The accompanying notes are an integral
part of these condensed consolidated financial statements.
The accompanying notes are an integral part
of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed
consolidated financial statements.
The accompanying notes are an integral
part of these condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
|
1.
|
Description
of Business, Basis of Presentation and Significant Accounting Policies and Estimates
|
Alliqua BioMedical, Inc. (“Alliqua”
or the “Company”) manufactures high water content, electron beam cross-linked, aqueous polymer hydrogels, or gels,
used for wound care, medical diagnostics, transdermal drug delivery and cosmetics. The Company believes that it is one of the leading
manufacturers of high-performance gels in the United States. The Company specializes in custom gels by capitalizing on proprietary
manufacturing technologies. The Company has, historically, served as a contract manufacturer, supplying its gels to third parties
who incorporate them into their own products.
Recent Developments
Merger Agreement with TO Pharmaceuticals,
LLC.
On November 27, 2018, AquaMed Technologies,
Inc. (“AquaMed”), a wholly-owned subsidiary of Alliqua, AQ TOP, LLC, a Delaware limited liability company and a wholly-owned
subsidiary of AquaMed , and TO Pharmaceuticals, LLC, a Delaware limited liability company (“TOP”), entered into an
Agreement and Plan of Merger (the “TOP Merger Agreement”), pursuant to which, among other things, subject to the satisfaction
or waiver of the conditions set forth in the TOP Merger Agreement, AquaMed will merge with and into TOP, with TOP becoming a wholly-owned
subsidiary of AquaMed and the surviving company of the merger (the “TOP Merger”). The TOP Merger is intended to qualify
for federal income tax purposes as a tax-free contribution under the provisions of Section 351(a) of the Internal Revenue Code
of 1986, as amended.
The TOP Merger will occur after the consummation
by Alliqua of the following steps:
(1) Pursuant to an Asset Contribution and
Separation Agreement to be entered into by and between Alliqua and AquaMed (the “Separation Agreement”) prior to consummation
of the TOP Merger, Alliqua will transfer certain assets and liabilities utilized primarily in connection with its custom hydrogels
contract manufacturing business to AquaMed (the “Separation”),
(2) AquaMed will issue a to be determined
number of shares of common stock to Alliqua in consideration of the contribution of assets pursuant to the Separation Agreement
(the “Distribution Consideration”),
(3) Alliqua will distribute to its stockholders
all of the issued and outstanding shares of common stock, par value $0.001 per share, of AquaMed by way of a pro rata dividend
(the “Distribution”), and
(4) Alliqua will consummate the previously
announced reverse merger transaction with Adynxx, Inc. (“Adynxx”), pursuant to that certain Agreement and Plan of Merger
and Reorganization, dated as of October 11, 2018, by and among Alliqua, Embark Merger Sub, Inc. and Adynxx.
At the effective time of the TOP Merger,
all of the outstanding membership units of TOP will be converted into the right to receive, in the aggregate, merger consideration
consisting of shares of AquaMed common stock. Immediately after the effective time of the TOP Merger and consummation of the Private
Placement (as defined below), before giving effect to any fees payable in equity to financial advisors or other intermediaries,
the current members of TOP and the third-party investors that participate in the Private Placement are expected to hold approximately
90% of the total number of shares of AquaMed common stock outstanding (on a fully diluted basis).
The consummation of the TOP Merger is subject
to certain customary and other conditions, including (i) the completion of the Separation and the Distribution, (ii) the
effectiveness of the registration statement on Form S-1 filed with the SEC with respect to, and the approval for listing on the
NASDAQ Capital Market of, the shares of AquaMed common stock to be issued in the Distribution and the TOP Merger, (iii) receipt
of binding commitments from third-party investors to consummate a private placement of AquaMed’s common stock in a minimum
aggregate amount of $10 million immediately prior to the effective time of the TOP Merger (the “Private Placement”)
(iv) the accuracy of the parties’ representations and warranties and the performance of their respective covenants contained
in the TOP Merger Agreement, and (v) receipt of an independent third-party valuation of the AquaMed common stock to be issued
in the Distribution.
