price | $ / shares	$ 0.60
Number | shares	680,013
Expiration Date	September 12, 2019
Warrants underlying Placement Agent Unit Warrants [Member]
Exercise price | $ / shares	$ 0.60
Number | shares	680,013
Expiration Date	September 12, 2019
Placement Agent Share Warrants [Member]
Exercise price | $ / shares	$ 0.60
Number | shares	1,000,000
Expiration Date	September 12, 2019
Investor Warrants One [Member]
Exercise price | $ / shares	$ 0.60
Number | shares	2,145,371
Expiration Date	March 19, 2020 - June 26, 2020
Investor Warrants Two [Member]
Exercise price | $ / shares	$ 0.60
Number | shares	891,666
Expiration Date	July 2, 2020 - September 14, 2020
Investor Warrants Three [Member]
Exercise price | $ / shares	$ 0.60
Number | shares	583,334
Expiration Date	November 5, 2020 - November 20, 2020
Investor Warrants Four [Member]
Exercise price | $ / shares	$ 0.60
Number | shares	2,133,334	[1]
Expiration Date	January 7, 2021 - March 21, 2021
Investor Warrants Five [Member]
Exercise price | $ / shares	$ 0.60
Number | shares	1,900,000	[1]
Expiration Date	April 15, 2021 - April 25, 2021
LMB Warrants One [Member]
Exercise price | $ / shares	$ 0.41
Number | shares	1,352,266
Expiration Date	June 12, 2019 - March 2, 2021
LMB Warrants Two [Member]
Exercise price | $ / shares	$ 0.66
Number | shares	122,319
Expiration Date	September 30, 2019 - January 8, 2020
LMB Warrants Three [Member]
Exercise price | $ / shares	$ 1.38
Number | shares	265,814
Expiration Date	November 3, 2019 - March 6, 2020
LMB Warrants Four [Member]
Exercise price | $ / shares	$ 0.50
Number | shares	1,108,249
Expiration Date	August 18, 2020 - March 14, 2021
LMB Warrants Five [Member]
Exercise price | $ / shares	$ 0.91
Number | shares	796,649
Expiration Date	March 24, 2022 - April 29, 2022
Financial Advisor Warrants [Member]
Exercise price | $ / shares	$ 0.20
Number | shares	1,000,000
Expiration Date	August 15, 2021
Offering Warrants 2016 [Member]
Exercise price | $ / shares	$ 0.55
Number | shares	975,000
Expiration Date	November 23, 2021
Offering Placement Agent Warrants 2016 [Member]
Exercise price | $ / shares	$ 0.55
Number | shares	97,500
Expiration Date	November 23, 2021

[1] Fair value of these warrants are included in the derivative warrant liability

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COMMON STOCK, STOCK OPTIONS AND WARRANTS (Details Narrative)

1 Months Ended

3 Months Ended

12 Months Ended

Sep. 12, 2014

USD ($)

Unit

$ / shares

shares

Nov. 23, 2016

USD ($)

Unit

$ / shares

shares

Sep. 15, 2016

Dec. 31, 2016

USD ($)

Unit

$ / shares

shares

Dec. 31, 2015

USD ($)

Sep. 30, 2016

USD ($)

Unit

$ / shares

shares

Sep. 30, 2015

USD ($)

Unit

$ / shares

shares

Mar. 22, 2016

USD ($)

$ / shares

shares

Description of increase in authorized shares of common stock

Stockholders approved an increase in the number of shares of authorized common stock from 90,000,000 shares to 200,000,000 shares.

Description of reverse stock split

Reverse stock split of our common stock by a ratio of not less than 1-for-8 and not more than 1-for-20 at any time prior to September 15, 2017.

Stock-based compensation expense | $

$ 241,514

$ 121,299

Additional warrant purchase

97,500

Options to purchase of common stock

4,033,334

4,616,668

Stock Options [Member] | Board of Directors [Member]

Common stock reserved for employees

13,000,000

Private Offering [Member]

Common stock exercise price per share | $ / shares

$ 0.001

Description of warrant redeemable

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.

