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 March 31, 2016
OR
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 May 3, 2016 , 61,808,619 shares of the common stock, par value $.001, of the registrant were outstanding. 
 

Table of Contents     

Table of Contents  
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

3
Table of Contents     

PART I.


ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)

Apricus Biosciences, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(In thousands, except share and per share data)
 
March 31,
2016
 
December 31,
2015
 
(Unaudited)
 
 
Assets
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
6,907

 
$
3,887

Accounts receivable
688

 
519

Restricted cash
180

 
280

Inventories
405

 
469

Prepaid expenses and other current assets
939

 
1,062

Total current assets
9,119

 
6,217

Property and equipment, net
1,235

 
1,290

Other long term assets
78

 
274

Total assets
$
10,432

 
$
7,781

 
 
 
 
Liabilities and stockholders’ (deficit) equity
 
 
 
Current liabilities
 
 
 
Notes payable, net
$
8,746

 
$
9,401

Accounts payable
1,096

 
1,580

Accrued expenses
2,902

 
3,343

Accrued compensation
405

 
1,223

Deferred revenue
99

 
137

Total current liabilities
13,248

 
15,684

Warrant liability
3,848

 
1,841

Other long term liabilities
179

 
200

Total liabilities
17,275

 
17,725

 
 
 
 
Commitments and contingencies

 

Stockholders’ (deficit) equity
 
 
 
Preferred stock, $.001 par value, 10,000,000 shares authorized, no shares issued or outstanding as of March 31, 2016 and December 31, 2015, respectively
—

 
—

Common stock, $.001 par value, 150,000,000 shares authorized, 61,778,121 and 50,414,481 issued and outstanding as of March 31, 2016 and December 31, 2015, respectively
62

 
50

Additional paid-in-capital
304,475

 
298,881

Accumulated deficit
(311,380
)
 
(308,875
)
Total stockholders’ (deficit) equity
(6,843
)
 
(9,944
)
Total liabilities and stockholders’ (deficit) equity
$
10,432

 
$
7,781


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

4
Table of Contents     

Apricus Biosciences, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations (Unaudited)
(In thousands, except per share data)
 
Three Months Ended 
 March 31,
 
2016
 
2015
License fee revenue
$
—

 
$
350

Royalty revenue
367

 
88

Product sales
259

 
37

Total revenue
626

 
475

Cost of goods sold
233

 
233

Gross profit
393

 
242

Operating expense
 
 
 
Research and development
2,806

 
3,268

General and administrative
2,404

 
3,096

Total operating expense
5,210

 
6,364

Loss before other income (expense)
(4,817
)
 
(6,122
)
Other income (expense)
 
 
 
Interest expense, net
(279
)
 
(158
)
Change in fair value of warrant liability
2,595

 
(136
)
Other income, net
—

 
4

Total other income (expense)
2,316

 
(290
)
Loss before income tax expense
(2,501
)
 
(6,412
)
Income tax expense
(4
)
 
—

Net loss
$
(2,505
)
 
$
(6,412
)
 
 
 
 
Loss per share
 
 
 
Basic
$
(0.05
)
 
$
(0.13
)
Diluted
$
(0.09
)
 
$
(0.13
)
Weighted average shares outstanding
 
 
 
Basic
55,050

 
47,633

Diluted
56,021

 
47,633

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

5
Table of Contents     

Apricus Biosciences, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
 
For the Three Months Ended 
 March 31,
 
2016
 
2015
Cash flows from operating activities:
 
 
 
Net loss
$
(2,505
)
 
$
(6,412
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Depreciation and amortization
73

 
74

Non-cash interest expense
100

 
58

Stock-based compensation expense
355

 
289

Warrant liability revaluation
(2,595
)
 
136

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(169
)
 
165

Inventories
64

 
58

Prepaid expenses and other current assets
123

 
(223
)
Other assets
23

 
(3
)
Accounts payable
(374
)
 
(68
)
Accrued expenses
(589
)
 
461

Accrued compensation
(569
)
 
(562
)
Deferred revenue
(39
)
 
(45
)
Other liabilities
(20
)
 
(55
)
Net cash used in operating activities
(6,122
)
 
(6,127
)
Cash flows from investing activities:
 
 
 
Purchase of fixed assets
(6
)
 
(165
)
Net cash used in investing activities
(6
)
 
(165
)
Cash flows from financing activities:
 
 
 
Issuance of common stock and warrants, net of offering costs
9,804

 
10,957

Proceeds from the exercise of stock options
—

 
83

Release of restricted cash
100

 
10

Repayment of capital lease obligations
(1
)
 
(2
)
Repayment of principal on notes payable
(755
)
 
—

Net cash provided by financing activities
9,148

 
11,048

Net increase in cash and cash equivalents
3,020

 
4,756

Cash and cash equivalents, beginning of period
3,887

 
11,400

Cash and cash equivalents, end of period
$
6,907

 
$
16,156

 
 
 
 
Non-cash investing and financing activities:
 
 
 
Issuance of restricted stock
$
249

 
$
—

Purchase of fixed assets not yet paid
$
(12
)
 
$
—

Transaction costs for 2016 financing activities
$
(137
)
 
$
—

Capital lease payable
$
(1
)
 
$
—

Liability incurred in connection with February 2015 financing
$
—

 
$
88

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

6
Table of Contents     

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
 
50,414

 
$
50

 
$
298,881

 
$
(308,875
)
 
$
(9,944
)
Stock-based compensation expense
 
—

 
—

 
355

 
—

 
355

Issuance of restricted stock
 
—

 
—

 
249

 
—

 
249

Issuance of common stock and warrants, net of offering costs
 
11,364

 
12

 
4,990

 
—

 
5,002

Net loss
 
—

 
—

 
—

 
(2,505
)
 
(2,505
)
Balance as of March 31, 2016
 
61,778

 
$
62

 
$
304,475

 
$
(311,380
)
 
$
(6,843
)

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.

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 $311.4 million as of March 31, 2016 and reported a net loss of approximately $2.5 million and negative cash flows from operations for the three months ended March 31, 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 financings and up-front payments received from commercial partners for the Company’s products under development. As of March 31, 2016 , the Company had cash and cash equivalents of approximately $6.9 million .
In January 2016, the Company entered into subscription agreements with certain purchasers pursuant to which it agreed to sell an aggregate of 11,363,640 shares of its common stock and warrants to purchase up to an additional 5,681,818 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 $0.88 and included one half of a warrant to purchase a share of common stock. The warrants have an exercise price of $0.88 per share, become 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 2,528,411 shares and warrants to purchase up to 1,264,204 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. Prior to the Company’s January 2016 financing, its ability to issue equity under the committed equity financing facility with Aspire Capital Fund, LLC (“Aspire Capital”) was subject to the written consent from

7

one of the purchasers in the February 2015 financing (see note 8 below for a description of this financing). Pursuant to the terms of the Company’s January 2016 financing, the Company is no longer required to obtain such consent.
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 $8.8 million as of March 31, 2016 .
The Company currently has an effective shelf registration statement on Form S-3 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. The Company has approximately $79.0 million available under the S-3 shelf registration statement (No. 333-198066) and of that, $18.2 million is currently reserved for its committed equity financing facility with Aspire Capital. This equity financing facility may be terminated in the Company’s sole discretion by giving written notice. 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. In addition, under current SEC regulations, at any time during which the aggregate market value of the Company’s common stock held by non-affiliates, or 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 Purchase Agreement, is limited to an aggregate of one-third of our public float. As of May 3, 2016 the Company’s public float was 47.1 million shares, the value of which was approximately $63.6 million based upon the closing price of its common stock of $1.35 on March 24, 2016 . SEC regulations permit the Company to use the highest closing sales price of its common stock (or the average of the last bid and last ask prices of its common stock) on any day within 60 days of sales under its shelf registration statement. The value of one-third of the Company’s public float calculated on the same basis was $21.2 million .
The Company’s stock price must be $1.00 per share or above in order for the Company to access the remaining reserve under its committed equity financing facility with Aspire Capital. Of the maximum number of shares, approximately 5.0 million shares of common stock remain available for sale to Aspire Capital. As of March 31, 2016 , the Company did not have access to any of the reserve due to a stock price of $0.58 per share. Assuming a stock price of $1.00 per share or greater, the agreement specifies a maximum number of shares of common stock to be sold. The Company may sell additional shares under the agreement above the maximum if the total weighted average of all shares issued to date is $1.97 per share or greater. Shares issued to date have a total weighted average sales price of $1.46 per share.
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:

•
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;
•
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.
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

8

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.
Warrant Liabilities

The Company’s outstanding common stock warrants issued in connection with its February 2015 and January 2016 financings are classified as liabilities in the accompanying condensed consolidated balance sheets as they contain provisions that require the Company to maintain active registration of the shares underlying such warrants, which is considered outside of the Company’s control. 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 March 31, 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 March 31, 2016
 
$
—

 
$
—

 
$
3,848

 
$
3,848

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 for the three months ended March 31, 2016 :
Risk-free interest rate
 
1.30
%
Volatility
 
95.26%-99.32%

Dividend yield
 
—
%
Expected term
 
6.79-6.93

Weighted average fair value
 
$
0.44


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

9

 
 
Warrant liability
Balance as of December 31, 2015
 
$
1,841

Issuance of warrants in connection with January 2016 financing
 
4,807

Change in fair value measurement of warrant liability
 
(3,476
)
Repricing of February 2015 warrants in connection with January 2016 financing
 
676

Balance as of March 31, 2016
 
$
3,848


Of the inputs used to value the outstanding common stock warrant liabilities as of March 31, 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 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.

10

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 March 31, 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 months ended March 31, 2016 , the Company recognized $ 0.3 million 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 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 as well as finders’ fees and royalty payments to Midas Pharma GmbH, who assists the Company in locating commercialization partners for Vitaros ® .
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 and common equivalent shares outstanding during the same period. Common equivalent shares may include 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 table sets forth the computation of basic and diluted net loss per share for the three months ended March 31, 2016 and 2015 (in thousands, except per share data):

 
 
2016
 
2015
Basic net loss per share
 
 
 
 
Net loss allocated to common stockholders
 
$
(2,505
)
 
$
(6,412
)
Weighted average common shares outstanding- basic
 
55,050

 
47,633

Net loss per share- basic
 
$
(0.05
)
 
$
(0.13
)
Diluted net loss per share
 
 
 
 
Net loss allocated to common stockholders- basic
 
$
(2,505
)
 
$
(6,412
)
Change in fair value of warrants
 
2,595

 
—

Net loss allocated to common stockholders
 
$
(5,100
)
 
$
(6,412
)
Weighted average common shares outstanding- basic
 
55,050

 
47,633

Dilutive securities
 
971

 
—

Weighted average common shares outstanding- diluted
 
56,021

 
47,633

Net loss per share- diluted
 
$
(0.09
)
 
$
(0.13
)


11

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 they are anti-dilutive:
 
 
Three Months Ended March 31,
 
 
2016
 
2015
Outstanding stock options
 
5,528,168

 
4,592,562

Outstanding warrants
 
13,547,825

 
9,881,659

Restricted stock
 
224,677

 
—

Stock-Based Compensation
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:
 
 
Three Months Ended 
 March 31,
 
 
2016
 
2015
Risk-free interest rate
 
1.57%-1.78%

 
1.39% - 1.67%

Volatility
 
72.35%-80.02%

 
81.13%-101.54%

Dividend yield
 
—
%
 
—
%
Expected term
 
5.25-6.08 years

 
5.25- 6.08

Forfeiture rate
 
11.33
%
 
11.54
%
Weighted average fair value
 
$
0.76

 
$
1.05

A summary of the Company’s stock option activity under all stock option plans during the three months ended March 31, 2016 is as follows (in thousands):
 
 
Number of
Shares
 
Weighted
Average
Exercise
Price
Outstanding as of December 31, 2015
 
4,053,605

 
$
1.95

Granted
 
1,502,000

 
1.11

Exercised
 
—

 
—

Cancelled
 
(27,437
)
 
2.89

Outstanding as of March 31, 2016
 
5,528,168

 
$
1.71

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 
 March 31,
 
 
2016
 
2015
Research and development
 
$
64

 
$
30

General and administrative
 
291

 
259

Total
 
$
355

 
$
289

Segment Information
The Company operates under one segment which develops pharmaceutical products.

12

Recent Accounting Pronouncements
In April 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-10, Revenue from Contracts with Customers , which further clarified aspects of Topic 606: identifying performance obligations and the licensing and implementation guidance. In March 2016, the FASB issued ASU No. 2016-08, the amendment of which 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 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. This ASU was effective January 1, 2016 and 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 was reclassified from other expense to interest expense for the three months ended March 31, 2015.
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. The Company is currently in the process of evaluating whether the adoption of this update will have a material effect on its condensed consolidated financial statements and related 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):

13

 
 
Three Months Ended March 31,
 
 
2016 (1)
 
2015
Ferring International Center S.A. ("Ferring")
 
$
—

 
$
—

Hexal AG, an affiliate within the Sandoz Division of the Novartis Group of Companies ("Sandoz")
 
11

 
410

Takeda Pharmaceuticals International GmbH (“Takeda”)
 
39

 
65

Laboratories Majorelle ("Majorelle")
 
174

 
—

Recordati Ireland Ltd. ("Recordati")
 
63

 
—

Bracco SpA (“Bracco”)
 
84

 
—

 
 
$
371

 
$
475

(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.
The following table summarizes the potential future milestones the Company was eligible for by commercialization partner (in thousands) as of March 31, 2016 :
Commercialization Partner
 
Regulatory Milestones (1)
 
Commercial Launch Milestones (1)
 
Sales Milestones (1)
 
Total
Sandoz
 
$
326

 
$
1,500

 
$
47,229

 
$
49,055

Recordati
 
—

 
1,131

 
39,027

 
40,158

Takeda (2)
 
452

 
—

 
37,896

 
38,348

Allergan
 
—

 
25,000

 
—

 
25,000

Majorelle
 
2,000

 
—

 
17,534

 
19,534

Ferring
 
2,000

 
—

 
14,000

 
16,000

Abbott Laboratories Limited, now a subsidiary of Mylan N.V. (“Mylan”)
 
225

 
—

 
13,000

 
13,225

Bracco
 
—

 
—

 
5,091

 
5,091

Neopharm Scientific Limited (“Neopharm”)
 
250

 
—

 
4,000

 
4,250

Elis Pharmaceuticals Limited (“Elis”)
 
100

 
—

 
1,900

 
2,000

 
 
$
5,353

 
$
27,631

 
$
179,677

 
$
212,661

(1) Certain contractual amounts have been converted to USD based on the applicable exchange rate as of March 31, 2016 .
(2) Effective April 2016, the Company terminated its license agreement with Takeda.
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 erectile dysfunction (“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. The product has been approved for the treatment of ED in the United Kingdom.
In addition to the milestones outlined in the table above, the Company is eligible to receive high single-digit royalties on Ferring’s sales of the product in Latin America and low double digit royalties on its sales of the product in the United Kingdom.
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.

14

In addition to the milestones outlined in the table above, the Company is eligible to receive tiered low double-digit royalties on Majorelle’s sales of the product.
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 above, the Company is eligible to receive tiered low double-digit royalties on Bracco’s sales of the product.
Sandoz
The Company entered into three license agreements with Sandoz, in February 2012, December 2013 and February 2015. The agreements are collectively referred to herein as the “Sandoz Agreements.” The first agreement granted Sandoz the exclusive right to commercialize Vitaros ® for the treatment of ED in Germany. The second agreement extended the exclusive license grant to the following countries: Austria, Belgium, Denmark, Finland, Iceland, Luxemburg, the Netherlands, Norway, Sweden and Switzerland (the “Expanded Territory”). The third agreement further extended the exclusive license grant to the following additional countries: Malaysia, Indonesia, the Philippines, Thailand, Taiwan, Vietnam, Hong Kong and Singapore (the “Expanded APAC Territory”). In June 2014, the Company also entered into a Manufacturing and Supply Agreement with Sandoz whereby the Company or its contract manufacturer will manufacture Vitaros ® and supply it to Sandoz on a cost plus basis.
The product has been approved for the treatment of ED in Austria, Belgium, Denmark, Finland, Germany, Iceland, Luxemburg, the Netherlands, Norway, Sweden and Switzerland. To date, Sandoz has launched the product as Vitaros ® in Germany, Luxemburg and Sweden and as Vytaros ® in Belgium.
In addition to the milestones outlined in the table above, the Company is eligible to receive tiered low double-digit royalties on Sandoz’s sales of the product.
Takeda
In April 2016, the Company and Takeda mutually agreed to terminate the license agreement, entered into in September 2012, which had granted Takeda the exclusive right to market Vitaros ® for the treatment of ED in the U.K, as well as any ancillary agreements related to the manufacture or sale of the product.
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, Poland, Portugal, Romania and Slovakia. Recordati launched the product as Virirec ™ in Spain in May 2015.
In addition to the milestones outlined in the table above, the Company is eligible to receive tiered low double-digit royalties 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 above, Company is eligible to receive tiered low single digit to low double-digit royalties 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. In addition to the milestones above, the Company is eligible to receive tiered low double-digit royalties 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 above, the Company is eligible to receive tiered low double-digit royalties based on Neopharm’s sales of the product.

