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Document and Entity Information (USD $)
12 Months Ended
Dec. 31, 2011
Mar. 28, 2012
Document And Entity Information
Entity Registrant Name Alliqua, Inc.
Entity Central Index Key 0001054274
Document Type 10-K
Document Period End Date Dec 31, 2011
Amendment Flag false
Current Fiscal Year End Date --12-31
Is Entity a Well-known Seasoned Issuer? No
Is Entity a Voluntary Filer? No
Is Entity's Reporting Status Current? Yes
Entity Filer Category Smaller Reporting Company
Entity Public Float $ 8,599,491
Entity Common Stock, Shares Outstanding 232,073,863
Document Fiscal Period Focus FY
Document Fiscal Year Focus 2011
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Condensed Consolidated Balance Sheets (USD $)
Dec. 31, 2011
Dec. 31, 2010
Assets
Cash and Cash Equivalents $ 260,111 $ 1,393,727
Restricted Cash - Escrow 0 362,546
Accounts Receivable, net 67,773 122,925
Inventories 230,290 128,558
Prepaid Expenses 45,734 70,572
Total Current Assets 603,908 2,078,328
Property and Equipment, net 2,126,811 2,244,784
Intangibles, net 10,679,167 11,029,167
Goodwill 425,969 9,812,749
Other Assets 189,240 32,341
Total Assets 14,025,095 25,197,369
Liabilities and Stockholders Equity
Accounts Payable 251,881 272,829
Accrued Expenses 85,312 23,056
Deferred Income 0 39,000
Derivative Liability 0 4,630
Total Current Liabilities 337,193 339,515
Long-term Liabilities
Deferred Rent Payable 20,816 16,741
Deferred Tax Liability 33,000 22,000
Total Liabilities 391,009 378,256
Stockholders Equity
Preferred stock, par value $0.001; 1,000,000 shares authorized, no shares issued and outstanding 0 0
Common stock, par value $0.001 per share; 500,000,000 shares authorized; 209,073,863 shares issued and outstanding at December 31, 2011 and 199,884,158 shares issued and outstanding at December 31, 2010 209,075 199,885
Additional paid-in capital 31,140,073 28,481,087
Accumulated deficit (17,715,062) (3,861,859)
Total Stockholders Equity 13,634,086 24,819,113
Total Liabilities and Stockholders Equity $ 14,025,095 $ 25,197,369
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Condensed Consolidated Balance Sheets (Parenthetical) (USD $)
Dec. 31, 2011
Dec. 31, 2010
Stockholders equity:
Preferred stock, par value $ 0.001 $ 0.001
Preferred stock, authorized shares 1,000,000 1,000,000
Preferred stock, issued shares 0 0
Preferred stock, outstanding shares 0 0
Common stock, par value $ 0.001 $ 0.001
Common stock, authorized shares 500,000,000 500,000,000
Common stock, issued shares 209,073,863 199,884,158
Common stock, outstanding shares 209,073,863 199,884,158
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Condensed Consolidated Statements of Operations (USD $)
12 Months Ended
Dec. 31, 2011
Dec. 31, 2010
Income Statement [Abstract]
Revenue, net $ 1,832,234 $ 1,319,297
Cost of Sales 1,918,591 1,837,872
Gross Loss (86,357) (518,575)
Operating Expenses
General and Administrative 3,852,706 2,029,259
Research and Product Development 522,830 170,247
Impairment of Goodwill 9,386,780 0
Total Operating Expenses 13,762,316 2,199,506
Loss from operations (13,848,673) (2,718,081)
Other Income (Expenses)
Interest Expense (2,509) (2,460)
Acquisition Related Costs 0 (381,874)
Interest Income 4,349 9,075
Change in Value of Warrant Liability 4,630 7,287
Total Other Income (Expenses) 6,470 (367,972)
Income Tax Provision 11,000 12,000
Net Loss $ (13,853,203) $ (3,098,053)
Basic and Fully Diluted Loss per Share $ (0.07) $ (0.02)
Weighted-Average Shares Outstanding - basic and diluted 207,145,050 156,008,513
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Consolidated Statements of Stockholders' Equity (USD $)
Common Stock
Additional Paid-In Capital
Retained Earnings / Accumulated Deficit
Total
Beginning Balance, Amount at Dec. 31, 2009 $ 76,988 $ 7,218,174 $ (763,806) $ 6,531,356
Beginning Balance, Shares at Dec. 31, 2009 76,988,000
Issuance of Common stock to related party for cash, shares 7,812,000
Issuance of Common stock to related party for cash, amount 7,812 242,188 250,000
Issuance of common stock for cash, shares 11,400,000
Issuance of common stock for cash, amount 11,400 1,288,600 1,300,000
Placement Fee, shares 2,000,000
Placement Fee, amount 2,000 (2,000) 0
Acquisition of Hepalife business, shares 101,494,158
Acquisition of Hepalife business, amount 101,495 19,181,965 19,283,460
Issuance of common stock for services, shares 190,000
Issuance of common stock for services, amount 190 20,710 20,900
Share based compensation 531,450 531,450
Net loss for year ended (3,098,053) (3,098,053)
Ending Balance, Amount at Dec. 31, 2010 199,885 28,481,087 (3,861,859) 24,819,113
Ending Balance, shares at Dec. 31, 2010 199,884,158
Issuance of common stock for cash, shares 6,250,000
Issuance of common stock for cash, amount 6,250 993,750 1,000,000
Placement Fee, shares 437,500
Placement Fee, amount 438 (10,438) (10,000)
Acquisition of Hepalife business, amount 0
Share based compensation 1,678,176 1,678,176
Cashless exercise of warrants, shares 2,502,205
Cashless exercise of warrants, amount 2,502 (2,502) 0
Net loss for year ended (13,853,203) (13,853,203)
Ending Balance, Amount at Dec. 31, 2011 $ 209,075 $ 31,140,073 $ (17,715,062) $ 13,634,086
Ending Balance, shares at Dec. 31, 2011 209,073,863
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Condensed Consolidated Statements of Cash Flows (USD $)
12 Months Ended
Dec. 31, 2011
Dec. 31, 2010
Cash Flows From Operating Activities
Net Loss $ (13,853,203) $ (3,098,053)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and Amortization 632,694 624,449
Reserve for Obsolete Inventory (188) 188
Share Based Compensation 1,678,176 531,450
Issuance of Common Stock for Services 0 20,900
Change in Value of Warrant Liability (4,630) (7,287)
Changes in Operating Assets and Liabilities:
Accounts Receivable 55,152 97,752
Inventory (101,544) (19,920)
Deposits and Prepaid Expenses (7,445) (58,433)
Goodwill 9,386,780 0
Accounts Payable and Accrued Expenses 45,383 156,357
Deferred Tax Liability 11,000 0
Deferred Revenue (39,000) 39,000
Net Cash Used in Operating Activities (2,196,825) (1,713,596)
Cash flows from investing activities
Cash Acquired from Acquisition 0 1,793,768
Decrease (Increase) in Restricted Cash 362,546 (362,546)
Purchase of Equipment & Parts Not Placed In Service (124,616) 0
Purchase of Property and Equipment (164,721) (53,591)
Net Cash Provided by Investing Activities 73,209 1,377,631
Cash Flows From Financing Activities
Proceeds From Sale of Common Shares 990,000 1,550,000
Net Cash Provided by Financing Activities 990,000 1,550,000
Net Increase (Decrease) in Cash and Cash Equivalents (1,133,616) 1,214,035
Cash and Cash Equivalents - Beginning of year 1,393,727 179,692
Cash and Cash Equivalents - End of year 260,111 1,393,727
Supplemental Disclosure of Cash Flows Information
Cash paid during the period for interest 2,509 2,460
Non-cash investing and financing activities:
Common stock issued for acquiring Hepalife's net assets exclusive of net cash 0 17,498,692
Assets acquired and liabilities assumed:
Current Assets 0 1,808,597
Other liabilities 0 (11,917)
Intangible assets 0 8,100,000
Goodwill 0 9,386,780
Total purchase price 0 19,283,460
Less: Cash acquired 0 (1,793,768)
Total non-cash consideration $ 0 $ 17,489,692
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Organization
12 Months Ended
Dec. 31, 2011
Notes to Financial Statements
Organization

 

Note 1 – Organization

 

Alliqua, Inc., formerly Hepalife Technologies, Inc., (“Alliqua” or the "Company"), a public company, is a Florida corporation formed on October 21, 1997.  On December 20, 2010, the Company changed its name to Alliqua, Inc.

