Summary of ALLIQUA, INC. - Yahoo! Finance

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

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the accompanying condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and with our Annual Report on Form 10-K for the year ended December 31, 2011, filed with the Securities and Exchange Commission ("SEC") on March 29, 2012.

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains "forward-looking statements," which include information relating to future events, future financial performance, strategies, expectations, competitive environment and regulation. Words such as "may," "should," "could," "would," "predict," "potential," "continue," "expect," "anticipate," "future," "intend," "plan," "believe," "estimate," and similar expressions, as well as statements in future tense, identify forward-looking statements. Forward-looking statements should not be read as a guarantee of future performance or results and may not be accurate indications of when such performance or results will actually be achieved. Forward-looking statements are based on information we have when those statements are made or our management's good faith belief as of that time with respect to future events, and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements. Important factors that could cause such differences include, but are not limited to:

? inadequate capital;

? the uncertainty regarding the adequacy of our liquidity to pursue our complete business objectives;

? acceptance by customers of new proprietary products;

? entry of new competitors and similar products;

? loss of a key customer or supplier;

? impairment of goodwill and/or intangibles;

? adverse economic conditions and/or intense competition;

? adverse federal, state and local government regulation;

? technological obsolescence of our products;

? technical problems with our research and products;

? price increases for supplies and components;

? inability to carry out research, development and commercialization plans; and

? loss or retirement of key executives.

For a discussion of these and other risks that relate to our business and investing in shares of our common stock, you should carefully review the risks and uncertainties described under the heading "Part I - Item 1A. Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2011, and those described from time to time in our future reports filed with the SEC. The forward-looking statements contained in this Quarterly Report on Form 10-Q are expressly qualified in their entirety by this cautionary statement. We do not undertake any obligation to publicly update any forward-looking statement to reflect events or circumstances after the date on which any such statement is made or to reflect the occurrence of unanticipated events.

Overview

We operate through the following wholly-owned subsidiaries: AquaMed Technologies, Inc., Alliqua Biomedical, Inc. and HepaLife Biosystems, Inc.

We develop, manufacture and market high water content, electron beam cross-linked, aqueous polymer hydrogels, or gels, used for wound care, medical diagnostics, transdermal drug delivery and cosmetics. We supply these gels primarily to the wound care and pain management segments of the healthcare industry. We believe that we are one of only two known manufacturers of these gels in the world. We specialize in custom gels by capitalizing on proprietary manufacturing technologies.

Our gels can be utilized as delivery mechanisms for medication to be delivered through the skin into the blood stream, known as transdermal delivery, or to be delivered between the layers of the skin, known as intradermal delivery. Active ingredients can be added to our gels for use in wound/burn dressings and to provide for the topical application of non-prescription drugs. Additionally, our gels can also be used as components in certain medical devices, skin care treatments, cosmetics and other commercial products.

Our products are manufactured using proprietary and non-proprietary mixing, coating and cross-linking technologies. Together, these technologies enable us to produce gels that can satisfy rigid tolerance specifications with respect to a wide range of physical characteristics (e.g., thickness, water content, adherence, absorption, vapor transmission, release rates) while maintaining product integrity. Additionally, we have the manufacturing ability to offer broad choices in selection of liners onto which the gels are coated. Consequently, our customers are able to determine tolerances in vapor transmission and active ingredient release rates while personalizing color and texture.

In July of 2012, we launched our new line of proprietary products under the SilverSeal® name. These hydrogel dressings are initially available in two (2) sizes and are intended for the management of wounds and to provide an antimicrobial barrier. We are currently opening various distribution channels while engaging several consultants to assist in the process of educating medical professionals about the benefits of these dressings. We have also begun to assemble a Scientific Advisory Board to help bring our product into the wound care marketplace.

Recent Events

In May of 2012, the composition of our Board of Directors changed with the appointments of Dr. Jerome B. Zeldis and Mr. Kenneth Londoner and the resignations of Dr. Michael Goldberg and Mr. Nachum Stein. Dr. Zeldis, an experienced senior biopharmaceutical executive, is currently the CEO of Celgene Global Health and the Chief Medical Officer of Celgene Corporation. Mr. Londoner is the founder, Chairman, and CEO of BioSig Technologies, Inc., a privately held medical technology company formed in 2009. Mr. Londoner is also the Managing Partner of Endicott Management Partners, LLC, a private investment company focused on medical technology and consumer-related companies.