15

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 low 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

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.
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 low double-digit royalty 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 low double-digit royalty on its net sales of the product.
4. FORENDO IN-LICENSING AGREEMENT
In October 2014, the Company entered into a license agreement and stock issuance agreement with Forendo Pharma Ltd. (“Forendo”), under which the Company was granted the exclusive right in the United States to develop and commercialize fispemifene, a tissue-specific selective estrogen receptor modulator (“SERM”) designed to treat symptomatic secondary hypogonadism, as well as chronic prostatitis and lower urinary tract symptoms in men.
In exchange for the license, the Company issued to Forendo approximately 3.6 million shares of common stock with a value of $5.9 million based on the Company’s closing stock price on the date of the agreement and made an upfront cash payment of $5.0 million . The Company made an additional payment of $2.5 million to Forendo in April 2015 pursuant to the terms of the agreement. This payment was previously considered deferred consideration and was recorded as a liability as of December 31, 2014 because the agreement was not terminable prior to the payment. The liability was released upon payment in April 2015.
The Company may be obligated to pay Forendo up to an additional $42.5 million based on completion of certain regulatory milestones, up to $260.0 million in sales milestones, plus tiered low double-digit royalties based on its sales of the product in the United States.
The Company recognized research and development expense of $13.6 million upon the completion of the transaction in December 2014. The $13.6 million is the sum of the following: $5.0 million upfront payment made in October 2014; $5.9 million in common stock issued to Forendo; the $2.5 million cash consideration paid in April 2015; and transaction costs of $0.2 million .
6. OTHER FINANCIAL INFORMATION
Inventory
Inventory is comprised of the following (in thousands):
 
March 31,
2016
 
December 31,
2015
Raw materials
$
86

 
$
145

Work in process
319

 
324

 
$
405

 
$
469

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

16

 
March 31,
2016
 
December 31,
2015
Outside research and development services
$
1,420

 
$
2,228

Professional fees
1,086

 
466

Deferred compensation
178

 
178

Environmental remediation
3

 
6

Other
215

 
465

 
$
2,902

 
$
3,343

Other Long Term Liabilities
Other long term liabilities are comprised of the following (in thousands):
 
March 31,
2016
 
December 31,
2015
Deferred compensation
$
89

 
$
135

Deferred rent
90

 
65

 
$
179

 
$
200

7. DEBT
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 proceeds from these loans were designated to pay off existing indebtedness and for working capital and general business purposes. 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 March 31, 2016 , 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. 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 193,798 shares of common stock at an exercise price of $1.29 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 152,440 shares of common stock at an exercise price of $1.64 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 initial fair value of the warrants 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.

17

The Company’s notes payable balance consisted of the following (in thousands), all of which is classified as short-term:
 
 
March 31,
2016
 
December 31,
2015
Notes payable, principal
 
$
8,787

 
$
9,505

Add: accretion of final payment fee
 
190

 
171

Less: unamortized debt discount
 
(231
)
 
(275
)
 
 
$
8,746

 
$
9,401

The debt issuance costs, accretion of the final payment and amortization 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 $0.3 million and $0.2 million during the three months ended March 31, 2016 and 2015, respectively.
8. STOCKHOLDERS' EQUITY
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 11,363,640 shares of its common stock and warrants to purchase up to an additional 5,681,818 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 $0.88 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 2,528,411 shares and warrants to purchase up to 1,264,204 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 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 5,681,818 total shares of the Company’s common stock at an exercise price of $0.88 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 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 become 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 6,043,955 shares of its common stock and issued warrants to purchase up to an additional 3,021,977 shares of its common stock.  Each share of common stock was sold at $1.82 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 3,021,977 shares of its common stock at an exercise price of $1.82 per share. The initial $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.
Pursuant to the January 2016 financing, the exercise price of the February Warrants was reduced from $1.82 per share to $0.88 per share, become exercisable in July 2016 and have an expiration date of January 2023. The modification to the February 2015

18

warrants resulted in a charge in the amount of approximately $0.7 million . As of March 31, 2016 , the total fair value of the January 2016 Warrants and the February 2015 Warrants was $3.8 million .
A summary of the warrant activity during the three months ended March 31, 2016 is as follows:
 
Common Shares
Issuable upon
Exercise
 
Weighted
Average
Exercise
Price
 
Weighted
Average
Remaining
Contractual
Life (in years)
Outstanding at December 31, 2015
8,837,351

 
$
3.30

 
3.6

Issued
5,681,818

 
$
0.88

 
6.9

Exercised
—

 
$
—

 
—

Cancelled
—

 
$
—

 
—

Outstanding as of March 31, 2016
14,519,169

 
$
2.16

 
4.9

Exercisable as of March 31, 2016
5,815,374

 
$
4.07

 
2.0

The following table shows the number of outstanding warrants by exercise price and date of expiration as of March 31, 2016 :
Shares Issuable Upon Exercise
 
Exercise Price
 
Expiration Date
2,469,136

 
$
5.25

 
February 2017
3,000,000

 
$
3.40

 
May 2018
3,021,977

 
$
0.88

 
January 2023
1,264,204

 
$
0.88

 
January 2023
4,417,614

 
$
0.88

 
March 2023
193,798

 
$
1.29

 
October 2024
152,440

 
$
1.64

 
July 2025
14,519,169

 
 
 
 
11. SUBSEQUENT EVENTS
On April 25, 2016, the Company terminated the exclusive license agreement with Takeda, previously entered into in September 2012, whereby the Company granted Takeda exclusive rights to market NexMed’s Vitaros ®  drug for the treatment of ED in the UK. In addition, the Company amended its distribution agreement with Ferring to extend Ferring’s exclusive rights to market Vitaros ®  for the treatment of ED in Latin America and certain Caribbean countries to now include the United Kingdom (collectively the “Territory”).

Under the terms of the agreement, the Company will receive an additional upfront payment of $0.3 million from Ferring for the UK rights. The Company continues to be eligible to receive up to $16.0 million in regulatory and sales milestone payments, plus high single-digit to low double-digit royalties based on Ferring’s net sales of the product in the Territory. Ferring has agreed to obtain all necessary regulatory marketing approvals.

In addition, on April 25, 2016, the Company granted 1,000,000 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 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 named above are also subject to accelerated vesting pursuant to the terms of their existing employment agreements.


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-

19
Table of Contents     

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.

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 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 Laboratoires Majorelle (“Majorelle”), Bracco S.p.A. (“Bracco”), Hexal AG (“Sandoz”), Ferring International Center S.A. (“Ferring”) and Recordati Ireland Ltd. (“Recordati”). The product is currently approved for marketing in Austria, Belgium, Czech Republic, Denmark, Finland, France, Germany, Iceland, Ireland,

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Italy, 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 and the product is now launched in Belgium, France, Germany, Italy, Luxembourg, Spain, Sweden and the UK by our commercialization partners. In addition, in October 2015, we announced that Ferring will be our Vitaros ® distributor in certain Latin American countries. 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. We expect to re-submit a revised NDA with the FDA in the second half of 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.
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.
Fispemifene
Fispemifene is a once-daily, orally administered, tissue-specific selective estrogen receptor modulator designed to potentially treat a variety of men’s health conditions, including secondary hypogonadism, lower urinary tract symptoms and chronic prostatitis in men.
We in-licensed the United States development and commercialization rights to fispemifene from Forendo Pharma Ltd. in October 2014. We conducted a randomized double-blind Phase 2b clinical trial in symptomatic secondary hypogonadism and we released top-line data during the first quarter of 2016 indicating that the study did not achieve statistical significance for either the erectile function primary endpoint or low libido secondary endpoint. Achievement of one or both of these clinical endpoints was essential in order to meet U.S. FDA regulatory requirements. As a result, we will discontinue all development of fispemifene in secondary hypogonadism.
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:

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Partner
Licensed Territory
Approved Countries (*Launched)
Abbott Laboratories Limited, now a subsidiary of Mylan N.V. (“Mylan”)
Canada
Canada
Ferring
UK and certain Latin American countries
UK*
Sandoz
Germany, Austria, Belgium, Luxemburg, the Netherlands, Denmark, Finland, Iceland, Norway, Sweden and Switzerland, Malaysia, Indonesia, the Philippines, Thailand, Taiwan, Vietnam, Hong Kong and Singapore
Germany*, Belgium*, Sweden*, Luxembourg*, Denmark, Finland, Iceland, the Netherlands, Norway, Switzerland
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
Spain*, Ireland, Czech Republic, Poland, Portugal, Romania, Slovakia
Neopharm Scientific Limited (“Neopharm”)
Israel and the Palestinian National Authority
 
Elis Pharmaceuticals Limited (“Elis”)
Gulf States and certain Middle Eastern countries
 
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 and Sweden and 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 we expect to re-submit the NDA for Vitaros ® in the United States in the second half of 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.
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.


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Liquidity, Capital Resources and Financial Condition
We have experienced net losses and negative cash flows from operations each year since our inception. Through March 31, 2016 , we had an accumulated deficit of approximately $311.4 million and recorded a net loss of approximately $2.5 million and negative cash flows from operations for the three months ended March 31, 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 March 31, 2016 , net open purchase orders totaled approximately $6.5 million .
In January 2016, we entered into subscription agreements with certain purchasers pursuant to which we agreed to sell an aggregate of 11,363,640 shares of our common stock and warrants to purchase up to an additional 5,681,818 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 $0.88 and included one half of a warrant to purchase a share of common stock. The warrants have an exercise price of $0.88 per share, become 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 2,528,411 shares and warrants to purchase up to 1,264,204 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. Prior to our January 2016 financing, our ability to issue equity under the committed equity financing facility with Aspire Capital Fund, LLC (“Aspire Capital”) was subject to the written consent from one of the purchasers in our February 2015 financing. Pursuant to the terms of our January 2016 financing, we are no longer required to obtain such consent.
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 $8.8 million as of March 31, 2016 (see note 7 to our consolidated financial statements for further details).
As of March 31, 2016 , we had cash and cash equivalents of approximately $6.9 million . During the first quarter of 2016, we raised $10.0 million from equity events. 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 filed with the SEC under which we may offer from time to time any combination of debt securities, common and preferred stock and warrants. We have approximately $79.0 million available under the S-3 shelf registration statement (No. 333-198066) and of that, $18.2 million is currently reserved for our committed equity financing facility with Aspire Capital. This equity financing facility may be terminated in our sole discretion by giving written notice. The rules and regulations of the SEC or any other regulatory agencies may restrict our ability to conduct certain types of financing activities, or may affect the timing of and amounts we can raise by undertaking such activities. In addition, 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 committed equity financing facility with Aspire Capital, is limited to an aggregate of one-third of our public float. As of May 3, 2016 our public float was 47.1 million shares, the value of which was approximately $63.6 million based upon the closing price of our common stock of $1.35 on March 24, 2016 . 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 our shelf registration statement. The value of one-third of our public float calculated on the same basis was $21.2 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. Assuming a stock price of $1.00 per share or greater, the agreement specifies a maximum number of shares of common stock to be sold, of which approximately 5.0 million shares is currently available. We may sell additional shares under the agreement above the maximum if the total weighted average of all shares issued to date is $1.97 per share or greater. Shares issued to date have a total weighted average sales price of $1.46 per share. As of May 3, 2016 , none was available under the committed equity financing facility since our stock price was below $1.00.
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:

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•
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;
•
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;
•
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  three months ended March 31, 2016 .
Results of Operations
Revenues and gross profit were as follows (in thousands, except percentages):
 
 
Three Months Ended 
 March 31,
 
2016 vs 2015
 
 
2016
 
2015
 
$  Change
 
% Change
License fee revenue
 
$
—

 
$
350

 
$
(350
)
 
(100
)%
Royalty revenue
 
367

 
88

 
279

 
317
 %
Product sales
 
259

 
37

 
222

 
600
 %
Total revenue
 
626

 
475

 
151


32
 %
Cost of goods sold
 
233

 
233

 
—

 
—
 %
Gross profit
 
$
393

 
$
242

 
$
151

 
62
 %
Revenue
License Fee Revenue
The $0.4 million decrease in license fee revenue during the three months ended March 31, 2016 , was due to the recognition in 2015 of $0.4 million due to the expansion of our license agreement with Sandoz to commercialize Vitaros ®  in certain Asian and Pacific countries.

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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 months ended March 31, 2016 of $0.4 million , was related to sales of licensed Vitaros ® product sold by Takeda, Sandoz, Recordati, Majorelle and Bracco in their respective territories. Royalty revenue during the three months ended March 31, 2015 of $0.09 million , was related to sales of licensed Vitaros ® product sold by Takeda and Sandoz 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 revenues increased by $0.2 million for the three months ended March 31, 2016 as compared to the same period in the prior year. Historically, sales of component inventory to the manufacturing partners was 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 three months ended March 31, 2016 , we recognized $ 0.3 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 and finders’ fees and royalty payments to Midas Pharma GmbH, who assists us in locating commercialization partners for Vitaros ® . Cost of goods sold for the three months ended March 31, 2016 was comparable to the same period of the prior year.
Since the majority of our commercialization partners are now working directly with our contract manufacturers, 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.
Operating Expense
Operating expense was as follows (in thousands, except percentages):
 
 
Three Months Ended 
 March 31,
 
2016 vs 2015
 
 
2016
 
2015
 
$  Change
 
% Change
Operating expense
 
 
 
 
 
 
 
 
Research and development
 
$
2,806

 
$
3,268

 
$
(462
)
 
(14
)%
General and administrative
 
2,404

 
3,096

 
(692
)
 
(22
)%
Total operating expense
 
5,210

 
6,364

 
(1,154
)
 
(18
)%
Loss from operations
 
$
(4,817
)
 
$
(6,122
)
 
$
1,305

 
(21
)%
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 $0.5 million decrease in research and development expense during the three months ended March 31, 2016 , as compared to the same period in the prior year, resulted primarily from decreases in outside services related to the development of Vitaros ® and RayVa ™ offset by an increase in outside services related to the development of fispemifene. We expect to continue to incur additional expenses in 2016 primarily related to resubmission of an NDA for Vitaros ® in the United States.
During the second quarter of 2016, we announced a cost-reduction plan that includes an approximate 30% reduction in our operating expenses and workforce to better align our workforce with the needs of our business following the recent announcement of the discontinuation of development of fispemifene in secondary hypogonadism. We expect to complete the reduction in force and to substantially complete payments of employee severance and benefits by the end of the third quarter of 2016.

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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 $0.7 million during the three months ended March 31, 2016 as compared to the same period of the prior year. This decrease was primarily due to lower accounting and legal expenses as well as a decrease in payroll-related expenses.
Other Income and Expense
Other income and expense were as follows (in thousands, except percentages):
 
 
Three Months Ended 
 March 31,
 
2016 vs 2015
 
 
2016
 
2015
 
$  Change
 
% Change
Other income (expense)
 
 
 
 
 
 
 
 
Interest expense, net
 
$
(279
)
 
$
(158
)
 
$
(121
)
 
77
 %
Change in fair value of warrant liability
 
2,595

 
(136
)
 
2,731

 
(2,008
)%
Other income, net
 
—

 
4

 
(4
)
 
(100
)%
Total other income (expense)
 
$
2,316

 
$
(290
)
 
$
2,606

 
(899
)%
Interest Expense, Net
Interest expense increased $0.1 million during the three months ended March 31, 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 6 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  3,021,977  shares and 5,681,818 shares, respectively, of its common stock at an exercise price of  $1.82 and $0.88  per share, respectively. Pursuant to the January 2016 financing, the February 2015 Warrants were repriced from $1.82 to $0.88 per share.

The initial fair value of the February 2015 Warrants and January 2016 Warrants of $5.1 million  and $4.8 million , respectively, was 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 8 to our consolidated financial statements for further details).

Cash Flow Summary
The following table summarizes selected items in our condensed consolidated statements of cash flows (in thousands):
 
 
Three Months Ended 
 March 31,
 
 
2016
 
2015
Net cash used in operating activities
 
$
(6,122
)
 
$
(6,127
)
Net cash used in investing activities
 
(6
)
 
(165
)
Net cash provided by financing activities
 
9,148

 
11,048

Net increase in cash and cash equivalents
 
$
3,020

 
$
4,756

Operating Activities
Cash used in operating activities of $6.1 million during the first quarter of 2016 was primarily due to a net loss of $2.5 million net of adjustments to net loss for non-cash items such as the warrant liability revaluation of $2.6 million and stock based compensation expense of $0.4 million . Changes in operating assets and liabilities also contributed to the cash used in operating activities, such as a decrease to accrued expenses and accrued compensation primarily due to the decrease in accrued outside R&D services.
Investing Activities
Cash used in investing activities decreased by $0.2 million during the three months ended March 31, 2016 as compared to the same period in the prior year due to lower expenditures for the purchase of fixed assets.
Financing Activities

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Cash provided by financing activities of $9.1 million during the three months ended March 31, 2016 was primarily attributable to the $9.8 million in net proceeds that we received from the issuance of common stock and warrants in our January 2016 financing. This was offset by the repayment of $0.8 million on our credit facility.
Off-Balance Sheet Arrangements
As of March 31, 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 March 31, 2016 . Based on this evaluation, our CEO and our CAO concluded that our disclosure controls and procedures were effective as of March 31, 2016 .
Management’s Report on Internal Control Over Financial Reporting
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 March 31, 2016 using criteria established in the  Internal Control-Integrated Framework (2013)  issued by the Committee of Sponsoring Organizations of the Treadway

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Commission (“COSO”). Based on this assessment, management determined that, as of March 31, 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 March 31, 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.

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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 March 31, 2016 , we had cash and cash equivalents of approximately $6.9 million . During the first quarter of 2016, we raised $10.0 million in equity financings. 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 Fund, LLC (“Aspire Capital”), subject to certain limitations described below.
We have approximately $79.0 million available under the S-3 shelf registration statement (No. 333-198066) and of that, $18.2 million is currently reserved for our committed equity financing facility with Aspire Capital. In addition, 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 committed equity financing facility with Aspire Capital, is limited to an aggregate of one-third of our public float. As of May 3, 2016 our public float was 47.1 million shares, the value of which was approximately $63.6 million based upon the closing price of our common stock of $1.35 on March 24, 2016 . 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 our shelf registration statement. The value of one-third of our public float calculated on the same basis was $21.2 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. Assuming a stock price of $1.00 per share or greater, the agreement specifies a maximum number of shares of common stock to be sold, of which approximately 5.0 million shares is currently available. We may sell additional shares under the agreement above the maximum if the total weighted average of all shares issued to date is $1.97 per share or greater. Shares issued to date have a total weighted average sales price of $1.46 per share. As of May 3, 2016 , none was available under the committed equity financing facility since our stock price was below $1.00.

Our forecast of the period of time through which our financial resources will be adequate to support our operations and the cost to develop and commercialize our products involves risks and uncertainties, and may be wrong as a result of a number of factors, including the factors discussed in this Risk Factors section of this report. We have based these estimates on assumptions that may prove to be incorrect, and we could utilize our available capital resources sooner than we currently expect.
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 $311.4 million from our inception through March 31, 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, (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 quarter 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. For example, Sandoz reported that it was out of stock of Vitaros ® in Germany in July 2015 and in Sweden and Belgium in January 2016 because it has put a hold on releasing additional batches pending the results of an ongoing out-of-specification investigation by our contract manufacturer. We cannot give any assurance that Sandoz will resume product orders in Germany, Sweden or Belgium soon, or at all.
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

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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 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. Sandoz reported that it was out-of-stock of Vitaros ® in Germany in July 2015 and in Sweden and Belgium in January 2016. Sandoz has put a hold on releasing additional batches pending the results of an ongoing out-of-specification investigation by our contract manufacturer. Such investigation relates to a stability sample of Vitaros ® manufactured for sale in the United Kingdom. All relevant health authorities have been informed and are privy to the ongoing investigation. Our other Vitaros ® partners continue to release batches and sell product in the U.K., France, Spain and Italy. There can be no assurances that we will not experience similar manufacturing issues in the future.
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.

