SEELOS THERAPEUTICS, INC. - FORM 10-Q

Attached files

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EX-31.2 - EXHIBIT 31.2 - SEELOS THERAPEUTICS, INC.	apri93016ex312.htm
EX-32.2 - EXHIBIT 32.2 - SEELOS THERAPEUTICS, INC.	apri93016ex322.htm
EX-32.1 - EXHIBIT 32.1 - SEELOS THERAPEUTICS, INC.	apri93016ex321.htm
EX-31.1 - EXHIBIT 31.1 - SEELOS THERAPEUTICS, INC.	apri93016ex311.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)



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

For the quarterly period ended September 30, 2016



o	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 0-22245

APRICUS BIOSCIENCES, INC.

(Exact Name of Registrant as Specified in Its Charter)




Nevada		87-0449967
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

11975 El Camino Real, Suite 300, San Diego, CA 92130

(Address of Principal Executive Offices) (Zip Code)

(858) 222-8041

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:




Title of Each Class		Name of Exchange on Which Registered
Common Stock, par value $.001		The NASDAQ Capital Market

Securities registered pursuant to Section 12(g) of the Act:

None

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 file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý 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 (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý 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. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one):



Large accelerated filer	o		Accelerated filer	ý
Non-accelerated filer	o	(do not check if a smaller reporting company)	Smaller Reporting Company	o

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

As of October 31, 2016, 7,733,205 shares of the common stock, par value $.001, of the registrant were outstanding.

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		Page
	PART I.

ITEM 1.	FINANCIAL STATEMENTS (UNAUDITED)	4

ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	23

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	31

ITEM 4.	CONTROLS AND PROCEDURES	31

	PART II.

ITEM 1.	LEGAL PROCEEDINGS	32

ITEM 1A.	RISK FACTORS	32

ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	47

ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	47

ITEM 4.	MINE SAFETY DISCLOSURES	47
ITEM 5.	OTHER INFORMATION	47

ITEM 6.	EXHIBITS	48

SIGNATURES		51

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PART I.

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)

Apricus Biosciences, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(In thousands, except share and par value data)



	September 30, 2016			December 31, 2015
	(Unaudited)
Assets
Current assets
Cash and cash equivalents	$	5,614		$	3,887
Accounts receivable	398			519
Restricted cash	—			280
Inventories	800			469
Prepaid expenses and other current assets	424			1,062
Total current assets	7,236			6,217
Property and equipment, net	1,091			1,290
Other long term assets	83			274
Total assets	$	8,410		$	7,781

Liabilities and stockholders’ deficit
Current liabilities
Notes payable, net	$	7,372		$	9,401
Accounts payable	1,434			1,580
Accrued expenses	3,144			3,343
Accrued compensation	656			1,223
Deferred revenue	—			137
Total current liabilities	12,606			15,684
Warrant liability	3,261			1,841
Other long term liabilities	80			200
Total liabilities	15,947			17,725

Commitments and contingencies
Stockholders’ deficit
Preferred stock, $.001 par value, 10,000,000 shares authorized, no shares issued or outstanding as of September 30, 2016 and December 31, 2015	—			—
Common stock, $.001 par value, 15,000,000 shares authorized, 7,733,205 and 5,041,526 issued and outstanding as of September 30, 2016 and December 31, 2015, respectively	8			5
Additional paid-in-capital	308,464			298,926
Accumulated deficit	(316,009		)	(308,875		)
Total stockholders’ deficit	(7,537		)	(9,944		)
Total liabilities and stockholders’ deficit	$	8,410		$	7,781

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

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Apricus Biosciences, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations (Unaudited)

(In thousands, except per share data)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015
License fee revenue	$	3,950		$	1,000		$	4,000		$	1,350
Royalty revenue	195			188			866			351
Product sales	172			85			541			509
Total revenue	4,317			1,273			5,407			2,210
Cost of goods sold	111			142			437			884
Cost of Sandoz rights	3,380			—			3,380			—
Gross profit	826			1,131			1,590			1,326
Operating expense
Research and development	409			4,611			6,002			10,986
General and administrative	1,815			2,412			6,513			8,177
Total operating expense	2,224			7,023			12,515			19,163
Loss before other income (expense)	(1,398		)	(5,892		)	(10,925		)	(17,837		)
Other income (expense)
Interest expense, net	(251		)	(267		)	(788		)	(594		)
Change in fair value of warrant liability	626			1,193			5,063			1,804
Other financing expenses	(256		)	—			(461		)	—
Other (expense) income, net	(11		)	(68		)	(16		)	(64		)
Total other income	108			858			3,798			1,146
Loss before income tax expense	(1,290		)	(5,034		)	(7,127		)	(16,691		)
Income tax expense	(1		)	—			(7		)	—
Net loss	$	(1,291	)	$	(5,034	)	$	(7,134	)	$	(16,691	)

Basic and diluted loss per common share	$	(0.19	)	$	(1.00	)	$	(1.17	)	$	(3.37	)
Weighted average common shares outstanding used for basic and diluted loss per share	6,632			5,042			6,108			4,950

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

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Apricus Biosciences, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows (Unaudited)

(In thousands)



	For the Nine Months Ended September 30,
	2016			2015
Cash flows from operating activities:
Net loss	$	(7,134	)	$	(16,691	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	217			224
Non-cash interest expense	282			209
Stock-based compensation expense	1,427			912
Warrant liability revaluation	(5,063		)	(1,804		)
Loss on disposal of fixed assets	—			56
Other financing expenses	461			—
Changes in operating assets and liabilities:
Accounts receivable	121			103
Inventories	(140		)	133
Prepaid expenses and other current assets	638			(718		)
Other assets	18			(12		)
Accounts payable	(225		)	(443		)
Accrued expenses	(391		)	(1,686		)
Accrued compensation	(318		)	(233		)
Deferred revenue	(137		)	(1,219		)
Other liabilities	(119		)	(163		)
Net cash used in operating activities	(10,363		)	(21,332		)
Cash flows from investing activities:
Release of restricted cash	280			10
Purchase of fixed assets	(18		)	(216		)
Net cash provided by (used in) investing activities	262			(206		)
Cash flows from financing activities:
Issuance of common stock and warrants, net of offering costs	14,144			10,869
Proceeds from issuance of notes payable	—			5,000
Proceeds from the exercise of stock options	—			83
Repayment of capital lease obligations	(5		)	(5		)
Repayment of principal on notes payable	(2,311		)	—
Net cash provided by financing activities	11,828			15,947
Net increase/(decrease) in cash and cash equivalents	1,727			(5,591		)
Cash and cash equivalents, beginning of period	3,887			11,400
Cash and cash equivalents, end of period	$	5,614		$	5,809

Supplemental disclosure of cash flow information:
Cash paid for interest	$	508		$	340
Non-cash investing and financing activities:
Issuance of restricted stock	$	249		—
Accrued transaction costs for 2016 financing activities	$	(259	)	—
Issuance of 54,123 Placement Agent warrants	$	103		—
Issuance of 15,244 common warrants to debtholders	—			$	75

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

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Apricus Biosciences, Inc. and Subsidiaries

Condensed Consolidated Statements of Changes in Stockholders’ Deficit

(Unaudited) (In thousands)



	Common Stock (Shares)	Common Stock (Amount)		Additional Paid-In Capital		Accumulated Deficit			Total Stockholders’ Deficit
Balance as of December 31, 2015	5,042	$	5	$	298,926	$	(308,875	)	$	(9,944	)
Stock-based compensation expense	—	—		1,427		—			1,427
Issuance of restricted stock	—	—		249		—			249
Issuance of common stock due to the vesting of restricted stock	18	—		—		—			—
Issuance of common stock and warrants, net of offering costs	2,674	3		7,862		—			7,865
Net loss	—	—		—		(7,134		)	(7,134		)
Balance as of September 30, 2016	7,733	$	8	$	308,464	$	(316,009	)	$	(7,537	)

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

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Apricus Biosciences, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Financial Statement Presentation

The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto as of and for the year ended December 31, 2015 included in the Apricus Biosciences, Inc. and subsidiaries (the “Company”) Annual Report on Form 10-K (“Annual Report”) filed with the U.S. Securities and Exchange Commission (the “SEC”) on March 9, 2016. The accompanying financial statements have been prepared by the Company in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted. In the opinion of management, the accompanying condensed consolidated financial statements for the periods presented reflect all adjustments, consisting of only normal, recurring adjustments, necessary to fairly state the Company’s financial position, results of operations and cash flows. Certain prior year items have been reclassified to conform to the current year presentation. The December 31, 2015 condensed consolidated balance sheet was derived from audited financial statements, but does not include all GAAP disclosures. The unaudited condensed consolidated financial statements for the interim periods are not necessarily indicative of results for the full year. The preparation of these unaudited condensed consolidated financial statements requires the Company to make estimates and judgments that affect the amounts reported in the financial statements and the accompanying notes. The Company’s actual results may differ from these estimates under different assumptions or conditions.

On October 21, 2016, the Company effected a one-for-ten (1:10) reverse stock split whereby the Company (i) decreased the number of authorized shares of Common Stock by a ratio equal to one-for-ten (1:10) (the “Reverse Split Ratio”), and (ii) correspondingly and proportionately decreased, by a ratio equal to the Reverse Split Ratio, the number of issued and outstanding shares of Common Stock (the “Reverse Stock Split”). Under Nevada law, because the Reverse Stock Split was approved by the Board of Directors in accordance with Nevada Revised Statutes (“NRS”) Section 78.207, no stockholder approval was required. NRS Section 78.207 provides that the Company may effect the Reverse Stock Split without stockholder approval if (x) both the number of authorized shares of Common Stock and the number of outstanding shares of Common Stock are proportionally reduced as a result of the Reverse Stock Split, (y) the Reverse Stock Split does not adversely affect any other class of stock of the Company and (z) the Company does not pay money or issue scrip to stockholders who would otherwise be entitled to receive a fractional share as a result of the Reverse Stock Split. As described herein, the Company has complied with these requirements. The Reverse Stock Split was effected by the Company filing a Certificate of Change pursuant to NRS Section 78.209 with the Secretary of State of the State of Nevada on October 21, 2016, which became effective at 5 p.m. PST on October 21, 2016. Upon effectiveness of the Reverse Stock Split, the number of shares of the Company’s common stock (x) issued and outstanding decreased from approximately 77.3 million shares (as of October 21, 2016) to approximately 7.7 million shares; (y) reserved for issuance upon exercise of outstanding options, restricted stock units and warrants decreased from approximately 4.9 million, 1.2 million and 23.2 million shares, respectively, to approximately 0.5 million, 0.1 million and 2.3 million shares, respectively, and (z) reserved but unallocated under the Company’s current equity incentive plans decreased from approximately 0.1 million common shares to approximately 0.01 million common shares. In connection with the Reverse Stock Split, the Company’s total number of authorized shares of common stock decreased from 150.0 million to 15.0 million. The number of authorized shares of preferred stock remained unchanged at 10.0 million shares. Following the Reverse Stock Split, certain reclassifications have been made to the prior periods’ financial statements to conform to the current period's presentation. The Reverse Stock Split was applied retroactively to all periods presented to adjust the number and per share amounts of common stock shares, options, restricted stock units and warrants for the Company’s common stock. The Company adjusted shareholders’ equity to reflect the Reverse Stock Split by reclassifying an amount equal to the par value of the shares eliminated by the split from common stock to the Additional Paid-in Capital during the third quarter of fiscal 2016, resulting in no net impact to shareholders' equity on the Company’s consolidated balance sheets. The Company’s shares of common stock commenced trading on a split-adjusted basis on October 24, 2016. Proportional adjustments for the reverse stock split were made to the Company's outstanding stock options, warrants and equity incentive plans for all periods presented.

Liquidity

The accompanying consolidated financial statements have been prepared on a basis which assumes the Company is a going concern and that contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. The Company had an accumulated deficit of approximately $316.0 million and negative working capital of $5.4 million as of September 30, 2016 and reported a net loss of approximately $7.1 million and negative cash flows from operations for the nine months ended September 30, 2016. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The Company has principally been financed through the sale of its common stock and other equity securities, debt

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financings and up-front payments received from commercial partners for the Company’s products under development. As of September 30, 2016, the Company had cash and cash equivalents of approximately $5.6 million.

In September 2016, the Company completed a registered direct offering of 1,082,402 shares of common stock for gross proceeds of approximately $3.7 million (the “September 2016 Financing”). Concurrently in a private placement, for each share of common stock purchased by an investor, such investor received from the Company an unregistered warrant to purchase three quarters of a share of common stock. See footnote 6 for a further description. Under the terms of the securities purchase agreement entered into with such investors, the Company agreed not to sell any shares of common stock or common stock equivalents for a period of 90 days, which expires on December 27, 2016.

In July 2016, the Company and Aspire Capital Fund, LLC (“Aspire Capital”) entered into a Common Stock Purchase Agreement (the “Aspire Purchase Agreement”), which provides that Aspire Capital is committed to purchase, if the Company chooses to sell and at the Company’s discretion, an aggregate of up to $7.0 million of shares of the Company’s common stock over the 24-month term of the Aspire Purchase Agreement. The Aspire Purchase Agreement can be terminated at any time by the Company by delivering notice to Aspire Capital. On July 5, 2016 (the “Aspire Closing Date”), the Company delivered to Aspire Capital a commitment fee of 151,899 shares of the Company’s common stock at a value of $0.6 million (the “Commitment Shares”) in consideration for Aspire Capital entering into the Aspire Purchase Agreement. Additionally, on the Aspire Closing Date, the Company sold 253,165 shares of the Company’s common stock to Aspire Capital for proceeds of $1.0 million. Through September 30, 2016, 455,064 shares of the Company’s common stock have been sold for gross proceeds of $1.2 million. However, in connection with the September 2016 Financing, the Company agreed to not make any further sales under the Aspire Purchase Agreement for a period of twelve months following the date of the September 2016 Financing. Pursuant to the Aspire Purchase Agreement, the Company and Aspire Capital terminated the prior Common Stock Purchase Agreement, dated August 12, 2014, between the parties. See footnote 6 for additional discussion of the Aspire Purchase Agreement.

In January 2016, the Company entered into subscription agreements with certain purchasers pursuant to which it agreed to sell an aggregate of 1,136,364 shares of its common stock and warrants to purchase up to an additional 568,184 shares of its common stock to the purchasers for an aggregate offering price of $10.0 million, to take place in separate closings. Each share of common stock was sold at a price of $8.80 and included one half of a warrant to purchase a share of common stock. The warrants have an exercise price of $8.80 per share, became exercisable six months and one day after the date of issuance and will expire on the seventh anniversary of the date of issuance. During the first closing in January 2016, the Company sold an aggregate of 252,842 shares and warrants to purchase up to 126,421 shares of common stock for gross proceeds of $2.2 million. The remaining shares and warrants were sold in a subsequent closing in March 2016 for gross proceeds of $7.8 million following stockholder approval at a special meeting on March 2, 2016.

In October 2014, the Company entered into the Loan and Security Agreement (the “Credit Facility”) with Oxford Finance LLC (“Oxford”) and Silicon Valley Bank (“SVB”) (Oxford and SVB are referred to together as the “Lenders”), which is secured by substantially all of the Company’s assets, excluding intellectual property. Upon closing, a $5.0 million term loan was funded. In July 2015, the Company borrowed the remaining $5.0 million available under its Credit Facility with the Lenders. The principal balance under the Credit Facility was $7.2 million as of September 30, 2016.

The Company currently has an effective shelf registration statement on Form S-3 (No. 333-198066) filed with the Securities and Exchange Commission (“SEC”) under which it may offer from time to time any combination of debt securities, common and preferred stock and warrants. As of September 30, 2016, the Company had approximately $74.1 million available under its Form S-3 shelf registration statement. Under current SEC regulations, at any time during which the aggregate market value of the Company’s common stock held by non-affiliates (“public float”), is less than $75.0 million, the amount it can raise through primary public offerings of securities in any twelve-month period using shelf registration statements, including sales under the Aspire Purchase Agreement, is limited to an aggregate of one-third of the Company’s public float. SEC regulations permit the Company to use the highest closing sales price of the Company’s common stock (or the average of the last bid and last ask prices of the Company’s common stock) on any day within 60 days of sales under the shelf registration statement. As the Company’s public float was less than $75.0 million as of September 30, 2016, the Company’s usage of its S-3 shelf registration statement is limited. The Company still maintains the ability to raise funds through other means, such as through the filing of a registration statement on Form S-1 or in private placements. The rules and regulations of the SEC or any other regulatory agencies may restrict the Company’s ability to conduct certain types of financing activities, or may affect the timing of and amounts it can raise by undertaking such activities.

The accompanying consolidated financial statements have been prepared assuming the Company will continue to operate as a going concern, which contemplates the realization of assets and settlement of liabilities in the normal course of business, and do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result from uncertainty related to its ability to continue as a going concern.

The Company’s future liquidity and capital funding requirements will depend on numerous factors, including:

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•	its ability to raise additional funds to finance its operations and service its debt;


•	the revenue generated by product sales and royalty revenue from the Company’s Vitaros^® commercialization partners;


•	the revenue generated by component sales to the Company’s contract manufacturers;


•	its ability to successfully implement its cost-reduction plan as part of a broader strategic re-positioning toward Vitaros^®;


•	the outcome, costs and timing of clinical trial results for its product candidate;


•	the emergence and effect of competing or complementary products;


•	its ability to maintain, expand and defend the scope of its intellectual property portfolio, including the amount and timing of any payments the Company may be required to make, or that it may receive, in connection with the licensing, filing, prosecution, defense and enforcement of any patents or other intellectual property rights;


•	its ability to retain its current employees and the need and ability to hire additional management and scientific and medical personnel;


•	the terms and timing of any collaborative, licensing or other arrangements that it has or may establish;


•	the trading price of the Company’s common stock being above the $1.00 closing floor price that is required for the Company to use the committed equity financing facility with Aspire Capital;


•	the trading price of its common stock; and


•	its ability to maintain compliance with the listing requirements of The NASDAQ Capital Market.

On May 10, 2016, the Company received a written notification from NASDAQ indicating that the Company was not in compliance with NASDAQ Listing Rule 5550(a)(2), as the closing bid price for the Company’s common stock was below $1.00 per share for the last 30 consecutive business days.

Pursuant to NASDAQ Listing Rule 5810(c)(3)(A), the Company has been granted a 180 calendar day compliance period, or until November 7, 2016, to regain compliance with the minimum bid price requirement. During the compliance period, the Company’s shares of common stock will continue to be listed and traded on NASDAQ. To regain compliance, the closing bid price of the Company’s shares of common stock must meet or exceed $1.00 per share for at least 10 consecutive business days during the 180 calendar day compliance period.

On October 21, 2016, the Company effected the Reverse Stock Split. Following the Reverse Stock Split, the closing bid price of shares of the Company’s common stock has met or exceeded $1.00 per share for the 10 consecutive business days ending as of November 7, 2016. On November 8, 2016, the Company received a letter from NASDAQ confirming that the Company is in compliance with NASDAQ Listing Rule 5550(a)(2).

On June 2, 2016, the Company received a notice from NASDAQ stating that the Company was not in compliance with NASDAQ Listing Rule 5550(b)(2) because the market value of the Company’s listed securities (“MVLS”) was below $35 million for the previous thirty (30) consecutive business days. In accordance with NASDAQ Marketplace Rule 5810(c)(3), the Company was granted a 180 calendar day compliance period, or until November 29, 2016, to regain compliance with the minimum MVLS requirement. Compliance can be achieved by meeting the $35 million MVLS requirement for a minimum of 10 consecutive business days during the 180 calendar day compliance period.