 

AquaMed Technologies, Inc. (“AquaMed”) is a Delaware corporation formed on January 13, 2009. On May 11, 2010, Alliqua consummated a merger (the “Merger”) whereby Alliqua acquired all of the issued and outstanding common and preferred shares of AquaMed, a privately-held Delaware corporation. As a result of the transaction, the former owners of AquaMed became the controlling stockholders of Alliqua. Accordingly, the merger of AquaMed and Alliqua has been accounted for as a reverse business combination in which AquaMed is deemed to be the accounting acquirer.  Pursuant to the Merger, the Company has restated its statements of stockholders’ equity on a recapitalization basis, so that all accounts are now presented as if the reverse merger had occurred at the beginning of the earliest period presented.

 

The Company is a biomedical company that does business through the following wholly owned subsidiaries:

 

     
  AquaMed, which was incorporated in Delaware on January 13, 2009. Through AquaMed, the Company develops, manufactures and markets high water content, electron beam cross-linked, aqueous polymerhydrogels (“gels”) used for wound care, medical diagnostics, transdermal drug delivery and cosmetics.
     
  Alliqua Biomedical, Inc. (“Alliqua Biomedical”), which was incorporated in Delaware on October 27, 2010. Through Alliqua Biomedical, the Company focuses on the development of proprietary products for wound care dressings and a core transdermal delivery technology platform designed to deliver drugs and other beneficial ingredients through the skin. The Company intends to market its own branded lines of prescription and over-the-counter (“OTC”) wound care products, as well as to supply products to developers and distributors of prescription and OTC wound healing products for redistribution to healthcare professionals and retailers through Alliqua Biomedical.
     
  HepaLife Biosystems, Inc. (“HepaLife”), which was incorporated in Nevada on April 17, 2007. Through HepaLife, we hold legacy technology called HepaMate™.  Since May 2010, we have not allocated resources to HepaMate™ other than for the maintenance of patents and intellectual property related to the technology and instead have focused our resources on products being developed by AquaMed and Alliqua Biomedical.  We continue, however, to explore various options to best realize value from our HepaMate™ technology, including selling it or partnering with another company to further develop it.  If we are unsuccessful in our efforts to realize value from our HepaMate™ technology, the recorded value of the related intangibles and goodwill will be subject to significant impairment.

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Summary of Significant Accounting Policies
12 Months Ended
Dec. 31, 2011
Notes to Financial Statements
Summary of Significant Accounting Policies

Note 2 – Summary of Significant Accounting Policies

 

Liquidity

 

The Company historically has incurred operating losses. The Company’s future capital requirements are expected to be driven by (1) marketing of its new product lines, (2) successfully building distribution channels, (3) research and development costs, and (4) the need to supplement working capital levels. At December 31, 2011, cash and cash equivalents totaled $260,111, compared to $1,393,727, excluding $362,546 of restricted cash, at December 31, 2010. The decrease was attributable to $990,000 net proceeds received from the issuance of common stock, offset by cash used in operating activities of $2,196,825 and capital expenditures of $289,337. The balance of the restricted cash was disbursed in 2011.  The net loss of $13,853,203 included non-cash expenses totaling $11,697,650; $9,386,780 for impairment charge of goodwill, $632,694 for depreciation and amortization, and $1,678,176 for share based compensation.

  

The Company recognized revenue of $1,832,234 in 2011 as sales levels in the contract manufacturing business increased, primarily due to more frequent orders from the Company’s largest customer.  The Company experienced significant sales growth, with particular strength in the first nine months of the year. Sales for the fourth quarter of 2011 were significantly lower than the previous quarters as the Company did not recognize any revenues from its largest customer.

 

The Company has experienced negative operating cash flows since inception and has funded its operations primarily from sales of common stock and other securities. The Company’s 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 2011 and continuing into 2012, the Company raised additional financing through common equity issuances as follows:

 

●   On March 2, 2011, the Company sold 6,250,000 shares of common stock including a five year warrant to purchase 6,250,000 shares of common stock at an exercise price of $0.17 for total net proceeds of $990,000.  These funds were used for both working capital and capital expenditures.

 

●   On February 16, 2012, the Company sold 21,000,000 shares of common stock including five year warrants to purchase 10,500,000 shares of common stock at, an exercise price of $0.069 for total net proceeds of $969,525.  The Company intends to use these funds for operations in 2012.

 

It is anticipated that existing capital resources will enable the Company to continue operations through at least March 31, 2013.

 

The Company believes that it will require additional capital in order to execute the longer term aspects of its business plan, including additional research and development efforts related to HepaMate™.

 

The Company believes that its need for additional equity capital will continue and it intends to pursue additional financing from existing relationships (such as prior shareholders, investors and lenders) and from new investors to support its research and development programs and operations. The Company may pursue sources of additional capital through various means, including joint ventures, debt financing, or equity financing.  The Company intends to engage investment banking firms to assist it with these efforts.

 

Future financings are likely to be dilutive to existing stockholders and, the terms of securities issued may be more favorable for new investors. Newly issued securities may include preferences, superior voting rights, and the issuance of warrants or other derivative securities, which may have additional dilutive effects. Further, the Company 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. The Company may also be required to recognize non-cash expenses in connection with certain securities it may issue, such as convertible notes and warrants, which may adversely impact the Company’s financial condition

 

If the Company is unable to raise additional capital or encounters unforeseen circumstances that place constraints on its capital resources, it will be required to take more severe measures to conserve liquidity, which could include, but are not necessarily limited to, curtailing business development activities or suspending the pursuit of the Company’s business plan.

 

There can be no assurance that the Company will be successful in improving revenues, reducing expenses and/or securing additional capital in sufficient amounts and on terms favorable to it, if needed.

 

Principles of Consolidation

 

The accompanying consolidated financial statements of the Company include the consolidated financial statements of Alliqua, Inc. and its subsidiaries, AquaMed Technologies, Inc., HepaLife Biosystems, Inc. and Alliqua Biomedical, Inc.

 

All significant inter-company transactions and accounts have been eliminated in consolidation.

 

Cash and Cash Equivalents

 

The Company considers all highly liquid securities purchased with original maturities of three months or less to be cash equivalents. From time to time the Company's cash account balances may be uninsured or in deposit accounts that exceed the Federal Deposit Insurance Corporation guarantee limit. The Company reduces its exposure to credit risk by maintaining its cash deposits with major financial institutions and monitoring their credit ratings.

  

Accounts Receivable

 

Trade accounts receivable are stated at the amount the Company expects to collect. Management considers the following factors when determining the collectability of specific customer accounts: customer credit-worthiness, past transaction history with the customer, current economic industry trends, and changes in customer payment terms. If the financial condition of the Company’s customers were to deteriorate, adversely affecting their ability to make payments, additional allowances would be required.  Based on management’s assessment, an allowance for doubtful accounts is not provided since all accounts recorded on the books are deemed collectible.

 

Inventory

 

Inventories are valued at the lower of cost or market on a first-in, first-out basis. Cost is determined by the first-in, first-out method. Reserves for obsolete inventories are based on historical experience. At December 31, 2011 and 2010, the Company had reserves for obsolete inventory of $0 and $188, respectively.

 

Property and Equipment

 

Property and equipment is stated at cost and is depreciated under the straight-line method over the estimated useful life as follows:

 

Machinery and equipment        10 years
Office equipment 10 years
Furniture and fixtures   10 years

 

Leasehold improvements are amortized using the straight-line method over the lesser of the remaining respective lease term or useful lives.