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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. 
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. We expect to resubmit an NDA by the end of the third quarter of 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

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

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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.
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

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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 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 $8.8 million as of March 31, 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. A significant appreciation in the Euro relative to the U.S. dollar, for instance, will result in higher expenses and cause increases in our net losses. 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.

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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 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;

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•
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;
•
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;

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•
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;
•
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;

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•
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
•
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:

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•
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; 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.

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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;
•
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.

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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
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.
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 160,000,000 shares of our capital stock, consisting of 150,000,000 shares of our common stock and 10,000,000 shares of our preferred stock. We have approximately $79.0 million available under the S-3 shelf registration statement (No. 333-198066) and of that, $18.2 million is currently reserved for our committed equity financing facility with Aspire Capital.
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 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 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 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 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).
 
 
 
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 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 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).
 
 
 
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)
 
 
 

44
Table of Contents     

10.1
 
Subscription Agreement dated January 12, 2016, among the Company, Sarissa Capital Domestic Fund LP and Sarissa Capital Offshore Master Fund LP (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 January 13, 2016).
 
 
 
10.2
 
Subscription Agreement dated January 12, 2016, between the Company and Aspire Capital (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 January 13, 2016).
 
 
 
10.3
 
Subscription Agreement dated January 12, 2016, between the Company and additional purchaser (incorporated herein by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on January 13, 2016).
 
 
 
10.4
 
Employment Transition Agreement, by and between Apricus Biosciences, Inc. and Dr. Barbara Troupin, dated April 13, 2016.
 
 
 
10.5
 
Amended and Restated Employment Agreement, by and between Apricus Biosciences, Inc. and Neil Morton, dated April 25, 2016.
 
 
 
10.6
 
Form of Restricted Stock Unit Award Agreement
 
 
 
10.7
 
Non-Employee Director Compensation Policy
 
 
 
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.



45
Table of Contents     

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: May 9, 2016
/s/ CATHERINE BOVENIZER
 
Catherine Bovenizer
 
Vice President, Chief Accounting Officer



46

Exhibit 10.4


EMPLOYMENT TRANSITION AGREEMENT

This Employment Transition Agreement (this “ Agreement ”), is entered into as of April 13, 2016 (the “ Effective Date ”), by and between Barbara Troupin, M.D., M.B.A. (“ Employee ”) and Apricus Biosciences, Inc., a Nevada corporation (collectively with its subsidiaries, the “ Company ”).
        
WHEREAS, Employee is currently employed by the Company as its Senior Vice President, Chief Medical Officer, and is a party to that certain Employment Agreement, dated December 15, 2014, by and between Employee and the Company (the “ Employment Agreement ”);

WHEREAS, both Employee and the Company have determined that it is in their mutual best interests that Employee’s employment with the Company terminate, and that their employment relationship be dissolved in the manner set forth in this Agreement;

WHEREAS, the Company desires to continue to employ Employee, and Employee desires to continue employment with the Company, through May 31, 2016 (such date or any earlier date on which Employee’s employment with the Company terminates, the “ Termination Date ”); and

WHEREAS, Employee and the Company desire to set forth the terms and conditions of the foregoing arrangement.

NOW, THEREFORE, in consideration of the mutual promises herein contained, the parties agree as follows:

1. Employment Period .

(a)     Employment Period . During the period commencing on the Effective Date and ending on the Termination Date (the “ Employment Period ”), Employee shall continue to be employed by the Company as its Senior Vice President, Chief Medical Officer. Employee hereby agrees that, effective as of the Termination Date, she shall automatically cease to serve in the position of Senior Vice President, Chief Medical Officer (and any other titles or officer positions she may hold) of the Company (and any of its affiliates and subsidiaries). Employee shall execute any additional documentation necessary to effectuate the foregoing. The Termination Date shall constitute Employee’s involuntary “separation from service” within the meaning of Section 409A of the Internal Revenue Code of 1986, as amended (the “ Code ”), and the Department of Treasury regulations and other guidance promulgated thereunder.

(b)     Duties . During the Employment Period, Employee will continue to perform her duties as an employee in the role of Senior Vice President, Chief Medical Officer of the Company. Employee shall at all times faithfully, industriously and to the best of her ability, experience and talent perform all of such duties and shall devote substantially all of her productive time and efforts to the performance of such duties. In the performance of such duties, Employee shall report directly to the Chief Executive Officer of the Company (the “ CEO ”), and shall be subject to the direction of the CEO and to such limits upon Employee’s authority as the CEO may from time to time impose. Employee shall be subject to and comply with the policies and procedures generally applicable to employees of the Company to the extent the same are not inconsistent with any term of this Agreement.
  
(c)     Compensation . As compensation for the services to be rendered by Employee to the Company during the Employment Period, Employee shall be paid the following compensation and

1

Exhibit 10.4

benefits, which compensation and benefits may be paid or provided by the Company or NexMed (U.S.A.), Inc., the Company’s wholly-owned subsidiary:

(1) Salary . For the period commencing on the Effective Date and ending on the Termination Date, the Company shall continue to pay to Employee her base salary at the rate of $334,750 per year, payable in accordance with the customary payroll practices of the Company applicable to employees.

(2) Bonus . Employee acknowledges and agrees that she shall not be eligible to receive an annual cash performance bonus for 2016 pursuant to the Company’s annual bonus plan for its employees.
(3) Benefits . Employee shall be eligible for inclusion, to the extent permitted by law, as a full-time employee of the Company, in any and all of the following plans, programs, and policies in effect during the Employment Period, subject to the terms and conditions of such plans, programs and policies: (i) pension, profit sharing, savings, and other retirement plans and programs, (ii) life and health (medical, dental, hospitalization, short-term and long-term disability) insurance plans and programs, (iii) stock option and stock purchase plans and programs, (iv) accidental death and dismemberment protection plans and programs, (v) travel accident insurance plans and programs, (vi) Company-paid holidays, twenty (20) vacation days per year, five (5) sick days per year and two (2) personal days per year, in each case subject to accrual limits under the Company’s policies, and (vii) other plans and programs sponsored by the Company or any subsidiary for employees generally, including any and all plans and programs that supplement any or all of the foregoing types of plans or programs. Nothing in this Agreement shall preclude the Company from terminating or amending any employee benefit plan, program or policy.

(4) Expenses . The Company shall pay or reimburse Employee for all ordinary and reasonable out-of-pocket expenses actually incurred (and, in the case of reimbursement, paid) by Employee during the Employment Period in the performance of Employee’s services under this Agreement; provided that Employee submits proof of such expenses, with the properly completed forms as prescribed by the Company, no later than thirty (30) days after such expenses have been so incurred or as otherwise provided in accordance with the standard practices of the Company.

(d)     At-Will Employment . The Company and Employee acknowledge that Employee’s employment during the Employment Period is at-will, as defined under applicable law, and that Employee’s employment with the Company during the Employment Period may be terminated by either party at any time for any or no reason, with or without notice. If Employee’s employment terminates for any reason following the Effective Date, Employee shall not be entitled to any payments, benefits, damages, awards or compensation other than as provided in this Agreement.


2

Exhibit 10.4

2. Termination of Employment .

(a)      Compensation through Termination Date . On the Termination Date, the Company shall issue Employee her final paycheck, reflecting (i) her earned but unpaid base salary through the Termination Date, and (ii) all accrued, unused paid time off (vacation and sick leave) due to Employee through the Termination Date. Subject to Sections 2(b) and (d) below, Employee acknowledges and agrees that with her final check, the payment of any outstanding expense reimbursements, and the payment of any amounts payable under any of the employee benefit plans of the Company in accordance with the terms of such plans, Employee will have received all monies, bonuses, commissions, expense reimbursement, vacation pay, or other compensation she earned or was due during her employment by the Company.

(b) Expense Reimbursements . The Company, within thirty (30) days after the Termination Date, will reimburse Employee for any and all ordinary and reasonable out-of-pocket expenses actually incurred by Employee during the term of employment (including the Employment Period) in performance of Employee’s job duties prior to the Termination Date, which expenses shall be submitted to the Company with supporting receipts and/or documentation no later than thirty (30) days after the Termination Date.

(c) Benefits . Subject to Section 2(d)(iv) below, Employee’s entitlement to benefits from the Company, and eligibility to participate in the Company’s benefit plans, programs and policies, shall cease on the Termination Date, except to the extent Employee elects to and is eligible to receive continued healthcare coverage pursuant to the provisions of the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended (“ COBRA ”), for herself and any covered dependents, in accordance with the provisions of COBRA.

(d) Severance . In connection with the termination of Employee’s employment upon the Termination Date or, if earlier, as a result of Employee’s Involuntary Termination (as defined in the Employment Agreement), and subject to Employee’s continued compliance with Section 3 and Employee’s execution and non-revocation of the Release (as defined below), Employee shall be entitled to receive, in lieu of any severance benefits to which Employee may otherwise be entitled under any plan or program of the Company or any agreement providing for severance or termination payments or benefits (including the Employment Agreement), the benefits provided below:

(i) A cash severance payment in the amount of $167,375, which shall be paid in a lump sum within five (5) days following the date Employee’s Release becomes effective and irrevocable;

(ii) A cash severance payment in the amount of $264,875, which shall be paid in a lump sum on the earlier of (A) the date on which a Change in Control (as defined in the Employment Agreement) occurs, (B) the filing of any Petition For Relief in a Bankruptcy Court or Under the Bankruptcy Laws, including any Petition or request seeking a reorganization and/or liquidation under the Bankruptcy laws, or the filing of any Petition seeking relief from creditors, or (C) December 31, 2017;

(iii) Full acceleration of the vesting of all equity awards held by Employee on the Termination Date, including any options, restricted stock, restricted stock units or other awards and such Employee shall have the ability to exercise her stock options until December 31, 2016; and


3

Exhibit 10.4

(iv) Reimbursement for the cost of continuation of health insurance benefits provided to Employee immediately prior to the Termination Date pursuant to the terms of COBRA or other applicable law through the earliest to occur of (A) six (6) months following the Involuntary Termination, (B) the date Employee becomes eligible for coverage under health and/or dental plans of another employer, or (C) the date upon which Employee is no longer eligible for such COBRA or other benefits under applicable law (the “ COBRA Coverage Period ”). If any of the Company’s health benefits are self-funded as of the Termination Date, or if the Company cannot provide the foregoing benefits in a manner that is exempt from Section 409A of the Code or that is otherwise compliant with applicable law (including, without limitation, Section 2716 of the Public Health Service Act), instead of providing the reimbursements as set forth in the immediately preceding sentence, the Company shall instead pay to Employee the foregoing monthly amount as a taxable monthly payment for the COBRA Coverage Period (or any remaining portion thereof).

Employee acknowledges that the foregoing cash payments and benefits will represent full satisfaction of the amounts payable to her under the Employment Agreement and any other plan, program, policy or agreement providing for severance or termination payments or benefits. In the event of Employee’s termination of employment prior to May 31, 2016 for any reason other than an Involuntary Termination, Employee shall not be entitled to receive any of the benefits described in this Section 2(d). The benefits set forth hereinabove will be paid regardless of how any press release or public document or filing characterizes Employee’s termination or separation from employment.

(e) Exclusive Remedy . Except as otherwise expressly required by law (e.g., COBRA) or as specifically provided herein, all of Employee’s rights to compensation, benefits, and other amounts hereunder (if any) accruing after the termination of Employee’s employment by the Company shall cease upon such termination.

(f) Release . Employee’s right to receive any of the payments or other compensation to be made to Employee pursuant to Section 2(d) shall be contingent on Employee providing to the Company (and failing to revoke) a full and complete release of claims in the form attached hereto as Exhibit A (the “ Release ”). The Release must be executed by Employee, and any applicable revocation period specified therein must have expired without Employee’s revocation of the Release, within thirty (30) days following the Termination Date in order for Employee to be eligible to receive the severance benefits provided pursuant to Section 2(d) under this Agreement. Notwithstanding the above, Employee’s Release shall be deemed and/or become ineffective and null and void in the event that any payments or benefits, including severance benefits contemplated or described in Section 2(d), have not been made or are not made in accordance with and pursuant the times set forth in Section 2(d). If the severance benefits and payments described in this Agreement are not made, then, Employee shall be free to pursue claims she would have had but for the release, including, but, not limited to, claims for severance or other benefits under her Employment Agreement.

(g)     No Mitigation . Employee shall not be required to mitigate the amount of any payment provided for in this Section 2 by seeking other employment or otherwise, nor shall the amount of any payment or benefit provided for in this Section 2 be reduced by any compensation earned by Employee as the result of employment by another employer or self-employment or by retirement benefits.

4

Exhibit 10.4



3. Restrictive Covenants .

(a) Proprietary Information and Inventions Agreement . Employee has executed and agrees to abide by the terms of the Company’s form of Proprietary Information and Inventions Agreement, which shall survive termination of Employee’s employment with the Company and the termination of this Agreement.

(b) Non-Disparagement . Upon any termination of employment or service, Employee agrees that she will not, directly or indirectly through affiliates or associates, make any written or oral communications that could reasonably be considered to be disparaging of the Company in any respect, including, but not limited to, the Company’s business, technology, products, executives, officers, directors, former executives, consultants, contractors or agents. Additionally, the Company agrees that the Board of Directors of the Company and the Company’s executive officers will not make (or direct the Company to make) any written or oral communications that could reasonably be considered to be disparaging of Employee in any respect. Nothing in this Section shall preclude Employee or any representative of the Company from testifying truthfully in any deposition or judicial or administrative proceeding. Moreover, nothing in this Section applies to communications to Employee’s immediate family or communications by Employee or representatives of the Company to their respective attorneys, or to pleadings or other documents in any proceeding to enforce this Agreement or between Employee and the Company.

4. Limitation and Conditions on Payments .

(a) Parachute Payments . In the event that the severance and other benefits provided for in this Agreement to Employee: (i) constitute “parachute payments” within the meaning of Section 280G of the Code; and (ii) but for this Section, would be subject to the excise tax imposed by Section 4999 of the Code, then Employee’s severance benefits under Section 2(d) shall be payable either:
(1) in full; or

(2) as to such lesser amount which would result in no portion of such severance benefits being subject to excise tax under Section 4999 of the Code, whichever of the foregoing amounts, taking into account the applicable federal, state and local income taxes and the excise tax imposed by Section 4999, results in the receipt by Employee on an after-tax basis, of the greatest amount of severance benefits under Section 2(d), notwithstanding that all or some portion of such severance benefits may be taxable under Section 4999 of the Code. Any determination required under this Section 4 shall be made in writing by independent public accountants selected by the Company (the “ Accountants ”), whose determination shall be conclusive and binding upon Employee and the Company for all purposes. For purposes of making the calculations required by this Section 4, the Accountants may make reasonable assumptions and approximations concerning applicable taxes and may rely on reasonable, good faith interpretations concerning the application of Section 280G and 4999 of the Code. The Company and Employee shall furnish to the Accountants such information and documents as the Accountants may reasonably request in order to make a determination under this Section. The Company shall bear all costs the Accountants may reasonably incur in connection with any calculations contemplated by this Section 4. Any reduction in severance benefits required by this Section 4 shall occur in a manner necessary to provide Employee with the greatest economic benefit. If more than one manner of reduction of severance benefits is necessary

5

Exhibit 10.4

to arrive at the reduced amount yields the greatest economic benefit to Employee, the payments and benefits shall be reduced pro rata.

(b) Code Section 409A . All severance payments to be made upon a termination of employment under this Agreement may be made only upon a “separation of service” within the meaning of Section 409A of the Code and the Department of Treasury regulations and other guidance promulgated thereunder. Notwithstanding any provision to the contrary in this Agreement, subject to Employee’s compliance with Section 2(f), any amount payable under Section 2(d) that is deemed deferred compensation subject to Section 409A of the Code shall be paid on the sixtieth (60 th ) day following Employee’s “separation from service.” Notwithstanding any provision to the contrary in this Agreement, if Employee is deemed by the Company at the time of Employee’s separation from service to be a “specified employee” for purposes of Code Section 401A(a)(2)(B)(i), to the extent delayed commencement of any portion of the benefits to which Employee is entitled under this Agreement is required in order to avoid a prohibited distribution under Code Section 409A(a)(2)(B)(i), such portion of Employee’s benefits shall not be provided to Employee prior to the earlier of (i) the expiration of the six-month period measured from the date of Employee’s “separation of service” with the Company or (ii) the date of Employee’s death. Upon the first business day following the expiration of the applicable Code Section 409A(a)(2)(B)(i) period, all payments deferred pursuant to this Section 4(b) shall be paid in a lump sum to Employee, and any remaining payments due under the Agreement shall be paid as otherwise provided herein. For purposes of Code Section 409A (including, without limitation, for purposes of Treasury Regulation Section 1.409A-2(b)(2)(iii)), Employee’s right to receive installment payments under this Agreement shall be treated as a right to receive a series of separate payments and, accordingly, each installment payment hereunder shall at all times be considered a separate and distinct payment. It is intended that none of the severance payments and benefits to be provided hereunder will be subject to Section 409A of the Code and any ambiguities herein will be interpreted to be so exempt or, if not so exempt, to comply with Section 409A of the Code. Employee and the Company agree to work together in good faith to consider amendments to this Agreement and to take such reasonable actions which are necessary, appropriate or desirable to avoid imposition of any additional tax or income recognition prior to actual payment to Employee under Section 409A of the Code. Notwithstanding anything to the contrary contained herein, to the extent that any amendment to this Agreement with respect to the payment of any severance payments or benefits would constitute under Code Section 409A a delay in a payment or a change in the form of payment, then such amendment must be done in a manner that complies with Code Section 409A(a)(4)(C). Any reimbursement of expenses or in-kind benefits payable under this Agreement shall be made in accordance with Treasury Regulation Section 1.409A-3(i)(1)(iv) and shall be paid on or before the last day of Employee’s taxable year following the taxable year in which Employee incurred the expenses. The amount of expenses reimbursed or in-kind benefits payable during any taxable year of Employee shall not affect the amount eligible for reimbursement or in-kind benefits payable in any other taxable year of Employee, and Employee’s right to reimbursement for such amounts shall not be subject to liquidation or exchange for any other benefit.