If the Company does not regain compliance within the allotted compliance period(s), including any extensions that may be granted by NASDAQ, NASDAQ will provide notice that shares of the Company’s Common Stock will be subject to delisting.

In order to fund its operations during the next twelve months, the Company will need to raise substantial additional funds through one or more of the following: issuance of additional debt or equity, accessing additional capital under its committed equity financing facility with Aspire Capital, as described above or the completion of a licensing transaction for one or more of the Company’s pipeline assets. If the Company is unable to maintain sufficient financial resources, its business, financial condition and results of operations will be materially and adversely affected. This could affect future development activities, such as the resubmission of a Vitaros^® United States new drug application (“NDA”), continued development of Room Temperature Vitaros^®, as well as future clinical studies for RayVa^™. There can be no assurance that the Company will be able to obtain the needed financing on acceptable terms or at all. Additionally, equity or debt financings may have a dilutive effect on the holdings of the Company’s existing stockholders.

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Warrant Liabilities

The Company’s outstanding common stock warrants issued in connection with its February 2015, January 2016 and September 2016 financings are classified as liabilities in the accompanying condensed consolidated balance sheets as they contain either provisions that require the Company to maintain active registration of the shares underlying such warrants, which is considered outside of the Company’s control, or could require cash settlement. The warrants were recorded at fair value using the Black-Scholes option pricing model. The fair value of these warrants is re-measured at each financial reporting period with any changes in fair value being recognized as a component of other income (expense) in the accompanying condensed consolidated statements of operations.

Fair Value Measurements

The Company determines the fair value measurements of applicable assets and liabilities based on a three-tier fair value hierarchy established by accounting guidance and prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted market prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. The Company’s common stock warrant liabilities are measured and disclosed at fair value on a recurring basis, and are classified within the Level 3 designation. None of the Company’s non-financial assets and liabilities are recorded at fair value on a non-recurring basis.

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.

The following table presents the Company’s fair value hierarchy for its warrant liabilities measured at fair value on a recurring basis (in thousands) as of September 30, 2016 and December 31, 2015:



	Quoted Market Prices for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Warrant liabilities
Balance as of September 30, 2016	$	—	$	—	$	3,261	$	3,261
Balance as of December 31, 2015	$	—	$	—	$	1,841	$	1,841

The common stock warrant liabilities are recorded at fair value using the Black-Scholes option pricing model. The following assumptions were used in determining the fair value of the common stock warrant liabilities valued using the Black-Scholes option pricing model as of September 30, 2016 and December 31, 2015:



	September 30, 2016			December 31, 2015
Risk-free interest rate	1.14%-1.2%			1.82		%
Volatility	73.7%-80.05%			83.00		%
Dividend yield	—		%	—		%
Expected term	5.00-6.42			6.13
Weighted average fair value	$	1.88		$	6.09

The following table is a reconciliation for all liabilities measured at fair value using Level 3 unobservable inputs (in thousands):

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	Warrant liability
Balance as of December 31, 2015	$	1,841
Issuance of warrants in connection with January 2016 financing	4,807
Issuance of warrants in connection with September 2016 financing	1,676
Change in fair value measurement of warrant liability	(5,739		)
Repricing of February 2015 warrants in connection with January 2016 financing	676
Balance as of September 30, 2016	$	3,261

Of the inputs used to value the outstanding common stock warrant liabilities as of September 30, 2016, the most subjective input is the Company’s estimate of expected volatility.

Revenue Recognition

The Company generates revenues from licensing technology rights and the sale of products. The Company recognizes revenue when all of the following criteria are met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been rendered; (3) the Company’s price to the buyer is fixed or determinable; and (4) collectability is reasonably assured.

Payments received under commercial arrangements, such as licensing technology rights, may include non-refundable fees at the inception of the arrangements, milestone payments for specific achievements designated in the agreements, and royalties on the sale of products. The Company considers a variety of factors in determining the appropriate method of accounting under its license agreements, including whether the various elements can be separated and accounted for individually as separate units of accounting. Deliverables under the arrangement will be separate units of accounting, provided (i) a delivered item has value to the customer on a standalone basis; and (ii) the arrangement includes a general right of return relative to the delivered item, delivery or performance of the undelivered item is considered probable and substantially in the Company’s control.

Multiple Element Arrangements

The Company accounts for revenue arrangements with multiple elements by separating and allocating consideration according to the relative selling price of each deliverable. If an element can be separated, an amount is allocated based upon the relative selling price of each element. The Company determines the relative selling price of a separate deliverable using the price it charges other customers when it sells that product or service separately. If the product or service is not sold separately and third party pricing evidence is not available, the Company will use its best estimate of selling price.

Milestones

Revenue is recognized when earned, as evidenced by written acknowledgment from the collaborator or other persuasive evidence that the milestone has been achieved, provided that the milestone event is substantive. A milestone event is considered to be substantive if its achievability was not reasonably assured at the inception of the arrangement and the Company’s efforts led to the achievement of the milestone (or if the milestone was due upon the occurrence of a specific outcome resulting from the Company’s performance). Events for which the occurrence is either contingent solely upon the passage of time or the result of a counterparty’s performance are not considered to be milestone events. If both of these criteria are not met, the milestone payment is recognized over the remaining minimum period of the Company’s performance obligations under the arrangement, if any. The Company assesses whether a milestone is substantive at the inception of each arrangement.

License Fee Revenue

The Company defers recognition of non-refundable upfront license fees if it has continuing performance obligations, without which the licensed data, technology, or product has no utility to the licensee separate and independent of its performance under the other elements of the applicable arrangement. Non-refundable, up-front fees that are not contingent on any future performance by the Company and require no consequential continuing involvement on the Company’s part are recognized as revenue when the license term commences and the last element of the licensed data, technology or product is delivered. The specific methodology for the recognition of the revenue is determined on a case-by-case basis according to the facts and circumstances of the applicable agreement.

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Product Sales Revenue

The Company’s product sales revenue is comprised of two components: sales of Vitaros^® product to its commercialization partners and sales of work-in-process inventory to its manufacturing partners. The Company has supply and manufacturing agreements with certain of its licensee partners for the manufacture and delivery of Vitaros^®product. These agreements do not permit the Company’s licensee partners to return product, unless the product sold to the licensee partner is delivered with a short-dated shelf life as specified in each respective license agreement, if applicable. In those cases, the Company defers revenue recognition until the right of return no longer exists, which is the earlier of: (i) evidence that the product has been sold to an end customer or (ii) the right of return has expired. As such, the Company does not have a sales and returns allowance recorded as of September 30, 2016 and December 31, 2015.

Historically, sales of component inventory to the manufacturing partners was accounted for on a net basis since these products were ultimately returned to the Company as finished goods and were then sold onto commercialization partners. As the majority of the Company’s commercialization partners are now buying the finished goods directly from the manufacturers, the Company’s component sales are no longer recognized on a net basis. During the three and nine months ended September 30, 2016, the Company recognized $0.2 million and $0.4 million, respectively, in revenues from component sales to its third party manufacturers.

Royalty Revenue

The Company relies on its commercial partners to sell its Vitaros^® product in approved markets and receives royalty revenue from its commercial partners based upon the amount of those sales. Royalty revenues are computed and recognized on a quarterly basis, typically one quarter in arrears, and at the contractual royalty rate pursuant to the terms of each respective license agreement.

Cost of Goods Sold

The Company’s cost of goods sold includes direct material and manufacturing overhead associated with production. Cost of goods sold is also affected by manufacturing efficiencies, allowances for scrap or expired material and additional costs related to initial production quantities of new products. Cost of goods sold also includes the cost of one-time manufactured samples provided to the Company’s licensee partners free of charge.

Cost of Sandoz Rights

In July 2016, the Company and Hexal AG, an affiliate with the Sandoz Division of the Novartis Group of Companies (“Sandoz”), mutually agreed to terminate the exclusive license agreement, previously entered into by the parties in February 2012, as amended and restated in December 2013 and further amended in February 2015, granting Sandoz exclusive rights to market the Company’s Vitaros^® drug for the treatment of erectile dysfunction (“ED”) in certain countries in Europe and the Asia-Pacific region, as well as any ancillary agreements related to the manufacture or sale of the product. Sandoz, as a result of the mutual termination, received a one-time payment of $2.0 million upon transfer of the marketing authorization in Germany to Ferring in August 2016. Sandoz is eligible to receive an additional $1.5 million to be paid in six equal installments, of which $0.3 million has been paid through September 30, 2016. The five remaining installments are due quarterly commencing in the second quarter of 2017 through the second quarter of 2018. As the rights acquired from Sandoz were immediately transferred to Ferring, the present value of the payments to Sandoz of $3.4 million was expensed and included as Cost of Sandoz Rights in the condensed consolidated statements of operations.

Loss Per Common Share

Basic net loss per share is computed by dividing net loss by the weighted average number of common shares outstanding during the same period. Diluted net loss per share is computed by dividing net loss by the weighted average number of common shares and common equivalent shares outstanding during the same period. Common equivalent shares may be related to stock options, restricted stock, warrants or shares related to convertible notes. The Company excludes common stock equivalents from the calculation of diluted net loss per share when the effect is anti-dilutive.

The following securities that could potentially decrease net loss per share in the future are not included in the determination of diluted loss per share as their effect is anti-dilutive:



	As of September 30,
	2016	2015
Outstanding stock options	490,199	435,528
Outstanding warrants	2,317,847	1,003,414
Restricted stock	115,574	—

Stock-Based Compensation

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The Company estimates the fair value of each option award on the date of grant using the Black-Scholes option pricing model. The Company also issues performance-based shares which represent a right to receive a certain number of shares of common stock based on the achievement of corporate performance goals and continued employment during the vesting period. At each reporting period, the Company reassesses the probability of the achievement of such corporate performance goals and adjusts expense as necessary.

The following table presents the assumptions used by the Company to estimate the fair value of stock option grants using the Black-Scholes option-pricing model, as well as the resulting weighted average fair values:



	Nine Months Ended September 30,
	2016			2015
Risk-free interest rate	1.36%-1.78%			1.37% - 1.87%
Volatility	72.35%-80.02%			66.85%-101.54%
Dividend yield	—		%	—		%
Expected term	5.25-6.08 years			5.25- 6.46 years
Forfeiture rate	11.33		%	11.54		%
Weighted average grant date fair value	$	7.23		$	10.67

A summary of the Company’s stock option activity under its stock option plans during the nine months ended September 30, 2016 is as follows (share amounts in thousands):



	Number of Shares		Weighted Average Exercise Price
Outstanding as of December 31, 2015	405		$	19.46
Granted	167		$	10.57
Exercised	—		$	—
Cancelled	(82	)	$	17.16
Outstanding as of September 30, 2016	490		$	16.82

A summary of the Company’s restricted stock unit activity under its stock option plans during the nine months ended September 30, 2016 is as follows (share amounts in thousands):



	Number of Shares		Weighted Average Grant Date Fair Value
Unvested as of December 31, 2015	—		$	—
Granted	133		$	3.70
Vested	(18	)	$	3.12
Forfeited	—		$	—
Unvested as of September 30, 2016	116		$	3.79

During the second quarter of 2016, the Company granted approximately 0.1 million restricted stock units (“RSUs”) to its employees in order to retain and incentivize its employees to achieve its strategic objectives regarding Vitaros^®. One half of the RSUs will vest if the Company receives marketing approval of Vitaros^® in the United States by the Food and Drug Administration (“FDA”) on or before December 31, 2018 and the remaining half will vest on January 1, 2018. The RSUs are subject to the employee’s continued employment with the Company through the applicable date and subject to accelerated vesting upon a change in control of the Company. The RSUs granted to the Company’s officers are also subject to accelerated vesting pursuant to the terms of their existing employment agreements.

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The following table summarizes the total stock-based compensation expense resulting from share-based awards recorded in the Company’s condensed consolidated statements of operations (in thousands):



	Three Months Ended September 30,				Nine Months Ended September 30,
	2016		2015		2016		2015
Research and development	$	54	$	55	$	479	$	142
General and administrative	279		244		948		770
Total	$	333	$	299	$	1,427	$	912

Segment Information

The Company operates under one segment which develops pharmaceutical products.

Recent Accounting Pronouncements

In August 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-15, which clarifies the treatment of several cash flow categories. In addition, ASU 2016-15 clarifies that when cash receipts and cash payments have aspects of more than one class of cash flows and cannot be separated, classification will depend on the predominant source or use. This update is effective for annual periods beginning after December 15, 2017, and interim periods within those fiscal years, with early adoption permitted, including adoption in an interim period. The Company is currently evaluating whether the adoption of the new standard will have a material effect on its condensed consolidated financial statements and related disclosure.

In May 2016, the FASB issued ASU No. 2016-12, Revenue from Contracts with Customers, the amendment of which addressed narrow-scope improvements to the guidance on collectability, noncash consideration, and completed contracts at transition as well as providing a practical expedient for contract modifications. In April 2016 and March 2016, the FASB issued ASU No. 2016-10 and ASU No. 2016-08, respectively, the amendments of which further clarified aspects of Topic 606: identifying performance obligations and the licensing and implementation guidance and intended to improve the operability and understandability of the implementation guidance on principal versus agent considerations. The FASB issued the initial release of Topic 606 in ASU No. 2014-09, which requires entities to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Entities may use a full retrospective approach or report the cumulative effect as of the date of adoption. On July 9, 2015, the FASB voted to defer the effective date by one year to December 15, 2017 for interim and annual reporting periods beginning after that date. Early adoption of ASU 2016-10 is permitted but not before the original effective date (annual periods beginning after December 15, 2017). The Company is currently in the process of evaluating its various contracts and revenue streams subject to this update but has not completed its assessment and therefore has not yet concluded on whether the adoption of this update will have a material effect on its condensed consolidated financial statements and related disclosures.

In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The new standard simplifies income tax consequences and the classification of awards as either equity or liabilities and the classification on the statement of cash flows. The new standard is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted for any organization in any interim or annual period. The Company is currently evaluating whether the adoption of the new standard will have a material effect on its condensed consolidated financial statements and related disclosures.

In February 2016, the FASB issued ASU No. 2016-2, Leases. The new standard establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company is currently evaluating whether the adoption of the new standard will have a material effect on its condensed consolidated financial statements and related disclosures.

In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory (“ASU 2015-11”). ASU 2015-11 affects reporting entities that measure inventory using first-in, first-out or average cost. Specifically, ASU 2015-11 requires that inventory be measured at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and

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transportation. ASU 2015-11 is effective for annual periods beginning after December 15, 2016, with early adoption permitted. The Company does not believe the adoption of the new standard will have a material impact on its condensed consolidated financial statements and required disclosures. This standard will not have a material impact on the Company’s consolidated results of operations or financial position.

In April 2015, the FASB issued ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs. This ASU requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The Company adopted this ASU on January 1, 2016 and this ASU had no material impact on the Company’s condensed consolidated financial statements and related disclosures. ASU 2015-03 requires a retroactive method of adoption, and therefore, the Company has reclassified approximately $0.07 million from other current assets to the current portion of its note payable as of December 31, 2015. Approximately $0.01 million and $0.04 million was reclassified from other expense to interest expense for the three and nine months ended September 30, 2015, respectively.

In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements - Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. The amendments in this update will require management to assess, at each annual and interim reporting period, the entity’s ability to continue as a going concern and, if management identifies conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued, to disclose in the notes to the entity’s financial statements the principal conditions or events that raised substantial doubt about the entity’s ability to continue as a going concern, management’s evaluation of their significance, and management’s plans that alleviated or are intended to alleviate substantial doubt about the entity’s ability to continue as a going concern. This new standard is effective for annual periods ending after December 15, 2016 and early adoption is permitted. After adoption at December 31, 2016, the Company will apply this guidance to assess going concern. The Company does not expect the adoption to have a material effect on its condensed consolidated financial statements and required disclosures.

2. VITAROS^® LICENSING AND DISTRIBUTION AGREEMENTS

The following table summarizes the total revenue by commercialization partner recorded in the Company’s consolidated statements of operations (in thousands):



	Three Months Ended September 30,				Nine Months Ended September 30,
	2016 ⁽¹⁾		2015		2016 ⁽¹⁾		2015
Ferring International Center S.A. ("Ferring")	$	3,850	$	—	$	3,850	$	—
Laboratories Majorelle ("Majorelle")	157		84		490		84
Bracco SpA (“Bracco”)	11		—		137		—
Sandoz ⁽²⁾	—		1,109		16		1,725
Recordati Ireland Ltd. ("Recordati")	28		42		114		120
Takeda Pharmaceuticals International GmbH (“Takeda”) ⁽³⁾	—		38		214		281
Elis Pharmaceuticals Limited ("Elis")	100		—		100		—
	$	4,146	$	1,273	$	4,921	$	2,210

⁽¹⁾Product sales to the Company’s contract manufacturers are not shown in the table above since they were unrelated to any of the Company’s commercialization partners. License revenue from parties unrelated to Vitaros^®are also not shown above.

⁽²⁾Effective July 2016, the Company terminated its license agreement with Sandoz, transitioning the commercialization of Vitaros^® in Sandoz’s prior territory to Ferring International Center S.A.

⁽³⁾Effective April 2016, the Company terminated its license agreement with Takeda, transitioning the commercialization of Vitaros^® in Takeda’s prior territory to Ferring International Center S.A.

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The following table summarizes the potential future milestones the Company was eligible for by commercialization partner (in thousands) as of September 30, 2016:



Commercialization Partner	Regulatory Milestones ⁽¹⁾		Commercial Launch Milestones ⁽¹⁾		Sales Milestones ⁽¹⁾		Total
Ferring International Center S.A. ("Ferring")	$	2,000	$	1,500	$	24,500	$	28,000
Majorelle	2,000		—		17,394		19,394
Bracco	—		—		5,050		5,050
Recordati	—		1,122		38,715		39,837
Abbott Laboratories Limited, now a subsidiary of Mylan N.V. (“Mylan”)	225		—		13,000		13,225
Allergan	—		25,000		—		25,000
Elis Pharmaceuticals Limited (“Elis”)	—		—		1,900		1,900
Neopharm Scientific Limited (“Neopharm”)	250		—		4,000		4,250
	$	4,475	$	27,622	$	104,559	$	136,656

⁽¹⁾ Certain contractual amounts have been converted to USD based on the applicable exchange rate as of September 30, 2016.

Ferring

In October 2015, the Company entered into a distribution agreement with Ferring, granting Ferring the exclusive right to commercialize Vitaros^® for the treatment of ED in Latin America, including Central America, South America and certain Caribbean countries. In April 2016, the Company extended the exclusive license grant to include the United Kingdom. In July 2016, the Company further extended the exclusive license grant to include Germany, Austria, Belgium, Denmark, Finland, Iceland, Luxembourg, Norway, the Netherlands, Sweden, Switzerland, Malaysia, Indonesia, the Philippines, Thailand, Taiwan, Vietnam, Hong Kong, Singapore and Korea (the “Expanded Territories”).

The product has been approved for the treatment of ED in the United Kingdom, Austria, Belgium, Denmark, Finland, Germany, Iceland, Luxemburg, the Netherlands, Norway, Sweden, Switzerland and Argentina.

In addition to the milestones outlined in the table above, the Company is eligible to receive high single-digit to low double-digit royalties based on Ferring’s sales of the product.