 

Upon retirement or other disposition of these assets, the cost and related accumulated depreciation and amortization of these assets are removed from the accounts and the resulting gains and losses are reflected in the consolidated results of operations. Expenditures for maintenance and repairs are charged to operations as incurred and betterments are capitalized.

 

Intangible Assets

 

The Company recognizes certain intangible assets acquired in acquisitions, primarily goodwill, client relationships and technology. The Company accounts for intangible assets in accordance with Accounting Standards Codification (“ASC”) 350 “Intangibles - Goodwill and Other”. ASC 350 requires that goodwill and other intangibles with indefinite lives be tested for impairment annually or on an interim basis if events or circumstances indicate that the fair value of an asset has decreased below its carrying value.

 

Goodwill & Impairment

 

We review goodwill for impairment, if any, at least annually for each reporting unit. If the value of the reporting unit exceeds its net book value, goodwill is not impaired, and no further testing is necessary. If the fair value of the reporting unit is less that its net book value, there may be goodwill impairment.

 

There are a number of factors involved in determining if an indication of impairment is likely. In the fourth quarter of 2011, we performed our annual assessment of goodwill. As a result, we recorded a non-cash goodwill impairment charge of $9,386,780 for the year ended December 31, 2011. This charge is presented separately in the statement of operations and relates solely to the HepaLife Technologies, Inc. reporting unit. The remaining goodwill balance of $425,969 relates to our AquaMed Technologies, Inc. reporting unit.

 

On May 11, 2010, at the date of the Merger, $9,386,780 of the goodwill was assigned to the HepaLife Biosystems, Inc. (“Hepa”) reporting unit. Step 1 of the goodwill impairment test concluded that the market value of the Hepa reporting unit was less than the carrying amount. As a result, we performed the required Step 2 of the analysis to measure any goodwill impairment. To measure the amount of the impairment charge, we determined the implied fair value of goodwill in the same manner as if this reporting unit were being acquired in a business combination. Based on our Step 2 assessment, we concluded, in the fourth quarter of 2011, that the net book value of the Hepa reporting unit exceeded its fair value, and a goodwill impairment charge of $9,386,780 was recorded for the entire goodwill relating to the Hepa reporting unit.

 

Additionally, we estimated the fair value of the AquaMed Technologies, Inc. reporting unit using discounted expected future cash flows. We determined the fair value of this reporting unit is greater than the carrying amount and that there was no impairment of the goodwill of this reporting unit.

  

Acquired in-Process Research and Development (“IPR&D”)

 

In accordance with authoritative guidance, the Company recognizes in-process research and development, or IPR&D, at fair value as of the acquisition date, and subsequently accounts for it as an indefinite-lived intangible asset until completion or abandonment of the associated research and development efforts. Once an IPR&D project has been completed, the useful life of the IPR&D asset is determined and amortized accordingly. If the IPR&D asset is abandoned, the remaining carrying value will be written off. During fiscal year 2010, the Company acquired IPR&D through the merger with AquaMed Technologies, Inc.  The Company’s IPR&D is comprised of the HepaMate™ technology, which was valued on the date of the merger. It will take additional financial resources to continue development of this technology.

 

The Company assessed the following qualitative factors that could affect any change in the fair value of the IPR&D:  

 

   Analysis of the technology’s current phase.

 

   Additional testing necessary to bring the technology to market.

 

   Development of competing products.

 

   Changes in projections caused by delays.

 

   Changes in regulations.

 

   Changes in the market for the technology.

 

   Changes in cost projections to bring the technology to market.

 

Management has concluded that there is no impairment in the IPR&D.

 

Impairment of long-lived assets subject to amortization

 

The Company amortizes intangible assets with finite lives over their estimated useful lives and reviews them for impairment whenever an impairment indicator exists. The Company continually monitors events and changes in circumstances that could indicate carrying amounts of long-lived assets, including intangible assets, may not be recoverable. When such events or changes in circumstances occur, the Company will assess recoverability by determining whether the carrying value of such assets will be recovered through the undiscounted expected future cash flows. If future undiscounted cash flows are less than the carrying amount of these assets, the Company will recognize an impairment loss based on the excess of the carrying amount over the fair value of the assets. Recoverability of long-lived assets is measured by comparing the carrying amount of the asset or asset group to the undiscounted cash flows that the asset or asset group is expected to generate. If the undiscounted cash flows of such assets are less than the carrying amount, the impairment to be recognized is measured by the amount by which the carrying amount of the property, if any, exceeds its fair market value.

 

Management has concluded that there is no impairment and the Company did not recognize any intangible asset impairment charges for the years ended December 31, 2011 and 2010. The Company reevaluates the carrying amounts of its amortizable intangibles at least quarterly to identify any triggering events.


Revenue Recognition

 

The Company applies the revenue recognition principles in accordance with ASC 605, “Revenue Recognition,” with respect to recognizing its revenue. Accordingly, the Company records revenue when (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred, (iii) the seller’s price to the buyer is fixed or determinable, and (iv) collectability is reasonably assured.

 

Deposits received on product orders are recorded as deferred revenue until revenues are earned when the products are shipped to customers.

 

The costs associated with shipping physical products are recorded in general and administrative expenses. Currently, shipping charges are not billed to customers.

 

For irradiation services, the Company records revenue based upon an hourly service charge as services are provided.

 

Research and Development

 

Research and development expenses represent costs incurred to develop technology. The Company charges all research and development expenses to operations as they are incurred, including internal costs, costs paid to sponsoring organizations, and contract services for any third party laboratory work. The Company does not track research and development expenses by project. Any purchased in-process research and development technology is capitalized and is amortized when the technology is placed in service. As of December 31, 2011 and 2010 research and development costs totaled $522,830 and $170,247, respectively.

 

Advertising Expenses

 

Advertising and marketing costs are expensed as incurred.  Advertising expenses for the years ended December 31, 2011 and 2010 were $379,494 and $218,864, respectively.

 

Use of Estimates in the Financial Statements

 

The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. These estimates and assumptions include valuing equity securities and derivative financial instruments issued in financing transactions, accounts receivable reserves, inventory reserves, deferred taxes and related valuation allowances, and the fair values of long lived assets, intangibles and goodwill. The Company re-evaluates its accounting estimates quarterly and records adjustments, when necessary.

 

Shipping and Handling

 

All shipping and handling costs are paid for by the Company. Shipping and handling costs amounted to approximately $4,820 and $6,456 as of December 31, 2011 and 2010, respectively, and are included in general and administrative expenses.

 

Reclassification

 

Prior period amounts are reclassified, when necessary, to conform to the current period presentation.  These reclassifications had no effect on previously reported net loss.

  

Income Taxes

 

The Company accounts for income taxes pursuant to the asset and liability method which requires deferred income tax assets and liabilities to be computed annually for temporary differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. The income tax provision or benefit is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities.

 

The Company adopted the Financial Accounting Standards Board (“FASB”) released ASC Topic 740 “Income Taxes.” ASC Topic 740 clarifies the accounting and reporting for uncertainties in income tax law. ASC Topic 740 prescribes a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of uncertain tax positions taken or expected to be taken in income tax returns.


The benefit of tax positions taken or expected to be taken in the Company's income tax returns are recognized in the financial statements if such positions are more likely than not of being sustained. As of December 31, 2011 and December 31, 2010, no liability for unrecognized tax benefits was required to be reported. The guidance also provides direction on derecognition, classification, interest and penalties, accounting in the interim periods, disclosure and transition. The Company’s policy is to classify assessments, if any, for tax related interest as interest expense and penalties as selling, general and administrative expenses. The Company's tax returns beginning with the year ended December 31, 2008 remain subject to examination for federal, state, and local income tax purposes by various taxing authorities.

 

Fair Value of Financial Instruments

 

The carrying amounts reported in the balance sheet for cash, lines of credit and other liabilities approximate fair value based on the short-term maturity of these instruments.  

