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ALQA > SEC Filings for ALQA > Form 10-Q/A on 16-May-2013All Recent SEC Filings

Show all filings for ALLIQUA, INC.

Form 10-Q/A for ALLIQUA, INC.


16-May-2013

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, 2012, filed with the Securities and Exchange Commission ("SEC") on April 16, 2013.

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:

? the uncertainty of our ability to continue as a going concern;

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

? inadequate capital;

? loss or retirement of key executives;

? adverse economic conditions and/or intense competition;

? loss of a key customer or supplier;

? entry of new competitors and products;

? adverse federal, state and local government regulation;

? technological obsolescence of our products;

? technical problems with our research and our products;

? price increases for supplies and components; and

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


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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, 2012, 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 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.

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

Recent Events

On April 22, 2013, we entered into a securities purchase agreement with certain accredited investors pursuant to which (i) 7,111,111 shares of common stock and
(ii) five year warrants to purchase up to 7,111,111 shares of common stock at an exercise price of $0.097 per share were issued in exchange for aggregate consideration of $576,000. Each warrant is exercisable immediately for cash. In addition, in the event that there is no effective registration statement registering, or no current prospectus available for, the resale of the shares of common stock issuable upon exercise of a warrant at any time following the one year anniversary of the issuance date of such warrant, such warrant may also be exercised by way of a cashless exercise. The warrants also contain provisions that protect their holders against dilution by adjustment of the purchase price in certain events such as stock dividends, stock splits and other similar events. As consideration for serving as placement agent in connection with this offering, we paid Laidlaw & Co. (UK) Ltd. fees of $46,600 and issued it five year warrants to purchase 575,308 shares of common stock at an exercise price of $0.097 per share. The placement agent warrants have identical terms to the investor warrants. The securities purchase agreement allows for the sale of up to $3,000,000 of shares of common stock and warrants in one or more closings until May 31, 2013.

On April 11, 2013, we entered into a securities purchase agreement with certain accredited investors pursuant to which (i) 2,913,580 shares of common stock and
(ii) five year warrants to purchase up to 2,913,580 shares of common stock at an exercise price of $0.097 per share were issued in exchange for aggregate consideration of $236,000. Each warrant is exercisable immediately for cash. In addition, in the event that there is no effective registration statement registering, or no current prospectus available for, the resale of the shares of common stock issuable upon exercise of a warrant at any time following the one year anniversary of the issuance date of such warrant, such warrant may also be exercised by way of a cashless exercise. The warrants also contain provisions that protect their holders against dilution by adjustment of the purchase price in certain events such as stock dividends, stock splits and other similar events. As consideration for serving as placement agent in connection with this offering, we paid Laidlaw & Co. (UK) Ltd. fees of $23,600 and issued it five year warrants to purchase 291,358 shares of common stock at an exercise price of $0.097 per share. The placement agent warrants have identical terms to the investor warrants. The securities purchase agreement allows for the sale of up to $3,000,000 of shares of common stock and warrants in one or more closings until May 31, 2013.

On February 22, 2013, we entered into a securities purchase agreement with certain accredited investors pursuant to which (i) 4,697,532 shares of common stock and (ii) five year warrants to purchase up to 4,697,532 shares of common stock at an exercise price of $0.097 per share were issued in exchange for aggregate consideration of $380,500. Jerome Zeldis, David Johnson, David Stefansky, Joseph Leone and an affiliate of Richard Rosenblum invested $100,000, $50,000, $50,000, $20,000 and $50,000, respectively. Each warrant is exercisable immediately for cash or by way of a cashless exercise and contains provisions that protect its holder against dilution by adjustment of the exercise price and the number of shares issuable thereunder in certain events such as stock dividends, stock splits and other similar events.


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Effective February 4, 2013, we appointed David Johnson (one of our directors) as our chief executive officer. James Sapirstein resigned from this position and assumed the role of chief executive officer of Alliqua Biomedical, Inc., in which role we anticipate that he will focus his efforts on leveraging our hydrogel platform into a drug delivery system.

In July 2012, we began to market two proprietary products, SilverSeal®, a hydrogel wound dressing with silver coated fibers, and Hydress®, an over-the-counter hydrocolloid wound dressing. In order to promote sales of these products and transition from a contract manufacturer to a manufacturer and marketer of specialty wound care products, we are currently ramping up our sales and marketing efforts. We appointed a new chairman of our board of directors in November 2012 and, as described above, we have recently restructured our senior management team, all with the goal of maximizing the potential for success in achieving our sales and marketing goals. We have also hired a national director of sales and retained certain consultants and an outside sales organization to educate medical professionals about the benefits of these dressings. These consultants will perform in-service presentations to healthcare providers so they can better understand the medical benefits offered by our products. We have also assembled a scientific advisory board to help us target improvements and new applications for our products and assist in our marketing efforts.