The Company received an upfront payment in April 2016 of $0.3 million from Ferring for the rights in the United Kingdom. The first upfront payment was deemed to be related to the license deliverable and was recorded as deferred revenue until completion of the transfer of the United Kingdom marketing authorization, which occurred in August 2016. The Company received an upfront payment in July 2016 of $2.0 million from Ferring for the rights in the Expanded Territories. In August 2016, the Company received a milestone payment of $1.6 million from Ferring upon the transfer of the Germany marketing authorization from Sandoz to Ferring. The Company concluded that the fair value of the Vitaros^® license for the United Kingdom and the Expanded Territories was equal to the sum of the upfront payments and the milestone payment upon the transfer of the Germany marketing authorization (a total of $3.9 million) and recognized this as license fee revenue in its statement of operations during the third quarter of 2016. The rights that the Company licensed to Ferring in July 2016 were purchased from Sandoz as discussed below.

Majorelle

In November 2013, the Company entered into a license agreement with Majorelle, granting Majorelle the exclusive right to market Vitaros^® for the treatment of ED in France, Monaco and certain countries in Africa. To date, the product has been approved for the treatment of ED in France, where it was launched in May 2015.

In December 2013, in a related negotiation, Majorelle agreed to make severance payments to certain former employees of the Company’s former subsidiaries in France for an aggregate amount of approximately $2.0 million on behalf of the Company. In September 2014, the Company entered into a Manufacturing and Supply Agreement with Majorelle whereby the Company or its contract manufacturer will manufacture Vitaros^® product and supply the product to Majorelle on a cost plus basis. During the first quarter of 2015, Groupe Parima began manufacturing product for Majorelle under its own manufacturing and supply agreement.

In addition to the milestones outlined in the table above, the Company is eligible to receive tiered double-digit royalties in the ten to twenty percent range based on Majorelle’s sales of the product.

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Bracco

In December 2010, the Company entered into a license agreement with Bracco, granting Bracco the exclusive right to commercialize Vitaros^® for the treatment of ED in Italy. The product has been approved for the treatment of ED in Italy, where it was launched in September 2015. In addition to the milestones outlined in the table above, the Company is eligible to receive tiered double-digit royalties in the ten to twenty percent range based on Bracco’s sales of the product.

Sandoz

In July 2016, the Company and Sandoz mutually agreed to terminate the exclusive license agreement, previously entered into by the parties in February 2012, as amended and restated in December 2013 and further amended in February 2015, granting Sandoz exclusive rights to market the Company’s Vitaros^® drug for the treatment of ED in certain countries in Europe and the Asia-Pacific region, as well as any ancillary agreements related to the manufacture or sale of the product. Sandoz, as a result of the mutual termination, received a one-time payment of $2.0 million upon transfer of the marketing authorization in Germany to Ferring in August 2016. Sandoz is eligible to receive an additional $1.5 million to be paid in equal quarterly installments in 2016 and 2017, of which $0.3 million has been paid through September 30, 2016.

Recordati

In February 2014, the Company entered into a license agreement with Recordati, granting Recordati the exclusive right to market Vitaros^® for the treatment of ED in Spain, Ireland, Portugal, Greece, Cyprus, the CEE Countries (Central and Eastern Europe), Russia and the other CIS Countries (former Soviet Republics), Ukraine, Georgia, Turkey and certain countries in Africa. In June 2014, the Company entered into a Manufacturing and Supply Agreement with Recordati whereby the Company or its contract manufacturer will manufacture Vitaros^® product and supply the product to Recordati on a cost plus basis. During the third quarter of 2015, Groupe Parima began manufacturing product for Recordati under its own manufacturing and supply agreement. The product has been approved for the treatment of ED in Spain, Ireland, Czech Republic, Greece, Poland, Portugal, Romania and Slovakia. Recordati launched the product as Virirec^™ in Spain in May 2015, as Vytaros^® in Poland in September 2016, and as Vitaros^® in Portugal, Ireland, the Czech Republic and Slovakia in September 2016.

In addition to the milestones outlined in the table above, the Company is eligible to receive tiered double-digit royalties in the ten to twenty percent range based on Recordati’s sales of the product.

Mylan

In January 2012, the Company entered into a license agreement with Abbott Laboratories Limited, now a subsidiary of Mylan, granting Mylan the exclusive right to commercialize Vitaros^® for the treatment of ED in Canada. The product was approved for the treatment of ED by Health Canada in late 2010. In addition to the milestones outlined in the table above, Company is eligible to receive tiered high single-digit to double-digit royalties in the ten to twenty percent range based on Mylan’s sales of the product.

Elis

In January 2011, the Company entered into a license agreement with Elis, granting Elis the exclusive rights to market Vitaros^® for the treatment of ED in the United Arab Emirates, Oman, Bahrain, Qatar, Saudi Arabia, Kuwait, Lebanon, Syria, Jordan, Iraq and Yemen. The product has been approved for the treatment of ED in Lebanon. In July 2016, the Company earned a milestone of $0.1 million in conjunction with the Lebanon approval. In addition to the remaining milestones outlined in the table above, the Company is eligible to receive tiered double-digit royalties in the ten to twenty percent range based on Elis’ sales of the product.

Neopharm

In February 2011, the Company entered into a license agreement with Neopharm, granting Neopharm the exclusive rights to market Vitaros^® for the treatment of ED in Israel and the Palestinian Territories. In addition to the milestones outlined in the table above, the Company is eligible to receive tiered double-digit royalties in the ten to twenty percent range based on Neopharm’s sales of the product.

Global Harvest

In June 2009, the Company entered into a license agreement with Global Harvest, granting Global Harvest the exclusive rights to market Vitaros^® for the treatment of ED in Australia and New Zealand. The Company is eligible to receive high single-digit royalty payments on Global Harvest’s sales of the product. Global Harvest filed for approval with the Therapeutic Goods Administration in Australia in December 2014 but withdrew the submission in January 2016, pending resolution of certain review issues. The Company expects Global Harvest will resubmit upon resolution of those issues.

3. ALLERGAN IN-LICENSING AGREEMENT

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In 2009, Warner Chilcott Company, Inc., now a subsidiary of Allergan, acquired the commercial rights to Vitaros^® in the United States. In September 2015, the Company entered into a license agreement and amendment to the original agreement with Warner Chilcott Company, Inc., granting the Company exclusive rights to develop and commercialize Vitaros^® in the United States in exchange for a $1.0 million upfront payment and an additional $1.5 million in potential regulatory milestone payments to Allergan. The upfront payment was recorded as R&D expense during the third quarter of 2015.

Upon the Food and Drug Administration’s approval of a new drug application for Vitaros^® in the United States, Allergan has the right to exercise a one-time opt-in right to assume all future commercialization activities in the United States. If Allergan exercises its opt-in right, the Company is eligible to receive up to a total of $25.0 million in upfront and potential launch milestone payments, plus a double-digit royalty in the low twenties based on Allergan’s net sales of the product. If Allergan does not exercise its opt-in right, the Company may commercialize the product and in return will pay Allergan a double-digit royalty in the low twenties based on its net sales of the product.

4. OTHER FINANCIAL INFORMATION

Inventory

Inventory is comprised of the following (in thousands):



	September 30, 2016		December 31, 2015
Raw materials	$	350	$	145
Work in process	450		324
	$	800	$	469

Accrued Expenses

Accrued expenses are comprised of the following (in thousands):



	September 30, 2016		December 31, 2015
Sandoz termination payments	$	1,147	$	—
Professional fees	957		466
Outside research and development services	627		2,228
Deferred compensation	179		178
Other	234		471
	$	3,144	$	3,343

Other Long Term Liabilities

Other long term liabilities are comprised of the following (in thousands):



	September 30, 2016		December 31, 2015
Deferred compensation	$	—	$	135
Deferred rent	80		65
	$	80	$	200

5. DEBT

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Credit Facility

On October 17, 2014 (the “Closing Date”), the Company entered into the Credit Facility with the Lenders, pursuant to which the Lenders agreed, subject to certain conditions, to make term loans totaling up to $10.0 million available to the Company. The first $5.0 million term loan was funded on the Closing Date. A second term loan of $5.0 million was funded at the Company’s request on July 23, 2015. Pursuant to the terms of the Credit Facility, the Lenders have a senior-secured lien on all of the Company’s current and future assets, other than its intellectual property. The Lenders have the right to declare the term loan immediately due and payable in an event of default under the Credit Facility, which includes, among other things, a material adverse change in the Company’s business, operations, or financial condition or a material impairment in the prospect of repayment of the term loan. As of September 30, 2016 and December 31, 2015, the Company was in compliance with all covenants under the Credit Facility and has not received any notification or indication from the Lenders of an intent to declare the loan due prior to maturity. However, due to the Company’s current cash flow position and the substantial doubt about its being able to continue as a going concern, the entire principal amount of the Credit Facility has been presented as short-term for all periods presented. The Company will continue to evaluate the debt classification on a quarterly basis and evaluate for reclassification in the future should the Company’s financial condition improve.

The first term loan bears interest at an annual rate of 7.95%. The second term loan bears interest at an annual rate of 8.01%. The repayment schedule provides for interest-only payments in arrears until November 2015, followed by consecutive equal monthly payments of principal and interest in arrears through the maturity date, which is October 1, 2018 (the “Maturity Date”). The Company has the option to prepay the outstanding balance of the term loans in full prior to the Maturity Date, subject to a prepayment fee of up to 3%. Upon repayment of each term loan, the Company is also required to make a final payment to the Lenders equal to 6% of the original principal amount of each term loan. This final payment is being accreted over the life of the Credit Facility using the effective interest method.

On the Closing Date, the Company issued warrants to purchase up to an aggregate of 19,380 shares of common stock at an exercise price of $12.90 per share to the Lenders. On July 23, 2015, in connection with the funding of the second term loan, the Company issued additional warrants to purchase up to an aggregate of 15,244 shares of common stock at an exercise price of $16.40 per share to the Lenders. The warrants expire ten years from their dates of issuance. The warrants were classified in equity since they do not include provisions that would require the Company to repurchase its shares or cash settle, among other factors that would require liability classification. The fair value of the warrants at issuance of approximately $0.1 million was recorded as a discount to the principal balance and is being amortized over the life of the Credit Facility using the effective interest method.

The Company’s notes payable balance consisted of the following (in thousands), all of which is classified as short-term:



	September 30, 2016			December 31, 2015
Notes payable, principal	$	7,194		$	9,505
Add: accretion of final payment fee	331			171
Less: unamortized debt discount	(153		)	(275		)
	$	7,372		$	9,401

The debt issuance costs, accretion of the final payment and amortization of the fair value of the warrants are included in interest expense in the Company’s condensed consolidated statements of operations. The Company recognized interest expense related to the Credit Facility of $0.2 million and $0.3 million for the three months ended September 30, 2016 and 2015, respectively, and $0.8 million and $0.6 million during the nine months ended September 30, 2016 and 2015, respectively.

6. STOCKHOLDERS' EQUITY

September 2016 Financing

In September 2016, the Company completed the September 2016 Financing, which was a registered direct offering of 1,082,402 shares of common stock at a purchase price of $3.45 per share with a group of investors. Concurrently in a private placement, for each share of common stock purchased by each investor, such investor received from the Company an unregistered warrant to purchase three quarters of a share of common stock (the “Private Placement Warrants”). The Private Placement Warrants have an exercise price of $4.50 per share, are exercisable six months from the initial issuance date, and will expire five and a half years from the initial issuance date. The aggregate gross proceeds from the sale of the common stock and warrants were approximately $3.7 million, and the net proceeds after deduction of commissions, fees and expenses were approximately $3.2 million. In connection with this transaction, the Company issued to the placement agent warrants to purchase up to 54,123 shares of common stock sold in this offering (the “Placement Agent Warrants”). The Placement Agent Warrants have substantially the same terms as the Private Placement Warrants, except that the Placement Agent Warrants have

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an exercise price of $4.3125 per share and will expire five years from the initial issuance date. The Private Placement Warrants and the Placement Agent Warrants were accounted for as a liability and fair-valued at the issuance date. Out of the total gross proceeds, $1.6 million was allocated to the Private Placement Warrants based on their fair value, and the rest was allocated to the common stock and recorded in equity. Also, in connection with the transaction, the Company incurred cash-based transaction costs of approximately $0.5 million and non-cash transaction costs of $0.1 million related to the fair value of the Placement Agent Warrants. These costs were allocated between the warrant liability and the equity based on their relative values at the issuance date. The transaction costs were allocated to the warrant liability of approximately $0.3 million were expensed and included in Other Financing Expenses on the condensed consolidated statements of operations and the transaction costs of approximately $0.4 million related to the common stock were netted against the proceeds allocated to the common stock shares.

The total initial $1.7 million fair value of the Private Placement Warrants and the Placement Agent Warrants were determined using the Black-Scholes option pricing model and were recorded as the initial carrying value of the common stock warrant liabilities. The Private Placement Warrants were initially valued using assumptions of a 5.5 year expected term, a 73.7% volatility, a 0.0% annual rate of dividends and a 1.2% risk-free interest rate. The Placement Agent Warrants were initially valued using assumptions of a 5.0 year expected term, a 74.8% volatility, a 0.0% annual rate of dividends and a 1.1% risk-free interest rate. The fair value of these warrants is remeasured at each financial reporting period with any changes in fair value recognized as a change in fair value of warrant liability in the accompanying consolidated statements of operations. These Private Placement Warrants and the Placement Agent Warrants become exercisable in March 2017 and have expiration dates of March 2022 and September 2021, respectively. Under the terms of the securities purchase agreement entered into with such investors, the Company agreed not to sell any shares of common stock or common stock equivalents for a period of 90 days, which expires on December 27, 2016.

Aspire Common Stock Purchase Agreement

In July 2016, the Company and Aspire Capital entered into the Aspire Purchase Agreement, which provides that Aspire Capital is committed to purchase, if the Company chooses to sell and at the Company’s discretion, an aggregate of up to $7.0 million of shares of the Company’s common stock over the 24-month term of the Aspire Purchase Agreement. The Aspire Purchase Agreement can be terminated at any time by the Company by delivering notice to Aspire Capital. On the Aspire Closing Date, the Company delivered to Aspire Capital a commitment fee of 151,899 shares of the Company’s common stock at a value of $0.6 million, in consideration for Aspire Capital entering into the Aspire Purchase Agreement. Additionally, on the Aspire Closing Date, the Company sold 253,165 shares of the Company’s common stock to Aspire Capital for proceeds of $1.0 million. In connection with the transaction, the Company incurred cash transaction costs of approximately $0.1 million, which were netted against the proceeds in equity. Pursuant to the Aspire Purchase Agreement, the Company and Aspire Capital terminated the prior Common Stock Purchase Agreement, dated August 12, 2014, between the parties.

On any business day during the 24-month term of the Aspire Purchase Agreement, the Company has the right, in its sole discretion, to present Aspire Capital with a purchase notice (each, a “Purchase Notice”) directing Aspire Capital to purchase up to 10,000 shares of the Company’s common stock per business day, subject to certain limitations. The Company and Aspire Capital may mutually agree to increase the number of shares that may be sold pursuant to a Purchase Notice to as much as an additional 200,000 shares of the Company’s common stock per business day. The purchase price per share of the Company’s common stock sold to Aspire Capital pursuant to a Purchase Notice is equal to the lower of (i) the lowest sales price of the Company’s common stock on the purchase date or (ii) the average of the lowest three closing sales prices of the Company’s common stock for the twelve business days prior to the purchase date. Under the Aspire Purchase Agreement, the Company and Aspire Capital shall not effect any sales on any purchase date where the closing sale price of the Company’s common stock is less than $1.00.

Additionally, on any date on which (i) the Company submits a Purchase Notice to Aspire Capital for at least 10,000 shares of the Company's common stock and (ii) the last closing trade price for the Company’s common stock is higher than $3.00, the Company has the right, in its sole discretion, to present Aspire Capital with a volume-weighted average price purchase notice (each, a “VWAP Purchase Notice”) directing Aspire Capital to purchase an amount of the Company's common stock equal to up to 30% of the aggregate shares of the Company’s common stock traded on the next business day (the “VWAP Purchase Date”), subject to certain limitations. The purchase price per share of the Company's common stock sold to Aspire Capital pursuant to a VWAP Purchase Notice shall be the lesser of (i) the closing sale price of the Company’s common stock on the VWAP Purchase Date or (ii) 97% of the volume weighted average price of the Company’s common stock traded on the VWAP Purchase Date, subject to certain limitations.

The Company also entered into a registration rights agreement with Aspire Capital, in which the Company agreed to file one or more registration statements, as permissible and necessary to register, under the Securities Act of 1933, as amended, the sale of the shares of the Company’s common stock that have been and may be issued to Aspire Capital under the Purchase Agreement.

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The Company has filed with the SEC a prospectus supplement to the Company’s prospectus, dated August 25, 2014, filed as part of the Company’s effective $100.0 million shelf registration statement on Form S-3, File No. 333-198066, registering all of the shares of common stock that may be offered and sold to Aspire Capital from time to time.

Pursuant to the Aspire Purchase Agreement, in no case may the Company issue more than 1.2 million shares of the Company’s common stock (which is equal to approximately 19.99% of the Company’s common stock outstanding on the Aspire Closing Date) to Aspire Capital unless (i) the average price paid for all shares issued under the Aspire Purchase Agreement is at least $3.820 per share (a price equal to the most recent consolidated closing bid price of the Company’s common stock prior to the execution of the Aspire Purchase Agreement) or (ii) the Company receives stockholder approval to issue more shares to Aspire Capital. Through September 30, 2016, the Company has issued a total of 0.5 million shares for gross proceeds of $1.2 million. As of October 31, 2016, all of the reserve was available under the committed equity financing facility since the Company’s stock price was above $1.00, subject to SEC limitations under the Form S-3 Registration Statement. However, in connection with the September 2016 Financing, the Company agreed to not make any further sales under the Aspire Purchase Agreement for a period of twelve months following the date of the September 2016 Financing.

January 2016 Financing

In January 2016, the Company entered into subscription agreements with certain purchasers pursuant to which it agreed to sell an aggregate of 1,136,364 shares of its common stock and warrants to purchase up to an additional 568,184 shares of its common stock to the purchasers for an aggregate offering price of $10.0 million, to take place in separate closings. Each share of common stock was sold at a price of $8.80 and included one half of a warrant to purchase a share of common stock. During the first closing in January 2016, the Company sold an aggregate of 252,842 shares and warrants to purchase up to 126,421 shares of common stock for gross proceeds of $2.2 million. The remaining shares and warrants were sold in a subsequent closing in March 2016 for gross proceeds of $7.8 million following stockholder approval at a special meeting on March 2, 2016. The aggregate net proceeds, after deduction of fees and expenses of approximately $0.4 million, were approximately $9.6 million.

The warrants issued in connection with the January 2016 financing (the “January 2016 Warrants”) occurred in separate closings in January 2016 and March 2016 and gave rights to purchase up to 568,184 total shares of the Company’s common stock at an exercise price of $8.80 per share. The total initial $4.8 million fair value of the warrants on their respective closing dates was determined using the Black-Scholes option pricing model and was recorded as the initial carrying value of the common stock warrant liabilities. The warrants issued in January 2016 and March 2016 were initially valued using assumptions of expected terms of 7.0 years, volatilities of 101.9% and 99.4%, respectively, annual rate of dividends of 0.0%, and risk-free interest rates of 1.6% and 1.4%, respectively. Fees and expenses of approximately $0.2 million were allocated to the warrant liability and expensed in Other Financing Costs. The remaining expenses were netted against the proceeds allocated to the common stock shares. The fair value of these warrants is remeasured at each financial reporting period with any changes in fair value recognized as a change in fair value of warrant liability in the accompanying consolidated statements of operations. These warrants became exercisable in July 2016 and September 2016 and have expiration dates of January 2023 and March 2023, respectively.

