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APRI > SEC Filings for APRI > Form 10-Q on 14-Aug-2013All Recent SEC Filings

Show all filings for APRICUS BIOSCIENCES, INC.

Form 10-Q for APRICUS BIOSCIENCES, INC.


14-Aug-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 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 U.S. Securities and Exchange Commission ("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, 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.

We operate 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 our 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. We undertake 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 and in Europe through the European Decentralized Procedure ("DCP") for the treatment of erectile dysfunction. Also in the area of sexual health is our Femprox ® product candidate for female sexual interest/arousal disorder ("FSIAD").

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 in Europe through the DCP in June 2013. Under the DCP, the Company filed its application for marketing approval designating Netherlands as the Reference Member State ("RMS") on behalf of nine other European Concerned Member States ("CMS") participating in the procedure. The CMS include France, Germany, Italy, UK, Ireland, Spain, Sweden, Belgium and Luxembourg. The Company will continue to work independently, as well as with its commercialization partners, Sandoz, Takeda, and Bracco towards the next step of obtaining national phase approvals in order to make Vitaros® ready to launch in each of the included territories across Europe.

Vitaros® 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 support sales launches in Canada and the European countries where we have existing partners. We are actively seeking to secure additional partnerships in the remaining European and global markets and expect to earn license fees upon the completion of those partnership negotiations. 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.


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We operated in three segments during the first four months of 2013:

• 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 our subsidiary, Finesco and Scomedica.

As previously described, 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 for all periods presented.

Additionally, we announced in March 2013 that we ceased funding our French subsidiaries, and as a result we will receive 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, the French subsidiaries entered into a liquidation bankruptcy. These subsidiaries are presented in the Contract Sales segment during 2013.

Further, in June 2013, we determined that the BQ Kits segment would be offered for sale to qualified buyers and in July 2013, it was sold to an unrelated third-party. This segment is also presented as a discontinued operation for all periods presented.

Therefore, beginning in July 2013, the only segment we will be operating under will be the Pharmaceuticals segment and we will no longer present segment information, except as required for comparison purposes.

Liquidity, Capital Resources and Financial Condition

We have experienced net losses and negative cash flows from operations each year since our inception. Through June 30, 2013, we had an accumulated deficit of $263.7 million, recorded a net loss of approximately $12.6 million for the six months ended June 30, 2013 and have been principally financed through the public offering of our common stock and other equity securities, private placements of equity securities, debt financings and up-front payments received from commercial partners for our products under development. Funds raised in recent periods include approximately $15.8 million from our May 2013 follow-on public offering and approximately $18.4 million from our February 2012 follow-on public offering. Additionally, we raised approximately $0.8 million during the first half of 2013 from the sale of common stock via our "at-the-market" stock selling facility and approximately $2.0 million from this facility in 2012. In March 2013, we completed the sale of our New Jersey Facility to a third-party resulting in net proceeds to us of approximately $3.6 million (See Note 5 in the Notes to the consolidated financial statements). In March 2013, we received $1.5 million in cash, as consideration for the sale of its Totect ® assets (See Note 4 in the Notes to the consolidated financial statements). These cash generating activities should not necessarily be considered an indication of our ability to raise additional funds in any future periods due to the uncertainty associated with raising capital.

Our cash and cash equivalents as of June 30, 2013 were approximately $24.8 million. We expect to require external financing to fund our long-term operations. Based upon our current business plan, we believe we have sufficient cash reserves to fund our on-going operations into late 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 ® 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.


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As a result of the French subsidiaries entering into judicial liquidation procedures in April 2013, we deconsolidated 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 impose these liabilities on us. If that was to occur, we may be required to satisfy liabilities of the liquidating French subsidiaries. If we 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 our financial condition (See Note 10 in the Notes to the consolidated financial statements).