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 3 of the Notes to the Consolidated Financial Statements included in our 2012 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 2012 Annual Report on Form 10-K. There have not been any material changes to such critical accounting policies since December 31, 2012.

Results of Operations

Overview. For the three months ended March 31, 2013, we had a net loss of $2,703,835, which was inclusive of non-cash items totaling approximately $1,757,000. For the three months ended March 31, 2012, we had a net loss of $871,851, which was inclusive of non-cash items totaling approximately $171,000. There may be significant future expense for non-cash stock based compensation if the milestones are achieved in the options granted to members of the board in May and November of 2012.

Revenues. Sales revenues were $391,797 for the three months ended March 31, 2013, compared to $195,601 for the same period in 2012. The increase of $196,196, or 100%, was primarily due to greater sales volume from our largest customer during the three months ended March 31, 2013. This customer has continued to increase volumes during the second quarter of 2013 and we believe this is likely to continue for the rest of 2013.

Gross Loss. Our gross loss was $73,725 for the three months ended March 31, 2013, compared to a gross loss of $256,014 for the three months ended March 31, 2012. The decrease in gross loss was primarily attributable to an increase in revenue of $196,196. The increased margin for the three months ended March 31, 2013, as compared to 2012, was due to the higher volume of sales with sustained fixed overhead expenses. Our sales were not sufficient to cover our fixed overhead expenses.

Fixed overhead includes depreciation, labor and occupancy expense. Depreciation of equipment and amortization of technology included in cost of goods sold for three months ended March 31, 2013 was $162,068, compared to $160,083 for the three months ended March 31, 2012. Labor-related expense for the three months ended March 31, 2013 was $97,536, compared to $95,165 in the comparable period in 2012. Rent expense for the three months ended March 31, 2013 was $62,889, compared to $62,899 in the 2012 period. Utility expense for the three months ended March 31, 2013 was $17,854, compared to $14,901 for the 2012 period. This increase was due to higher electrical consumption as a result of higher production.


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General and Administrative Expenses. General and administrative expense was $2,031,023 for the three months ended March 30, 2013, compared to $499,202 for the same period in 2012, an increase of $1,531,821. The increase is due to an increase in non-cash stock based compensation of approximately $992,000, an increase in salary expense of approximately $220,000, an increase in consulting expense of $122,000 as well as increases in advertising, royalty fees, insurance, professional fees and investor relations. Officer salaries were $237,658 for the months ended March 31, 2013, compared to $72,096 for the same period in 2012. This was due to our hiring of several key personnel since the 2012 period. Director fees for the three months ended March 31, 2013 were $122,697, compared to $191 in the 2012 period. The 2013 director fees were all non-cash, as some directors vested in stock options. Rent expense for our principal executive office was $12,000 for the three months ended March 31, 2013, compared to $21,500 for the same period in 2012. The decrease of $9,500 was due to some of our personnel moving to our Langhorne facility.

Research and Development. We incurred $1,629 in research and development expenses for the three months ended March 31, 2013, compared to $113,212 for the comparable period in 2012. The decrease of $111,583 is due principally to a reduction in expenses associated with the development of our transdermal pain patch. We have put efforts to develop this product on hold until our capital resources are significantly higher or we are able to find a strategic partner. We believe our research and development expenses will increase through 2013 as we continue the life cycle management of our proprietary line of products. Also, we intend to commit management resources to the further development of the HepaMate™ asset as we have completed our strategic plan and are actively seeking partners.

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 March 31, 2013. We did not recognize any impairment charges for goodwill for the three month periods ended March 31, 2012.


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Liquidity and Capital Resources

At March 31, 2013, cash and cash equivalents totaled $28,690 compared to $260,357 at December 31, 2012. The decrease is attributable to cash used in operating activities of $732,167 offset be net financing proceeds received during the three months ended March 31, 2013 of $500,500. On February 15, 2013, the Company received $20,000 for the subscription receivable as of December 31, 2012. On February 22, 2013, the Company received $380,500 from the issuance of 4,697,532 shares of common stock and five year warrants to purchase 4,697,532 shares of common stock at a price of $0.097. On March 6, 2013, the Company received $100,000 for a securities purchase agreement which closed on April 22, 2013. The Company will issue 1,234,568 shares of common stock and five year warrants to purchase 1,234,568 shares of common stock at a price of $0.097 in May, 2013.

Our accounts receivable as of May 13, 2013 is $280,000 and our open sales orders are $315,000 through the end of June 2013.