 

Effective January 1, 2008, the Company adopted ASC Topic 820, “Fair Value Measurements and Disclosures.” ASC Topic 820 clarifies that fair value is an exit price, representing the amount that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability.  As a basis for considering such assumptions, ASC Topic 820 establishes a three-tier value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value:

 

Level 1:   Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.

 

Level 2:   Other inputs that are directly or indirectly observable in the marketplace.

 

Level 3:   Unobservable inputs supported by little or no market activity.

 

The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The adoption of this pronouncement did not have any material impact on the Company’s financial position, results of operations and cash flows.

 

ASC Topic 825, “Fair Value Option” permits an entity to choose to measure many financial instruments and certain other items at fair value at specified election dates. Subsequent unrealized gains and losses on items for which the fair value option has been elected will be reported in earnings.

 

Stock-Based Compensation

 

The Company accounts for equity instruments issued to employees in accordance with accounting guidance which requires that such equity instruments are recorded at their fair value on the date of grant, and are amortized over the vesting period of the award. The Company recognizes the compensation costs over the requisite period of the award, which is typically the date the services are performed. Stock based compensation is reflected within operating expenses.

  

Net Loss Per Common Share

 

Basic net loss per common share is computed based on the weighted average number of shares of common stock outstanding during the periods presented on a recapitalization basis in accordance with the Merger. Common stock equivalents, consisting of warrants and stock options, were not included in the calculation of the diluted loss per share because their inclusion would have been anti-dilutive.

 

Potentially dilutive securities outlined in the table below have been excluded from the computation of diluted net loss per share, because the effect of their inclusion would have been anti-dilutive.

 

The total common shares issuable upon the exercise of stock options and warrants are as follows:

 

    December 31,  
    2011     2010  
             
Stock Options     18,870,000       12,720,000  
Warrants     13,567,201       13,239,773  
Total     32,437,201       25,959,773  

 

Related Party Transactions

 

A related party is generally defined as (i) any person who holds 10% or more of the Company’s securities and their immediate families, (ii) the Company’s management, (iii) someone who directly or indirectly controls, is controlled by or is under common control with the Company, or (iv) anyone who can significantly influence the financial and operating decisions of the Company. A transaction is considered to be a related party transaction when there is a transfer of resources or obligations between related parties. (See Note 12).

 

Subsequent Events

 

The Company evaluates events that have occurred after the balance sheet date but before the financial statements are issued to determine if events or transactions require adjustment to or disclosure in the financial statements.

 

Recent Accounting Pronouncements

 

In September 2011, the FASB issued Accounting Standards Update (“ASU”) No. 2011-08, “Intangibles—Goodwill and Other (Topic 350)—Testing Goodwill for Impairment” (“ASU 2011-08”), to simplify how entities test goodwill for impairment. ASU 2011-08 allows entities to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If a greater than 50 percent likelihood exists that the fair value is less than the carrying amount then a two-step goodwill impairment test as described in Topic 350 must be performed. The standard was adopted and applied during the 3rd quarter of 2011. 

 

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

  

In December 2010, FASB issued ASU 2010-29, Business Combinations (Topic 805): Disclosure of Supplementary Pro Forma Information for Business Combinations. This ASU reflects the decision reached in EITF Issue No. 10-G. The amendments in this ASU affect any public entity that enters into business combinations that are material on an individual or aggregate basis. The amendments in this ASU specify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendments also expand the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The amendments are effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual

reporting period beginning on or after December 15, 2010. Early adoption is permitted. The Company will review the requirements of ASC Topic 810-10 and comply with its requirements. Originally issued in December 2007, ASC Topic 805 on business combinations, established principles and requirements as to how acquirers recognize and measure the identifiable assets acquired, the liabilities assumed, non-controlling interests and goodwill acquired in the business combination or a gain from a bargain purchase. This guidance was effective for business combinations with an acquisition date on or after the beginning of the first annual reporting period beginning on or after December 15, 2008.  The adoption did not have a material impact on the Company’s financial statements.

 

In December 2010, FASB issued ASU No. 2010-28, “Intangibles - Goodwill and Other (Topic 350).” Under Topic 350, testing for goodwill impairment is a two-step test. When a goodwill impairment test is performed (either on an annual or interim basis), an entity must assess whether the carrying amount of a reporting unit exceeds its fair value (Step 1). If it does, an entity must perform an additional test to determine whether goodwill has been impaired and calculate the amount of that impairment (Step 2). The amendments in this update modify Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that impairment may exist. The qualitative factors require that goodwill of a reporting unit be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The Company adopted this standard as of January 1, 2011. The adoption of this update did not have a material effect on the consolidated financial statements or disclosures

 

In February 2010, FASB issued ASU No. 2010-09, Subsequent Events (Topic 855): Amendments to Certain Recognition and Disclosure Requirements. The amendments in the ASU remove the requirement for an SEC filer to disclose a date through which subsequent events have been evaluated in both issued and revised financial statements. Revised financial statements include financial statements revised as a result of either correction of an error or retrospective application of U.S. GAAP. The FASB also clarified that if the financial statements have been revised, then an entity that is not an SEC filer should disclose both the date that the financial statements were issued or available to be issued and the date the revised financial statements were issued or available to be issued. The FASB believes these amendments remove potential conflicts with the SEC’s literature. The provisions of ASC 855, established general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. The provisions of ASC 855 are effective for interim and annual reporting periods ending after June 15, 2009. The adoption did not have an impact on the Company’s financial position, results of operations or cash flows.

 

In January 2010, FASB issued ASU No. 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. This ASU requires some new disclosures and clarifies some existing disclosure requirements about fair value measurement as set forth in Codification Subtopic 820-10. The FASB’s objective is to improve these disclosures and, thus, increase the transparency in financial reporting.

  

Specifically, ASU 2010-06 amends Codification Subtopic 820-10 to now require:

 

   A reporting entity should disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers; and

 

   In the reconciliation for fair value measurements using significant unobservable inputs, a reporting entity should present separately information about purchases, sales, issuances, and settlements.

 

In addition, ASU 2010-06 clarifies the requirements of the following existing disclosures:

 

   For purposes of reporting fair value measurement for each class of assets and liabilities, a reporting entity needs to use judgment in determining the appropriate classes of assets and liabilities; and

 

   A reporting entity should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements.

 

ASU 2010-06 is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. Early application is permitted. The adoption did not have an impact on the Company’s financial position, results of operations or cash flows.

 

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Business Combination
12 Months Ended
Dec. 31, 2011
Notes to Financial Statements
Business Combination

 

Note 3 – Business Combination

 

The Company accounts for business combination under ASC Topic 805 which establishes principles and requirements as to how acquirers recognize and measure the identifiable assets acquired, the liabilities assumed and goodwill acquired in a business combination.

 

AquaMed Technologies, Inc.

 

On May 11, 2010, Alliqua consummated the Merger and thereby acquired all of the issued and outstanding common and preferred shares of AquaMed, a privately-held Delaware corporation, in exchange for 85 million shares (45% of voting control) of Alliqua’s common stock. Certain former members of AquaMed's management assumed all key management roles of the combined company and also received majority control of the Board. All members of management of Alliqua prior to the Merger are no longer with Alliqua. As a result of the transaction, the former owners of AquaMed became the controlling stockholders of Alliqua.

 

Accordingly, the Merger of AquaMed and Alliqua is a merger that has been accounted for as a reverse business combination in which AquaMed is deemed to be the accounting acquirer.

 

The fair value of the net assets acquired from the acquisition of Alliqua was $19,283,000 based on 101,494,158 shares issued at a closing stock price of $0.19 at the date of the Merger. As of the date of acquisition, AquaMed acquired identifiable net assets of $1,796,000 and intangibles of $17,486,780. Of this amount, a fair value was assigned to the in-process research and development technology relating to the “HepaMate” bioartificial liver in the amount of $8,100,000. The value assigned to this technology is not subject to amortization until such time as the technology is placed in service. The remaining portion of consideration in the amount of $9,386,000 was allocated to goodwill. Pursuant to the reverse merger, AquaMed restated its statements of stockholders’ equity on a recapitalization basis, so that all accounts are now presented as if the reverse merger had occurred at the beginning of the earliest period presented.