Dr. Zeldis was awarded an options package totaling 23,200,000 shares of common stock with the following terms:

? 3,480,000 options with a five (5) year term and exercise price of $0.10 per share vest immediately;

? 2,320,000 options with a five (5) year term and exercise price of $0.10 per share vest upon the delivery of a written three-year strategic plan (in which Dr. Zeldis actively assists) to the Company with respect to the Company's hydrogel platform (the "Platform"), provided that the report is delivered by February 17, 2013;

? 2,320,000 options with a five (5) year term and exercise price of $0.10 per share which vest upon the two year anniversary of the Company hiring a chief medical officer identified by Dr. Zeldis, provided that the chief medical officer is hired by November 17, 2012;

? 4,640,000 options with a five (5) year term and exercise price of $0.15 per share which vest upon the delivery of a written clinical program to the Company (in which Dr. Zeldis actively assists) with respect to the completion of U.S. Food and Drug Administration trials to approve the delivery of an active pharmaceutical ingredient (an "API") delivered through the Platform, provided such clinical program is delivered by May 17, 2013;

? 4,640,000 options with a five (5) year term and exercise price of $0.15 per share which vest upon the Company entering into a co-licensing agreement to develop a product that provides for the delivery of an API using the Platform, provided such co-licensing agreement is entered into by November 17, 2013; and

? 5,800,000 options with a five (5) year term and exercise price of $0.15 per share which vest upon (a) Dr. Zeldis's delivery of a written strategic plan to the Company with respect to the Company's HepaMate™ product and, (b) HepaLife Biosystems, Inc., a wholly owned subsidiary of the Company, completing a financing resulting in gross proceeds of at least $2,500,000 provided such strategic plan is delivered and such financing occurs by May 17, 2013.

Mr. Londoner was awarded an options package totaling 2,500,000 shares of common stock with the following terms:

? 250,000 options with a five (5) year term and exercise price of $0.10 per share vest immediately;

? 500,000 options with a five (5) year term and exercise price of $0.10 per share vest upon the Company forming a Scientific Advisory Board comprised of at least five leading doctors and clinicians;

? 500,000 options with a five (5) year term and exercise price of $0.10 per share vest upon the Company hiring a Chief Executive Officer; and

? 1,250,000 options with a five (5) year term and exercise price of $0.10 per share vest upon the Company having consolidated gross revenue of at least $10,000,000 as reported in the Company's annual report on Form 10-K for the fiscal year ended December 31, 2013.

Upon Dr. Goldberg's resignation from the Board of Directors, he was appointed to the Company's Scientific Advisory Board ("SAB"). Subsequently, during the quarter, Dr. Michael Moore and Dr. Charles Wolff were added as well. The Company intends to add additional professionals to the SAB in the near future to assist in the further development and expansion of our proprietary products as well as to aide in the advancement of our In-Process Research & Development.

The additions of Dr. Zeldis and Mr. Londoner to our Board of Directors, along with the formation of the SAB, demonstrates the Company's goal of adding personnel with industry-specific experience to further develop and achieve our objectives.

Critical Accounting Policies

A critical accounting policy is one that is both important to the portrayal of our financial condition and results of operation and requires management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Our critical accounting policies are more fully described in Note 2 of the Notes to the Consolidated Financial Statements included in our 2011 Annual Report on Form 10-K and are disclosed in the Management's Discussion and Analysis of Financial Condition and Results of Operations section of our 2011 Annual Report on Form 10-K. There have not been any material changes to such critical accounting policies since December 31, 2011.

Results of Operations

Overview. For the quarter ended June 30, 2012, we realized a net loss of $1,307,775, comprised primarily of a loss from operations of approximately $722,000, depreciation and amortization expense of approximately $161,000 and non-cash stock based compensation expense of approximately $425,000. For the six months ended June 30, 2012, we realized a net loss of $2,179,626, comprised primarily of a loss from operations of approximately $1,432,000, depreciation and amortization expense of approximately $322,000 and non-cash stock based compensation expense of approximately $425,000. For the quarter and six months ended June 30, 2011, we had a net loss of $656,112 and $2,818,579, respectively. The greater net loss for quarter ending June 30, 2012 compared to the quarter ending June 30, 2011, was principally due to lower sales and higher non-cash stock compensation expense in the 2012 period. The lower net loss for the six month period ending June 30, 2012 compared to the six months ending June 30, 2011 was primarily due to lower non-cash stock compensation expense in the six month period. Although there were significant option grants in the 2012 period, the vesting schedules are performance based while the 2011 option grants were primarily granted for prior services with full vesting upon the date of the grants.