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 June 30, 2013, we have approximately $46.0 million available under the S-3 shelf registration statement including $17.2 million allocated to the at-the-market common stock selling facility with Ascendiant. Our 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 June 30, 2013 and 2012

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

                                            Three Months Ended June 30,
                                         2013           2012         $ Change
           License fee revenue        $      637     $        3     $      634
           Contract service revenue          555             -             555

           Total revenue                   1,192              3          1,189
           Cost of service revenue           702             -             702

           Gross profit               $      490     $        3     $      487

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

Revenue

The $0.6 million increase in license fee revenue during the three months ended June 30, 2013 as compared to the same period in the prior year is primarily due to a $0.3 million milestone payment received from Bracco as well as recognition of $0.3 million deferred revenue, both of which resulted from regulatory marketing approval for our Vitaros product in Europe. The $0.6 million increase in contract service revenue during the three months ended June 30, 2013 as compared to the same period in 2012, is primarily due to recognition of revenue related to Warner Chilcott UK for work completed in the second quarter of June 2013.

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 $0.7 million increase in cost of service revenue during the three months ended June 30, 2013, compared to the same period in 2012, is primarily due to contract service expenses related to our French subsidiaries which have been included in our statements of operations beginning in July 2012. At the end of April 2013, we deconsolidated our French subsidiaries, and therefore will not incur cost of service revenue associated with the contract sales service business during the remaining half of 2013.


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Costs and Expenses

Cost and expenses were as follows (in thousands):



                                                   Three Months Ended June 30,
                                                2013           2012         $ Change
    Costs and expenses
    Research and development                 $    1,535      $  1,033      $      502
    General and administrative                    3,754         3,317             437
    Recovery on sale of subsidiary                 (105 )          -             (105 )
    Deconsolidation of French subsidiaries         (641 )          -             (641 )

    Total costs and expenses                      4,543         4,350             193

    Loss from operations                     $   (4,053 )    $ (4,347 )    $      294

The table above excludes 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, as well as expenses to third parties who conduct research and development on our behalf, pursuant to development and consulting agreements in place.

The $0.5 million increase in our research and development expenditures during the three months ended June 30, 2013, as compared to the same period in 2012, reflects an increase in consulting services 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.

General and Administrative Expenses

General and Administrative expenses increased $0.4 million during the three months ended June 30, 2013 as compared to the same period in 2012. The increase is primarily due to one-time severance-related charges due to the departure of an executive officer. We also had increases in general and administrative expenses associated with our French subsidiaries (See Note 3 in the Notes to the consolidated financial statements). During the second quarter of 2013, we deconsolidated our French subsidiaries, and therefore will no longer have general and administrative expenses associated with these businesses.

Deconsolidation of French subsidiaries

As a result of the French subsidiaries entering into judicial liquidation procedures in April 2013, we deconsolidated the French subsidiaries in the second quarter of 2013, which resulted in a non-cash benefit of $0.6 million in the second quarter of 2013. In addition, we have recorded a liability of $2.8 million as of June 30, 2013, equal to the net deconsolidation liabilities. Although the Company does 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 impose these liabilities on the Company. If that was to occur, we may be required to satisfy liabilities of the liquidating French Subsidiaries. Therefore, we have not recorded a benefit from the deconsolidation. Any resulting gain or loss from the deconsolidation will be recorded when realized on the date the Company has no further obligations associated with this matter.

During the three months ended June 30, 2013, our operating results reflect net revenues related to the French subsidiaries of $0.02 million, total costs of $0.7 million, a non-cash benefit from deconsolidation of $0.6 million, and a short-term liability of $2.8 million.

Interest Expense, net

Interest expense increased $0.1 million during the three months ended June 30, 2013 as compared to the same period in 2012. This increase was primarily due to non-cash interest expense as a result of amortization of the discount related to the 2012 Convertible Notes (See Note 7 in the Notes to the consolidated financial statements).


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Other (Expense) Income

Other (expense) income, net, increased $0.2 million during the three months ended June 30, 2013 as compared to the same period in 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).