  

In accordance with independent appraisals, the Company allocated the total purchase price to the assets acquired and liabilities assumed based on their fair values as follows:

 

    Amount  
Cash   $ 1,793,768  
Prepaid expenses     14,829  
Technology, in-process research and development     8,100,000  
Warrant liability     (11,917 )
Net Fair Value Assigned to Assets Acquired and Liabilities Assumed     9,896,680  
Goodwill     9,386,780  
Total   $ 19,283,460  

 

Unaudited Pro-forma Financial Information

 

The unaudited pro-forma results for the year ended December 31, 2010 combines the historical results of Alliqua and AquaMed as if the acquisition had been completed as of the beginning of the period presented. The pro-forma weighted average number of shares outstanding also assumes that the shares issued as purchase consideration were outstanding as of the beginning of the period presented.

 

    For the year ended December 31, 2010  
Revenues   $ 1,319,297  
Net Loss Available to common shareholders   $ (3,571,273 )
Pro-forma basic and diluted net loss per common share   $ (0.02 )
Pro-forma weighted average common shares outstanding – basic and diluted     192,157,117  

 

The pro-forma combined results are not necessarily indicative of the results that actually would have occurred if the acquisition of Alliqua had been completed as of the beginning of 2010. Alliqua is a research and development company and has had no revenues since the acquisition date.

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Inventories
12 Months Ended
Dec. 31, 2011
Notes to Financial Statements
Inventories

 

Note 4 – Inventories

 

Inventories consist of the following: 

 

   As of
   December 31,
2011
  December 31,
2010
Raw materials  $216,307   $108,145 
Work in process   4,170    10,140 
Finished goods   9,813    10,461 
Less: Inventory reserve   —      (188)
Total  $230,290   $128,558 

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Property and Equipment
12 Months Ended
Dec. 31, 2011
Notes to Financial Statements
Property and Equipment

 

Note 5 – Property and Equipment

 

Property and equipment consist of the following at December 31, 2011 and 2010:

 

   2011  2010
Machinery and equipment  $2,789,357   $2,729,966 
Computer and office equipment   23,747    11,896 
Furniture and fixtures   12,777    9,777 
Leasehold improvements   105,649    15,170 
    2,931,530    2,766,809 
Less:  accumulated depreciation   (804,719)   (522,025)
           
   Property and Equipment, Net  $2,126,811   $2,244,784 

 

Total depreciation expense was $282,694 for the year ended December 31, 2011 and $274,449 for the year ended December 31, 2010.

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Intangible Assets
12 Months Ended
Dec. 31, 2011
Notes to Financial Statements
Intangible Assets

 

Note 6 – Intangible Assets

 

Technology and Customer Relationships

 

Technology and customer relationships consist of the following at December 31, 2011:

 

 

Estimated

Useful Lives

    Cost    

Accumulated

Amortization

    Net  
 In process Research and Development -       8,100,000        -       8,100,000   
Technology 10 Years     $ 3,000,000     $ (875,000 )   $ 2,125,000  
Customer relationships 12 Years       600,000       (145,833 )     454,167  
                             
Total       $ 11,700,000     $ (1,020,833 )   $ 10,679,167  

 

Technology and customer relationships consist of the following at December 31, 2010:

 

   

Estimated

Useful Lives

    Cost    

Accumulated

Amortization

    Net  
                               
 In process Research and Development   -       8,100,000       -       8,100,000  
Technology   10 Years     $ 3,000,000     $ (575,000)     $ 2,425,000  
Customer relationships   12 Years       600,000       (95,833)       504,167  
                               
Total         $ 11,700,000     $ (670,833 )   $ 11,029,167  

 

The Company recorded amortization expense related to acquired amortizable intangibles of $350,000 for each of the years ended December 31, 2011 and 2010.

 

In-process research and development technology represents HepaMate™ patented biotech technologies acquired from Alliqua in the Merger which currently have no commercial use. The value assigned to this technology will not be subject to amortization until such time as the technology is placed in service. HepaMate™ is an extracorporeal (outside the body), temporary liver support system designed to provide ‘whole’ liver function to patients with acute or severe liver failure. Unlike conventional technologies which use mechanical methods to perform rudimentary filtration of a patient’s blood or partially detoxify blood by using albumin or sorbents, HepaMate™ combines the process of removing toxins from the patient’s blood (detoxification) with concurrent biologic liver cell therapy. The technology is valued at $8,100,000

 

The estimated future amortization expense related to technology and customer relationships as of December 31, 2011 is as follows:

 

For the Year Ending

December 31,

 

 

Technology

   

Customer

Relationships

   

 

Total

 
2012   $ 300,000     $ 50,000     $ 350,000  
2013     300,000       50,000       350,000  
2014     300,000       50,000       350,000  
2015     300,000       50,000       350,000  
2016     300,000       50,000       350,000  
Thereafter     625,000       204,167       829,167  
                         
Total   $ 2,125,000     $ 454,167     $ 2,579,167  

 

Goodwill

 

A summary of the change in the Company’s goodwill for the years ended December 31, 2011 and 2010 is as follows:

 

    December 31, 2011     December 31, 2010  
Goodwill beginning of year   $ 9,812,749     425,969  
Goodwill related to purchase (see Note 3)                    -       9,386,780  
Impairment of goodwill     (9,386,780)                     -  
Goodwill end of year   $      425,969     $ 9,812,749  

 

See note 2 - Summary of Significant Accounting Policies Goodwill and Impairment for further information.

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Operating Leases
12 Months Ended
Dec. 31, 2011
Notes to Financial Statements
Operating Leases

 

Note 7 – Operating Leases

 

Manufacturing Facility.  The Company has an obligation for its commercial manufacturing facility located at 2150 Cabot Boulevard West, Langhorne, Pennsylvania which is due to expire January 31, 2016. The lease calls for monthly lease payments as follows: $14,883 monthly through January 31, 2010, $15,627 monthly through January 31, 2014 and $17,187 monthly through January 31, 2016.

 

Rent expense charged to operations amounted to $191,597 for each of the years ended December 31, 2011 and 2010, respectively. In addition the lease calls for monthly reimbursements which are adjusted annually. The monthly reimbursements for the years ended December 31, 2011 and 2010 amounted to $60,951 and $59,255 respectively.

 

The terms of the Company’s lease obligation provide for scheduled escalations in the monthly rent. Non-contingent rent increases are being amortized over the life of the leases on a straight line basis. Deferred rent of $20,816 and $16,741 represents the unamortized rent adjustment amount at December 31, 2011 and 2010, respectively.

 

The following is a schedule by year of future minimum rental payments, excluding reimbursements, required under the operating lease agreements:

 

For the Year Ending

December 31

  Amount  
2012   $ 187,524  
2013     187,524  
2014     204,684  
2015     206,244  
2016     17,187  
Total   $ 803,163  

 

Corporate Office.  The Company has an agreement obligation effective November 1, 2010, on a month to month basis for shared corporate office space located at 850 3rd Avenue, New York, NY. The agreement calls for a monthly fee of $14,000 per month. Prior to November 1, 2010, the Company paid $46,000 for the use of these offices. These fees have been classified as rent expense and charged to operations amounting to $168,000 and $74,000 for the years ended December 31, 2011 and 2010, respectively.

 

This agreement was modified in January 2012, such that, the Company issued Harborview Capital Management, LLC 2,000,000 shares of common stock as consideration for an extension of the lease agreement until December 31, 2012 and, effective as of December 1, 2011, the elimination of the requirement to make any further cash payments.  At the date of issuance, the common stock was valued at $100,000 and the associated expense will be amortized over the term of the lease.  The Company does not have any right to extend the terms of the lease agreement past December 31, 2012 (see Note 17 Subsequent events).