February 2015 Financing

In February 2015, the Company entered into subscription agreements with certain purchasers pursuant to which it sold an aggregate of 604,396 shares of its common stock and issued warrants to purchase up to an additional 302,199 shares of its common stock. Each share of common stock was sold at $18.20 and included one half of a warrant to purchase a share of common stock. The total net proceeds from the offering were $10.9 million after deducting expenses of approximately $0.1 million.

The warrants issued in connection with the February 2015 financing (the “February 2015 Warrants”) gave rights to purchase up to 302,199 shares of its common stock at an exercise price of $18.20 per share. The $5.1 million fair value of the warrants on the transaction date was determined using the Black-Scholes option pricing model and was recorded as the initial carrying value of the common stock warrant liability. The fair value of these warrants is remeasured at each financial reporting period with any changes in fair value recognized as a change in fair value of warrant liability in the accompanying consolidated statements of operations. The February 2015 Warrants became exercisable in July 2016 and have an expiration date of January 2023.

Pursuant to the January 2016 financing, the exercise price of the February 2015 Warrants was reduced from $18.20 per share to $8.80 per share. The modification to the February 2015 warrants resulted in a charge to other income (expense) of approximately $0.7 million for the nine months ended September 30, 2016.

As of September 30, 2016, the total fair value of the Private Placement Warrants, the Placement Agent Warrants, the January 2016 Warrants and the February 2015 Warrants was $3.3 million.

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The following table shows the number of outstanding warrants by exercise price and date of expiration as of September 30, 2016:



Shares Issuable Upon Exercise	Exercise Price		Expiration Date
246,914	$	52.50	February 2017
300,000	$	34.00	May 2018
428,621	$	8.80	January 2023
441,763	$	8.80	March 2023
19,380	$	12.90	October 2024
15,244	$	16.40	July 2025
811,802	$	4.50	March 2022
54,123	$	4.31	September 2021
2,317,847


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 unaudited condensed consolidated financial statements and the related notes that appear elsewhere in this report as well as in conjunction with the Risk Factors section and in our Annual Report on Form 10-K for the year ended December 31, 2015 as filed with the United States Securities and Exchange Commission (“SEC”) on March 9, 2016. This report and our Form 10-K 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, including statements regarding the establishment of future partnerships, the timing of planned launches of Vitaros^® in various countries by commercial partners and the success of our partners’ commercialization efforts, the planned commencement of additional clinical trials for RayVa^™, the expected timing of data results on our clinical trials, the resubmission of a new drug application for Vitaros^® in the United States, the timing and success of our research and development efforts for Room Temperature Vitaros^®, the sufficiency of our current cash holdings and the availability of additional funds, and the development and/or acquisition of additional products. 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 dependence on commercial partners to carry out commercial launches of Vitaros^® in various territories and the potential for delays in the timing of commercial launches, our ability to enter into partnering agreements or raise financing on acceptable terms, if at all; successful completion of clinical development programs; the timing of resubmission of a revised NDA for Vitaros^®to the Food and Drug Administration (“FDA”); regulatory review and approval by the FDA and similar regulatory bodies; anticipated revenue growth; manufacturing, competition, and/or other factors, including those set forth under the “Risk Factors” section in Part II, Item 1A and in our Annual Report on Form 10-K for the year ended December 31, 2015, as updated in Part II below, 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 the date of this report. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, unless required by law.

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Vitaros^® is a registered trademark in certain countries and is pending registration in certain other countries, including the United States. Solely for convenience, we have used the^®symbol throughout this report, even when discussing territories where the trademark registration is pending.

Overview

We are a Nevada corporation that was initially formed in 1987. We have operated in the pharmaceutical industry since 1995. Our current focus is on the development and commercialization of innovative products and product candidates in the areas of urology and rheumatology. Our proprietary drug delivery technology is a permeation enhancer called NexACT^®.

We have one commercial product, Vitaros^® for the treatment of erectile dysfunction (“ED”), which is currently in development in the United States, approved in Canada and marketed throughout Europe. We have one active product candidate, RayVa^™, which is in Phase 2 development for the treatment of Raynaud’s Phenomenon, secondary to scleroderma. Based on recent clinical trial results, we are discontinuing all development of our other product candidate, fispemifene, for the treatment of secondary hypogonadism, but will continue to pursue fispemifene as a product candidate for other urological conditions.

Vitaros^®

Vitaros^® (alprostadil) is a topically-applied cream formulation of alprostadil, which dilates blood vessels, combined with our proprietary permeation enhancer NexACT^®, which directly increases blood flow to the penis, causing an erection. We own the non-United States rights to Vitaros^®, which we out-license to our marketing partners for commercialization in their respective territories. Allergan plc (“Allergan”) owns the rights to Vitaros^® in the United States and in September 2015, we entered into an agreement with Allergan to license the United States development and commercialization rights for Vitaros^®. Vitaros^® is currently in development in the United States, approved in Canada and marketed throughout Europe.

Our European commercialization partners for Vitaros^® include Recordati Ireland Ltd. (“Recordati”), Ferring International Center S.A. (“Ferring”), Laboratoires Majorelle (“Majorelle”) and Bracco S.p.A. (“Bracco”). The product is currently approved for marketing in Argentina, Austria, Belgium, Czech Republic, Denmark, Finland, France, Germany, Greece, Iceland, Ireland, Italy, Lebanon, Luxembourg, the Netherlands, Norway, Poland, Portugal, Romania, Slovakia, Spain, Sweden, Switzerland and the United Kingdom (the “UK”). Our commercialization partners began launching Vitaros^®in certain territories in Europe beginning in the second half of 2014. The product has been launched in Belgium, the Czech Republic, France, Germany, Ireland, Italy, Luxembourg, Poland, Portugal, Slovakia, Spain, Sweden and the UK by our commercialization partners. We have a second-generation Vitaros^® product candidate in development, which is a proprietary stabilized dosage formulation that is expected to be stored at room temperature conditions, which we refer to as “Room Temperature Vitaros^®.”

With our broad Vitaros^®expertise and internal know-how, coupled with the proven success in obtaining regulatory approvals for Vitaros^® in other territories, we believe we are well equipped to pursue regulatory approval for Vitaros^®in the United States. We initiated certain activities in 2015 to address issues previously raised by the FDA in a 2008 non-approvable letter, including possible safety risks associated with our proprietary permeating enhancer, NexACT^®, and certain chemistry, manufacturing and control issues. Our goal is to re-submit a revised NDA with the FDA in the fourth quarter of 2016, following our Type B meeting with the FDA on November 17, 2016.

We believe Vitaros^®offers greater market opportunity compared to other alprostadil dosage forms due to its patient-friendly delivery form as well as a competitive alternative to oral ED products. ED affects approximately 150 million men worldwide. In the United States, ED is estimated to affect 20 million men, of which approximately 5 million have been diagnosed and only approximately 1.25 million are being treated. An estimated 600,000 men are newly diagnosed each year. In the United States, the ED market is approximately $3 billion annually.

RayVa^™

RayVa^™ (alprostadil) is our product candidate for the treatment of Raynaud's Phenomenon associated with scleroderma (systemic sclerosis). The RayVa^™ product combines alprostadil, which dilates blood vessels, with our proprietary permeation enhancer, NexACT^®, and is applied as an on-demand topical cream to affected extremities.

Raynaud's Phenomenon is characterized by constriction of the blood vessels in response to cold or stress of the hands and feet, resulting in reduced blood flow and the sensation of pain, which can be severe. Primary Raynaud's Phenomenon, which is not associated with an underlying medical condition, affects an estimated 3-5% of the United States population. Secondary Raynaud’s Phenomenon, affecting approximately 500,000 in the United States, is driven by an underlying medical condition, such as scleroderma, lupus or rheumatoid arthritis. Symptoms are severe and patients risk associated fingertip ulcerations. There are an estimated 100,000 adult patients with scleroderma in the United States, of which approximately 90% have secondary Raynaud’s Phenomenon. Approximately 80% of scleroderma patients are women. Both primary and secondary Raynaud’s Phenomenon disproportionately affect women.

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RayVa^™ received clearance in May 2014 from the FDA to begin clinical studies. We reported results from our Phase 2a clinical trial of RayVa^™ for the treatment of Raynaud’s Phenomenon secondary to scleroderma in September 2015, which supported moving RayVa^™ forward into future clinical trials. We expect to finalize the RayVa^™ Phase 2b delivery device and study protocol, explore U.S. and European Union Orphan Designation and partner ex-U.S. prior to initiating any future clinical studies.

We believe that RayVa^™ presents an attractive commercial opportunity. There is currently no approved therapy for Raynaud’s Phenomenon in the United States, representing an unmet medical need. Moreover, because there are only approximately 4,500 rheumatologists treating secondary Raynaud’s patients in the United States, we believe we can commercialize RayVa^™ efficiently if we receive FDA approval.

Growth Strategy

To commercialize and develop our proprietary products and product candidates, through these primary initiatives:

Commercialize Vitaros^® through partnerships

We currently have commercial partnerships for Vitaros^® with the following pharmaceutical companies in the countries indicated:



Partner	Licensed Territory	Approved Countries (*Launched)
Abbott Laboratories Limited, now a subsidiary of Mylan N.V. (“Mylan”)	Canada	Canada
Ferring	Germany, Austria, Belgium, Luxemburg, the Netherlands, Denmark, Finland, Iceland, Norway, Sweden and Switzerland, Malaysia, Indonesia, the Philippines, Thailand, Taiwan, Vietnam, Hong Kong, Korea and Singapore, UK and certain Latin American countries	Argentina, Germany, Belgium, Sweden, Luxembourg, Denmark, Finland, Iceland, the Netherlands, Norway, Switzerland, UK*
Majorelle	France, Monaco and certain African countries	France*
Bracco	Italy, Vatican City and San Marino	Italy*
Recordati	Spain, Ireland, Portugal, Greece, Cyprus, the CEE countries (Central and Eastern Europe), Russia and the rest of the CIS countries (former Soviet republics), Ukraine, Georgia, Turkey and certain African countries	Czech Republic, Greece, Ireland, Poland, Portugal, Romania, Slovakia, Spain
Neopharm Scientific Limited (“Neopharm”)	Israel and the Palestinian National Authority
Elis Pharmaceuticals Limited (“Elis”)	Gulf States and certain Middle Eastern countries	Lebanon
Global Harvest Pharmaceutical Corporation (“Global Harvest”)	Australia and New Zealand

We will continue to leverage Vitaros^® as a cash-generating asset through royalty and milestone payments and by expanding the product’s market reach via additional ex-U.S. launches by our commercialization partners. Last year, we expanded Vitaros^® partnerships to include parts of Asia, Eastern Europe and Latin America.

Our commercialization partners have launched Vitaros^®in France, Italy, Germany, the United Kingdom, Spain, Belgium, Luxemburg, Sweden, the Czech Republic, Ireland, Poland, Portugal and Slovakia. We expect to obtain European approval for one or more variations to the approved product with the goal of enhancing the profile of Vitaros^®. In addition, we have licensed the U.S. development and commercialization rights for Vitaros^® from Allergan and our goal is to re-submit the NDA for Vitaros^® in the United States in the fourth quarter of 2016, following our Type B meeting with the FDA on November 17, 2016.

Establish new Vitaros^® and RayVa^™licensing partnerships with pharmaceutical companies

In the future, we will seek new partnerships to license, develop and commercialize Vitaros^® and RayVa^™in markets not covered by existing partnerships. For Vitaros^®, these territories primarily consist of Japan and China. For RayVa^™,these territories consist of all countries, including the United States. We expect that any such agreements will provide us with one or more of the following: up-front payments, the right to receive regulatory and sales milestone payments and/or royalty payments.

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Develop and commercialize additional technologies and products based upon proprietary technologies developed in-house or acquired from third-parties

Our product candidate for the treatment of Raynaud’s Phenomenon secondary to scleroderma, RayVa^™, is currently in Phase 2 development. We completed and reported top-line data on the Phase 2a clinical trial for RayVa^™ and we believe the data, coupled with previously generated non-clinical data, supports moving RayVa^™ forward into future clinical trials designed to evaluate symptomatic effects in subjects with Raynaud’s secondary to scleroderma.

Liquidity, Capital Resources and Financial Condition

We have experienced net losses and negative cash flows from operations each year since our inception. Through September 30, 2016, we had an accumulated deficit of approximately $316.0 million and recorded a net loss of approximately $7.1 million and negative cash flows from operations for the nine months ended September 30, 2016. These factors raise substantial doubt about our ability to continue as a going concern. We have principally been financed through the sale of our common stock and other equity securities, debt financings and up-front payments received from commercial partners for our products under development. As of September 30, 2016, net open purchase orders totaled approximately $3.7 million.

In September 2016, we completed a registered direct offering of 1,082,402 shares of common stock at a purchase price of $3.450 per share (the “September 2016 Financing”). Concurrently in a private placement, for each share of common stock purchased by an investor, such investor received from us an unregistered warrant to purchase three quarters of a share of common stock. The warrants have an exercise price of $4.50 per share, are exercisable six months from the date of issuance, and will expire five and a half years from the initial issuance date. The aggregate gross proceeds from the sale of the common stock and warrants were approximately $3.7 million, and the net proceeds after deduction of commissions, fees and expenses were approximately $3.2 million. Under the terms of the securities purchase agreement entered into with such investors, we agreed to not sell any shares of common stock or common stock equivalents for a period of 90 days, which expires on December 27, 2016.

In July 2016, we and Aspire Capital Fund, LLC (“Aspire Capital”) entered into a Common Stock Purchase Agreement (the “Aspire Purchase Agreement”), which provides that Aspire Capital is committed to purchase, if we choose to sell and at our discretion, an aggregate of up to $7.0 million of shares of our common stock over the 24-month term of the Aspire Purchase Agreement. The Aspire Purchase Agreement can be terminated by us at any time by delivering notice to Aspire Capital. On July 5, 2016 (the “Aspire Closing Date”), we delivered to Aspire Capital a commitment fee of 151,899 shares of our common stock at a value of $0.6 million, in consideration for Aspire Capital entering into the Aspire Purchase Agreement. Additionally, on the Aspire Closing Date, we sold 253,165 shares of our common stock to Aspire Capital for proceeds of $1.0 million.

On any business day during the 24-month term of the Aspire Purchase Agreement, we have the right, in our sole discretion, to present Aspire Capital with a purchase notice (each, a “Purchase Notice”) directing Aspire Capital to purchase up to 10,000 shares of our common stock per business day, subject to certain limitations. We and Aspire Capital may mutually agree to increase the number of shares that may be sold to as much as an additional 200,000 shares of our common stock per business day. The purchase price per share of our common stock sold to Aspire Capital pursuant to a Purchase Notice shall be the lower of (i) the lowest sales price of our common stock on the purchase date or (ii) the average of the lowest three closing sales prices of our common stock for the twelve business days prior to the purchase date. Under the Aspire Purchase Agreement, we and Aspire Capital shall not effect any sales on any purchase date where the closing sale price of our common stock is less than $1.00.

Additionally, on any date on which (i) we submit a Purchase Notice to Aspire Capital for at least 10,000 shares of our common stock and (ii) the last closing trade price for our common stock is higher than $3.00, we have the right, in our sole discretion, to present Aspire Capital with a volume-weighted average price purchase notice (each, a “VWAP Purchase Notice”) directing Aspire Capital to purchase an amount of our common stock equal to up to 30% of the aggregate shares of our common stock traded on the next business day (the “VWAP Purchase Date”), subject to certain limitations. The purchase price per share of our common stock sold to Aspire Capital pursuant to a VWAP Purchase Notice shall be the lesser of (i) the closing sale price of our common stock on the VWAP Purchase Date or (ii) 97% of the volume weighted average price of our common stock traded on the VWAP Purchase Date, subject to certain qualifications.

Pursuant to the Aspire Purchase Agreement, in no case may we issue more than 1.2 million shares of our common stock (which is equal to approximately 19.99% of our common stock outstanding on the Aspire Closing Date) to Aspire Capital unless (i) the average price paid for all shares issued under the Aspire Purchase Agreement is at least $3.820 per share (a price equal to the most recent consolidated closing bid price of our common stock prior to the execution of the Aspire Purchase Agreement) or (ii) we receive stockholder approval to issue more shares to Aspire Capital. Through September 30, 2016, the Company has issued a

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total of 455,064 shares for gross proceeds of $1.2 million. As of October 31, 2016, all of the reserve was available under the committed equity financing facility since our stock price was above $1.00. However, in connection with the September 2016 Financing, we agreed to not make any further sales under the Aspire Purchase Agreement for a period of twelve months following the date of the September 2016 Financing. Pursuant to the Aspire Purchase Agreement, we and Aspire Capital terminated the prior Common Stock Purchase Agreement, dated August 12, 2014, between the parties.

In January 2016, we entered into subscription agreements with certain purchasers pursuant to which we agreed to sell an aggregate of 1,136,364 shares of our common stock and warrants to purchase up to an additional 568,184 shares of our common stock to the purchasers for an aggregate offering price of $10.0 million, which took place in two separate closings. Each share of common stock was sold at a price of $8.80 and included one half of a warrant to purchase a share of common stock. The warrants have an exercise price of $8.80 per share, became exercisable six months and one day after the date of issuance and will expire on the seventh anniversary of the date of issuance. During the first closing in January 2016, we sold an aggregate of 252,842 shares and warrants to purchase up to 126,421 shares of common stock for gross proceeds of $2.2 million. The remaining shares and warrants were sold in a subsequent closing in March 2016 for gross proceeds of $7.8 million following stockholder approval at a special meeting on March 2, 2016.

In October 2014, we entered into a Loan and Security Agreement (the “Credit Facility”) with Oxford Finance, LLC (“Oxford”) and Silicon Valley Bank (“SVB”) (Oxford and SVB are referred to together as the “Lenders”), which is secured by substantially all of our assets, excluding intellectual property. Upon closing, a $5.0 million term loan was funded. In July 2015, we borrowed the remaining $5.0 million available under our Credit Facility with the Lenders. The principal balance under the Credit Facility was $7.2 million as of September 30, 2016 (see note 5 to our consolidated financial statements for further details).

As of September 30, 2016, we had cash and cash equivalents of approximately $5.6 million. We will receive additional cash from Vitaros^®royalties and product sales. We may also have access to additional capital under our committed equity financing facility with Aspire Capital, subject to certain limitations described below.

We currently have an effective shelf registration statement on Form S-3 (No. 333-198066) filed with the Securities and Exchange Commission (“SEC”) under which we may offer from time to time any combination of debt securities, common and preferred stock and warrants. As of September 30, 2016, we had approximately $74.1 million available under our Form S-3 shelf registration statement. Under current SEC regulations, at any time during which the aggregate market value of our common stock held by non-affiliates, or public float, is less than $75.0 million, the amount we can raise through primary public offerings of securities in any twelve-month period using shelf registration statements, including sales under the Aspire Purchase Agreement, is limited to an aggregate of one-third of our public float. SEC regulations permit us to use the highest closing sales price of our common stock (or the average of the last bid and last ask prices of our common stock) on any day within 60 days of sales under the shelf registration statement. As of September 30, 2016, our public float was approximately $27.5 million based on 6.3 million shares of our common stock outstanding at a price of $4.40 per share, which was the closing sale price of our common stock on September 15, 2016. Since our public float is currently less than $75.0 million, as of September 30, 2016, we may only sell an aggregate of approximately $9.2 million of securities under our shelf registration statements on Form S-3. Through September 30, 2016 we have sold $1.2 million through the Aspire Purchase Agreement and $3.7 million in the September 2016 Financing, leaving approximately $4.3 million available for sale under our shelf registration statement. We still maintain the ability to raise funds through other means, such as through the filing of a registration statement on Form S-1 or in private placements. 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.