6

Exhibit 10.4


5. Successors . Any successor to the Company (whether direct or indirect and whether by purchase, lease, merger, consolidation, liquidation or otherwise) to all or substantially all of the Company’s business and/or assets shall assume the obligations under this Agreement and agree expressly to perform the obligations under this Agreement in the same manner and to the same extent as the Company would be required to perform such obligations in the absence of a succession. The terms of this Agreement and all of Employee’s rights hereunder and thereunder shall inure to the benefit of, and be enforceable by, Employee’s personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees.

6. Notice . Notices and all other communications contemplated by this Agreement shall be in writing and shall be deemed to have been duly given when personally delivered or when mailed by U.S. registered or certified mail, return receipt requested and postage prepaid. Mailed notices to Employee shall be addressed to Employee at the home address which Employee most recently communicated to the Company in writing. In the case of the Company, mailed notices shall be addressed to its corporate headquarters, and all notices shall be directed to the attention of its Secretary.

7. Miscellaneous .

(a) Waiver . No provision of this Agreement shall be modified, waived or discharged unless the modification, waiver or discharge is agreed to in writing and signed by Employee and by an authorized officer of the Company (other than Employee). No waiver by either party of any breach of, or of compliance with, any condition or provision of this Agreement by the other party shall be considered a waiver of any other condition or provision or of the same condition or provision at another time.

(b) Whole Agreement . Other than any indemnification agreement entered into between the Company and Employee in connection with Employee’s employment, any outstanding stock option or other equity compensation award agreements, the Proprietary Information and Inventions Agreement executed by Employee and the Employment Agreement, no agreements, representations or understandings (whether oral or written and whether express or implied) which are not expressly set forth in this Agreement have been made or entered into by either party with respect to the subject matter hereof. This Agreement supersedes any agreement of the same title and concerning similar subject matter dated prior to the Effective Date, including the Employment Agreement, and by execution of this Agreement both parties agree that the Employment Agreement shall be deemed null and void.

(c) Choice of Law . The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of California without reference to conflict of laws provisions.

(d) Severability . If any term or provision of this Agreement or the application thereof to any circumstance shall, in any jurisdiction and to any extent, be invalid or unenforceable, such term or provision shall be ineffective as to such jurisdiction to the extent of such invalidity or unenforceability without invalidating or rendering unenforceable the remaining terms and provisions of this Agreement or the application of such terms and provisions to circumstances other than those as to which it is held invalid or unenforceable, and a suitable and equitable term or provision shall be substituted therefore to carry out, insofar as may be valid and enforceable, the intent and purpose of the invalid or unenforceable term or provision.

7

Exhibit 10.4


(e) Arbitration . Any dispute, claim or controversy based on, arising out of or relating to Employee’s employment or the termination thereof or this Agreement shall be settled by final and binding arbitration in the County of San Diego, California, before a single neutral arbitrator in accordance with the National Rules for the Resolution of Employment Disputes (the “ Rules ”) of the American Arbitration Association (“ AAA ”), and judgment on the award rendered by the arbitrator may be entered in any court having jurisdiction. The Rules may be found online at www.adr.org. Arbitration may be compelled pursuant to the California Arbitration Act (Code of Civil Procedure §§ 1280 et seq.). If the parties are unable to agree upon an arbitrator, one shall be appointed by the AAA in accordance with its Rules. Each party shall pay the fees of its own attorneys, the expenses of its witnesses and all other expenses connected with presenting its case; however , the parties agree that, to the extent permitted by law, including, without limitation, the California Labor Code, the arbitrator may, in his or her discretion, award reasonable attorneys’ fees to the prevailing party; provided , further , that the prevailing party shall be reimbursed for such fees, costs and expenses within forty-five (45) days following any such award, but in no event later than the last day of Employee’s taxable year following the taxable year in which the fees, costs and expenses were incurred; provided , further , that the parties’ obligations pursuant to this sentence shall terminate on the tenth (10 th ) anniversary of the date of the termination of Employee’s employment. Other costs of the arbitration, including the cost of any record or transcripts of the arbitration, AAA’s administrative fees, the fee of the arbitrator, and all other fees and costs, shall be borne by the Company. This Section 7(e) is intended to be the exclusive method for resolving any and all claims by the parties against each other for payment of damages under the Agreement or relating to Employee’s employment or the termination thereof; provided , however , that Employee shall retain the right to file administrative charges with or seek relief through any government agency of competent jurisdiction, and to participate in any government investigation, including but not limited to (i) claims for workers’ compensation, state disability insurance or unemployment insurance; (ii) claims for unpaid wages or waiting time penalties brought before the California Division of Labor Standards Enforcement; provided , however , that any appeal from an award or from denial of an award of wages and/or waiting time penalties shall be arbitrated pursuant to the terms of this paragraph; and (iii) claims for administrative relief from the United States Equal Employment Opportunity Commission and/or the California Department of Fair Employment and Housing (or any similar agency in any applicable jurisdiction other than California); provided , further , that Employee shall not be entitled to obtain any monetary relief through such agencies other than workers’ compensation benefits or unemployment insurance benefits. This paragraph shall not limit either party’s right to obtain any provisional remedy, including, without limitation, injunctive or similar relief, from any court of competent jurisdiction as may be necessary to protect their rights and interests pending the outcome of arbitration, including without limitation injunctive relief, in any court of competent jurisdiction pursuant to California Code of Civil Procedure § 1281.8 or any similar statute of an applicable jurisdiction. Seeking any such relief shall not be deemed to be a waiver of such party’s right to compel arbitration. Both the Company and Employee expressly waive their right to a jury trial.

(f) Legal Fees and Expenses . The parties shall each bear their own expenses, legal fees and other fees incurred in connection with this Agreement. Notwithstanding the foregoing, in the event of any dispute arising under or relating to this Agreement, the arbitrator or court may, but shall not be required to, award the prevailing party its fees and expenses, including reasonable attorneys’ fees and, in the event of any arbitration, the other costs of the cost of arbitration, including the cost of any record or transcripts of the arbitration, AAA’s administrative fees, the forum’s filing fees, the fees of the arbitrator, and all other fees and costs, shall be borne by the Company.


8

Exhibit 10.4

(g) No Assignment of Benefits . The rights of Employee to payments or benefits under this Agreement shall not be made subject to option or assignment, either by voluntary or involuntary assignment or by operation of law, including (without limitation) bankruptcy, garnishment, attachment or other creditor’s process, and any action in violation of this Section 7(g) shall be void. This Agreement does not create, and shall not be construed as creating, any rights enforceable by any person not a party to this Agreement.

(h) Employment Taxes . All payments made pursuant to this Agreement will be subject to withholding of applicable income and employment taxes. The Company shall be responsible for all relevant employer contributions and taxes normally paid by an employer.

(i) Assignment by Company . The Company may assign its rights under this Agreement to an affiliate, and an affiliate may assign its rights under this Agreement to another affiliate of the Company or to the Company. In the case of any such assignment, the term “Company” when used in a section of this Agreement shall mean the corporation that actually employs Employee.

(j) Construction . The language in all parts of this Agreement shall in all cases be construed simply, according to its fair meaning, and not strictly for or against any of the parties hereto. Without limitation, there shall be no presumption against any party on the ground that such party was responsible for drafting this Agreement or any part thereof.

(k) Counterparts . This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which together will constitute one and the same instrument.

(l) Survival . The covenants, agreements, representations and warranties contained in or made in Sections 2, 3, 4, 5, 6 and 7 of this Agreement shall survive any termination of Employee’s services or any termination of this Agreement.

(m) Section Headings . The headings of the several sections in this Agreement are inserted solely for the convenience of the parties and are not a part of and are not intended to govern, limit or aid in the construction of any term or provision hereof.

(n) Amendment . No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by Employee and the CEO.

(o) Right to Advice of Counsel . EMPLOYEE acknowledgeS that she HAS the right, AND IS ENCOURAGED, to consult with her lawyer AND PERSONAL TAX ADVISORS; by her signature below, EMPLOYEE acknowledgeS that she HAS consulted, or has elected not to consult, with her lawyer AND PERSONAL TAX ADVISORS concerning this Agreement AND THAT NEITHER THE COMPANY NOR ITS REPRESENTATIVES OR AGENTS HAS GIVEN her LEGAL OR TAX ADVICE CONCERNING THIS AGREEMENT.




(Signature Page Follows)

 

9

Exhibit 10.4

    
The parties have executed this Agreement on the date first written above.


APRICUS BIOSCIENCES, INC.

By: /s/ Richard W. Pascoe
Name: Richard W. Pascoe
Title: Chief Executive Officer & Secretary




EMPLOYEE

Signature: /s/ Barbara Troupin
Print Name: Barbara Troupin, M.D., M.B.A.



 

10

Exhibit 10.4

EXHIBIT A
RELEASE OF CLAIMS

FOR AND IN CONSIDERATION OF the severance payments and benefits to be provided to me in connection with the termination of my employment pursuant to Section 2(d) of the Employment Transition Agreement between me and Apricus Biosciences, Inc. (the “ Company ”) dated April 13, 2016 (the “ Agreement ”), which are conditioned on my signing this Release of Claims and not revoking this Release of Claims as provided below, and to which I am not otherwise entitled, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, I, on my own behalf and on behalf of my heirs, executors, administrators, beneficiaries, representatives and assigns, and all others connected with or claiming through me, hereby release and forever discharge the Company, its subsidiaries and other affiliates and all of their respective past, present and future officers, directors, shareholders, employees, employee benefit plans, agents, general and limited partners, members, managers, joint venturers, representatives, successors and assigns and all others connected with any of them (all of the foregoing, the “ Company Released Parties ”), both individually and in their official capacities, from any and all causes of action, rights or claims of any type or description, known or unknown, which I have had in the past, now have, or might now have, through the date of my signing of this Release of Claims, in any way related to, resulting from, arising out of or connected with my employment by or service to the Company or any of its subsidiaries or other affiliates or the termination of that employment or service or pursuant to any federal, state or local law, regulation or other requirement (including without limitation Title VII of the Civil Rights Act of 1964, the Age Discrimination in Employment Act, as amended by the Older Workers Benefit Protection Act (the “ ADEA Claims ”), Employee Retirement Income Security Act, the Americans with Disabilities Act, and the wage and hour, wage payment, and fair employment practices laws of the state or states in which I have been employed by the Company or any of its subsidiaries or other affiliates, each as amended from time to time).

In signing this Release of Claims, I expressly waive and relinquish all rights and benefits afforded by Section 1542 of the Civil Code of the State of California, as well as under any other statutes or common law principles of similar effect, and do so understanding and acknowledging the significance of such specific waiver of Section 1542, which Section states as follows:

A general release does not extend to claims which the creditor does not know or suspect to exist in his or her favor at the time of executing the release, which if known by him or her must have materially affected his or her settlement with the debtor.

Thus, notwithstanding the provisions of Section 1542, and for the purpose of implementing a full and complete release and discharge of the Released, I expressly acknowledge that this Release of Claims is intended to include in its effect, without limitation, all Claims which I do not know or suspect to exist in my favor at the time of execution hereof, and that this Release of Claims contemplates the extinguishment of such Claim or Claims.

Excluded from the scope of this Release of Claims is (i) any claim arising under the terms of the Agreement based on the Company’s executory obligations under the Agreement after the effective date of this Release of Claim; (ii) any right of indemnification or contribution that I have pursuant to the articles of incorporation or by-laws of the Company or pursuant to California law, including, but, not limited to Labor Code section 2802., (iii) all rights to any outstanding options, restricted stock, restricted stock units or other awards to the extent vested and exercisable pursuant to the terms of the awards and the plans under which they were granted as of the termination of my employment; and (iv) any right which cannot be waived by operation of law, including claims for indemnification under the California Labor Code and/or the California

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Exhibit 10.4

Corporations Code, unemployment compensation or any state disability insurance benefits pursuant to the terms of applicable state law, claims for workers’ compensation insurance benefits under the terms of any workers’ compensation insurance policy or fund of the Company or any claims pursuant to the terms and conditions of the federal law known as COBRA or any comparable state law, including Cal-COBRA. This Release shall be deemed and/or become ineffective and null and void in the event that any payments or benefits, including severance benefits contemplated or described in Section 2(d) of the EMPLOYMENT TRANSITION AGREEMENT, have not been made or are not made in accordance with and pursuant the times set forth in Section 2 (d) of the EMPLOYMENT TRANSITION AGREEMENT. If any of the severance benefits and payments described in this EMPLOYMENT TRANSITION AGREEMENT are not made, then, Employee shall be free to pursue claims she would have had but for the release, including, but not limited to, claims for severance or other benefits under her Employment Agreement.

I hereby represent, warrant and agree that I have been paid in full all compensation due to me, whether for services rendered by me to the Company, its subsidiaries and other affiliates, or otherwise, through the date on which my employment with the Company terminated and that, exclusive only of the Company’s provision to me of the severance benefits in accordance with the terms and conditions set forth in Section 2(d) of the Agreement, no further compensation of any kind shall be due to me from the Company or any of the other Company Released Parties as a result of my employment now ended. Without limiting the generality of the foregoing, I specifically acknowledge and agree that I have been paid in full all base salary, bonus compensation and pay for unused vacation due to me and that I have been reimbursed for all business expenses I incurred in the performance of my duties for the Company and the other Company Released Parties.

Effective as of the date of my termination of employment, I hereby confirm my resignation from all officer positions I hold or previously held with the Company or any subsidiary. I further agree that I will execute any additional documents that the Company may reasonably request in connection with the foregoing.

I understand that I must immediately return to the Company any and all documents, materials and information (whether in hardcopy, on electronic media or otherwise) related to the business (whether present or otherwise) of the Company, its subsidiaries and other affiliates and all keys, access cards, credit cards, computer hardware and software, telephones and other property of the Company, its subsidiaries and other affiliates and any copies thereof in my possession or control.

I have previously entered into the Company’s standard proprietary information and inventions agreement (the “ Proprietary Information and Inventions Agreement ”). I agree to continue to perform my obligations thereunder.

This Release of Claims creates legally binding obligations and I acknowledge that I am hereby advised by the Company to seek the advice of an attorney prior to signing this Release of Claims.

In signing this Release of Claims, I acknowledge my understanding that I may not sign it prior to the termination of my employment, but that I may consider the terms of this Release of Claims for up to twenty-one (21) days from the date I receive it, provided that I sign and return it to the Company no later than the twenty-first (21 st ) day after such receipt. I acknowledge that I have had sufficient time to consider this Release of Claims and to consult with an attorney, if I wished to do so, or to consult with any other person of my choosing before signing; and that I am signing this Release of Claims knowingly, voluntarily and with a full understanding of its terms. I represent and acknowledge that if I am executing this Release of Claims before the foregoing period has elapsed, I do so knowingly, voluntarily and upon the advice of and with the approval of my legal counsel (if any), and I voluntarily waive any remaining portion of the consideration period. I further acknowledge that, in signing this Release of Claims, I have not relied on any promises or

12

Exhibit 10.4

representations, express or implied, that are not set forth in writing expressly in the Agreement or this Release of Claims.

I understand that I may revoke this Release of Claims solely with respect to any potential ADEA Claims at any time within seven (7) days of the date of my signing by written notice to the Company c/o the Chief Executive Officer and that this Release of Claims will take full effect on the eighth calendar day after my signing and only if I have not revoked it during the preceding seven-day revocation period. Notwithstanding my election to revoke with respect to any potential ADEA Claims, I acknowledge that all other terms of this Release of Claims shall remain in full force and effect. I further acknowledge that I shall not be entitled to any payments under Section 2(d) of the Agreement unless this Release of Claims is executed and becomes effective not later than thirty (30) days following the date of my termination of employment.

This Release of Claims, the Agreement and the Proprietary Information and Inventions Agreement constitute the entire agreement of the Company and me in respect of the subject matter contained herein and therein and supersede all prior or simultaneous representations, discussions, negotiations and agreements, whether written or oral. This Release of Claims may be amended or modified only with my written consent and the written consent of an authorized representative of the Company. No oral waiver, amendment or modification will be effective under any circumstances whatsoever.

The validity, interpretation, construction and performance of this Release of Claims shall be governed by the laws of the State of California without reference to conflict of laws provisions.

If any term or provision of this Release of Claims or the application thereof to any circumstance shall, in any jurisdiction and to any extent, be invalid or unenforceable, such term or provision shall be ineffective as to such jurisdiction to the extent of such invalidity or unenforceability without invalidating or rendering unenforceable the remaining terms and provisions of this Release of Claims or the application of such terms and provisions to circumstances other than those as to which it is held invalid or unenforceable, and a suitable and equitable term or provision shall be substituted therefore to carry out, insofar as may be valid and enforceable, the intent and purpose of the invalid or unenforceable term or provision.

This Release of Claims may be executed in counterparts, each of which shall be deemed an original, but all of which together will constitute one and the same instrument.

Any dispute, claim or controversy based on, arising out of or relating to my employment or the termination thereof or the Agreement shall be settled by final and binding arbitration in the County of San Diego, California, before a single neutral arbitrator in accordance with the National Rules for the Resolution of Employment Disputes (the “ Rules ”) of the American Arbitration Association (“ AAA ”), and judgment on the award rendered by the arbitrator may be entered in any court having jurisdiction. The Rules may be found online at www.adr.org. Arbitration may be compelled pursuant to the California Arbitration Act (Code of Civil Procedure §§ 1280 et seq.). If the parties are unable to agree upon an arbitrator, one shall be appointed by the AAA in accordance with its Rules. Each party shall pay the fees of its own attorneys, the expenses of its witnesses and all other expenses connected with presenting its case; however, the parties agree that, to the extent permitted by law, the arbitrator may, in his or her discretion, award reasonable attorneys’ fees to the prevailing party; provided , further , that the prevailing party shall be reimbursed for such fees, costs and expenses within forty-five (45) days following any such award, but in no event later than the last day of my taxable year following the taxable year in which the fees, costs and expenses were incurred; provided , further , that the parties’ obligations pursuant to this sentence shall terminate on the tenth (10 th ) anniversary of the date of the termination of my employment. Other costs of the arbitration, including the cost of any record or transcripts of the arbitration, AAA’s administrative fees, the fee of the arbitrator, and all other fees and

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Exhibit 10.4

costs, shall be borne by the Company. This paragraph is intended to be the exclusive method for resolving any and all claims by the parties against each other for payment of damages under the Agreement or relating to my employment or the termination thereof; provided , however , that I shall retain the right to file administrative charges with or seek relief through any government agency of competent jurisdiction, and to participate in any government investigation, including but not limited to (i) claims for workers’ compensation, state disability insurance or unemployment insurance; (ii) claims for unpaid wages or waiting time penalties brought before the California Division of Labor Standards Enforcement; provided , however , that any appeal from an award or from denial of an award of wages and/or waiting time penalties shall be arbitrated pursuant to the terms of this paragraph; and (iii) claims for administrative relief from the United States Equal Employment Opportunity Commission and/or the California Department of Fair Employment and Housing (or any similar agency in any applicable jurisdiction other than California); provided , further , that I shall not be entitled to obtain any monetary relief through such agencies other than workers’ compensation benefits or unemployment insurance benefits. This paragraph shall not limit either party’s right to obtain any provisional remedy, including, without limitation, injunctive or similar relief, from any court of competent jurisdiction as may be necessary to protect their rights and interests pending the outcome of arbitration, including without limitation injunctive relief, in any court of competent jurisdiction pursuant to California Code of Civil Procedure § 1281.8 or any similar statute of an applicable jurisdiction. Seeking any such relief shall not be deemed to be a waiver of such party’s right to compel arbitration. Both the Company and I expressly waive our right to a jury trial.