Net cash flow used in operating activities was $732,167 for the three months ended March 31, 2013, compared to $595,908 for the three months ended March 31, 2012. The increase in cash used is primarily attributable to the increase in management salaries for the 2013 period. We recognized revenue of $391,797 for the three months ended March 31, 2013, compared to $195,601 for the three months ended March 31, 2012, primarily due to higher sales from our largest customer. Cash flow generated from financing activities was $500,500 for the three months ended March 31, 2013 compared to cash flow generated from financing activities of $987,025 for the same period in 2012. At March 31, 2013, current assets totaled $712,687 and current liabilities totaled $2,372,542, compared to current assets of $882,196 and current liabilities of $1,507,606 at December 31, 2012. As a result, our working capital deficit increased to $1,659,855 from $625,410 during the first three months of 2013. This decrease was primarily due to the increase in derivative liability, 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.

Subsequent to March 31, 2013, we raised additional financing through common equity issuances as follows:

? On April 11, 2013, the Company sold 2,913,580 shares of common stock, including five year warrants to purchase 2,913,580 shares of common stock at an exercise price of $0.097 in exchange for aggregate consideration of $236,000.

? On April 22, 2013, the Company consummated additional closings in which the Company sold 7,111,111 shares of common stock, inclluding five year warrants to purchase 7,111,111 shares of common stock at an exercise price of $.097 in exchange for aggregate considertion of $576,000.


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As described above, we have recently undergone a transition in management. During this transition, sales of our proprietary products have been weaker than expected. In addition, as a result of the 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 continue to attempt to raise additional working capital.

At March 31, 2013, we had negative working capital and limited cash resources. As a result, we have had three capital raising initiatives during 2013, described in the bullets above. Moreover, as a result of our recurring losses, our expectation of continued incurrence of negative cash flows from operations and our negative working capital and limited cash resources in light of expected expenditures, there is substantial doubt about our ability to continue operating as a going concern.

We believe that our liquidity and 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. We are seeking complementary products to our hydrogels in an effort to expand our offerings. In addition, we are always seeking ways to modify our products via size, shape or thickness in order to appeal to a broader marketplace.

Our latest forecast of future operating cash flows, prepared by our new executive management team, includes ramp up of sales and marketing resources, resulting in increasing sales revenues over time. Our forecast envisions increases in operating expenses resulting in subsequent revenue increases. Such forecast is dependent, in large part, on (i) our ability to hire knowledgeable and effective sales personnel, (ii) our ability to successfully market our proprietary line of products, (iii) our ability to successfully develop distribution channels and (iv) our continuing investment in research and development for expanded product offerings. We believe the appointment of David Johnson as chief executive officer to be an important enhancement to the Company's ability to achieve these business objectives. Mr. Johnson's prior experience and success as CEO of Convatec, Inc., a leading provider of medical devices and wound care dressings, should enhance our ability to build the management team, grow our customer base, and expand product offering resulting in future revenue growth.

Due to the time delay between sales resource investment and resulting increase in revenues, we expect to continue to incur losses from operations. 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 up 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. Even if demand for our new products meets or exceeds our forecasts, we may require additional capital funding 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. There is no assurance that sales from our contract manufacturing business for the rest of 2013 will continue at the rate recognized in the first three months of 2013.

If our new products do not gain forecasted market recognition, it will be necessary to either reduce expenses, delay investment spending or raise additional capital. The reduction in future expenses could be significant and further delay any increase in revenues. 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 additional capital in order to maintain sufficient funds to operate. In addition, we believe that we will require additional capital in order to execute the longer term aspects of our business plan, including additional research and development efforts related to HepaMate.

As it is likely that our need for additional equity capital will continue, 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 shareholders 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.


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If we are unable to raise additional capital or we encounter circumstances that place unforeseen constraints on our capital resources, we will be required to take even stronger measures to conserve liquidity, which may include, but are not limited to, eliminating all non-essential positions, eliminating our clinical studies, and ceasing all marketing efforts. We would have to curtail business development activities and suspend the pursuit of our business plan. There can be no assurance that we will be successful in improving revenues, reducing expenses and/or securing additional capital in sufficient amounts and on terms favorable to us.

These factors, among others, raise substantial doubt about our ability to continue as a going concern.

Notwithstanding our current liquidity situation, we believe that we will be able to raise sufficient funds through the issuance of either equity or debt in order to finance the operation of our business. This is a result of the current response to our new management team and the operating model they have put in place. However, there can be no absolute assurance that such amounts we raise will be adequate.

Our consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amount and classification of liabilities that might be necessary should we be unable to continue as a going concern.

Off Balance Sheet Arrangements

We have no off-balance sheet arrangements.

Recent Accounting Pronouncements

None.

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