The accompanying consolidated financial statements have been prepared assuming we will continue to operate as a going concern, which contemplates the realization of assets and settlement of liabilities in the normal course of business, and do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result from uncertainty related to our ability to continue as a going concern.

Our future liquidity and capital funding requirements will depend on numerous factors, including:


•	our ability to raise additional funds to finance our operations and service our debt;


•	the revenue generated by product sales and royalty revenue from our Vitaros^® commercialization partners;


•	the revenue generated by component sales to our contract manufacturers;


•	our ability to successfully implement our cost-reduction plan as part of a broader strategic re-positioning toward Vitaros^®;


•	the outcome, costs and timing of clinical trial results for our product candidate;


•	the emergence and effect of competing or complementary products;


•	our ability to maintain, expand and defend the scope of our intellectual property portfolio, including the amount and timing of any payments we may be required to make, or that we may receive, in connection with the licensing, filing, prosecution, defense and enforcement of any patents or other intellectual property rights;

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•	our ability to retain our current employees and the need and ability to hire additional management and scientific and medical personnel;


•	the terms and timing of any collaborative, licensing or other arrangements that we have or may establish;


•	the trading price of our common stock being above the $1.00 closing floor price that is required for us to use the committed equity financing facility with Aspire Capital;


•	the trading price of our common stock; and


•	our ability to maintain compliance with the listing requirements of The NASDAQ Capital Market.

In order to fund our operations during the next twelve months, we will need to raise substantial additional funds through one or more of the following: issuance of additional debt or equity, accessing additional capital under our committed equity financing facility with Aspire Capital, as described above and/or the completion of a licensing transaction for one or more of our pipeline assets. If we are unable to maintain sufficient financial resources, our business, financial condition and results of operations will be materially and adversely affected, and we may be unable to continue as a going concern. This could affect future development activities, such as the resubmission of a Vitaros^® NDA, continued development of Room Temperature Vitaros^®, as well as future clinical studies for RayVa^™. There can be no assurance that we will be able to obtain the needed financing on acceptable terms or at all. Additionally, equity or debt financings may have a dilutive effect on the holdings of our existing stockholders.

Critical Accounting Estimates and Policies

Our discussion and analysis of our financial condition and results of operations is based upon our unaudited condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an ongoing basis, we evaluate our estimates including those related to bad debts, inventories, other long-term assets, warrants, stock-based compensation, income taxes, and legal proceedings. We base our estimates on historical experience and on various other assumptions we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities not readily apparent from other sources. Actual results may differ from these estimates. Our critical accounting policies and estimates are discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015 and there have been no material changes during the nine months ended September 30, 2016.

Recent Accounting Pronouncements

Please refer to the notes to condensed consolidated financial statements (unaudited) for a discussion of recent accounting pronouncements.

Results of Operations

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



	Three Months Ended September 30,				2016 vs 2015					Nine Months Ended September 30,				2016 vs 2015
	2016		2015		$ Change			% Change		2016		2015		$ Change			% Change
License fee revenue	$	3,950	$	1,000	$	2,950		295	%	$	4,000	$	1,350	$	2,650		196	%
Royalty revenue	195		188		7			4	%	866		351		515			147	%
Product sales	172		85		87			102	%	541		509		32			6	%
Total revenue	4,317		1,273		3,044			239	%	5,407		2,210		3,197			145	%
Cost of goods sold	111		142		(31		)	(22	)%	437		884		(447		)	(51	)%
Cost of Sandoz rights	3,380		—		3,380			N/M		3,380		—		3,380			N/M
Gross profit (loss)	$	826	$	1,131	$	(305	)	(27	)%	$	1,590	$	1,326	$	264		20	%

Revenue

License Fee Revenue

The $2.7 million increase in license fee revenue during the nine months ended September 30, 2016 as compared to the same period in the prior year was due primarily to the recognition in 2016 of $3.9 million due to the expansion of our license agreement with Ferring to commercialize Vitaros^® in the United Kingdom and in Germany, Austria, Belgium, Denmark, Finland, Iceland, Luxembourg, Norway, the Netherlands, Sweden, Switzerland, Malaysia, Indonesia, the Philippines, Thailand, Taiwan, Vietnam, Hong Kong, Singapore and Korea (the “Expanded Territories”).

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Royalty Revenue

Our royalty revenue is computed based on sales reported to us by our licensee partners on a quarterly basis, which are typically one quarter in arrears, and agreed upon royalty rates for the respective license agreement. Royalty revenue during the three and nine months ended September 30, 2016 of $0.2 million and $0.9 million, respectively, was related to sales of licensed Vitaros^®product sold by Majorelle, Bracco, Takeda, Recordati and Sandoz in their respective territories. Royalty revenue during the three and nine months ended September 30, 2015 of $0.2 million and $0.4 million, respectively, was related to sales of licensed Vitaros^®product sold by Takeda, Sandoz, Recordati and Majorelle in their respective territories.

Product Sales

Our product sales revenue is comprised of two components: sales of Vitaros^® product to our commercialization partners and sales of work-in-process inventory to our manufacturing partners. Product sales revenue increased by $0.1 million and $32,000 for the three and nine months ended September 30, 2016 as compared to the same periods in the prior year. Historically, sales of component inventory to the manufacturing partners were accounted for on a net basis since these products were ultimately returned to us as finished goods and were then sold onto our commercialization partners. As the majority of our commercialization partners are now buying the finished goods directly from the manufacturers, our component sales are no longer recognized on a net basis. During the nine months ended September 30, 2016, we recognized $0.4 million in revenues from component sales to our third party manufacturers which was offset by a decline in product sales of Vitaros^® product in 2016 as our commercialization partners work directly with our manufacturers. We expect sales of Vitaros^® product to continue to decline as our remaining commercialization partners enter into contracts directly with our manufacturers.

We expect our cash inflows from operations during the remainder of 2016 will result from licensing and milestone revenues received from commercial partners and related royalty payments from our Vitaros^® product as well as product sales to our contract manufacturers. The timing of these revenues is uncertain and as such our revenue may vary significantly between periods.

Cost of Goods Sold

Our cost of goods sold includes direct material costs associated with the production of inventories. Cost of goods sold also includes the cost of manufactured samples provided to our commercialization partners free of charge. We anticipate that our future cost of goods sold will be derived from the cost of goods related to our component sales to our contract manufacturers.

Cost of Sandoz Rights

Cost of Sandoz rights for the three and nine months ended September 30, 2016 includes $3.4 million incurred as a cost of reacquiring and relicensing the rights to certain territories previously licensed to Sandoz. These territories were relicensed to Ferring in the third quarter of 2016.

Operating Expense

Operating expense was as follows (in thousands, except percentages):



	Three Months Ended September 30,						2016 vs 2015					Nine Months Ended September 30,						2016 vs 2015
	2016			2015			$ Change			% Change		2016			2015			$ Change			% Change
Operating expense
Research and development	$	409		$	4,611		$	(4,202	)	(91	)%	$	6,002		$	10,986		$	(4,984	)	(45	)%
General and administrative	1,815			2,412			(597		)	(25	)%	6,513			8,177			(1,664		)	(20	)%
Total operating expense	2,224			7,023			(4,799		)	(68	)%	12,515			19,163			(6,648		)	(35	)%
Loss from operations	$	(1,398	)	$	(5,892	)	$	4,494		(76	)%	$	(10,925	)	$	(17,837	)	$	6,912		(39	)%

Research and Development Expenses

Research and development costs are expensed as they are incurred and include the cost of compensation and related expenses, as well as expenses for third parties who conduct research and development on our behalf. The $4.2 million and $5.0 million decreases in research and development expense during the three and nine months ended September 30, 2016, respectively, as compared to the same periods in the prior year, resulted primarily from decreases in outside services related to the development of fispemifene, Vitaros^® and RayVa^™. We expect to continue to incur additional expenses in 2016 primarily related to resubmission of an NDA for Vitaros^® in the United States.

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General and Administrative Expenses

General and administrative expenses include expenses for personnel, finance, legal, business development and investor relations. General and administrative expenses decreased by $0.6 million and $1.7 million during the three and nine months ended September 30, 2016, respectively, as compared to the same periods of the prior year. These decreases were primarily due to lower professional services expenses, such as legal and accounting expenses, and due to lower personnel-related expenses, including travel.

Other Income and Expense

Other income and expense were as follows (in thousands, except percentages):



	Three Months Ended September 30,						2016 vs 2015					Nine Months Ended September 30,						2016 vs 2015
	2016			2015			$ Change			% Change		2016			2015			$ Change			% Change
Other income (expense)
Interest expense, net	$	(251	)	$	(267	)	$	16		(6	)%	$	(788	)	$	(594	)	$	(194	)	33	%
Change in fair value of warrant liability	626			1,193			(567		)	(48	)%	5,063			1,804			3,259			181	%
Other financing expenses	(256		)	—			(256		)	N/M		(461		)	—			(461		)	N/M
Other (expense) income, net	(11		)	(68		)	57			(84	)%	(16		)	(64		)	48			(75	)%
Total other income	$	108		$	858		$	(750	)	(87	)%	$	3,798		$	1,146		$	2,652		231	%

Interest Expense, Net

Interest expense increased $0.2 million during the nine months ended September 30, 2016, as compared to the same period in the prior year due to interest charges in connection with the Credit Facility with the Lenders (see note 5 to our condensed consolidated financial statements for further details).

Change in Fair Value of Warrant Liability

In connection with our February 2015 and January 2016 equity financings, we issued warrants to purchase up to 302,199 shares and 568,184 shares, respectively, of our common stock at an exercise price of $18.20 and $8.80 per share, respectively. Pursuant to the January 2016 financing, the February 2015 Warrants were repriced from $18.20 to $8.80 per share.

In connection with our September 2016 equity financing, we issued warrants to the investors and to the placement agent to purchase up to 811,802 shares and 54,123 shares, of our common stock at an exercise price of $4.50 and $4.31 per share, respectively (“the September 2016 Private Placement Warrants” and the “September 2016 Placement Agent Warrants”).

The initial fair value of the February 2015 Warrants, January 2016 Warrants, the September 2016 Private Placement Warrants and the September 2016 Placement Agent Warrants of $5.1 million, $4.8 million, $1.6 million and $0.1 million, respectively, were determined using the Black-Scholes option pricing model on each respective transaction date and recorded as the initial carrying values of the common stock warrant liabilities. The fair value of these warrants is remeasured at each financial reporting period with any changes in fair value recognized as a change in fair value of warrant liability in the accompanying consolidated statements of operations (see notes 1 and 6 to our consolidated financial statements for further details). The positive change in fair value of warrant liability is due to the decrease in the Company’s stock price for all periods presented.

Other Financing Expenses

Other financing expenses were $0.5 million for the nine months ended September 30, 2016. Other financing expenses represent the portion of total financing expenses allocated to the warrants issued for our January 2016 and September 2016 financings.

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Cash Flow Summary

The following table summarizes selected items in our condensed consolidated statements of cash flows (in thousands):



	Nine Months Ended September 30,
	2016			2015
Net cash used in operating activities	$	(10,363	)	$	(21,332	)
Net cash provided by (used in) investing activities	262			(206		)
Net cash provided by financing activities	11,828			15,947
Net increase/(decrease) in cash and cash equivalents	$	1,727		$	(5,591	)

Operating Activities

Cash used in operating activities of $10.4 million during the nine months ended September 30, 2016 was primarily due to a net loss of $7.1 million net of adjustments to net loss for non-cash items such as the warrant liability revaluation of $5.1 million and stock-based compensation expense of $1.4 million.

Investing Activities

Cash provided by investing activities increased by $0.5 million during the nine months ended September 30, 2016 as compared to the same period in the prior year due to the release of restricted cash related to the completion of environmental remediation services on our New Jersey facility. This was offset by lower expenditures for the purchase of fixed assets in the current period.

Financing Activities

Cash provided by financing activities of $11.8 million during the nine months ended September 30, 2016 was primarily attributable to the $14.1 million in net proceeds that we received from the issuance of common stock and warrants in our January 2016, July 2016 and September 2016 financings. This was offset by the repayment of $2.3 million on our credit facility.

Off-Balance Sheet Arrangements

As of September 30, 2016, we did not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K.


ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes in our assessment of our sensitivity to market risk since the presentation set forth in Item 7A, “Quantitative and Qualitative Disclosures about Market Risk,” in our Annual Report on Form 10-K for the year ended December 31, 2015.


ITEM 4.	CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Under the supervision and with the participation of our management, including the Chief Executive Officer (“CEO”) (principal executive officer) and the VP, Finance and Chief Accounting Officer (“CAO”) (principal financial officer), we conducted an evaluation of the effectiveness of our disclosure controls and procedures, as such term is defined under Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of September 30, 2016. Based on this evaluation, our CEO and our CAO concluded that our disclosure controls and procedures were effective as of September 30, 2016.

Management’s Report on Internal Control Over Financial Reporting

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Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Our internal control over financial reporting is a process designed, under the supervision and, with the participation of our principal executive officer and principal financial officer, overseen by our Board of Directors and implemented by our management and other personnel, to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of our financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes policies and procedures that:


•	Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;


•	Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of our management and directors; and


•	Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements.

Because of its inherent limitations, our internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management performed an assessment of the effectiveness of our internal control over financial reporting as of September 30, 2016 using criteria established in the Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on this assessment, management determined that, as of September 30, 2016, our internal control over financial reporting was effective.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting during the most recent fiscal quarter ended September 30, 2016, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II.

ITEM 1. LEGAL PROCEEDINGS

We are a party to certain litigation that is either judged to be not material or that arises in the ordinary course of business from time to time. We intend to vigorously defend our interests in these matters. We expect that the resolution of these matters will not have a material adverse effect on our business, financial condition or results of operations. However, due to the uncertainties inherent in litigation, no assurance can be given as to the outcome of these proceedings.

ITEM 1A. RISK FACTORS

The risk factors set forth below with an asterisk (*) next to the title are new risk factors or risk factors containing material changes from the risk factors previously disclosed in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2015, as filed with the SEC on March 9, 2016:

Risks Related to the Company

We expect to continue to require external financing to fund our operations, which may not be available. ^*

We expect to require external financing to fund our long-term operations. Such financing may not be available on terms we deem acceptable or at all.

As of September 30, 2016, we had cash and cash equivalents of approximately $5.6 million. During the first quarter of 2016, we raised $10.0 million in equity financings. During the third quarter of 2016, we sold an additional $1.2 million of our common stock pursuant to a Common Stock Purchase Agreement (the “Aspire Purchase Agreement”) with Aspire Capital Fund, LLC (“Aspire Capital”). Also during the third quarter of 2016, we raised an additional $3.7 million through the sale of common stock and warrants (the “September 2016 Financing”). We will receive additional cash from Vitaros^®royalties and product sales.

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common stock held by non-affiliates (“public float”) is less than $75.0 million, the amount we can raise through primary public offerings of securities in any twelve-month period using shelf registration statements, including sales under the Aspire Purchase Agreement, is limited to an aggregate of one-third of our public float. SEC regulations permit us to use the highest closing sales price of our common stock (or the average of the last bid and last ask prices of our common stock) on any day within 60 days of sales under the shelf registration statement. As of September 30, 2016, our public float was approximately $27.5 million based on 6.3 million shares of our common stock outstanding at a price of $4.40 per share, which was the closing sale price of our common stock on September 15, 2016. Since our public float is currently less than $75.0 million, as of September 30, 2016, we may only sell approximately $9.2 million of securities under shelf registration statements on Form S-3, of which we have already sold $3.7 million in the September 2016 Financing and $1.2 million sold through the Aspire Purchase Agreement through September 30, 2016, leaving approximately $4.3 million available for sale under our shelf registration statement. If our public float decreases, the amount of securities we may sell under our Form S-3 shelf registration statement will also decrease. For example, if we calculated our public float based on the closing sales price of $2.01 per share on October 31, 2016, our public float would be approximately $12.6 million. The value of one-third of our public float calculated on that basis would be approximately $4.2 million.

Our stock price must be $1.00 per share or above in order for us to access the remaining reserve under our committed equity financing facility with Aspire Capital. In no case may we issue more than 1.2 million shares of our common stock (which is equal to approximately 19.99% of our common stock outstanding on the date we entered into Aspire Purchase Agreement) to Aspire Capital unless (i) the average price paid for all shares issued under the Aspire Purchase Agreement is at least $3.820 per share (a price equal to the most recent consolidated closing bid price of our common stock prior to the execution of the Aspire Purchase Agreement) or (ii) we receive stockholder approval to issue more shares to Aspire Capital. As of October 31, 2016, all of the reserve was available under the committed equity financing facility since our stock price was above $1.00. However, in connection with the September 2016 Financing, we agreed to not make any further sales under the Aspire Purchase Agreement for a period of twelve months following the date of the September 2016 Financing. In addition, under the terms of the securities purchase agreement entered into with investors in the September 2016 Financing, we agreed not to sell any shares of common stock or common stock equivalents for a period of 90 days, which expires on December 27, 2016.

We still maintain the ability to raise funds through other means, such as through the filing of a registration statement on Form S-1 or in private placements. 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.

While we have historically generated modest revenues from our operations, these revenues will not be sufficient to fund our short-term or long-term ongoing operations, including the development and commercialization of our product candidate and general and administrative expenses for the foreseeable future. Given our current lack of profitability and limited capital resources, we may not be able to fully execute all of the elements of our strategic plan, including seeking additional market approvals and commercializing Vitaros^®, and progressing our development program for RayVa^™. If we are unable to accomplish these objectives, our business prospects will be diminished, we will likely be unable to achieve profitability, and we may be unable to continue as a going concern.

We have a history of operating losses and an accumulated deficit, and we may be unable to generate sufficient revenue to achieve profitability in the future.

We only began generating revenues from the commercialization of Vitaros^®in the third quarter of 2014, we have never been profitable and we have incurred an accumulated deficit of approximately $316.0 million from our inception through September 30, 2016. We have incurred these losses principally from costs incurred in funding the research, development and clinical testing of our product candidates, from our general and administrative expenses and from our efforts to support commercialization of Vitaros^® by our partners. We expect to continue to incur significant operating losses and capital expenditures for the foreseeable future.

Our ability to generate revenues and become profitable depends, among other things, on (1) the successful development and commercialization of Vitaros^® in the United States and other markets outside of the United States, and (2) the successful development, approval and commercialization of RayVa^™. If we are unable to accomplish these objectives, we may be unable to achieve profitability and would need to raise additional capital to sustain our operations.

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There is substantial doubt concerning our ability to continue as a going concern.

Our financial statements have been prepared assuming that we will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. We expect to incur further losses for the foreseeable future. These circumstances raise substantial doubt about our ability to continue as a going concern. As a result of this uncertainty and the substantial doubt about our ability to continue as a going concern as of December 31, 2015, the Report of Independent Registered Public Accounting Firm included immediately prior to the Consolidated Financial Statements included in our Annual Report on Form 10-K as filed March 9, 2016, includes a going concern explanatory paragraph. There was no change in this assessment during the first half of 2016. Management plans to raise additional funds with the following activities: future financing events; increasing revenue by seeking new arrangements with commercial distribution partners; and by the reduction of expenditures. However, no assurance can be given at this time as to whether we will be able to achieve these objectives. Our financial statements do not include any adjustment relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should we be unable to continue as a going concern.