The TOP Merger Agreement contains customary
and other representations, warranties and covenants, including a covenant for AquaMed to use (i) commercially reasonable efforts
to consummate and make effective the Separation and payment of the Distribution Consideration contemplated by the Distribution
Agreement in accordance with its terms and (ii) reasonable best efforts to consummate the Private Placement.
Merger Agreement with Adynxx
On October 11, 2018, the Company, Embark
Merger Sub Inc., a Delaware corporation and wholly-owned subsidiary of the Company (“Merger Sub”), and Adynxx, Inc.,
a privately-held Delaware corporation (“Adynxx”), entered into an Agreement and Plan of Merger and Reorganization (the
“Adynxx Merger Agreement”), pursuant to which, among other things, subject to the satisfaction or waiver of the conditions
set forth in the Adynxx Merger Agreement, Merger Sub will merge with and into Adynxx, with Adynxx becoming a wholly-owned subsidiary
of the Company and the surviving corporation of the merger (the “Adynxx Merger”). Subject to the terms and conditions
of the Adynxx Merger Agreement, at the effective time of the Adynxx Merger (the “Effective Time”), (a) each outstanding
share of Adynxx common stock, on an as-converted basis taking into consideration all outstanding common stock, preferred stock,
restricted stock and all other securities convertible or exercisable for Adynxx common stock, will be converted into the right
to receive the number of shares of the Company’s common stock (the “Company Common Stock”) equal to the exchange
ratio described below; (b) each outstanding Adynxx stock option that has not previously been exercised prior to the Effective Time
will be assumed by the Company; and (c) each outstanding warrant to acquire Adynxx capital stock that has not previously been exercised
prior to the Effective Time will be assumed by the Company.
Under the exchange ratio formula in the
Adynxx Merger Agreement, as of immediately after the Adynxx Merger, but excluding the effect of certain financings (as further
described in the Adynxx Merger Agreement), the former Adynxx securityholders are expected to own approximately 86% of the aggregate
number of shares of the Company Common Stock issued and outstanding following the consummation of the Adynxx Merger (the “Post-Closing
Shares”), and the stockholders of the Company as of immediately prior to the Adynxx Merger are expected to own approximately
14% of the aggregate number of Post-Closing Shares. This exchange ratio will be fixed immediately prior to the Effective Time to
reflect the Company’s and Adynxx’s equity capitalization as of immediately prior to such time. In addition, to the
extent Adynxx consummates a Permitted Financing, as specifically defined in the Adynxx Merger Agreement, in excess of $10.0 million
dollars prior to the Effective Time, the exchange ratio may be further adjusted in a manner that would reduce the percentage of
the aggregate number of Post-Closing Shares held by stockholders of the Company as of immediately prior to the Adynxx Merger.
Immediately following the Adynxx Merger,
the name of the Company will be changed from “Alliqua BioMedical, Inc.” to “Adynxx, Inc.” At the Effective
Time, the Adynxx Merger Agreement contemplates that the Board of Directors of the Company will consist of such directors selected
by Adynxx, with the Company having the right to designate one member. The executive officers of the Company immediately after the
Effective Time will be designated by Adynxx; the merger will be a change of control and accounted for as a reverse business combination
whereby Adynxx will be deemed the accounting acquiror.
The Adynxx Merger Agreement contains customary
representations, warranties and covenants made by the Company and Adynxx, including covenants relating to obtaining the requisite
approvals of the stockholders of the Company and Adynxx, indemnification of directors and officers, and the Company’s and
Adynxx’s conduct of their respective businesses between the date of signing the Adynxx Merger Agreement and the closing of
the Adynxx Merger. Consummation of the Adynxx Merger is subject to certain closing conditions, including, among other things, approval
by the stockholders of the Company and Adynxx. The Adynxx Merger Agreement contains certain termination rights for both the Company
and Adynxx, and further provides that, upon termination of the Adynxx Merger Agreement under specified circumstances, the Company
or Adynxx, as applicable, may be required to pay the other party a termination fee of $0.249 million.