Number of additional units sold | Unit

1,000,000

266,667

200,000

Number of additional units sold, per unit | $ / shares

$ 0.60

$ 0.60

$ 0.60

Number of units sold | Unit

3,400,067

4,350,001

2,837,037

Number of units sold, per unit | $ / shares

$ 0.60

$ 0.54

$ 0.54

Number of units sold for gross proceeds | $

$ 2,040,040

$ 2,509,000

$ 1,652,000

Stock sold

5,000,000

Stock sold per share price | $ / shares

$ 0.60

Stock sold for gross proceeds | $

$ 3,000,000

Offering Warrants 2016 [Member]

Common stock exercise price per share | $ / shares

$ 0.55

Common stock outstanding

975,000

Weighted average remaining life

3 years 7 months 2 days

Number of units sold | Unit

975,000

Number of units sold, per unit | $ / shares

$ 0.40

Number of unit offering | Unit

15,000,000

Number of unit offering per share price | $ / shares

$ 0.40

Number of units offering for gross proceeds | $

$ 6,000,000

Percentage of cash commission on gross proceeds

0.10

Additional warrant purchase

97,500

Common stock reserved for employees

19,131,595

Warrant offering description

On November 23, 2016, the Company sold 975,000 2016 Offering Units, at a price of $0.40 per Unit, consisting of (i) one share of common stock and (ii) a warrant to purchase one share of common stock. Each 2016 Offering Warrant has an exercise price of $0.55 and is exercisable for five years from the date of issuance.

Warrants outstanding

280,568

Stock Options [Member]

Common stock outstanding

8,732,770

8,732,770

Shares available for future grants

6,341,230

Unrecognized total compensation cost related to unvested awards | $

$ 831,020

Weighted average remaining life

1 year 15 days

Average contractual term

P8Y4M2D

Stock Options [Member] | 2014 Plan [Member]

Shares available for future grants

4,267,230

Stock-based compensation expense | $

$ 241,514

$ 121,299

Unrecognized total compensation cost related to unvested awards | $

$ 1,145,334

Weighted average remaining life

1 year 6 months 29 days

Options to purchase of common stock

8,732,770

Average contractual term

generally 10 years

Warrant [Member]

Estimated fair value | $

$ 234,505

Placement Agent Unit Warrants [Member]

Common stock exercise price per share | $ / shares

$ 0.60

Common stock outstanding

680,013

Number of units sold | Unit

975,000

Number of units sold for gross proceeds | $

$ 390,000

Estimated fair value | $

23,451

Expense allowance | $

50,700

Other cost | $

$ 156,896

Options to purchase of common stock

1,000,000

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RELATED PARTY TRANSACTIONS (Details Narrative) - USD ($)	3 Months Ended
	Dec. 31, 2016	Dec. 31, 2015	Sep. 30, 2016
General and administrative expense	$ 1,132,183	$ 294,221
Expenses paid by related party	$ 27,637		$ 27,637
Chairman [Member]
Additional stock purchased	5,000,000
Financial Consultant [Member]
General and administrative expense	$ 12,000	$ 12,000

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OPERATING LEASE (Details Narrative)	3 Months Ended
	Dec. 31, 2016 USD ($)
Operating Lease Details Narrative
Operating lease rent	$ 2,167
Lease agreement expire date	Oct. 31, 2017
Rent expense	$ 6,501

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SUBSEQUENT EVENTS (Details Narrative) - USD ($)	1 Months Ended
	Feb. 28, 2017	Jan. 30, 2017
Investor Relations Services [Member]
Common stock issued		445,932
Subsequent Event [Member]
Additional offering units	399,750
Number Of Units Sold For Gross Proceeds	$ 159,900
Subsequent Event [Member] | Chairman [Member]
Additional demand notes		$ 260,000
Placement Agent [Member]
Warrant to purchase common stock	39,975