Intending to be legally bound, I have signed this Release of Claims as of the date written below.



Signature: _______________________            

Name: Barbara Troupin, M.D., M.B.A.

Date Signed: _____________________                        


Acknowledged and Agreed:

APRICUS BIOSCIENCES, INC.


Signature: ________________________            

Name:      Richard W. Pascoe

Title: Chief Executive Officer & Secretary

Date Signed: _______________________                            


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Exhibit 10.5


APRICUS BIOSCIENCES, INC.
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
This Amended and Restated Employment Agreement (the “ Agreement ”) is dated as of April 25, 2016, by and between Neil Morton (“ Employee ”) and Apricus Biosciences, Inc., a Nevada corporation (“ Apricus ,” and collectively with its subsidiaries, the “ Company ”).
RECITALS
A.    Employee became a full-time employee of the Company on March 20, 2014 and Employee and Apricus entered into an Employment Agreement, dated March 20, 2014 (the “ Original Agreement ”).

B.    The Board of Directors of Apricus (the “ Board ”) believes it is in the best interests of the Company and its shareholders to retain Employee and provide incentives to Employee to serve the Company as set forth herein.

C.    The Board further believes that it is necessary to provide Employee with certain benefits upon certain terminations of Employee’s employment, which benefits are intended to provide Employee with financial security and provide sufficient income and encouragement to Employee to remain employed with the Company, notwithstanding the possibility of a Change in Control.

D.    To accomplish the foregoing objectives, the Board has directed the Company, upon execution of this Agreement by Employee, to agree to the terms provided in this Agreement.

It is therefore agreed as follows:
1. At-Will Employment . The Company and Employee acknowledge that Employee’s employment is and shall continue to be at-will, as defined under applicable law, and that Employee’s employment with the Company may be terminated by either party at any time for any or no reason. This “at-will” nature of Employee’s employment shall remain unchanged during Employee’s tenure as an employee and may not be changed, except in an express writing signed by Employee and a duly authorized officer of the Company. If Employee’s employment terminates for any reason, Employee shall not be entitled to any payments, benefits, damages, award or compensation other than as provided in this Agreement or otherwise agreed to in writing by the Company or as provided by applicable law.

2. Duties. Employee shall be employed by the Company as Senior Vice President, Chief Business Officer of the Company, and, as such, Employee shall faithfully perform for the Company the duties of said office and shall perform such other duties of an executive, managerial or administrative nature as shall be specified and designated from time to time by the Board or the Chief Executive Officer of Apricus (“ CEO ”). While employed by the Company, Employee shall not, without the prior consent of the CEO, (i) render to others services of any kind for compensation or engage in any other business activity that would materially interfere with the performance of Employee’s duties under this Agreement, or (ii) directly or indirectly, whether as a partner, employee, creditor, shareholder, or otherwise, promote, participate or engage in any activity or other business competitive with the Company’s business. Employee shall not invest in any company or business that competes in any manner with the Company; provided that , Employee may, without violating this section, own as a passive investment, shares of capital stock of a publicly-traded corporation that engages in competition if (i) such shares are actively traded on an established national securities market in the United States, (ii) the number of shares of such corporation’s capital stock that are beneficially owned

1

Exhibit 10.5

(directly or indirectly) by Employee represents less than one percent of the total number of shares of such corporation’s outstanding capital stock, and (iii) Employee is not otherwise associated directly or indirectly with such corporation or with any affiliated of such corporation. Employee may also participate freely in the affairs of any recognized charitable organizations, non-profit or in any community affairs of Employee’s choice. Employee shall be subject to and comply with the policies and procedures generally applicable to employees of the Company to the extent the same are not inconsistent with any term of this Agreement.

3. Compensation . As compensation for the services to be rendered by Employee to the Company pursuant to this Agreement, Employee shall be paid the following compensation and other benefits, which compensation and benefits may be paid or provided by Apricus or NexMed (U.S.A.), Inc., Apricus’ wholly-owned subsidiary.

(a) Salary . The Company shall pay Employee a salary at an initial rate of $275,000.00 per annum, which may be adjusted by the Compensation Committee of the Board from time to time (the “ Annual Salary ”), and shall be paid in accordance with the customary payroll practices of the Company applicable to employees.

(b) Bonus .     For each fiscal year completed during the term hereof, commencing with 2015, Employee shall be eligible to participate in any annual bonus plan provided by the Company for its employees generally, as in effect from time to time. Employee’s annual target bonus shall be 40% of the Annual Salary, with the actual amount of the bonus, if any, to be determined by the Board or the Compensation Committee in accordance with the terms of the bonus plan. Employee shall be required to be employed with the Company on the date that bonuses are paid in order to be entitled to receive such payment.

(c) Benefits . During the term hereof, Employee shall be eligible for inclusion, to the extent permitted by law, as a full-time employee of the Company or any of its subsidiaries, in any and all of the following plans, programs, and policies in effect at the time, subject to the terms and conditions of such plans, programs and policies: (i) pension, profit sharing, savings, and other retirement plans and programs, (ii) life and health (medical, dental, hospitalization, short-term and long-term disability) insurance plans and programs, (iii) stock option and stock purchase plans and programs, (iv) accidental death and dismemberment protection plans and programs, (v) travel accident insurance plans and programs, (vi) vacation policy (Employee shall accrue paid vacation per calendar year based on seniority in accordance with Company’s policies), and (vii) other plans and programs sponsored by the Company or any subsidiary for employees generally, including any and all plans and programs that supplement any or all of the foregoing types of plans or programs. Nothing in this Agreement shall preclude the Company or any of its subsidiaries or affiliates from terminating or amending any employee benefit plan, program or policy from time to time after the date of this Agreement.

(d) Expenses . The Company shall pay or reimburse Employee for all ordinary and reasonable out-of-pocket expenses actually incurred (and, in the case of reimbursement, paid) by Employee during the term of employment in the performance of Employee’s services under this Agreement; provided that Employee submits proof of such expenses, with the properly completed forms as prescribed from time to time by the Company, no later than thirty (30) days after such expenses have been so incurred or as otherwise provided in accordance with the standard practices of the Company.

4. Benefits Upon Termination of Employment.

(a) Severance Upon Involuntary Termination. In the event that Employee suffers an Involuntary Termination, and subject to the limitations set forth in Section 6, then in addition to any accrued but unpaid Annual Salary, including Annual Salary in respect of any accrued and accumulated but unpaid

2

Exhibit 10.5

vacation, due to Employee at the date of such termination, Employee will be entitled to receive severance benefits as follows: (i) the Company shall pay to Employee in one lump sum an amount equal to (A) twelve (12) months of Employee’s Annual Salary that Employee was receiving immediately prior to the Involuntary Termination; plus (B) any accrued but unpaid bonus for the calendar year preceding Employee’s termination, to the extent that all criteria for such bonus have been met (with the exception of the requirement that Employee be employed on the date the bonus is to be paid)(as determined by the Compensation Committee of the Board in its discretion); plus (C) 100% of the average of the bonuses paid by the Company to Employee for services during each of the three most recent fiscal years (or such shorter period of time during which Employee was eligible for a bonus) prior to the date of the Involuntary Termination (and, to the extent Employee was not employed for an entire fiscal year, the bonus received by Employee for such fiscal year shall be annualized for purposes of the preceding calculation); (ii) full acceleration of the vesting of all equity awards held by Employee at the time of the Involuntary Termination, including any options, restricted stock, restricted stock units or other awards; and (iii) reimbursement for the cost of continuation of health insurance benefits provided to Employee immediately prior to the Involuntary Termination pursuant to the terms of the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended (“ COBRA ”) or other applicable law through the earliest to occur of (A) twelve (12) months following the Involuntary Termination, (B) the date Employee becomes eligible for coverage under health and/or dental plans of another employer, or (C) the date upon which Employee is no longer eligible for such COBRA or other benefits under applicable law (the “ COBRA Coverage Period ”). If any of the Company’s health benefits are self-funded as of the date of Employee’s Involuntary Termination, or if the Company cannot provide the foregoing benefits in a manner that is exempt from Section 409A of the Internal Revenue Code of 1986, as amended (the “ Code ”) or that is otherwise compliant with applicable law (including, without limitation, Section 2716 of the Public Health Service Act), instead of providing the reimbursements as set forth in clause (ii) above, the Company shall instead pay to Employee the foregoing monthly amount as a taxable monthly payment for the COBRA Coverage Period (or any remaining portion thereof). Subject to Section 6(c), the amounts payable pursuant to clause (i) above shall be payable in a lump sum within five (5) days following the date Employee's Release becomes effective and irrevocable.

(b) Disability or Death.   If Employee should suffer a Permanent Disability, the Company may terminate Employee’s employment hereunder upon ten (10) or more days’ prior written notice to Employee.  If Employee should pass away during the term of this Agreement, Employee’s employment shall be deemed terminated on Employee’s date of death.  For purposes of this Agreement, a “ Permanent Disability ” shall be deemed to have occurred only when Employee has qualified for benefits (including satisfaction of any applicable waiting period) under the Company’s or a subsidiary’s long-term disability insurance arrangement.  In the event of the termination of Employee’s employment hereunder by reason of Permanent Disability or death, the Employment Term shall end on the day of such termination and the Company shall pay, no later than the first payroll date following Employee’s termination, to Employee or Employee’s legal representative (in the event of Permanent Disability), or any beneficiary or beneficiaries designated by Employee to the Company in writing, or to Employee’s estate if no such beneficiary has been so designated (in the event of Employee’s death), a single lump sum payment of: (i) any accrued but unpaid Annual Salary, including Annual Salary in respect of any accrued and accumulated but unpaid vacation, due to Employee at the date of such termination; (ii) any amounts owing, but not yet paid, pursuant to Section 3(d) hereof. In addition, upon a termination under this Section 4(b): (1) Employee shall receive a pro rata bonus for the calendar year in which such termination occurs, equal to Employee's target bonus for the calendar year of said termination multiplied by a fraction, the numerator of which is the number of days in such year preceding and including the date of termination, and the denominator of which is three hundred sixty-five (365); (2) Employee shall receive any accrued but unpaid bonus for the calendar year preceding Employee’s termination, to the extent that all criteria for such bonus have been met (with the exception of the requirement that Employee be employed on the date the bonus is to be paid) (as determined by the Compensation Committee of the

3

Exhibit 10.5

Board in its discretion); and (3) all of Employee’s outstanding but unvested equity awards shall vest immediately and the expiration date for all of Employee’s unvested stock option awards shall be extended so that they expire one year after the date of Employee’s termination under this Section 4(b).  Subject to Section 6(c), the amounts payable pursuant to clauses (1) and (2) above shall be paid within five (5) days following the date Employee’s Release becomes effective and irrevocable (or, in the event of Employee’s death, within five (5) days following the date of Employee’s death).

(c) Severance Upon a Change in Control. In the event that Employee suffers an Involuntary Termination within the 12-month period following the effective date of a Change in Control, then in addition to all accrued but unpaid Annual Salary, including Annual Salary in respect of any accrued and accumulated but unpaid vacation, due to Employee at the date of Employee’s termination of employment, Employee will be entitled to receive severance benefits as follows: (i) the Company shall pay to Employee in one lump sum an amount equal to the greater of (A) twelve (12) months of Employee’s Annual Salary that Employee was receiving immediately prior to the Involuntary Termination or (B) twelve (12) months of Employee’s Annual Salary that Employee was receiving immediately prior to the Change in Control; (ii) the Company shall pay to Employee in one lump sum (A) any accrued but unpaid bonus for the calendar year preceding Employee’s termination, to the extent that all criteria for such bonus have been met (with the exception of the requirement that Employee be employed on the date the bonus is to be paid) (as determined by the Compensation Committee of the Board in its discretion), plus (B) 100% of the average of the bonuses paid by the Company to Employee for services during each of the three most recent fiscal years (or such shorter period of time during which Employee was eligible for a bonus) prior to the date of the Involuntary Termination (and, to the extent Employee was not employed for an entire fiscal year, the bonus received by Employee for such fiscal year shall be annualized for purposes of the preceding calculation); (iii) full acceleration of the vesting of all equity awards held by Employee at the time of the Involuntary Termination, including any options, restricted stock, restricted stock units or other awards , ; and (iv) reimbursement for the cost of continuation of health insurance benefits provided to Employee immediately prior to the Involuntary Termination pursuant to the terms of COBRA or other applicable law for a period continuing until the earlier of twelve (12) months following the Involuntary Termination or the date upon which Employee is no longer eligible for such COBRA or other benefits under applicable law (the “ Change in Control COBRA Coverage Period ”). If any of the Company’s health benefits are self-funded as of the date of Employee’s Involuntary Termination, or if the Company cannot provide the foregoing benefits in a manner that is exempt from Section 409A of the Code or that is otherwise compliant with applicable law (including, without limitation, Section 2716 of the Public Health Service Act), instead of providing the reimbursements as set forth in clause (ii) above, the Company shall instead pay to Employee the foregoing monthly amount as a taxable monthly payment for the Change in Control COBRA Coverage Period (or any remaining portion thereof). The amounts payable pursuant to clauses (i) and (ii) above shall be payable in a lump sum within five (5) days following the date Employee’s Release becomes effective and irrevocable.

(d) Termination for Cause . Notwithstanding any other provision of this Agreement, if Employee’s employment is terminated for Cause at any time, then Employee shall not be entitled to receive payment of any severance benefits or any continuation or acceleration of stock award vesting and all of Employee’s stock awards shall remain subject to all applicable forfeiture provisions and transfer restrictions. Employee will receive payment(s) for all accrued but unpaid Annual Salary, including Annual Salary in respect of any accrued and accumulated but unpaid vacation, due to Employee at the date of such termination.

(e) Voluntary Resignation . If Employee voluntarily resigns from the Company under circumstances which do not constitute an Involuntary Termination, then Employee shall not be entitled to receive payment of any severance benefits, or option acceleration, or relinquishment of forfeiture and transfer restrictions. Employee will receive payment(s) for all accrued but unpaid Annual Salary, including Annual

4

Exhibit 10.5

Salary in respect of any accrued and accumulated but unpaid vacation, due to Employee at the date of such termination.

5. Definition of Terms . The following terms referred to in this Agreement shall have the following meanings:

(a) “ Cause ” means any of the following: (i) Employee’s theft, dishonesty, willful misconduct, breach of fiduciary duty for personal profit, or falsification of any Company or affiliate documents or records; (ii) Employee’s material failure to abide by a Company’s or affiliate’s code of conduct or other policies (including without limitation, policies relating to confidentiality and reasonable workplace conduct); (iii) Employee’s unauthorized use, misappropriation, destruction or diversion of any tangible or intangible asset or corporate opportunity of the Company or an affiliate (including, without limitation, Employee’s improper use or disclosure of confidential or proprietary information); (iv) any intentional act by Employee which has a material detrimental effect on the Company or an affiliate’s reputation or business; (v)  Employee’s repeated failure or inability to perform any reasonable assigned duties after written notice from the Company or an affiliate (including, without limitation, habitual absence from work for reasons other than illness), and a reasonable opportunity to cure, such failure or inability; (vi) any material breach by Employee of any employment or service agreement between Employee and the Company or an affiliate, which breach is not cured pursuant to the terms of such agreement; or (vii) Employee’s conviction (including any plea of guilty or nolo contendere ) of any criminal act involving fraud, dishonesty, misappropriation or moral turpitude, or which materially impairs Employee’s ability to perform his duties with the Company or an affiliate.

(b) “ Change in Control ” means the occurrence of any of the following:

(i)
an Ownership Change Event or a series of related Ownership Change Events (collectively, a “ Transaction ”) in which the shareholders of Apricus immediately before the Transaction do not retain immediately after the Transaction, in substantially the same proportions as their ownership of shares of Apricus’ voting stock immediately before the Transaction, direct or indirect beneficial ownership of more than fifty percent (50%) of the total combined voting power of the outstanding voting securities of Apricus or such surviving entity immediately outstanding after the Transaction, or, in the case of an Ownership Change Event the entity to which the assets of Apricus were transferred (the “ Transferee ”), as the case may be; or

(ii)
the liquidation or dissolution of Apricus.

For purposes of Section 5(b)(i), indirect beneficial ownership shall include, without limitation, an interest resulting from ownership of the voting securities of one or more corporations or other business entities which own Apricus or the Transferee, as the case may be, either directly or through one or more subsidiary corporations or other business entities. The Board shall have the right to determine whether multiple sales or exchanges of the voting securities in Apricus or multiple Ownership Change Events are related, and its determination shall be final, binding and conclusive. The Board may also, but need not, specify that other transactions or events constitute a Change in Control.
(c) “ Involuntary Termination ” shall include (i) any termination of Employee’s employment by the Company (other than for Cause and other than as a result of Employee’s death or Permanent Disability) or (ii) Employee’s voluntary termination within sixty (60) days following the occurrence of any of the

5

Exhibit 10.5

following events without Employee’s written consent: (i) a material reduction or material change in job duties, responsibilities, authority and requirements inconsistent with Employee’s position with the Company and Employee’s prior duties, responsibilities and requirements or a material negative change in Employee’s reporting relationship (in each case, excluding any changes as a result of the loss of any interim or temporary roles within the Company); (ii) a material reduction of Employee’s base compensation (other than in connection with a general decrease in base salaries for most officers of the Company or successor corporation); or (iii) Employee’s refusal to relocate to a facility or location more than fifty (50) miles from the Company’s current location, provided that Employee will not resign due to such change, reduction or relocation without first providing the Company with written notice of the event or events constituting the grounds for Employee’s voluntary resignation within thirty (30) days of the initial existence of such grounds and a reasonable cure period of not less than thirty (30) days following the date of such notice.