The Adynxx Merger Agreement contemplates
that the Company will also seek approval from its stockholders to effect a reverse stock split, if applicable, with the split ratio
to be mutually agreed to by the Company and Adynxx within the range approved by the Company’s stockholders immediately prior
to the Effective Time. In addition, the Adynxx Merger Agreement requires the Company to use commercially reasonable efforts to
consummate a spin-off of its hydrogel contract manufacturing business prior to the closing of the Adynxx Merger.
The transactions contemplated by the Adynxx
Merger Agreement were approved by the affirmative vote of a majority of the voting power of issued and outstanding shares of our
common stock on April 8, 2019. In addition to the receipt of our approval of our stockholders, each party’s obligation to
consummate the Adynxx Merger is conditioned upon certain other customary closing conditions.
The Company’s operations contemplated
under the Adynxx Merger Agreement and TOP Merger Agreement are classified as Held for Use.
Basis of Presentation
The condensed consolidated financial statements
contained in this report are unaudited. In the opinion of management, the condensed consolidated financial statements include all
adjustments, which are of a normal recurring nature, necessary to present fairly the Company’s financial position as of March
31, 2019 and results of operations and cash flows for the three months ended March 31, 2019 and 2018. While management believes
that the disclosures presented are adequate to make the information not misleading, these unaudited condensed consolidated financial
statements should be read in conjunction with the audited consolidated financial statements and the notes thereto in the Company’s
latest year-end financial statements, which are included in the Company’s Annual Report on Form 10-K for the year ended December 31,
2018 (the “2018 Annual Report”). The results of the Company’s operations for any interim period are
not necessarily indicative of the results of operations for any other interim period or for the full year.
Principles of Consolidation
The accompanying condensed consolidated
financial statements include the financial statements of the Company and its wholly-owned subsidiary, AquaMed Technologies, Inc.
All significant inter-company transactions and accounts have been eliminated in consolidation.
Reclassifications
Certain amounts in prior periods
have been reclassified to conform to the current year presentation. Such reclassifications did not have a material effect on the
Company’s financial condition or results of operations as previously reported.
Discontinued Operations
Summarized operating results of
discontinued operations for the three months ended March 31, 2019 and 2018 are presented in the following table (in thousands):
|
|
Three Months Ended March 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Revenue, net of returns, allowances and discounts
|
|
$
|
-
|
|
|
$
|
4,837
|
|
Cost of revenues
|
|
|
-
|
|
|
|
1,287
|
|
Gross profit
|
|
|
-
|
|
|
|
3,550
|
|
Selling, general and administrative
|
|
|
-
|
|
|
|
6,347
|
|
Other income
|
|
|
(240
|
)
|
|
|
-
|
|
Interest expense
|
|
|
-
|
|
|
|
547
|
|
Income/(Loss) from discontinued operations, net of tax
|
|
|
240
|
|
|
|
(3,344
|
)
|
Non-cash amortization expense of
$0 and $1.0 million is included in selling, general and administrative expense for the three months ended March 31, 2019 and 2018,
respectively.
