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APRI > SEC Filings for APRI > Form 10-Q on 10-May-2013All Recent SEC Filings

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Form 10-Q for APRICUS BIOSCIENCES, INC.


10-May-2013

Quarterly Report


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

Disclosures Regarding Forward-Looking Statements

The following should be read in conjunction with the condensed consolidated financial statements (unaudited) and the related notes that appear elsewhere in this document as well as in conjunction with the Risk Factors section herein and in our Form 10-K for the year ended December 31, 2012 filed with the SEC on March 18, 2013. These reports include forward-looking statements made based on current management expectations pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, as amended.


Some of the statements contained in this report discuss future expectations, contain projections of results of operations or financial conditions or state other "forward-looking" information. Those statements include statements regarding the intent, belief or current expectations of Apricus Biosciences, Inc. and its subsidiaries ("we," "us," "our" or the "Company") and our management team. Any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and actual results may differ materially from those projected in the forward-looking statements. In light of the significant risks and uncertainties inherent in the forward-looking statements included in this report, the inclusion of such statements should not be regarded as a representation by us or any other person that our objectives and plans will be achieved. There are many factors that affect our business, condensed consolidated financial position, results of operations and cash flows, including but not limited to, our ability to enter into partnering agreements or raise financing on acceptable terms, successful completion of clinical development programs, regulatory review and approval, product development and acceptance, anticipated revenue growth, manufacturing, competition, and/or other factors, many of which are outside our control.

The Company operates in a rapidly changing business, and new risk factors emerge from time to time. Management cannot predict every risk factor, nor can it assess the impact, if any, of all such risk factors on the Company's business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those projected in any forward-looking statements. Accordingly, forward-looking statements should not be relied upon as a prediction of actual results and readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates. The Company undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

General

We are a Nevada corporation and have been in existence since 1987. We have operated in the pharmaceutical industry since 1995, initially focusing on research and development in the area of drug delivery and are now primarily focused on product development in the area of sexual health. Our proprietary drug delivery technology is called NexACT® and we have one approved drug using the NexACT® delivery system, Vitaros®, which is approved in Canada for the treatment of erectile dysfunction. Also in the area of sexual health is our Femprox ® product candidate for female sexual arousal disorder.

We continue to enter into and are seeking additional commercialization partnerships for our existing pipeline of products and product candidates, including Vitaros®, and Femprox® and we are enhancing our business development efforts by offering potential partners clearly defined regulatory paths for our products under development.

Our lead product, Vitaros®, was approved for commercialization in Canada in November 2010 and is now partnered in the United States, Canada, Germany, the United Kingdom, Italy, certain countries in the Middle East, the Gulf countries and Israel. Our near term focus for Vitaros® is to commence sales in Canada through our commercial partner, Abbott, and to continue to generate revenue from partnerships for the product with other commercial partners. We also expect payment from certain of our partners on the approval of Vitaros® in Europe. Typically, in our partnership arrangements we receive up-front payments in exchange for license rights to our products plus sales milestones and royalties to be paid upon commercialization of the product.

We filed for marketing approval for Vitaros® in Europe under a Decentralized Procedure ("DCP") in the second quarter of 2011. We are currently awaiting a decision regarding the approval of Vitaros ® in Europe via the DCP with the Netherlands serving as the Reference Member State ("RMS"). In April of 2013, in consultation with our European commercialization partners, we submitted to the RMS our response to the Day 120 List of Questions ("LOQ"). In early May of 2013, which marked Day 180 of the regulatory approval process, the RMS notified us that the major issues outlined in the Day 120 LOQ have been resolved. While the regulatory review process is ongoing, and we remain in active dialogue with the RMS on certain remaining matters included in the Day 180 response, we believe that the marketing approval process for Vitaros® in Europe remains on track for an approval decision on Day 210 of the process assuming there are no other interruptions in the review process. If Vitaros® is approved by the RMS, our commercialization partners will commence with the National Phase approvals in their respective territories. Once those approvals are secured on a country-by-country basis, marketing of Vitaros® can then be initiated in each country by our commercialization partners.


The Company operates in three segments:

• Pharmaceuticals-designs and develops pharmaceutical products including those with its NexACT® platform;

• Diagnostic Sales-sells diagnostic products; and

• Contract Sales-provides contract sales for third party pharmaceutical companies through the Company's subsidiary, Finesco and Scomedica.

As previously announced, we made the strategic decision in December 2012 to focus on our core product candidates associated with sexual health and the underlying NexACT® technology. As a result, we chose to divest our United States based oncology supportive care business which was aggregated into our Pharmaceuticals segment and is presented as a discontinued operation at March 31, 2013.