(d) “ Ownership Change Event ” means the occurrence of any of the following with respect to Apricus: (i) the direct or indirect sale or exchange in a single or series of related transactions by the shareholders of Apricus of more than fifty percent (50%) percent of the outstanding voting stock of Apricus; (ii) a merger or consolidation in which Apricus is a party, other than a change of domicile; or (iii) the sale, exchange, or transfer of all or substantially all of the assets of Apricus.

6. Limitation and Conditions on Payments .

(a) Parachute Payments . In the event that the severance and other benefits provided for in this Agreement to Employee: (i) constitute “parachute payments” within the meaning of Section 280G of the Code; and (ii) but for this Section, would be subject to the excise tax imposed by Section 4999 of the Code, then Employee’s severance benefits under Section 4 shall be payable either:

(i)
in full; or

(ii)
as to such lesser amount which would result in no portion of such severance benefits being subject to excise tax under Section 4999 of the Code, whichever of the foregoing amounts, taking into account the applicable federal, state and local income taxes and the excise tax imposed by Section 4999, results in the receipt by Employee on an after-tax basis, of the greatest amount of severance benefits under Section 4, notwithstanding that all or some portion of such severance benefits may be taxable under Section 4999 of the Code. Any determination required under this Section 6 shall be made in writing by independent public accountants selected by the Company (the “ Accountants ”), whose determination shall be conclusive and binding upon Employee and the Company for all purposes. For purposes of making the calculations required by this Section 6, the Accountants may make reasonable assumptions and approximations concerning applicable taxes and may rely on reasonable, good faith interpretations concerning the application of Section 280G and 4999 of the Code. The Company and Employee shall furnish to the Accountants such information and documents as the Accountants may reasonably request in order to make a determination under this Section. The Company shall bear all costs the Accountants may reasonably incur in connection with any calculations contemplated by this Section 6. Any reduction in severance benefits required by this Section 6 shall occur in a manner necessary to provide Employee with the greatest economic benefit. If more than one manner of reduction of severance benefits is necessary to arrive at the reduced amount yields the greatest economic benefit to Employee, the payments and benefits shall be reduced pro rata.

6

Exhibit 10.5

(b) Release Prior to Receipt of Benefits . Prior to the receipt of any benefits under Sections 4(a), 4(b) (in the event of a termination of Employee’s employment by reason of Permanent Disability) or 4(c) of this Agreement, Employee (or, in the event of Employee's incapacity due to Permanent Disability, his legal representative) shall execute, and allow to become effective, a release of claims agreement in the form attached hereto as Exhibit A (the “ Release ”) not later than fifty-two (52) days following Employee’s employment termination. In no event will the Company have any obligation to pay any severance benefits under Sections 4(a), 4(b) (in the event of a termination of Employee’s employment by reason of Permanent Disability) or 4(c) of this Agreement to Employee until the Release becomes effective. In the event the Release does not become effective within fifty-two (52) days following Employee’s employment termination, the Company shall not have any obligation to pay to Employee any severance benefits under Sections 4(a), 4(b) (in the event of a termination of Employee’s employment by reason of Permanent Disability) or 4(c).

(c) Section 409A . All severance payments to be made upon a termination of employment under this Agreement may be made only upon a “separation of service” within the meaning of Section 409A of the Code and the Department of Treasury regulations and other guidance promulgated thereunder. Notwithstanding any provision to the contrary in this Agreement, subject to Employee’s compliance with Section 6(b), any amount payable under Section 4 that is deemed deferred compensation subject to Section 409A of the Code shall be paid on the sixtieth (60 th ) day following Employee’s “separation from service.” Notwithstanding any provision to the contrary in this Agreement, if Employee is deemed by the Company at the time of Employee’s separation from service to be a “specified employee” for purposes of Code Section 401A(a)(2)(B)(i), to the extent delayed commencement of any portion of the benefits to which Employee is entitled under this Agreement is required in order to avoid a prohibited distribution under Code Section 409A(a)(2)(B)(i), such portion of Employee’s benefits shall not be provided to Employee prior to the earlier of (i) the expiration of the six-month period measured from the date of Employee’s “separation of service” with the Company or (ii) the date of Employee’s death. Upon the first business day following the expiration of the applicable Code Section 409A(a)(2)(B)(i) period, all payments deferred pursuant to this Section 6(c) shall be paid in a lump sum to Employee, and any remaining payments due under the Agreement shall be paid as otherwise provided herein. For purposes of Code Section 409A (including, without limitation, for purposes of Treasury Regulation Section 1.409A-2(b)(2)(iii)), Employee’s right to receive installment payments under this Agreement shall be treated as a right to receive a series of separate payments and, accordingly, each installment payment hereunder shall at all times be considered a separate and distinct payment. It is intended that none of the severance payments and benefits to be provided hereunder will be subject to Section 409A of the Code and any ambiguities herein will be interpreted to be so exempt or, if not so exempt, to comply with Section 409A of the Code. Employee and the Company agree to work together in good faith to consider amendments to this Agreement and to take such reasonable actions which are necessary, appropriate or desirable to avoid imposition of any additional tax or income recognition prior to actual payment to Employee under Section 409A of the Code. Notwithstanding anything to the contrary contained herein, to the extent that any amendment to this Agreement with respect to the payment of any severance payments or benefits would constitute under Code Section 409A a delay in a payment or a change in the form of payment, then such amendment must be done in a manner that complies with Code Section 409A(a)(4)(C). Any reimbursement of expenses or in-kind benefits payable under this Agreement shall be made in accordance with Treasury Regulation Section 1.409A-3(i)(1)(iv) and shall be paid on or before the last day of Employee’s taxable year following the taxable year in which Employee incurred the expenses. The amount of expenses reimbursed or in-kind benefits payable during any taxable year of Employee’s shall not affect the amount eligible for reimbursement or in-kind benefits payable in any other taxable year of Employee's, and Employee’s right to reimbursement for such amounts shall not be subject to liquidation or exchange for any other benefit.


7

Exhibit 10.5

7. Proprietary Information and Inventions Agreement . Employee has executed and agrees to abide by the terms of the Company’s form of Proprietary Information and Inventions Agreement, which shall survive termination of Employee’s employment with the Company and the termination of this Agreement.

8. Conflicts . Employee represents that Employee’s performance of all the terms of this Agreement will not breach any other agreement to which Employee is a party. Employee has not, and will not during the term of this Agreement, enter into any oral or written agreement in conflict with any of the provisions of this Agreement. Employee further represents that Employee is entering into or has entered into an employment relationship with the Company of Employee’s own free will and that Employee has not been solicited as an employee in any way by the Company.

9. Successors . Any successor to the Company (whether direct or indirect and whether by purchase, lease, merger, consolidation, liquidation or otherwise) to all or substantially all of the Company’s business and/or assets shall assume the obligations under this Agreement and agree expressly to perform the obligations under this Agreement in the same manner and to the same extent as the Company would be required to perform such obligations in the absence of a succession. The terms of this Agreement and all of Employee’s rights hereunder and thereunder shall inure to the benefit of, and be enforceable by, Employee’s personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees.

10. Notice . Notices and all other communications contemplated by this Agreement shall be in writing and shall be deemed to have been duly given when personally delivered or when mailed by U.S. registered or certified mail, return receipt requested and postage prepaid. Mailed notices to Employee shall be addressed to Employee at the home address which Employee most recently communicated to the Company in writing. In the case of the Company, mailed notices shall be addressed to its corporate headquarters, and all notices shall be directed to the attention of its Secretary.

11. Miscellaneous Provisions .

(a) No Duty to Mitigate . Employee shall not be required to mitigate the amount of any payment contemplated by this Agreement (whether by seeking new employment or in any other manner), nor shall any such payment be reduced by any earnings that Employee may receive from any other source.

(b) Waiver . No provision of this Agreement shall be modified, waived or discharged unless the modification, waiver or discharge is agreed to in writing and signed by Employee and by an authorized officer of the Company (other than Employee). No waiver by either party of any breach of, or of compliance with, any condition or provision of this Agreement by the other party shall be considered a waiver of any other condition or provision or of the same condition or provision at another time.

(c) Whole Agreement . This Agreement replaces the Original Agreement in its entirety. Other than any indemnification agreement entered into between the Company and Employee in connection with Employee’s employment, any outstanding stock option or other equity compensation award agreements and the Proprietary Information and Inventions Agreement executed by Employee, no agreements, representations or understandings (whether oral or written and whether express or implied) which are not expressly set forth in this Agreement have been made or entered into by either party with respect to the subject matter hereof. This Agreement supersedes any agreement of the same title and concerning similar subject matter dated prior to the Effective Date, including any offer letter between Employee and the Company, and by execution of this Agreement both parties agree that any such predecessor agreement shall be deemed null and void.

8

Exhibit 10.5


(d) Choice of Law . The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of California without reference to conflict of laws provisions.

(e) Severability . If any term or provision of this Agreement or the application thereof to any circumstance shall, in any jurisdiction and to any extent, be invalid or unenforceable, such term or provision shall be ineffective as to such jurisdiction to the extent of such invalidity or unenforceability without invalidating or rendering unenforceable the remaining terms and provisions of this Agreement or the application of such terms and provisions to circumstances other than those as to which it is held invalid or unenforceable, and a suitable and equitable term or provision shall be substituted therefore to carry out, insofar as may be valid and enforceable, the intent and purpose of the invalid or unenforceable term or provision.

(f) Arbitration . Any dispute, claim or controversy based on, arising out of or relating to Employee’s employment or the termination thereof or this Agreement shall be settled by final and binding arbitration in the County of San Diego, California, before a single neutral arbitrator in accordance with the National Rules for the Resolution of Employment Disputes (the “ Rules ”) of the American Arbitration Association, and judgment on the award rendered by the arbitrator may be entered in any court having jurisdiction. The Rules may be found online at www.adr.org. Arbitration may be compelled pursuant to the California Arbitration Act (Code of Civil Procedure §§ 1280 et seq.). If the parties are unable to agree upon an arbitrator, one shall be appointed by the AAA in accordance with its Rules. Each party shall pay the fees of its own attorneys, the expenses of its witnesses and all other expenses connected with presenting its case; however , the parties agree that, to the extent permitted by law, the arbitrator may, in his or her discretion, award reasonable attorneys’ fees to the prevailing party; provided , further , that the prevailing party shall be reimbursed for such fees, costs and expenses within forty-five (45) days following any such award, but in no event later than the last day of Employee’s taxable year following the taxable year in which the fees, costs and expenses were incurred; provided , further , that the parties’ obligations pursuant to this sentence shall terminate on the tenth (10 th ) anniversary of the date of the termination of my employment. Other costs of the arbitration, including the cost of any record or transcripts of the arbitration, AAA’s administrative fees, the fee of the arbitrator, and all other fees and costs, shall be borne by the Company. This Section 11(f) is intended to be the exclusive method for resolving any and all claims by the parties against each other for payment of damages under the Agreement or relating to my employment or the termination thereof; provided , however , that Employee shall retain the right to file administrative charges with or seek relief through any government agency of competent jurisdiction, and to participate in any government investigation, including but not limited to (i) claims for workers’ compensation, state disability insurance or unemployment insurance; (ii) claims for unpaid wages or waiting time penalties brought before the California Division of Labor Standards Enforcement; provided , however , that any appeal from an award or from denial of an award of wages and/or waiting time penalties shall be arbitrated pursuant to the terms of this paragraph; and (iii) claims for administrative relief from the United States Equal Employment Opportunity Commission and/or the California Department of Fair Employment and Housing (or any similar agency in any applicable jurisdiction other than California); provided , further , that Employee shall not be entitled to obtain any monetary relief through such agencies other than workers’ compensation benefits or unemployment insurance benefits. This paragraph shall not limit either party’s right to obtain any provisional remedy, including, without limitation, injunctive or similar relief, from any court of competent jurisdiction as may be necessary to protect their rights and interests pending the outcome of arbitration, including without limitation injunctive relief, in any court of competent jurisdiction pursuant to California Code of Civil Procedure § 1281.8 or any similar statute of an applicable jurisdiction. Seeking any such relief shall not be deemed to be a waiver of such party’s right to compel arbitration. Both the Company and Employee expressly waive their right to a jury trial.


9

Exhibit 10.5

(g) Legal Fees and Expenses . The parties shall each bear their own expenses, legal fees and other fees incurred in connection with this Agreement. Notwithstanding the foregoing, in the event of any dispute arising under or relating to this Agreement, the arbitrator or court may, but shall not be required to, award the prevailing party its fees and expenses, including reasonable attorneys’ fees.

(h) No Assignment of Benefits . The rights of Employee to payments or benefits under this Agreement shall not be made subject to option or assignment, either by voluntary or involuntary assignment or by operation of law, including (without limitation) bankruptcy, garnishment, attachment or other creditor’s process, and any action in violation of this Section 11(h) shall be void. This Agreement does not create, and shall not be construed as creating, any rights enforceable by any person not a party to this Agreement.

(i) Employment Taxes . All payments made pursuant to this Agreement will be subject to withholding of applicable income and employment taxes.

(j) Assignment by Company . The Company may assign its rights under this Agreement to an affiliate, and an affiliate may assign its rights under this Agreement to another affiliate of the Company or to the Company. In the case of any such assignment, the term “Company” when used in a section of this Agreement shall mean the corporation that actually employs Employee.

(k) Non-Disparagement . Upon any termination of employment or service, Employee agrees that he/she will not, directly or indirectly through affiliates or associates, make any written or oral communications that could reasonably be considered to be disparaging of the Company in any respect, including, but not limited to, the Company’s business, technology, products, executives, officers, directors, former executives, consultants, contractors or agents. Additionally, the Company agrees that the Board and the Company’s executive officers will not make (or direct the Company to make) any written or oral communications that could reasonably be considered to be disparaging of Employee in any respect. Nothing in this Section shall preclude Employee or any representative of the Company from testifying truthfully in any deposition or judicial or administrative proceeding. Moreover, nothing in this Section applies to communications to Employee’s immediate family or communications by Employee or representatives of the Company to their respective attorneys, or to pleadings or other documents in any proceeding to enforce this Agreement or between Employee and the Company.

(l) Construction . The language in all parts of this Agreement shall in all cases be construed simply, according to its fair meaning, and not strictly for or against any of the parties hereto. Without limitation, there shall be no presumption against any party on the ground that such party was responsible for drafting this Agreement or any part thereof.

(m) Counterparts . This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which together will constitute one and the same instrument.








[Signature page follows]

10

Exhibit 10.5


The parties have executed this Agreement on the date first written above.



APRICUS BIOSCIENCES, INC.



By: /s/ Richard W. Pascoe
Name: Richard W. Pascoe
Title: Chief Executive Officer & Secretary


EMPLOYEE



Signature: /s/ Neil Morton
Print Name: Neil Morton
    



11

Exhibit 10.5

Exhibit A
FORM OF RELEASE OF CLAIMS

FOR AND IN CONSIDERATION OF the severance benefits to be provided me in connection with the involuntary termination of my employment, as set forth in Section 4[insert relevant subsection] of the Amended and Restated Employment Agreement between me and Apricus Biosciences, Inc. (the “ Company ”), dated April 25, 2016 (the “ Agreement ”), which are conditioned on my signing this Release of Claims and not revoking this Release of Claims as provided below, and to which I am not otherwise entitled, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, I, on my own behalf and on behalf of my heirs, executors, administrators, beneficiaries, representatives and assigns, and all others connected with or claiming through me, hereby release and forever discharge the Company, its subsidiaries and other affiliates and all of their respective past, present and future officers, directors, shareholders, employees, employee benefit plans, agents, general and limited partners, members, managers, joint venturers, representatives, successors and assigns and all others connected with any of them (all of the foregoing, the “ Company Released Parties ”), both individually and in their official capacities, from any and all causes of action, rights or claims of any type or description, known or unknown, which I have had in the past, now have, or might now have, through the date of my signing of this Release of Claims, in any way related to, resulting from, arising out of or connected with my employment by or service to the Company or any of its subsidiaries or other affiliates or the termination of that employment or service or pursuant to any federal, state or local law, regulation or other requirement (including without limitation Title VII of the Civil Rights Act of 1964, the Age Discrimination in Employment Act, as amended by the Older Workers Benefit Protection Act (the “ ADEA Claims ”), Employee Retirement Income Security Act, the Americans with Disabilities Act, and the wage and hour, wage payment, and fair employment practices laws of the state or states in which I have been employed by the Company or any of its subsidiaries or other affiliates, each as amended from time to time).

In signing this Release of Claims, I expressly waive and relinquish all rights and benefits afforded by Section 1542 of the Civil Code of the State of California, as well as under any other statutes or common law principles of similar effect, and do so understanding and acknowledging the significance of such specific waiver of Section 1542, which Section states as follows:

A general release does not extend to claims which the creditor does not know or suspect to exist in his or her favor at the time of executing the release, which if known by him or her must have materially affected his or her settlement with the debtor.

Thus, notwithstanding the provisions of Section 1542, and for the purpose of implementing a full and complete release and discharge of the Released, I expressly acknowledge that this Release of Claims is intended to include in its effect, without limitation, all Claims which I do not know or suspect to exist in my favor at the time of execution hereof, and that this Release of Claims contemplates the extinguishment of such Claim or Claims.

Excluded from the scope of this Release of Claims is (i) any claim arising under the terms of the Agreement based on the Company’s executory obligations under the Agreement after the effective date of this Release of Claim; (ii) any right of indemnification or contribution that I have pursuant to the articles of incorporation or by-laws of the Company, (iii) all rights to any outstanding options, restricted stock, restricted stock units or other awards to the extent vested and exercisable pursuant to the terms of the awards and the plans under which they were granted as of the termination of my employment; and (iv) any right which cannot be waived by operation of law, including claims for unemployment compensation or any state disability insurance benefits pursuant to the terms of applicable state law, claims for workers’ compensation insurance

12

Exhibit 10.5

benefits under the terms of any workers’ compensation insurance policy or fund of the Company or any claims pursuant to the terms and conditions of the federal law known as COBRA or any comparable state law, including Cal-COBRA.