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Commitments and Contingencies
12 Months Ended
Dec. 31, 2011
Notes to Financial Statements
Commitments and Contingencies

 

Note 8 – Commitments and Contingencies

 

Consulting Agreements

 

The Company currently has various consulting agreements for management consulting, marketing, public relations and research and development. Some agreements are based on fixed fee arrangements and others on specified hourly rates. The following agreements were in effect as of December 31, 2011:

 

A month-to-month consulting agreement for management services commenced on February 9, 2009, for a monthly fee of $11,250. Effective December 1, 2011, the monthly fee was increased to $16,250. For the years ended December 31, 2011 and 2010, the related consulting fees charged to operating expenses were $140,000 and $135,000, respectively.

  

A two year consulting agreement to provide regulatory consulting service commenced on March 1, 2010.  Hourly billing rates for staff range from $185 to $380, plus project related expenses.  For the years ended December 31, 2011 and 2010, related consulting fees charged to research and development expenses were $3,351 and $26,859, respectively.

 

A one year consulting agreement, to provide regulatory and product and process development consulting services, commenced on May 1, 2010, at a rate of $150 per hour, plus expenses. For the years ended December 31, 2011 and 2010, the related consulting fees charged to research and development expenses were $77,017 and $39,330, respectively. This agreement has not been formally extended and work is being done on an “as needed” basis.

 

A three year master services agreement commenced on July 1, 2010, to develop a strategy for the development of a generic version of transdermal pain patch, provide support services associated with its development, and provide support services in the assembly and submission of the Abbreviated New Drug Application for a generic version of the market-leading product for treatment of PHN pain. For the years ended December 31, 2011 and 2010, the related consulting fees charged to research and development expenses were $175,780 and $38,307, respectively. This agreement can be terminated at no additional expense to the Company outside of the work already performed.

 

A consulting agreement, to assist in obtaining a General Service Administration Schedule Contract, commenced on September 27, 2011.  The agreement calls for an upfront fee of $2,500 upon execution, and seven monthly payments of $1,000. For the year ended December 31, 2011, the related fees charged to operating expenses were $4,500. This agreement will terminate on May 31, 2012.

 

A consulting agreement, to provide consulting services on clinical and regulatory guidance and development, commenced on September 26, 2011.  The agreement calls for a maximum of fees and cost of $20,000. For the year ended December 31, 2011, the related fees charged to research and development expenses were $5,850.

 

A consulting agreement, to assist in development, marketing and sale of medical devices, commenced on December 24, 2011, at an hourly rate of $250 per hour, plus expenses.  A maximum monthly fee of $2,500 is allowed without further required approval from the Company. For the year ended December 31, 2011, the related fees charged to operating expenses were $4,500. This agreement can be terminated upon written notice of either party.

 

Cooperative and License Agreements

 

USDA, ARS CRADA.  In November 2002, Alliqua entered into a Cooperative Research and Development Agreement (“CRADA”) with the U.S. Department of Agriculture (“USDA”), Agricultural Research Service (“ARS”) pertaining to the continued development and use of patented liver cell lines in artificial liver devices and in-vitro toxicological testing platforms. This agreement was amended several times, with a final agreement termination date of November 2008.

 

USDA, ARS License.  On November 20, 2007, Alliqua exercised its license right under the CRADA by entering into an exclusive license agreement with the USDA, ARS for existing and future patents related to the PICM-19 hepatocyte cell lines. Under this license agreement, the Company is responsible for annual license maintenance fees commencing in 2010 for the term of the license, which is until the expiration of the last to expire licensed patents unless terminated earlier. The license agreement also requires certain milestone payments, if and when milestones are reached, as well as royalties on net sales of resulting licensed products, if any.  License maintenance fees charged to general and administrative expenses for the years ended December 31, 2011 and 2010 were $18,682 and $4,110, respectively.

 

On July 15, 2011, the Company, under its subsidiary Alliqua Biomedical, Inc., entered into a license agreement with Noble Fiber Technologies, LLC, whereby Alliqua Biomedical, Inc. will have 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. An upfront license fee of $100,000 was expensed in the current year as a general and administrative expense.  Royalties are to be paid equal to 9.75% of net sales of licensed products. The agreement calls for minimum royalties to be paid each calendar year as follows: 2012 - $50,000; 2013 - $200,000, 2014 - $400,000; 2015 - $500,000; and 2016 - $600,000.

 

Litigation, Claims and Assessments

 

From time to time, in the normal course of business, the Company may be involved in litigation. The Company’s management has determined any asserted or unasserted claims to be immaterial to the consolidated financial statements. 

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Stockholders' Equity
12 Months Ended
Dec. 31, 2011
Notes to Financial Statements
Stockholders' Equity

 

Note 9 – Stockholders’ Equity

 

Common Stock and Warrants

 

The Company has authorized 500,000,000 shares of common stock, $0.001 par value per share, and as of December 31, 2011, 209,073,863 shares were issued and outstanding. The holders of the common stock are entitled to one vote per share. The holders of common stock are entitled to receive ratably such dividends, if any, as may be declared by the board of directors out of legally available funds. However, the current policy of the board of directors is to retain earnings, if any, for the operation and expansion of the business. Upon liquidation, dissolution or winding-up of the Company, the holders of common stock are entitled to share ratably in all assets of the Company which are legally available for distribution and after payment of or provision for all liabilities. The holders of Common Stock have no preemptive, subscription, redemption or conversion rights.

 

In May 2010, the Company issued 11,400,000 units of securities consisting of 11,400,000 shares of common stock and 5,700,000 Series E warrants each allowing the purchase of one share of common stock at $0.16 per share, and 5,700,000 Series F warrants each allowing the purchase of one share of common stock at $0.20 per share for net proceeds of $1,300,000.

 

Palladium served as the placement agent in the private placements and received an aggregate cash fee of $114,000, which equaled 8% of the aggregate cash consideration received by the company in the Private Placements plus an additional $5,000 for incidental expenses. In addition, in connection with the Private Placements, Palladium was issued 2,000,000 shares of Common Stock valued at $380,000 and (i) Series E Warrants to purchase 456,000 shares of common stock and (ii) Series F Warrants to purchase 456,000 shares of common stock. The Company also paid $6,000 in expenses in connection with the Private Placements.

 

On October 27, 2010, a consultant received 190,000 shares of restricted common stock valued at $0.11 a share for a total value of $20,900.

 

In March 2011, the Company issued 6,250,000 shares of common stock and a five year warrant to purchase 6,250,000 shares of common stock at an exercise price of $0.17 per share for gross proceeds of $1,000,000. The warrant was exercisable immediately for cash or by way of a cashless exercise which was exercised on May 2, 2011. In connection with this offering, the Company paid a placement agent $10,000 and issued the placement agent 437,500 shares of common stock valued at $91,875 and a five year warrant to purchase 312,500 shares of common stock at an exercise price of $0.20 per share. As a result of this issuance, the total number of warrants issued in 2007 outstanding at December 31, 2011 has been adjusted to 942,701 shares with an exercise price of $1.17.

 

On May 2, 2011, 2,502,205 shares of common stock were issued upon the non-cash exercise in full of warrants issued in the March 2011 financing.

 

Preferred Stock

 

The Company has authorized 1,000,000 shares of preferred stock, $0.001 par value per share, which may be divided into series and with preferences, limitations and relative rights determined by the board of directors. As of December 31, 2011 no shares of preferred stock are issued or outstanding.

 

Warrants

 

As of December 31, 2011, the Company has a total of 13,567,201 warrants outstanding as follows:

 

6,250,000 Warrants were issued March 2, 2011, each allowing the purchase of one share of common stock at $0.17 per share until March 2, 2016. The warrants were exercisable immediately for cash or by way of a cashless exercise and were exercised on May 2, 2011 and no longer outstanding.