Revenues based on Vitaros^® represent a substantial portion of our current and expected future revenues.

Our marketing partners are obligated to pay us royalties on their sales of Vitaros^®. These payments are expected to be a substantial portion of our ongoing revenues for some time. As a result, any setback that may occur with respect to Vitaros^® could significantly impair our operating results and/or reduce the market price of our stock. Setbacks for Vitaros^® could include problems with shipping, distribution, manufacturing, product safety, marketing, government regulation or reimbursement, licenses and approvals, intellectual property rights, competition with existing or new products and physician or patient acceptance of the product, as well as higher than expected total rebates, returns or discounts.

In markets where Vitaros^® is approved, we are substantially dependent on marketing partners to successfully commercialize Vitaros^®.

In markets where Vitaros^® has received regulatory approval, we do not have or expect to have any sales or marketing infrastructure. Accordingly, our operating results and long-term success is substantially dependent on the commercialization efforts of our worldwide marketing partners. In jurisdictions where we have commercialized our products with partners the amount of revenue we receive from product sales will be lower than if we commercialized directly, as we will be required to share the revenues with our partners. If our partners’ commercialization efforts for Vitaros^® are unsuccessful, we may realize little or no revenue from sales in such markets.

In addition, distribution of Vitaros^® requires cold-chain distribution, whereby the product must be maintained between specified temperatures. If a difficulty arises in our partner’s cold-chain distribution processes, through our partner’s failure to maintain Vitaros^® between specified temperatures, Vitaros^® could be damaged or spoiled and rendered unusable. Our marketing partners may also be required to repackage Vitaros^® in certain smaller territories where Vitaros^® has been approved, or our marketing partners may make claims about applications of Vitaros^® beyond uses approved by regulators. Any failure by our partners to comply with packaging, labeling, advertising or promoting requirements in any jurisdiction may result in restrictions on the marketing or manufacturing of Vitaros^®, withdrawal of the product from the market or voluntary or mandatory product recalls, which could negatively affect our potential future revenues. Our marketing partners independently determine when to order new product and whether to release Vitaros^®in compliance with their own policies and guidelines. Our partners’ internal product release guidelines, over which we have no control, may be more restrictive than local regulations. This may result in delays of sales, delivery or new orders of our product.

Any failure of our partners to adequately perform their obligations under our license agreements for Vitaros^® or RayVa^™ or the termination of such agreements could have a material and adverse impact on our business.

We and our licensees depend upon third party manufacturers for our products and for the raw materials, components, chemical supplies, and dispensers required for our finished products.

We do not manufacture any of our products or product candidates. As such, we are dependent on third party manufacturers for the supply of these products and product candidates. The manufacturing process for our products is highly regulated and regulators may refuse to qualify new suppliers and/or terminate manufacturing at existing facilities that they believe do not comply with regulations. Further, our commercial partners may require changes in the product specifications which could cause delays or additional costs to be incurred. The inability of our contract manufacturers to successfully produce commercial quantities of Vitaros^® with an acceptable shelf-life could delay or prevent a commercial launch in certain territories, which would negatively affect our potential future revenues.

Our third-party manufacturers and suppliers are subject to numerous regulations, including Good Manufacturing Practices, FDA regulations governing manufacturing processes and related activities and similar foreign regulations. Our third-party manufacturers and suppliers are independent entities who are subject to their own operational and financial risks that are out of our control. If we or any of these third-party manufacturers or suppliers fail to perform as required or fail to comply with the regulations of the FDA and other applicable governmental authorities, our ability to deliver our products on a timely basis, receive royalties or

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continue our clinical trials would be adversely affected. Also, the manufacturing processes of our manufacturing partners may be found to violate the proprietary rights of others, which could interfere with their ability to manufacture products on a timely and cost effective basis.

In addition, we and our licensees are also dependent on third party manufacturers and suppliers of raw materials, components, chemical supplies for the active drugs in our products and product candidates under development for the formulation and supply of our NexACT^® enhancers and finished products. We are dependent on these third-party manufacturers for dispensers that are essential in the production of our products Vitaros^®and other products and product candidates. These raw materials, components, chemical supplies, finished products and dispensers must be supplied on a timely basis and at satisfactory quality levels.

If our third party product manufacturers or suppliers of raw materials, components, chemical supplies, finished products and dispensers fail to produce quality products on time and in sufficient quantities, or if we are unable to secure adequate alternative sources of supply for such materials, components, chemicals, finished products and dispensers, our results would suffer, as we or our licensees would encounter costs and delays in re-validating new third party suppliers.

Our financial prospects depend in part on the ability of our contract manufacturers and our suppliers to produce and deliver Vitaros^® in Canada, Europe and other countries within the approved product specifications. If Vitaros^® is not able to be manufactured and provided to customers within the desired specifications and if those specifications cannot be maintained in accordance with approved label requirements, the expected sales by our partners may not be possible and our financial results would be negatively impacted.

We are dependent upon our suppliers and manufacturers of active drug substance, proprietary excipient and other components used in Vitaros^® to produce and deliver these materials for Vitaros^® manufacturing according to the approved quality specifications filed with the regulatory authorities and according to GMP. If these suppliers or manufacturers are not able to supply these materials in a consistent and timely manner, or fail to meet the regulatory requirements to include Vitaros^® product specifications, then Vitaros^® would not be able to be manufactured.

Similarly, we are dependent upon contract manufacturers to produce Vitaros^® dosage form according to the approved specifications for each territory. If the manufacturers are not able to make Vitaros^® for any reason, such as an unexpected plant shutdown, failure of certain inspections by regulatory authorities, equipment failure or inability to meet approved regulatory specifications for Vitaros^®, then Vitaros^® would not be able to be delivered to our partners.

It is possible that our contract manufacturers will not be able to successfully manufacture according to the requirements, and any unforeseen delay, inability to manufacture, or any unforeseen circumstance whereby the approved product label cannot be maintained could significantly impact our financial results.

The product specifications for Vitaros^®, and other pharmaceutical products, are governed by the applicable jurisdiction’s regulatory authorities and those specifications may affect the ability of our partners to manufacture a product with a desired product shelf-life, prescribing information or other product characteristics that impact their marketing goals. Such product specifications are specific to each individual jurisdiction’s market-approval directives and are generally not applicable to those product specifications approved by other countries’ regulatory authorities.

The manufacturing specifications for producing Vitaros^® in Canada affect the expected shelf-life that can be achieved for the product. Mylan, Inc., our marketing partner in Canada, is working with their contract manufacturer to optimize the shelf-life period for the cold-chain product prior to launch. If any of our partners are unable to achieve the desired product shelf life within approved specifications, our financial results could be negatively impacted.

Pre-clinical and clinical trials are inherently unpredictable. If we or our partners do not successfully conduct the clinical trials or gain regulatory approval, we or our partners may be unable to market our product candidate.

Through pre-clinical studies and clinical trials, our product candidate, RayVa^™, must be demonstrated to be safe and effective for their indicated uses. Results from pre-clinical studies and early clinical trials may not be indicative of, or allow for, prediction of results in later-stage testing. Many of the pre-clinical studies that we have conducted are in animals with “models” of human disease states. Although these tests are widely used as screening mechanisms for drug candidates before being advanced to human clinical studies, results in animal studies are less reliable predictors of safety and efficacy than results of human clinical studies. Future clinical trials may not demonstrate the safety and effectiveness of our product candidates or may not result in regulatory approval to market our product candidates. Commercial sales in any territory cannot begin until approval is received from the applicable regulatory authorities, including the FDA in the United States.

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Our business is dependent in part on the success of our product candidates, which will require significant additional clinical testing before we can seek regulatory approval and potentially commercialize products. *

Our future success depends in part on our ability to obtain regulatory approval for, and then successfully commercialize our product candidates. Our product candidates will require additional clinical and non-clinical development, regulatory review and approval in multiple jurisdictions, substantial investment, access to sufficient commercial manufacturing capacity and significant marketing efforts before we can generate any revenues from product sales. We are not permitted to market or promote our product candidates in the United States before we receive regulatory approval from the United States FDA and comparable foreign regulatory authorities in overseas jurisdictions, and we may not receive such regulatory approvals on a timely basis, or at all.

Our clinical development plan for RayVa^™ includes a Phase 2b take-home clinical trial and up to two Phase 3 clinical trials in patients with Raynaud’s Phenomenon secondary to scleroderma. We reported results on the Phase 2a clinical trial in September 2015, which supported moving RayVa^™ forward into future clinical trials. There is no guarantee that we will commence our planned clinical trials or that our ongoing clinical trials will be completed on time or at all, and the FDA or comparable foreign regulatory authorities may disagree with the design or implementation of our clinical trials. Even if such regulatory authorities agree with the design and implementation of our clinical trials, we cannot guarantee that such regulatory authorities will not change their requirements in the future. In addition, even if the clinical trials are successfully completed, we cannot guarantee that the FDA or foreign regulatory authorities will interpret the results as we do, and more trials could be required before we submit our product candidates for approval. To the extent that the results of the clinical trials are not satisfactory to the FDA or foreign regulatory authorities for support of a marketing application, approval of our product candidates may be significantly delayed, or we may be required to expend significant additional resources, which may not be available to us, to conduct additional trials in support of potential approval of our product candidates.

We cannot anticipate when or if we will seek regulatory review of our product candidates for any indication. We in-licensed the rights to Vitaros^® in the United States in September 2015. Our goal is to resubmit an NDA in the fourth quarter of 2016, following our Type B meeting with the FDA on November 17, 2016. An NDA must include extensive pre-clinical and clinical data and supporting information to establish the drug candidate’s safety and effectiveness for each desired indication. The NDA must also include significant information regarding the chemistry, manufacturing and controls for the product. Obtaining approval of an NDA is a lengthy, expensive and uncertain process and may not be obtained on a timely basis, or at all. We have not received marketing approval for any product candidates in the United States, and we cannot be certain that our product candidates will be successful in clinical trials or receive regulatory approval for any indication. If we do not receive regulatory approvals for and successfully commercialize our product candidates on a timely basis or at all, we may not be able to continue our operations. Even if we successfully obtain regulatory approvals to market our product candidates, our revenues will be dependent, in part, on our ability to commercialize our product candidates and on the favorableness of the labeling language granted as well as the size of the markets in the territories for which we gain regulatory approval and have commercial rights. If the markets for the treatment of Raynaud’s Phenomenon secondary to scleroderma are not as significant as we estimate, our business and prospects will be harmed.

If we are unable to adequately establish, maintain and protect our intellectual property rights, we may incur substantial litigation costs and may be unable to generate significant product revenue.

Protection of the intellectual property for our products and product candidates is of material importance to our business in the United States and other countries. We have sought and will continue to seek proprietary protection for our product candidates to attempt to prevent others from commercializing equivalent products. Our success may depend on our ability to (1) obtain effective patent protection within the United States and internationally for our proprietary technologies and products, (2) defend patents we own, (3) preserve our trade secrets and (4) operate without infringing upon the proprietary rights of others. In addition, we have agreed to indemnify certain of our partners for certain liabilities with respect to the defense, protection and/or validity of our patents and would also be required to incur costs or forgo revenue if it is necessary for our partners to acquire third party patent licenses in order for them to exercise the licenses acquired from us.

While we have obtained patents and have many patent applications pending, the extent of effective patent protection in the United States and other countries is highly uncertain and involves complex legal and factual questions. No consistent policy addresses the breadth of claims allowed in, or the degree of protection afforded under, patents of medical and pharmaceutical companies. Patents we currently own or may obtain might not be sufficiently broad enough to protect us against competitors with similar technology. Any of our patents could be invalidated or circumvented.

Furthermore, holders of competing patents could allege that our activities infringe on their rights and could potentially prevail in litigation against us. We have also sold certain patents in transactions where we have licensed rights to our drug candidates. In certain of these transactions, we have agreed to indemnify the purchaser from third party patent claims, which could expose us to potentially significant damages for patents that we no longer own. Any litigation could result in substantial cost to us and would divert management’s attention, which may harm our business. In addition, our efforts to protect or defend our proprietary rights may not be successful or, even if successful, may result in substantial cost to us.

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We face a high degree of competition.^*

We are engaged in a highly competitive industry. We and our licensees compete against many companies and research institutions that research, develop and market products in areas similar to those in which we operate. For example, Viagra^®(Pfizer), Cialis^®(Lilly), Levitra^®(Glaxo Smith Kline), Stendra^®(Auxilium Pharmaceuticals, Inc.), and Spedra^®(Menarini Group) are currently approved for treatment of ED.

These and other competitors may have specific expertise and development technologies that are better than ours. Many of these competitors, which include large pharmaceutical companies, have substantially greater financial resources, larger research and development capabilities and substantially greater experience than we do. Accordingly, our competitors may successfully develop competing products. We are also competing with other companies and their products with respect to manufacturing efficiencies and marketing capabilities, areas where we have limited or no direct experience.

Our pharmaceutical expenditures may not result in commercially successful products.

We cannot be sure our business expenditures will result in the successful acquisition, development or launch of products that will prove to be commercially successful or will improve the long-term profitability of our business. If such business expenditures do not result in successful acquisition, development or launch of commercially successful brand products, our results of operations and financial condition could be materially adversely affected.

Business development activity involves numerous risks, including the risks that we may be unable to integrate an acquired business successfully and that we may assume liabilities that could adversely affect us.

In order to augment our product pipeline or otherwise strengthen our business, we may decide to acquire or license additional businesses, products and technologies. Acquisitions could require us to raise significant capital and involve many risks, including, but not limited to, the following:


•	difficulties in achieving identified financial revenue synergies, growth opportunities, operating synergies and cost savings;


•	difficulties in assimilating the personnel, operations and products of an acquired company, and the potential loss of key employees;


•	difficulties in consolidating information technology platforms, business applications and corporate infrastructure;


•	difficulties in integrating our corporate culture with local customs and cultures;


•	possible overlap between our products or customers and those of an acquired entity that may create conflicts in relationships or other commitments detrimental to the integrated businesses;


•	our inability to achieve expected revenues and gross margins for any products we may acquire;


•	the diversion of management’s attention from other business concerns;


•	risks and challenges of entering or operating in markets in which we have limited or no prior experience, including the unanticipated effects of export controls, exchange rate fluctuations, foreign legal and regulatory requirements, and foreign political and economic conditions; and


•	difficulties in reorganizing, winding-down or liquidating operations if not successful.

In addition, foreign acquisitions involve numerous risks, including those related to changes in local laws and market conditions and due to the absence of policies and procedures sufficient to assure compliance by a foreign entity with United States regulatory and legal requirements. Business development activities require significant transaction costs, including substantial fees for investment bankers, attorneys, and accountants. Any acquisition could result in our assumption of material unknown and/or unexpected liabilities. We also cannot provide assurance that we will achieve any cost savings or synergies relating to recent or future acquisitions. Additionally, in any acquisition agreement, the negotiated representations, warranties and agreements of the selling parties may not entirely protect us, and liabilities resulting from any breaches could exceed negotiated indemnity limitations. These factors could impair our growth and ability to compete, divert resources from other potentially more profitable areas, or otherwise cause a material adverse effect on our business, financial position and results of operations.

The financial statements of acquired companies, or those that may be acquired in the future, are prepared by management of such companies and are not independently verified by our management. In addition, any pro forma financial statements prepared by us to give effect to such acquisitions may not accurately reflect the results of operations of such companies that would have been achieved had the acquisition of such entities been completed at the beginning of the applicable periods.

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We may be subject to product liability and similar claims, which may lead to a significant financial loss if our insurance coverage is inadequate.

We are exposed to potential product liability risks inherent in the development, testing, manufacturing, marketing and sale of human therapeutic products. Product liability insurance for the pharmaceutical industry is extremely expensive, difficult to obtain and may not be available on acceptable terms, if at all. Although we maintain various types of insurance, we have no guarantee that the coverage limits of such insurance policies will be adequate. If liability claims were made against us, it is possible that our insurance carriers may deny, or attempt to deny, coverage in certain instances. A successful claim against us if we are uninsured, or which is in excess of our insurance coverage, if any, could have a material adverse effect upon us and on our financial condition.

Our business and operations would be adversely impacted in the event of a failure or security breach of our information technology infrastructure.

We rely upon the capacity, reliability and security of our information technology hardware and software infrastructure, including internet-based systems, and our ability to expand and update this infrastructure in response to our changing needs. We are constantly updating our information technology infrastructure. Any failure to manage, expand and update our information technology infrastructure or any failure in the operation of this infrastructure could harm our business.

Despite our implementation of security measures, our systems and those of our business partners may be vulnerable to damages from cyber-attacks, computer viruses, natural disasters, unauthorized access, telecommunication and electrical failures, and other similar disruptions. Our business is also potentially vulnerable to break-ins, sabotage and intentional acts of vandalism by third parties as well as employees. Any system failure, accident or security breach could result in disruptions to our operations, could lead to the loss of trade secrets or other intellectual property, could lead to the public exposure of personal information of our employees, clinical trial participants and others, and could result in a material disruption to our clinical and commercialization activities and business operations. To the extent that any disruption or security breach results in a loss or damage to our data, or inappropriate disclosure of confidential information, it could harm our business and cause us to incur liability. In addition, we may be required to incur significant costs to protect against damage caused by these disruptions or security breaches in the future.

If we fail to attract and retain senior management and key scientific personnel, we may be unable to successfully operate our business.

Our success depends, in part, on our ability to attract, retain and motivate highly qualified management and scientific personnel and on our ability to develop and maintain important relationships with healthcare providers, clinicians and scientists. We are highly dependent upon our senior management and scientific staff. We have incurred attrition at the senior management level in the past, and although we have employment agreements with five of our executives, these agreements are generally terminable at will at any time, and, therefore, we may not be able to retain their services as expected. The loss of services of one or more members of our senior management and scientific staff could delay or prevent us from successfully operating our business. Competition for qualified personnel in the biotechnology and pharmaceuticals field is intense, particularly in the San Diego, California area, where our offices are located. We may need to hire additional personnel to support development and commercial efforts for Vitaros^® and to support our further development of RayVa^™. We may not be able to attract and retain qualified personnel on acceptable terms.

Our ability to maintain, expand or renew existing business relationships and to establish new business relationships, particularly in the drug development sector, also depends on our ability to subcontract and retain scientific staff with the skills necessary to keep pace with continuing changes in drug development technologies.

From time to time we are subject to various legal proceedings, which could expose us to significant liabilities.

We, as well as certain of our officers and distributors, are subject, from time to time, to a number of legal proceedings. Litigation is inherently unpredictable, and any claims and disputes may result in significant legal fees and expenses regardless of merit and could divert management’s time and other resources. If we are unable to successfully defend or settle any claims asserted against us, we could be liable for damages and be required to alter or cease certain of our business practices or product lines. Any of these outcomes could cause our business, financial performance and cash position to be negatively impacted. There is no guarantee of a successful result in any of these lawsuits regardless of merit, either in defending these claims or in pursuing counterclaims.

We are exposed to potential risks from legislation requiring companies to evaluate internal controls over financial reporting.