Additionally, we announced in March 2013 that we ceased funding our French Subsidiaries, and as a result we will receive little or no return on our investment. On March 28, 2013, the Commercial Court of Versailles, France opened a bankruptcy reorganization of the French Subsidiaries following a declaration of insolvency by their legal representative. The court appointed a trustee to oversee the bankruptcy reorganization. On April 25, 2013, Finecso and Scomedica, the primary French Subsidiaries entered into a liquidation bankruptcy. It is expected that the liquidation process may take between six and twenty-four months to complete. These subsidiaries are presented in the Contract Sales segment during 2013.

Liquidity, Capital Resources and Financial Condition

We have experienced net losses and negative cash flows from operations each year since our inception. Through March 31, 2013, we had an accumulated deficit of $259.8 million and our operations have principally been financed through public offerings of our common stock and other equity instruments, private placements of equity securities, debt financing and up-front license fees received from commercial partners. Funds raised during the first quarter of 2013 from common stock transactions include, approximately $0.8 million from the sale of common stock through our "at-the-market" stock sales facility. The receipt of this cash during the first quarter of 2013 was offset by our cash used in operations. Our net cash outflow from operations during the first quarter was approximately $6.0 million, which resulted from the increase in expenditures for research and development activities while we commercialize our Vitaros ® product for sale in Canada and obtain market approval in other regions. In November 2012, we extended the term of our $4.0 million convertible notes payable with private investors and the notes are now due in December 2014. These recent transactions should not be considered an indication of our ability to raise additional funds in any future periods. We operate in a rapidly changing and highly regulated marketplace and we expect to adjust our capital needs and financing plans as our operational objectives and market conditions dictate.

Our cash and cash equivalents at March 31, 2013 were approximately $14.1 million. We expect to require external financing to fund our long-term operations. In March 2013, the Company completed the sale of our New Jersey Facility to a third-party resulting in net proceeds to the Company of approximately $3.6 million. (See Note 5 in the Notes to the condensed consolidated financial statements). In March 2013, the Company received $1.5 million in cash, as consideration for the sale of its Totect® assets. (See Note 4 in the Notes to the condensed consolidated financial statements). Based upon our current business plan, we believe we have sufficient cash reserves to fund our on-going operations into 2014. We expect to continue to have net cash outflows from operations in 2013 as we execute our market approval and commercialization plan for Vitaros®, develop and implement a regulatory and clinical trial program for Femprox® for FSAD and further develop our pipeline products. We expect our cash inflows during 2013 will be from licensing and milestone revenues received from commercial partners for our late stage product candidates. We expect our most significant expenditures in 2013 will include development expenditures including continued regulatory and manufacturing activities related to Vitaros® and costs associated with the clinical development of Femprox®.

Based on our recurring losses, negative cash flows from operations and working capital levels, we will need to raise substantial additional funds to finance our operations. If we are unable to maintain sufficient financial resources, including by raising additional funds when needed, our business, financial condition and results of operations will be materially and adversely affected. There can be no assurance that we will be able to obtain the needed financing on reasonable terms or at all. Additionally, equity financings may have a dilutive effect on the holdings of our existing stockholders and may result in downward pressure on the price of our common stock.

As a result of two of the French Subsidiaries entering into judicial liquidation procedures in April 2013 and the third smaller entity remaining in judicial reorganization, the Company expects to deconsolidate the French Subsidiaries in the second quarter of 2013. Although we do not expect to be liable for the unsatisfied liabilities of the French Subsidiaries in the liquidation process in France, it is possible that a French court could attempt to impose these liabilities on the Company. If that was to occur, we may be required to satisfy part or all of the liabilities of the liquidating French Subsidiaries. If the Company were subject to the liabilities of the liquidating entities, then it is likely that the liquidation activities in France could have a material adverse effect on the Company's financial condition.


We have one currently effective shelf registration statement on Form S-3 filed with the SEC under which we may offer from time to time any combination of debt securities, common and preferred stock and warrants. This registration statement includes our "at-the-market" common stock selling facility through Ascendiant Capital. This facility allows us to raise cash through the sale of newly issued shares of our common stock. As of March 31, 2013, we have available $ 80.0 million under the S-3 shelf registration statement including $17.2 million allocated to the at-the-market common stock selling facility with Ascendiant. The Company's at-the-market common stock selling facility may be terminated by either party by giving proper written notice. The rules and regulations of the SEC or any other regulatory agencies may restrict our ability to conduct certain types of financing activities, or may affect the timing of and amounts we can raise by undertaking such activities.