I hereby represent, warrant and agree that I have been paid in full all compensation due to me, whether for services rendered by me to the Company, its subsidiaries and other affiliates, or otherwise, through the date on which my employment with the Company terminated and that, exclusive only of the Company’s provision to me of the severance benefits in accordance with the terms and conditions set forth in Section 4(a) of the Agreement, no further compensation of any kind shall be due to me from the Company or any of the other Company Released Parties as a result of my employment now ended. Without limiting the generality of the foregoing, I specifically acknowledge and agree that I have been paid in full all base salary, bonus compensation and pay for unused vacation due to me and that I have been reimbursed for all business expenses I incurred in the performance of my duties for the Company and the other Company Released Parties.

Effective as of the date of my termination of employment, I hereby confirm my resignation from all officer positions I hold or previously held with the Company or any subsidiary. I further agree that I will execute any additional documents that the Company may reasonably request in connection with the foregoing.

I understand that I must immediately return to the Company any and all documents, materials and information (whether in hardcopy, on electronic media or otherwise) related to the business (whether present or otherwise) of the Company, its subsidiaries and other affiliates and all keys, access cards, credit cards, computer hardware and software, telephones and other property of the Company, its subsidiaries and other affiliates and any copies thereof in my possession or control.

I have previously entered into the Company’s standard proprietary information and inventions agreement (the “ Proprietary Information and Inventions Agreement ”). I agree to continue to perform my obligations thereunder.

This Release of Claims creates legally binding obligations and I acknowledge that I am hereby advised by the Company to seek the advice of an attorney prior to signing this Release of Claims.

In signing this Release of Claims, I acknowledge my understanding that I may not sign it prior to the termination of my employment, but that I may consider the terms of this Release of Claims for up to [twenty-one (21)][forty-five (45)] days from the date I receive it, provided that I sign and return it to the Company no later than the [twenty-first (21 st )][forty-fifth (45 th )] day after such receipt. I acknowledge that I have had sufficient time to consider this Release of Claims and to consult with an attorney, if I wished to do so, or to consult with any other person of my choosing before signing; and that I am signing this Release of Claims knowingly, voluntarily and with a full understanding of its terms. I represent and acknowledge that if I am executing this Release of Claims before the foregoing period has elapsed, I do so knowingly, voluntarily and upon the advice of and with the approval of my legal counsel (if any), and I voluntarily waive any remaining portion of the consideration period. I further acknowledge that, in signing this Release of Claims, I have not relied on any promises or representations, express or implied, that are not set forth in writing expressly in the Agreement or this Release of Claims.

I understand that I may revoke this Release of Claims solely with respect to any potential ADEA Claims at any time within seven (7) days of the date of my signing by written notice to the Company c/o the Chief Executive Officer and that this Release of Claims will take full effect on the eighth calendar day after my signing and only if I have not revoked it during the preceding seven-day revocation period. Notwithstanding my election to revoke with respect to any potential ADEA Claims, I acknowledge that all

13

Exhibit 10.5

other terms of this Release of Claims shall remain in full force and effect. I further acknowledge that I shall not be entitled to any payments under Section 4[insert relevant subsection] of the Agreement unless this Release of Claims is executed and becomes effective not later than [thirty (30)][fifty-two (52)] days following the date of my termination of employment.

[I acknowledge that I have been provided with a notice, as required by the Older Workers Benefit Protection Act of 1990, that contains information about the job titles and ages of all individuals eligible or selected to receive the severance package and the ages of all individuals in the same job classification or organizational unit who are not eligible or selected for the severance package. (See Attachment 1.)]

This Release of Claims, the Agreement and the Proprietary Information and Inventions Agreement constitute the entire agreement of the Company and me in respect of the subject matter contained herein and therein and supersede all prior or simultaneous representations, discussions, negotiations and agreements, whether written or oral. This Release of Claims may be amended or modified only with my written consent and the written consent of an authorized representative of the Company. No oral waiver, amendment or modification will be effective under any circumstances whatsoever.

The validity, interpretation, construction and performance of this Release of Claims shall be governed by the laws of the State of California without reference to conflict of laws provisions.

If any term or provision of this Release of Claims or the application thereof to any circumstance shall, in any jurisdiction and to any extent, be invalid or unenforceable, such term or provision shall be ineffective as to such jurisdiction to the extent of such invalidity or unenforceability without invalidating or rendering unenforceable the remaining terms and provisions of this Release of Claims or the application of such terms and provisions to circumstances other than those as to which it is held invalid or unenforceable, and a suitable and equitable term or provision shall be substituted therefore to carry out, insofar as may be valid and enforceable, the intent and purpose of the invalid or unenforceable term or provision.

This Release of Claims may be executed in counterparts, each of which shall be deemed an original, but all of which together will constitute one and the same instrument.

Any dispute, claim or controversy based on, arising out of or relating to my employment or the termination thereof or the Agreement shall be settled by final and binding arbitration in the County of San Diego, California, before a single neutral arbitrator in accordance with the National Rules for the Resolution of Employment Disputes (the “ Rules ”) of the American Arbitration Association, and judgment on the award rendered by the arbitrator may be entered in any court having jurisdiction. The Rules may be found online at www.adr.org. Arbitration may be compelled pursuant to the California Arbitration Act (Code of Civil Procedure §§ 1280 et seq.). If the parties are unable to agree upon an arbitrator, one shall be appointed by the AAA in accordance with its Rules. Each party shall pay the fees of its own attorneys, the expenses of its witnesses and all other expenses connected with presenting its case; however, the parties agree that, to the extent permitted by law, the arbitrator may, in his or her discretion, award reasonable attorneys’ fees to the prevailing party; provided , further , that the prevailing party shall be reimbursed for such fees, costs and expenses within forty-five (45) days following any such award, but in no event later than the last day of my taxable year following the taxable year in which the fees, costs and expenses were incurred; provided , further , that the parties’ obligations pursuant to this sentence shall terminate on the tenth (10 th ) anniversary of the date of the termination of my employment. Other costs of the arbitration, including the cost of any record or transcripts of the arbitration, AAA’s administrative fees, the fee of the arbitrator, and all other fees and costs, shall be borne by the Company. This paragraph is intended to be the exclusive method for resolving any and all claims by the parties against each other for payment of damages under the Agreement or relating

14

Exhibit 10.5

to my employment or the termination thereof; provided , however , that I shall retain the right to file administrative charges with or seek relief through any government agency of competent jurisdiction, and to participate in any government investigation, including but not limited to (i) claims for workers’ compensation, state disability insurance or unemployment insurance; (ii) claims for unpaid wages or waiting time penalties brought before the California Division of Labor Standards Enforcement; provided , however , that any appeal from an award or from denial of an award of wages and/or waiting time penalties shall be arbitrated pursuant to the terms of this paragraph; and (iii) claims for administrative relief from the United States Equal Employment Opportunity Commission and/or the California Department of Fair Employment and Housing (or any similar agency in any applicable jurisdiction other than California); provided , further , that I shall not be entitled to obtain any monetary relief through such agencies other than workers’ compensation benefits or unemployment insurance benefits. This paragraph shall not limit either party’s right to obtain any provisional remedy, including, without limitation, injunctive or similar relief, from any court of competent jurisdiction as may be necessary to protect their rights and interests pending the outcome of arbitration, including without limitation injunctive relief, in any court of competent jurisdiction pursuant to California Code of Civil Procedure § 1281.8 or any similar statute of an applicable jurisdiction. Seeking any such relief shall not be deemed to be a waiver of such party’s right to compel arbitration. Both the Company and I expressly waive our right to a jury trial.

Intending to be legally bound, I have signed this Release of Claims as of the date written below.

Signature: _____________________                                                        
Name: Neil Morton                    

Date Signed:____________________                        


Acknowledged and Agreed:

APRICUS BIOSCIENCES, INC.


Signature:_______________________                                                     
Name:__________________________                                                            
Title:___________________________
                                                        
Date Signed:_____________________                    



15

Exhibit 10.6

APRICUS BIOSCIENCES, INC.
2012 STOCK LONG TERM INCENTIVE PLAN
RESTRICTED STOCK UNIT AWARD GRANT NOTICE AND
RESTRICTED STOCK UNIT AWARD AGREEMENT

Apricus Biosciences, Inc., a Nevada corporation (the “ Company ”), pursuant to its 2012 Stock Long Term Incentive Plan (the “ Plan ”), hereby grants to the holder listed below (“ Participant ”), an award of restricted stock units (“ Restricted Stock Units ” or “ RSUs ”) with respect to the number of shares of the Company’s Stock (the “ Stock ”) set forth below. This award for Restricted Stock Units (this “ RSU Award ”) is subject to all of the terms and conditions as set forth herein and in the Restricted Stock Unit Award Agreement attached hereto as Exhibit A (the “ Restricted Stock Unit Agreement ”) and the Plan, which are incorporated herein by reference. Unless otherwise defined herein, the terms defined in the Plan shall have the same defined meanings in this Grant Notice and the Restricted Stock Unit Agreement.
Participant:
_____________________________________________________
Grant Date:
_____________________________________________________
Total Number of RSUs:
_____________________________________________________
Distribution Schedule:
Subject to the terms of the Restricted Stock Unit Agreement, the RSUs shall be distributable as they vest pursuant to the Vesting Schedule in accordance with Section 2.1(c) of the Restricted Stock Unit Agreement.
Vesting Schedule:
Subject to the terms of the Restricted Stock Unit Agreement, the RSU Award shall vest on February 15, 2017, provided that Participant shall not have had a termination of Employment prior to such date.
 
 
By his or her signature, Participant agrees to be bound by the terms and conditions of the Plan, the Restricted Stock Unit Agreement and this Grant Notice. Participant has reviewed the Restricted Stock Unit Agreement, the Plan and this Grant Notice in their entirety, has had an opportunity to obtain the advice of counsel prior to executing this Grant Notice and fully understands all provisions of this Grant Notice, the Restricted Stock Unit Agreement and the Plan. Participant hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Administrator upon any questions arising under the Plan, this Grant Notice or the Restricted Stock Unit Agreement.
The Plan, this Grant Notice and the Restricted Stock Unit Agreement constitute the entire agreement of the parties and supersede in their entirety all oral, implied or written promises, statements, understandings, undertakings and agreements between the Company and Participant with respect to the subject matter hereof, including without limitation, the provisions of any employment agreement or offer letter regarding equity awards to be awarded to Participant by the Company, or any other oral, implied or written promises, statements, understandings, undertakings or agreements by the Company or any of its representatives regarding equity awards to be awarded to Participant by the Company.
APRICUS BIOSCIENCES, INC.
 
Participant
By:
_________________________
 
By:
_________________________
Name:
_________________________
 
 
_________________________
Title:
_________________________
 
Name:
_________________________
Address:
11975 El Camino Real, Suite 300 San Diego, CA 92130
 
Address:
_________________________

1

Exhibit 10.6


EXHIBIT A
TO RESTRICTED STOCK UNIT AWARD GRANT NOTICE
RESTRICTED STOCK UNIT AWARD AGREEMENT

Pursuant to the Restricted Stock Unit Award Grant Notice (the “ Grant Notice ”) to which this Restricted Stock Unit Award Agreement (this “ Agreement ”) is attached, Apricus Biosciences, Inc., a Nevada corporation (the “ Company ”) has granted to Participant the right to receive the number of RSUs set forth in the Grant Notice under the Company’s 2012 Stock Long Term Incentive Plan (the “ Plan ”).

ARTICLE I

GENERAL

1.1 Defined Terms . Capitalized terms not specifically defined herein shall have the meanings specified in the Plan and the Grant Notice.

1.2 Incorporation of Terms of Plan . The RSU Award is subject to the terms and conditions of the Plan, which are incorporated herein by reference. In the event of any inconsistency between the Plan and this Agreement, the terms of the Plan shall control.

ARTICLE II

AWARD OF RESTRICTED STOCK UNIT

2.1     Award of Restricted Stock Units .

(a) Award . In consideration of Participant’s past and/or continued employment with or service to the Company or any Affiliate and for other good and valuable consideration, the Company hereby grants to Participant the right to receive the number of RSUs set forth in the Grant Notice, subject to all of the terms and conditions set forth in this Agreement, the Grant Notice and the Plan. Prior to actual issuance of any shares of Stock, the RSUs and the RSU Award represent an unsecured obligation of the Company, payable only from the general assets of the Company.

(b) Vesting . The RSUs subject to the RSU Award shall vest in accordance with the Vesting Schedule set forth in the Grant Notice. Unless and until the RSUs have vested in accordance with the vesting schedule set forth in the Grant Notice, Participant will have no right to any distribution with respect to such RSUs. In the event of Participant’s termination of Employment prior to the vesting of all of the RSUs, any unvested RSUs will terminate automatically without any further action by the Company and be forfeited without further notice and at no cost to the Company.

(c) Distribution of Shares .

(i) Shares of Stock shall be distributed to Participant (or in the event of Participant’s death, to his or her estate) with respect to such Participant’s vested RSUs within thirty (30) days following the vesting date of the RSUs as specified in the Vesting Schedule set forth in the Grant Notice, subject to the terms and provisions of the Plan and this Agreement.


2

Exhibit 10.6

(ii) All distributions shall be made by the Company in the form of whole shares of Stock. In lieu of any fractional share of Stock, the Company shall make a cash payment to Participant equal to the fair market value of such fractional share on the date the RSUs are settled pursuant to this Section 2.1.

(iii)    Neither the time nor form of distribution of Stock with respect to the RSUs may be changed, except as may be permitted by the Administrator in accordance with the Plan and Section 409A of the Code and the Treasury Regulations thereunder.

2.2     Tax Withholding . Notwithstanding any other provision of this Agreement (including, without limitation, Section 2.1(b) hereof):

(a)    The Company and its Affiliates have the authority to deduct or withhold, or require Participant to remit to the Company or the applicable Affiliate, an amount sufficient to satisfy applicable federal, state, local and foreign taxes (including the employee portion of any FICA obligation) required by law to be withheld with respect to any taxable event arising pursuant to this Agreement. Participant is ultimately liable and responsible for all taxes owed in connection with the RSU Award, regardless of any action the Company or any Affiliate takes with respect to any tax withholding obligations that arise in connection with the RSU Award. Neither the Company nor any Affiliate makes any representation or undertaking regarding the treatment of any tax withholding in connection with the awarding or vesting of the RSU Award or the subsequent sale of Stock. The Company and its Affiliates do not commit and are under no obligation to structure the RSU Award to reduce or eliminate Participant’s tax liability. The Company and its Affiliates may withhold, or may permit Participant to satisfy, the tax withholding obligation in one or more of the forms specified below:

(i)     by cash or check made payable to the Company or the Affiliate with respect to which the withholding obligation arises;

(ii)     by the deduction of such amount from other compensation payable to Participant;

(iii)     with the consent of the Administrator, by requesting that the Company withhold a net number of vested shares of Stock otherwise issuable pursuant to the RSUs having a then current fair market value not exceeding the amount necessary to satisfy the withholding obligation of the Company and its Affiliates based on the minimum applicable statutory withholding rates for federal, state, local and foreign income tax and payroll tax purposes;

(iv)     with the consent of the Administrator, by tendering vested shares of Stock having a then current fair market value not exceeding the amount necessary to satisfy the withholding obligation of the Company and its Affiliates based on the minimum applicable statutory withholding rates for federal, state, local and foreign income tax and payroll tax purposes;

(v)     through the delivery of a notice that Participant has placed a market sell order with a broker acceptable to the Company with respect to the Stock issuable pursuant to the RSUs then vesting and that the broker has been directed to pay a sufficient portion of the net proceeds of the sale to the Company or its Affiliate with respect to which the tax withholding obligation arises in satisfaction of such obligation based on the minimum applicable statutory withholding rates for federal, state, local and foreign income tax and payroll tax purposes; provided that payment of such proceeds is then made to

3

Exhibit 10.6

the Company or the applicable Affiliate at such time as may be required by the Administrator, but in any event not later than the settlement of such sale; or

(vi)    in any combination of the foregoing.

(b)     In the event Participant fails to provide timely payment of all sums required pursuant to Section 2.2(a), the Company shall have the right and option, but not the obligation, to treat such failure as an election by Participant to satisfy all or any portion of Participant’s required payment obligation pursuant to Section 2.2(a)(ii) or Section 2.2(a)(iii) above, or any combination of the foregoing as the Company may determine to be appropriate. The Company shall not be obligated to deliver any certificate representing shares of Stock issuable with respect to the RSUs to Participant or his legal representative unless and until Participant or his legal representative shall have paid or otherwise satisfied in full the amount of all federal, state, local and foreign taxes applicable with respect to the taxable income of Participant resulting from the grant of the RSUs, the distribution of the shares of Stock issuable with respect thereto, or any other taxable event related to the RSUs, provided that no payment shall be delayed under this Section 2.2(b) if such delay will result in the imposition of taxes or penalties under Section 409A of the Code.

(c)    In the event Participant’s tax withholding obligation will be satisfied under Section 2.2(a)(iii) above, then the Company may elect to instruct any brokerage firm determined acceptable to the Company for such purpose to sell on Participant’s behalf a whole number of shares from those shares of Stock issuable to Participant upon settlement of the RSUs as the Company determines to be appropriate to generate cash proceeds sufficient to satisfy Participant’s tax withholding obligation. Participant’s acceptance of this RSU Award constitutes Participant’s instruction and authorization to the Company and such brokerage firm to complete the transactions described above, including the transactions described in the previous sentence, as applicable. Any shares of Stock to be sold at the Company’s direction through a broker-assisted sale will be sold on the day the tax withholding obligation arises (i.e., the date Stock is delivered) or as soon thereafter as practicable. The shares of Stock may be sold as part of a block trade with other participants of the Plan in which all participants receive an average price. Participant will be responsible for all broker’s fees and other costs of sale, and Participant agrees to indemnify and hold the Company harmless from any losses, costs, damages, or expenses relating to any such sale. To the extent the proceeds of such sale exceed Participant’s tax withholding obligation, the Company agrees to pay such excess in cash to Participant as soon as practicable. Participant acknowledges that the Company or its designee is under no obligation to arrange for such sale at any particular price, and that the proceeds of any such sale may not be sufficient to satisfy Participant’s tax withholding obligation. The Company may refuse to issue any shares of Stock in settlement of the RSU Award to Participant until the foregoing tax withholding obligations are satisfied.