Summarized assets and liabilities of discontinued
operations are presented in the following table (in thousands):
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Accounts receivable, net
|
|
$
|
-
|
|
|
$
|
60
|
|
Inventory, net
|
|
|
-
|
|
|
|
-
|
|
Prepaid expenses and other current assets
|
|
|
-
|
|
|
|
-
|
|
Total current assets
|
|
|
-
|
|
|
|
60
|
|
Fixed assets, net
|
|
|
-
|
|
|
|
-
|
|
Operating lease - right of use asset
|
|
|
703
|
|
|
|
-
|
|
Goodwill, net
|
|
|
-
|
|
|
|
-
|
|
Total assets of discontinued operations
|
|
|
703
|
|
|
|
60
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
24
|
|
|
|
271
|
|
Accrued expenses and other current liabilities
|
|
|
-
|
|
|
|
-
|
|
Senior secured term loan, net
|
|
|
-
|
|
|
|
-
|
|
Total current liabilities
|
|
$
|
24
|
|
|
$
|
271
|
|
Operating lease - right of use liability
|
|
|
760
|
|
|
|
-
|
|
Total liabilities of discontinued operations
|
|
$
|
784
|
|
|
$
|
271
|
|
Significant Accounting Policies
and Estimates
The Company’s significant accounting
policies are disclosed in Note 2 —
Summary of Significant Accounting Policies
in the 2018 Annual Report. Since the
date of the 2018 Annual Report, there have been no material changes to the Company’s significant accounting policies, except
those noted below. The preparation of the condensed consolidated financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts
reported in the condensed consolidated financial statements and accompanying notes. These estimates and assumptions
include valuing equity securities and derivative financial instruments issued in financing transactions, allowance for doubtful
accounts, inventory reserves, deferred taxes and related valuation allowances. Actual results could differ from the estimates.
In February 2016, the FASB issued
a new standard related to leases to increase transparency and comparability among organizations by requiring the recognition of
operating lease right-of-use (“ROU”) assets and lease liabilities on the balance sheet. Most prominent among the changes
in the standard is the recognition of ROU assets and lease liabilities by lessees for those leases classified as operating leases.
Under the standard, disclosures are required to meet the objective of enabling users of financial statements to assess the amount,
timing, and uncertainty of cash flows arising from leases. The Company is also required to recognize and measure new leases at
the adoption date and recognize a cumulative-effect adjustment in the period of adoption using a modified retrospective approach,
with certain practical expedients available.
The Company adopted Accounting Standards
Codification (“ASC”) 842, “Leases” (“ASC 842”) effective January 1, 2019 and elected to apply
the available practical expedients and implemented internal controls and key system functionality to enable the preparation of
financial information on adoption. ASC 842 requires the Company to make significant judgments and estimates. As a result, the Company
implemented changes to our internal controls related to lease evaluation for the three months ended March 31, 2019. These changes
include updated accounting policies affected by ASC 842 as well as redesigned internal controls over financial reporting related
to ASC 842 implementation. Additionally, the Company has expanded data gathering procedures to comply with the additional disclosure
requirements and ongoing contract review requirements. The standard had an impact on the Company’s condensed consolidated
balance sheets but did not have an impact on the Company’s condensed consolidated statements of operations or condensed consolidated
statements of cash flows upon adoption. The most significant impact was the recognition of ROU assets and lease liabilities for
operating leases, while the Company’s accounting for finance leases remained substantially unchanged. The adoption of ASC
842 did not have a material impact in the current year and prior year comparative periods and as a result, a cumulative-effect
adjustment was not required.
Disaggregation
of Revenue
The Company recognizes
revenue predominately from contract manufacturing and recognizes an immaterial amount from products. Revenue from both products
and contract manufacturing is recognized at the point where the customer obtains control of the goods and the Company satisfies
its performance obligation, which generally is at the time it ships the product to the customer.
As of March 31,
2019, or December 31, 2018, the Company did not have any contract assets or contract liabilities from contracts with customers.
During the three months ended March 31, 2019 and 2018, there was no revenue recognized from performance obligations satisfied (or
partially satisfied) in previous periods. As of March 31, 2019, there were no remaining performance obligations that the Company
had not satisfied.
3.
|
Net Loss Per Common Share
|
Basic loss per share data for each
period presented is computed using the weighted-average number of shares of common stock outstanding during each such period. Diluted
loss per share data is computed using the weighted-average number of common and dilutive common-equivalent shares outstanding during
each period. Dilutive common-equivalent shares consist of: (a) shares that would be issued upon the exercise of stock options and
warrants, computed using the treasury stock method; and (b) shares of non-vested restricted stock.
