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[May 12, 2014]
ALLIQUA, INC. - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL AND RESULTS OF OPERATIONS
(Edgar Glimpses Via Acquire Media NewsEdge) The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and related notes above.
18 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 regarding the adequacy of our liquidity to pursue our complete business objectives; · inadequate capital; · our plans to make significant additional outlays of working capital before we expect to generate significant revenues and the uncertainty regarding when we will begin to generate significant revenues, if we are able to do so; · 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 products; · price increases for supplies and components; and · the 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, 2013. 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 are a provider of advanced wound care solutions. Through our hydrogel technology platform and licensed and proprietary products, we seek to create superior outcomes for patients, providers, and partners. Our core businesses include advanced wound care and contract manufacturing. We leverage our proprietary hydrogel and licensed technology to add value to our own products and those of our partners.
Results of Operations Three Months Ended March 31, 2014 Compared to the Three Months Ended March 31, 2013 Overview. For the three months ended March 31, 2014 and 2013, we had a net loss of $9,036,162 and $2,703,835, respectively, which was inclusive of non-cash items, including non-cash stock-based compensation of approximately $5,161,525 and $991,911 of stock-based compensation. Included in the net loss for the three months ended March 31, 2014 is approximately $1.2 million of expense related to the termination of several former employees. Also included in the net loss for the three months ended March 31, 2014 were expenses related to the hiring of our new direct sales force and several other corporate employees, as described below, to support our anticipated growth.
Revenues, net. For the three months ended March 31, 2014 revenues increased by $198,778, or 51%, to $590,575 from $391,797 for the three months ended March 31, 2013. The increase was primarily due to an increase in the sales of our licensed and proprietary products.
19 The components of revenue were as follows for the three months ended March 31,: Three Months Ended March 31, 2014 2013 Revenues Contract manufacturing $ 478,270 $ 385,342 Products 112,305 6,455 Total revenues, net $ 590,575 $ 391,797 Gross loss. Our gross loss was $41,124 for the three months ended March 31, 2014 compared to $61,225 for the three months ended March 31, 2013. The improved results for the three months ended March 31, 2014, as compared to 2013 was due to the greater volume of sales in comparison to the increase in the cost of materials due to product and customer mix and an increase in labor costs.
The components of cost of revenues are as follows for the three months ended March 31,: Three Months Ended March 31, 2014 2013 Cost of revenues Stock-based compensation $ 17,210 $ - Compensation and benefits 153,079 105,626 Depreciation and amortization 146,736 149,568 Materials 213,666 89,990 Equipment, production and other expenses 101,008 107,838 Total cost of revenues $ 631,699 $ 453,022 Selling, general and administrative expenses. The following table highlights selling, general and administrative expenses by type for the three months ended March 31,: Three Months Ended March 31, 2014 2013 Selling, general and administrative expenses Stock-based compensation $ 5,144,315 $ 991,911 Compensation and benefits 1,777,331 401,627 Marketing 224,323 61,135 Royalty fees 100,000 50,000 Other expenses 1,466,557 538,850Total selling, general and administrative expenses $ 8,712,526 $ 2,043,523 Selling, general and administrative expenses increased $6,669,003 to $8,712,526 for the three months ended March 31, 2014, as compared to $2,043,523 for the three months ended March 31, 2013.
Stock-based compensation increased by $4,152,404, to $5,144,315 for the three months ended March 31, 2014, as compared to $991,911 for the three months ended March 31, 2013. Compensation and benefits increased $1,375,704, to $1,777,331 for the three months ended March 31, 2014, as compared to $401,627 for the three months ended March 31, 2013. The increase in both stock-based compensation and compensation and benefits was due to the hiring of new executive officers, various senior sales and marketing executives, and a direct sales force to support our anticipated growth. Included in selling, general and administrative expenses for the three months ended March 31, 2014 are compensation and benefits and stock-based compensation expense for severed employees of $311,875 and $897,582 respectively. We expect our stock-based compensation expense to decrease in future quarters.
Marketing expenses increased by $163,188, to $224,323 for the three months ended March 31, 2014, as compared to $61,135 for the three months ended March 31, 2013. The increase was primarily due to increased efforts to market our proprietary and licensed products through tradeshows, sample products, and market research.
20 Other selling, general and administrative expenses increased by $927,707, to $1,466,557 for the three months ended March 31, 2014, as compared to $538,850 for the three months ended March 31, 2013. These increases were largely due to the recruitment of our new direct sales force and several other corporate employees. Significant increases as a result of the increase in number of employees include recruiting expenses of $108,293, information technology expenses of $56,051, training expenses of $54,036 and travel expenses of $52,699 in the three months ended March 31, 2014 as compared to the three months ended March 31, 2014. Legal expenses increased by $320,611 primarily due to business development, filings with the Securities and Exchange Commission and other corporate matters in the three months ended March 31, 2014 as compared to the three months ended March 31, 2013. Public and investor relation expenses increased $119,587 as result of increased activity in these areas in the three months ended March 31, 2014 as compared to the three months ended March 31, 2013.