2.3     Conditions to Issuance of Shares . The Company shall not be required to issue or deliver any shares of Stock issuable upon the vesting of the RSUs prior to the fulfillment of all of the following conditions:

(a)     the admission of the Stock to listing on all stock exchanges on which such shares of Stock are then listed;

(b)     the completion of any registration or other qualification of the Stock under any state or federal law or under rulings or regulations of the U.S. Securities and Exchange Commission or other governmental regulatory body, which the Administrator shall, in its sole and absolute discretion, deem necessary and advisable;

(c)     the obtaining of any approval or other clearance from any state or federal governmental agency that the Administrator shall, in its absolute discretion, determine to be necessary or advisable;

4

Exhibit 10.6


(d)    the lapse of any such reasonable period of time following the date the RSUs vest as the Administrator may from time to time establish for reasons of administrative convenience, subject to Section 409A of the Code and the Treasury Regulations and other guidance issued thereunder; and

(e)     the receipt by the Company of full payment of any applicable withholding tax in any manner permitted under Section 2.2 above.

2.4     Other Forfeiture and Claw-Back Provisions . Participant hereby acknowledges and agrees that the RSUs and any shares of Stock issued or paid to Participant in settlement of the RSUs are subject to the provisions of Section 6(a)(5) of the Plan.

2.5     Trading Restrictions .
        
(a)    The Company may establish periods from time to time during which Participant’s ability to engage in transactions involving the Company’s Stock is subject to specific restrictions (“ Restricted Periods ”). Notwithstanding any other provisions herein, Participant may not sell or otherwise dispose of any shares of Stock acquired pursuant to the RSU Award during an applicable Restricted Period unless such sale or other disposition is specifically permitted by the Company, in its sole discretion. Participant may be subject to restrictions giving rise to a Restricted Period for any reason that the Company determines appropriate, including, restrictions generally applicable to employees or groups of employees or restrictions applicable to Participant during an investigation of allegations of misconduct or conduct detrimental to the Company or any Affiliate by Participant.

(b)    Participant acknowledges and agrees that the RSU Award, any other equity awards now held by Participant or hereafter acquired by Participant, and any shares of Stock issuable upon exercise, vesting or settlement thereof, shall be subject to the terms and conditions of any stock ownership or retention guidelines (the “ Guidelines ”) adopted from time to time by the Company to the extent such Guidelines are by their terms applicable to Participant. Participant hereby acknowledges and agrees that the Administrator shall have the authority to review Participant’s compliance (or progress towards compliance) with such Guidelines from time to time and, in its sole discretion, to impose such conditions, restrictions or limitations on Participant, the RSU Award, other equity awards held by Participant and other shares of Stock issuable upon exercise, vesting or settlement thereof as the Administrator determines to be necessary or appropriate in order to achieve the purposes of such Guidelines.

ARTICLE III

OTHER PROVISIONS

3.1     Rights as Shareholder . Neither Participant nor any person claiming under or through Participant shall have any of the rights or privileges of a shareholder of the Company in respect of any shares of Stock issuable hereunder unless and until certificates representing such shares of Stock (which may be in book-entry form) shall have been issued and recorded on the books and records of the Company or its transfer agents or registrars, and delivered to Participant (including through electronic delivery to a brokerage account). No adjustment will be made for a dividend or other right for which the record date is prior to the date of such issuance, recordation and delivery, except as provided in Section 7 of the Plan. After such issuance, recordation and delivery, Participant shall have all the rights of a shareholder of the Company, including with respect to the right to vote the shares of Stock and the right to receive any cash or share dividends or other distributions paid to or made with respect to the shares of Stock.

5

Exhibit 10.6


3.2     No Right to Continued Employment . Nothing in the Plan, the Grant Notice, or this Agreement shall confer upon Participant any right to continue in the employ or service of the Company or any Affiliate or shall interfere with or restrict in any way the rights of the Company and any Affiliate, which rights are hereby expressly reserved, to discharge or terminate the services of Participant at any time for any reason whatsoever, except to the extent expressly provided otherwise in a written agreement between the Company or an Affiliate and Participant.

3.3     RSU Award and Interests Not Transferable . This RSU Award and the rights and privileges conferred hereby, including the RSUs awarded hereunder, may not be sold, pledged, assigned or transferred in any manner other than by will or the laws of descent unless and until the shares of Stock underlying the RSU Award have been issued, and all restrictions applicable to such shares of Stock have lapsed. Neither the RSU Award nor any interest or right therein shall be liable for the debts, contracts or engagements of Participant or his or her successors in interest or shall be subject to disposition by transfer, alienation, anticipation, pledge, encumbrance, assignment or any other means whether such disposition be voluntary or involuntary or by operation of law by judgment, levy, attachment, garnishment or any other legal or equitable proceedings (including bankruptcy), and any attempted disposition thereof shall be null and void and of no effect, except to the extent that such disposition is permitted by the preceding sentence.

3.4     Adjustments . Participant acknowledges that the RSU Award, including the vesting of the RSU Award and the number of shares of Stock subject to the RSU Award, is subject to adjustment in the discretion of the Administrator upon the occurrence of certain events as provided in this Agreement and Section 7 of the Plan.

3.5     Notices . Any notice to be given under the terms of this Agreement to the Company shall be addressed to the Company in care of the Secretary of the Company at the address given beneath the signature of the Company’s authorized officer on the Grant Notice, and any notice to be given to Participant shall be addressed to Participant at the address given beneath Participant’s signature on the Grant Notice. By a notice given pursuant to this Section 3.5, either party may hereafter designate a different address for notices to be given to that party. Any notice shall be deemed duly given when sent via email (if to Participant) or when sent by certified mail (return receipt requested) and deposited (with postage prepaid) in a post office or branch post office regularly maintained by the United States Postal Service.

3.6     Titles . Titles are provided herein for convenience only and are not to serve as a basis for interpretation or construction of this Agreement.

3.7     Governing Law; Severability . The laws of the State of Nevada shall govern the interpretation, validity, administration, enforcement and performance of the terms of this Agreement regardless of the law that might be applied under principles of conflicts of laws. Should any provision of this Agreement be determined by a court of law to be illegal or unenforceable, the other provisions shall nevertheless remain effective and shall remain enforceable.

3.8     Conformity to Securities Laws . Participant acknowledges that the Plan, the Grant Notice and this Agreement are intended to conform to the extent necessary with all provisions of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended (the “ Exchange Act ”), and any and all regulations and rules promulgated by the Securities and Exchange Commission thereunder, and state securities laws and regulations. Notwithstanding anything herein to the contrary, the Plan shall be administered, and the RSUs are granted and may be settled, only in such a manner as to conform to such

6

Exhibit 10.6

laws, rules and regulations. To the extent permitted by applicable law, the Plan, the Grant Notice and this Agreement shall be deemed amended to the extent necessary to conform to such laws, rules and regulations.

3.9     Tax Representations . Participant has reviewed with Participant’s own tax advisors the federal, state, local and foreign tax consequences of this investment and the transactions contemplated by the Grant Notice and this Agreement. Participant is relying solely on such advisors and not on any statements or representations of the Company or any of its agents. Participant understands that Participant (and not the Company) shall be responsible for Participant’s own tax liability that may arise as a result of this investment or the transactions contemplated by this Agreement.

3.10     Successors and Assigns . The Company may assign any of its rights under this Agreement to single or multiple assignees, and this Agreement shall inure to the benefit of the successors and assigns of the Company. Subject to the restrictions on transfer set forth herein and the Plan, this Agreement shall be binding upon Participant and his or her heirs, executors, administrators, successors and assigns.

3.11     Limitations Applicable to Section 16 Persons . Notwithstanding any other provision of the Plan or this Agreement, if Participant is subject to Section 16 of the Exchange Act, the RSUs, the Plan and this Agreement shall be subject to any additional limitations set forth in any applicable exemptive rule under Section 16 of the Exchange Act (including any amendment to Rule 16b-3 of the Exchange Act) that are requirements for the application of such exemptive rule. To the extent permitted by applicable law, this Agreement shall be deemed amended to the extent necessary to conform to such applicable exemptive rule.

3.12     Amendment, Suspension and Termination . To the extent permitted by the Plan, this Agreement may be wholly or partially amended or otherwise modified, suspended or terminated at any time or from time to time by the Administrator , provided, that, except as may otherwise be provided by the Plan, no amendment, modification, suspension or termination of this Agreement shall alter the terms of the RSU Award so as to affect materially and adversely Participant’s rights hereunder without the prior written consent of Participant.

3.13     Electronic Delivery and Paperless Administration . By accepting this Award, Participant hereby consents and agrees to receive any and all documentation related to the Award by electronic delivery and agrees to participate in the Plan through an online or electronic system, such as a system using an internet website or interactive voice response, maintained by the Company or a third party designated by the Company. In addition, in order to facilitate the administration of the Company’s equity administration by a third party, and for such third party administrator to provide reporting to the Company or its Affiliates on shares of Stock held within Participant’s account by such third party administrator, Participant hereby provides his or her consent on the sharing of this information by such third party administrator with the Company and its Affiliates. The foregoing consent shall lapse upon Participant’s termination of Employment or his or her earlier revocation of such consent in writing to the Company.

3.14     Section 409A .

(a)    Notwithstanding any other provision of the Plan, this Agreement or the Grant Notice, the Plan, this Agreement and the Grant Notice shall be interpreted in accordance with, and incorporate the terms and conditions required by, Section 409A of the Code (together with any Department of Treasury regulations and other interpretive guidance issued thereunder, including without limitation any such regulations or other guidance that may be issued after the Grant Date, “ Section 409A ”). The Administrator may, in its discretion, adopt such amendments to the Plan, this Agreement or the Grant Notice or adopt other policies and procedures (including amendments, policies and procedures with retroactive effect), or take any

7

Exhibit 10.6

other actions, as the Administrator determines are necessary or appropriate to comply with the requirements of Section 409A.

(b)    This Agreement is not intended to provide for any deferral of compensation subject to Section 409A of the Code, and, accordingly, the shares of Stock issuable pursuant to the RSUs hereunder shall be distributed to Participant no later than the later of: (i) the fifteenth (15 th ) day of the third month following Participant’s first taxable year in which such RSUs are no longer subject to a substantial risk of forfeiture, and (ii) the fifteenth (15 th ) day of the third month following first taxable year of the Company in which such RSUs are no longer subject to substantial risk of forfeiture, as determined in accordance with Section 409A and any Treasury Regulations and other guidance issued thereunder.

(c)    For purposes of Section 409A of the Code (including, without limitation, for purposes of Treasury Regulation Section 1.409A-2(b)(2)(iii)), each payment that Participant may be eligible to receive under this Agreement shall be treated as a separate and distinct payment.

3.15     Limitation on Participant's Rights . Participation in the Plan confers no rights or interests other than as herein provided. This Agreement creates only a contractual obligation on the part of the Company as to amounts payable and shall not be construed as creating a trust. Neither the Plan nor any underlying program, in and of itself, has any assets. Participant shall have only the rights of a general unsecured creditor of the Company with respect to amounts credited and benefits payable, if any, with respect to the RSUs, and rights no greater than the right to receive the Stock as a general unsecured creditor.

8

Exhibit 10.7

APRICUS BIOSCIENCES, INC.

NON-EMPLOYEE DIRECTOR COMPENSATION POLICY

(EFFECTIVE APRIL 5, 2016)

Non-employee members of the board of directors (the “ Board ”) of Apricus Biosciences, Inc. (the “ Company ”) shall be eligible to receive cash and equity compensation as set forth in this Non-Employee Director Compensation Policy. The cash compensation, common stock grants and option grants described in this Non-Employee Director Compensation Policy shall be paid or be made, as applicable, automatically and without further action of the Board, to each member of the Board who is not an employee of the Company or any parent or subsidiary of the Company (each, a “ Non-Employee Director ”) who may be eligible to receive such cash compensation or equity compensation, unless such Non-Employee Director declines the receipt of such cash compensation or equity compensation by written notice to the Company. This Non-Employee Director Compensation Policy shall remain in effect until it is revised or rescinded by further action of the Board. The terms and conditions of this Non-Employee Director Compensation Policy shall supersede any prior cash or equity compensation arrangements between the Company and its directors.
1.     Annual Retainers . Each Non-Employee Director shall be eligible to receive an annual retainer of $40,000 for service on the Board. In addition, a Non-Employee Director serving as:
(a)    chairman of the Board shall be eligible to receive an additional annual retainer of $40,000 for such service;
(b)    chairman of the Audit Committee shall be eligible to receive an additional annual retainer of $15,000 for such service;
(c)     a member (other than the chairman) of the Audit Committee shall be eligible to receive an additional annual retainer of $7,000 for such service;
(d)     chairman of the Compensation Committee shall be eligible to receive an additional annual retainer of $12,000 for such service;
(e)     a member (other than the chairman) of the Compensation Committee shall be eligible to receive an additional annual retainer of $5,000 for such service;
(f)     chairman of the Corporate Governance and Nominating Committee shall be eligible to receive an additional annual retainer of $8,000 for such service; and
(g)     a member (other than the chairman) of the Corporate Governance and Nominating Committee shall be eligible to receive an additional annual retainer of $3,000 for such service.
The annual retainers shall be paid by the Company in quarterly installments as follows: (x) seventy-five percent (75%) of the retainer payable to a Non-Employee Director for a calendar quarter shall be paid in cash within fifteen days following the end of such calendar quarter; and (y) twenty-five percent (25%) of the retainer payable to a Non-Employee Director for a calendar quarter shall be paid in the form of fully vested shares of the Company’s common stock granted automatically on the last day of such calendar quarter pursuant to the Company’s 2012 Stock Long Term Incentive Plan (the “ 2012 Plan ”), with the number of shares of the Company’s common stock to be issued calculated by dividing (1) the amount payable to such Non-Employee Director pursuant to this clause (y) divided by (2) the closing price per share of the

1

Exhibit 10.7

Company’s common stock on the last day of the calendar quarter to which such payment relates. Notwithstanding the foregoing, the shares to be granted to the Non-Employee Directors pursuant to clause (y) above with respect to the first quarter of 2016 shall be granted on April 5, 2016.
2.     Option Grants . The Non-Employee Directors shall be granted the following option awards. The options described below shall be granted under and shall be subject to the terms and provisions of the Company’s 2012 Plan and shall be granted subject to the execution and delivery of option agreements, including attached exhibits, in substantially the same forms previously approved by the Board, setting forth the vesting schedule applicable to such options and such other terms as may be required by the 2012 Plan.
(a)     Initial Options . Unless otherwise determined by the Board, a person who is initially elected or appointed to the Board, and who is a Non-Employee Director at the time of such initial election or appointment, shall be automatically granted a non-qualified stock option to purchase 60,000 shares of common stock (subject to adjustment as provided in the 2012 Plan) on the date of such initial election or appointment (each, an “ Initial Option ”).
(b)     Subsequent Options . A person who is a Non-Employee Director as of the first trading day of each calendar year shall be automatically granted a non-qualified stock option to purchase 35,000 shares of common stock (or, in the case of a Non-Employee Director serving as chairman of the Board, a non-qualified stock option to purchase 50,000 shares of common stock) (subject to adjustment as provided in the 2012 Plan) on such date. The option grants described in this clause 2(b) shall be referred to as “ Subsequent Options .”
        
(c)     Termination of Employment of Employee Directors . Members of the Board who are employees of the Company or any parent or subsidiary of the Company who subsequently terminate their employment with the Company and any parent or subsidiary of the Company and remain on the Board will not receive an Initial Option grant pursuant to clause 2(a) above, but to the extent that they are otherwise eligible, will be eligible to receive, after termination from employment with the Company and any parent or subsidiary of the Company, Subsequent Options as described in clause 2(b) above.
(d)     Terms of Options Granted to Non-Employee Directors
(i)      Exercise Price . The per share exercise price of each option granted to a Non-Employee Director shall equal 100% of the fair market value of a share of common stock on the date the option is granted, as determined under the 2012 Plan.
(ii)     Vesting . Initial Options granted to Non-Employee Directors shall become exercisable over four years, with one-fourth of the shares subject to such Initial Options vesting on the first anniversary of the date of grant and the remaining shares subject to such Initial Options vesting in thirty-six equal monthly installments over the three years thereafter, such that each Initial Option shall be 100% vested on the fourth anniversary of the date of grant, subject to the director’s continuing service on the Board through such dates. Subsequent Options granted to Non-Employee Directors shall become vested in twelve equal monthly installments of one-twelfth of the shares subject to such option on the first day of each calendar month following the date of the Subsequent Option grant, subject to a director’s continuing service on the Board through such dates. Unless otherwise determined by the Board, no portion of an option which is unexercisable at the time of a Non-Employee Director’s termination of membership on the Board shall thereafter become exercisable. All Initial Options and Subsequent Options granted to the Non-Employee Directors shall vest in full immediately prior to the occurrence of a Covered Transaction (as defined in the 2012 Plan).

2

Exhibit 10.7

(iii)    The term of each option granted to a Non-Employee Director shall be ten years from the date the option is granted.


3


Exhibit 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
I, Richard W. Pascoe, certify that:
1.
I have reviewed this Quarterly Report on Form 10-Q of Apricus Biosciences, Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)), and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: May 9, 2016
 
/S/ RICHARD W. PASCOE
Richard W. Pascoe
Chief Executive Officer




Exhibit 31.2
CERTIFICATION OF PRINCIPAL ACCOUNTING OFFICER
I, Catherine Bovenizer, certify that:
1.
I have reviewed this Quarterly Report on Form 10-Q of Apricus Biosciences, Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)), and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: May 9, 2016
 
/S/ CATHERINE BOVENIZER
Catherine Bovenizer
Chief Accounting Officer




Exhibit 32.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Richard W. Pascoe, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of Apricus Biosciences, Inc. on Form 10-Q for the quarter ended March 31, 2016 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Quarterly Report on Form 10-Q fairly presents in all material respects the financial condition and results of operations of Apricus Biosciences, Inc.
 
Date: May 9, 2016
By:
/S/ RICHARD W. PASCOE
 
Name:
Richard W. Pascoe
 
Title:
Chief Executive Officer




Exhibit 32.2
CERTIFICATION OF CHIEF ACCOUNTING OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Catherine Bovenizer, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of Apricus Biosciences, Inc. on Form 10-Q for the quarter ended March 31, 2016 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Quarterly Report on Form 10-Q fairly presents in all material respects the financial condition and results of operations of Apricus Biosciences, Inc.
 
Date: May 9, 2016
By:
/S/ CATHERINE BOVENIZER
 
Name:
Catherine Bovenizer
 
Title:
Chief Accounting Officer