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ALQA > SEC Filings for ALQA > Form 10-Q on 21-Nov-2012All Recent SEC Filings

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Form 10-Q for ALLIQUA, INC.


21-Nov-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 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 or retirement of key executives;

? 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; and

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


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 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 the 2nd quarter of 2012, we launched a 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

On October 1, 2012, James Sapirstein was appointed as our chief executive officer and as a Class I member of the board with a term expiring at the 2013 annual meeting of stockholders. Richard Rosenblum ceased serving as our president and was appointed as our executive co-chairman to serve alongside with David Stefansky.


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 September 30, 2012, we realized a net loss of $874,483, comprised primarily of a loss from operations of approximately $453,000, depreciation and amortization expense of approximately $162,000 and non-cash stock based compensation expense of approximately $259,000. For the nine months ended September 30, 2012, we realized a net loss of $3,054,064, comprised primarily of a loss from operations of approximately $1,886,000, depreciation and amortization expense of approximately $484,000 and non-cash stock based compensation expense of approximately $684,000. For the quarter and nine months ended September 30, 2011, we had a net loss of $844,618 and $3,663,238, respectively. The greater net loss for the quarter ending September 30, 2012 compared to the quarter ending September 30, 2011, was principally due to lower sales in the 2012 period. The lower net loss for the nine month period ending September 30, 2012 compared to the nine months ending September 30, 2011 was primarily due to lower non-cash stock compensation expense in the 2012 nine month period offset by significantly lower sales. 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. There may be significant future expense for non-cash stock based compensation if the milestones are achieved in the options granted to a member of the board in May, 2012.


Revenues. Sales revenues were $373,790 for the three months ended September 30, 2012, compared to $419,825 for the same period in 2011, and $828,260 for the nine months ended September 30, 2012, compared to $1,671,445 for the same period in 2011. The decreases of $46,035 and $843,185, representing declines of 11% and 50%, respectively, for the three and nine months ended September 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 was no longer necessary in 2012.

Gross Loss. Our gross loss, which is total revenue less cost of sales, was $77,286 for the three months ended September 30, 2012, compared to a gross loss of $61,201 for the same period in 2011, and our gross loss for the nine months ended September 30, 2012 was $519,433 compared to a gross profit of $149,661 for the same period in 2011. The decreases in profitability of $16,085 and $669,094, representing declines of 26% and 447%, respectively, for the three and nine months ended September 30, 2012, can be attributed to lower sales revenues for the reasons noted above 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 $162,067 for the three months ended September 30, 2012, compared to $158,187 for the same period in 2011, and $484,800 for the nine months ended September 30, 2012, compared to $471,957 for the same period in 2011. The increases of $3,880 and $12,843, representing 2% increases for each respective period, is attributable to additional equipment being put in place in 2012. Labor related expense was $110,466 for the three months ended September 30, 2012, compared to $93,774 for the same period in 2011, and $317,543 for the nine months ended September 30, 2012, compared to $302,453 for the same period in 2011. The increases of 18% and 5% for the three and nine month periods ended September 30, 2012 comparated to the same periods in 2011, is primarily attributable to certain labor related expenses being allocated to research and development activities during the 2011 periods. Rent expense was $62,889 for the three months ended September 30, 2012 compared to $66,849 for the same period in 2011 and $198,761 for the nine months ended September 30, 2012, compared to $189,648 for the same period in 2011. The decrease of $3,960 and increase of $9,113 respectively is due to the timing of operating escalation expenses in 2012. Utility expense was $15,548 for the three months ended September 30, 2012, compared to $23,706 for the same period in 2011 and $44,750 for the nine months ended September 30, 2012, compared to $68,199 for the same period in 2011. The decrease of $8,158 and $23,449, 34% 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 $767,614 for the three month period ended September 30, 2012, compared to $661,808 for the same period in 2011, and $2,335,539 for the nine months ended June 30, 2012, compared to $3,419,261 for the same period in 2011. The increase of $105,806, or 16%, for the three month period ending September 30, 2012, can be attributed to greater non-cash stock based compensation expense in the 2012 period. Conversely, the decrease of $1,083,722 or 31% for the nine month period ended September 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 the three months ended September 30, 2012 was $198,446 compared to $40,786 for the same period in 2011 and $484,080 for the nine months ended September 30, 2012, compared to $348,571 for the same period in 2011. The 2012 director fees are all non-cash as directors received stock options for their services in 2012. Rent expense was $21,500 for the three months ended September 30, 2012, compared to $42,000 for the same period in 2011, and $64,500 for the nine month period ended September 30, 2012, compared to $126,000 for the same period in 2011. The decrease of $20,500 and $61,500 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. Investor relations expense was $9,982 for the three month period ended September 30, 2012, compared to $387 for the same period in 2011, and was $16,832 for the nine month period ended September 30, 2012, compared to $374,043 for the same period in 2011. The decrease is attributable to suspending investor relations expenses in the 2012 periods.