Revenues. Sales revenues were $258,869 for the three months ended June 30, 2012, compared to $848,228 for the same period in 2011, and $454,470 for the six months ended June 30, 2012, compared to $1,251,620 for the same period in 2011. The decreases of $585,359 and $797,150, representing declines of 69% and 64% respectively for the three and six months ended June 30, 2012, were primarily due to lower sales volume from our largest customer in the 2012 periods for the manufacture of our hydrogel products. We attribute this decrease to the customer's desire to buildup inventory levels in the 2011 period that it did not believe was necessary in 2012.

Gross Loss. Our gross loss, which is total revenue less cost of sales, was $186,133 for the three months ended June 30, 2012, compared to a gross profit of $304,077 for the same period in 2011, and our gross loss for the six months ended June 30, 2012 was $442,147 compared to a gross profit of $210,862 for the same period in 2011. The decreases in profitability of $490,210 and $653,009, representing declines of 161% and 309% respectively for the three and six months ended June 30, 2012, can be attributed to lower sales revenues in addition to our cost of sales not fluctuating in direct proportion to our sales volume due to a significant portion of fixed overhead expenses being included in cost of sales. Our gross profit or loss may fluctuate from period to period based on the mix of products sold and based on the volume of products sold in each period.

Depreciation of equipment and amortization of technology included in cost of goods sold was $160,082 for the three months ended June 30, 2012, compared to $156,272 for the same period in 2011, and $320,169 for the six months ended June 30, 2012, compared to $312,380 for the same period in 2011. The increases of $3,810 and $7,789, representing 2% increases for each respective period, is attributable to additional equipment being put in place in 2012. Labor related expense was $113,513 for the three months ended June 30, 2012, compared to $88,700 for the same period in 2011, and $208,678 for the six months ended June 30, 2012, compared to $208,679 for the same period in 2011. The increase of $23,212 or 26% for the quarter ending June 30, 2012 is primarily due to certain labor related expenses being allocated to research and development during the quarter ended June 30, 2011, that was allocated to cost of sales during 2012 due to the curtailment of our research and development activities. Rent expense was $72,586 for the three months ended June 30, 2012 compared to $61,399 for the same period in 2011 and $135,862 for the six months ended June 30, 2012, compared to $122,798 for the same period in 2011. The increase of $11,187 and $13,064 respectively is due to a larger operating escalation expense in 2012. Utility expense was $14,300 for the three months ended June 30, 2012, compared to $22,202 for the same period in 2011 and $29,201 for the six months ended June 30, 2012, compared to $44,493 for the same period in 2011. The decrease of $7,902 and $15,292, 36% and 34% respectively for each period, is due to lower electrical consumption as a result of lower production and the lower energy costs as a result of outsourcing to an alternate utility provider.

General and Administrative Expenses. General and administrative expense was $1,068,883 for the three month period ended June 30, 2012, compared to $821,127 for the same period in 2011, and $1,567,925 for the six months ended June 30, 2012, compared to $2,757,453 for the same period in 2011. The increase of $247,756, or 30%, for the three month period ending June 30, 2012, can be attributed to greater non-cash stock based compensation expense in the 2012 period. Conversely, the decrease of $1,189,528 or 43% for the six month period ended June 30, 2012 versus the same period in 2011 can be attributed to a greater non-cash stock based compensation expense for the three month period ended March 31, 2011. Director fees for both the three and six month periods ended June 30, 2012 was $285,634. These fees are all non-cash as directors received stock options for their services in 2012. Director fees for the three and six months periods ended June 30, 2011, were $40,500 and $81,000, respectively. Rent expense was $21,500 for the three months ended June 30, 2012, compared to $42,000 for the same period in 2011, and $43,000 for the six month period ended June 30, 2012, compared to $84,000 for the same period in 2011. The decrease of $20,500 and $41,000 for the respective periods is due to the lower rent for executive offices in addition to all rent expense for 2012 being a non-cash expense. Advertising expense was $6,850 for the three month period ended June 30, 2012, compared to $263,649 for the same period in 2011, and was $6,850 for the six month period ended June 30, 2012, compared to $373,646 for the same period in 2011. The decrease in advertising expense is attributable to us suspending investor relations expenses.