 

312,500 Warrants were issued March 2, 2011, each allowing the purchase of one share of common stock at $0.20 per share until March 2, 2016.

 

6,156,000 Series E warrants were issued May 11, 2010, each allowing the purchase of one share of common stock at $0.16 per share until May 11, 2015.

 

6,156,000 Series F warrants were issued May 11, 2010, each allowing the purchase of one share of common stock at $0.20 per share until May 11, 2015.

 

Warrant shares outstanding at December 31, 2011 include warrants issued by the Company on May 11, 2007, with an original amount of warrant shares of 737,000 at an exercise price of $1.50 per share. The related warrant agreement provides for an adjustment to the exercise price and number of shares if the Company issues shares of Common Stock or Common Stock equivalents for consideration less that the then market price at the date of issuance, subject to a 1% adjustment floor. As a result of this provision, the total number of Warrant shares outstanding as of December 31, 2010 was 927,773 with an exercise price of $1.19. Subsequent to the March 2011 financing, these warrant shares were further adjusted to 942,701 warrant shares outstanding with an exercise price of $1.17 per share.


The potential of a dilutive adjustment to the warrants’ exercise prices and number of underlying shares of common stock may result in a settlement amount that does not equal the difference between the fair value of a fixed number of the common stock and a fixed exercise price. Accordingly, the warrants are not considered indexed to the Company’s own stock and, therefore, are accounted for as a derivative pursuant to ASC 815-40 Contracts in an Entity’s Own Equity which became effective January 1, 2009.   

 

At December 31, 2011, the Company valued the warrant liability for the warrants using the Black-Scholes pricing-model (Level 3 inputs) which approximates the fair value measured using the Binomial Lattice Model containing the following assumptions: volatility of 100.67%, a risk-free rate of 0.06%, and a term of 0.36 years.

 

The warrant liability recorded at fair value is summarized below:

 

Warrant Liability

 

Beginning balance as of January 1, 2011  $4,630 
      
Change in fair value of warrant liability   (4,630)
      
Ending balance as of December 31, 2011  $—   

 

As a result of adjusting the warrant liability to fair value, the Company recorded a non-cash gain of $4,630 relating to the Warrants for the year ended December 31, 2011.

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Stock Options
12 Months Ended
Dec. 31, 2011
Notes to Financial Statements
Stock Options

 

Note 10 – Stock Options

 

Stock Option Plan

 

The Company maintains an active stock option plan that provides shares for option grants to employees, directors and others. A total of 40,000,000 shares of common stock have been reserved for award under the stock option plan, of which 40,000,000 were available for future issuance as of December 31, 2011. Options granted under the option plan generally vest over two to five years or as otherwise determined by the Board, have exercise prices equal to the fair market value of the common stock on the date of grant, and expire no later than ten years after the date of grant.

 

Stock Based Compensation

 

 On January 3, 2011, the Company granted 1,250,000 non-qualified stock options with an exercise price of $0.135 and an expiration date of January 3, 2021, to the new members of its Board of Directors. These options were valued at $138,750 using the Black-Scholes option pricing model with the following assumptions: dividend yield of 0%, expected volatility of 107.7%, risk-free interest rate of 2.02% and an expected life of 5.0 years. These options have a ten year term and vested immediately on the grant date.

 

On March 1, 2011, the Company granted 5,000,000 qualified and non-qualified stock options with an exercise price of $0.21 and an expiration date of March 1, 2021, to certain members of its Board of Directors and employees for their contributions to date to the success of the Company. These options were valued at $815,000 utilizing the Black-Scholes option pricing model with the following assumptions: dividend yield of 0%, expected volatility of 106.2%, risk-free interest rate of 2.11% and an expected life of 5.0 years. These options have a ten year term and vested immediately on the grant date.

 

The expected lives of options granted were calculated using the simplified method set out in SEC Staff Accounting Bulletin No. 110 using the vesting term, which was the date of grant and the contractual term of 10 years.  The simplified method defines the expected life as the average of the contractual term and the vesting period.

 

On December 9, 2010, the Company granted 12,550,000 non-qualified stock options with an exercise price of $0.145 with an expiration date of December 9, 2020, to certain members of its board of directors, executives and employees for their contributions to date to the success of the Company. The options issued were valued at $1,426,005 and have a ten year term. 3,550,000 of the options vested immediately with the remaining portion vesting upon the completion of specific strategic events which were all expected to occur within the next year.

 

The fair value of the options granted during the year ended December 31, 2010, was calculated using the Black-Scholes option pricing model with the following assumptions: dividend yield of 0%, expected volatility of 107.7%, risk-free interest rate of 1.90% and an expected term of 5.16 years. The weighted average fair value of options granted during the year ended December 31, 2010, was $0.09.

 

During the years ended December 31, 2011 and 2010, total stock option compensation expense charged to operations was $1,678,176 and $531,450, respectively, with $1,450,913 and $144,578 classified as salaries and benefits, and $227,263 and $386,872 included in director fees. At December 31, 2011, the unamortized value of employee stock options outstanding was approximately $130,333. The unamortized portion at December 31, 2011 will be expensed upon satisfaction of the performance condition.

 

A summary of the status of the Company’s stock option plans and the changes during the year ended December 31, 2011, is presented in the table below:

 

   

Number of

Options

   

Weighted

Average

Exercise

Price

   

Weighted

Average

Remaining

Contractual

Life

   

Intrinsic

Value

 
          (per share)     (in years)        
Options outstanding at December 31, 2010     12,720,000     $ 0.15       9.86     $ -  
Options granted January 3, 2011     1,250,000       0.14       9.02       -  
Options granted March 1, 2011     5,000,000       0.21       9.17       -  
Options expired May 2, 2011     (100,000 )     0.32       -                      -  
Options outstanding at December 31, 2011     18,870,000     $ 0.16       9.00     $                -  
Exercisable December 31, 2011     12,600,000     $ 0.17       9.03     $                -  

 

The intrinsic value is calculated as the difference between the market value as of December 31, 2011, and the exercise price of the shares. The market value as of December 31, 2011, was $0.06 as reported on the OTCBB.

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Income Taxes
12 Months Ended
Dec. 31, 2011
Notes to Financial Statements
Income Taxes

 

Note 11 – Income Taxes

 

The Company files tax returns in the U.S. federal and various state jurisdictions and is subject to audit by tax authorities beginning with the year ended December 31, 2008.

 

The income tax provision (benefit) consists of the following:

   

    Years Ended:  
    2011     2010  
Federal            
    Current   $ -     $ -  
    Deferred     (1,512,000 )     (5,127,000 )
State and Local                
    Current     -       -  
    Deferred     (242,000 )     (917,000 )
Change in Valuation Allowance     1,765,000       6,056,000  
Income Tax Provision   $ 11,000     $ 12,000  

 

For the periods ended December 31, 2011, and December 31, 2010, the expected tax expense (benefit) based on the statutory rate reconciled with the actual tax expense (benefit) is as follows:

       

    Years Ended:  
    2011     2010  
U.S. Federal Statutory Rate     (34.0 )%     (34.0 )%
State Income Tax, Net of Federal Benefit     ( 5.9 )     ( 6.0 )
Other Permanent Differences     0.1       4.9  
Goodwill impairment     27.1  %             -  
Additional Tax Loss     -       (6.1)  
Premerger Net Deferred Tax Assets     -        (155.0)  
Change in Valuation Allowance     12.8        196.2  
Effective Income Tax Rate     0.1 %     0.0 %

 

As of December 31, 2011, and December 31, 2010, the Company’s deferred tax assets consisted of the effects of temporary differences attributable to the following:

        

    Years Ended:  
    2011     2010  
Deferred Tax Assets:            
  Net operating losses   $ 6,892,000     $ 5,867,000  
  Stock Compensation Cost     902,000       231,000  
  Intangible Assets     834,000       689,000  
  Other     108,000       109,000  
Total Deferred Tax Assets     8,736,000       6,896,000  
  Valuation Allowance     (8,132,000 )     (6.367,000 )
Deferred Tax Asset, Net of Valuation Allowance   $ 604,000     $ 529,000  

 

Deferred Tax Liabilities:            
   Excess of book over tax basis of:            
      Property and equipment   $ (604,000 )   $ (529,000 )
      Goodwill     (33,000 )     (22,000 )
Total Deferred Tax Liabilities     (637,000 )     (551,000 )
                 
Deferred Tax Asset (Liability)   $ (33,000 )   $ (22,000 )

 

For the years ended December 31, 2011, and December 31, 2010, the Company had approximately $17,256,000 and $14,817,000 of federal and state net operating loss carryovers (“NOL”), respectively, which begin to expire in 2018. The net operating loss carryovers may be subject to limitation under Internal Revenue Code Section 382 should there be a greater than 50% ownership change as determined under the regulations. The Company conducted a change in ownership study in accordance with Section 382 of the Internal Revenue Code (“IRC”) and determined that none of its federal and state NOL carryforwards are subject to an annual limitation.