The following securities are excluded from the calculation
of weighted average dilutive common shares because their inclusion would have been anti-dilutive:
|
|
As of March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Stock options
|
|
|
348,087
|
|
|
|
722,446
|
|
Warrants
|
|
|
276,478
|
|
|
|
471,070
|
|
Non-vested restricted stock
|
|
|
20,000
|
|
|
|
193,006
|
|
Total
|
|
|
644,565
|
|
|
|
1,386,522
|
|
Accrued expenses and other current
liabilities consist of the following (in thousands):
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Salaries, benefits and incentive compensation
|
|
$
|
49
|
|
|
$
|
108
|
|
Professional fees
|
|
|
124
|
|
|
|
230
|
|
Other
|
|
|
92
|
|
|
|
47
|
|
Total accrued expenses and other current liabilities
|
|
$
|
265
|
|
|
$
|
385
|
|
5.
|
Commitments and Contingencies
|
License Agreement with Noble
Fiber Technologies, LLC
On July 15, 2011, the Company entered
into a license agreement with Noble Fiber Technologies, LLC, whereby the Company has the exclusive right and license to manufacture
and distribute “SilverSeal Hydrogel Wound Dressings” and “SilverSeal Hydrocolloid Wound Dressings”. The
license is granted for ten years with an option to be extended for consecutive renewal periods of two years after the initial term.
Royalties are to be paid equal to 9.75% of net sales of licensed products. There are no minimum royalties subsequent to 2016. Total
royalties, for the three months ended March 31, 2019 and 2018 were nominal, in connection with this agreement. There was no outstanding
payable as of March 31, 2019 and 2018, respectively, in connection with this agreement.
Litigation, Claims and Assessments
The Company is subject to periodic lawsuits,
investigations and claims that arise in the ordinary course of business. The company is not party to any material litigation as
of March 31, 2019.
Stock-Based Compensation
During the three months ended March
31, 2019, there was no stock-based compensation expense recognized. During the three months ended March 31, 2018, the Company recognized
a credit of $80,000 related to stock-based compensation resulting from the forfeiture of certain unvested awards, consisting of
expense of $14,000 included in cost of revenues that is offset by a credit of $94,000 which is included in selling, general and
administrative expenses in the condensed consolidated statements of operations. As of March 31, 2019, there is no unrecognized
stock-based compensation expense remaining.
In November 2015, the Company entered
into a manufacturing supply agreement with a company where a Company director is a member of the Board of Directors. During the
three months ended March 31, 2019 and 2018, the Company incurred costs of approximately $0 and $189,000, respectively, from this
vendor. There is nothing included in accounts payable related to this related party as of March 31, 2019 and December 31, 2018,
respectively.
8.
|
Fair Value Measurement
|
Fair value is defined as the price
that would be received upon selling an asset or the price paid to transfer a liability on the measurement date. It focuses on the
exit price in the principal or most advantageous market for the asset or liability in an orderly transaction between willing market
participants. A three-tier fair value hierarchy is established as a basis for considering such assumptions and for inputs used
in the valuation methodologies in measuring fair value. This hierarchy requires entities to maximize the use of observable inputs
and minimize the use of unobservable inputs. The three levels of inputs used to measure fair values are as follows:
Level 1: Observable prices in active
markets for identical assets and liabilities.
Level 2: Observable inputs other
than quoted prices in active markets for identical assets and liabilities.
Level
3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets
and liabilities.
Warrant Liabilities
On March 31, 2019, the Company recomputed
the fair value of its warrant liability of outstanding warrants to purchase an aggregate of 210,000 shares of common stock as $291,000
using the Binomial option pricing model (Level 3 inputs) using the following assumptions: expected volatility of 92.82% risk-free
rate of 2.21%, expected term of 2.83 years, and expected dividends of 0.00%. The Company recorded a loss on the change in fair
value of these warrant liabilities of $135,000 during the three months ended March 31, 2019.
