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ALQA > SEC Filings for ALQA > Form 10-Q on 14-Aug-2013All Recent SEC Filings

Show all filings for ALLIQUA, INC.

Form 10-Q for ALLIQUA, INC.


14-Aug-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/A for the year ended December 31, 2012, filed with the Securities and Exchange Commission ("SEC") on May 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.


Table of Contents

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/A 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

In the six months ended June 30, 2013, we completed a series of private placements pursuant to which we sold an aggregate of 42,684,262 shares of common stock and five year warrants to purchase an aggregate of 42,684,262 shares of common stock at an exercise price of $0.097 per share for aggregate gross proceeds of $3,457,425. In connection with those private placements, we paid placement agents an aggregate of $186,132 in fees and issued them warrants to purchase an aggregate of 1,995,457 shares of common stock. Details of these financings can be found under Liquidity and Capital Resources below.


Table of Contents

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/A 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/A. There have not been any material changes to such critical accounting policies since December 31, 2012.

Results of Operations

Overview. For the three and six months ended June 30, 2013, we had a net loss of $2,089,343 and $4,793,178, respectively, inclusive of non-cash items, largely related to stock-based compensation, totaling approximately $1,270,000 and $3,027,000, for each respective period. For the three and six months ended June 30, 2012, we had a net loss of $1,307,775 and $2,179,626, respectively, inclusive of non-cash items, largely related to stock-based compensation, totaling approximately $586,000 and $1,333,000, for each respective period. There may be significant future expense for non-cash stock based compensation.

Revenues. For the three and six months ended June 30, 2013, revenues were $499,129 and $890,926, respectively, compared to $258,869 and $454,470 for the three and six months ended June 30, 2012. The increase of $240,260 and $436,456 for each respective period is primarily due to greater sales volume from our largest customer during 2013.

Gross Loss. For the three and six months ended June 30, 2013, we had a gross profit of $6,801 and a gross loss of $66,924, respectively. For the three and six months ended June 30, 2012, we had a gross loss of $186,133 and $442,147, respectively. The improved results for the three and six months ended June 30, 2013, as compared to 2012, was due to the higher volume of sales with sustained fixed overhead expenses. For the three months ended June 30, 2013, revenues were 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 sales for three and six months ended June 30, 2013 was $162,067 and $324,135 respectively, compared to $160,082 and $320,169 for the three and six months ended June 30, 2012. Labor-related expense for the three and six months ended June 30, 2013 was $81,628 and $179,164 respectively, compared to $113,513 and $208,678 for the comparable periods in 2012. Rent expense for the three and six months ended June 30, 2013 was $64,644 and $127,543 respectively, compared to $72,586 and $135,862 in the comparable 2012 periods.

General and Administrative Expenses. General and administrative expense was $2,380,205 and $4,411,228 for the three and six months ended June 30, 2013, respectively, compared to $1,068,883 and $1,567,925 for the same periods in 2012. The increase in expenses is due to an increase in both cash compensation of executive salaries and non-cash stock based compensation in the respective 2013 periods compared to 2012. Officer salaries for the three and six months ended June 30, 2013 were $344,920 and $582,588, respectively, compared to $83,366 and $155,462 for the three and six months ended June 30, 2012. The increase in salaries is attributable to the hire of several executive personnel in 2013. Consulting fees for the three and six month periods ended June 30, 2013 were $1,154,737 and $1,357,993 compared to $87,314 and $224,143 for the three and six month periods ended June 30, 2012. Prior to the recent hire of several managerial positions, we had a number of consultants to assist us in various positions. In addition, several consultants were issued stock options as non-cash stock based remuneration. Director fees for the three and six months ended June 30, 2013 were $193,010 and $315,707, respectively, compared to $285,643 and $285,634 for the comparable periods of 2012. These expenses were all non-cash stock based compensation expense and were higher in 2013 due to the grant of stock options in lieu of cash in the 2013 periods.

Research and Development. We recorded research and development expenses for the three and six months ended June 30, 2013 of $27,973 and $29,602, respectively, and $49,494 and $162,706 respectively during the three and six months ended June 30, 2012. The decrease in research and development expenses was due principally to a reduction in expenses associated with the development of our transdermal pain patch. We had put efforts to develop this product on hold until our capital resources were higher and given our successful capital raises in 2013, we have recently relaunched our research and development efforts of our pain patch. 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 explore various options to monetize this technology.

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 any reporting unit is less than its carrying amount at this time, and therefore, the two-step impairment test was unnecessary at June 30, 2013. We did not recognize any impairment charges for goodwill for the three month period ended June 30, 2012.