The Sarbanes-Oxley Act requires that we report annually on the effectiveness of our internal controls over financial reporting. Among other things, we must perform systems and processes evaluation testing. This includes an assessment of our internal controls to allow management to report on, and our independent public accounting firm to attest to, our internal controls over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act. In connection with our compliance efforts, we have incurred and expect to continue to incur or expend, substantial accounting and other expenses and significant management time and resources. Further, in connection with our management’s assessment of the effectiveness of our internal control over financial reporting as of December 31, 2014, we determined that, as of December 31, 2014, material weaknesses existed in our internal

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control over financial reporting over the accounting for and disclosures of technical accounting matters in the consolidated financial statements and effective monitoring and oversight over the controls in the financial reporting process. While our management has concluded that we have remediated these material weaknesses as of December 31, 2015, there can be no assurances that our future assessments, or the future assessments by our independent registered public accounting firm, will not reveal further material weaknesses in our internal controls. If material weaknesses are identified in the future we would be required to conclude that our internal controls over financial reporting are ineffective, which would likely require additional financial and management resources and could adversely affect the market price of our common stock.

The terms of our Credit Facility place restrictions on our operating and financial flexibility.

On October 17, 2014, we entered into a Loan and Security Agreement (the “Credit Facility”) with Oxford Finance LLC (“Oxford”) and Silicon Valley Bank (“SVB”) (Oxford and SVB are referred to together as the “Lenders”) that is secured by substantially all of our assets, excluding intellectual property. The principal balance under the Credit Facility was $7.2 million as of September 30, 2016.

The Credit Facility includes affirmative and negative covenants applicable to us and any subsidiaries we create in the future. The affirmative covenants include, among others, covenants requiring us to maintain our legal existence and governmental approvals, deliver certain financial reports and maintain insurance coverage. The negative covenants include, among others, restrictions on our transferring collateral, incurring additional indebtedness, engaging in mergers or acquisitions, paying dividends or making other distributions, making investments, creating liens, selling assets, and suffering a change in control, in each case subject to certain exceptions.

The Credit Facility also includes events of default, the occurrence and continuation of which provide Oxford, as collateral agent, with the right to exercise remedies against us and the collateral securing the term loans under the Credit Facility, including foreclosure against our properties securing the Credit Facility, including our cash. These events of default include, among other things, our failure to pay any amounts when due under the Credit Facility, a breach of covenants under the Credit Facility, our insolvency, a material adverse change, the occurrence of any default under certain other indebtedness in an amount greater than $250,000, and a final judgment against us in an amount greater than $250,000.

If we fail to comply with our obligations in our intellectual property licenses and funding arrangements with third parties, we could lose rights that are important to our business.

We are party to license agreements with both Allergan and Forendo Pharma Ltd. that impose diligence, development and commercialization timelines, milestone payment, royalty, insurance and other obligations on us. Under our existing licensing agreements, we are obligated to pay royalties on net product sales of Vitaros^®or fispemifene to the extent they are covered by the agreements. If we fail to comply with our obligations, our counterparties may have the right to terminate these agreements, in which event we might not be able to develop, manufacture or market any product that is covered by these agreements and may face other penalties under the agreements. Such an occurrence could materially adversely affect the value of product candidates being developed using rights licensed to us under any such agreement. Termination of these agreements or reduction or elimination of our rights under these agreements may result in our having to negotiate new or reinstated agreements with less favorable terms, or cause us to lose our rights under these agreements, including our rights to important intellectual property or technology.

We may enter into license agreements in the future that could also impose diligence, development and commercialization timelines, milestone payments, royalty, insurance and other obligations.

Fluctuations in the value of the Euro or other foreign currency could negatively impact our results of operations and increase our costs.

Certain revenues from our commercialization partners are denominated in the Euro or another foreign currency although our reporting currency is the U.S. dollar. As a result, we are exposed to foreign exchange risk, and our results of operations may be negatively impacted by fluctuations in the exchange rate between the U.S. dollar and the other foreign currency. Likewise, to the extent that we generate any revenues denominated in foreign currencies, or become required to make payments in other foreign currencies, fluctuations in the exchange rate between the U.S. dollar and those foreign currencies could also negatively impact our results of operations. We currently have not entered into any foreign currency hedging contracts to reduce the effect of changes in foreign currency exchange rates, and foreign currency hedging is inherently risky and may result in unanticipated losses.

Industry Risks

Instability and volatility in the financial markets in the global economy are likely to have a negative impact on our ability to raise necessary funds.

During the past several years, there has been substantial volatility in financial markets due in part to the global economic environment. In addition, there has been substantial uncertainty in the capital markets and access to financing is uncertain. These

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conditions are likely to have an adverse effect on our industry, licensing partners and business, including our financial condition, results of operations and cash flows.

We expect to need to raise capital through equity sales and/or incur indebtedness, if available, to finance operations. However, continued volatility in the capital markets may have an adverse effect on our ability to fund our business strategy through sales of capital stock or through borrowings, in the public or private markets on terms that we believe to be reasonable, if at all.

Changes in trends in the pharmaceutical and biotechnology industries, including difficult market conditions, could adversely affect our operating results.

Industry trends and economic and political factors that affect pharmaceutical, biotechnology and medical device companies also affect our business. In the past, mergers, product withdrawals, liability lawsuits and other factors in the pharmaceutical industry have slowed decision-making by pharmaceutical companies and delayed drug development projects. Continuation or increases in these trends could have an adverse effect on our business.

The biotechnology, pharmaceutical and medical device industries generally, and more specifically drug discovery and development, are subject to increasingly rapid technological changes. Our competitors might develop technologies, services or products that are more effective or commercially attractive than our current or future technologies, services or products, or that render our technologies, services or products less competitive or obsolete. If competitors introduce superior technologies, services or products and we cannot make enhancements to our technologies, services or products to remain competitive, our competitive position, and in turn our business, revenue and financial condition, would be materially and adversely affected.

We and our licensees are subject to numerous and complex government regulations which could result in delay and expense.

Governmental authorities in the United States and other countries heavily regulate the testing, manufacture, labeling, distribution, advertising and marketing of our proposed product candidates. None of our proprietary products under development have been approved for marketing in the United States. Before any products we develop are marketed, FDA and comparable foreign agency approval must be obtained through an extensive clinical study and approval process.

The failure to obtain requisite governmental approvals for our product candidates under development in a timely manner, or at all, would delay or preclude us and our licensees from marketing our product candidates or limit the commercial use of our product candidates, which could adversely affect our business, financial condition and results of operations.

Because we intend that our product candidates will also be sold and marketed outside the United States, we and/or our licensees will be subject to foreign regulatory requirements governing the conduct of clinical trials, product licensing, pricing and reimbursements. These requirements vary widely from country to country. The failure to meet each foreign country’s requirements could delay the introduction of our proposed product candidates in the respective foreign country and limit our revenues from sales of our proposed product candidates in foreign markets.

We face uncertainty related to healthcare reform, pricing and reimbursement, which could reduce our revenue.

In the United States and some foreign jurisdictions, there have been a number of legislative and regulatory changes and proposed changes regarding the healthcare system that could, among other things, prevent or delay marketing approval of our product candidates, restrict or regulate post-approval activities and affect our ability to profitably sell Vitaros^®or any products for which we obtain marketing approval.

For example, in March 2010, the Patient Protection and Affordable Care Act, as amended by the Health Care Education Reconciliation Act, collectively the Affordable Care Act, was enacted to broaden access to health insurance, reduce or constrain the growth of healthcare spending, enhance remedies against fraud and abuse, add new transparency requirements for health care and health insurance industries, impose new taxes and fees on the health industry and impose additional health policy reforms. Among the provisions of the Affordable Care Act of importance to our potential drug candidates are the following:


•	an annual, nondeductible fee payable by any entity that manufactures or imports specified branded prescription drugs and biologic agents;


•	an increase in the statutory minimum rebates a manufacturer must pay under the Medicaid Drug Rebate Program;


•	a new methodology by which rebates owed by manufacturers under the Medicaid Drug Rebate Program are calculated for drugs that are inhaled, infused, instilled, implanted or injected;


•	a new Medicare Part D coverage gap discount program, in which manufacturers must agree to offer 50% point-of-sale discounts off negotiated prices of applicable brand drugs to eligible beneficiaries under their coverage gap period, as a condition for the manufacturer’s outpatient drugs to be covered under Medicare Part D;


•	extension of manufacturers’ Medicaid rebate liability to individuals enrolled in Medicaid managed care organizations;


•	expansion of eligibility criteria for Medicaid programs;

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•	expansion of the entities eligible for discounts under the Public Health Service pharmaceutical pricing program;


•	a new requirement to annually report drug samples that manufacturers and distributors provide to physicians; and a new Patient-Centered Outcomes Research Institute to oversee, identify priorities in, and conduct comparative clinical effectiveness research, along with funding for such research.

Although it is too early to determine the full effect of the Affordable Care Act, the law has continued the downward pressure on pharmaceutical pricing, especially under the Medicare program, and increased the industry’s regulatory burdens and operating costs.

In addition, other legislative changes have been proposed and adopted since the PPACA was enacted. For example, in August 2011, the President signed into law the Budget Control Act of 2011, which, among other things, created the Joint Select Committee on Deficit Reduction to recommend to Congress proposals in spending reductions. The Joint Select Committee did not achieve a targeted deficit reduction of at least $1.2 trillion for the years 2013 through 2021, triggering the legislation’s automatic reduction to several government programs. This included reductions to Medicare payments to providers of 2% per fiscal year, which went into effect in April 2013 and, due to subsequent legislative amendments to the statute, will stay in effect through 2025 unless additional Congressional action is taken. Additionally, in January 2013, the American Taxpayer Relief Act of 2012 was signed into law, which, among other things, reduced Medicare payments to several providers. We expect that additional state and federal healthcare reform measures will be adopted in the future, particularly following the 2016 presidential election cycle, any of which could limit the amounts that federal and state governments will pay for healthcare products and services, which could result in reduced demand for our products and product candidates or additional pricing pressures.

If reimbursement for our products is substantially less than we expect in the future, or rebate obligations associated with them are substantially increased, our business could be materially and adversely impacted. Further, numerous foreign governments are also undertaking efforts to control growing healthcare costs through legislation, regulation and voluntary agreements with medical care providers and pharmaceutical companies.

Sales of Vitaros^®and other product candidates, if approved, will depend in part on the availability of coverage and reimbursement from third-party payors such as United States and foreign government insurance programs, including Medicare and Medicaid, private health insurers, health maintenance organizations and other health care related organizations. Both the federal and state governments in the United States and foreign governments continue to propose and pass new legislation affecting coverage and reimbursement policies, which are designed to contain or reduce the cost of health care. Further federal and state proposals and healthcare reforms are likely that could limit the prices that can be charged for the product candidates that we develop and may further limit our commercial opportunity. There may be future changes that result in reductions in current coverage and reimbursement levels for our products and we cannot predict the scope of any future changes or the impact that those changes would have on our operations.

Adoption by the medical community of Vitaros^®and other product candidates, if approved, may be limited if third-party payors will not offer coverage. Cost control initiatives may decrease coverage and payment levels for drugs, which in turn would negatively affect the price that we will be able to charge. We are unable to predict all changes to the coverage or reimbursement methodologies that will be applied by private or government payors to any drug candidate we have in development. Any denial of private or government payor coverage or inadequate reimbursement for our products could harm our business and reduce our revenue.

The FDA regulatory approval process is lengthy and time-consuming, and if we experience significant delays in the clinical development and regulatory approval of our product candidates, our business may be substantially harmed.

We may experience delays in commencing and completing clinical trials of our product candidates. We do not know whether planned clinical trials will begin on time, need to be redesigned, enroll patients on time or be completed on schedule, if at all. Any of our planned clinical trials may be delayed for a variety of reasons, including delays related to:


•	the availability of financial resources for us to commence and complete our planned clinical trials;


•	reaching agreement on acceptable terms and pricing with prospective contract research organizations (“CROs”) and clinical trial sites, the terms of which can be subject to extensive negotiation and may vary significantly among different CROs and clinical trial sites;


•	obtaining independent institutional review board (“IRB”) approval at each clinical trial site;


•	obtaining regulatory approval to commence clinical trials in each country;


•	recruiting a sufficient number of eligible patients to participate in a clinical trial;


•	having patients complete a clinical trial or return for post-treatment follow-up;


•	clinical trial sites deviating from trial protocol or dropping out of a trial;

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•	adding new clinical trial sites; or


•	manufacturing sufficient quantities of our product candidate for use in clinical trials.

Patient enrollment is a significant factor in the timing of clinical trials and is affected by many factors including the size and nature of the patient population, the proximity of patients to clinical sites, the eligibility criteria for the clinical trial, the design of the clinical trial, competing clinical trials and clinicians’ and patients’ perceptions as to the potential advantages or potential side effects of the drug candidate being studied in relation to other available therapies, including any new drugs that may be approved for such indications.

We could encounter delays if physicians encounter unresolved ethical issues associated with enrolling patients in clinical trials of our product candidates in lieu of prescribing existing treatments that have established safety and efficacy profiles. Further, a clinical trial may be suspended or terminated by us, the IRBs in the institutions in which such trials are being conducted, the Data Monitoring Committee for such trial (if included), or by the FDA or other regulatory authorities due to a number of factors, including failure to conduct the clinical trial in accordance with regulatory requirements or our clinical protocols, inspection of the clinical trial operations or trial site by the FDA or other regulatory authorities resulting in the imposition of a clinical hold, unforeseen safety issues or adverse side effects, failure to demonstrate a benefit from using a product candidate, changes in governmental regulations or administrative actions or lack of adequate funding to continue the clinical trial. Furthermore, we rely on CROs and clinical trial sites to ensure the proper and timely conduct of our clinical trials. While we have agreements governing the CROs’ services, we have limited influence over their actual performance. If we experience termination of, or delays in the completion of, any clinical trial of our product candidates, the commercial prospects for our product candidates will be harmed, and our ability to generate product revenues will be delayed. In addition, any delays in completing our clinical trials will increase our costs, slow down our product development and approval process and jeopardize our ability to commence product sales and generate revenues from our product candidates. Any of these occurrences may harm our business, prospects, financial condition and results of operations. Furthermore, many of the factors that cause, or lead to, a delay in the commencement or completion of clinical trials may also ultimately lead to the denial of regulatory approval of our product candidates.

If we are unable to obtain regulatory approval of our product candidates, we will not be able to commercialize our product candidates and our business will be adversely impacted.

If we fail to obtain regulatory approval to market our product candidates, we will be unable to sell our product candidates, which will impair our ability to generate additional revenues. To receive approval, we must, among other things, demonstrate with substantial evidence from clinical trials that the product candidate is both safe and effective for each indication for which approval is sought. Failure can occur in any stage of development. Satisfaction of the approval requirements is unpredictable but typically takes several years following the commencement of clinical trials, and the time and money needed to satisfy them may vary substantially, based on the type, complexity and novelty of the pharmaceutical product. We cannot predict if or when our existing and planned clinical trials will generate the data necessary to support an NDA and if, or when, we might receive regulatory approvals for our product candidates.

Our product candidates could fail to receive regulatory approval for many reasons, including the following:


•	the FDA or comparable foreign regulatory authorities may disagree with the design or implementation of our clinical trials;


•	we may be unable to demonstrate to the satisfaction of the FDA or comparable foreign regulatory authorities that our product candidates are safe and effective for any of the proposed indications;


•	the results of clinical trials may not meet the level of statistical significance required by the FDA or comparable foreign regulatory authorities for approval;


•	we may be unable to demonstrate that our product candidates’ clinical and other benefits outweigh their safety risks;


•	the FDA or comparable foreign regulatory authorities may disagree with our interpretation of data from preclinical studies or clinical trials;


•	the data collected from clinical trials of our product candidates may not be sufficient to the satisfaction of the FDA or comparable foreign regulatory authorities to support the submission of an NDA or other comparable submission in foreign jurisdictions or to obtain regulatory approval in the United States or elsewhere;


•	the FDA or comparable foreign regulatory authorities may fail to approve the manufacturing processes or facilities of third-party manufacturers with which we contract for clinical and commercial supplies;


•	the approval policies or regulations of the FDA or comparable foreign regulatory authorities may significantly change in a manner rendering our clinical data insufficient for approval; and

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•	even after following regulatory guidance or advice, the FDA or comparable foreign regulatory authorities may still reject our ultimate regulatory submissions since their guidance is generally considered non-binding and the regulatory authorities have the authority to revise or adopt new and different guidance at any time.

This lengthy approval process as well as the unpredictability of future clinical trial results may result in our failure to obtain regulatory approval to market our product candidates, which would significantly harm our business, prospects, financial condition and results of operations. In addition, any approvals that we obtain may not cover all of the clinical indications for which we are seeking approval, or could contain significant limitations in the form of narrow indications, warnings, precautions or contra-indications with respect to conditions of use. In such event, our ability to generate revenues would be greatly reduced and our business would be harmed.

Even if we receive regulatory approval for our product candidates, we will be subject to ongoing regulatory obligations and continued regulatory review, which may result in significant additional expense. Additionally, our product candidates, if approved, could be subject to labeling and other restrictions and market withdrawal and we may be subject to penalties if we fail to comply with regulatory requirements or experience unanticipated problems with our product candidates.

Any regulatory approvals that we receive for our product candidates may contain requirements for potentially costly post-marketing testing, including Phase 4 clinical trials, and surveillance to monitor the safety and efficacy of the product candidate. The FDA may also require additional risk management activities and labeling which may limit distribution or patient/prescriber uptake. An example would be the requirement of a risk evaluation and mitigation strategy in order to approve our product candidates, which could entail requirements for a medication guide, physician communication plans or additional elements to ensure safe use, such as restricted distribution methods, patient registries and other risk minimization tools. In addition, if the FDA or a comparable foreign regulatory authority approves our product candidates, the manufacturing processes, labeling, packaging, distribution, adverse event reporting, storage, advertising, promotion, import, export and record-keeping for our product candidates will be subject to extensive and ongoing regulatory requirements. These requirements include submissions of safety and other post-marketing information and reports, and registration. We are also required to maintain continued compliance with cGMP requirements and cGCPs requirements for any clinical trials that we conduct post-approval. Later discovery of previously unknown problems with our product candidates or other manufacturers’ products in the same class, including adverse events of unanticipated severity or frequency, or with our third-party manufacturers or manufacturing processes, or failure to comply with regulatory requirements, may result in, among other things:


•	restrictions on the marketing or manufacturing of our product candidates, withdrawal of the product from the market, or voluntary or mandatory product recalls;


•	fines, warning letters or holds on clinical trials;


•	refusal by the FDA to approve pending applications or supplements to approved applications filed by us or suspension or revocation of license approvals;


•	product seizure or detention, or refusal to permit the import or export of our product candidates; and


•	injunctions or the imposition of civil or criminal penalties.

The FDA’s and other regulatory authorities’ policies may change and additional government regulations may be enacted that could prevent, limit or delay regulatory approval of our product candidates. We cannot predict the likelihood, nature or extent of government regulation that may arise from future legislation or administrative action, either in the United States or abroad. If we are slow or unable to adapt to changes in existing requirements or the adoption of new requirements or policies, or if we are not able to maintain regulatory compliance, we may lose any marketing approval that we may have obtained and we may not achieve or sustain profitability, which would adversely affect our business, prospects, financial condition and results of operations.

Our relationships with investigators, health care professionals, consultants, third-party payors, and customers are subject to applicable healthcare regulatory laws, which could expose us to penalties.