Comparison of Results of Operations between the Six Months Ended June 30, 2013 and 2012

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

                                             Six Months Ended June 30,
                                        2013            2012         $ Change
          License fee revenue        $      669      $      674     $       (5 )
          Contract service revenue        1,452              -           1,452

          Total revenue                   2,121             674          1,447
          Cost of service revenue         2,553              -           2,553

          Gross profit               $     (432 )    $      674     $   (1,106 )

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

Revenue

The $1.5 million increase in contract service revenue during the six months ended June 30, 2013 as 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 since July 2012. During the second quarter of 2013, we deconsolidated our French subsidiaries, and therefore will not have revenues from contract services in the future. Also contributing to the increase in contract services was the recognition of revenue related to Warner Chilcott UK for work completed in June 2013.

We expect our cash inflows during the remainder of 2013 will be from licensing and milestone revenues received from commercial partners for our Vitaros product. The timing of these revenues are uncertain, as such our revenue will vary significantly between periods.

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 $2.6 million increase in cost of service revenue during the six months ended June 30, 2013, as compared to the same period in 2012, is primarily due to contract services related to our French subsidiaries which have been included in our statements of operations since July 2012 as well as $0.2 million in costs related to Warner Chilcott UK. During the second quarter of 2013, we deconsolidated our French subsidiaries, and therefore do not expect to have cost of service revenue associated with the contract sales service business during the remaining half of 2013.

Costs and Expenses

Costs and expenses were as follows (in thousands):



                                                    Six Months Ended June 30,
                                                2013           2012        $ Change
     Costs and expenses
     Research and development                 $   2,948      $  2,210      $     738
     General and administrative                   7,580         6,554          1,026
     Recovery on sale of subsidiary                (105 )          -            (105 )
     Deconsolidation of French subsidiaries        (641 )          -            (641 )

     Total costs and expenses                     9,782         8,764          1,018

     Loss from operations                     $ (10,214 )    $ (8,090 )    $  (2,124 )

The table above excludes expenses associated with the discontinued operations.


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Research and Development Expenses

Research and development costs are expensed as incurred and include the cost of compensation and related expenses, as well as expenses to third parties who conduct research and development on our behalf, pursuant to development and consulting agreements in place. The $0.7 million increase in our research and development expenditures during the six months ended June 30, 2013, as compared to the same period in 2012, reflects an increase in consulting services 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. This was partially offset by a decrease in license fees related to the purchase of Nitromist and PediatRx licenses in 2012 and sale of Nitromist in 2013.

General and Administrative Expenses

General and Administrative expenses increased $1.0 million during the six months ended June 30, 2013 as compared to the same period in 2012. The increase is due to one-time severance-related charges due to the departure of an executive officer during the first half of 2013 as well as expenses associated with our French subsidiaries (See Note 3 in the Notes to the consolidated financial statements).

Deconsolidation of French subsidiaries

As a result of the French subsidiaries entering into judicial liquidation procedures in April 2013, we deconsolidated the French subsidiaries in the second quarter of 2013, which resulted in a non-cash benefit of $0.6 million in the second quarter of 2013. In addition, we have recorded a liability of $2.8 million as of June 30, 2013, equal to the net deconsolidation liabilities. Although the Company does 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 impose these liabilities on the Company. If that was to occur, we may be required to satisfy liabilities of the liquidating French Subsidiaries. Therefore, we have not recorded a benefit from the deconsolidation. Any resulting gain or loss from the deconsolidation will be recorded when realized on the date the Company has no further obligations associated with this matter.

During the six months ended June 30, 2013, our operating results reflect net revenues from our French Subsidiaries of $0.9 million, total costs of $3.5 million, a non-cash benefit from deconsolidation of $0.6 million, and a short-term liability of $2.8 million.

Interest Expense, net

Interest expense increased $0.3 million during the six months ended June 30, 2013 as compared to the same period in 2012. The increase is primarily due to non-cash interest expense as a result of amortization of the 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 $0.5 million during the six months ended June 30, 2013 as compared to the same period in 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 June 30, 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 our Annual Report on Form 10-K, as filed with the SEC on March 18, 2013.

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