General and administrative expense was 413% of product sales for the three month period ended June 30, 2012, and 345% of product sales for the six month period ended June 30, 2012, compared to 97% and 220% for the comparable periods in 2011. The increased percentages in the 2012 periods are attributed to significantly lower product sales in 2012. Officer compensation for the three month period ended June 30, 2012 was $423,003, compared to $983,224 for the similar period in 2011 and was $495,100 for the six month period ended June 30, 2012, compared to $1,379,772 for the similar period in 2011. The increase in the quarter ending June 30, 2012 compared to the quarter ending March 31, 2012, is due to employment contracts entered into in May, 2012 and the decrease for the six month comparative period is due to the large non-cash compensation expense from the issuance of stock options in the first quarter of 2011. Professional fees for the three month period ended June 30, 2012 were $116,071, compared to $88,324 for the same period in 2011 and were $304,313 for the six month period ended June 30, 2012, compared to $284,606 for the same period in 2011. The increase of $29,761 or 34% for the three month period and $22,884 or 8% for the six month period is due to some additional legal fees. Consulting fees for the 3 months ended June 30, 2012 were $52,027, and $120,590 for the six month period ended June 30, 2012, compared to $33,750 and $76,259 for the comparable periods in 2011. The increase in consulting fees is attributable to the engagement of consultants to assist management with the development of the HepaMate technology.

Research and Development. We incurred $49,494 in research and development expenses for the three month period ended June 30, 2012, and $162,706 for the six month period ended June 30, 2012, compared to $139,413 and $272,029 for the comparable periods in 2011. The decrease of $89,919 or 64% for the three month period and $109,323 or 40% for the six month period is due principally to a reduction in expenses associated with the development of our transdermal pain patch. We believe our research and development expenses will continue to decrease in 2012 as the development of our proprietary products is at the point where we have successfully completed all product testing and have initiated sales into the marketplace. We have been committing non-cash resources to the further development of the HepaMate asset and with the assistance of a member of our board of directors, have engaged leading experts in the field of liver transplant medicine to continue our efforts.

Impairment of Goodwill. We review our goodwill for impairment annually, or more frequently, if facts and circumstances warrant a review. Goodwill is assigned on the date of acquisition. We evaluate goodwill for impairment by comparing fair value of each reporting unit to its carrying value, including the associated goodwill. To determine the fair value, we use the income approach based on estimated discounted future cash flows. The cash flow assumptions consider historical and forecasted revenue, operating costs and other relevant factors. We have assessed qualitative factors to determine whether current events and circumstances lead to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount at this time. After assessing the totality of events and circumstances, we determined that it is not more likely than not that the fair value of the any reporting unit is less than its carrying amount at this time, and therefore, the two-step impairment test was unnecessary at June 30, 2012. We did not recognize any impairment charges for goodwill for the three month periods ended June 30, 2012 and 2011. A non-cash goodwill impairment charge of $9,386,780 was recorded in the quarter ended December 31, 2011 relating to the HepaLife Biosystems, Inc. reporting unit.

Liquidity and Capital Resources

At June 30, 2012, cash and cash equivalents totaled $169,957, compared to $260,111 at December 31, 2011. The decrease is attributable to cash used in operating activities of $1,072,064 and capital expenditures of $5,115 offset by net proceeds of $987,025 received from the issuance of 21,000,000 shares of common stock and five year warrants to purchase 10,500,000 of common stock at a price of $0.069 in February 2012. The use of cash in operating activities is primarily attributable to cost of goods sold including compensation and materials, legal and professional fees and general operating expenses.

Net cash flow used in operating activities was $1,072,064 for the six months ended June 30, 2012, compared to $1,204,092 for the six month period ended June 30, 2011. The decrease in cash used is primarily attributable to discontinuing cash payments for director fees and rent for corporate offices in 2012 and paying these in stock and stock options.

We recognized revenue of $454,470 in the six month period ended June 30, 2012 as sales levels in the contract manufacturing business decreased from the same period in 2011, primarily due to lower sales from our largest customer.