 

In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of the deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and taxing strategies in making this assessment. The deferred tax liability related to goodwill cannot be used in this determination since goodwill is considered to be an asset with an indefinite life for financial reporting purposes. Therefore, the deferred tax liability related to goodwill cannot be considered when determining the ultimate realization of deferred tax assets. Based upon this assessment, management has established a full valuation allowance for the amount of the deferred tax asset which cannot be supported through the production of future taxable income generated through the reversal of the deferred tax liability related to the depreciation of the property and equipment, since it is more likely than not that all the deferred tax assets will not be realized. The change in the valuation allowance for the years ended December 31, 2011, and December 31, 2010, is $1,787,000 and $6,056,000, respectively.

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Related Party Transactions
12 Months Ended
Dec. 31, 2011
Notes to Financial Statements
Related Party Transactions

 

Note 12 – Related Party Transactions

 

The Company incurred $162,000 and $102,000, respectively, in Board fees for directors for the years ended December 31, 2011and 2010. Agreements called for a total of $13,500 a month to be paid in director fees.  Beginning in 2012, the Company discontinued paying cash fees to its directors.

 

On January 3, 2011, a total of 1,250,000 non-qualified stock options were granted to the new members of the Board of Directors (see Note 10).

 

On March 1, 2011, the Company granted 5,000,000 qualified and non-qualified stock options to certain members of the Board of Directors and employees (see Note 10).

 

The Company paid Harborview Capital Management, LLC $168,000 and $74,000, respectively for the years ended December 31, 2011 and 2010 for sub-leased office space. David Stefansky, the Company’s Chairman, and Richard Rosenblum, the Company’s President and a director, are the managing members of Harborview Capital Management, LLC.  Effective as of December 1, 2011, the Company amended its agreement with Harborview Capital Management, LLC and issued Harborview Capital Management, LLC 2,000,000 shares of common stock as consideration for an extension of the lease agreement until December 31, 2012 and the elimination of the requirement to make any further cash payments. At the date of issuance, the shares had a value of $100,000.

 

On December 9, 2010, a total of 12,250,000 stock options were granted to the Board and management.

 

Prior to the Merger a related party invested $250,000 for shares of preferred stock of AquaMed that converted into 7,812,499 shares of Common Stock at the effective time of the Merger.

 

The Company paid $250,000 to a related party for services rendered in connection with the Merger. 

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Major Customers
12 Months Ended
Dec. 31, 2011
Notes to Financial Statements
Major Customers

 

Note 13 – Major Customers

 

Revenues from the Company’s services to a limited number of clients have accounted for a substantial percentage of the Company’s total revenues. For the year ended December 31, 2011, three major customers accounted for approximately 87% of revenue, with each customer individually accounting for 59%, 15%, and 13%. The total accounts receivable balance as of December 31, 2011, due from these three customers was $65,092, representing 96% of the total accounts receivable. Four major customers accounted for approximately 91% of the revenues for year ended December 31, 2010, with each customer individually accounting for 38%, 22%, 21% and 10%. The accounts receivable balance at December 31, 2010, was split between six customers, with the largest representing 61%, 23% and 12%, respectively.

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Suppliers and Materials
12 Months Ended
Dec. 31, 2011
Notes to Financial Statements
Suppliers and Materials

 

Note 14 - Suppliers and Materials

 

Principal components used in manufacturing are purchased from the following sources: Berry Plastics, Dow Chemical and BASF. The total materials purchased from these single sources in 2011 and 2010 amounted to $224,109 and $144,870, respectively, representing 44% and 42%, respectively, of the total material purchases in each year.

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Employee Benefit Plans
12 Months Ended
Dec. 31, 2011
Notes to Financial Statements
Employee Benefit Plans

 

Note 15 - Employee Benefit Plans

 

The Company adopted a Health Reimbursement Plan on December 1, 2011 whereby participants will be reimbursed for eligible medical expenses up to a maximum each year of $1,500 for single participants and $2,000 for family participants. Based upon the current eligible participants in the plan the maximum annual contribution by the Company will be $11,500.

 

The Company maintains a 401(K) plan (the “Plan”) for the benefit of all eligible employees. The Plan does not provide for any Company match and therefore no expense was recorded in 2011 and 2010.

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Fair Value Measurement
12 Months Ended
Dec. 31, 2011
Notes to Financial Statements
Fair Value Measurement

 

Note 16 – Fair Value Measurement

 

The following table sets forth a summary of the changes in the fair value of Level 3 financial liabilities that are measured at fair value on a recurring basis:

 

   December 31, 2011
Beginning Balance as of January 1, 2011  $(4,630)
      
Net unrealized gain/(loss) on derivative financial Instruments   4,630 
      
Ending Balance as of December 31, 2011  $—   

 

Assets and liabilities measured at fair value on a recurring or nonrecurring basis are as follow:

 

    Level     Level     Level  
      1       2       3  
Recurring:                        
Derivative liabilities     N/A       N/A     $ -  
                         
Non Recurring:                        
Intangible assets     N/A       N/A     $ 8,100,000  
                         
Goodwill     N/A       N/A     $ 425,969  

 

The Company’s level 3 liabilities consist of derivative liabilities associated with warrants that contain exercise reset provisions. Their fair values were determined using pricing models for which at least one significant assumption is unobservable. For the assets valued on a nonrecurring basis, fair value was determined using discounted cash flow methodologies or similar techniques.

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Subsequent Events
12 Months Ended
Dec. 31, 2011
Notes to Financial Statements
Subsequent Events

 

Note 17 – Subsequent Events

 

Shares Issued to Harborview Capital

 

On  January 11, 2012, effective as of December 1, 2011, the Company amended its Executive Office License agreement with Harborview Capital Management, LLC, dated November 1, 2010 for office space and other services.  Pursuant to the amendment, the Company issued Harborview Capital Management, LLC 2,000,000 shares of common stock as consideration for an extension of the lease agreement until December 31, 2012 and the elimination of the requirement to make any further cash payments.  The cash value of these shares on the date of issuance was $100,000. The expense will be amortized over the term of the lease. The Company does not have any right to extend the terms of the agreement past December 31, 2012.

 

Unregistered Sales of Equity Securities

 

On February 16, 2012, the Company entered into a securities purchase agreement with certain accredited investors pursuant to which (i) 21,000,000 shares of common stock and (ii) five year warrants to purchase up to 10,500,000 shares of common stock at an exercise price of $0.069 per share were issued in exchange for aggregate consideration of $1,050,000.

 

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.

 

Palladium Capital Advisors, LLC served as the placement agent in the private placement. As consideration for serving as placement agent, the Company paid the placement agent a cash fee equal to approximately $55,500 and issued the placement agent a five year warrant to purchase 1,109,500 shares of common stock at an exercise price of $0.069 per share. The placement agent warrant has identical terms to the terms of the warrants issued to other investors.  In addition, the placement agent invested $15,000 in the private placement in exchange for 300,000 shares of common stock and a warrant to purchase 150,000 shares of common stock.

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