We continue to pursue strategies to monetize our HepaMate technology. Current initiatives include dedicating senior management resources, evaluating capital requirements, hiring a banker to explore its sale and partnering options, updating valuation scenarios and reviewing the technology with key opinion leaders and subject area experts. While management currently believes that fair value is greater than book value, there can no assurances that the results of these initiatives to obtain sufficient resources or partners to monetize such asset will be successful. Accordingly, after performing the annual quantitative impairment analysis, we may determine that partial or full impairment may be necessary.


Liquidity and Capital Resources

At June 30, 2013, cash and cash equivalents totaled $1,934,153 compared to $260,357 at December 31, 2012. The increase is attributable to net financing proceeds of approximately $3,300,000 offset by cash used in operating activities of approximately $1,600,000 during the six months ended June 30, 2013. Cash raised in the second quarter will be used for operations and working capital. As of the filing date, our current cash balance is approximately $850,000.

Net cash flow used in operating activities was $882,343 and $1,614,510 for the three and six months ended June 30, 2013, compared to $476,156 and $1,072,064 for the three and six months ended June 30, 2013. The increase in cash used is primarily attributable to the increase in management salaries for the 2013 period. We have made several significant hires in management since November of 2012 in an effort to realign our managerial profile. These hires are intended to lead to increased revenues in our contract manufacturing and wound care businesses. Cash flow generated from financing activities was $3,291,293 for the six months ended June 30, 2013 compared to cash flow generated from financing activities of $987,025 for the same period in 2012. At June 30, 2013, current assets totaled $2,657,658 and current liabilities totaled $2,033,784, compared to current assets of $882,196 and current liabilities of $1,507,606 at December 31, 2012. As a result, we had a working capital surplus of $623,874 at of June 30, 2013 compared to a working capital deficit of $625,410 at December 31, 2012. This increase in working capital is primarily due to the financings we have completed in 2013.

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.

In 2013, we raised additional financing through common equity issuances as follows:

? 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.

? 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. As consideration for serving as a placement agent, we paid Laidlaw & Co. (UK) Ltd. ("Laidlaw") a fee equal to $23,600 and issued Laidlaw a five year warrant to purchase 291,358 shares of common at an exercise price of $0.097 and all other identical terms as the investor warrants. In addition, we paid $13,500 in legal and administrative fees related to this financing.

? 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. As consideration for serving as a placement agent, we paid Laidlaw a fee equal to $46,600 and issued Laidlaw a five year warrant to purchase 575,308 shares of common at an exercise price of $0.097 and all other identical terms as the investor warrants. In addition, we paid $8,500 in legal and administrative fees related to this financing.

? On May 31, 2013, we entered into a securities purchase agreement with certain accredited investors pursuant to which (i) 3,555,557 shares of common stock and (ii) five year warrants to purchase up to 3,555,557 shares of common stock at an exercise price of $0.097 per share were issued in exchange for aggregate consideration of $288,000. As consideration for serving as a placement agent, we paid Laidlaw a fee equal to $28,800 and issued Laidlaw a five year warrant to purchase 355,556 shares of common at an exercise price of $0.097 and all other identical terms as the investor warrants. In addition, we paid $2,500 in legal fees related to this financing.

? On June 28, 2013, we entered into a securities purchase agreement with certain accredited investors pursuant to which (i) 24,406,482 shares of common stock and (ii) five year warrants to purchase up to 24,406,482 shares of common stock at an exercise price of $0.097 per share were issued in exchange for aggregate consideration of $1,976,925. As consideration for serving as a placement agent, we paid Summer Street Research Partners a fee equal to $62,632 and issued Summer Street Research Partners a five year warrant to purchase 773,235 shares of common at an exercise price of $0.097 and all other identical terms as the investor warrants.

As described above, we have completed a series of financings pursuant to which we have raised gross proceeds of $3,457,425 and net proceeds of $3,271,293. 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.


Table of Contents

We recently underwent 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 may 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 subsequently completed a series of capital raises, as described 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.

In August 2013, we entered into distribution agreements with two firms that we believe will allow us to have a greater presence of sales representatives than was previously the case, without taking on the financial burden of an internal sales force. We are also engaging independent sales associates across the United States in order to gain a footprint nationally and eliminating the expense of full-time employees. We believe this model will allow us to recognize revenues with our only expense being commissions payable. Additionally, we have initiatives under way to partner with national distributors in order to simplify the fulfillment process for our customers. This will allow us to focus our efforts and resources on the sales process.

Due to the time delay between sales resource investment and an 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 have 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 it may result in cash constraints. 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 six months of 2013.

If our new products do not gain forecasted market recognition, it will be necessary to reduce expenses, delay investment spending or raise additional capital. The reduction in future expenses could be significant and may further delay increased 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 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. From time to time, 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.

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.


Off Balance Sheet Arrangements

We have no off-balance sheet arrangements.

Recent Accounting Pronouncements

None.

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