Warrants that contain exercise reset
provisions and contingent consideration liabilities are Level 3 derivative liabilities measured at fair value on a recurring basis
using pricing models for which at least one significant assumption is unobservable as defined in ASC 820. The fair value of contingent
consideration liabilities that are classified as Level 3 were estimated using a discounted cash flow technique with significant
inputs that are not observable in the market and thus represents a Level 3 fair value measurement as defined in ASC 820. The significant
inputs in the Level 3 measurement not supported by market activity include the probability assessments of expected future cash
flows related to the acquisitions, appropriately discounted considering the uncertainties associated with the obligation, and as
calculated in accordance with the terms of the acquisition agreements. The development and determination of the unobservable inputs
for Level 3 fair value measurements and the fair value calculations are the responsibility of the Company’s Chief Financial
Officer and are approved by the Chief Executive Officer.
The following table sets forth a
summary of the changes in the fair value of Level 3 warrant liabilities that are measured at fair value on a recurring basis (in
thousands):
|
|
Year Ended March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Warrant Liabilities
|
|
|
|
|
|
|
|
|
Beginning balance as of January 1,
|
|
$
|
156
|
|
|
$
|
130
|
|
Change in fair value of warrant liability
|
|
|
135
|
|
|
|
19
|
|
Warrant modification expense
|
|
|
-
|
|
|
|
-
|
|
Ending balance as of March 31,
|
|
$
|
291
|
|
|
$
|
149
|
|
Assets and liabilities measured
at fair value on a recurring basis are as follows (in thousands):
|
|
March 31, 2019
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant liabilities
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
291
|
|
Total liabilities
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
291
|
|
|
|
December 31, 2018
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant liabilities
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
156
|
|
Total liabilities
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
156
|
|
The Company leases one commercial
manufacturing facility through an operating lease agreement. The Company has an obligation for its commercial manufacturing facility
located in Langhorne, Pennsylvania, through 2026. The Company leases one corporate office through an operating lease agreement,
located in Yardley, Pennsylvania which, effective February 1, 2019, this property has been subleased to The Pinnacle Health Group,
Inc. through April 20, 2023 and the Company receives monthly lease payments.
Future minimum payments under non-cancellable
leases as of March 31, 2019 were as follows:
For the Year Ended December 31,
|
|
Amount
|
|
2019
|
|
$
|
323
|
|
2020
|
|
|
435
|
|
2021
|
|
|
439
|
|
2022
|
|
|
443
|
|
2023
|
|
|
287
|
|
Thereafter
|
|
|
432
|
|
Total future minimum lease payments
|
|
$
|
2,359
|
|
Lease: imputed interest
|
|
|
(598
|
)
|
Total
|
|
$
|
1,761
|
|
As of March 31, 2019, $0.760 million has
been reclassed to discontinued operations representing the Yardley, Pennsylvania and $1,001 remains in continuing operations representing
the commercial manufacturing facility located in Langhorne, Pennsylvania.
Total operating lease expenses for
the three months ended March 31, 2019 was $0.107 million and is recorded in cost of goods sold and other operating expenses on
the condensed consolidated statements of operations. Total rent expense for the three months ended March 31, 2018 was $0.120 million
and is recorded in other operating expenses on the condensed consolidated statements of operations.
As of March 31, 2019, the Company
had no leases that were classified as a financing lease. As of March 31, 2019, the Company did not have additional operating and
financing leases that have not yet commenced.
During the three months ended March 31,
2019 the Company recognized $55,000 of sublease income on its condensed consolidated statement of operations, which is included
in discontinued operations.
Supplemental cash flows information related to leases
was as follows:
|
|
Three Months
Ended
March 31,
2019
|
|
|
|
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
Operating cash flows from operating leases
|
|
$
|
107,395
|
|
|
|
|
|
|
Right-of-use assets obtained in exchange for lease obligations:
|
|
|
|
|
Operating leases
|
|
$
|
1,766,807
|
|
|
|
|
|
|
Weighted Average Remaining Lease Term
|
|
|
|
|
Operating leases
|
|
|
5.65 years
|
|
|
|
|
|
|
Weighted Average Discount Rate
|
|
|
|
|
Operating leases
|
|
|
11.0
|
%
|