General and administrative expense was 205% of product sales for the three month period ended September 30, 2012, and 282% of product sales for the nine month period ended September 30, 2012, compared to 157% and 204% 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 September 30, 2012 was $213,765, compared to $242,469 for the same period in 2011 and was $708,865 for the nine month period ended September 30, 2012, compared to $1,661,347 for the same period in 2011. The decrease in the three and nine month periods ending September 30, 2012, compared to the corresponding periods in 2011 is due to non-cash compensation expense in the 2011 periods from the issuance of stock options to executive management. Professional fees for the three month period ended September 30, 2012 were $96,438, compared to $88,324 for the same period in 2011 and were $400,751 for the nine month period ended September 30, 2012, compared to $379,670 for the same period in 2011. Professional fees have remained consistent through the comparable periods. Consulting fees for the three months ended September 30, 2012 were $75,865, and $196,455 for the nine month period ended September 30, 2012, compared to $33,750 and $110,009 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 and to support the rollout of our new line of proprietary products.

Research and Development. We incurred $30,396 in research and development expenses for the three month period ended September 30, 2012, and $193,102 for the nine month period ended September 30, 2012, compared to $121,609 and $393,638 for the comparable periods in 2011. The decrease of $91,213 or 75% for the three month period and $200,536 or 51% for the nine 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 have engaged leading experts in the field of liver transplant medicine to continue our efforts. We expect to formulate a detailed and strategic plan for this asset in the first half of 2013.

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 September 30, 2012. We did not recognize any impairment charges for goodwill for the three month periods ended September 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 September 30, 2012, cash and cash equivalents totaled $97,281, compared to $260,111 at December 31, 2011. The decrease is attributable to cash used in operating activities of $1,355,489 and capital expenditures of $84,366, 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 shares of common stock at a price of $0.069 in February 2012 and net proceeds of $295,000 received from the issuance of 5,900,000 shares of common stock and five year warrants to purchase 2,950,000 shares of common stock in August 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.

On November 8, 2012, we entered into a securities purchase agreement with certain accredited investors pursuant to which we issued, in the aggregate, (i) 16,300,000 shares of common stock and, (ii) five year warrants to purchase, in the aggregate, 16,300,000 shares of common stock at an exercise price of $0.05 per share, in exchange for net proceeds to us of $794,500. Our current cash balance is approximately $575,000, current accounts receivable is $112,000 and our existing order backlog is $262,000 through the end of January 2013. We have recently undergone a number of management changes, including the appointment of James Sapirstein as chief executive officer, as part of our transition from a contract manufacturer to a biopharmaceutical company with a transdermal drug delivery platform. Mr. Sapirstein has begun building the team he believes is essential to executing the Company's business plan by hiring a Vice President of Medical Affairs and he intends to bring in additional seasoned healthcare personnel in 2013. During this transition in management, sales of our proprietary products have been weaker than expected. In addition, as a result of the current management changes, our fixed expenses have increased and will continue to increase as additional personnel are engaged to execute our long-term objectives. Based on these factors and if weak sales continue in our proprietary products, we will experience a shortfall in cash necessary to sustain operations and we expect to raise additional working capital.


Net cash flow used in operating activities was $1,355,489 for the nine months ended September 30, 2012, compared to $1,498,275 for the nine month period ended September 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 expenses in restricted common stock and stock options. We recognized revenue of $828,260 in the nine month period ended September 30, 2012, compared to $1,671,445 for the nine month period ended September 30, 2011, primarily due to lower sales from our largest customer. Cash used in investing activities was $84,366 in the nine month period ending September 30, 2012, compared to $99,012 provided by investing activities in the nine month period ended September 30, 2011. In the 2011 period, we 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 $1,277,025 for the period ending September 30, 2012 compared to cash flow generated from financing activities of $990,000 for the similar period in 2011. At September 30, 2012, current assets totaled $531,880 and current liabilities totaled $607,161, 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 ($75,281) from $266,715 during the first nine months of 2012. This decrease was primarily due to cash used during the current period along with an increase in accounts payable.

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 believe the appointment of James Sapirstein as chief executive officer to be a noteworthy element towards achieving these business objectives.

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 $247,500 for the nine month period ended September 30, 2012 compared to the same period in 2011.


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 third quarter of 2013. It is difficult to accurately predict cash flow due to various factors, including estimating potential demand for our products as we are entering new markets and varying demand levels from our major customers. The initial ramp of sales in our new line of products has been slower than expected and if we are unable to meet our revenue forecast, our cash flow will be constrained. If demand for our new products exceeds our forecasts, we may require additional funding for capital expenditures in order to increase capacity and efficiency in our manufacturing process. If demand is greater than forecast, we may outsource a portion of our manufacturing process which will decrease our profit margins.

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 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.


Off Balance Sheet Arrangements

We have no off-balance sheet arrangements.

Recent Accounting Pronouncements

In May 2011, the FASB issued ASU No. 2011-04, "Fair Value Measurement (Topic 820) - Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs" ("ASU 2011-04"). ASU 2011-04 addresses fair value measurement and disclosure requirements within Accounting Standards Codification Topic 820 for the purpose of providing consistency and common meaning between U.S. GAAP and IFRS. Generally, ASU 2011-04 is not intended to change the application of the requirements in Topic 820. Rather, ASU 2011-04 primarily changes the wording to describe many of the requirements in U.S. GAAP for measuring fair value or for disclosing information about fair value measurements. ASU 2011-04 is effective for periods beginning after December 15, 2011. The adoption of this standard did not have any material impact on our consolidated financial statements or disclosures.

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