Cash expenses included $563,179 for cost of sales, $224,013 for consultant fees, $304,314 for professional fees including legal and accounting with the balance attributable to various general and administrative expenses. Inventory decreased by $27,730 of which $13,269 is attributable to the write down of obsolete inventory and an increased reserve balance. Accounts payable and accrued expenses, net of deposits and prepaid expenses, increased $108,876 and accounts receivable decreased $27,008. Deferred revenue increased $39,000.

Cash used in investing activities was $5,115 in the six month period ending June 30, 2012, compared to $341,739 provided by investing activities in the period ended June 30, 2011. In the 2011 period, the Company used the $362,396 balance of restricted cash which had been received in the May 2010 financing. Cash flow generated from financing activities was approximately $987,025 for the period ending June 30, 2012 compared to cash flow generated from financing activities of $990,000 for the similar period in 2011.

At June 30, 2012, current assets totaled $665,644 and current liabilities totaled $537,681, compared to current assets of $603,908 and current liabilities of $337,193 at December 31, 2011. As a result, our working capital decreased to $127,963 from $266,715 during the first six months of 2012. This decrease was primarily due to cash used during the current period.

We have experienced negative operating cash flows since inception and have funded our operations primarily from sales of common stock and other securities. Our cash requirements have historically been for product development, clinical trials, marketing and sales activities, finance and administrative costs, capital expenditures and overall working capital. We expect to continue to access the equity markets in the future to fund our business plan.

Our future cash flows are dependent, in large part, on (i) our ability to successfully market and sell our newly launched proprietary line of products,
(ii) our ability to successfully put distribution channels in place, (iii) research and development, and (iv) the need to supplement working capital.

We expect to continue to incur losses from operations. We believe that our capital resources will improve if our new products gain market recognition and acceptance, resulting in increased sales. We continue to focus our efforts on expanding our product offerings. For example, our subsidiary, Alliqua Biomedical, Inc., executed a license agreement during the third quarter of 2011 with Noble Fiber Technologies, LLC ("Noble"). Pursuant to this agreement, Noble granted Alliqua Biomedical, Inc. an exclusive worldwide license to use Noble's silver coated fibers marketed under the trademarks X-Static® and SilverSeal® in our manufacture, sale, use and distribution of two proprietary wound dressings.

We intend to restrict expenses, including research and development, as necessary to preserve liquidity. We terminated monthly cash rental payments for our executive office space in December, 2011 and, beginning in 2012, we discontinued paying cash fees to directors. These expenses are being paid in stock and stock options during 2012. The termination of these cash payments resulted in a reduction in cash expense of $165,000 for the six month period ended June 30, 2012 compared to the same period in 2011.

If sales decline and/or weak demand continues in the contract manufacturing business and if our new products do not gain forecasted market recognition, it will be necessary to further reduce expenses. The reduction in future expenses may be significant.

If we are not successful with our sales and marketing efforts, or if it takes us longer to achieve these benefits than anticipated, or if the reduction in expenses is not sufficient, then we will experience a shortfall in cash necessary to sustain operations and we will be required to seek other sources of funds in order to maintain sufficient funds available to operate. We believe that we will also require additional capital in order to execute the longer term aspects of our business plan, including additional research and development efforts related to HepaMate™.

We believe that our need for additional equity capital will continue and we intend to pursue additional financing from existing relationships (such as prior shareholders, investors and lenders) and from new investors to support our research and development programs and operations. In addition, we may pursue sources of additional capital through various means, including joint ventures, debt financing, or equity financing. We intend to engage investment banking firms to assist us with these efforts.

Future financings are likely to be dilutive to existing stockholders and the terms of securities issued may be more favorable to new investors. Newly issued securities may include certain preferences, superior voting rights, and the issuance of warrants or other derivative securities, which may have additional dilutive effects. Further, we may incur substantial costs in pursuing future capital and/or financing, including investment banking fees, legal fees, accounting fees, securities law compliance fees, printing and distribution expenses and other costs. We may also be required to recognize non-cash expenses in connection with certain securities we may issue, such as convertible notes and warrants, which may adversely impact our financial condition.

Based on current forecasts, which include improving sales orders from our principal contract manufacturing customer, sales orders from our new line of proprietary products and our ability to manufacture and successfully fulfill these orders, we believe our cash and cash equivalents, anticipated cash flows from operations, and other external sources of credit will be sufficient to meet our cash requirements through the second quarter of 2013.

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