Our business operations and arrangements with investigators, healthcare professionals, consultants, marketing partners, third-party payors and customers, may expose us to broadly applicable fraud and abuse and other healthcare laws and regulations. These laws may constrain the business or financial arrangements and relationships through which we conduct our operations, including how we research, market, sell and distribute our products and product candidates for which we obtain marketing approval. Such laws include:

•

the federal Anti-Kickback Statute prohibits, among other things, persons from knowingly and willfully soliciting, offering, receiving or providing remuneration, directly or indirectly, in cash or in kind, to induce or reward, or in return for, either the referral of an individual for, or the purchase, order or recommendation of, any good or service, for which payment may be made under a federal healthcare program such as Medicare and Medicaid. A person or entity does not need to have actual knowledge of the federal Anti-Kickback Statute or specific intent to violate it to have committed a violation;

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in addition, the government may assert that a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the False Claims Act;


•	the federal False Claims Act imposes criminal and civil penalties, including civil whistleblower or qui tam actions, against individuals or entities for knowingly presenting, or causing to be presented, to the federal government, claims for payment that are false or fraudulent or making a false statement to avoid, decrease or conceal an obligation to pay money to the federal government;


•	the federal HIPAA imposes criminal and civil liability for executing a scheme to defraud any healthcare benefit program or making false statements relating to healthcare matters. Similar to the federal Anti-Kickback Statute, a person or entity does not need to have actual knowledge of the statute or specific intent to violate it to have committed a violation;


•	HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act and its implementing regulations, also imposes obligations, including mandatory contractual terms, with respect to safeguarding the privacy, security and transmission of individually identifiable health information;

•

the federal Physician Payment Sunshine Act, which requires manufacturers of drugs, devices, biologics and medical supplies for which payment is available under Medicare, Medicaid or the Children’s Health Insurance Program (with certain exceptions) to report annually to the government information related to payments or other “transfers of value” made to physicians (defined to include doctors, dentists, optometrists, podiatrists and chiropractors) and teaching hospitals, and requires applicable manufacturers and group purchasing organizations to report annually to the government ownership and investment interests held by the physicians described above and their immediate family members and payments or other “transfers of value” to such physician owners (manufacturers are required to submit reports to the government by the 90^th day of each calendar year); and

•

analogous state and foreign laws and regulations, such as state anti-kickback and false claims laws, may apply to sales or marketing arrangements and claims involving healthcare items or services reimbursed by non-governmental third party payors, including private insurers; state laws that require pharmaceutical companies to comply with the pharmaceutical industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal government; state laws that require drug manufacturers to report information related to payments and other transfers of value to physicians and other healthcare providers or marketing expenditures; and state and foreign laws governing the privacy and security of health information in some circumstances, many of which differ from each other in significant ways and often are not preempted by HIPAA, thus complicating compliance efforts.

Efforts to ensure that our business arrangements with third parties will comply with applicable healthcare laws and regulations will involve substantial costs. It is possible that governmental authorities will conclude that our business practices do not comply with current or future statutes, regulations, agency guidance or case law involving applicable healthcare laws. If our operations are found to be in violation of any of these or any other health regulatory laws that may apply to us, we may be subject to significant penalties, including the imposition of significant civil, criminal and administrative penalties, damages, monetary fines, disgorgement, individual imprisonment, possible exclusion from participation in Medicare, Medicaid and other federal healthcare programs, contractual damages, reputational harm, diminished profits and future earnings, and curtailment of our operations, any of which could adversely affect our ability to operate our business and our results of operations. Defending against any such actions can be costly, time-consuming and may require significant financial and personnel resources. Therefore, even if we are successful in defending against any such actions that may be brought against us, our business may be impaired.

Our product candidates may cause undesirable side effects or have other properties that could delay or prevent their regulatory approval, limit the commercial profile of an approved label, or result in significant negative consequences following marketing approval, if any.

Undesirable side effects caused by our product candidates could cause us or regulatory authorities to interrupt, delay or halt clinical trials and could result in a more restrictive label or the delay or denial of regulatory approval by the FDA or other comparable foreign authorities. Results of our trials could reveal a high and unacceptable severity and prevalence of undesirable side effects. In such an event, our trials could be suspended or terminated and the FDA or comparable foreign regulatory authorities could order us to cease further development of or deny approval of our product candidates for any or all targeted indications. The drug-related side effects could affect patient recruitment or the ability of enrolled patients to complete the trial or result in potential product liability claims. Any of these occurrences may harm our business, financial condition and prospects significantly.

Additionally if one or more of our product candidates receives marketing approval, and we or others later identify undesirable side effects caused by such products, a number of potentially significant negative consequences could result, including:


•	regulatory authorities may withdraw approvals of such product;


•	regulatory authorities may require additional warnings on the label;


•	we may be required to create a medication guide outlining the risks of such side effects for distribution to patients;

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•	we could be sued and held liable for harm caused to patients; and


•	our reputation may suffer.

Any of these events could prevent us from achieving or maintaining market acceptance of the particular product candidate, if approved, and could significantly harm our business, results of operations and prospects.

Our employees, independent contractors, principal investigators, CROs, consultants, commercial partners and vendors are subject to a number of regulations and standards.

We are exposed to the risk that employees, independent contractors, principal investigators, CROs, consultant and vendors may engage in fraudulent or other illegal activity for which we may be held responsible. Misconduct by these parties could include intentional, reckless and/or negligent conduct or disclosure of unauthorized activities to us that violates: (1) the laws of the FDA and other similar foreign regulatory bodies; including those laws that require the reporting of true, complete and accurate information to the FDA and other similar foreign regulatory bodies, (2) manufacturing standards, (3) healthcare fraud and abuse laws in the United States and similar foreign fraudulent misconduct laws, or (4) laws that require the true, complete and accurate reporting of financial information or data. These laws may impact, among other things, our current activities with principal investigators and research subjects, as well as proposed and future sales, marketing and education programs. In particular, the promotion, sales and marketing of healthcare items and services, as well as certain business arrangements in the healthcare industry, are subject to extensive laws designed to prevent fraud, kickbacks, self-dealing and other abusive practices. These laws and regulations may restrict or prohibit a wide range of pricing, discounting, marketing and promotion, structuring and commission(s), certain customer incentive programs and other business arrangements generally. Activities subject to these laws also involve the improper use of information obtained in the course of patient recruitment for clinical trials. If we obtain FDA approval for any of our product candidates and begin commercializing those products in the United States, our potential exposure under such laws will increase significantly, and our costs associated with compliance with such laws are also likely to increase. If any such actions are instituted against us, and we are not successful in defending ourselves or asserting our rights, those actions could have a significant impact on our business, including the imposition of civil, criminal and administrative penalties, damages, monetary fines, contractual damages, reputational harm, diminished profits and future earnings, and curtailment of our operations, any of which could adversely affect our ability to operate our business and our results of operations.

We rely on third parties to conduct our preclinical studies and clinical trials. These third parties may not perform as contractually required or expected and issues may arise that could delay the completion of clinical trials and impact regulatory approval of our product candidates.

We sometimes rely on third parties, such as CROs, medical institutions, academic institutions, clinical investigators and contract laboratories to conduct our preclinical studies and clinical trials. We are responsible for confirming that our preclinical studies are conducted in accordance with applicable regulations and that each of our clinical trials is conducted in accordance with its general investigational plan and protocol. The FDA and the European Medicines Agency require us to comply with good laboratory practices for conducting and recording the results of our preclinical studies and cGCP, for conducting, monitoring, recording and reporting the results of clinical trials to assure that the data gathered and reported results are accurate and that the clinical trial participants are adequately protected. Our reliance on third parties does not relieve us of these responsibilities. If the third parties conducting our clinical trials do not perform their contractual duties or obligations, do not meet expected deadlines, fail to comply with cGCP, do not adhere to our clinical trial protocols or otherwise fail to generate reliable clinical data, we may need to enter into new arrangements with alternative third parties and our clinical trials may be more costly than expected or budgeted, extended, delayed or terminated or may need to be repeated, and we may not be able to obtain regulatory approval for or commercialize the product candidate being tested in such trials.

Our CROs may also have relationships with other commercial entities, including our competitors, for whom they may also be conducting clinical studies or other drug development activities that could harm our competitive position. If our CROs do not successfully carry out their contractual duties or obligations, fail to meet expected deadlines or if the quality or accuracy of the clinical data they obtain is compromised due to the failure to adhere to our clinical protocols or regulatory requirements, or for any other reasons, our clinical studies may be extended, delayed or terminated and we may not be able to obtain regulatory approval for, or successfully commercialize our product candidates.

Further, if our contract manufacturers are not in compliance with regulatory requirements at any stage, including post-marketing approval, we may be fined, forced to remove a product from the market and/or experience other adverse consequences, including delays, which could materially harm our business.

Risks Related to Owning Our Common Stock

If we are not able to comply with the applicable continued listing requirements or standards of the NASDAQ Capital Market, NASDAQ could delist our Common Stock.*

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Our common stock is currently listed on the NASDAQ Capital Market (“NASDAQ”). In order to maintain that listing, we must satisfy minimum financial and other continued listing requirements and standards, including those regarding director independence and independent committee requirements, minimum stockholders’ equity, minimum share price, and certain corporate governance requirements. There can be no assurances that we will be able to comply with the applicable listing standards.

On May 10, 2016, we received a written notification from NASDAQ indicating that we were not in compliance with NASDAQ Listing Rule 5550(a)(2), as the closing bid price for our Common Stock was below $1.00 per share for the last 30 consecutive business days.

Pursuant to NASDAQ Listing Rule 5810(c)(3)(A), we have been granted a 180 calendar day compliance period, or until November 7, 2016, to regain compliance with the minimum bid price requirement. During the compliance period, our shares of common stock will continue to be listed and traded on NASDAQ. To regain compliance, the closing bid price of our shares of common stock must meet or exceed $1.00 per share for at least 10 consecutive business days during the 180 calendar day compliance period.

On October 21, 2016, we effected a 1-for-10 reverse stock split of our common stock. Following the reverse stock split, the closing bid price of our shares of common stock has met or exceeded $1.00 per share for the 10 consecutive business days ending as of November 7, 2016. On November 8, 2016, we received a letter from NASDAQ confirming that we are in compliance with NASDAQ Listing Rule 5550(a)(2).

On June 2, 2016, we received a notice from NASDAQ stating that we were not in compliance with NASDAQ Listing Rule 5550(b)(2) because our market value of listed securities (“MVLS”) was below $35 million for the previous thirty (30) consecutive business days. In accordance with NASDAQ Marketplace Rule 5810(c)(3), we were granted a 180 calendar day compliance period, or until November 29, 2016, to regain compliance with the minimum MVLS requirement. Compliance can be achieved by meeting the $35 million MVLS requirement for a minimum of 10 consecutive business days during the 180 calendar day compliance period.

If we do not regain compliance within the allotted compliance period(s), including any extensions that may be granted by NASDAQ, NASDAQ will provide notice that our shares of Common Stock will be subject to delisting.

In the event that our Common Stock is delisted from NASDAQ and is not eligible for quotation or listing on another market or exchange, trading of our Common Stock could be conducted only in the over-the-counter market or on an electronic bulletin board established for unlisted securities such as the Pink Sheets or the OTC Bulletin Board. In such event, it could become more difficult to dispose of, or obtain accurate price quotations for, our Common Stock, and there would likely also be a reduction in our coverage by securities analysts and the news media, which could cause the price of our Common Stock to decline further. Also, it may be difficult for us to raise additional capital if we are not listed on a major exchange. In addition, following delisting, unless our shares of Common Stock were immediately thereafter trading on the OTC Bulletin Board or the OTCQB or OTCQX market places of the OTC Markets, we would no longer be able to sell shares to Aspire Capital under the Purchase Agreement.

We are vulnerable to volatile stock market conditions.

The market prices for securities of biopharmaceutical and biotechnology companies, including ours, have been highly volatile. The market has from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. In addition, future announcements, such as the results of testing and clinical trials, the status of our relationships with third-party collaborators, technological innovations or new therapeutic products, governmental regulation, developments in patent or other proprietary rights, litigation or public concern as to the safety of products developed by us or others and general market conditions concerning us, our competitors or other biopharmaceutical companies, may have a significant effect on the market price of our common stock. In the past, when the market price of a stock has been volatile, holders of that stock have been more likely to initiate securities class action litigation against the company that issued the stock. If any of our stockholders brought a lawsuit against us, we could incur substantial costs defending the lawsuit. Such a lawsuit could also divert the time and attention of our management.

We do not expect to pay dividends on our common stock in the foreseeable future.

Although our stockholders may in the future receive dividends if and when declared by our board of directors, we do not intend to declare dividends on our common stock in the foreseeable future. In addition, our ability to pay dividends is currently restricted by the terms of our Credit Facility. Therefore, you should not purchase our common stock if you need immediate or future income by way of dividends from your investment.

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We may issue additional shares of our capital stock that could dilute the value of your shares of common stock. *

We are authorized to issue 25,000,000 shares of our capital stock, consisting of 15,000,000 shares of our common stock and 10,000,000 shares of our preferred stock. We currently have an effective shelf registration statement on Form S-3 (No. 333-198066) filed with the SEC under which we may offer from time to time any combination of debt securities, common and preferred stock and warrants.

In light of our future capital needs, we may also issue additional shares of common stock at or below current market prices or issue convertible securities. These issuances would dilute the book value of existing stockholders common stock and could depress the value of our common stock.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Not applicable.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

Not applicable.

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ITEM 6.	EXHIBITS



EXHIBITS NO.		DESCRIPTION



2.1		Amendment to Stock Purchase Agreement, dated June 13, 2014, by and between Apricus Biosciences, Inc. and Samm Solutions, Inc. (doing business as BTS Research and formerly doing business as BioTox Sciences) (incorporated herein by reference to Exhibit 2.1 to the Company’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on August 11, 2014).

3.1		Amended and Restated Articles of Incorporation of Apricus Biosciences, Inc. (incorporated herein by reference to Exhibit 2.1 to the Company’s Registration Statement on Form 10-SB filed with the Securities and Exchange Commission on March 14, 1997).

3.2		Certificate of Amendment to Articles of Incorporation of Apricus Biosciences, Inc., dated June 22, 2000 (incorporated herein by reference to Exhibit 3.2 to the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 31, 2003).

3.3		Certificate of Amendment to Articles of Incorporation of Apricus Biosciences, Inc., dated June 14, 2005 (incorporated herein by reference to Exhibit 3.4 to the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 16, 2006).

3.4		Certificate of Amendment to Amended and Restated Articles of Incorporation of Apricus Biosciences, Inc., dated March 3, 2010 (incorporated herein by reference to Exhibit 3.6 to the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 31, 2010).

3.5		Certificate of Correction to Certificate of Amendment to Amended and Restated Articles of Incorporation of Apricus Biosciences, Inc., dated March 3, 2010 (incorporated herein by reference to Exhibit 3.7 to the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 31, 2010).

3.6		Certificate of Designation for Series D Junior-Participating Cumulative Preferred Stock (incorporated herein by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-A12GK filed with the Securities and Exchange Commission on March 24, 2011).

3.7		Certificate of Change filed with the Nevada Secretary of State (incorporated herein by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the Securities Exchange Commission on June 17, 2010).

3.8		Certificate of Amendment to Amended and Restated Articles of Incorporation of Apricus Biosciences, Inc., dated September 10, 2010 (incorporated herein by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on September 10, 2010).

3.9		Fourth Amended and Restated Bylaws, dated December 18, 2012 (incorporated herein by reference to Exhibit 3.9 to the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 18, 2013).

3.10		Certificate of Withdrawal of Series D Junior Participating Cumulative Preferred Stock, dated May 15, 2013 (incorporated herein by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 16, 2013).

3.11		Amendment to the Fourth Amended and Restated Bylaws of Apricus Biosciences, Inc., dated January 11, 2016 (incorporated herein by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on January 13, 2016).

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3.12		Second Amendment to the Fourth Amended and Restated Bylaws of Apricus Biosciences, Inc., dated March 3, 2016 (incorporated herein by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on March 7, 2016).

3.13		Certificate of Change filed with the Nevada Secretary of State (incorporated herein by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the Securities Exchange Commission on October 25, 2016).

4.1		Form of Warrant, dated September 17, 2010 (incorporated herein by reference to Exhibit 4.6 of Amendment No. 2 to the Company’s Registration Statement on Form S-1 (File No. 333-169132) filed with the Securities and Exchange Commission on September 28, 2010).

4.2		Form of Warrant Certificate (incorporated herein by reference to Exhibit 4.7 of Amendment No. 2 to the Company’s Registration Statement on Form S-1 (File No. 333-169132) filed with the Securities and Exchange Commission on September 28, 2010).

4.3		Form of Common Stock Certificate (incorporated herein by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on March 24, 2011).

4.4		Form of Warrant (incorporated herein by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on February 13, 2012).

4.5		Form of Warrant (incorporated herein by reference to Exhibit 1.1 to the Company’s Current Report on From 8-K filed with the Securities and Exchange Commission on May 24, 2013).

4.6		Form of Warrant issued to the Holders under the Amendment Agreement, dated as of October 17, 2014, by and among Apricus Biosciences, Inc., The Tail Wind Fund Ltd., Solomon Strategic Holdings, Inc., and Tail Wind Advisory & Management Ltd. (incorporated herein by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on October 20, 2014).

4.7		Form of Warrant issued to the lenders under the Loan and Security Agreement, dated as of October 17, 2014, by and among Apricus Biosciences, Inc., NexMed (U.S.A.), Inc., NexMed Holdings, Inc. and Apricus Pharmaceuticals USA, Inc., as borrowers, Oxford Finance LLC, as collateral agent, and the lenders party thereto from time to time including Oxford Finance LLC and Silicon Valley Bank. (incorporated herein by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on October 20, 2014).

4.8		Form of Warrant (incorporated herein by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on February 12, 2015).

4.9		Form of Warrant issued to Sarissa Capital Domestic Fund LP and Sarissa Capital Offshore Master Fund LP (incorporated herein by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on January 13, 2016).

4.10		Form of Warrant issued to other purchasers (incorporated herein by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on January 13, 2016).

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4.11		Form of Warrant Amendment (incorporated herein by reference to Exhibit 4.3 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on January 13, 2016).

4.12		Form of Warrant (incorporated herein by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on September 28, 2016).

10.1		Common Stock Purchase Agreement, by and between the Company and Aspire Capital Fund, LLC, dated as of July 5, 2016 (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 6, 2016).

10.2		Registration Rights Agreement, by and between the Company and Aspire Capital Fund, LLC, dated as of July 5, 2016 (incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 6, 2016).

10.3		Form of Securities Purchase Agreement (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on September 28, 2016).

31.1		Chief Executive Officer’s Certificate, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Chief Accounting Officer’s Certificate, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Chief Executive Officer’s Certificate, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (1)

32.2		Chief Accounting Officer’s Certificate, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (1)

101.INS		XBRL Instance Document. (1)

101.SCH		XBRL Taxonomy Extension Schema. (1)

101.CAL		XBRL Taxonomy Extension Calculation Linkbase. (1)

101.DEF		XBRL Taxonomy Extension Definition Linkbase. (1)

101.LAB		XBRL Taxonomy Extension Label Linkbase. (1)

101.PRE		XBRL Taxonomy Extension Presentation Linkbase. (1)


(1)	Furnished, not filed.

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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.



	Apricus Biosciences, Inc.

Date: November 8, 2016	/s/ CATHERINE BOVENIZER
	Catherine Bovenizer
	Vice President, Chief Accounting Officer

SEELOS THERAPEUTICS, INC. - FORM 10-Q - November 8, 2016

Attached files

SEELOS THERAPEUTICS, INC. Reports