Liquidity and Capital Resources As of March 31, 2014, we had cash and cash equivalents totaling $9,646,810 compared to $12,100,544 at December 31, 2013. The decrease was largely attributable to cash used in operating activities of $2,615,514 offset by proceeds of $469,550 from the exercise of stock options during the three months ended March 31, 2014.
Net cash flow used in operating activities was $2,615,514 and $732,167 for the three months ended March 31, 2014 and 2013, respectively. The increase was primarily attributable to an increase in net loss excluding stock compensation and other non-cash items of $3,427,286 offset by an increase in accrued expenses and other liabilities compared to the prior year.
Cash flow generated from financing activities was $268,376 for the three months ended March 31, 2014, compared to cash flow generated from financing activities of $500,500 for the three months ended March 31, 2013. During the three months ended March 31, 2014, we received proceeds from stock options of $469,550. This was offset by the payment of withholding taxes related to stock-based compensation of $201,174. During the three months ended March 31, 2013, we received proceeds from the issuance of common stock and shares to be issued of $500,500.
At March 31, 2014, current assets totaled $10,450,553 and current liabilities totaled $3,480,585, as compared to current assets totaling $12,847,234 and current liabilities totaling $3,353,464 at December 31, 2013. As a result, we had working capital of $6,969,968 at March 31, 2014 compared to working capital of $9,493,770 at December 31, 2013.
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 have experienced negative operating cash flows since inception and have funded our operations primarily from sales of common stock and other securities.
Liquidity Outlook We have revamped our strategy to focus on being a provider of wound care solutions as well as continuing to be a contract manufacturer. The use of proceeds from our financings will largely be used to support the sales and marketing of our wound care solutions and potential acquisitions. We have restructured our senior management team with the goal of maximizing the potential for success in achieving our sales and marketing goals. We have hired new executive officers, various senior sales and marketing executives, and a direct sales force to sell our wound care products. We expect to continue to attend trade shows and seek other avenues to market our products.
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 seeking ways to modify products' size, shape or thickness in order to appeal to a broader marketplace.
The implementation of our growth strategy will continue to result in an increase in our fixed cost structure. Due to the time delay between outlays for working capital expenditures, such as costs to acquire rights to additional products, merger and acquisition activity, the hiring and training of sales agents and personnel, pre-launch marketing costs, the purchasing of inventory, and the billing and collection of revenue, we expect our net cash outflows from operations will continue to increase in the second quarter of 2014.
Subsequent to March 31, 2014, we entered into a letter agreement with certain of the holders of warrants to purchase shares of our common stock, par value $0.001 per share, that were granted pursuant to that certain securities purchase agreement, dated November 18, 2013, by and among us and the investors signatory thereto. We received approximately $5,293,000 from the exercising holders upon the exercise of the warrants, and we issued a total of 930,313 shares of common stock to the exercising holders pursuant to the terms of the warrants. In connection with the exercising holders exercising their warrants pursuant to the letter agreement, we paid $265,000 in placement agent fees. Professional fees for the escrow agent of $2,500 were also deducted from gross proceeds.
21 Subsequent to March 31, 2014, we also entered into a securities purchase agreement pursuant to which we issued to certain accredited investors an aggregate of 2,139,287 shares of common stock, and five year warrants to purchase an aggregate of 427,857 shares of common stock at an exercise price of $10.50 per share, in exchange for aggregate consideration of approximately $14,975,000. In connection with the financing, we paid $598,500 in placement agent fees. Professional fees for the escrow agent of $4,000 were also deducted from gross proceeds.
Subsequent to March 31, 2014, we acquired Choice Therapeutics, Inc. for an aggregate cash payment of approximately $2,000,000 and 274,771 total shares of common stock, par value $0.001 per share, at a per share purchase price equal to $7.29. In addition to the cash and common stock consideration, the agreement allows for contingent consideration, in aggregate up to $5,000,000 in shares of common stock or cash, to be earned based upon revenues earned by the sale of existing Choice Therapeutics products over the next three years.
We believe that our cash on hand and our cash generated from operations will be sufficient to fund our business for at least the next 12 months. However, our future results of operations involve significant risks and uncertainties.
Factors that could affect our future operating results and cause actual results to vary materially from expectations include, but are not limited to, potential demand for our products, risks from competition, regulatory approval of our new products, technological change, and dependence on key personnel.
In order to complete our future growth strategy, we will require additional equity and/or debt financing. 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 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 As of March 31, 2014, we had no off-balance sheet transactions, arrangements, obligations (including contingent obligations), or other relationships with unconsolidated entities or other persons that have, or may have, a material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Critical Accounting Policies There have been no significant changes to the Company's critical accounting policies and estimates from the information provided in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," included in the Annual Report on Form 10-K for the year ended December 31, 2013.
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