Even if we are successful in obtaining additional cash resources to support further development of our products, we may still encounter additional obstacles such as our development activities may not be successful, our products may not prove to be safe and effective, clinical development work may not be completed in a timely manner or at all, and the anticipated products may not be commercially viable or successfully marketed. Additionally, our business could require additional financing if we choose to accelerate product development expenditures in advance of receiving up-front payments from development and commercial partners. If our efforts to raise additional equity or debt funds when needed are unsuccessful, we may be required to delay or scale-back our development plans, reduce costs and personnel and cease to operate as a going concern. These financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Comparison of Results of Operations between the Three Months Ended March 31, 2013 and 2012

Revenues and gross profit were as follows (in thousands):

                                 Three Months Ended
                                      March 31                     2013 vs 2012
                                                                                  %
                                                             Increase         Increase
                                  2013           2012       (Decrease)       (Decrease)
    License fee revenue        $       32        $ 671     $       (639 )            -95 %
    Product sales                     105          110               (5 )             -5 %
    Contract service revenue          882           -               882              100 %

    Total revenue                   1,019          781              238               30 %
    Cost of product sales              71           76               (5 )             -7 %
    Cost of service revenue         1,847           -             1,847              100 %

    Gross profit               $     (899 )      $ 705     $     (1,604 )           -228 %

The table above excludes the revenues and expenses associated with the discontinued operations.

Revenue

The $0.2 million increase in total revenue during the first three months of 2013 when compared to the same period in 2012 is primarily due to new revenue from contract services related to our French Subsidiaries of $0.9 million, which have been included in our statements of operations beginning in July 2012. The increase in contract services was partially offset by a $0.6 million decrease in license fee revenue. In the first three months of 2012 we recognized upfront fees from Sandoz in the amount of $0.7 million (net of tax withholdings). We did not have any new license fee revenue during the first three months of 2013. The remaining decrease was due to slower product sales in the first three months of 2013 as compared to the first three months in 2012. In April 2013, we will be deconsolidating our French Subsidiaries, and as such, we do not expect to have significant revenues from contract services in the future. We expect our cash inflows during 2013 will be from licensing and milestone revenues received from commercial partners for our late stage product candidates. The timing of these revenues are uncertain, as such our revenue will vary significantly between periods.

Cost of Product Sales

Our cost of product sales generally includes the cost of finished goods inventory. Cost of product sales has remained consistent between the first three months of 2013 and 2012.

Cost of Service Revenue

Our cost of service revenue generally includes compensation, related personnel expenses and contract services to support our contract service revenue. The $1.8 million increase in cost of service revenue during the first three months of 2013, when compared to 2012, is due to our new contract services related to our French Subsidiaries which have been included in our statements of operations beginning in July 2012. In April 2013, we will be deconsolidating our French Subsidiaries, and as such, we do not expect to continue to have significant cost of service revenue associated with the contract sales service business.


Costs and Expenses

Research and development and general and administrative expenses were as follows
(in thousands):



                                  Three Months Ended
                                       March 31                      2013 vs 2012
                                                                                   %
                                                              Increase          Increase
                                   2013          2012        (Decrease)        (Decrease)
   Costs and expenses
   Research and development     $    1,413      $ 1,177     $        236                20 %
   General and administrative        3,846        3,240              606                19 %

   Total costs and expenses          5,259        4,417              842                19 %

The table above excludes the revenues and expenses associated with the discontinued operations.

Research and Development Expenses

Research and development costs are expensed as incurred and include the cost of compensation and related expenses, and expenses to third parties who conduct research and development pursuant to development and consulting agreements, on our behalf. The $0.2 million increase in our research and development expenditures during the first three months of 2013, when compared to the same period in 2012, reflects an increase in compensation for additional personnel to support our regulatory filings in Europe and an increase in expenditures for our development pipeline including Vitaros® manufacturing activities and expenses related to regulatory filings in Europe for Vitaros® as a treatment for patients with ED. We expect to see an increase in research and development spending in 2013 as we continue to support regulatory filings in Europe and Switzerland for Vitaros®, develop the next generation of Vitaros ® and enter into clinical development and clinical trials for Femprox®.

General and Administrative Expenses

General and Administrative expenses increased $0.6 million during the first quarter of 2013 as compared to the same period in 2012. The increase is due to $0.9 million in general and administrative expenses associated with our French Subsidiaries (See Note 3 in the Notes to the consolidated financial statements). This increase was partially offset by $0.3 million attributable to reduced consulting services, reduced personnel costs and reduced depreciation expense. In April 2013, we will deconsolidate our French Subsidiaries, and as such, we do not expect to continue to have significant general and administrative expenses associated with these businesses.

Interest Expense, net

We had interest expense of $0.2 million during the first quarter of 2013 as compared to an expense of $0.1 million during the same period in 2012. The increase in the first quarter of 2013 is primarily due to non-cash interest expense as a result of amortization of the note discount related to the 2012 Convertible Notes. (See Note 7 in the Notes to the consolidated financial statements.)

Other (Expense) Income

Other (expense) income, net, increased $0.7 million during the first quarter of 2013 as compared to the first quarter of 2012. This increase was primarily attributed to the change in the market value of the derivative liability related to the 2012 convertible notes. (See Note 7 in the Notes to the consolidated financial statements.)

Off-Balance Sheet Arrangements

As of March 31, 2013, we did not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K.

Disclosure of Contractual Obligations

There have been no material changes to the contractual obligations as described in the Company's Annual Report on Form 10-K, as filed with the SEC on March 18, 2013.


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